The SC’s dismissal of the Income-Tax (I-T) department’s plea that companies cannot claim deductions against tax liabilities on account of losses due to foreign exchange rate fluctuations legitimises the way companies were accounting for these forex losses. Companies who had taken foreign currency loans for capital expenditure or new projects have been adding the exchange differences to the cost of the asset, as allowed under Schedule VI of the Companies Act.
This case is about the I-T department’s efforts to optimise tax revenues and the companies’ efforts to minimise the same and boost cash profits. When a company adds the exchange differences to the cost of the asset, the asset value goes up, which allows it to claim a higher depreciation, reduce profits, and hence, pay a lower tax.
On the other hand, if the foreign liability is valued at lower exchange rate (say Rs 40) as the I-T department would like it to be, the depreciation claim on that asset would be lower. The SC judgement is also in line with the suspension of AS 11 for two years for treating forex losses on capital account. AS 11 required companies to provide for the exchange differences on their foreign exchange liabilities in their profit & loss (P&L) account.
Companies have been arguing that if the rupee has touched Rs 50 to the dollar from Rs 40, they should be allowed to amortise the forex loss over the tenure of the loan or capitalise them by adding to the cost of the project.
“We make the balance-sheet as a going concern on a particular date so that if it has to be wound up or sold, the foreign liabilities can be valued at the prevailing rate. We are crystallising the losses on particular date. If there’s any change in the liability as on the date of payment (if the rupee appreciates again), it can again be adjusted back in the statement of account,’’ said Arvind Parakh, CFO, Jindal Steel Ltd.
Companies say the change in accounting norm will give them more time to amortise the exchange losses over the life of the asset or the tenure of the foreign currency liability.
