2022 (2) TMI 695 - AT - Income Tax

Disallowance of foreign exchange loss on restatement of working capital loans and gold loans - Assessee has borrowed foreign currency working capital loan from Indian Overseas Bank - HELD THAT - When the assessee has taken foreign currency working capital loan for business purpose, then loss on account of any appreciation or depreciation in the value of foreign currency at the end of the relevant accounting year is in the nature of revenue expenditure which can be allowed as deduction. This principle is supported by the decision of M/s.Sutlej Cotton Mills Ltd. 1978 (9) TMI 1 - SUPREME COURT where it was categorically held that profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be a trading profit or loss, if foreign currency is held by the assessee on revenue account or as a trading asset or as a part of capital embarked in the business. See CIT Vs. Woodward Governor India Pvt. Ltd 2009 (4) TMI 4 - SUPREME COURT In this case, the assessee has taken foreign currency working capital for the purpose of business of the assessee and thus, profit or loss arisen on account of restatement of such loan is in nature of revenue expenditure which can be allowed as deduction. The learned CIT(A), without appreciating those facts has simply confirmed additions made by AO. Hence, we set aside order of the learned CIT(A) and direct the Assessing Officer to allow deduction towards foreign exchange loss claimed by the assessee on account of restatement of foreign currency working capital loan and gold loan taken from Indian Overseas Bank. Disallowance of travelling expenses - Assessee failed to file necessary evidences before the AO to justify for travelling expenses claimed in books of account with reference to nexus between expenses and business activities of the assessee - HELD THAT - It is well settled position of law that businessmen are required to incur travelling expenses. Therefore, it cannot be said that total expenditure incurred by the assessee is for personal purposes, but not for business purposes. At the same time, the assessee has also not filed necessary evidences to prove that total expenditure incurred for travelling purpose is for purpose of business. Therefore, we are of the considered view that both parties have failed to justify their cases with necessary reasons. Hence, to settle dispute between the parties, we deem it appropriate to direct the Assessing Officer to restrict disallowance of travelling expenses to 50% of expenses claimed by the assessee for relevant assessment year. Hence, we direct the Assessing Officer to restrict disallowances to 50% of total travelling expenses claimed by the assessee. Ad-hoc disallowance @ 25% of general expenses - AO has disallowed 25% expenses like sale promotion expenses, incentives, vehicle expenses, business promotion expenses etc. on the ground that the assessee has failed to file necessary supporting bills and vouchers to prove expenses incurred for purpose of business of the assessee - HELD THAT - AO has made 25% ad-hoc disallowance of expenses, but failed to give proper reasons for making such adhoc disallowances. It is well settled principle of law that unless the Assessing Officer points out specific defects in books of account maintained by the assessee for certain expenditure, then he cannot make ad-hoc disallowance of expenses. Since both the parties have failed to justify their cases, we are of the considered view that the possibility of incurring certain expenses for personal purposes cannot be ruled and therefore, to resolve dispute between the parties, we direct the Assessing Officer to restrict disallowance of those expenses to 10% of total expenses incurred by the assessee for the assessment year. Appeal filed by the assessee is partly allowed.

Summary

Issues:
1. Disallowance of foreign exchange loss on restatement of working capital loans and gold loans.
2. Disallowance of entire travelling expenses incurred by the appellant for business purposes.
3. 25% ad-hoc disallowance of general expenses.

Issue 1: Disallowance of foreign exchange loss on restatement of loans:
The appellant, a Hindu Undivided Family (HUF) engaged in retail trading of gold jewellery, appealed against the order of the Commissioner of Income Tax (Appeals) sustaining additions made by the Assessing Officer regarding foreign exchange fluctuation losses on restatement of loans. The appellant claimed these losses as business expenditure, but the Assessing Officer disallowed them as 'notional losses.' The appellant argued that these losses were revenue expenditures and should be allowed as deductions. The ITAT Chennai held that when foreign currency loans are taken for business purposes, losses due to currency fluctuations are revenue expenditures, citing judicial precedents. The tribunal directed the Assessing Officer to allow the deduction for foreign exchange losses on working capital and gold loans.

Issue 2: Disallowance of entire travelling expenses:
The appellant claimed travelling expenses for business purposes but failed to provide sufficient evidence to justify the expenses. The Assessing Officer disallowed the entire amount, alleging personal use. The ITAT noted that while the appellant did not adequately prove the expenses were solely for business, the Assessing Officer failed to demonstrate that the expenses were entirely personal. The tribunal directed the Assessing Officer to restrict the disallowance to 50% of the claimed travelling expenses to settle the dispute.

Issue 3: 25% ad-hoc disallowance of general expenses:
The Assessing Officer disallowed 25% of various expenses, such as sale promotions and vehicle expenses, due to lack of supporting documentation. The appellant argued that these expenses were genuine and business-related. The ITAT observed that both parties failed to provide sufficient evidence to support their claims. The tribunal directed the Assessing Officer to limit the disallowance to 10% of the total expenses incurred by the appellant for the assessment year to resolve the dispute.

In conclusion, the ITAT Chennai partly allowed the appeal filed by the appellant, directing the Assessing Officer to make specific adjustments regarding the disallowed expenses and losses.