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TMI Blog2019 (12) TMI 433X X X X Extracts X X X X X X X X Extracts X X X X ..... gn exchange loss suffered by the assessee cannot be disallowed u/s 14A. Moreover, copy of account of Natural Energy Corporation GmbH for AY 2010-11, available at page 25 of the paper book, is duly showing debit of exchange fluctuation gain to advance and corresponding credit to exchange fluctuation gain. Even otherwise, there is no dispute that the assessee is continuously following the mercantile method of accounting and thereby consistently providing exchange fluctuation loss or gain in its account in the year in which the same has been incurred. Hon ble Apex Court in Woodward Governor India (P.) Ltd. [ 2007 (4) TMI 118 - DELHI HIGH COURT] we are of the considered view that loss suffered by the assessee on account of foreign exchange rate fluctuation as on date of balance sheet is an item of expenditure u/s 37(1) of the Act and is not liable to be disallowed u/s 14A of the Act. So, the loss suffered by the assessee on account of fluctuation in the rate of foreign exchange is a revenue loss and not a capital loss as held by ld. CIT (A) in AY 2008-09 and contended by ld. DR for the Revenue. Claim of foreign exchange fluctuation loss - revenue loss OR capital loss - Similarly, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustment against services to be rendered. 2. That the Ld. CIT(A) has erred in holding that the exchange fluctuation loss provided on business advance has no nexus with the business income of the assessee and has direct nexus with the exempt income and is disallowable u/s 14A read with Rule 8D. The advance was received as business advance and not for investments in mutual funds. Exchange fluctuation loss provided at the year end on business advance is in relation to the business and the same cannot be held to be an expense incurred in relation to exempt income. As such and otherwise too there is no warrant in applying the provisions of section 14A and Rule 8D to the same. 3. That the Ld. CIT(A) has erred in not following the decision of his predecessor in AY 2008-09 wherein similar disallowance made by the Ld. AO was deleted. There being no change in facts in this year, the disallowance as confirmed by the Ld. CIT(A) is against the consistency principle. 4. That the above disallowances as confirmed by the Ld. CIT(A) is based on erroneous views and/or non-appreciation of the facts or law involved, without properly considering the submissions and material on record. As such too t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... O in AY 2009-10 by treating the foreign exchange fluctuation loss as capital loss. Feeling aggrieved, against the impugned orders dated 01.11.2011 and 16.09.2013 for AYs 2008-09 & 2009-10 respectively, both the Revenue as well as assessee have come up before the Tribunal by way of filing the present appeals. 6. We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case. 7. Ld. DR for the Revenue challenging the impugned order passed by the ld. CIT (A) for AY 2008-09 contended inter alia that since no services have been rendered to Natural Energy Corporation GmbH by the assessee during the year under consideration nor in the next year, the advance taken by the assessee was invested in mutual funds which has to be treated as capital loss and that when the assessee company has itself disallowed an amount of ₹ 3,91,000/- u/s 14A further disallowance under Rule 8D has not been made out on ad hoc basis and is liable to be sustained and relied upon the order passed by the AO as well as ld. CIT (A) passed in AY 2009-10 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) has conveniently ignored the findings restricted the disallowance to the amount claimed by the assessee. 2. Disallowance of exchange fluctuation (EF) loss by the AD treating as capital expenditure was allowed by the ld. CIT(A) treating the same as revenue expenditure. The AO rightly disallowed the EF loss holding it as capital loss as firstly the said amount was received as ADVANCE by the assessee and not an amount in lieu of any business transaction. So, at first place it is a Balance Sheet figure and it sits in the Balance sheet of the assessee. It is not a figure of receivable or received as income or expended so as to be claimed as expenditure subsequent to business transaction; so the figure has never been a part of P&L account and couldn't be either. Hence there is no question of treating the said amount as revenue expenditure as wrongly claimed by the assessee. Further, it is also submitted that the assessee has nothing to show that the said amount was for rendering services to the related concern. The services were never rendered (which partakes the character of business of the assessee) neither in the current year not the next year. So, the money never translated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fluctuation loss is allowable as business loss and relied upon the cases of Oil & Natural Gas Corpn. Ltd v. CIT 322 ITR 180 (SC), Woodward Governor India P. Ltd. 312 ITR 254 (SC), Taiko Chander Nagar Chemicals P. Ltd. 311 ITR 475, Diamonds 'R' US vs. DCIT (2011) 9 taxmann.com 67 (Mum.) and Hon'ble Delhi High Court in Pr.CIT vs. Samwon Precision Mould Mfg. India P. Ltd. ITA No.72/2018. 9. Undisputedly, assessee company has received business advance of Euro 20,00,000 equivalent to ₹ 11,25,00,000/- from Natural Energy Corporation GmbH against consultancy services. It is also not in dispute that no services have been rendered by the assessee company during the years under consideration and the said advances continued to be reflected as advance by customers in the books of account. It is also not in dispute that the balance sheet reflected the said advance from the customers as current liability in Schedule IX. It is also not in dispute that the assessee company has been consistently following mercantile system of accounting and has been consistently reflecting exchange fluctuation loss or gain in its accounts in the year in which the same was incurred. 10. Undisputedly, assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /-) was not taken by the assessee for the purposes of investment in mutual funds. The advance is a business advance which is on revenue account. Merely because surplus business receipts have been invested by the assessee in mutual funds so as to generate some income for the company, the same cannot be held to have been taken for the purposes of investment in mutual funds. As such, any loss on account of exchange fluctuation in relation to transaction on revenue account is in relation to the business of the assessee and not in relation to investments on which exempt income has been received. 6.4 The loss is incurred in the course of business of the appellant. There is no case for invoking Rule 8D r.w.s. 14A with regard to loss of ₹ 1,50,20,000/- on account of foreign exchange fluctuation. I am in agreement with the contentions of the AR and the disallowance is hereby deleted." 13. We are of the considered view that when undisputedly, the assessee has taken the advance of Euro 20,00,000 equivalent to ₹ 11,25,00,000/- from Natural Energy Corporation GmbH against consultancy services and not for investment in mutual funds nor any interest has been paid to Natural En ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing not expenditure does not come within the ambit of section 14A. 17. So, following the decision rendered by Hon'ble Apex Court in the case of Walfort Share & Stock Brokers (P.) Ltd. (supra) and decision rendered by the coordinate Bench of the Tribunal discussed in the preceding para, we are of the considered view that when business advances taken by the assessee company from Natural Energy Corporation GmbH for providing consultancy services though admittedly invested in mutual funds, the same cannot be treated to have been received for the purpose of investment in mutual funds. Meaning thereby, there is no proximate nexus between the advances received and investment made in the mutual funds yielding tax exempt income and in these circumstances, foreign exchange loss suffered by the assessee cannot be disallowed u/s 14A of the Act. 18. Moreover, copy of account of Natural Energy Corporation GmbH for AY 2010-11, available at page 25 of the paper book, is duly showing debit of exchange fluctuation gain to advance and corresponding credit to exchange fluctuation gain. Even otherwise, there is no dispute that the assessee is continuously following the mercantile method of accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X
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