Foreign exchange fluctuation loss on capital-purpose ECB

Foreign exchange fluctuation loss on capital-purpose ECB restatement is capital in nature and non-deductible.

Issue

Whether foreign exchange fluctuation loss arising on the year-end restatement of an External Commercial Borrowing (ECB) utilized for capital purposes is deductible as revenue business expenditure under section 37(1).

Facts

The assessee-company availed an External Commercial Borrowing (ECB) from its Swiss parent company for capital purposes, which was subsequently converted into equity shares.
Upon year-end restatement of the outstanding ECB at the prevailing foreign exchange rate, the assessee debited a foreign exchange fluctuation loss to its Profit & Loss Account and claimed it as a business deduction under section 37(1).
The Assessing Officer (AO) disallowed the claim, holding that the foreign exchange loss was capital in nature as the underlying borrowing was utilized for capital asset acquisition.
In the assessee’s own case for another assessment year, the Tribunal previously recorded that because the loan was obtained for acquiring capital assets, the liability remained in the capital field, making any restatement loss a non-deductible capital loss.

Decision

Capital Nature of Loss: Following the binding precedent in the assessee’s own case, the loss arising on account of the restatement of the ECB liability belongs to the capital field and constitutes a capital loss.
Non-Deductibility under Section 37(1): Capital losses cannot be claimed as revenue business expenditure while computing taxable business income; therefore, the disallowance made by the AO was rightly upheld.

Key Takeaways

Capital vs. Revenue Field Test: The tax treatment of foreign exchange fluctuation loss depends on the purpose of the underlying loan; losses on borrowings tied to capital asset acquisition are capital in nature.
Inapplicability of Section 37(1): Section 37(1) explicitly bars deduction for expenditure/loss of a capital nature, irrespective of whether the loss is debited to the Profit & Loss Account.

IN THE ITAT CHENNAI BENCH ‘B’

Egger Pumps India (P.) Ltd.

Income-tax Officer

Manu Kumar Giri, Judicial Member
and Ms. Padmavathy S., Accountant Member

IT Appeal No. 1251 (Chny) of 2026
[Assessment year 2010-11]

JULY 20, 2026

Ms. Sonali Kothari, Adv. for the Appellant. E. Elango, JCIT for the Respondent.

ORDER

Manu Kumar Giri, Judicial Member. – This is an appeal preferred by the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)/Addl./JCIT(A)-1, (hereinafter referred to as “the Ld. CIT(A)”), Nashik, dated 11.02.2026 for the Assessment Year (hereinafter referred to as “AY”) 2010-11.

2. Brief facts of the case are that the assessee, M/s. Egger Pumps India Pvt. Ltd., filed its return of income for the relevant assessment year. During the course of assessment proceedings, the Assessing Officer observed that the assessee had availed an External Commercial Borrowing (ECB) from its Swiss parent company, which was subsequently converted into equity shares. On account of yearend restatement of the outstanding ECB liability at the prevailing exchange rate, the assessee had debited a foreign exchange fluctuation loss of Rs.18,23,420/- to its Profit & Loss Account and claimed the same as a deduction. The Assessing Officer held that since the ECB was utilized for capital purposes and was ultimately converted into share capital, the foreign exchange fluctuation loss arising on restatement of such liability was capital in nature and, therefore, not allowable as a revenue expenditure. Accordingly, the AO disallowed the claim of Rs.18,23,420/- and added the same to the total income. However, after set-off of brought forward losses, the assessed income remained at Nil, while book profit under section 115JB was determined at Rs.57,06,863/-.

3. On appeal, the ld.CIT(A), after considering the assessment order, the grounds of appeal and the written submissions of the assessee, upheld the action of the Assessing Officer. The ld. CIT(A) held that the foreign exchange fluctuation loss of Rs.18,23,420/- arising on restatement of the External Commercial Borrowings was capital in nature, as the borrowing was connected with the capital structure of the company and was subsequently converted into equity shares. Accordingly, the loss could not be allowed as a revenue deduction. The ld.CIT(A) further observed that the disallowance made by the Assessing Officer was in accordance with the facts of the case, the applicable legal provisions and the judicial precedents governing the issue. Consequently, the addition made by the Assessing Officer was confirmed and all the grounds raised by the assessee were dismissed.

4. The issue for consideration is whether the foreign exchange fluctuation loss of Rs.18,23,420/- arising on year-end restatement of an External Commercial Borrowing obtained from the parent company, which was subsequently converted into equity shares, is allowable as a revenue deduction or is to be treated as a capital loss not allowable under the Act.

5. We have heard the rival submissions and perused the material available on record. The solitary issue involved in the present appeal is whether the foreign exchange fluctuation loss arising on restatement of an External Commercial Borrowing obtained from the parent company, which was utilized for capital purposes and subsequently converted into equity shares, is allowable as a revenue expenditure.

6. We find that an identical issue has been considered by the coordinate Bench of the Tribunal in the assessee’s own case in Egger Pumps India (P) Ltd v. ITO [IT Appeal No. 3104 (Chny) of 2024, dated 18-6-2025] for A.Y. 2011-12. The Tribunal, while following its earlier order in the assessee’s own case for A.Y. 2012-13 Egger Pumps India (P) Ltd v. ITO [IT Appeal No. 477 (Mds) of 2017, dated 1-9-2017], held as under:

“In the present case, it is noted that the loan has been given by the parent company for the purpose of acquisition of capital asset and correspondingly the loan is in the capital field and the loss arising on account of restatement of the liability, which is in the capital field to be considered as capital nature and it is a capital loss cannot be considered as deduction while computing the income of assessee as a business expenditure.”

The Tribunal further observed that, in the absence of any change in facts or law, there was no infirmity in the order of the CIT(A) and accordingly dismissed the appeal of the assessee.

7. In the present case also, the assessee has not brought on record any material to demonstrate that the facts are distinguishable from those considered by the co-ordinate Bench in the assessee’s own case. No change in the factual matrix or in the applicable legal position has been pointed out before us.Therefore, respectfully following the decision of the co-ordinate Bench in the assessee’s own case for A.Y. 2011-12 in ITA No.3104/Chny/2024 dated 18.06.2025, we uphold the order of the ld. CIT(A) sustaining the disallowance of the foreign exchange fluctuation loss of Rs.18,23,420/-.Accordingly, the grounds raised by the assessee are dismissed.

8. In the result, the appeal of the assessee is dismissed.