TMI Blog2019 (12) TMI 433X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is no direct nexus between the entire business advances having been invested by the assessee company i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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, with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eating 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. 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 bas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [IT Appeal No. 6573/Mum/2014, dated 16-11-2017], Navin Bharat Industries Ltd. v. Dy. CIT [2004] 90 ITD 1 (Mum.) (TM) and CIT v. Woodward Governor India (P.) Ltd. 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 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 090 Total ₹ 1,54,11,090 Since the appellant itself had disallowed ₹ 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 ₹ 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 ₹ 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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 16. Coordinate Bench of the Tribunal in case cited as 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. 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 investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt 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. 21. In view of what has been discussed above, we are of the considered view that claim of foreign exchange fluctuation loss is a 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. 22. In view of what has been discussed above, the appeal bearing ITA No.503/Del/2012 filed by the Revenue is dismissed and the app ..... X X X X Extracts X X X X X X X X Extracts X X X X
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