TaxTMI 
TaxTMI 
2025 (10) TMI 516
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....onus to prove that the said loss was not of capital in nature even after providing sufficient opportunities of being heard? 2. Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in deleting disallowance of Rs. 8,22,07,457/- on account of 'interest paid on residential property 'by ignoring the fact that during assessment proceeding the assessee could not discharge its initial onus u/s 37 (1) of the Income Tax Act,1961 (the Act) to prove that the said expenses were incurred wholly and exclusively for purpose of business of the assessee even after providing sufficient opportunities of being heard? 3. Whether on facts and in circumstances of the case, Ld. CIT(A) is legally justified in restricting disallowance of Rs. 6,06,06,535/- to Rs. 51,20,733/- on account of 'expenses incurred by directors on foreign travelling' by ignoring the fact that during assessment proceeding the assessee could not discharge its initial onus u/s 37 (1) of the Income Tax Act,1961 (the Act) to prove that the said expenses were incurred wholly and exclusively for purpose of business of the assessee even after providing sufficient opportunities of being ....
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....ssment order the AO has observed as under: "In the profit & loss account, the assessee company has debited an amount of Rs. 25,26,20,209/- on account of exchange loss (net). During the assessment proceedings, the assessee was asked to explain whether exchange loss of Rs. 25,26,20,209/- includes any notional loss /gain on account of reinstatement of liability or assets. In reply, the assessee submitted the breakup of Rs. 25,26,20,209/-. During the assessment proceedings, the assessee furnished bifurcation of this amount. The perusal of details shows that it includes an amount of Rs 20,25,60,179/- on account of unrealized foreign exchange loss on outstanding FC creditors which appear to be provisions of liabilities and as such the liability has not been incurred. As per accounting standard (AS-11), any monetary assets / liabilities (in foreign currency) outstanding as on the date of the balance sheet have to be reinstated at the closing rate of the respective currency. It is clear from the details filed by the assessee company that the foreign exchange loss of Rs 20,25,60,179/- is on account of restatement as on 31.03.2013. The assessee has failed to prove that the ....
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....o be disallowed as not having occurred during the relevant previous year. It will mean disallowance of Rs. 20,25,60,179/- and the same is being added back to the total income of the assessee company for the year under consideration." 3.1.2 In appeal, the AR has submitted as under: "(i) The assessee had claimed exchange fluctuation losses of Rs. 25,26,20,209, the broad break up of which is as under: - On Trading transactions during the year (Net) Rs. 5,00,60,030 - On reinstatement of liabilities Rs. 20,25,60,179 Rs. 25,26,20,209 (ii) It was submitted before the DCIT, that on 13/12/2010, the assessee had received an advance of $ 3,03,04,629 from the Government of Angola against master invoice for supply of material and expatriate services for their army boots and uniform manufacturing facilities set up by the assessee in earlier years. In this connection the assessee had filed copies of inward remittance certificate, and copies of the master invoice. Part supplies were made in years ending 31/03/2010 to 31/03/2013 and bill amounts were set off against the advances so received. Detailed working of the loss and copies of accounts of the part....
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....date. It would nevertheless be a liability which was certain and not contingent. The main ingredient of a contingent liability was that it depended upon the happening of a certain event. The change in the value of foreign currency in relation to Indian currency by the assessee was the fait accompli and not a notional one. Therefore the increase in liability due to foreign exchange fluctuation as per the exchange rate prevailing on the last date of the financial year was allowable as a deduction and was not notional or contingent". The same was affirmed by the Supreme Court in CIT vs Woodward Governor India (P) Ltd in 312 ITR 254 wherein they have stated that loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of balance sheet is an item of expenditure under sec 37(1) of the Income tax act. There is no expenditure on capital account but only on revenue account. Even in the new accounting policies for Income Computation and Accounting Disclosures notified by the CBDT vide SO 3079(E) dated 29th September 2016, the same is allowable. In view of the above the exchange fluctuation loss as claimed be allowed and....
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....oreign exchange loss all along is concerned. We thus upheld the learned CIT(A)'s action deleting the impugned disallowance in very terms. 7. The Revenue's second substantive ground herein seeks to revive the Assessing Officer's action disallowing an amount of Rs. 8,22,07,457/- on account of interest paid of residential property made by the Assessing Officer which stands reversed in the lower appellate discussion as under: "3.2. GROUND NO. 2 "That in the facts and circumstances of the case and in law the learned DCIT has erred in disallowing the entire interest on term loan of Rs. 8,22,07,457 on the ground that the asset has not been used, without appreciating the fact that the amount had been invested in purchase of fixed assets and for claiming interest expenses, use of asset was not necessary. That the addition being unjustified and unwarranted be deleted. (i) Without prejudice to the above, the amount of interest disallowed being excessive be suitably reduced". 1.2.1. The AO has stated as under in the assessment order: "It is observed that the assessee has debited an amount of Rs. 8,22,07,457/- in the P&L account of interest cost o....
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....ssee has been considered carefully and found not to be acceptable. Despite giving many opportunities of being heard, the assessee did not submit proof of using this residential property for the purposes of the business of the assessee company and the assessee also did not submit details of the function/activities carried out from this residential premises for the furtherance of the objectives of the assessee company. The residential property in question is a completely residential property as per the building scheme of the NDMC, New Delhi. No business activity can be carried out from the premises of the said residential property. The assessee completely failed to bring on record, how the residential property in question is being used for the business of the assessee company. In view of the above, the interest cost amounting to Rs. 8,22,07,457/- claimed as business expenditure cannot be allowed as business expenditure, since the same has not been used for the purpose of the business of the assessee company and the same is disallowed and added back to the total income of the assessee." 3.2.2. In the appeal the AR vide letter dated 22/03/2017 and 5/5/2017 has explained the fa....
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....-13 u/s 143(3) and no further disallowance was made out of interest payments. (iii) The loan of Rs. 60 crores taken from Citi Bank NA was repaid on 23/07/2012 whereas the loan of Rs. 30 crore taken from Citi Corp Finance Ltd was continuing throughout the year. (iv) The DCIT has disallowed the entire interest of Rs. 8,22,07,457 on the ground that the building has not been used for the purposes of the business of the assessee, ignoring the fact that the amount had been invested in purchase of fixed assets and possession had been received in earlier year. (v) No disallowance on this account has been made either in earlier year or subsequent years." Vide letter dated 5/5/2017, the AR further submitted as under: "The assessee has already filed a detailed note on claim of interest expenses for purchase of property. Further details of interest paid on term loan are enclosed. Your kind attention is invited to sec. 36(1) (iii) which specifically permits interest payments for business purposes as allowable deduction. Sec 36(1) (iii) reads as under: The amount of the interest paid in respect of capital borrowed for the purpose of ....
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....ion of interest is allowed in respect of capital borrowed for the purposes of business or profession in the computation of income under the head "Profits and gains of business or profession. It is proposed to insert a proviso in the said clause so as to provide that no such deduction shall be allowed in respect of any amount of interest paid, in respect of capital borrowed of acquisition of new asset for extension of existing business or profession (Whether capitalized in the books of accounts or not) and such amount of interest is for the period beginning from the date on which the capital was borrowed for acquisition of the assets till the date on which such assets was first put to use. The amendment will take effect from 1st April 2004 and will, accordingly, apply in relation to the assessment year 2004-2005 and subsequent years. The words "for extension of existing business or profession" have been omitted by Finance Act 2015 w.e.f. 01/04/2016. Therefore w.e.f. AY: 2016-17 interest paid on money borrowed for acquisition of the assets till the asset was first put to use shall not be allowed as a deduction. But since the year under consideration is AY: ....
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.....3 GROUND NO. 3 "That without appreciating the facts of the case and in law the DCIT has erred in coming to the conclusion that the foreign visits were personal in nature and had no connection to business and remained uninvestigated in entirety and to disallow 80% of foreign travel including travel by staff and senior managerial staff and make an addition of Rs. 6,06,06,535. That the addition being unwarranted, unjustified and excessive be deleted or substantially reduced." 3.3.1. The AO has observed as under in the assessment order: "The assessee has debited an amount of Rs. 7,57,58,169/- in the P&L account on account of foreign travelling expenses. During the assessment proceedings, the AR of the assessee was asked to submit details of the country visited, business relations with that country, purpose for visiting abroad, copy of the passport of the visitors, details of the invoices etc. In response to this, the assessee submitted its reply. From the submission filed, it is seen that most of the visits has been made to Phuket (Thailand), Hongkong, Singapore, Orlando, Miami, Bahamas, London, Toronto. The assessee also did not submit the details of ....
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....s. 6,06,06,535/- to the income of the assessee, including 80% of Rs. 15,88,062/- already disallowed." Further, vide letter dated 29/5/2017, the appellant has filed a chart showing the disallowance in earlier and later years on this issue as under: AY Director Travelling (Rs.) Staff & Others (Rs.) Total (Rs.) Disallowance in assessment out of foreign travels 2011-12 51721130 27853399 79574529 Nil 2012-13 55148180 16834668 71982848 Nil 2014-15 47028520 16407942 63436462 10% of director foreign travelling Rs. 4702852 3.3.3. Considering the submissions made, the details filed, the observations of the AO and the history of the case, the element of travel for personal trips for non business purposes cannot be ruled out. It will be reasonable if Rs. 51,20,733/- being 10% of the director's travelling of Rs. 5,12,07,334/- is disallowed. I, accordingly sustain an addition of Rs. 51,20,733/- and delete the balance addition of Rs. 5,54,85,802/-." 10. Suffice to say, it has come on record that the learned Assessing Officer had made an ad-hoc disallowance of 80% of foreign travel expenditure as against that rest....
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.... Rs. 1,67,43,627/- is disallowed and added back to the total income of the assessee." 3.4.2. The submissions by the AR are as under: (a) The assessee had added back a sum of Rs. 31,03,150 u/s 14A read with Rule 8D(iii) being y2% of average investment of Rs. 62,06,29,925 based on computation given in Annexure 'E' to tax audit report. (b) During the year the assessee had paid interest as under (Sch 22) Interest On Term loan Rs. 82207457 On Other loan etc. Rs. 120661 On Working capital Rs. 103500 Others Income Tax etc. Rs. 350646 (c) It was explained that interest expenditure had not been considered for disallowance u/s 14A read with Rule 8D(ii) due to followings reasons: (i) All the investment in shares have been made in earlier years out of positive bank balance and no interest expenses were incurred during the year on account of investments made. An addition of Rs. 35,00,000 investment in shares of Raj Prof in (P) Ltd during the year was on account of conversion of unsecured loans given to them in earlier years. Copy of account of party was filed to show that no payment was made during the year. ....
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....e IT AT has held that unless the AO examines the expenditure and shows the nexus to the earning of tax free income, no disallowance can be made." Further in AY 2012-13 the CIT(A) has been pleased to delete addition on similar ground. 3.4.3. I have carefully considered the facts of the case and the arguments of the AR. The AO has not shown any nexus between the interest paid and investments in the shares in earlier years. Further, the appellant had sufficient non-interest bearing funds. I have also perused the judgments of ITAT in appellant's own case for AY 2008-09 and CIT(A) order in AY 2012-13, which support the appellant's stand. The Id. CIT(A) had observed as under in the appellate order for AY 2012-13. "I have duly considered the order of assessment u/s 143(3) of the Act, and the submissions of the appellant's AR on the disallowance u/s 14A. The appellant's objection to the disallowance mainly rests on the fact the application of Rule 8D(2) (II) while computing the disallowance u/s 14A of the Act was not correct -the AO had adopted Rs. 2,53,23,58,209/- whereas the appellant had adopted Rs. 36,60,232/- under Rule 8D(2)(II) and had disallow....