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2019 (12) TMI 433 - AT - Income TaxDisallowance 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.
Issues Involved:
1. Disallowance of expenditure under Section 14A of the Income Tax Act read with Rule 8D. 2. Treatment of foreign exchange fluctuation loss as either a revenue loss or a capital loss. Detailed Analysis: Issue 1: Disallowance of Expenditure under Section 14A Background: The Revenue challenged the deletion of the disallowance of ?1,50,20,000/- made under Section 14A read with Rule 8D by the CIT(A) for AY 2008-09. The assessee had invested business advances in mutual funds, generating exempt income. The AO disallowed the expenditure, treating the foreign exchange fluctuation loss as having a direct nexus with the exempt income. Tribunal's Findings: - The CIT(A) allowed the claim of exchange fluctuation loss by treating it as a business loss rather than a capital loss. - The Tribunal upheld this view, noting that the advance of Euro 20,00,000 (?11,25,00,000) was for consultancy services, not for investment in mutual funds. - The Tribunal emphasized that there was no direct nexus between the exchange fluctuation loss and the exempt income earned from mutual funds. - Citing the Supreme Court judgment in Walfort Share & Stock Brokers (P.) Ltd., the Tribunal held that loss on account of foreign exchange fluctuation is not expenditure related to dividend income and cannot be disallowed under Section 14A. - The Tribunal also referenced the decision in Af-Taab Investment Co. Ltd., which held that diminution in the value of investment does not fall under Section 14A. Conclusion: The Tribunal concluded that the foreign exchange fluctuation loss is a business loss and not an expenditure incurred to earn exempt income. Therefore, the disallowance under Section 14A read with Rule 8D was not justified. Issue 2: Treatment of Foreign Exchange Fluctuation Loss Background: The Revenue contended that the foreign exchange fluctuation loss should be treated as a capital loss. The AO had disallowed the loss, arguing it was a balance sheet figure not related to any business transaction. Tribunal's Findings: - The Tribunal noted that the assessee consistently followed the mercantile system of accounting, reflecting exchange fluctuation loss or gain in the year it was incurred. - The Tribunal cited the Supreme Court decision in Woodward Governor India (P.) Ltd., which held that loss on account of foreign exchange fluctuation as on the date of the balance sheet is an item of expenditure under Section 37(1) of the Income Tax Act. - The Tribunal emphasized that the foreign exchange fluctuation loss is a revenue loss, not a capital loss, as it pertains to the business advances received for consultancy services. Conclusion: The Tribunal held that the foreign exchange fluctuation loss is a revenue loss and not a capital loss. Consequently, the loss is allowable under Section 37(1) and not disallowable under Section 14A. Final Judgment: - The appeal by the Revenue (ITA No.503/Del/2012) was dismissed. - The appeal by the assessee (ITA No.134/Del/2014) was allowed. Order Pronounced: The judgment was pronounced in open court on July 29, 2019.
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