Foreign exchange loss duly allowable as deduction

DCIT Vs Oscar Investment Ltd (ITAT Delhi)

ITAT Delhi held that AO duly accepted foreign exchange gain offered to taxation in earlier Assessment Year, hence AO cannot disallow foreign exchange loss assuming it to be a contingent loss in the year under consideration.

Facts-

The Revenue is aggrieved by the deletion of disallowance u/s 14A of the Income-tax Act, 1961 r.w.r 8D of the ITAT Rules, 1963 amounting to Rs. 5,52,52,182/- and secondly, the Revenue is aggrieved by the deletion of addition on account of disallowance of foreign exchange loss of Rs. 11,48,23,000/-.
AO noticed that assessee has earned income not forming part of total income in nature of dividend exempt u/s 10(34)/ 10(35) of the Act. Hence, the assessee was asked to explain why the disallowance should not be made as per section 14A r.w.r. 8D of the Rules.

Notably, the forex gain /loss on such Swap transaction of loan was to be borne by the assessee. The Assessing Officer was of the firm belief that since the liability of the assessee was outstanding in foreign currency, which has resulted loss to the assessee due to fluctuation and since there is no settlement of transaction, loss is clearly a notional loss and was, accordingly, disallowed by the Assessing Officer.

Conclusion-

In our considered opinion, interest cost of Rs. 18.44 crores taken by the Assessing Officer in computing the disallowance is contradictory to the facts discussed hereinabove and therefore, the computation of disallowance made by the Assessing Officer on erroneous facts cannotbe accepted and therefore, the findings of the ld. CIT(A) cannot be faulted with. Accordingly, the grievance of the Revenue is dismissed on the facts of the case in hand.

Foreign exchange fluctuation gain in AY 2010-2011 and 2011-2012 is duly credited to profit and loss account and duly offered to taxation. Following the same principle, the assessee has claimed the loss incurred during the year under consideration and the same cannot be disallowed by AO assuming it to be a contingent loss because when there was gain, AO taxed the same. Hence, the deduction on account of foreign exchange loss suffered by the appellant during the year is duly allowable as loss incurred during the year.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal by the Revenue is preferred against the order of the CIT(A) – XVI, Delhi dated 27.12.2013 pertaining to Assessment Year 2009-10.

2. The grievances of the Revenue is two-fold – firstly, the Revenue is aggrieved by the deletion of disallowance u/s 14A of the Income-tax Act, 1961 [hereinafter referred to as ‘The Act’] r.w.r 8D of the ITAT Rules, 1963 amounting to Rs. 5,52,52,182/- and secondly, the Revenue is aggrieved by the deletion of addition on account of disallowance of foreign exchange loss of Rs. 11,48,23,000/-.

3. The representatives of both the sides were heard at length, the case records carefully perused.

4. Briefly stated, the facts of the case are that the assessee company is engaged in the business of investing/dealing in shares and securities and financing activities.

5. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has earned income not forming part of total income in nature of dividend exempt u/s 10(34)/10(35) of the Act.

6. The assessee was asked to explain why the disallowance should not be made as per section 14A r.w.r 8D of the Rules.

7. In its reply, the assessee stated that the assessee’s company’s own funds are far too excess of its investments.

8. It was explained that the assessee’s own fund as on 31.03.2009 were at Rs. 1,292.24 crores whereas the investments were at Rs. 201.74 crores. However, since the investments as on 01.04.2008 were more than its own funds, the assessee suo motto computed the disallowance u/s 14A of the Act at Rs. 2,39,59,0968/-.

9. Computation of disallowance made by the assessee was not accepted by the Assessing Officer who proceeded by computing his own disallowance as under:

10. Deducting the suo motto disallowance made the assessee, the Assessing Officer made addition of Rs. 5,52,52,182/-.

11. Before us, the ld. DR strongly contended that since the assessee itself has computed the disallowance u/r 8D of the Rules, therefore, the entire disallowance has to be computed as per provisions of section 14A r.w.r 8D of the Rules and disallowance computed by the assessee is not as per the formula given in Rule 8D(2) clause (i) and (iii).

12. The ld. counsel for the assessee vehemently stated that the assessee has disallowed the entire expenditure and there cannot be any further disallowance over and above the expenditure claimed by the assessee. The ld. counsel for the assessee drew our attention to the computation of disallowance.

13. We have given thoughtful consideration to the rival contentions qua the issue. A perusal of the statement of taxable income shows that the assessee has added interest of Rs. 1,80,777/- and other expenses Rs. 1,19,35,491/- under disallowance u/s 14A of the Act. We further find that disallowance of interest has been made on day to day basis as under:

14. Expenditure directly relating to income which does not form part of total income is computed as under:

15. And computation of expenditure directly relating to income which does not form part of income is as under:

16. We further find that secured loans have come down from Rs. 143.60 crores to Rs. NIL and unsecured loans have come down from 116.80 crores to Rs. 60 crores. We further find that during the year under consideration, the assessee has realized Rs. 1262.78 crores being sale consideration of its entire share holding in Ranbaxy shares by which the assessee repaid its entire borrowings and had made investments thereafter only after sale proceeds realized from disposal of shares of M/s Ranbaxy. Therefore, there is no question of incurring any interest cost on investment after 20.10.2008.

17. In our considered opinion, interest cost of Rs. 18.44 crores taken by the Assessing Officer in computing the disallowance is contradictory to the facts discussed hereinabove and therefore, the computation of disallowance made by the Assessing Officer on erroneous facts cannotbe accepted and therefore, the findings of the ld. CIT(A) cannot be faulted with. Accordingly, the grievance of the Revenue is dismissed on the facts of the case in hand as discussed hereinabove.

18. In so far as second grievance of the Revenue is concerned, the underlying facts are that the assessee company claimed loss of Rs. 11,48,23,009/- on account of foreign exchange fluctuation.

19. It was explained during the course of assessment proceedings that for the purpose of carrying out its business activities, the assessee had taken loan of Rs. 60 crores from M/s RHC Holding Pvt Ltd at an interest rate of 11% p.a. It was explained that the said loan was utilized by the assessee in its activity of granting loans and advances on which it had earned interest income.

20. It was further explained that in order to save/reduce interest cost, the assessee entered into a Swap Deal Agreement with HSBC wherein HSBC agreed to swap the assessee’s loan of Rs. 60 crores in USD @ 40.68 per USD and in terms of agreement with HSBC the assessee was to earn interest income of 0.95% per annum from the bank which reduced the interest cost of 11% per annum on loan of Rs. 60 crores from M/s RHC.

21. However, the forex gain /loss on such Swap transaction of loan was to be borne by the assessee. The Assessing Officer was of the firm belief that since the liability of the assessee was outstanding in foreign currency, which has resulted loss to the assessee due to fluctuation and since there is no settlement of transaction, loss is clearly a notional loss and was, accordingly, disallowed by the Assessing Officer.

22. We find that in the year ended 31.03.2010 and 31.03.2011, there was foreign exchange fluctuation gain of Rs. 4.75 crores and 1.22 crores respectively. The undisputed fact is that these gains have been credited to the profit and loss account and the same were offered for taxation and was accepted by the Assessing Officer while completing the assessment for Assessment Years 2011-11 and 2011-12 u/s 143(3) of the Act.

23. Following the same principle, the assessee has claimed loss incurred during the year under consideration and in our considered opinion, the same cannot be disallowed by the Assessing Officer assuming it to be a contingent loss because when there was gain, the Assessing Officer taxed the same and. therefore, by the same analogy, when there is loss the Assessing Officer should have allowed the same.

24. Following findings of the ld. CIT(A) need special mention:

“4.2.18 It is also seen that in the ultimate analysis the net impact of foreign exchange gain/loss accounted for by the assessee on accrual basis is revenue neutral. Since the appellant is accounting for the net loss/gain on the basis of difference between the dollar rate as on the beginning and closing of the financial year, therefore, the net impact of foreign exchange 10 loss/gain would be revenue neutral. In other words the profit or loss based on the difference between the dollar rate as on 12.03.2008 and as on 21.02.2013 at the end of the 5 year swap deal period is the same as the aggregate of the net gain or loss accounted for by the appellant financial year wise on accrual basis to comply with the provisions of section 145(1) of Income Tax Act as well as AS-11. The above fact is also verifiable from the loss/gain offered for taxation by the appellant in the IT Return filed for AY 2009-10 to AY 2013-14. As per year wise details of foreign exchange gain/loss submitted by the appellant the dollar rate as on Feb, 2013 is Rs. 54.064. Therefore, the loss based on difference between dollar rate of Rs. 40.68 as on 12.03.2008 and the dollar rate of Rs. 54.064 as on Feb, 2013 is Rs. 19.73 crores. On the other hand, the aggregate of loss/gain claimed/offered for taxation under the IT Act on accrual basis for the AY 2009-10 to AY 2013-14 is also (-) Rs. 19.73 crs. Therefore, in the ultimate analysis net impact of foreign exchange gain/loss is revenue neutral because in all the above AY 2009-10 to AY 2013- 14 taxes are paid by the appellant at maximum marginal rate on normal profit and not on book profit u/s 115JB.

4.2.19 In view of above, factual and legal position the deduction on account of foreign exchange loss suffered by the appellant during the year is duly allowable as loss incurred during the year. Therefore, AO is directed to allow the said Foreign Exchange Loss under reference. The appeal is allowed in these grounds.”

25. Considering the facts in totality, the afore stated findings of the CIT(A) cannot be faulted with. Second grievance of the Revenue is also dismissed.

26. In the result, the appeal of the Revenue in ITA No.1785/DEL/2014 is dismissed.

The order is pronounced in the open court on 08.09.2022.