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2021 (8) TMI 607 - AT - Income TaxDisallowance of foreign exchange loss - assessee itself has failed to prove that the said loans were not used in investment in equity shares and the loan was used wholly exclusively for business purpose - CIT(A) deleting the 50% addition - HELD THAT - As relying on assessee's own case 2020 (5) TMI 674 - ITAT DELHI the matter is being referred to the file Assessing Officer for verification of the utilization of the loan for business purpose by taking into account the amount of the loan raised, the quantum of the own capital and the reserves surplus, utilization of the amount for day-to-day running of the business and utilization of the amount for investment in the equity shares of the subsidiary company or the amount invested for infusion of the capital in any other company. The AO may then take a considered decision with regard to disallowance of interest on loan and bank charges in accordance with the provisions of the Income Tax Act - Appeal allowed for statistical purposes.
Issues Involved:
1. Disallowance of foreign exchange fluctuation loss. 2. Utilization of loans for business purposes. 3. Application of Accounting Standards in assessing foreign exchange losses. Issue-wise Detailed Analysis: 1. Disallowance of Foreign Exchange Fluctuation Loss: The primary issue revolves around the disallowance of foreign exchange fluctuation loss claimed by the assessee. The Assessing Officer (AO) disallowed the loss on the grounds that the loans, on which the fluctuation loss was claimed, were not utilized for business purposes but for investment in equity shares. The learned Commissioner of Income Tax (Appeals) [CIT(A)] partially agreed with the AO, deleting 50% of the disallowance and sustaining the remaining 50%. The CIT(A) referenced the Supreme Court's judgment in CIT Vs Woodward Governor India Pvt. Limited, which allows foreign exchange fluctuation loss as a deductible expense under Section 37(1) of the Income Tax Act if it is incurred in the course of business. 2. Utilization of Loans for Business Purposes: The assessee contended that the loans were indeed utilized for business purposes, specifically for the construction of highways and infrastructure development. The CIT(A) noted that the assessee had used the loans for revenue expenditure and business purposes, including projects supervised for its Malaysian associated enterprises and investments made under commercial expediency to secure contracts. However, the CIT(A) maintained that 50% of the foreign exchange loss could not be conclusively linked to business purposes, leading to a partial disallowance. 3. Application of Accounting Standards: The assessee argued that the foreign exchange losses were accounted for following the mercantile system of accounting and in accordance with Accounting Standard 11 (AS-11) issued by the Institute of Chartered Accountants of India (ICAI). The CIT(A) acknowledged that the assessee had consistently followed AS-11 for revaluing foreign currency loans and advances, which supports the claim that the foreign exchange losses were genuine and allowable under Section 37(1) of the Income Tax Act. Tribunal's Decision: The Tribunal reviewed the rival submissions and relevant material, noting that similar issues had been addressed in preceding assessment years (2010-11, 2011-12, and 2013-14). The Tribunal decided to restore the matter to the AO for verification of the utilization of the loans for business purposes. This decision aligns with the Tribunal's earlier findings, where the AO was directed to verify the utilization of loans by considering the amount raised, the quantum of own capital, reserves, surplus, and the actual use of the funds. Conclusion: The Tribunal concluded that the appeals of the Revenue and the assessee, along with the cross objections, should be allowed for statistical purposes. The AO is tasked with verifying the utilization of the loans for business purposes and making a considered decision regarding the disallowance of foreign exchange fluctuation loss in accordance with the provisions of the Income Tax Act and the directions provided by the Tribunal in earlier years. Order Pronounced: The order was pronounced in the open court on 10th August 2021, allowing all appeals and cross objections for statistical purposes.
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