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Income Tax Appellate Tribunal, PUNE BENCH “SMC”, PUNE
Before: SHRI D. KARUNAKARA RAO, AM
आदेश/ ORDER
PER D. KARUNAKARA RAO, AM :
This appeal is filed by the assessee against the order of CIT(A)-7, Pune dated 04.08.2017 for the Assessment Year 2012-13.
The effective ground raised by the assessee is extracted hereunder :- “The learned Hon’ble CIT(Appeals)-7, Pune, erred, both in facts and law, in upholding the action of the A.O. in making disallowance of Rs.2,04,793/- by treating it is capital loss, which in fact, was allowable as business expenditure.”
Briefly stated relevant facts include that the assessee is an individual and is engaged in the business of manufacturing of chaddars, towels and others. The assessee in his return of income declaring total income of Rs.90,000/-. During the course of assessment proceedings u/s 143(3) of
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the Act, the Assessing Officer made addition of Rs.2,04,793/- on account of
business loss (foreign exchange difference on interest paid on the loan).
The Assessing Officer further observed that the assessee took loan of
Rs.30,00,000/- from the Laxmi Co-operative Bank Ltd. on 12.05.2011 and
03.06.2011. The said loan was taken for import of weaving machinery from
Turkey. The assessee paid the same to the supplier of machinery in foreign
exchange. Subsequently, on finding of some technical objections, the
proposal for import of the machinery stands cancelled. Consequently, there
was correspondence between the assessee and the importer relating to the
refund of the money consequent to the decision of cancellation of the order
for import of the machinery. Eventually, the suppliers refunded the
amount at that time when the foreign exchange is not favourable to Indian
Rupees. This refund resulted into loss in terms of INR. That is how the
assessee had to foot the losses. Further, on receipt of the refund from Turkey by 20th November, 2011, the loan taken from the Laxmi Co-
operative Bank Ltd. was squared up. The Bank charged interest from May,
2011 to six months on the loan taken by the assessee which is source for
such payment to the Turkey’s supplier in foreign exchange. The interest
amount for this period of Rs.30,00,000/- was claimed as allowable
expenditure. The assessee claimed these two amounts are foreign
exchange on one side on the interest income paid to the Bank on the other
as the allowable business expenditure of the assessee. The Assessing
Officer did not allow the same by holding that the same foreign exchange is
of capital in nature. Per contra, the assessee submitted that these
amounts constitute revenue expenditure. Considering the fact that the
capital transaction for import of machinery did not materialize, the CIT(A)
confirmed the disallowance made by the Assessing Officer.
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Aggrieved with the same, the assessee is in appeal before the
Tribunal with the grounds extracted above.
Before us, ld. Counsel for the assessee narrated the above facts of the
case and submitted that the amount of Rs.2,04,793/- (Rs.80,890/- +
Rs.1,23,903/-) is an allowable expenditure as this amounts are incurred in
connection with the transaction of import of machinery. In this regard, he
relied on various decisions including the decision of Hon’ble Bombay High
Court in the case of Vassantram Mehta & Co. (P.) Ltd. vs. JCIT reported in
63 taxmann.com 102. This case is relevant for ratio that in case where the
assessee forfeited the advances paid in connection with the pre-shipment
packing credit facility, the same constitutes allowable as business
expenditure, no disallowance u/s 36(1)(iii) of interest paid by the assessee
on amount received is called for. Further, this case is relevant for another
legal proposition that whether loss on account of foreign exchange rate
fluctuation reported by the assessee in connection with cancellation of a
contract constitutes an allowable expenditure. He also relied on another
decision of Pune Bench of the Tribunal in the case of Saokar Developers
Pvt. Ltd. vs. ITO vide ITA No.1561/PN/2005, order dated 30.06.2008. For
the proposition in favour of the assessee, he also relied on another decision
of Hon’ble Rajasthan High Court in the case of CIT vs. Anjani Kumar Co.
Ltd. reported in 259 ITR 0114. Ld. Counsel mentioned that irrecoverable
advance payment made by assessee for acquisition of a capital asset which
did not materialize is allowable as business loss. Further, ld. Counsel filed
a written submission explaining the above facts. For the sake of
completeness, the relevant paragraphs of the written submission are
extracted hereunder :-
ITA No.2662/PUN/2017
“The action of Learned Assessing Officer is not in consensus with legal principles in this regards. It is admitted fact that assessee has booked a machinery with foreign supplier and paid certain amounts, due to the quality issue it has cancelled the order and amounts has been refunded therefore assessee has not incurred any capital expenditure on asset which will give him any enduring benefit which is pre-requisite for showing any capital asset. Rather the amount which was incurred by assessee are clear revenue expenditure or at base it can be called as business loss as the relatable capital asset never came into existence. In view of this fact it is most humbly submitted that the action of Learned Assessing Officer is incorrect on facts as well as in law rater since no capital came into existence such irrecoverable expenditure are in the nature of business loss. This proposition is supported by following judiciary proposition. 1. Decision Hon’ble Rajasthan High Court in case CIT vs. Anjani Kumar Co. Ltd. (2003) 259 ITR 0114 wherein it is conclude that (copy enclosed as annexure no.1). “irrecoverable advance payment made by assessee for acquisition of a capital asset which did not materialize was allowable as business loss.” 2. Decision of Hon’ble ITAT, Pune in case of Saokar Developments Pvt. Ltd. vs. ITO in ITA No.1561/PN/2005 wherein it is conclude that (copy enclosed as annexure no.2). enclosed as annexure no.2). “we hereby hold that the assessee was already in the business of development and in the course of the said business suffered the impugned loss. We hereby direct to allow the claim of the loss. Resultantly, the ground raised is allowed. Appeal allowed.”
On the other hand, ld. DR for the Revenue heavily relied on the
orders of the Assessing Officer and the CIT(A).
I heard both the sides on the issue of allowing of sum of
Rs.2,04,793/- forex loss and interest expenditure and also considered the
written submission filed by the assessee as well as decisions relied on by
the ld. Counsel for the assessee. I find there are two limbs of this issue, (i)
relating to the allowability of foreign exchange loss and (ii) relating to the
interest paid to the financial institution who granted loan for import of
machinery, which is stand cancelled due to some technical reasons. On
perusal of the above decisions, I find both the limbs of this issue are
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covered in favour of the assessee by the said decisions. Considering the legal proposition, which is already mentioned in the preceding paragraphs, the issue raised in the ground of appeal by the assessee is allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced on this 20th day of November, 2018.
Sd/- (D. KARUNAKARA RAO) लेखासद�य/ ACCOUNTANT MEMBER पुणे/ Pune; �दनांकDated : 20th November, 2018. Sujeet आदेशक���त�ल�पअ�े�षत/Copy of the Order is forwarded to : अपीलाथ�/ The Appellant; 1. ��यथ�/ The Respondent; ��यथ�/ The Respondent; 2. 2. 3. The CIT(A)-7, Pune; 4. The Chief CIT, Pune; �वभागीय��त�न�ध, आयकरअपील�यअ�धकरण, पुणे“एक-सद�यमामला” / 5. DR ‘SMC’, ITAT, Pune; गाड�फाईल/ Guard file. 6.
// True Copy // आदेशानुसार/ BY ORDER, स�या�पत ��त//True Copy//
Senior Private Secretary आयकरअपील�यअ�धकरण ,पुणे/ ITAT, Pune