2018 (3) TMI 801 - HC - Income Tax

Loan taken for capital expenditure utilized for working capital and loss on currency fluctuation - allowable business loss - Held that - We find that both the CIT(A) as well as the Tribunal have on perusal of the record, have come to a conclusion that the loan taken was utilized only for working capital requirements. Therefore, loss on account of foreign exchange variation would be allowable as a trading loss. In fact, even the Assessing Officer has held that term loan was not utilized for purchase of plant and machinery. We find that this issue stands covered by the decisions of the Supreme Court in Sutlej Cotton Mills Ltd., v/s. CIT (1978 (9) TMI 1 - SUPREME Court) that loss arising during the process of conversion of foreign currency is a part of its trading asset i.e. circulating capital, it would be a trading loss. No substantial question of law. Appeal on admitted on first substantial question of law a) Whether on the facts and in the circumstance of the case and in law, the Tribunal was justified in law in holding that in exercise of power under Rule 46 (A)(4) of the Income Tax Rules 1962, the CIT(A) can rely upon documents called for by him in respect of payment made to certain parties claimed as expenditure without giving notice/ hearing the other side on the additional documents called for?

Summary

Issues:
1. Interpretation of Rule 46(A)(4) of the Income Tax Rules 1962 regarding the reliance on documents without notice/hearing.
2. Allowability of foreign exchange fluctuation loss as business loss.

Analysis:

Issue 1: Interpretation of Rule 46(A)(4) of the Income Tax Rules 1962:
The case involved a challenge to an order passed by the Income Tax Appellate Tribunal (the Tribunal) for Assessment Year 2009-10. The primary issue raised was whether the CIT(A) can rely on documents called for by him without giving notice/hearing to the other side. The Tribunal had to consider if the power under Rule 46(A)(4) of the Income Tax Rules 1962 allowed such reliance. The Court admitted the appeal on this issue for further consideration.

Issue 2: Allowability of foreign exchange fluctuation loss as business loss:
Regarding the claim of a loss arising from foreign exchange fluctuation on a term loan, the facts revealed that the loan was initially taken for capital expenditure but was utilized for working capital needs. The Assessing Officer disallowed the claim, deeming it as notional, as the loan was not used for the intended purpose of purchasing assets. However, the CIT(A) and the Tribunal both concluded that the loan was indeed used for working capital requirements, making the loss on foreign exchange fluctuation allowable as a trading loss. The Court cited relevant precedents to support this conclusion, emphasizing that such losses are part of trading assets and are thus allowable as expenditure. The Court found that the issue was adequately addressed by the lower authorities and did not raise any substantial question of law, leading to the dismissal of the appeal on this issue.

In conclusion, the High Court of Bombay addressed the issues raised in the appeal concerning the interpretation of Rule 46(A)(4) of the Income Tax Rules 1962 and the allowability of foreign exchange fluctuation loss as a business loss. The judgment provided detailed analysis and reasoning for each issue, ultimately leading to the dismissal of the appeal on the second issue while admitting it for further consideration on the first issue.