2017 (9) TMI 1598 - AT - Income Tax

Weighted deduction u/s 35(2AB) - Held that - We find that the certificate is issued by the prescribed authority i.e. the Secretary to the Govt. of India, Ministry of Science & Technology, Department of Scientific Research and Industrial Research (DSIR), New Delhi. The prescribed authority has approved the expenses claimed by the assessee u/s 35(2AB) of the Act. However, only for the limited purpose of verifying the authenticity of the said documents so produced by the assessee, this issue is set aside to the file of the AO. Ground No.2 is thus treated as allowed for statistical purposes. Disallowance of derivate loss - whether the loss claimed by assessee is only a notional loss and such notional liability would be contingent in nature which is not allowable under any of the provisions of the Act? - Held that - The loss which is incurred on account of forward contract to sell currency at an agreed price at a future date falling beyond the last date of accounting period is a loss incurred by the assessee on account of the valuation of the contract on the last date of the accounting period and before the date of the maturity of the forward contract and hence is not a contingent liability but an accrued liability and is allowable as an expenditure. We find that the facts of the case before us are similar to the facts of the case before the Special Bench in the case of Bank of Bahrain and Kuwait (2010 (8) TMI 578 - ITAT, MUMBAI).

Summary

Issues:
1. Allowability of weighted deduction u/s 35(2AB)
2. Disallowance of derivative loss

Issue 1: Allowability of weighted deduction u/s 35(2AB)

The Revenue appealed against the CIT (A)'s order for the A.Y 2012-13, challenging the allowance of weighted deduction u/s 35(2AB) and deletion of derivative loss disallowance. The AO observed that the assessee did not submit the prescribed form approved by the DSIR to justify the weighted deduction claim. Despite allowing a sum u/s 35(1), the AO disallowed the weighted deduction. The CIT (A) allowed the claim after the assessee submitted Form 3CM from the prescribed authority. The Revenue argued that accepting additional evidence without AO verification violated Rule 46A. The assessee contended that the forms were from a govt. agency, justifying the CIT (A)'s decision. The ITAT found the certificate authentic but remanded the issue to the AO for verification, allowing Ground No. 2 for statistical purposes.

Issue 2: Disallowance of derivative loss

The AO disallowed the MTM loss on forward contracts as a notional loss, adding it to taxable income. The CIT (A) allowed the claim based on the ITAT's decision in the assessee's earlier case, treating the loss as an accrued liability. The Revenue argued against the CIT (A)'s decision, citing CBDT Instruction No.3 of 2010. The ITAT noted the assessee's hedging purpose for the forward contracts and the accounting treatment following ICAI standards. It held that the loss was an expenditure under section 37(1), following the Supreme Court's decision in Woodward Governor of India Pvt. Ltd. and the ITAT Special Bench's ruling in Bank of Bahrain and Kuwait case. As the CIT (A) followed precedent in the assessee's case, the ITAT upheld her decision, rejecting the Revenue's appeal. Grounds of appeal 3 & 4 were dismissed.

In conclusion, the ITAT partly allowed the Revenue's appeal for statistical purposes regarding the weighted deduction issue but rejected it concerning the derivative loss disallowance. The judgment emphasized the authenticity of prescribed forms for deductions and the treatment of derivative losses as accrued liabilities based on legal precedents and accounting standards.