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2016 (4) TMI 1135 - AT - Income TaxDisallowance of expenditure u/s.14A - Held that - Sec.14A(1) declares the law that the expenditure incurred by the assessee in relation to the income which does not form part of the total income under the Act shall not be allowed as a deduction in computing the taxable income of the assessee. Sec.14A(2) provides for determining the quantum of such expenditure which shall not be allowed as a deduction. That is the machinery provision as far as sec.14A is concerned. In that provision, it has been provided that if the Assessing Officer is not satisfied with the correctness of the computations made by an assessee, he shall compute the quantum in accordance with the method that may be prescribed. For this matter, Rule 8D has already been prescribed. Sub-sec.(3) further provides that even in a case where an assessee claims that no expenditure was incurred, the assessing authority has to presume the incurring of such expenditure as provided under sub-sec.(2) read with Rule prescribed. Therefore, it becomes clear that even in a case where the assessee claims that no expenditure was so incurred, the statute has provided for a presumptive expenditure which has to be disallowed by force of the statute. In a distant manner, literally speaking, it may even be considered for the purpose of convenience as a deeming provision. When such deeming provision is made on the basis of statutory presumption, the requirement of factual evidence is replaced by statutory presumption and the Assessing Officer has to follow the consequences stated in the statute. It means that even in a case where no expenditure is stated to have been incurred, the assessing authority has to apply Rule 8D. As the statutory presumption substitutes the requirement of factual evidence, the question of enquiry does not arise. - Decided in favour of assessee. Allowance of claim of forex loss as revenue expenditure - Held that - In view of the provisions of sec.43A of the Act, at the time of making payments in foreign exchange towards any business asset after the acquisition of the asset - if there is any fluctuation in the rate of exchange leading to an increase or decrease in the liability of the assessee, then the amount of expenditure would have to be considered to be of capital nature, and shall be taken into account in computing the actual cost of the asset as per the provisions of section 43A. The expenses claimed by the assessee were incurred in connection with the purchase of spares for the Dredging Machine and as rightly observed by the Assessing Officer these expenses have incurred on the capital account and therefore the same cannot be allowed as revenue expenditure. The assessee would be entitled to the depreciation on the enhanced value as per the provisions of the Sec.43A of the Income Tax Act and the assessee got relief to that extent - Decided against assessee.
Issues Involved:
1. Disallowance of expenditure under Section 14A of the Income Tax Act. 2. Direction of the CIT(A) regarding the claim of forex loss as revenue expenditure. Issue-wise Detailed Analysis: 1. Disallowance of expenditure under Section 14A of the Income Tax Act: The primary issue in these appeals is the disallowance of expenditure under Section 14A of the Income Tax Act. The Assessing Officer (AO) invoked the provisions of Section 14A read with Rule 8D of the Income Tax Rules, disallowing expenditures of ?98,16,104/-, ?1,69,84,915/-, and ?2,39,01,020/- for the assessment years 2009-10, 2010-11, and 2011-12, respectively. The CIT(A) confirmed the AO's findings, prompting the assessee to appeal. The assessee's representative argued that the disallowance should not exceed the exempt income earned, citing various judicial precedents, including the Delhi High Court's decision in Joint Investments Pvt. Ltd. v. CIT, which emphasized that disallowance under Section 14A should not exceed the exempt income. However, the Department's representative countered that the CBDT Circular No.5/2014 mandates disallowance even if no exempt income is earned in a particular year. Upon reviewing the case, the Tribunal noted the assessee's investments and the resulting exempt income for the relevant years. The Tribunal upheld the AO's disallowance under Section 14A read with Rule 8D, referencing the Tribunal's decision in M/s. Lakshmi Ring Travellers and the Karnataka High Court's judgment in Pradeep Kar v. ACIT, which supported the statutory presumption of expenditure related to exempt income. The Tribunal concluded that the AO's action was correct, as the provisions of Section 14A read with Rule 8D were applicable. The Tribunal also noted that the judgment in Simpson & Co. Ltd. cited by the assessee's representative was not applicable, as it pertained to an assessment year before the introduction of Rule 8D. Consequently, the Tribunal dismissed this ground of appeal. 2. Direction of the CIT(A) regarding the claim of forex loss as revenue expenditure: The second issue pertains to the CIT(A)'s direction to the AO not to allow the claim of forex loss as revenue expenditure. The assessee incurred a forex loss of ?16,47,436/- during the assessment year 2009-10 due to the depreciation of the rupee while repaying a loan for purchasing dredging machinery. The AO disallowed this loss, treating it as capital in nature. The CIT(A) upheld the AO's decision, referencing Section 43A of the Income Tax Act, which stipulates that any fluctuation in exchange rates affecting the liability of an assessee for a business asset should be treated as capital expenditure and adjusted against the asset's cost. The CIT(A) also cited the jurisdictional High Court's decision in CIT v. South India Viscose Ltd., which supported this view. The Tribunal agreed with the CIT(A)'s decision, noting that it was consistent with Section 43A and the jurisdictional High Court's ruling. However, the Tribunal observed that the assessee would be entitled to depreciation on the enhanced value of the asset as per Section 43A. Thus, the Tribunal dismissed this ground of appeal. Conclusion: The Tribunal dismissed all the appeals and the stay petitions filed by the assessee, upholding the AO's disallowance under Section 14A read with Rule 8D and the CIT(A)'s direction regarding the forex loss. The Tribunal's decision was pronounced on April 6, 2016, in Chennai.
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