TaxTMI 
TaxTMI 
2023 (12) TMI 270
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....of advance settlement of payment by letter of credit before receipt of fixed assets from the foreign vendors. Such loss imposed has no direct nexus with the acquisition of the fixed assets. 5. The learned CIT (A) erred in considering the advance payments before the acquisition of assets under section 43A of the Act, wherein the fact is that it is not covered under the provisions of the section. 6. The Learned CIT(A) erred in not applying the judicial pronouncements relied on by the appellant and further affirmed the additions by relying on other judgments wherein the facts are different. 7. The learned CIT(A) failed to appreciate that loss recognized on account of foreign exchange fluctuation as per notified accounting standard is a subsisting liability, eligible for deduction. 8. The learned CIT(A) has erred in making the disallowance under Section 14A read with Rule 8D. 9. The learned CIT(A) has erred in holding that the Assessing Officer has resorted to Rule 8D after recording his satisfaction that the claim made by the Appellant is incorrect. 10. The learned CIT(A) failed to consider that for the purpose of Rule 8D, only tho....
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....of the assessee and he disallowed u/s. 43A to the extent of Rs. 48,23,924/- and further the foreign exchange gain of Rs. 10,17,445/-. 4. The assessing officer further noted from the financial statements that the assessee has made payments which are capable of generating income which are exempt from tax and has received dividend of Rs. 2,60,00,000/- from GE BE Pvt. Ltd. which was claimed as exempt income u/s. 10(34) of the IT Act and the company has also cash credit account for which interest has been paid and charged to the profit and loss account. The assessee itself has disallowed u/s. 14A of Rs. 1,30,000/- only. After considering the submissions of the assessee, the assessing officer calculated separately the disallowance u/s. 14A of Rs. 6,16,199/- and after adjusting, the assessee's disallowance he added back of Rs. 4,86,199/- to the total income of the assessee. 5. Aggrieved by the order, the assessee filed appeal before the Ld.CIT(A) and made detailed written submissions. The CIT (A) after considering the submissions of the assessee, the disallowance towards foreign exchange loss for purchasing of fixed assets were disallowed by observing that the loss suffered by the a....
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....amount equal to one-half percent of the value of the investment, income from which does not or shall not form part of the total income" should be taken into consideration. Thus, it is not all investment but only that which is expressly spelled out in rule 8D(2)(iii) read with section 14A is to be reckoned for the purpose of calculation of the required average percentage. Having said this, learned CIT(A) ought to have considered Rs. 1,30,000 i.e. 0.5% of Rs. 2,60,00,000/- (investments made in GE BE Private Ltd. on which exempt dividend income was received) instead of considering Rs. Rs. 5,99,055/- i.e. 0.5% of Rs. 11,98,11,000/- for calculating disallowance under Rule 8D(2)(iii). 4. In other words, in the instant case, the learned CIT(A) instead of adopting the average value of investment of which income is not part of the total income i.e., the value of tax-exempt investment, chose to factor in the total investment itself. 5. In this regard, the Appellant wishes to place reliance on the judicial pronouncement of Delhi High Court in the case of ACB India Ltd. v. Asstt. CIT [2015] 62 taxmann.com 71/235 Taxman 22/374 ITR 108 (Delhi) wherein it was held that for the p....
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....n this regard, the learned CIT (A) drew the support from the amendment to Section 14A of the Act by Finance Act 2022 by way of insertion of an Explanation. The Notes on clauses explaining the intention behind insertion of Explanation to Section 14A states as under- "It is also proposed to insert an Explanation to the said section to clarify that notwithstanding anything to the contrary contained in this Act, the provisions of the said section shall apply and shall be deemed to have been always applied in a case where the income, not forming part of the total income, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not form part of the total income. This amendment will take effect from 1^st April, 2022." Clauses 4, 5, 6 & 7 of the Memorandum of Finance Bill, 2022 reproduced herein below provide following guidelines: "4. In order to make the intention of the legislation clear and to make it free from any misinterpretation, it is proposed to insert an Explanation to section 14A of the Act to clarify that not....
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.... Infrastructure (India) Ltd. [2022] 141 taxmann.com 289/288 Taxman 384 where it was held, following the judgment of Hon'ble Supreme Court in Sedco Forex International Drill Inc. v. CIT [2005] 149 Taxman 352/12 SCC 717 (SC), that the amendment of Section 14A, which is "for removal of doubts" cannot be presumed to be retrospective, even where such language is used, if it alters or changes the law as it earlier stood. Therefore, the Explanation is held prospective. The decision of Hon'ble Delhi High Court in Era Infrastructure Ltd. (supra) was followed in following cases - • Dy. CIT v. Lodha Developers Ltd. [2022] 143 taxmann.com 442 (Mum. - Trib.); • Asstt. CIT v. Bajaj Capital Ventures (P.) Ltd.[2022] 140 taxmann.com 1/196 ITD 24 (Mum. - Trib.) 12. Thus, in view of the submissions made above, it is humbly submitted that if there is no exempt income, naturally, there cannot be any disallowance under Section 14A of the Act because no expenditure has been incurred on any exempt income during the year. Further, the reliance placed by the learned CIT(A) on the amendment made by the Finance Act 2022 applies prospectively as held by the Hon'ble De....
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....f Rs. 48,23,924/- under Section 43A of the Act. Grounds as per Form 36 III. The learned CIT(A) has erred in confirming the disallowance of foreign exchange loss of Rs. 48,23,924. IV. The learned CIT(A) has failed to consider that provision of Section 43A of the Act has no application in the instant case as the foreign exchange loss is in respect of advance settlement of payment by letter of credit before receipt of fixed assets from the foreign vendors. Such loss imposed has no direct nexus with the acquisition of the fixed assets. V. The learned CIT (A) erred in considering the advance payments before the acquisition of assets under Section 43 A of the Act wherein fact it is not covered under the provisions of the Section. VI. The learned CIT(A) erred in not applying the judicial pronouncements relied on by the Appellant and further affirmed the additions by relying on other judgments wherein the facts are different. VII. The learned CIT(A) failed to appreciate that loss recognized on account of foreign exchange fluctuation as per notified accounting standard is a subsisting liability, eligible for deduction. Submissio....
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....into an agreement to buy and sell goods with the condition that payment will be made through LC; b. The Buyer thereafter files an application with his bank ("Issuing Bank") to issue LC against pledge over document related to the transaction for which LC is to be issued; c. The Issuing Bank issues LC and sends it to the Seller's Bank ("Advising Bank"); d. The Advising Bank subsequently examines the LC and informs the Seller; e. The Seller thereafter dispatches the goods to Buyer; f. The Seller presents documents under LC to the Advising Bank; g. (i) The documents are checked, and forwarded to the Issuing Bank; (ii) If the documents are in place, payment is processed by the Advising Bank; h. The documents are then verified by the Issuing Bank and accordingly reimbursement is made to the Advising Bank; i. The Buyer then makes payment to the Issuing Bank and documents related to transaction are release 8. Thus, it is apparent that in the instant case, the Appellant, following the common practice of obtaining LC in the process of buying of the capital asset, has made the advance payments, and accounted ....
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.... be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid: Provided that where an addition to or deduction from the actual cost or expenditure or cost of acquisition has been made under this section, as it stood immediately before its substitution by the Finance Act, 2002, on account of an increase or reduction in the liability as aforesaid, the amount to be added to, or, as the case may be, deducted under this section from, the actual cost or expenditure or cost of acquisition at the time of making the payment shall be so adjusted that the total amount added to, or, as the case may be, deducted from, the actual cost or expenditure or cost of acquisition, is equal to the increase or reduction in the aforesaid liability taken into account at the time of making payment. 9. From the plain reading of Section 43A of the Act, one can infer that it deals with a situation where any asset is acquired from a country outside India for the purposes of business and if there is an increase or reduction in liability as expressed in Indian Currency (as compared to....
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.... aforesaid loan will not undergo any change owing to such fluctuation." 13. Further, it is humbly submitted that nothing can be added or reduced to the actual cost of assets except a situation that is envisaged in Section 43A of the Act because of its non-obstinate clause. The activity of repayment of LC and the actual cost of the asset are two different things and cannot be read from one to another. 14. The impugned fluctuation loss has a direct nexus to only providing a guarantee to the vendor, and it has no direct nexus or relation to bringing new capital asset into existence. Since, the business exigencies are implicit as well as explicit in the action of the Appellant and the LC was only obtained to provide the comfort of the guarantee to the vendor and therefore, it portrays commercial expediency, thereby it is eligible for deduction under the Act. 15. It is pertinent to note that the Appellant has inter alia followed its accounting policy in line with AS-11 dealing with the effects of the changes in the exchange rate to record the losses incurred owing to fluctuation in the foreign exchange. AS-11 enjoins reporting of monetary items denominated for....
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.... has incurred foreign exchange loss towards arrangement of the LoC on purchase of fixed assets which has been disallowed by the Assessing Officer u/s. 43A however the Ld.CIT(A) has treated it as a capital expenditure and not to be treated as a revenue expenditure, relying on the judgment of the Hon'ble Apex Court in the case of Woodward Governor Ltd. reported in 81 taxmann.com 285, Tata Locomotive and Engineering Co. Ltd. reported in 60 ITR 405 and Sutlej Cotton Mills Pvt. Ltd. reported in 188 ITR 255 (SC). The loss suffered by the assessee is directly linked with the purchase of fixed assets which is capital in nature. Though forex gain/ loss is arising on account of assurance for payments of capital assets are capital in nature which cannot be charged to the profit and loss account. Further the Hon'ble Apex Court has held in the case of Tata Locomotive and Engineering Co. Ltd. reported in 60 ITR 405 that the forex gain on money accumulated to purchase capital asset being the first step for acquisition of capital asset is capital in nature and cannot be taxed. The assessee made advance payments through Letter of Credit is the first step for acquisition of capital asset because the....