2017 (5) TMI 1160 - HC - Income Tax

Disallowance of expenditure in respect of interest and administrative expenses under Section 14A - Held that - The assessee was already having its own surplus fund and that too to the extent of ₹ 2319.17 Crores against which investment was made of ₹ 111.09 Crores, there was no question of making any disallowance of expenditure in respect of interest and administrative expenses under Section 14A of the Act, therefore, there was no question of any estimation of expenditure in respect of interest and administrative expenses of ₹ 54,39,916/ under rule 8D of the Rules. Thus it cannot be said that the learned Tribunal has committed any error in deleting the disallowance of expenditure incurred in respect of interest and administrative expenses under Section 14A of the Act. We are in complete agreement with the view taken by the learned Tribunal. - Decided against revenue. Disallowance of expenditure incurred towards foreign exchange gain - Held that - The money was borrowed by the assessee in foreign exchange for the purpose of expanding its business and making investment. Therefore, as rightly observed by the learned CIT A as well as the learned Tribunal, the purpose was, on capital account and any exchange fluctuation resulting into profit or loss should be treated on capital account and adjusted from the cost of the asset, but it cannot have any impact on the revenue account. At this stage, it is required to be noted that in the case of the very assessee, the assessee had incurred loss in the same account in the earlier assessment years as well as subsequent assessment year and the treatment given by the assessee has been accepted. Therefore, the learned CIT A as well as the Tribunal has rightly deleted the disallowance made on account of foreign gain. - Decided against revenue.

Summary

Issues Involved:
1. Disallowance of expenditure in respect of interest and administrative expenses under Section 14A of the Income-tax Act, 1961.
2. Disallowance of expenditure incurred towards foreign exchange gain.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure in Respect of Interest and Administrative Expenses under Section 14A of the Income-tax Act, 1961:

The Assessing Officer (AO) disallowed ?54,39,916 in respect of interest and administrative expenses under Section 14A of the Income-tax Act, 1961, read with Rule 8D of the Income-tax Rules. The Tribunal noted that the assessee had a reserve fund of ?2319.17 Crores and made an investment of ?111.09 Crores, indicating that the investment was made from surplus interest-free funds. The Tribunal observed that the AO did not provide cogent reasons for not being satisfied with the assessee's claim regarding the expenditure incurred in relation to exempt income. The Tribunal referenced the Delhi High Court's judgment in Maxopp Investment Limited, emphasizing that the AO must record dissatisfaction with the assessee's claim before determining the expenditure under Rule 8D. Since the assessee demonstrated that the investment was made from surplus funds and not from interest-bearing funds, the Tribunal concluded that the AO was not justified in making the disallowance. Consequently, the Tribunal allowed the appeal by the assessee, deleting the disallowance of ?54,39,916.

2. Disallowance of Expenditure Incurred Towards Foreign Exchange Gain:

The AO disallowed ?39,48,81,350 incurred towards foreign exchange gain. The CIT (A) and the Tribunal observed that the foreign exchange was borrowed for business expansion and investment, making it a capital account transaction. The Tribunal noted that any exchange fluctuation resulting in profit or loss should be adjusted from the cost of the asset and not impact the revenue account. The Tribunal also highlighted that the assessee had incurred similar losses in previous and subsequent assessment years, which were accepted by the Revenue. The Tribunal cited the Supreme Court's decision in ACIT v. Elecon Engineering Company Limited, supporting the assessee's treatment of foreign exchange gains. Consequently, the Tribunal upheld the CIT (A)'s decision to delete the disallowance of ?39,48,81,350.

Conclusion:

The High Court concurred with the Tribunal's findings on both issues. It agreed that the disallowance of ?54,39,916 under Section 14A was unjustified as the investment was made from surplus funds. It also upheld the deletion of ?39,48,81,350 disallowance towards foreign exchange gain, recognizing it as a capital account transaction. The High Court dismissed the Revenue's appeal, affirming the Tribunal's judgment.