2015 (5) TMI 269 - HC - Income Tax

Disallowance of claim of interest payment - interest-free advances made to sister concern - Held that - Neither the Revenue led any evidence to show how the borrowed funds were utilized by BBPL or the appellant given an opportunity to establish the need of the funds by BBPL for the benefit of appellant-Assesses. In the above view, we set aside the order of the Tribunal disallowing payment of interest to the extent of ₹ 17.27 lakhs and restore the issue to the Tribunal for fresh consideration. It is made clear that the Tribunal would also consider the decision of the Apex Court in S.A. Builders Ltd. (2004 (5) TMI 50 - PUNJAB AND HARYANA High Court ) to decide its applicability to the present facts after letting the parties before it an opportunity to produce evidence in support of their respective cases - Decided in favour of assessee for statistical purposes. Actual loss incurred due to fluctuation in currency rates disallowed - advance received from a foreign buyer and demurrage payable to a foreign buyer - Held that - Claiming of revenue loss on account of foreign exchange rate fluctuation, is an allowable expenditure on the date of making its balance sheet. This revenue loss is not to be postponed to a future date when the transaction gets crystalised either by performance and/or cancellation of the contract. This is so agreed, as the issue now stands covered by Apex Court decision in Commissioner of Income Tax V/s. Woodward Governor India P. Ltd. reported in (2009 (4) TMI 4 - SUPREME COURT ). Therefore, in view of the above, the impugned order dated 8.8.2007 with regard to question (B) is also set aside. However, the issue is restored to the Tribunal for deciding the quantum of loss on account of foreign exchange fluctuation which is to be allowed to the appellant-Assesse under Section 37 of the Act on the facts of this case. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of interest payment due to interest-free advances made to sister concern.
2. Disallowance of actual loss incurred due to fluctuation in currency rates.

Analysis:

Issue 1: Disallowance of Interest Payment
- The appellant claimed interest expenditure on pre-shipment credit but diverted funds to its sister concern, leading to disallowance by the Assessing Officer.
- The Commissioner of Income Tax (Appeals) upheld the disallowance partially, relying on precedents stating interest on borrowed capital advanced to a sister concern is not a permissible expenditure.
- The Tribunal affirmed the disallowance, prompting the appellant to appeal.
- The High Court noted the appellant had its own funds to make advances, but authorities found the funds were borrowed, leading to disallowance.
- Referring to the Apex Court's decision in S.A. Builders Ltd., the Court emphasized that interest paid on borrowed funds cannot be disallowed if advanced to a sister concern for commercial expediency.
- The Court found the Tribunal failed to consider how the borrowed funds were utilized by the sister concern, thus setting aside the disallowance and remanding the issue for fresh consideration.

Issue 2: Disallowance of Loss due to Currency Fluctuation
- The appellant claimed a loss on foreign exchange fluctuation, but the Assessing Officer disallowed a portion of the claimed amount.
- The Commissioner upheld the disallowance, stating that the loss should only be allowed when the goods are supplied against the advances received.
- The Tribunal affirmed the disallowance, leading to the current appeal.
- The High Court referenced the Apex Court's decision in Commissioner of Income Tax v. Woodward Governor India P. Ltd., stating that the revenue loss on currency fluctuation should be allowed when making the balance sheet.
- Consequently, the Court set aside the Tribunal's decision and remanded the issue for determining the quantum of loss to be allowed under Section 37 of the Income Tax Act.

In conclusion, the High Court partially allowed the appeal, quashing the Tribunal's order and remanding both issues for fresh consideration in accordance with the law.