2018 (3) TMI 1638 - AT - Income Tax

Addition u/s 14A - Held that - We are in agreement with contention of learned AR that disallowance of interest under Rule 8D 2(ii) should be with reference to the interest attributable to the investment and not to the entire interest, accordingly, we confirm the action of CIT(A) for directing the AO to recompute the interest. Disallowance by taking interest of ₹ 57, 57, 409/- in place of ₹ 8, 58, 89, 421/-. We direct accordingly. Treating loss incurred in share trading activity as speculation loss or business loss - Held that - As decided in assessee s own case 2017 (5) TMI 972 - ITAT MUMBAI Forward contracts entered into with the banks for hedging the losses due to foreign exchange fluctuations on the export proceeds are to be considered integral or incidental to the export activity of the assessee. It was further held that there is no requirement of law that there should be 1 1 correlation between the Forward Contracts and Export invoices and so long as the total value of forward contracts does not exceed, the claim of the assessee is sustainable as business loss. Accordingly, it was held that the forward contracts entered by the assessee, an exporter and not the dealer in foreign exchange, with the Banks as incidental to the export business, are business transactions and loss or gains is not of speculation nature. It was further specifically held that the loss arising on cancellation of matured forward contracts was allowable as deduction - Decided in favour of assessee

Summary

Issues Involved:
1. Treatment of loss incurred in share trading activity as 'speculation loss' instead of 'business loss'.
2. Disallowance under Section 14A read with Rule 8D of the IT Act.
3. Treatment of loss on cancellation of forward contracts as speculative loss.

Detailed Analysis:

1. Treatment of Loss Incurred in Share Trading Activity:
The assessee was aggrieved by the treatment of loss incurred in share trading activity as 'speculation loss' instead of 'business loss'. The learned AR conceded that the issue was covered against the assessee by the decision of the Jurisdictional High Court in the case of Prasad Agents (P) Ltd., 333 ITR 275. Consequently, the appeal of the assessee was dismissed.

2. Disallowance under Section 14A read with Rule 8D:
The Revenue contested the CIT(A)'s direction to take the interest component for disallowance under limb (ii) of Rule 8D at ? 51,51,409/- instead of ? 8,58,89,421/-. The AO had made a disallowance of ? 1,11,50,986/- under Section 14A, observing that the assessee had shown dividend income of ? 1,11,08,394/- as exempt. The AO computed the disallowance of interest by taking the total interest debited to the P&L account amounting to ? 8,58,89,421/-, whereas the assessee contended that only ? 57,57,409/- was attributable to share capital activity.

The CIT(A) directed the AO to recompute the disallowance of interest by taking interest of ? 57,57,409/- instead of ? 8,58,89,421/-, observing that the appellant had enough interest-free funds compared to the investments and that the borrowed funds were utilized for specific purposes unrelated to earning exempt income. The CIT(A) relied on the decision of the Jurisdictional High Court in the case of Reliance Utilities and Power Ltd. The Tribunal agreed with the CIT(A)'s direction and upheld the recomputation of interest disallowance.

3. Treatment of Loss on Cancellation of Forward Contracts:
The Revenue was aggrieved by the deletion of disallowance of loss on cancellation of forward contracts. The AO had treated the loss of ? 25,89,49,527/- on cancellation of forward contracts as speculative loss, observing that the assessee entered into forward contracts with financial institutions which were closed without actual delivery of goods. The CIT(A) deleted the disallowance, observing that the forward contracts were part of hedging to reduce future losses in the business due to foreign exchange fluctuations and were accounted for as per AS-11. The CIT(A) relied on the decision of the Hon'ble Supreme Court in the case of Woodward Governor India Pvt. Ltd., 312 ITR 254 (2009), and the decision of the ITAT in the case of London Star Diamonds Company (I) Ltd., which ruled that if the forward contracts were closed on maturity or with reasonable explanation, they should not be taken as speculative activity.

The Tribunal noted that similar issues were decided in the assessee's favor for the preceding year 2008-09, wherein it was held that the loss on cancellation of forward contracts was not speculative but a business loss. The Tribunal also referred to various judicial precedents, including the decision of the Hon'ble Bombay High Court in the case of Badridas Gauridu Pvt. Ltd., which held that foreign exchange contracts booked as incidental to the regular course of business are not speculative transactions. The Tribunal upheld the CIT(A)'s decision to allow the loss of ? 26,74,50,500/- as a normal loss for the year without treating it as speculative loss.

Conclusion:
Both the appeals of the assessee and the Revenue were dismissed. The Tribunal upheld the CIT(A)'s decisions on all issues, including the treatment of share trading loss as speculation loss, the recomputation of disallowance under Section 14A read with Rule 8D, and the treatment of loss on cancellation of forward contracts as normal business loss.