2023 (12) TMI 402 - AT - Income Tax

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 ... Allowability of foreign exchange loss as revenue expenditure under Section 37(1) - applicability of CBDT Instruction No.3/2010 to foreign exchange loss on External Commercial Borrowings and reinstatement/mark to market - deduction under Section 36(1)(viii) and relevance (or not) of timelines under Section 80IA - scope and quantification of disallowance under Section 14A read with Rule 8D - ceiling by amount of exempt income - consequence of short deduction of TDS and applicability of section 40(a)(ia) where there is only a difference of opinion on the nature of payment - allowability of depreciation on assets (windmills) used in businessAllowability of foreign exchange loss as revenue expenditure under Section 37(1) - applicability of CBDT Instruction No.3/2010 to foreign exchange loss on External Commercial Borrowings and reinstatement/mark to market - Deletion of disallowance made for notional foreign exchange loss on restatement/reinstatement of ECB liability for AY 2013 14 and AY 2014 15. - HELD THAT: - The Tribunal examined the assessee's submissions applying the tests in Woodward Governor and related Supreme Court decisions and noted that the assessee follows mercantile accounting and AS guidance to restate ECB liabilities. The Revenue did not produce material to controvert the assessee's factual and legal position and the Tribunal followed its earlier decision in the assessee's own case. It held that the CBDT Instruction No.3/2010 (directed at trading in forex derivatives) does not apply to the reinstatement/restatement loss on ECB liability and, on the facts and consistent accounting treatment, the notional foreign exchange loss could not be sustained as a disallowance. Accordingly the impugned disallowances of Rs. 20,54,47,894 (AY 2013 14) and Rs. 18,64,61,000 (AY 2014 15) were deleted. [Paras 14]Disallowances on account of foreign exchange loss on ECB restatement deleted for both years.Deduction under Section 36(1)(viii) and relevance (or not) of timelines under Section 80IA - Whether the Assessing Officer could deny deduction under Section 36(1)(viii) by applying the commencement/timeline tests of Section 80IA. - HELD THAT: - The Tribunal held that Section 36(1)(viii) is a self contained code granting deduction for finance to eligible undertakings and cannot be curtailed by importing timeline conditions from Section 80IA. Section 36(1)(viii) predates Section 80IA and there is no statutory text in Section 36(1)(viii) making the availability of the deduction contingent on the commencement timelines contained in Section 80IA. The AO therefore erred in disallowing the claimed deduction by reference to Section 80IA timelines. The disallowances under Section 36(1)(viii) were deleted for both assessment years. [Paras 20]Impugned disallowances under Section 36(1)(viii) deleted in both years; matter restored only where assessee failed to furnish required information as directed by CIT(A) (per appellate directions).Scope and quantification of disallowance under Section 14A read with Rule 8D - ceiling by amount of exempt income - Validity and quantum of additions under Section 14A/Rule 8D in both years and whether disallowance can exceed exempt dividend income. - HELD THAT: - The Tribunal followed binding precedents of the Delhi High Court and the Tribunal in the assessee's earlier years and accepted the CIT(A)'s approach restricting the disallowance to the amount of exempt dividend income. The AO's larger computation under Rule 8D was held to be excessive; strategic investments were to be excluded as per the applied precedents and the additional disallowances computed by the AO were deleted. The Tribunal confirmed the CIT(A)'s deletion/restriction of the Section 14A additions in both assessment years. [Paras 32]Additional disallowances under Section 14A (as computed by AO) deleted / restricted to the amount of exempt income in both years; Revenue appeals dismissed on this issue.Consequence of short deduction of TDS and applicability of section 40(a)(ia) where there is only a difference of opinion on the nature of payment - Whether disallowance under Section 40(a)(ia) could be made where tax was deducted but there was a bona fide difference of opinion on classification of the payment (and thus on rate). - HELD THAT: - The Tribunal upheld the CIT(A)'s finding that the appellant had deducted tax at source and the dispute was only as to the character/nature of the payment (and hence the applicable TDS rate). Where there is merely a difference of opinion as to classification, section 40(a)(ia) disallowance is not appropriate; the correct remedy is to proceed under section 201 (declaration of default) if warranted. In the facts, the CIT(A)'s deletion of the Section 40(a)(ia) disallowance was sustained. [Paras 30]Disallowances under Section 40(a)(ia) deleted in both years; Revenue appeals rejected on this issue.Allowability of depreciation on assets (windmills) used in business - Whether depreciation claimed on investment in windmills is allowable to the assessee. - HELD THAT: - The Tribunal noted that the assessee owned the windmill assets and put them to business use and that the issue was covered by earlier favourable precedents of the Delhi High Court and the Tribunal in the assessee's own case. Following those decisions, the CIT(A)'s deletion of the depreciation disallowance was upheld and the Revenue's appeals were dismissed. [Paras 29]Depreciation disallowances on windmill investments deleted; Revenue appeals dismissed.Procedural remand for verification of documentary evidence - restoration of advertisement expense claim - Restoration of claim for advertisement expenses to the AO for fresh consideration on production of supporting vouchers. - HELD THAT: - The CIT(A) restored the issue to the AO directing the assessee to produce ledger and supporting bills/vouchers; the Tribunal declined to interfere with that exercise of appellate discretion and observed that the assessee would have an opportunity to present its case afresh before the AO. [Paras 21]Matter relating to advertisement expenses remitted to the AO for fresh adjudication on production of supporting documents.Interest consequences as consequential relief - Interest under Sections 234B and 234C charged in assessment for AY 2013 14 is consequential to taxation adjustments. - HELD THAT: - The Tribunal recorded that charging of interest under Sections 234B and 234C was consequential to the primary additions and therefore no separate interference was called for in the headnote beyond treating it as consequential. [Paras 22]Interest demands under Sections 234B/234C treated as consequential.Final Conclusion: The Tribunal allowed the assessee's appeals in part (deleting the forex loss disallowances, deleting the Section 36(1)(viii) disallowances made by importing Section 80IA timelines, upholding deletion of Section 40(a)(ia) additions, confirming limitation of Section 14A disallowance to exempt dividend income, and upholding depreciation on windmills), remitted the advertisement expense issue to the AO for fresh verification, treated interest as consequential, and dismissed the Revenue's appeals. 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.