2013 (1) TMI 36 - AT - Income Tax

Addition on account of foreign exchange fluctuation loss Loss on restating the exchange rate of all foreign transaction outstanding as on balance sheet date AS 11 - AO argued that loss claimed was notional in nature and not actual loss - Following the decision in case of Woodward Governor India P. Ltd. (2009 (4) TMI 4 - SUPREME COURT) 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). In favour of assessee Disallowance u/s 40A(2)(b) - Payment of management consultancy fees to related party CIT(A) confirmed the findings of AO that the payment was hit by section 2(22)(e) - Held that - AO had required the assessee to substantiate its claim that the payments were made for business purposes and were not collusive in nature because payments were made to parties falling within the categories of section 40A(2)(b). However, after considering the assessee s reply he, inter-alia, concluded that the payment was hit by section 2(22)(e). The AO had not given any notice in this regard to assessee. Hence issue remand back to AO Disallowance u/s 14A Rule 8D Whether AO can apply Rule 8D without verifying the correctness of the claim of the assessee in respect of such expenditure in relation to income which did not form part of the total income of assessee - 5% of average value of investment towards deemed expenses relating to tax free income Held that - The mandate of section 14A(2) clearly requires the AO to first consider the assessee s claim and after rejecting the same should resort to Rule 8D. We, therefore, consider it in the interest of justice that the matter should be restored back to the file of AO

Summary

Issues Involved:
1. Disallowance of loss on account of foreign exchange fluctuation.
2. Addition of payment towards Inter-company Management charges (ICM charges) as deemed dividend under section 2(22)(e) of the Income-tax Act, 1961.
3. Disallowance under section 14A of the Income-tax Act.

Detailed Analysis:

1. Disallowance of Loss on Account of Foreign Exchange Fluctuation
Facts and Arguments:
The assessee, a private limited company engaged in manufacturing printing and packing inks, claimed a loss of Rs.6,21,988/- due to foreign exchange fluctuation. The Assessing Officer (AO) disallowed this claim, considering it a notional loss, not an actual one. The assessee argued that this practice aligns with AS-11 as per Indian GAAP and has been consistently followed.

Tribunal's Findings:
The Tribunal referenced the Supreme Court's decision in CIT vs. Woodward Governor India P. Ltd., which held that losses due to foreign exchange fluctuations as on the balance sheet date are deductible under section 37(1) of the Income-tax Act. Hence, the Tribunal allowed the assessee's claim, stating that the loss on account of foreign exchange fluctuation is an item of expenditure under section 37(1).

Conclusion:
The ground regarding the disallowance of loss on account of foreign exchange fluctuation was allowed in favor of the assessee.

2. Addition of Payment towards Inter-company Management Charges as Deemed Dividend
Facts and Arguments:
The AO disallowed Rs.1,43,87,079/- paid towards Inter-company Management charges, considering it a deemed dividend under section 2(22)(e). The AO argued that the payments were made to related concerns and were collusive, thus not for business exigencies. The CIT(A) upheld this disallowance, agreeing with the AO's reasoning.

Tribunal's Findings:
The Tribunal noted that the AO had not provided notice regarding the application of section 2(22)(e) to the assessee. It was observed that the lower authorities did not adequately consider the assessee's submissions about the business purpose of the payments. Consequently, the Tribunal remanded the matter back to the AO for a fresh examination, ensuring that the assessee's explanations are duly considered.

Conclusion:
The ground regarding the addition of Inter-company Management charges as deemed dividend was allowed for statistical purposes, with the matter remanded for a fresh examination.

3. Disallowance under Section 14A
Facts and Arguments:
The AO made a disallowance of Rs.12,71,020/- under section 14A by applying Rule 8D, without considering the assessee's claim that no expenditure was allocable towards earning exempt income. The CIT(A) upheld the AO's action.

Tribunal's Findings:
The Tribunal highlighted that under section 14A(2), the AO must first be dissatisfied with the assessee's claim regarding the non-allocation of expenditure towards exempt income before applying Rule 8D. Since the AO did not comment on the correctness of the assessee's claim, the Tribunal remanded the matter back to the AO for a de novo consideration, adhering to the mandate of section 14A(2).

Conclusion:
The ground regarding disallowance under section 14A was allowed for statistical purposes, with the matter remanded for a fresh examination.

Final Judgment:
The appeal was allowed for statistical purposes, with specific issues remanded back to the AO for de novo consideration.