ITAT Allows Foreign Exchange Loss as Revenue Expenditure in Real Estate
The Income Tax Appellate Tribunal (ITAT) in Mumbai has ruled that a foreign exchange loss of Rs. 1,12,449, arising from consulting charges paid to foreign parties, should be allowed as deductible expenditure rather than being capitalized to project costs.
Foreign Exchange LossRevenue ExpenditureItatReal EstateAccounting StandardsReal EstateJul 31, 2025
Macrotech Developers Limited, an entity engaged in real estate development, filed its return for the Assessment Year (AY) 2013-14. During the assessment, the Assessing Officer (AO) noted a foreign exchange loss of Rs. 1,12,449 claimed by the assessee, arising from consulting charges paid to foreign parties for contract-related services.
The AO disallowed the claim, holding that the loss pertained to project-related expenses which should be capitalized to work-in-progress under Accounting Standard-7 (AS-7) and the ICAI Guidance Note on real estate transactions, rather than treated as revenue expenditure. Aggrieved by the AO’s order, the assessee appealed to the Commissioner of Income Tax (Appeals) [CIT(A)].
The CIT(A) held that the consulting charges were revenue in nature and, consequently, the foreign exchange loss thereon should be treated as revenue expenditure, following the assessee's own case for AY 2018-19. Aggrieved by the CIT(A)’s order, the Revenue appealed to the ITAT. The Revenue argued that the loss should be capitalized as it related to construction activities governed by AS-7, and exchange differences must be recognized only upon settlement or intervening periods, but aligned with project cost accounting.
The assessee’s counsel contended that the treatment followed Accounting Standard-11 (AS-11), mandating foreign exchange gains/losses to be charged to the profit and loss account. The counsel emphasized that the underlying expenses were not capitalized, and the disallowance was inconsistent with prior tribunal decisions in the assessee's group cases.
The two-member bench, comprising Pawan Singh (Judicial Member) and Prabhhash Shankar (Accountant Member), observed that the assessee had provided details of the loss, which arose from revenue consulting charges not allocated to project costs. The bench noted that AS-11 requires such losses to be recognized in the profit and loss account, and the AO's reliance on AS-7 was misplaced without evidence of capitalization. It relied on coordinate bench decisions in the assessee's group cases for AY 2015-16, 2017-18, and 2018-19, where similar claims were allowed.
The tribunal upheld the CIT(A)’s order, deleting the Rs. 1,12,449 disallowance and confirming the loss as allowable revenue expenditure. The appeal of the Revenue was dismissed.
Frequently Asked Questions
What is the significance of the ITAT's decision in this case?
The ITAT's decision is significant because it clarifies that foreign exchange losses arising from revenue transactions should be allowed as deductible expenditure, rather than being capitalized to project costs. This provides clarity for real estate developers and other businesses dealing with foreign transactions.
What was the main argument of the Revenue in this case?
The Revenue argued that the foreign exchange loss should be capitalized as it related to construction activities governed by Accounting Standard-7 (AS-7), and exchange differences must be recognized only upon settlement or intervening periods, but aligned with project cost accounting.
How did the assessee's counsel support their case?
The assessee’s counsel contended that the treatment followed Accounting Standard-11 (AS-11), which mandates foreign exchange gains/losses to be charged to the profit and loss account. They also emphasized that the underlying expenses were not capitalized and highlighted prior tribunal decisions in the assessee's group cases.
What did the ITAT bench observe in their decision?
The ITAT bench observed that the assessee had provided details of the loss, which arose from revenue consulting charges not allocated to project costs. They noted that AS-11 requires such losses to be recognized in the profit and loss account, and the AO's reliance on AS-7 was misplaced without evidence of capitalization.
What was the final outcome of the case?
The ITAT upheld the CIT(A)’s order, deleting the Rs. 1,12,449 disallowance and confirming the loss as allowable revenue expenditure. The appeal of the Revenue was dismissed.
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