ITAT Allows FMI Automotive Appeal on Capital & Insurance Claims

The Income Tax Appellate Tribunal (ITAT), Delhi Bench has upheld the order passed by the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi, dismissing in full the appeal filed by the Revenue for the Assessment Year 2017–18. The case involved FMI Automotive Components, a subsidiary of Futaba Industrial Co. Ltd.

Background of the Case

The Revenue had filed an appeal on six grounds, alleging that the NFAC had made errors in law by deleting certain additions made by the Assessing Officer (AO). The issues mainly revolved around:

• Disallowance of foreign exchange loss related to plant and machinery

• Static balance of capital creditors

• Insurance claim being treated as a revenue receipt

During the course of assessment, the AO noticed a difference of ₹591 lakhs between the value of plant and equipment as reported in the financial statements and the Tax Audit Report (TAR). The assessee clarified that the difference resulted from foreign exchange fluctuation adjustments made while preparing the fixed assets schedule. Despite this explanation, the AO disallowed the claim and added it to the taxable income.

The assessee appealed before the Commissioner of Income Tax (Appeals), who deleted the addition after examining the supporting documents. Dissatisfied, the Revenue brought the matter before the ITAT.

Observations and Findings of the Tribunal

The ITAT Bench, consisting of Satbeer Singh Goadara (Judicial Member) and S. Rifaur Rahman (Accountant Member), reviewed each ground of appeal individually and made the following observations:

1. Foreign Exchange Loss – Section 43A of the Income Tax Act

The Tribunal observed that under Section 43A, any increase in liability due to exchange rate fluctuations concerning capital assets should be capitalized by increasing the asset’s value. Since the assessee had correctly followed this principle, the AO’s addition was not justified.

2. Static Balance of Creditors

It was noted that the assessee had already offered the relevant amount to tax, and there was no need for disallowance in the current assessment year.

3. Repairs and Replacement Expenses

The Tribunal found that these expenses were revenue in nature, as they neither created a new asset nor enhanced the existing asset’s value. Hence, the disallowance made by the AO was rightly deleted.

4 & 5. Ad Hoc Disallowances

The Bench stated that the Assessing Officer cannot make ad hoc disallowances without identifying specific defects in the accounts. It emphasized that the assessee’s books were audited and verified by independent auditors, and thus could not be rejected without valid reasons or supporting evidence.

6. Insurance Claim Treatment

The Tribunal clarified that insurance reimbursements received to cover actual damages cannot be treated as taxable income. Since the reimbursement was limited to the extent of damage suffered, the addition made by the AO was unsustainable.

Final Decision

After reviewing all six grounds, the ITAT dismissed the Revenue’s appeal entirely and upheld the order of the CIT (Appeals)/NFAC). The ruling reinforces that disallowances must be based on clear evidence and legal grounds, not on assumptions or arbitrary estimations.