2020 (11) TMI 731 - AT - Income Tax

Tribunal allows exchange loss deduction on business advances under Income-tax Act

Sitae Re Pvt. Ltd. Versus The ITO, Ward-23 (4), New Delhi.

The Tribunal allowed the appeal, holding that exchange fluctuation loss on business advances is deductible under section 37(1) of the Income-tax Act, ... Disallowance being the amount of exchange fluctuation loss provided at the year end on business advance received in foreign exchange - HELD THAT:- The Hon’ble Delhi High Court in the case of Taiko Chander Nagar Chemicals P.Ltd.[2007 (10) TMI 282 - DELHI HIGH COURT] has held that exchange fluctuation loss in respect of business advances received in the course of business on account of reinstatement of outstanding balance at the year end is allowable as business loss. Also see OIL & NATURAL GAS CORPORATION LTD. VERSUS COMMISSIONER OF INCOME TAX [2010 (3) TMI 81 - SUPREME COURT] and M/S WOODWARD GOVERNOR INDIA P. LTD. & M/S HONDA SIEL POWER PRODUCTS LTD. [2009 (4) TMI 4 - SUPREME COURT] Applying the said principle to the facts and circumstances of the case, we hold that the exchange fluctuation loss arising on account of the revaluation of business advances on the close of the year by the assessee is allowable as deduction in the hands of the assessee. Appeal of the assessee is allowed. Issues:Disallowance of exchange fluctuation loss as business expenditure under section 37(1) of the Income-tax Act, 1961.Analysis:1. Issue: Disallowance of Exchange Fluctuation Loss- The appellant contested the disallowance of Rs. 2,59,97,240 as exchange fluctuation loss on business advance received in foreign exchange. The contention was based on precedents like Oil and Natural Gas Corporation Ltd. Vs. CIT and CIT Vs. Woodward Governor India P. Ltd., where such losses were allowed as business expenditure under section 37(1) of the Act.- The Assessing Officer disallowed the claimed loss as notional, citing similar disallowances in prior years. The CIT(A) upheld this disallowance, emphasizing that no work was rendered against the advance received, and it was a contingent liability.- However, the Tribunal, following the decision in CIT vs. Woodward Governor India P. Ltd., held that the exchange fluctuation loss is a revenue expenditure under section 37(1) of the Act. The Tribunal also referred to judgments by the Hon'ble Supreme Court and the Hon'ble Delhi High Court supporting the allowance of such losses as business expenditure.- Consequently, the Tribunal allowed the appeal, stating that the exchange fluctuation loss arising from the revaluation of business advances is deductible. The addition of Rs. 2.59 crores was deleted, and the grounds of appeal raised by the assessee were upheld.2. Judicial Precedents and Tribunal Orders- The Tribunal referred to its consolidated order for Assessment Years 2008-09 and 2009-10, where the issue of exchange fluctuation loss was decided in favor of the assessee.- The Tribunal also mentioned the dismissal of the Revenue's appeal for Assessment Year 2012-13 due to low tax effect, reinforcing the allowance of exchange fluctuation losses as business expenditure.- Judicial decisions by the Hon'ble Supreme Court and the Hon'ble Delhi High Court were cited to support the allowance of exchange fluctuation losses in the context of business advances.3. Conclusion- The Tribunal concluded that the exchange fluctuation loss on business advances is a revenue expenditure under section 37(1) of the Act, aligning with judicial precedents and decisions. Therefore, the disallowance of the claimed loss was deemed unwarranted, and the appeal of the assessee was allowed.- The judgment was pronounced in favor of the assessee on 14th May 2020 by the Appellate Tribunal ITAT Delhi, with the disallowed amount being deleted.This detailed analysis of the judgment highlights the legal arguments, precedents, and final decision regarding the disallowance of exchange fluctuation loss as business expenditure under the Income-tax Act, 1961.