2016 (9) TMI 1185 - AT - Income Tax

Disallowance of foreign exchange fluctuation loss - loss arising on revaluation of outstanding loans on the balance sheet date on the ground that same is capital loss and is not allowed as deduction - Held that - Notional loss which arises owing to adverse fluctuation in foreign currency rates as on 31-03-2008 which led to restatement / revaluation of interest bearing loans denominated in foreign currency extended by the assessee company to its foreign AE in UAE and which could not be proved by the assessee company to have been extended for trade/business purposes , the presumption shall arise that loan is on capital field until the same is rebutted by the assessee company and hence the said notional loss arising on restatement/revaluation of foreign currency loans as on the date of Balance Sheet as on 31-03-2008 due to adverse foreign exchange fluctuations cannot be allowed as deduction u/s 37(1) of the Act while computing income of the assessee chargeable to tax under the Act. In the instant case the assessee company is not able to demonstrate that the loans/advances granted by the assessee company to its foreign AE in Emirates of Dubai in UAE was in the nature of trade/business advances for the purposes of business of the assessee company which has been in-fact actually utilized by its foreign AE for its business purposes. Hence keeping in view the peculiar facts and circumstances of the case as set out above , we dismiss the appeal filed by the assessee company - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of foreign exchange fluctuation loss on revaluation of outstanding loans.

Issue-wise Detailed Analysis:

1. Disallowance of Foreign Exchange Fluctuation Loss:

The primary issue in this appeal is whether the foreign exchange fluctuation loss of ?15,66,857/- on revaluation of outstanding loans to a foreign associated enterprise (AE) should be allowed as a deduction under the Income Tax Act, 1961.

Facts of the Case:
The assessee company, engaged in waterproofing, restoration, and civil contract works, had granted interest-bearing trade advances/loans to its foreign AE in the normal course of business. The foreign exchange loss arose due to the revaluation of these loans at the year-end. The assessee claimed this loss as a revenue expense under Section 37(1) of the Act, citing consistent accounting practices and the Supreme Court decision in CIT v. Woodward Governor India (P) Ltd.

Assessment Proceedings:
The Assessing Officer (AO) observed that the foreign exchange loss was a notional loss, as there was no settlement of the loan by the balance sheet date. The AO held that under Section 43A of the Act, amended from 1st April 2003, adjustments due to foreign exchange fluctuations are allowable only upon settlement/payment of liabilities. The AO disallowed the loss, distinguishing it from the Woodward Governor case, where the liability was related to the import of raw materials, a trading liability.

First Appeal:
The assessee contended before the Commissioner of Income Tax (Appeals) [CIT(A)] that the loans to the foreign AE were trade investments, and the foreign exchange loss should be allowed as a business expense. The CIT(A) rejected this argument, stating that the loan was a capital asset, and any impairment related to it was not deductible under Section 37(1).

Second Appeal:
In the appeal before the Tribunal, the assessee reiterated its position, emphasizing the business nature of the loan and the inclusion of interest income as business income. The Tribunal considered the rival contentions and the material on record, including case laws.

Tribunal's Findings:
The Tribunal noted that the assessee failed to provide evidence that the loans were used for business purposes by the foreign AE. The primary onus was on the assessee to substantiate its claim, which it failed to do. The Tribunal held that the notional loss due to foreign exchange fluctuations on the revaluation of loans, not proved to be for business purposes, could not be allowed as a deduction under Section 37(1). The Tribunal distinguished the Woodward Governor case, where the loss was related to stock-in-trade, and the ETP International case, where the loans were proven to be for business purposes.

Conclusion:
The Tribunal dismissed the appeal, upholding the disallowance of the foreign exchange fluctuation loss. The decision emphasized the need for cogent evidence to substantiate claims of business-related loans and the applicability of Section 43A for capital assets.

Order:
The assessee company's appeal for the assessment year 2008-09 was dismissed, and the order was pronounced in the open court on 17th August 2016.