2015 (2) TMI 1158 - AT - Income Tax

Disallowance of interest under section 36(1)(iii) - Held that - It is an undisputed fact that assessee was having own funds at ₹ 219.86 crores at the beginning of the year and ₹ 180.05 crores at the end of the year. It is also an undisputed fact that assessee advanced ₹ 29.18 lacs only during the year under consideration. Since the assessee is having sufficient own funds to meet out the advances we do not find any reasons for disallowance of the proportionate interest. On the facts of the case we set aside the findings of Ld. CIT(A) and direct the AO to delete the addition - Decided in favour of assessee Addition being mark to market losses treating it as only notional and contingent - Held that - As relying on the decision of DCIT vs. Bank of Bahrain and Kuwait (2010 (8) TMI 578 - ITAT, MUMBAI) to hold that the liabilities for foreign exchange was incurred during the normal course of assessee s business and in fact the gain earned on such revaluation having been accepted and brought to tax in the respective years, there is no reason to arrive at a different conclusion in this year merely because there is a loss. Thus directing the AO to delete the addition - Decided in favour of assessee

Summary

Issues:
1. Disallowance of interest under section 36(1)(iii) of the Income Tax Act, 1961.
2. Treatment of mark to market losses as notional and contingent.

Issue 1: Disallowance of Interest:
The appellant, engaged in import and export of diamonds, contested the disallowance of interest amounting to Rs. 19,95,375 made by the Assessing Officer (AO) under section 36(1)(iii) of the Income Tax Act, 1961. The AO observed that the appellant had paid interest on loans and given advances for the purchase of business premises, leading to a proportionate disallowance of interest. The appellant's explanations were rejected by the AO and the Commissioner of Income Tax (Appeals) [CIT(A)]. However, the appellant argued that it had sufficient own funds to cover the advances, citing a High Court precedent. The Income Tax Appellate Tribunal (ITAT) noted the appellant's financial position and directed the AO to delete the disallowance, ruling in favor of the appellant.

Issue 2: Mark to Market Losses Treatment:
The second ground of appeal related to the addition of Rs. 2,59,623 as mark to market losses treated as notional and contingent. The AO disallowed this amount, considering the gain and loss from export forward contracts as notional and contingent, contrary to the appellant's accounting treatment under Accounting Standard AS-11. The AO relied on a CBDT Instruction and dismissed the appellant's contentions. The ITAT, after reviewing the facts and legal precedents, found that the Revenue Authorities had misconstrued the nature of the forward contracts and the mark to market losses. Citing relevant judicial decisions and the Special Bench ruling in a similar case, the ITAT directed the AO to delete the addition of Rs. 2,59,623, thereby allowing the appeal in this regard.

In conclusion, the ITAT allowed the appeal filed by the appellant, overturning the decisions of the Revenue Authorities on both issues of disallowance of interest and mark to market losses. The judgment emphasized the importance of considering the appellant's financial position and the correct application of accounting standards and legal precedents in determining tax liabilities.