2022 (9) TMI 1652 - AT - Income Tax

Disallowance being loss incurred in foreign currency exchange fluctuation on account of ECB loss holding the same as capital in nature - HELD THAT - Admitted facts are that the assessee has availed an external commercial borrowing to part finance its expansion project. The loan was drawn down and utilized for the purpose of fixed assets all of which were purchased from domestic market i.e. domestic assets. The assessee did not use the loan for purchase of assets from abroad. Accordingly fluctuation in the exchange rate viz-a-viz the rate at which loans was available the transactional gain or loss is to be assessed as Revenue. Respectfully following in the case of Wipro Finance Ltd 2022 (4) TMI 694 - SUPREME COURT we allow the claim of assessee. Disallowance of expenses relatable to exempt income by invoking the provisions of section 14A r.w.rule 8D - HELD THAT -Assessee did not make any submission qua which limb of Rule 8D disallowance is made he could not brought out any submissions. Hence we dismiss this ground of assessee. Appeal filed by the assessee is partly allowed.

1. ISSUES PRESENTED and CONSIDERED

The legal judgment presented involves two core issues:

1. Whether the loss of Rs.37,08,705/- incurred by the assessee due to foreign currency exchange fluctuation on account of external commercial borrowing (ECB) should be treated as capital in nature or as a revenue expenditure.

2. Whether the disallowance of expenses related to exempt income, amounting to Rs.61,513/-, under Section 14A read with Rule 8D of the Income Tax Rules, was justified.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Treatment of Foreign Currency Exchange Loss

Relevant legal framework and precedents: The primary legal framework involves Section 43A of the Income Tax Act, which deals with adjustments to the cost of the asset for exchange rate fluctuations when an asset is acquired from a country outside India. The precedent set by the Hon'ble Supreme Court in the case of Wipro Finance Ltd. was also considered, which clarified the applicability of Section 43A.

Court's interpretation and reasoning: The Tribunal interpreted that Section 43A applies only to assets acquired from outside India. Since the assessee's assets were domestic, the loss due to exchange rate fluctuation should not be adjusted against the cost of the assets but considered as a revenue expenditure.

Key evidence and findings: The assessee used the ECB for purchasing fixed assets within India, not from abroad. The loss arose due to exchange rate fluctuations after the loan was availed.

Application of law to facts: The Tribunal applied the law by distinguishing the nature of assets involved (domestic vs. international) and concluded that Section 43A does not apply, thereby treating the loss as a revenue expenditure.

Treatment of competing arguments: The assessee argued based on the Supreme Court's ruling in Wipro Finance Ltd. that Section 43A does not apply to domestic assets. The Revenue relied on the assessment order and CIT(A)'s decision without providing additional arguments.

Conclusions: The Tribunal allowed the assessee's claim, treating the foreign exchange loss as a revenue expenditure, not a capital loss.

Issue 2: Disallowance of Expenses Related to Exempt Income

Relevant legal framework and precedents: Section 14A of the Income Tax Act, along with Rule 8D, provides the framework for disallowing expenses incurred in relation to earning exempt income.

Court's interpretation and reasoning: The Tribunal noted that the assessee received dividend income and the disallowance was a small sum relative to the income earned. However, the assessee did not provide specific arguments against the disallowance under Rule 8D.

Key evidence and findings: The assessee received Rs.8,56,909/- as dividend income, and the disallowance was Rs.61,513/-. No specific arguments or evidence were presented by the assessee regarding the limbs of Rule 8D.

Application of law to facts: The Tribunal upheld the disallowance due to the lack of specific submissions from the assessee challenging the application of Rule 8D.

Treatment of competing arguments: The assessee did not provide detailed arguments against the disallowance, leading to the Tribunal's decision to uphold the Revenue's action.

Conclusions: The Tribunal dismissed the assessee's ground on this issue, maintaining the disallowance of Rs.61,513/- under Section 14A r.w. Rule 8D.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning: "Respectfully following the decision of Hon'ble Supreme Court in the case of Wipro Finance Ltd., supra, we allow the claim of assessee."

Core principles established: The Tribunal reinforced that Section 43A applies only to foreign assets, and losses from exchange fluctuations on domestic assets should be treated as revenue expenditure. It also upheld the application of Section 14A r.w. Rule 8D in the absence of specific challenges from the assessee.

Final determinations on each issue: The appeal was partly allowed. The Tribunal granted relief to the assessee on the foreign exchange loss issue, treating it as a revenue expenditure. However, it upheld the disallowance of expenses related to exempt income due to the lack of specific arguments from the assessee.

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