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Likproof India Private Ltd. Versus Addl. Commissioner of Income Tax – Ward 1 (2) , Mumbai

Disallowance of foreign exchange fluctuation loss - loss arising on revaluation of outstanding loans on the balance sheet date on the ground that same is capital loss and is not allowed as deduction - Held that:- Notional loss which arises owing to adverse fluctuation in foreign currency rates as on 31-03-2008 which led to restatement / revaluation of interest bearing loans denominated in foreign currency extended by the assessee company to its foreign AE in UAE and which could not be proved by .....

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In the instant case the assessee company is not able to demonstrate that the loans/advances granted by the assessee company to its foreign AE in Emirates of Dubai in UAE was in the nature of trade/business advances for the purposes of business of the assessee company which has been in-fact actually utilized by its foreign AE for its business purposes. Hence keeping in view the peculiar facts and circumstances of the case as set out above , we dismiss the appeal filed by the assessee company - De .....

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(A) ), for the assessment year 2008-09, the appellate proceedings before the learned CIT(A) arising from the assessment order dated 21st December, 2010 passed by the learned Assessing Officer (hereinafter called the AO ) u/s 143 (3) of the Income Tax Act,1961 (Hereinafter called the Act ). 2. The grounds of appeal raised by the assessee company in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called the Tribunal ) reads as under:- 1. Learned Commissioner of .....

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l contract works for various clients. 4. During the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act , from the profit and loss account of the assessee company , the A.O. observed that the assessee company has debited an amount of ₹ 12,90,079/ - as foreign exchange loss (net) under the head 'administrative and selling expenses'. The assessee company was required to explain by the AO that how foreign exchange loss in respect of loan to subsidiary compa .....

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x in the return of income filed with the Revenue. The exchange loss of Rs. l5.66 lakhs was arisen consequent to revaluation/restatement of such foreign currency loan as at the year end on 31-03-2008. Such expenditure being revenue in nature is allowable u/s 37(1) of the Act. The assessee company submitted that it is consistently following mercantile system of accounting and in accordance with this method of accounting , the assessee company is required to value all the trading assets and liabili .....

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st in its foreign AE and hence the loan receivable from its foreign AE is a trade investment. The assessee company submitted that the foreign exchange loss accounted for in the profit & loss a/c is laid out and expended wholly and exclusively for the purposes of the business of the assessee company and hence, allowable u/s 37(1) of the Act. The A.O. observed from the copy of foreign exchange loss ledger account filed during the course of assessment proceedings u/s. 143(3) read with Section 1 .....

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nded w.e.f. Ist April, 2003, any adjustment to the cost on account of foreign exchange valuation is allowable only on settlement/payment of the liabilities denominated in foreign currency. The A.O. held that in the instant case the foreign exchange loss is computed as notional loss and further more the loss is not on account of any trading liability but it is related to loans advanced to foreign AE. Hence, the claim of notional loss in respect of the loans to subsidiary concern was not allowable .....

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the assessee company vide assessment order dated 21.12.2010 passed by the AO u/s 143(3) of the Act . 5. Aggrieved by the assessment order dated 21.12.2010 passed by the A.O. u/s. 143(3) of the Act , the assessee company filed its first appeal before the ld. CIT(A). 6. Before the ld. CIT(A) , the assessee company submitted that it had in the normal course of its business granted interest bearing trade advance/loans to its foreign AE as the assessee company has trading interest in the said foreign .....

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March, 2008 from its foreign AE. The revaluation of foreign currency assets as on the balance sheet date was made in accordance with the consistent accounting method followed by the assessee company, hence, the exchange loss of ₹ 15.66 lacs arising consequent upon the revaluation/restatement of such loan as at the yearend should be allowed as expense u/s 37(1) of the Act. The AO had disallowed the said claim of foreign exchange loss on the ground that as per proviso to Section 43A of the .....

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et from a country outside India consequent to change in foreign exchange rate during any previous year after acquisition of such asset. Rather the assessee company has given loan to its foreign AE and not borrowed any sum from its foreign AE, hence, the provisions of section 43A of the Act is not applicable. The assessee company relied upon the decision of Hon ble Supreme Court in the case of CIT v.Woodword Governor India Private Limited (supra) . It was submitted by the assessee company that th .....

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laid out and expended wholly and exclusively for the purposes of the business of the assessee company. The ld. CIT(A) rejected the contentions of the assessee company and observed that the assessee company had advanced money to it's foreign AE. The assessee company could not prove that the money is advanced for any trading purposes. The ld. CIT(A) held that the assessee company had advanced money to it's foreign AE as a loan and any loan given to a person for earning interest income has .....

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company has incurred foreign exchange loss on loans denominated in foreign currency granted to its foreign AE in Emirates of Dubai in UAE on account of restatement/revaluation of loan as on the date of Balance Sheet owing to adverse fluctuation in foreign exchange rates . It is a loss on revaluation/restatement of outstanding loan denominated in foreign currency receivable from the foreign AE. The assessee company is engaged in waterproofing, restoration and civil contract works. The assessee co .....

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mpany s case. The ld. Counsel also relied on the decision of the Tribunal in the case of M/s ETP International Private Limited v. ITO in ITA No. 6506/Mum/2011 for the assessment year 2007-08 vide orders dated 29th August, 2012. He submitted that the interest income earned by the assessee company on these loans denominated in foreign currency are duly included as business income in return of income filed with the Revenue and due taxes have been paid. 9. The ld. D.R., on the other hand, relied on .....

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ced in the file. The assessee company has granted loans denominated in foreign currency to the said foreign AE and also charged interest from the foreign AE of which interest income is offered for taxation as business income which is accepted by Revenue. The assessee company has advanced the loan denominated in foreign currency to said foreign AE and the foreign exchange loss amounting to ₹ 15.66 lacs was debited to its P&L account which arose on account of adverse fluctuation in forei .....

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Financial Statements of the said foreign AE or any other cogent material/evidences are not placed on records to prove and demonstrate that the assessee company extended trade/business advances to its foreign AE in Emirates of Dubai in UAE and the same were in-fact actually utilized towards business purposes by its foreign AE while consistent finding of fact is recorded by authorities below that the assessee company is not able to demonstrate and prove its contentions that the said interest bear .....

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e primary onus was on the assessee company to have led cogent evidences to substantiate its plea of grant of said loans to its foreign AE for purposes of trade/business and its actual utilization by foreign AE for business purposes, which the assessee company except for making bald statement could not led cogent evidences to substantiate its above stated contentions. The assessee company on the other hand is charging interest on these loans granted to foreign AE and presumption will arise unless .....

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ses , the presumption shall arise that loan is on capital field until the same is rebutted by the assessee company and hence the said notional loss arising on restatement/revaluation of foreign currency loans as on the date of Balance Sheet as on 31-03-2008 due to adverse foreign exchange fluctuations cannot be allowed as deduction u/s 37(1) of the Act while computing income of the assessee chargeable to tax under the Act. The decision of Hon ble Supreme Court in the case of Woodword Governor In .....

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