2020 (7) TMI 37 - AT - Income Tax

Revision u/s 263 - disallowance u/s 14A read with Rule 8D - HELD THAT - We modify the order passed by Ld Pr. CIT and direct the AO to examine the claim of the assessee and compute the addition to be made under clause (f) to Explanation 1 to sec.115JB of the Act independently without having regard to the provisions of sec.14A of the Act. Foreign exchange fluctuation loss arising on account of re-statement of outstanding foreign currency loan - AO did make enquiries on this issue and has accepted the explanations of the assessee - HELD THAT - We notice from the above said letters furnished by the assessee before the AO that the assessee has explained as to how the loss has arisen, why the provisions of sec.43A are not applicable and why the claim is on account of revenue expenditure. We have noticed that the Ld Pr. CIT has correctly explained that the provisions of sec.43A shall apply only to those fluctuations in foreign currency which arises at the time of making repayment of loan, i.e.., it does not apply to marked to market loss arising on account of restatement of loan at the year end. We notice that the Ld Pr. CIT has brought out the fact that the notional foreign currency loan has been taken by the assessee for acquiring fixed assets and hence it has capitalized the foreign currency fluctuation loss arising on restatement of outstanding loan in its books of accounts. The Ld Pr. CIT has also placed reliance on the decision in the case of Sutlej Cotton Mills 1978 (9) TMI 1 - SUPREME COURT wherein it has been held that the deduction of foreign currency fluctuation loss would depend upon the question as to whether the same is on capital account or revenue account. Admittedly, the AO did not examine this important aspect while completing the assessment proceedings. Hence, we are of the view that the assessment order is rendered erroneous, in view of the non examination of the issue in proper perspective. We have noticed earlier that the Ld Pr. CIT has also taken a view that the market to market loss is a notional loss. However, various case laws discussed above do not support the view taken by Ld Pr. CIT. Accordingly we set aside the said view of Ld Pr. CIT. We are of the view that the Ld Pr. CIT was justified in restoring this issue to the file of the AO.

Summary

Issues Involved:
1. Addition under Explanation-1(f) to Section 115JB of the IT Act.
2. Deduction of foreign exchange fluctuation loss.

Issue-wise Detailed Analysis:

1. Addition under Explanation-1(f) to Section 115JB of the IT Act:

The assessee challenged the revision order passed by the Principal Commissioner of Income Tax (Pr.CIT) under Section 263 of the IT Act for the assessment year 2013-14. The Pr.CIT found the assessment order erroneous and prejudicial to the interests of revenue, particularly for not adding the disallowance under Section 14A to the book profit as per Explanation-1(f) to Section 115JB. The assessee argued that no exempt income was earned, and thus, no expenditure related to such income was incurred, making Explanation-1(f) inapplicable. The Pr.CIT disagreed, stating that the amount disallowed under Section 14A should be added to the book profit. The Tribunal, however, noted that the Special Bench of the ITAT in the case of Vireet Investments (P) Ltd had held that disallowance under Section 14A for normal provisions cannot be imported for book profit computation under Section 115JB. The Tribunal directed the AO to independently examine and compute the addition under Explanation-1(f) without regard to Section 14A.

2. Deduction of Foreign Exchange Fluctuation Loss:

The second issue was the assessee's claim of a ?22.93 crore foreign exchange fluctuation loss on the restatement of outstanding foreign currency loans. The assessee argued that the loans were converted to US Dollar loans for lower interest rates and that the loss, though capitalized in books, should be deductible as revenue expenditure. The Pr.CIT disagreed, noting that the loss was not debited to the Profit & Loss account and cited the Supreme Court's decision in Woodward Governor India Pvt. Ltd, which allows such losses as revenue expenditure only if debited to the P&L account. The Tribunal found that the AO did not properly examine whether the loss was on capital or revenue account, as guided by the Supreme Court in Sutlej Cotton Mills. The Tribunal upheld the Pr.CIT's decision to restore the issue to the AO for re-examination but set aside the Pr.CIT's view that marked-to-market losses are notional and thus not deductible.

Conclusion:

The Tribunal partly allowed the appeal, directing the AO to re-examine both issues independently, without being influenced by the Pr.CIT's views. The AO must determine the applicability of Explanation-1(f) to Section 115JB and the nature of the foreign exchange fluctuation loss, ensuring compliance with relevant legal precedents and accounting standards.