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Income Tax Appellate Tribunal, DELHI BENCH ‘D’ : NEW DELHI
Before: SHRI R.K. PANDA & SHRI KULDIP SINGH
PER KULDIP SINGH, JUDICIAL MEMBER :
both the aforesaid appeals, one for AY 2008-09 filed by the Revenue and another for AY 2009-10 filed by the assessee, the same are being disposed off by way of composite order to avoid repetition of discussion.
Appellant, ACIT, Circle 16 (1), New Delhi (hereinafter referred to as the ‘Revenue’) by filing the present appeal being sought to set aside the impugned order dated 01.11.2011 passed by the Commissioner of Income-tax (Appeals)- XIX, New Delhi qua the assessment year 2008-09 on the grounds inter alia that :-
“1. "On the facts and in the circumstances of the case and in law the learned CIT (A) erred in deleting the disallowance of Rs.1,50,20,000/- made u/s 14A of the Income tax Act read with Rule 8D of the Income tax Rules, 1962. 2. On the facts and in the circumstances of the case and in law the learned CIT (A) erred in deleting the observation of the AO that the Foreign Exchange Fluctuation loss was a capital loss which was erroneously held to be revenue loss by the learned CIT (A)."
Appellant, M/s. Theolia Wind Power Pvt. Ltd. (hereinafter referred to as the ‘assessee’) by filing the present appeal being sought to set aside the impugned order dated 16.09.2013 passed by the Commissioner of Income-tax (Appeals)- 19, New Delhi qua the assessment year 2009-10 on the grounds inter alia that :- ./2012 ITA No.134/Del./2014 “1. That on the facts and law involved the Ld. Commissioner of Income Tax (Appeals) [Ld. CIT(A)] has erred in confirming the disallowance of a sum of Rs.96,17,616/- being the amount of exchange fluctuation loss provided at the year end on business advance pending adjustment 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.
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 the addition is unwarranted and not capable of being sustained. 5. That the above additions/disallowances have been made without specific lawful opportunity accorded. Accordingly, also the additions/disallowances are against the principles of equity, natural justice, fair play and the provisions of the Act and as such, the additions/disallowances are liable to be struck. 6. That the grounds of appeal as herein are without prejudice to each other.”
4. Briefly stated the facts necessary for adjudication of the issues at hand raised in both the appeals are : the Assessee company is into the business of installation and sale of wind mills and consultancy services in relation to wind mills projects. In Assessment Years 2008-09 and 2009-10, the assessee company has Rs.11,25,00,000/- from Natural Energy Corporation GmbH against consultancy services. It is the case of the assessee company that since no services have been rendered during the year, the said business advance continued to be reflected as advance in the customer’s books as on 31.03.2008 as current liability in Schedule IX. Assessee company claimed business loss on account of fluctuation in rate of foreign exchange in the balance sheet as on 31.03.2008. Assessee company claimed to have invested surplus business receipts and some capital receipts in mutual funds and claimed dividend in the shape of exempt income thereon. As against the investment of Rs.15,02,80,086/- in mutual funds as on 31.03.2008, assessee company claimed dividend income of Rs.58,84,073/- & Rs.5,82,373/- in AY 2008-09 & AY 2009-10 respectively. Assessing Officer (AO) by invoking the provisions contained under section 14A of the Income-tax Act, 1961 (for short ‘the Act) read with Rule 8D(2)(i) of the Income-tax Rules, 1962 (for short ‘the Rules’) made disallowance of Rs.1,50,20,000/- and Rs.96,17,616/- in AY 2008-09 & AY 2009-10 respectively by treating the foreign exchange loss on business advance as a capital under Rule 8D(2)(i) of the Rules.
5. Assessee carried the matter by way of an appeal before the ld. CIT (A) who has deleted the addition in AY 2008-09 by treating the foreign exchange loss as Revenue loss. However, ld. CIT (A) confirmed the addition made by AO 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.
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.
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 disallowed an amount of Rs.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. Ld. DR also filed written submissions which are extracted so as to bring the same on record as under :-
“In addition to oral arguments, a written submission is being furnished for the consideration of the Hon'ble Bench. There are essentially two issues of appeal being agitated by the Revenue (503/0/12(D/A). (i) Disallowance of expenditure u/s 14A to the tune of Rs. 1.50 Cr. by the AO which was allowed by the Ld. CIT(A). (ii) Disallowance of exchange fluctuation loss by the AO treating as capital expenditure was allowed by the Ld. CIT(A) treating the same as revenue expenditure.( Rs……for A.Y 2008-09 and Rs.96,17,616 for A.V 2009-10) 1. Disallowance of expenditure u/s 14A by the AO which was allowed by the Ld. CIT(A). Advance from customers was solely utilized in making investments in mutual funds which generated exempt income for the company. Advance of Rs. 11.25 Cr was received on 2.11.2007 for the services rendered by the company for setting up wind energy products in India. However, no services were rendered either during the year under consideration nor the next year. So, the advance kept on standing in the books of the assessee for two years. This was invested in mutual funds. The Ld. CIT(A) gives no cogent reasons for deleting the same. He simply states that the advances received were for the purpose of business without appreciating that assessee has not furnished an iota of evidence regarding the advances being business advances. There is neither any agreement nor any actual utilization of even a penny of the advances received.
./2012 ITA No.134/Del./2014 It is important to make note of the fact that the assessee itself disallowed an amount of Rs.3.91 lakh on account of Sec 14A which proves that principally it is agreeable to the disallowance. In so far as amount is considered it should be in consonance with Rule 8D as stipulated in the Act and not any adhoc basis as done by the assessee. The AO has rightly disallowed the amount on the basis of method stipulated in rule 8D . There was no basis for the Ld. CIT(A) to hold that the loss as on account of business loss as the advances were invested in mutual funds. The Ld. CIT failed to appreciate that the assessee had not given an iota of evidence to establish or corroborate that it was a business advance and so there was no reason with CIT(A) to hold that it was business advance. The CIT(A) 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 into income for the assessee, hence the claiming the EF loss as revenue loss is patently flawed and is totally illogical, against the principle of accounting. The Ld CIT(A) has not even adjudicated on this ground and only spoken the language of the assessee as clear from para 8 of his order without realizing that the said amount was always an advance and had no occasion to reach P&L Account, so there was no question of allowing the EF loss on this account. It is further argued that- (i) Since no income accrued against the advance, the accrual of loss or expenditure against the same is not admissible.
(ii) Further, it is not permissible to allow claim of loss or expenditure of that transaction during the year and postpone the accrual for future. (iii) Both income and expenditure are to be recorded simultaneously in matching concept of expenditures/loss are accounting as also in mercantile system of accounting (iv) Also, if income cannot be determined or still be accrued r the related expenditure/loss are claimed to WIP and debited to P&L A/c The Ld. CT(A) in the year 2009-10 has confirmed this issue. Pl refer to para 3.4 pg 10 onwards of the order. (Read during the hearing) Hence in view of above it is prayed that the AO's order deserves to be confirmed.”
However, on the other hand, ld. AR for the assessee contended inter alia that there is no direct and proximate nexus between exchange fluctuation loss on the business advance taken by the assessee and exempt dividend income earned on mutual fund as no loan/advance has been taken by the assessee for the purposes of investment in mutual funds or in the business; that u/s 14A read with Rule 8D, only expenditure incurred to earn exempt income can be disallowed and any business loss is not covered u/s 14A; that exchange fluctuation loss is not an expenditure under the mandate of section 14A and relied upon CIT vs. Walfort Share & Stock Brokers (P.) Ltd. (2010) 326 ITR 1 (SC), Vishnu Anant Mahajan vs. ACIT (2012) 22 taxmann.com 88 (Ahd.)(SB), Hoshand D Nanvati vs. ACIT (2012) 25 taxmann.com 141
9 ITA No.503/Del./2012 ITA No.134/Del./2014 (Mum.), DCIT vs. Af-Taab Investment Co. Ltd. dated 16.11.2017, Navin Bharat Industries Ltd. vs. DCIT (2004) 90 ITD 1 (Mum.)(TM) and Woodward Governor India P. Ltd. vs. CIT 312 ITR 254 (SC). Ld. AR for the assessee further contended that exchange fluctuation loss is allowable as business loss and relied upon the cases of Oil & Natural Gas Corporation Ltd vs. CIT 322 ITR 180 (SC), CIT vs. 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.
Undisputedly, assessee company has received business advance of Euro 20,00,000 equivalent to Rs.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 and has been consistently reflecting exchange fluctuation loss or gain in its accounts in the year in which the same was incurred.
Undisputedly, assessee company has made investment in mutual funds to the tune of Rs.15,02,80,086/- as on 31.03.2008 and it is also not in dispute that the assessee company has earned tax free dividend income of Rs.58,84,073/- & Rs.5,82,373/- in AYs 2008-09 & 2009-10 respectively. It is also not in dispute that the assessee company has made suo motu disallowance of Rs.3,91,090/- & Rs.1,43,274/- under Rule 8D(iii) in AYs 2008-09 & 2009-10 respectively.
In the backdrop of the aforesaid undisputed facts, orders passed by the Revenue authorities below, arguments addressed by the Authorized Representatives of the parties to the appeals, case laws relied upon, the questions arise for determination in this case is :-
“(i) As to whether claim of foreign fluctuation loss under section 14A as well as under section 37 of the Act is a Revenue loss as contended by the assessee or a capital loss as contended by the ld. DR for the Revenue?; (ii) as to whether when the entire business advance has been invested by the assessee company in the mutual fund which generated exempt income, exchange fluctuation loss claimed by the assessee has direct
So far as deletion of disallowance of Rs.1,50,20,000/- made u/s 14A of the Act read with Rule 8D by ld. CIT (A) is concerned, ld. CIT (A) has decided the issue in favour of the assessee by allowing the claim of exchange fluctuation loss by treating the same as business loss rather than capital loss and also allowed the same u/s 14A of the Act by returning following findings
“6.2 The AO noticed that the assessee invested the advance of Rs.11.25 crores in the mutual funds for Rs.15,02,80,086/ - as per Schedule 4 to Balance Sheet as on 31.03.2008. The AO invoked Rule 8D and worked out disallowance as under: Rule 8D (i) Rs.1,50,20,000 Rule 8D (ii) --- Rule 8D (iii) Rs. 3,91,090 Total Rs.1,54,11,090 Since the appellant itself had disallowed Rs.3,91,090/-, the balance amount of Rs.l,50,20,000/- is disallowed which is disputed in this appeal. The AO disallowed the loss of Rs.1,50,20,000/- on the ground that the loss is related to the investment made the income from which is exempted by invoking Rule 8D r.w.s. 14A. 6.3 The said advance of Rs.11.25 Crores (Euro 20,00,000/-) 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 Rs.1,50,20,000/- on account of foreign exchange
We are of the considered view that when undisputedly, the assessee has taken the advance of Euro 20,00,000 equivalent to Rs.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 Energy Corporation GmbH, there is no question of any direct nexus between exchange fluctuation loss claimed by the assessee with the exempt income earned during the years under assessment.
Hon’ble Apex Court incase cited as CIT vs. Walfort Share & Stock Brokers (P.) Ltd. (supra) decided the identical issue in favour of the assessee by returning following findings :-
"The next question which we need to decide is about reconciliation of sections 14A and 94(7). In our view, the two operate in different fields. As stated above, section 14A deals with disallowance of expenditure incurred in earning tax-tree income against the profits of the accounting year under sections 30 to 37 of the Act. On the other hand, section 94(7) refers to disallowance of the loss on the acquisition of an asset which situation is not there in cases falling under section 14A. Under section 94(7) the dividend goes to reduce the loss. It applies to cases where the loss is more than the dividend. Section 14A applies to cases where the assessee incurs expenditure to, earn tax free income but where there is no acquisition of an asset. In cases falling under section 94(7), there is acquisition of an asset and existence of the loss which arises at a point of time subsequent to the purchase of units and receipt of exempt income. It occurs only when the sale takes place. Section 14A comes in when there is claim for deduction of an expenditure whereas section 94(7) comes in when there is claim for allowance for the business loss. We may reiterate that one must keep in
The ratio of the aforesaid judgment is loss suffered by the assessee in purchase of securities-cum-dividend on account of “sale at loss” is not expenditure relating to dividend income and as such, cannot be disallowed u/s 14A of the Act. Even otherwise, section 14A categorically uses the word expenditure incurred by the assessee in relation to the income and statutory allowance u/s 37 of the Act is not an expenditure.
Coordinate Bench of the Tribunal in case cited as DCIT vs. Af-Taab Investment Co. Ltd. (supra) also decided the issue, “as to whether loss on account of diminution in the value of investment comes in the ambit of section 14A” and held that such diminution loss being not expenditure does not come within the ambit of section 14A.
So, following the decision rendered by Hon’ble Apex Court in the case of CIT vs. 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 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.
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.
Furthermore, Hon’ble Apex Court in case cited as CIT vs. 19.
Woodward Governor India P. Ltd. (supra) has explained the difference between the words “any expenditure” for the purpose of section 37 of the words “expenditure incurred” as per section 14A by returning following findings :-
“WORDS AND PHRASES- "ANY EXPENDITURE", "PROFITS", MEANINGS OF. "Loss" suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet is an ./2012 ITA No.134/Del./2014 item of expenditure under section 37(1) of the Income-tax Act, 1961. Decision of the Delhi High Court in CIT v. WOODWARD GOVERNOR INDIA P. LTD. [2007] 294 ITR 451 affirmed. For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant. This is because profit/loss is embedded in the closing stock. While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increase in profits before actual realization. This is the theory underlying the rule that closing stock is to be valued at cost or market price whichever is lower. Decision of the Delhi High Court affirmed. The expression "any expenditure" has been used in section 37 of the Income-tax Act, 1961, to cover both "expenses incurred" as well as an amount which is really a "loss" even though such amount has not gone out from the pocket of the assessee.”
So, following the decision rendered by Hon’ble Apex Court in CIT vs. Woodward Governor India P. Ltd. (supra), 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.
In view of what has been discussed above, we are of the considered view that claim of foreign exchange fluctuation loss is a 16 ITA No.503/Del./2012 ITA No.134/Del./2014 revenue loss and not capital loss as has been held by the ld. CIT (A) in AY 2008-09. Similarly, there is no direct nexus between the entire business advances having been invested by the assessee company in the mutual fund which generated exempt income, exchange fluctuation loss claimed by the assessee with the exempt income and as such, the same cannot be disallowed under Rule 8D(2)(i) of the Act. Consequently, aforesaid question no.1 framed is answered in favour of the assessee and question no.2 is determined against the Revenue.
In view of what has been discussed above, the appeal bearing Revenue is dismissed and the appeal bearing filed by the assessee is hereby allowed. Order pronounced in open court on this 29th day of July, 2019.