TaxTMI 
TaxTMI 
2023 (12) TMI 270
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....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 those investments relating to exempt income should be considered for the average and not the entire investm....
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....-. 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 assessee is in relation to the purchase of fixed assets and it cannot be treated as a revenue expenditure by relying on the Hon'ble Supr....
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....ration. 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 purpose of Section 14A, instead of taking into account total investment, investment attributable to dividend (exempt income) was required to be adopted and thereafter disallowan....
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....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 1st 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 notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where exempt income has not accrued or arisen or has not been received during the previous year relevant to an assessment year and t....
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...., 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 Delhi High Court in CIT v. Era Infrastructure (P.) Ltd. [2022] 141 taxmann.com 289/288 Taxman 384/448 ITR 674. Therefore, for the assessment year 2012-13, no disallowance could be made under Section 14A if no exempt income was earned by the Appellant. 13. Alternatively, it is submitted that the Assessing Officer has stated the reason for making the disallowan....
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....r 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. Submissions 1. During the year under consideration, the Appellant has claimed the foreign exchange loss on capital items as per the 'Significant Accounting Policy' followed by the Appellant. 2. It may be noted that there was a net loss of Rs. 3,70,63,515/- on account of foreign exchange, which was duly accounted for in the profit and loss account of the Appellant. Out of the net loss of Rs. 3,70,63,515/-, the net foreign exchange loss on a....
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....s 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 for impugned foreign exchange loss on such payments. It has no relation or connection with the acquisition of any capital asset. Moreover, all these payments were concluded well before the acquisition of the capital asset. In other words, such foreign exchange loss has no direct nexus with the acquisition of the capital asset. Thus, it is humbly submitted that impugned foreign exchange loss, by no stretch of the imagination, would fall under the four corners of Section 43A of the Act. In order to illustrate the same, the provisions as c....
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....f 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 the liability existing at the time of acquisition of the asset) at the time of making payment towards the whole or part of the cost of the asset or towards repayment of whole or part of money borrowed by him from any person directly or indirectly, in any foreign currency specifically for the purposes of acquiring the asset along with interest, if any, the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making payment, irrespective of method of accounting adopted by the assessee, shall be added to, or ....
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....icit 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 foreign currency using the closing rate at the end of the accounting year. It also requires that any difference, loss or gain, arising from such conversion of the liability at the closing rate should be recognized in the profit & loss account for the reporting period. 16. Also, the Appellant wishes to place the reliance in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 held as under: "The law may, therefore, now be taken to be well-settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss....
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....ts 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 there was a direct link of LOC towards purchase of the fixed assets, therefore it will be treated as capital in nature. Section 43(1) has defined the actual cost of the assets. Therefore the actual loss suffered by the assessee cannot be charged to the profit and loss account. The CIT(A) has rightly decided the issue in favour of the revenue. However, the AO is directed to give benefit of depreciation as per section 32 of the IT Act in the current year as well as in following years if there is effect on the following years. This issue is partly allowed for statistical purposes. 11. Disallowance u/s. 14A The Ld.CIT(A) has dealt with this issue in detail however he has not considered the is....