Foreign exchange fluctuation loss on ECB liability by NBFC allowed as business loss, not speculative under section 36(1)(viii)

ITAT Delhi ruled in favor of the assessee on multiple issues. The tribunal held that foreign exchange fluctuation loss on ECB liability by an NBFC was not speculative loss, rejecting AO's application of CBDT Instruction No. 3 of 2010 which applies only to forex derivatives trading. Disallowance under section 36(1)(viii) was deleted as AO incorrectly applied section 80IA timelines. Advertisement expense disallowance was remanded for fresh consideration. Section 14A disallowance was restricted to exempt income earned. Depreciation on windmill investment was allowed following Delhi HC precedent. TDS disallowance under section 40(a)(ia) was deleted, with tribunal directing invocation of section 201 instead for short deduction cases.

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Issues Involved:
1. Legality of additions/disallowances made by the CIT(A).
2. Disallowance of foreign exchange fluctuation loss.
3. Deduction under Section 36(1)(viii) of the Income Tax Act.
4. Disallowance of advertisement expenses.
5. Charging of interest under Sections 234B and 234C.
6. Depreciation on windmill investment.
7. Disallowance for short deduction/non-deduction of TDS.
8. Disallowance under Section 14A.

Summary:

1. Legality of Additions/Disallowances:
The Tribunal addressed various grounds taken by the assessee and the Revenue for AY 2013-14 and 2014-15, finding that the additions/disallowances made by the CIT(A) were partly justified but also required certain deletions and restorations.

2. Disallowance of Foreign Exchange Fluctuation Loss:
The CIT(A) confirmed the disallowance of Rs. 20,54,47,894/- and Rs. 18,64,61,000/- for AY 2013-14 and 2014-15, respectively, on account of notional loss booked under foreign exchange loss. The Tribunal, however, deleted these disallowances, following its own decision in the assessee's case for AY 2012-13, and held that foreign exchange loss related to ECBs is an allowable deduction under Section 37(1) of the Act, as per the Supreme Court's judgment in CIT vs. Woodward Governor India (P) Ltd.

3. Deduction under Section 36(1)(viii):
The CIT(A) restored the matter to the AO for both AYs concerning the disallowance under Section 36(1)(viii). The Tribunal found that Section 36(1)(viii) is a complete code in itself and does not warrant reference to Section 80IA for allowing deductions. The Tribunal deleted the disallowances of Rs. 1,76,16,528/- for AY 2013-14 and Rs. 2,89,99,437/- for AY 2014-15.

4. Disallowance of Advertisement Expenses:
The CIT(A) restored the matter to the AO to decide afresh on the production of ledger accounts and bills/vouchers by the assessee. The Tribunal upheld this decision, emphasizing the need for adequate opportunity for the assessee.

5. Charging of Interest under Sections 234B and 234C:
The Tribunal noted that this issue is consequential and did not require separate adjudication.

6. Depreciation on Windmill Investment:
The CIT(A) deleted the disallowances of Rs. 57,05,766/- for AY 2013-14 and Rs. 11,41,153/- for AY 2014-15. The Tribunal upheld this deletion, following the precedent set by the Hon'ble Delhi High Court and its own decisions in the assessee's case for previous AYs.

7. Disallowance for Short Deduction/Non-Deduction of TDS:
The CIT(A) deleted the disallowances of Rs. 56,97,665/- for AY 2013-14 and Rs. 59,58,893/- for AY 2014-15. The Tribunal upheld these deletions, agreeing that Section 40(a)(ia) is not applicable for short deduction of TDS, as supported by the Calcutta High Court and Delhi High Court judgments.

8. Disallowance under Section 14A:
The CIT(A) restricted the disallowance to the extent of exempt income earned by the assessee, deleting additional disallowances of Rs. 1,16,97,590/- for AY 2013-14 and Rs. 1,05,63,232/- for AY 2014-15. The Tribunal upheld these deletions, following the precedent set by the Hon'ble Delhi High Court and its own decisions in the assessee's case for previous AYs.

Conclusion:
The appeals of the assessee for AY 2013-14 and 2014-15 were partly allowed, and the appeals of the Revenue for the same AYs were dismissed.

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