It should be noted that very basis of determination that any loss or gain arising out of   foreign exchange fluctuation for in connection with borrowed funds shall be of capital nature or revenue nature is based on utilization of said loan amount. Hence it cannot be said as capital expenditure. ; Furthermore, one has to consider the time requirements for recording and monitoring receivables from sales, or other types of receivables (such as related-party receivables); An individually-recorded foreign exchange gain or loss on a provision may be simply disregarded in preparing a cash flow statement as an adjustment reflecting non-cash transactions; It is strenuous (yet not impossible) to keep a close eye on an accurate allocation of the foreign exchange gain or loss upon the recognition of a provision, its update and subsequent release; and. In terms of section 24I(7A) pre-8 November 2005 currency gains and losses are deferred in respect of loans and advances of a capital nature, loans and advances between companies that are connected persons and loans and advances that are not hedged by a related or matching FEC. CIT vs Woodward Governor India P. Ltd (312 ITR 254) (2009) (SC). The economic effects of an exchange rate change on a foreign operation that is an extension of the parent's domestic operations relate to individual assets and liabilities and impact the parent's cash flows directly. If your company conducted business with foreign suppliers/customers, borrowed money in foreign funds, or disposed of a capital asset in foreign currency in the year, your BDO advisor will be able to assist you in determining the correct treatment in respect of any resulting foreign exchange gains or losses. ♠ In case of CIT vs. V.S. Assets and liabilities. Hence, in our view, utlisation of loan for capital account or revenue account purpose has nothing to do with allowabilty of any expenditure in connection with liability or loan raised in foreign currency. Further analysis as regard to taxability of loss or gain considering the same as capital loss requires following to understand: A revenue receipt is taxable as income unless it is expressly exempt under the Act. The gains and losses arising from this are compiled as an entry in the comprehensive income statement of a translated balance sheet. Therefore in view of the same, the exchange difference is required to be recognized in profit and loss account. The next question arises is, whether the gain or loss can be reduced or added from/ to the cost of assets as per provisions of section 43(1) of the Income Tax Act. Foreign currency monetary items are retranslated at balance sheet date exchange rate. It is necessary to decide how the foreign exchange gains or losses will be accounted for as of the balance sheet date with regard to the remeasurement of provisions. I mean now can we show such loss in profit and loss . Do you have an idea for improvement? All Rights Reserved. An entity’s local currency is the currency of the primary economic environment in which the entity operates and ge… loss arising from foreign exchange in 2016 will not be allowed as a deduction under the ITA in YA 2016. When a foreign currency transaction takes place an exchange rate is used to translate one currency into another currency.The exchange rate simply expresses the value of one currency in terms of the other. is exposed to a foreign exchange risk, which is why it should be remeasured using the exchange rate as of the balance sheet date if the reserves concerned are settled in a foreign currency. 12 February 2010 As per accounting standard 11, the forex loss or gain in respect of transactions entered into on or after 1.4.2004, the difference arising on settlement of monetary items should be recognised as income or expenses in the period in which they arise. Translation Gain or Loss: This treatment considers the translation adjustment to be a gain or loss analogous to the gains and losses arising from foreign currency transactions and reports it in net income in the period in which the fluctuation in the exchange rate occurs. The above transaction may result into following types of foreign exchange gain or loss either on repayment of loan installment/payment to supplier or on restatement of outstanding foreign currency loan borrowed or on accrued interest or payment of interest on such borrowed funds. adjustments to the costs of assets only in relation to exchange gains/losses arising at the time of making payment. But however, interest cost on said loan being an item of revenue in nature, Loss pertaining to interest paid and interest accrued is deductible. AS-11(Revised 1994) provides for adjustment in the carrying cost of fixed assets acquired in foreign currency, due to foreign exchange fluctuation at each balance sheet date which also correspond to treatment given in section 43A. The same is also affirmed by Apex court in case of India Cements Limited vs. CIT (1966) (SC) 60 ITR 52. Basis of determination of capital or revenue nature being Utilization concept is vague: B. ... Special rules were made for exchange gains and losses arising on assets and liabilities that are ‘matched’. The same is also consistently followed by other sections of Income Tax Act for allowability of any expenditure in connection with liability incurred. What is the treatment of Exchange loss on borrowing (ECB) and its effect on Fixed Assets . (Refer para 13 of AS-11 issued by ICAI). SSAP 20 (applicable to entities not required or opting to apply FRS 23) requires foreign currency transactions to be translated in the entity’s local currency using the spot exchange rate, or an average rate for a period that is a close approximation. Accordingly, the exchange gains and losses in such an operation are included in net income. Do you want to ask us something? 5. until 2015). The European Financial Reporting Advisory Group (EFRAG) updated its report showing the status of endorsement of each IFRS, including standards, interpretations, and amendments, most recently on 12 October 2020. 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