2023 (4) TMI 110 - AT - Income Tax

Tribunal decision: Fluctuation loss treated as revenue expenditure, advances interest allowed.

Kamineni Health Services (P) Ltd, Hyderabad Versus Dy. C.I.T. Circle 2 (1) Hyderabad

The Tribunal partly allowed the appeal, upholding the disallowance of foreign exchange fluctuation loss but directing the deletion of the disallowance of ... Disallowance of foreign exchange fluctuation loss - HELD THAT:- The loss on foreign exchange fluctuation loss has to be added to the cost of the asset and depreciation has to be allowed on this but such foreign exchange fluctuation loss cannot be allowed as a revenue expenditure. The ground raised by the assessee is accordingly decided in the above terms. Addition of notional interest being interest free advance given to different persons - Disallowance of interest expenditure - addition being the interest @ 12% on advances given to various persons on the ground that interest bearing funds have been diverted for non-business purposes - HELD THAT:- Since the advance paid to Vijayawada Project is continuing in this year also and since the issue has already been decided by the Tribunal and the AO in the consequential order has allowed the same, therefore, no disallowance of interest on this amount issue is called for. Accordingly AO is directed to delete the disallowance of interest. So far as the balance amount we find an amount arises from the running account maintained with the holding company and the assessee company wherein funds were transferred as per the business requirement - no notional interest on such recurring transactions is called for. Accordingly, we direct the AO not to charge any notional interest. Rent deposit given to Kamineni Estates (P) Ltd., for the purpose of leasing a space to operate a Wellness Centre - No addition of notional interest on account of rental advance for lease of property in our opinion can be made since the same is for business purposes. Similarly, the disallowances of notional interest on the advances given to professionals who are doctors in our opinion cannot be made - we are of the considered opinion that the CIT (A) is not justified in sustaining the addition of proportionate notional interest on the advances to professionals made by the AO - The various other advances do not call for disallowance of notional interest. Accordingly, the same is directed to be deleted. The second issue raised by the assessee is accordingly allowed. Issues Involved:1. Disallowance of foreign exchange fluctuation loss.2. Disallowance of interest expenditure on advances given to related parties.Summary of Judgment:Issue 1: Disallowance of Foreign Exchange Fluctuation LossThe assessee, a healthcare company, claimed a foreign exchange fluctuation loss of Rs. 29,56,433/-. The Assessing Officer (AO) disallowed this, treating it as a capital expenditure since the loan was taken for purchasing a capital asset. The CIT (A) upheld this disallowance, noting that the assessee did not provide any submissions during the appeal proceedings. The Tribunal, referencing various judicial precedents, including the Hon'ble Supreme Court's decision in Sutlej Cotton Mills Ltd vs. CIT and the Hon'ble Bombay High Court's decision in Padamjee Pulp and Paper Mills Ltd vs. CIT, concluded that the foreign exchange fluctuation loss should be added to the cost of the asset and depreciation allowed on this enhanced value. Thus, the Tribunal upheld the disallowance of the foreign exchange fluctuation loss as a revenue expenditure.Issue 2: Disallowance of Interest Expenditure on AdvancesThe AO disallowed notional interest of Rs. 95,50,483/- on advances given to various parties, including Rs. 7,00,00,000/- for the Vijayawada Project, treating these as non-business purposes. The CIT (A) upheld this disallowance. The Tribunal noted that the identical issue had been decided in the assessee's favor in the preceding assessment year, where the advances for the Vijayawada Project were accepted as for business purposes. Consequently, the Tribunal directed the AO to delete the disallowance of interest on the amount of Rs. 7,00,00,000/-. For the remaining advances totaling Rs. 95,87,355/-, the Tribunal found that these were for business purposes, including a running account with the holding company and rental deposits. Therefore, the Tribunal directed the AO to delete the disallowance of notional interest on these amounts as well.Conclusion:The appeal filed by the assessee was partly allowed, with the Tribunal upholding the disallowance of the foreign exchange fluctuation loss but directing the deletion of the disallowance of interest expenditure on advances given to related parties.Order Pronounced:Order pronounced in the Open Court on 31st March, 2023.