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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 ..... 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)." 3. Appellant, M/s. Theolia Wind Power Pvt. Ltd. (hereinafter referred to as the 'assessee') by filing the present appeal being ITA No.134/Del/2014 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 :- "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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 loss having direct nexus with exempt income to be disallowed 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 Revenu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence regarding the advances being business advances. There is neither any agreement nor any actual utilization of even a penny of the advances received. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 v. Walfort Share & Stock Brokers (P.) Ltd. [2010] 326 ITR 1 (SC), Vishnu Anant Mahajan v. Asstt. CIT [2012] 22 taxmann.com 88 (Ahd.)(SB), Hoshang D Nanavati v. Asstt.CIT [2012] 25 taxmann.com 141 (Mum. - Trib.), ACIT v. Af-Taab Investment Co. Ltd. [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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctuation 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for allowance for the business loss. We may reiterate that one must keep in mind the conceptual difference between loss, expenditure, cost of acquisition, etc. while interpreting the scheme of the Act." 15. 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. 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 cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l as an amount which is really a "loss" even though such amount has not gone out from the pocket of the assessee.' 20. So, following the decision rendered by Hon'ble Apex Court in 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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