2013 (11) TMI 408 - AT - Income Tax

Disallowance u/s 36 - Interest expenditure - proportionate disallowance on the ground that possession of the premises had not been handed over to the assessee till the end of the AY - assessee contended that he has used interest free funds for purchase of property - Held that - neither before the AO nor before the FAA assessee had proved that interest free funds were given out of appellant s own funds out of internal accruals. - AO and FAA had rightly disallowed the interest payment. But, we are of the opinion that there is need for recalculating the exact amount of interest disallowance. Matter is restored back for recalculation of interest disallowance - Decided against the assessee. Market to market loss - loss on account of Exchange rate fluctuation - of outstanding debtors and creditors for sale and purchase of foreign currency - speculative transaction or not - Held that - assessee was not dealing in Foreign Exchange, therefore transactions entered into by it in Foreign Exchange cannot be held to be hedging transactions. Assessee is dealing in diamonds and FC entered into only for diamonds would have been covered by the proviso (a) to the section 43(5)of the Act. As held by the Hon ble High Court of Calcutta in the matter of Gourepore Co. Ltd.(1980 (11) TMI 23 - CALCUTTA High Court) onus was on the assessee to prove that the transactions in question were not of a speculative nature. We are of the opinion that the assessee has failed to discharge the onus cast upon him by the statute. - Decided against assessee.

Issues Involved:
1. Disallowance of proportionate interest expenditure.
2. Disallowance of mark-to-market (M to M) loss on outstanding forward contracts.

Detailed Analysis:

1. Disallowance of Proportionate Interest Expenditure:
The assessee-company challenged the disallowance of Rs. 13,52,741/- as proportionate interest expenditure. The Assessing Officer (AO) found that the assessee had given an advance of Rs. 2,08,40,685/- for purchasing office premises at Bharat Diamond Bourse (BDB), which increased to Rs. 2.48 Crores by the end of the assessment year (AY). The AO concluded that the interest expenditure should be capitalized as per the proviso to Section 36(1)(iii) of the Income Tax Act, 1961, since the asset was not put to use during the year. The First Appeal Authority (FAA) upheld this view, noting that the appellant failed to provide evidence that interest-free funds were used for the investment.

Upon appeal, the assessee argued that adequate interest-free funds were available and that the disallowance should be restricted to the investment made during the year, amounting to Rs. 40.01 lakhs. The tribunal agreed with the lower authorities that the proviso to Section 36(1)(iii) was applicable, as the asset was not put to use. However, it directed the AO to recalculate the interest disallowance based on the investment made during the year only, not the total investment.

Outcome: Ground No.1 is partly decided in favor of the assessee, with directions to recalculate the interest disallowance.

2. Disallowance of Mark-to-Market (M to M) Loss on Outstanding Forward Contracts:
The assessee claimed a loss of Rs. 4,02,96,635/- due to exchange rate fluctuations on outstanding forward contracts. The AO disallowed this claim, treating the loss as speculative under Section 43(5) of the Act and CBDT Instruction No. 3/2010, which considers such losses as notional and contingent. The FAA upheld this decision, stating that the forward contracts were settled without actual delivery, making them speculative transactions.

The assessee contended that the forward contracts were hedging transactions to mitigate foreign exchange risk and should not be treated as speculative. The tribunal examined the nature of forward contracts and hedging transactions, concluding that the assessee's transactions did not qualify as hedging under the proviso to Section 43(5). The tribunal noted that the assessee failed to prove that the transactions were not speculative and that the losses were due to forward contracts settled without actual delivery.

Outcome: Ground No.2 is decided against the assessee, affirming the disallowance of the M to M loss.

Conclusion:
The appeal filed by the assessee-company is partly allowed. The tribunal directed the AO to recalculate the interest disallowance for the investment made during the year but upheld the disallowance of the mark-to-market loss on forward contracts. The order was pronounced in the open court on 3.5.2013.

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