Unrealized foreign exchange gain on reinstating ECBs for domestic

Unrealized foreign exchange gain on reinstating ECBs for domestic capital assets is taxable under Section 43AA.

Issue

Whether unrealized foreign exchange gain arising on the year-end reinstatement of foreign-currency External Commercial Borrowings (ECBs) used to purchase capital assets in India falls under Section 43A or is taxable under Section 43AA.

Facts

ECB Utilization: The assessee-company raised foreign-currency-denominated External Commercial Borrowings (ECBs) and utilized the funds to acquire capital assets located within India.
Accounting Treatment: At the end of the previous year (AY 2017-18), the assessee recognized an unrealized foreign exchange gain arising from the year-end mark-to-market reinstatement of the long-term ECB liability.
AO Action: The Assessing Officer held that Section 43A was not applicable since the capital assets were acquired in India (not imported from abroad), and added the unrealized foreign exchange gain to the taxable income.
Assessee’s Stand: The assessee contended that the special treatment under Section 43A should apply to the foreign exchange fluctuation because the borrowing itself was denominated in foreign currency.

Decision

Section 43A Inapplicable to Domestic Assets: Section 43A applies exclusively to capital assets acquired from a country outside India. Merely because the borrowing is denominated in foreign currency does not bring domestic asset purchases under Section 43A.
Governed by Section 43AA: Since the capital assets were acquired locally in India, the transaction falls outside the statutory boundary of Section 43A, and foreign exchange fluctuations must be governed by Section 43AA.
Taxability Upheld: The assessee is required to recognize foreign exchange gain or loss arising on year-end reinstatement in accordance with Section 43AA and reflect the resultant gain while computing taxable income for AY 2017-18 (In favour of Revenue).

Key Takeaways

Asset Location Determines Section 43A Application: Section 43A applies strictly when capital assets are imported from outside India; it cannot be invoked for assets acquired domestically, regardless of foreign-currency financing.
Mandatory Year-End Reinstatement under Section 43AA: Foreign exchange gains/losses on foreign currency borrowings for domestic capital assets must be recognized in the P&L at the close of the financial year pursuant to Section 43AA (and Income Computation and Disclosure Standards / ICDS VI).
No Capital Adjustment for Domestic Purchases: Foreign exchange variations arising on loans used for local assets cannot be adjusted against the actual cost/written-down value (WDV) of the asset under Section 43A, but must be treated as revenue gains/losses in the relevant assessment year.

IN THE ITAT MUMBAI BENCH ‘F’

Umicore Autocat India (P.) Ltd.

Deputy Commissioner of Income-tax

Pawan Singh, Judicial Member
and ARUN KHODPIA, Accountant Member

I.T.A. No. 419 (Mum) of 2026
[Assessment year 2017-18]

SEPTEMBER 4, 2026

Kishor Mehta, CA for the Appellant. Harendra Verma, Sr. DR for the Respondent.

ORDER

Arun Khodpia, Accountant Member.- This appeal is preferred by the assessee, challenging the order of the Commissioner of Income Tax Appeals, National Faceless Appeal Centre (NFAC), Delhi [in short, “the Ld. CIT(A)”], dated 10.11.2025 for the Assessment Year (AY) 2017-18,arises from the assessment order under section 143(3) of the Income Tax Act, 1961 [in short, “the Act”] dated 10.04.2021, passed by National e-Assessment Centre, Delhi [in short, “the Ld.AO”].

2. The grounds of appeal raised by the assessee are as under:

“Ground 1: Incorrect disallowance of Rs. 2,61,42,826

(a) The learned CIT(A) erred in confirming the addition of Rs. 2,61,42,826 made by the Assessing Officer on account of alleged unrealised foreign exchange gain arising on reinstatement of Long-Term External Commercial Borrowing (ECB), thereby wrongly reducing the returned loss of Rs. 18,79,04,371 to Rs. 16,17,61,545.

(b) The learned CIT(A) erred in law in upholding the application of section 43A of the Act to unrealised foreign exchange fluctuation on ECB, despite the undisputed fact that: (a) no repayment of the ECB liability was made during the year; and (b) section 43A applies only upon actual payment of foreign currency liability and only for adjustment to the actual cost of imported assets.

(c) The learned CIT(A) failed to appreciate that unrealised foreign exchange gain arising on restatement of a long-term foreign currency loan availed for acquisition of capital assets is purely notional and capital in nature and does not constitute taxable income under the Act.

(d) The learned CIT(A) erred in law and on facts in sustaining the addition on the ground that the ECB was partly utilised for acquisition of indigenous assets and that unrealised exchange gain relatable thereto is taxable, ignoring that the Act does not provide for taxation of notional gains merely because the underlying assets are indigenous.

(e) The Appellant craves leave to add, alter, amend or withdraw any of the above grounds of appeal at or before the time of hearing.

3. Brief facts of the case are that the assessee is a company, engaged in the business of manufacturing and trading of automotive catalysts and providing technical support services. The return of income was e-filed on 29.11.2017 declaring total income at Rs.18,79,04,371/-. The case thereafter was selected for scrutiny through CASS and notices u/s 143(2) and 142(1) were issued to the assessee calling for certain information through questionnaires, which were responded by the assessee by filing of details such as audited accounts, audit report and other supporting submissions.

4. On perusal of the information and document furnished by the assessee, the Ld. AO found that as per Form 3CEB, the assessee has carried out international transaction with associate enterprises therefore, there was involvement of TP issues. Accordingly, the matter was referred to Transfer Pricing Officer (in short, “The TPO”) u/s 92CA(1) of the Act on 09.03.2019. However, the TPO in return has passed an order u/s 92CA(3) stating that the value of international transactions/specified domestic transactions with the Associate Enterprises (AEs) are at Arm’s Length Price (ALP) and need not be disturbed. Accordingly, no exchange transfer pricing adjustment was made. The Ld. AO further observed that the assessee has claimed certain unrealized exchange gain on long-term ECB for acquisition of indigenous asset and unrealized exchange gain on reinstatement of capital creditors.

5. It is further observed by the Ld. AO that the assessee has not differentiated between unrealized gain arising out of foreign currency fluctuation in respect of foreign currency loan obtained and used for acquiring indigenous assets and imported assets. The Ld. AO further observed that section 43A under which claim of deduction on account of foreign exchange was made is applicable only if asset has been imported from outside India and such provisions are not applicable in respect of foreign currency loan obtained and used for acquiring indigenous assets. As per facts on record, ostensibly it is not disputed that the assessee has utilized its foreign currency loans for the purpose of acquiring imported plant and machinery as well as indigenous plant and machinery. The Ld. AO, in terms of aforesaid view expressed by him has computed the ratio of unrealized exchange gain in terms of assessee’s investment in imported as well as indigenous plant and machinery and worked out the disallowance in the following table:

1	Imported Plant & Machinery	55,88,83,784/-
2	Indigenous Plant & Machinery	32,38,92,872/-
3	Total	88,27,76,656/-
4	% age of Imported	63.31
5	% age of Indigenous	36.69
6	Total Unrealized Exchange Gain (UEG)	7,12,53,273/-
7	UEG where Section 43A is not applicable (i.e. 36.69 % of Rs. 7,12,53,273/-)	2,61,42,826/-
8	UEG where Section 43A is applicable (i.e. 7,12,53,273 – 2,61,42,826)	4,51,10,447/-

6. In above terms, a show-cause notice was issued to the assessee along with draft assessment order, in response to which the assessee has raised certain contentions relying upon the following decisions and findings therein which is reproduced as under:

“a. The Hon’ble Supreme Court in the case of Sutlej Cotton Mills Ltd

b. Union Carbide Limited-Calcutta High Court

C. CIT v. V.S. Dempo & Co Pvt. Ltd- Bombay High Court 206 ITR 291 (Bombay))

d. Periyar Chemicals Limited – Kerala High Court

e. Bestobell (India) – Calcutta High Court

The crux of the assessee’s arguments against the addition proposed is reproduced as under:

“…..In view of the above judicial pronouncements and the applicability of section 43A, at the time of repayment of ECB Loan, we humbly request your goodself to drop the proposed addition of Rs. 2,61,42,826 towards Unrealized Exchange Gain on Long Term ECB for acquisition ofAssets.

Further, we wish to submit that there are plethora ofjudicial precedents which held that gain or loss on foreign exchange fluctuations in respect of loan obtained for the purpose of acquisition of capital/fixed asset shall be treated as capital receipt/capital loss and same cannot be allowed as business expenditure while computing the income from business or profession. The rationale behind the above judicial precedents is that capital loss shall not be allowed as expenditure under the provisions of the Act, similarly Capital receipt cannot be brought to tax as Income under the provisions of the Income Tax Act…..”

7. The aforesaid submissions of assessee could not find favour before the Ld. AO who relied on the decision of Hon’ble Apex Court in the case of Commissioner of Income Ta v. Tata Iron and Steel Co. Ltd. on 17^th December, 1997 taking therefrom the following observations:

“Coming to the question raised, we find it difficult to follow how the manner of repayment of loan can affect the cost of the assets acquired by the assessee. What is the actual cost must depend on the amount paid by the assessee to acquire the asset. The amount may have been borrowed by the assessee, but even if the assessee did not repay the loan it will not alter the cost of the asset. If the borrower defaults in repayment of a part of the loan, the cost of the asset will not change. What has to be borne in mind is that the cost of an asset and the cost of raising money for purchase of the asset are two different and independent transactions. Even if an asset is purchased with nonrepayable subsidy received from the Government, the cost of the asset will be the price paid by the assessee for acquiring the asset. In the instant case, the allegation is that at the time of repayment of loan, there was a fluctuation in the rate of foreign exchange as a result of which, the assessee bad to repay a much lesser amount than he would have otherwise paid. In our judgment, this is not a factor which can alter the cost incurred by the assessee for purchase of the asset. The assessee may have raised the funds to purchase the asset by borrowing but what the assessee has paid for it, is the price of the asset. That price cannot change by any event subsequent to the acquisition of the asset. In our judgment, the manner or mode of repayment of the loan has nothing to do with the cost ofan asset acquired by the assessee for the purpose of his business. We hold that the questions were rightly answered by the High Court. The appeals are dismissed. There will be no order as to costs.”

8. In terms of aforesaid observations, the Ld. AO was of the view that once the asset is purchased and put to use in business later due to change in foreign currency fluctuation, its cost cannot be changed however the assessee is given benefit of change in the cost of asset that has been imported from outside India due to currency fluctuation as per provisions of section 43A. Therefore, the contention of the assessee is not acceptable. Ld. AO also relied on he CBDT’ Circular 10/2017 in which certain FAQs on notified ICDS were circulated and had made the addition of Rs.2,61,42,826/- by disallowing the deduction claimed by the assessee u/s 43A of the Act.

9. The assessee, being aggrieved with the aforesaid findings and rejection of its claim u/s 43A has preferred an appeal before the Ld. CIT(A). The Ld. CIT(A) while adjudicating the issue was not convinced with the arguments made by the assessee and has expressed his view as under:

“After careful consideration of the facts, submissions, and applicable legal provisions, it is concluded that the Assessing Officer has correctly applied the provisions of section 43A in distinguishing unrealized foreign exchange fluctuations relatable to indigenous assets from those connected with imported capital assets. The appellant’s argument that the entire gain represents a capital adjustment cannot be accepted in view of the express statutory restriction under section 43A, which permits adjustment to the actual cost only in respect of imported assets and only upon actual payment. The reasoning adopted by the Assessing Officer is founded on a sound appreciation of law, supported by consistent accounting treatment and the legislative intent behind the provision. The order is therefore consistent with the legislative restriction under section 43A as amended by the Finance Act, 2002, which confines adjustment benefits strictly to imported assets. Accordingly, the addition of Rs. 2,61,42,826 is sustained, and this appeal is dismissed.”

10. Since the contentions of assessee are rejected and the appeal of assessee was dismissed by the Ld. CIT(A), the assessee is in appeal before us.

11. At the outset, Ld. Authorized Representative (AR) of the assessee submitted that the core issue herein to be addressed is that whether the Unrealized Exchange Gain (UEG) arising on the reinstatement of a long-term External Commercial Borrowings (ECB) utilized for acquiring capital asset is a capital receipt and cannot be brought to tax as revenue income, irrespective of whether the assets are imported or indigenous. It is submitted that the character of the gain is capital and not revenue, therefore, the fundamental test for taxability of foreign exchange fluctuation is the purpose of the underlying borrowings. It is submitted that the ECB was taken specifically for the acquisition of fix asset that is plant and machinery and building which is not in dispute in the present case. It is submitted that as per settled principles of law, a capital receipt cannot be taxed as business income u/s 28 unless explicitly provided by the Act. Ld. AR relied on the decision of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 (SC)andCIT v. V.S. Dempo & Co. (P.) Ltd. 206 ITR 291 (Bombay). The second argument of the Ld. AR was that the income is a notional one and cannot be treated as real income therefore, the income tax cannot be levied on a hypothetical income.

12. It is submitted that the unrealized exchange gain on the reinstatement of ECB at the year-end cannot be treated as actual repayment of the principal amount so as to crystallize this gain during the year under consideration. Reliance was placed on the decision of Godhra Electricity Co. Ltd. v. CIT 225 ITR 746 (SC)andCIT v. Excel Industries Ltd. 358 ITR 295 (SC). Ld. AR submitted that the core principle established in Godhara is the “Real Income Theory”. The Hon’ble Supreme Court held that even if the assessee follows the mercantile system of accounting and makes book entries recognizing an income, Income Tax cannot be levied unless that income has actually materialized and truly approved in reality.

13. In the present case, an amount of Rs.7.12 crores unrealized foreign exchange gains on reinstatement of the Long-Term ECB liability is purely notional and unrealized. It is a book entry made at the year-end solely to comply with accounting standards (AS-11/ AS 21) for reinstating foreign currency liabilities. There was no actual repayment of the ECB and hence no real gain materialized in the hands of the company. Ld. AR further submitted that following the principle of consistency also, the assessee has categorically furnished its explanation before the Ld. AO demonstrating that the company has maintained a uniform, symmetrical accounting and tax treatment for foreign exchange fluctuations on its capital borrowings over multiple years. It is submitted that the assessee did not just excluded gains but also voluntarily disallowed his unrealized exchange losses over multiple assessment years because of its capital nature, such as for AY 2016-17, the company has suffered unrealized exchange loss of Rs.9,63,67,238/- which is treated as additional to total income and added back to the income of the assessee. For AY 2018-19, a loss of Rs. 12,87,23,095/- was similarly added back to the total income and so for AY 2020-21 for Rs.6,18,46,870/-.

14. Further for AY 2015-16, the company recorded unrealized exchange gain of Rs.16,72,32,340/- and for AY 2019-20 Rs.3,04,34,370/-. On this aspect, Ld. AR relied on the decision of Hon’ble Apex Court in the case of Radhasoami Satsang v. CIT 193 ITR 321 (SC) wherein the Hon’ble Apex Court has held that while the principle of res judicata does not strictly apply to income tax proceedings (as each assessment year is an independent unit), where a fundamental aspect permeating through different assessment years has been accepted by the authorities, they cannot arbitrarily change that position in a subsequent year without a change in facts or laws. Ld. AR also raised one more proposition stating fallacy in the Ld. AO and CIT(A)’s application u/s 43A that the Ld. AO and CIT(A) incorrectly deduced that because the gain on the indigenous portion cannot be adjusted against the block of assets u/s 43A, it automatically becomes taxable income.

15. In rebuttal to such contentions of the Revenue Authorities, it is submitted by the assessee that section 43A is a machinery provision for calculating depreciation by adjusting the actual cost. It is not charging section. The inability to reduce the cost of an indigenous asset u/s 43A does not automatically transform capital receipt into a revenue receipt. Addressing the AO’s reliance on Tata Iron and Steel Co. Ltd. (SC)., Ld. AR submitted that the Ld. AO used this case to state that cost of asset cannot change due to subsequent currency fluctuations. In fact, even in the said case Hon’ble Supreme Court has held that the loan repayment and assets purchase are two different and independent transactions, the loan remains a capital liability. A notional reduction in a capital liability is a capital surplus, not a taxable revenue profit. Regarding ICDS, it is submitted by the Ld. AR that the ICDS cannot override the capital nature of receipts. The Ld. AO relied heavily on CBDT Circular 10/2017 to argued that ICDS overrides judicial precedents. To respond the aforesaid view of the Ld. AO, Ld. AR submitted that while section 43AA and ICDS-VI (effects of changes in foreign exchange rates) provide for the recognition of exchange differences, it is a settled constitutional and legal principle that delegated legislation (like ICDS) cannot override the substantive provisions of the Income Tax Act. Ld. AR placed his reliance on the decision of Chamber of Tax Consultants v. Union of India 77/400 ITR 178 (Delhi), wherein the Hon’ble High Court had read down several provisions of the ICDS, explicitly stating that ICDS cannot override binding judicial precedents or the basic tenets of the Act. The distinction between capital and revenue is a substantive feature of the Act. ICDS cannot tax a capital receipt.

16. With aforesaid submissions, it was the prayer that the addition made by the Ld. Assessing Officer was on unjustified premises and therefore, the same needs to be vacated and the order of Ld. CIT(A) supporting the findings of Ld. AO needs to be set aside.

17. Per contra, Ld. DR reiterated the facts from the order of Ld. Assessing Officer stating that the 43A benefit cannot be extended for assets acquired within India, the same was rightly allowed by the assessee to the extent of imported assets only. Accordingly, the Ld. AO and Ld. CIT(A) were right in adjudicating the issue by making addition u/s 43A. Therefore, the impugned order of Ld. CIT(A) deserves to be upheld. It is further submitted by the Ld. DR that as per insertion of section 43AA, effected from 01.04.2017, which is brought into the statute by Finance Act, 2018, any gain or loss arising on account of any change in foreign exchange rate shall be treated as income or loss as the case may be on such gain or loss shall be computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145 of the Act. On this issue, in rebuttal the Ld. AR of the assessee submitted that the Ld. Assessing Officer’s case was not based on provisions of section 43AA, therefore such issue cannot be raised at this stage to improve upon the order of Ld. AO and further since the issue herein pertains to AY 2017-18, such provisions brought with effect from 01.04.2017 cannot apply in the present case. Further, the provisions of section 43AA are capital in nature, therefore as per settled constitutional and legal principles such provisions cannot override the substantive provisions of the Income Tax Act.

18. We have considered the rival submissions, perused the material available on record and the case laws relied upon by the assessee. The issue before us is to examine whether the unrealized exchange gain arising on reinstatement of the long-term External Commercial Borrowings (ECB), which were utilized by the assessee for acquiring capital assets in India, is in the nature of a capital receipt or a revenue receipt and, consequently, whether such exchange fluctuation is liable to be brought to tax under the provisions of the Act. In order to examine the aforesaid issue, it would be appropriate to first refer to the provisions of section 43AA of the Act, which were inserted by the Finance Act, 2018 with retrospective effect from 01.04.2017. The said provision specifically deals with the treatment of gain or loss arising on account of change in foreign exchange rates and, therefore, assumes relevance in the facts of the present case. The relevant provisions of section 43AA read as under:

“43 AA. (1) Subject to the provisions of section 43A, any gain or loss arising on account of any change in foreign exchange rates shall be treated as income or loss, as the case may be, and such gain or loss shall be computed in accordance with the income computation and disclosure standards notified under sub-section (2) of section 145.

(2) For the purposes of sub-section (1), gain or loss arising on account of the effects of change in foreign exchange rates shall be in respect of all foreign currency transactions, including those relating to—

(i) monetary items and non-monetary items;

(ii) translation of financial statements of foreign operations;

(iii) forward exchange contracts;

(iv) foreign currency translation reserves. ”

19. On a plan and literal reading of the aforesaid section, any gain or loss arising on account of any change in foreign exchange rate shall be treated as income or loss, as the case may be and such gain or loss shall be computed in accordance with the income computation and disclosure standards notified under sub-section 2 of section 145. The second clause of section 43AA abundantly clarifies that the gain or loss on account of effect of change in foreign exchange rate shall be in respect of Foreign Currency Transactions, which includes any monetary item or non-monetary item, transaction of financial statement of foreign operations, valid exchange contracts or foreign financial translation reserve.

20. In view of the foregoing statutory provisions and the discussion hereinabove, we are of the considered view that the applicability of section 43A of the Act is predicated upon fulfilment of the conditions expressly stipulated therein. Section 43A constitutes a special provision governing the adjustment arising on account of change in the rate of exchange in respect of specified foreign-currency transactions, including transactions relating to acquisition of assets from outside India. The fact that the consideration for acquisition of an asset is financed or discharged out of funds raised through an External Commercial Borrowing (ECB) does not, by itself, render the acquisition of such asset an acquisition from outside India.

21. In the present case, it is an undisputed position that the subject assets were acquired within India. The source of funds, namely, the foreign-currency denominated ECBs, cannot be equated with the situs of acquisition of the assets. Thus, notwithstanding the fact that the assessee had obtained ECB funds in foreign currency, the underlying assets having been purchased in India, the essential statutory condition for invoking the special mechanism contemplated under section 43A is not satisfied. Consequently, the foreign-exchange fluctuation arising in respect of the ECBs cannot be dealt with under section 43A merely on the ground that the borrowed funds originated outside India or were denominated in foreign currency.

22. The question that then arises is as to the provision governing the resultant foreign-exchange gain or loss. Section 43AA specifically provides for the treatment of gains or losses arising from foreign exchange fluctuations in accordance with the prescribed accounting standards. The provision does not, in its application, make a distinction merely on the basis of whether the underlying foreign-currency transaction has a capital or revenue character, except to the extent that a particular transaction is specifically governed by the special regime contained in section 43A. Therefore, where the transaction does not fall within the specific field occupied by section 43A, the consequences arising from foreign-exchange fluctuation would require examination under section 43AA, subject, of course, to the other statutory conditions governing its applicability.

23. Accordingly, in the facts of the present case, the foreign-exchange gain arising on reinstatement, at the year-end, of the foreign-currency denominated ECB liability utilised for acquisition of capital assets in India, would not attract the special treatment prescribed under section 43A merely because the borrowing was denominated in foreign currency. Since the assets financed through such borrowing were acquired in India, the transaction falls outside the statutory scope of section 43A. The resultant foreign-exchange fluctuation is, therefore, required to be considered under the provisions of section 43AA of the Act.

24. Consequently, the assessee was required, in respect of the relevant foreign-currency monetary item, to recognise the foreign-exchange fluctuation arising upon reinstatement at the close of the relevant previous year in accordance with the applicable provisions of law and to give effect to the resultant gain or loss while computing its taxable income for the year under consideration. In the present case, the assessment year being AY 2017-18, the provisions of section 43AA, having been made applicable with effect from 01.04.2017, are attracted for the relevant previous year, subject to the precise statutory and accounting requirements governing such recognition. Thus, the determinative factor for excluding the transaction from the operation of section 43A is not the foreign-currency character or the origin of the funds, but the absence of the statutory condition relating to acquisition of the asset from outside India. Once section 43A is found inapplicable on that ground, the foreign-exchange fluctuation arising from the ECB liability is required to be examined under the otherwise applicable statutory framework, including section 43AA.

25. The ground and contentions of the assessee being violative to the newly inserted provision of section 43AA r.w.s. 43A, cannot suceed, we accordingly upheld the disallowance made by the AO and confirmed by the Ld. CIT(A).

26. In result the appeal of assessee stands dismissed, in above terms.