Foreign exchange loss on Letter of Credit for fixed asset purchase treated as capital expenditure, depreciation benefit allowed under section 32

The ITAT Bangalore upheld CIT(A)'s decision treating foreign exchange loss on Letter of Credit for fixed asset purchase as capital expenditure, not revenue. The tribunal ruled that forex loss directly linked to capital asset acquisition is capital in nature and cannot be charged to profit and loss account, following SC precedent in Tata Locomotive case. However, AO was directed to allow depreciation benefit under section 32. Regarding section 14A disallowance, the tribunal partially allowed the appeal, directing that only investments yielding exempt income should be considered for disallowance calculation under Rule 8D(2)(iii), not all investments.

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Issues Involved:

1. Disallowance of foreign exchange loss under Section 43A of the Income Tax Act.
2. Disallowance under Section 14A read with Rule 8D.

Summary:

1. Disallowance of Foreign Exchange Loss under Section 43A:

The assessee contended that the foreign exchange loss of Rs. 48,23,924 incurred due to advance settlement of payment by letter of credit before receipt of fixed assets should not be disallowed under Section 43A. The assessee argued that the loss had no direct nexus with the acquisition of fixed assets and should be treated as revenue expenditure. The Assessing Officer (AO) and CIT(A) treated the loss as capital in nature, relying on judgments from the Supreme Court in cases like Woodward Governor Ltd., Tata Locomotive and Engineering Co. Ltd., and Sutlej Cotton Mills Pvt. Ltd. The Tribunal upheld the CIT(A)'s decision, stating that the loss suffered was directly linked to the purchase of fixed assets, which is capital in nature. The AO was directed to give the benefit of depreciation as per Section 32 of the IT Act.

2. Disallowance under Section 14A read with Rule 8D:

The assessee challenged the disallowance of Rs. 4,69,055 under Section 14A, arguing that only investments yielding exempt income should be considered for disallowance under Rule 8D(2)(iii). The CIT(A) had restricted the disallowance to Rs. 4,69,055 but did not fully consider the issue as per Rule 8D(2)(iii). The Tribunal, following the Delhi High Court's judgment in ACB India Ltd. v. ACIT, held that only investments that generated exempt income should be considered for disallowance under Section 14A. The Tribunal deleted the disallowance made under Section 14A, amounting to Rs. 4,69,055, and allowed the appeal for statistical purposes.

Conclusion:

The appeal filed by the assessee was allowed for statistical purposes, with directions to the AO to give the benefit of depreciation for the foreign exchange loss and to reconsider the disallowance under Section 14A by considering only investments that generated exempt income.

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