Disallowance under section 14A

Foreign Exchange Loss Does Not Attract Disallowance Under Section 14A of The Income Act,1961

  • Facts of the Case:
  1. Assessee was a company which is engaged in the business of sale and installation of wind mill and consultancy services as well,
  2. During the FY 2008-09 assessee has received an advance from a foreign entity in foreign currency for providing consultancy services.
  3. However, no such services have rendered by the assessee during the FY 2008-09 and it incurred loss “Foreign exchange loss” on account of currency rate furcation on year end.
  4. Further during the same financial year, assessee has invested on several mutual fund and earned exempt divided income on the same.
  5. The Assessing offices (AO) made disallowance under section 14A of the act, by treating such foreign exchange loss on business advance has direct relation with the exempt income.
  • Held by the Delhi branch of the Income-tax Appellate Tribunal:
  1. The tribunal is of view that assessee has taken advance for business purpose for providing consultancy services during the regular course of business. Further the exempt income earned by the assessee was not transferred to customer (who had given advance) in any manner, so there is not any case of direct nexus between foreign exchange fluctuation loss claimed by the assessee with the exempt income earned by the assessee.
  2. The tribunal referred the judgement of Supreme Court in Woodward Governor India (P.) Ltd., where it was clarified that loss suffered by the assessee on account of Foreign exchange fluctuation is an item of expenditure under section 37(1) of the Act and is not attract disallowance under section 14A of the act.


The aid judgement of the tribunal, will surely provide relief to the giant corporates (Multi-Nation Companies), as now they can take more business advances in foreign currency, without having any fear of disallowance of foreign exchange loss under section 14A of the Act. This step ultimately increases the forex reserve of India and will give a boost to the growth of the country’s economy.

ACIT V. Theolia Wind Power Pvt. Ltd. [ITA No. 503/Del/2012] -Taxsutra.com