2017 (1) TMI 734 - AT - Income Tax

Disallowance of mark to market (MTM) loss - Held that - We find that the issue stands decided in favour of the assessee by the Tribunal in the matters relied upon by the AR. It is found that in the of the Kotak Mahindra Investment Ltd. (2013 (7) TMI 355 - ITAT MUMBAI ), the Tribunal has held that M T M losses have be allowed. We do not find any infirmity in the order of the FAA. So, respectfully, following the orders of the Tribunal, we decide issue against the AO. Disallowance under section 14A - Held that - We find the Judicial Forums have, on more than one occasions, held that no disallowance u/s. 14A could be made if the shares are held as stock in trade or the assessee had not claimed any expenditure against the exempt income. In the case before us, the AO/FAA has not proved that stocks were held by the assessee as investment or that it had claimed by any expenditure for earning the tax free income. Therefore, reversing the order of the FAA, we decide the first ground of appeal in favour of the assessee. Disallowance of depreciation - AO held that assessee was not the owner of the assets, that it had not produced any documentary evidence to prove the payment was made by it, that it was not eligible for claiming depreciation - Held that - We find that the group concern of the assessee had purchased computers/computer related accessories in Hong Kong, that the foreign-entity had made the initial payment, that the goods were shipped to India, that assets are appearing in the audited books of accounts of the assessee, that the AO had not doubted the genuineness of the details of the block of assets. After considering the available material, including the debit note raised by the foreign entity, we are of the opinion, the AO/FAA was not justified in denying the depreciation to the assessee. - Decided in favour of the assessee

Summary

Issues:
1. Disallowance of mark to market (MTM) loss
2. Disallowance under section 14A of the Act
3. Disallowance of depreciation on assets

Issue 1: Disallowance of mark to market (MTM) loss

The Assessing Officer (AO) disallowed mark to market (MTM) loss of &8377; 85.18 lakhs incurred by the assessee, considering it as a notional loss. The AO argued that the losses on future derivative transactions were not allowable deductions as they were provisions for contingent losses. The First Appellate Authority (FAA) allowed the claim made by the assessee under the head MTM losses, citing precedents. The Tribunal upheld the FAA's decision, referring to previous judgments where MTM losses were allowed. The Tribunal concluded that the AO's disallowance was not justified, based on the principles established in previous cases.

Issue 2: Disallowance under section 14A of the Act

The AO disallowed &8377; 6.43 lakhs under section 14A of the Act, pertaining to expenses incurred for earning exempt income. The assessee argued that no disallowance should be made as the shares generating dividend income were held as stock in trade, and no expenditure was claimed against the exempt income. The FAA upheld the AO's disallowance. However, the Tribunal reversed the FAA's decision, noting that the AO failed to prove that the stocks were held as investments or that any expenditure was incurred for earning the tax-free income. The Tribunal ruled in favor of the assessee, citing precedents where disallowance under section 14A was not applicable in similar circumstances.

Issue 3: Disallowance of depreciation on assets

The AO disallowed depreciation of &8377; 10.63 lakhs claimed by the assessee on assets purchased through a Hong Kong company. The AO argued that the assessee was not the owner of the assets and lacked evidence to support ownership claims. The FAA upheld the disallowance, stating that the assessee failed to substantiate ownership of the assets. However, the Tribunal found that the assets appeared in the audited books of accounts, and the foreign entity's debit note supported the ownership claim. The Tribunal concluded that the AO and FAA were unjustified in denying depreciation to the assessee, overturning the FAA's decision in favor of the assessee.

In conclusion, the Tribunal dismissed the appeal filed by the AO and allowed the appeal of the assessee, ruling in favor of the assessee on all three issues presented before the court.