Foreign exchange loss on FCCB liability allowed as revenue deduction; cash payment and fixed asset issues sent back for verification

Cash payments said to fall under section 40A(3) were remitted for verification because the Tribunal accepted that employee-linked business expenditure, if proved, may escape disallowance; the matter was sent back to the AO for fresh decision. The claimed loss on sale of fixed assets was also remitted because the assessee's case that the amount had been adjusted against the block of assets and reflected through a reduced written down value had not been examined. Foreign exchange fluctuation loss on FCCB liability was allowed as a revenue deduction, the Tribunal holding that balance-sheet date exchange differences on a real business liability are not merely notional and that FCCB funds retain loan character until conversion into equity.

---

---

Issues: (i) Whether cash payments disallowable under section 40A(3) required further verification where the assessee claimed that payments were made to employees for meeting business expenditure; (ii) Whether the claim relating to loss on sale of fixed assets could be sustained without verification of the accounting treatment first raised before the Tribunal; (iii) Whether foreign exchange fluctuation loss on FCCB liability was allowable as a revenue deduction.

Issue (i): Whether cash payments disallowable under section 40A(3) required further verification where the assessee claimed that payments were made to employees for meeting business expenditure.

Analysis: The issue had been considered in the assessee's own earlier years, where it was held that payments made to employees for meeting expenditure of the business, if verified, would not attract disallowance under section 40A(3). Following that view, the Tribunal found it necessary to verify the nature of the cash payments and their linkage with employee expenditure before deciding the disallowance.

Conclusion: The issue was remitted to the Assessing Officer for verification and fresh decision in accordance with law. The finding was in favour of the assessee for statistical purposes.

Issue (ii): Whether the claim relating to loss on sale of fixed assets could be sustained without verification of the accounting treatment first raised before the Tribunal.

Analysis: The assessee asserted that the amount was not a separate loss claimed as deduction, but had been adjusted against the block of assets, with depreciation claimed only on the reduced written down value. Since this factual position had not been examined by the lower authorities and was raised for the first time, the Tribunal held that verification was necessary before adjudication on merits.

Conclusion: The issue was remitted to the Assessing Officer for verification and fresh decision after giving the assessee an opportunity of hearing. The issue was not finally decided on merits.

Issue (iii): Whether foreign exchange fluctuation loss on FCCB liability was allowable as a revenue deduction.

Analysis: The Tribunal followed the earlier decision in the assessee's own case and the settled principle that exchange difference arising on balance-sheet date in respect of a revenue liability is a real business loss and not a mere notional loss. It also relied on the position that FCCB proceeds, until conversion into shares, remain in the nature of loan funds, and that expenditure or loss connected with such borrowing is allowable as revenue expenditure. The Tribunal therefore held that the foreign exchange loss could not be denied merely as notional or capital in character.

Conclusion: The disallowance was deleted and the claim was allowed in favour of the assessee.

Final Conclusion: The appeal resulted in mixed relief: one ground was allowed on merits, two grounds were sent back for verification, and the overall outcome was a partial success for the assessee.

Ratio Decidendi: Exchange loss on a balance-sheet date liability is allowable as a revenue deduction when it represents a real accrued business loss, and FCCB borrowings retain the character of loan funds until conversion into equity.

---