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2019 (12) TMI 433 - ITAT DELHIDisallowance u/s 14A read with Rule 8D - HELD THAT:- Undisputedly, the assessee has taken the advance of Euro 20,00,000 equivalent to ₹ 11,25,00,000/- from Natural Energy Corporation GmbH against consultancy services and not for investment in mutual funds nor any interest has been paid to Natural Energy Corporation GmbH, there is no question of any direct nexus between exchange fluctuation loss claimed by the assessee with the exempt income earned during the years under assessment. When business advances taken by the assessee company from Natural Energy Corporation GmbH for providing consultancy services though admittedly invested in mutual funds, the same cannot be treated to have been received for the purpose of investment in mutual funds. Meaning thereby, there is no proximate nexus between the advances received and investment made in the mutual funds yielding tax exempt income and in these circumstances, foreign exchange loss suffered by the assessee cannot be disallowed u/s 14A. Moreover, copy of account of Natural Energy Corporation GmbH for AY 2010-11, available at page 25 of the paper book, is duly showing debit of exchange fluctuation gain to advance and corresponding credit to exchange fluctuation gain. Even otherwise, there is no dispute that the assessee is continuously following the mercantile method of accounting and thereby consistently providing exchange fluctuation loss or gain in its account in the year in which the same has been incurred. Hon'ble Apex Court in Woodward Governor India (P.) Ltd. [2007 (4) TMI 118 - DELHI HIGH COURT] we are of the considered view that loss suffered by the assessee on account of foreign exchange rate fluctuation as on date of balance sheet is an item of expenditure u/s 37(1) of the Act and is not liable to be disallowed u/s 14A of the Act. So, the loss suffered by the assessee on account of fluctuation in the rate of foreign exchange is a revenue loss and not a capital loss as held by ld. CIT (A) in AY 2008-09 and contended by ld. DR for the Revenue. Claim of foreign exchange fluctuation loss - revenue loss OR capital loss - Similarly, there is no direct nexus between the entire business advances having been invested by the assessee company in the mutual fund which generated exempt income, exchange fluctuation loss claimed by the assessee with the exempt income and as such, the same cannot be disallowed under Rule 8D(2)(i) of the Act. Consequently, aforesaid question no.1 framed is answered in favour of the assessee and question no.2 is determined against the Revenue.
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