2023 (12) TMI 270 - AT - Income Tax

Disallowance of foreign exchange loss u/s. 43A - assessee has incurred foreign exchange loss towards arrangement of the LoC on purchase of fixed assets - CIT(A) has treated it as a capital expenditure and not to be treated as a revenue expenditure - HELD THAT - The loss suffered by the assessee is directly linked with the purchase of fixed assets which is capital in nature. Though forex gain/ loss is arising on account of assurance for payments of capital assets are capital in nature which cannot be charged to the profit and loss account. Apex Court has held in the case of Tata Locomotive and Engineering Co. Ltd. 1966 (1) TMI 24 - SUPREME COURT that the forex gain on money accumulated to purchase capital asset being the first step for acquisition of capital asset is capital in nature and cannot be taxed. The assessee made advance payments through Letter of Credit is the first step for acquisition of capital asset because there was a direct link of LOC towards purchase of the fixed assets, therefore it will be treated as capital in nature. Section 43(1) has defined the actual cost of the assets. Therefore the actual loss suffered by the assessee cannot be charged to the profit and loss account. CIT(A) has rightly decided the issue in favour of the revenue. However, the AO is directed to give benefit of depreciation as per section 32 of the IT Act in the current year as well as in following years if there is effect on the following years. This issue is partly allowed for statistical purposes. Addition u/s 14A r.w.r. 8D - As argued Only the investments yielding non-taxable income have to be considered and not all investments - HELD THAT - CIT(A) has dealt with this issue in detail however he has not considered the issue completely as per Rule 8D(2)(iii). The disallowance should be calculated as per Rule 8D(2)(iii) considering only the investments in which the assessee has received exempt income. In similar issue in the assessee s own case for the AY 2014-15 2023 (9) TMI 108 - ITAT BANGALORE wherein held that while calculating disallowance under section 14A of the Act, only investment that have generated exempt income should be taken into consideration. This issue is allowed for statistical purposes.

Summary

Issues Involved:

1. Disallowance of foreign exchange loss under Section 43A of the Income Tax Act.
2. Disallowance under Section 14A read with Rule 8D.

Summary:

1. Disallowance of Foreign Exchange Loss under Section 43A:

The assessee contended that the foreign exchange loss of Rs. 48,23,924 incurred due to advance settlement of payment by letter of credit before receipt of fixed assets should not be disallowed under Section 43A. The assessee argued that the loss had no direct nexus with the acquisition of fixed assets and should be treated as revenue expenditure. The Assessing Officer (AO) and CIT(A) treated the loss as capital in nature, relying on judgments from the Supreme Court in cases like Woodward Governor Ltd., Tata Locomotive and Engineering Co. Ltd., and Sutlej Cotton Mills Pvt. Ltd. The Tribunal upheld the CIT(A)'s decision, stating that the loss suffered was directly linked to the purchase of fixed assets, which is capital in nature. The AO was directed to give the benefit of depreciation as per Section 32 of the IT Act.

2. Disallowance under Section 14A read with Rule 8D:

The assessee challenged the disallowance of Rs. 4,69,055 under Section 14A, arguing that only investments yielding exempt income should be considered for disallowance under Rule 8D(2)(iii). The CIT(A) had restricted the disallowance to Rs. 4,69,055 but did not fully consider the issue as per Rule 8D(2)(iii). The Tribunal, following the Delhi High Court's judgment in ACB India Ltd. v. ACIT, held that only investments that generated exempt income should be considered for disallowance under Section 14A. The Tribunal deleted the disallowance made under Section 14A, amounting to Rs. 4,69,055, and allowed the appeal for statistical purposes.

Conclusion:

The appeal filed by the assessee was allowed for statistical purposes, with directions to the AO to give the benefit of depreciation for the foreign exchange loss and to reconsider the disallowance under Section 14A by considering only investments that generated exempt income.