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2021 (12) TMI 455 - AT - Income TaxDisallowance on account of foreign exchange fluctuation loss - HELD THAT - As the purpose of the assessee to borrow the amount from Standard Chartered Bank is concerned, there is no dispute that it was for acquiring 70% stake in Vimercati SPA, which also deals in auto spare parts. By purchase of 70% shares in Vimercati SPA, the assessee stood to benefit in the shape of enhancement of export. It, therefore, establishes the fact that the purchase of shares of Vimercati SPA by the assessee was for commercial expediency and in view of the decision of Hon ble Supreme Court in the case of SA Builders 2006 (12) TMI 82 - SUPREME COURT , such expense shall be deemed to have been incurred for the business purpose and the assessee has got right to decide their affair. So long as the method of repayment does not impact the cost of the asset, which would enhance the benefit in revenue field, we find it difficult to hold that such an expense is not allowable u/s. 37 Even if a capital asset is acquired, the interest or for that matter reinstatement of foreign exchange fluctuation loss could have been capitalized only till the acquisition of capital asset, i.e., acquisition of shares in this case. In the instant case, admittedly the shares were acquired in the financial year ended 31.03.2012 and therefore, the capitalization of the foreign exchange fluctuation loss could, at the most, be relevant for the financial year 2011-12 relevant to assessment year 2012-13 and there is no occasion to treat any part of the interest or for that matter exchange rate fluctuation gain or loss to treat the same as in the capital field during the year under consideration. It is an undisputed fact that for the assessment year 2012-13, 2013-14 and 2016-17, the assessee declared loss on account of foreign exchange fluctuation which was accepted by the Assessing Officer; whereas for the assessment year 2015-16, there was a gain to the tune of ₹ 4.65 crores, which the assessee offered to tax. Having accepted the same for two assessment years earlier and two years subsequent to the current assessment year, it is not open for the Revenue to take an altogether different stand for the current year and the Revenue is expected to follow the rule of consistency - we hold that the loss incurred by the assessee on account of foreign exchange fluctuation is allowable as revenue expenditure and we direct the Assessing Officer to delete the same. Disallowance u/s. 14A read with Rule 8D - Suo moto addition made by assessee - HELD THAT - No borrowed fund on which interest was paid was utilized for purchase of shares, inasmuch as, the own funds of the assessee including the share holding funds, reserves and surplus were to the tune of ₹ 92.62 crores far exceeding the investments during the year, as observed by the ld. CIT(A). It is, therefore, clear that the assessee did not incur any interest expense for investing the amounts in shares so as to earn the exempt income - where the interest component u/r. 8D(2)(ii) has to be deleted straight by restoring only the disallowance u/r. 8D(2)(iii), which is ₹ 1,65,703/- both according to the assessee and the Assessing Officer. In this scenario, the question of restricting the disallowance to the amount of dividend earned does not arise. In such case, instead of restriction, it amounts to expansion which is not permissible under law. We, therefore, hold that the entire addition is liable to be deleted. By observing so, we allow ground of assessee s appeal Disallowance of interest paid on borrowings - According to the Assessing Officer the assessee borrowed loans from its directors, share holders by paying interest at 9% - HELD THAT - There is no dispute and the Revenue did not prove before us that the own funds of the assessee for the relevant year are falling short of the funds lent to its subsidiary. Further in the preceding paragraphs, we held that the subsidiary is also in the same business and the business interests of the assessee are deep in the conduct of business of subsidiary. Therefore, disallowance of interest expense does not appear to be sound and as a matter of fact the findings of the ld. CIT(A) are firmly entrenched into the facts. Inasmuch as the assessee advanced loans to its subsidiary, out of its surplus funds, that too after business expediency, we find that the conclusions reached by the ld. CIT(A) are legal and does not warrant any interference. Addition u/s. 40A(3) - Payment to a person in a day exceeding ₹ 20,000/- -HELD THAT - Since the payment or aggregate of payments made to any person in cash in a day does not exceed ₹ 20,000/-, ld. CIT(A) held that no disallowance u/s. 40A(3) was called for. There is no material contrary to this finding of the ld. CIT(A) and there is no reason for us to take a different view from the view taken by the ld. CIT(A). We, therefore, confirm the same. Consequently, this ground of Revenue s appeal is dismissed.
Issues Involved:
1. Disallowance of foreign exchange fluctuation loss. 2. Disallowance of interest paid on borrowings. 3. Disallowance under Section 14A read with Rule 8D. 4. Disallowance of expenses exceeding ?20,000 under Section 40A(3). Issue-wise Detailed Analysis: 1. Disallowance of Foreign Exchange Fluctuation Loss: The assessee obtained a loan for acquiring shares in Vimercati SPA, Italy, to expand their business. The Assessing Officer disallowed the foreign exchange fluctuation loss, treating it as a capital expense, supported by the Delhi High Court's decision in CIT vs. Jagatjit Industries Limited. The CIT(A) upheld this view. The assessee argued that the expense was for business purposes and should be allowed under Section 37, citing the Supreme Court's decision in SA Builders vs. CIT. The Tribunal agreed with the assessee, noting the business benefits gained from the acquisition and the consistency in treatment of such expenses in previous and subsequent years. The Tribunal directed the deletion of the disallowance, emphasizing that the fluctuation loss should be treated as revenue expenditure. 2. Disallowance of Interest Paid on Borrowings: The Assessing Officer disallowed interest paid on borrowings, arguing that the assessee lent money to its subsidiary at a lower interest rate. The CIT(A) found that the assessee had sufficient own funds and did not use borrowed funds for the loan to the subsidiary. The Tribunal upheld the CIT(A)'s decision, noting that the loans were advanced from surplus funds and were for business expediency. The Tribunal confirmed that no interest should be disallowed as the loans were not made from borrowed funds. 3. Disallowance under Section 14A read with Rule 8D: The Assessing Officer disallowed an amount under Rule 8D(2)(ii) for interest expenses, while the CIT(A) limited the disallowance to the dividend income received. The Tribunal found that the assessee had sufficient own funds and did not use borrowed funds for investments generating exempt income. The Tribunal held that the entire disallowance of ?9,29,235/- should be deleted, retaining only the suo moto disallowance of ?1,65,703/- made by the assessee. 4. Disallowance of Expenses Exceeding ?20,000 under Section 40A(3): The Assessing Officer disallowed expenses exceeding ?20,000 in cash. The CIT(A) found that the payments were made to different persons on different dates, with no single payment exceeding ?20,000. The Tribunal upheld the CIT(A)'s decision, confirming that no disallowance under Section 40A(3) was warranted. Conclusion: The Tribunal allowed the assessee's appeal, directing the deletion of disallowances related to foreign exchange fluctuation loss and interest paid on borrowings. It also reduced the disallowance under Section 14A read with Rule 8D and confirmed the deletion of the disallowance under Section 40A(3). The Revenue's appeal was dismissed. The judgment emphasizes the importance of consistency in tax treatment and the distinction between capital and revenue expenditures.
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