Foreign exchange loss is allowable as deduction

Facts and Issue of the Case

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

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. 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. The assessee was asked to explain why the disallowance should not be made as per section 14A r.w.r 8D of the Rules. In its reply, the assessee stated that the assessee’s company’s own funds are far too excess of its investments.

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

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). 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.

Observation by the Court

The court 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.

The court 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.

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 cannot be 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.

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. 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. 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.

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.

The court 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. 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.

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