2014 (8) TMI 1129 - AT - Income Tax

Disallowance being marked to market losses on account of exchange rate fluctuation - Held that - The Hon ble Supreme Court in the case of Woodward Governor India (2009 (4) TMI 4 - SUPREME COURT) has held that loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance sheet is an item of expenditure u/s. 37(1) of the Act. Respectfully following the decision of the Hon ble Supreme Court, the AO is directed to delete the disallowance. Ground No. 1 is accordingly allowed. Disallowance of expenditure u/s. 14A read with Rule 8D - Held that - AO has not referred to the balance sheet figures of the assessee. The AO has also not given any findings whether the borrowed funds were also used for making the investments. The AO has also not considered the claim of the assessee that the investments have been made out of own funds. In the interest of justice, in our considered opinion, this issue needs to be readjudicated afresh. We, accordingly set aside this issue to the file of the AO. The AO is directed to show that the assessee has actually incurred certain expenditure for earning the exempt income considering the facts and the figures of the balance sheet of the assessee. The assessee is directed to file necessary details before the AO. This ground of the assessee is allowed for statistical purpose.

Summary

Issues: Disallowance of marked to market losses on account of exchange rate fluctuation and disallowance of expenditure under section 14A of the Act read with Rule 8D

Issue 1: Disallowance of marked to market losses on account of exchange rate fluctuation
The assessee, a manufacturer of engineering goods, filed a return of income for the assessment year 2009-10, showing a loss of &8377; 9,47,29,783/- due to foreign exchange currency rate fluctuation. The Assessing Officer disallowed &8377; 2,28,01,707/- as marked to market loss, considering it as a notional loss and not an allowable expenditure under section 37(1) of the Act. The assessee contended that the loss should be treated as an item of expenditure based on the decision of the Hon'ble Supreme Court in CIT Vs Woodward Governor India Pvt. Ltd. The Tribunal, following the Supreme Court decision, directed the AO to delete the disallowance of &8377; 2,28,01,707/-, thereby allowing Ground No. 1 of the appeal.

Issue 2: Disallowance of expenditure under section 14A of the Act read with Rule 8D
The Assessing Officer also disallowed expenditure of &8377; 38,04,004/- under section 14A r.w. Rule 8D, related to dividend income earned by the assessee. The assessee argued that the Revenue authorities failed to consider the evidence presented during assessment and appellate proceedings. The Tribunal observed that the AO did not assess whether borrowed funds were used for investments or if the investments were made from the assessee's own funds. The issue was remanded back to the AO for fresh adjudication, directing the assessee to provide necessary details. The Tribunal allowed this ground for statistical purposes. Consequently, the appeal filed by the assessee was allowed for statistical purposes, and the order was pronounced in the Open Court on 21st August, 2014.