2017 (5) TMI 972 - AT - Income Tax

Disallowance u/s.14A - Held that - As per the decision of Reliance Utilities And Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT and HDFC Bank Ltd. 2014 (8) TMI 119 - BOMBAY HIGH COURT no disallowance of interest is warranted where own funds are sufficient to cover the value of investment. As per the judicial pronouncements by Delhi High Court in case of Cheminvest. Ltd. 2015 (9) TMI 238 - DELHI HIGH COURT disallowance u/s. 14A should be restricted to exempt income. Recently Bombay High Court in the case of Ballarpur Industries Ltd. 2016 (10) TMI 1039 - BOMBAY HIGH COURT approved the propositions that has disallowance u/s.14A should not exceed the exempt income. Thus we direct the AO to restrict the disallowance u/s.14A to the extent of exempt dividend income earned by the assessee. Disallowing setting off business loss which pertains to foreign currency Forward Action Contracts by treating the same as Speculation Loss - Held that - Foreign currency transactions are incidental to the assessee s diamond business. Thus foreign currency transactions were entered by the assessee for the purpose of meeting the requirement and for nothing else or for no other purpose. Thus assessee s business and sources of borrowings are effectively in foreign currency and thus the assessee is exposed to adverse movements in foreign exchange which it receives and pays as part of its business. All these transactions entered by the assessee are incidental to its business activity of import and export and to protect against adverse movements in foreign exchange in a highly volatile global market. Thus foreign exchange fluctuation is a risk which assessee has to face and therefore it is prudent for it to mitigate it. No merit for not allowing the setting off loss arising out of cancellation of foreign exchange / forward contract. Disallowance of interest for IPO funding to reiterate the shares allotted in such IPOs - Held that - The incurring of interest expenditure is not in doubt it may be allowed in the year of incurring or can be capitalised to the cost of acquisition of shares. The assessee has asked for allocation on this interest expenditure for allowing the same against the respective shares for which it was incurred therefore re-working the short term capital gain on sale of shares we do not find anything wrong for such a claim of assessee. Accordingly we restore this issue back to the file of the AO for working out revised short term capital gain by allocating the respective interest expenditure to the shares for which it was actually incurred. After re-working the AO should allow the respective interest against the short term capital gain so offered by the assessee.

Summary

Issues Involved:

1. Disallowance of ?39,82,046/- under Section 14A for Dividend Income.
2. Treatment of business loss of ?49,674,536/- from foreign currency forward/option contracts as speculation loss.
3. Disallowance of interest paid amounting to ?84,68,707/- for IPO funding.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A for Dividend Income:

The assessee contested the disallowance of ?39,82,046/- made by the Assessing Officer (AO) under Section 14A of the Income Tax Act, which was computed under Rule 8D in respect of dividend income of ?1,24,598/-. The assessee argued that its own funds were sufficient to cover the value of the investment, thus no disallowance was warranted in respect of interest expenditure. The assessee relied on various judicial pronouncements, including Cheminvest Ltd. (378 ITR 33), Joint Investments v. CIT (372 ITR 694), and others, which suggested that disallowance under Section 14A should be restricted to the amount of exempt income earned.

Upon deliberation, the Tribunal referred to the decisions in Reliance Utilities And Power Ltd. (313 ITR 340) and HDFC Bank Ltd. (366 ITR 505), which supported the view that no disallowance of interest is warranted where own funds are sufficient to cover the value of investment. The Tribunal directed the AO to restrict the disallowance under Section 14A to the extent of exempt dividend income earned by the assessee, aligning with judicial precedents.

2. Treatment of Business Loss from Foreign Currency Forward/Option Contracts:

The assessee's grievance was regarding the AO and CIT(A)'s treatment of a business loss of ?49,674,536/- from foreign currency forward/option contracts as speculation loss. The lower authorities considered these transactions as speculative under Section 43(5) of the Act. The assessee argued that these contracts were entered into to mitigate risks associated with foreign exchange fluctuations, which were incidental to its diamond export business.

The Tribunal considered the nature of the assessee's business, which involved significant foreign currency transactions due to imports and exports. The Tribunal noted that such transactions are integral to the assessee's business and are aimed at mitigating foreign exchange risks. The Tribunal referred to the decision in Mahendra Brothers Exports Pvt. Ltd., which held that losses from foreign exchange forward contracts entered for hedging purposes are business losses and not speculative transactions. The Tribunal also cited various judicial precedents, including the Bombay High Court's decision in Badridas Gauridu (261 ITR 256) and the Gujarat High Court's decision in Friends and Friends Shipping Pvt. Ltd. (35 taxmann.com 553), supporting the view that such losses are business losses. Consequently, the Tribunal directed the AO to treat the loss as a business loss.

3. Disallowance of Interest for IPO Funding:

The assessee contested the disallowance of interest paid amounting to ?84,68,707/- for IPO funding. The AO had disallowed this interest expenditure, which the assessee argued should be allocated to the respective shares for which it was incurred, thereby revising the short-term capital gain.

The Tribunal acknowledged that the incurring of interest expenditure was not in doubt and that it could either be allowed in the year of incurring or capitalized to the cost of acquisition of shares. The Tribunal found merit in the assessee's request for allocation of interest expenditure to the respective shares and directed the AO to rework the short-term capital gain by allocating the interest expenditure accordingly. The AO was instructed to allow the respective interest against the short-term capital gain as claimed by the assessee.

Conclusion:

The appeal was allowed in part, with the Tribunal directing the AO to restrict the disallowance under Section 14A to the exempt dividend income, treat the foreign currency forward contract loss as a business loss, and rework the short-term capital gain by allocating the interest expenditure for IPO funding. The order was pronounced in the open court on 17/05/2017.