2013 (11) TMI 1278 - AT - Income Tax

Disallowance of Foreign Exchange Fluctuation - Held that - Loss due to foreign exchange fluctuation was a revenue loss - unrealized forex foreign exchange fluctuation loss being in the nature of revenue, should be allowed as deduction - Appeal of assessee relates to disallowance of expenditure on account of inland haulage expenses and clearing and forwarding expenses - there was no evidence to prove that that nothing was payable - Nor a copy of balance sheet or other document showing that nothing remained to be paid was submitted nor it is a part of record - Matter remitted back to the AO for re-adjudication. Disallowance of Expenditure u/s 14 of Income Tax Act, 1961 - Held that - Following CIT vs Dhanlaxmi Bank Ltd. 2002 (11) TMI 17 - KERALA High Court - Disallowance of administrative expenses in the absence of claim of interest expenses was not warranted - disallowance u/s 14A should be limited to interest liability and should not extend to over heads or administrative expenses which should be considered for disallowance under Rule 8D from AY 2008-09 onwards - there is no claim of interest expenses - Assessee has not claimed any interest expenses and the total expenses claimed against turn over crores were quite reasonable and moreover the case of assessee relates to AY 2005-06 when Rule 8D was not applicable Decided in favour of Assessee. Disallowance of Inland haulage and clearing and forwarding expenses u/s 40A (i)(iii) of Income Tax Act, 1961 Held that - There was no evidence to prove that nothing was payable as on 31st March - Nor a copy of balance sheet or other document showing that nothing remained to be paid was submitted nor it is a part of record Matter remitted back to the AO for re-adjudication - Addition of DEPB Benefits - Held that - Assessee had offered to tax, the actual amount of receipt of DEPB and the short amount received by assessee was not liable to tax - the addition was not justified - As regards, loss on sale of DEPB licenses, copies of sale of DEPB licenses are placed at paper book - The invoice bills mentions, face value of DEPB licenses along with sale value and difference represents amount which the assessee had booked as loss on the sale of such licenses - AO was not justified in making addition and Ld. CIT(A) had rightly deleted the addition - There was detail of short amount of DEPB receipt and the details are placed - The supporting documents showing lower receipt of DEPB against the DEPB accrued are also placed - The papers showing actual receipt are placed at paper book pages. Addition of Cessation of Trading Liability Held that - The balance payment out after deducting USD 60000 out of USD 1,10,029 were received during following years - There is also a bank certificate of export and realization which is placed at the paper book which also certifies the export and receipt of payment - AO was not justified in making additions on account of cessation of liability as the liability had not ceased but got adjusted in next year with the amount of export. Disallowance of Expenditure of Non-Deduction of TDS Held that - The breakup of loading/unloading charges and also the breakup of carriage outward charges which suggests that no payment was in excess Thus the assessee was not liable to deduct TDS - Decided partly in favour of Assessee.

Issues Involved:
1. Disallowance on account of foreign exchange fluctuation.
2. Disallowance of expenditure u/s 14A of the Act.
3. Addition on account of DEPB benefits.
4. Addition on account of cessation of trading liability.
5. Disallowance of expenditure on account of non-deduction of TDS.

Detailed Analysis:

1. Disallowance on account of foreign exchange fluctuation:
The AO disallowed Rs.42,27,345/- for foreign exchange fluctuation loss, considering it a notional loss. The assessee argued that the loss was booked as per accounting standards and was a revenue expenditure. The CIT(A) deleted the addition, citing the Supreme Court's decision in CIT vs Woodward Governor India Pvt. Ltd., which held that such losses are revenue losses and allowable. This decision was upheld by the tribunal, dismissing the revenue's appeal on this ground.

2. Disallowance of expenditure u/s 14A of the Act:
The AO disallowed 25% of dividend income as administrative expenses, which was reduced to 5% by the CIT(A). The assessee argued that no direct or indirect expenses were incurred for earning dividend income. The tribunal noted that Rule 8D was not applicable for AY 2005-06 and, following the Kerala High Court's decision in CIT vs Dhanlaxmi Bank Ltd., held that disallowance of administrative expenses was not warranted in the absence of interest expenses. Thus, the tribunal allowed the assessee's appeal on this ground and dismissed the revenue's corresponding ground.

3. Addition on account of DEPB benefits:
The AO added Rs.7,18,390/- due to unexplained differences in DEPB benefits. The assessee explained that the difference was due to calculation mistakes and loss on sale of DEPB licenses. The CIT(A) accepted the explanation and deleted the addition. The tribunal upheld this decision, finding that the assessee had correctly accounted for the DEPB benefits and the loss on sale of licenses.

4. Addition on account of cessation of trading liability:
The AO added Rs.26,16,800/- as cessation of trading liability, which the assessee argued was an advance from a foreign buyer that was adjusted in subsequent years. The CIT(A) deleted the addition, interpreting section 41(1) and relying on case laws that cessation of liability must be irrevocable. The tribunal upheld this decision, finding that the liability had not ceased but was adjusted against future sales.

5. Disallowance of expenditure on account of non-deduction of TDS:
The AO disallowed Rs.18,58,244/- for non-deduction of TDS on certain expenses. The CIT(A) deleted the disallowance for loading/unloading and carriage outward expenses but upheld it for inland haulage and clearing and forwarding charges. The tribunal remitted the matter back to the AO for verification of whether these expenses were payable as on 31st March. If found not payable, the AO was directed to allow the claim as per the Special Bench decision in Merlin Shipping & Transports vs ACIT.

Conclusion:
The tribunal partly allowed the assessee's appeal for statistical purposes and dismissed the revenue's appeal, providing a detailed analysis and verification of the claims and supporting documents. The order was pronounced on 8.2.2013.

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