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2018 (10) TMI 678 - AT - Income TaxPremium expense on hedging contract - speculative transaction or not - TDS liability - interest component on ECB - assessee claimed that premium or discount arising at the inception of forward exchange contract was amortised as expense over the life of the contract - TDS liability - The Assessing Officer opined that the transactions under consideration with these banks were in the nature of speculative transactions u/s 43(5) of the Act and, hence, the loss was not deductible. Alternatively, he opined that the assessee was required to deduct tax at source before making payment of interest and Premium to the two banks u/s 195 of the Act. In the absence of the assessee having deducted tax at source, the AO held the amount to be not deductible in terms of the provisions of section 40(a)(ia) read with section 195 of the Act. Held that - The assessee, did not enter to agreements with the two banks for sale or purchase of any commodity, which was to be settled otherwise than by the actual delivery. On the other hand, it is a case of a hedging transaction and the consideration is for securing the assessee against any fluctuation loss in foreign currency and service of loan by means of interest. Thus, it is clear that the provisions of section 43(5) of the Act are clearly not attracted. Interest component on ECB - Held that - As the loan was taken, admittedly, for the business purpose, interest thereon, which is a part of the overall compensation to the banks, thus has to be allowed as deduction. As tax was properly deducted on such interest component and paid to the exchequer, we hold that the ld. CIT(A) rightly appreciated the facts in deleting addition of ₹ 2.67 crore. Premium on hedging contract - Held that - the deductions have already been allowed by the Assessing Officer in the preceding three years, which assessments have attained finality. To that extent, there will be double deduction in the fifth year, which cannot be permitted. We, therefore, hold that the assessee was justified in claiming deduction of the proportionate part of the Premium on year to year basis. TDS liability - Held that - Having issued certificates u/s 195(3) of the Act to the two banks, the Revenue was not within its power to require deduction of tax at source from the amount of Premium payable to these two banks, which was claimed as deduction. We, therefore, hold that the assessee rightly claimed deduction for the proportionate part of the Premium payable to Citi Bank N.A. and Barclays Bank. Deduction u/s 80IB - Held that - the income relatable to the goods manufactured in Unit-1 cannot be allowed deduction u/s 80IB, even though the ultimate sale is made by Unit Nos.2 and 3 using, inter alia, the output of Unit-1 as their respective input. The contention of the assessee for allowing deduction on the total income from Unit Nos. 2 and 3, thus, cannot be accepted. Decided against the revenue and partly in favor of assessee.
Issues Involved:
1. Disallowance of hedging premium and interest expenses. 2. Deduction under Section 80IB for Units 2 and 3. 3. Treatment of short-term capital gains from mutual funds. 4. Deduction for damages and shortages. 5. Disallowance under Section 14A. Detailed Analysis: 1. Disallowance of Hedging Premium and Interest Expenses: Assessment Year 2007-08: - Hedging Premium: The assessee claimed a deduction for hedging premium amounting to ?13,61,36,388/-. The AO disallowed this, treating it as a speculative transaction under Section 43(5) and also disallowed it under Section 40(a)(ia) for non-deduction of TDS. The CIT(A) held it as an allowable expenditure but deferred the deduction to the succeeding year. The Tribunal held that the hedging transactions were not speculative and the premium should be allowed on a proportionate basis as the liability was incurred over the period of the contract. - Interest Expenses: The AO disallowed interest expenses of ?2,67,95,720/- on the grounds of non-deduction of TDS. The CIT(A) deleted this disallowance based on the assessee’s submission of TDS deduction evidence. The Tribunal upheld this deletion as the interest was part of the overall compensation to the banks and TDS was duly deducted. Assessment Year 2008-09: - The Tribunal followed the same reasoning as for AY 2007-08, allowing the deduction of ?15.26 crore for interest and premium, and dismissing the Revenue’s appeal on this ground. 2. Deduction Under Section 80IB for Units 2 and 3: Assessment Year 2007-08: - The AO restricted the deduction under Section 80IB by disallowing income attributable to Unit 1, which was not eligible for the deduction. The CIT(A) upheld this restriction. The Tribunal directed the AO to apportion the income based on the excisable value of goods transferred between the units. Assessment Year 2008-09: - The Tribunal followed the same approach as for AY 2007-08, directing the AO to re-compute the deduction under Section 80IB by excluding the income attributable to Unit 1. 3. Treatment of Short-term Capital Gains from Mutual Funds: Assessment Year 2007-08: - The AO treated the short-term capital gain of ?48,05,198/- from mutual funds as business income. The CIT(A) overturned this, treating it as short-term capital gain. The Tribunal upheld the CIT(A)’s decision, noting that the mutual funds were shown as investments and not stock-in-trade. 4. Deduction for Damages and Shortages: Assessment Year 2007-08: - The AO disallowed ?1,32,15,178/- claimed by the assessee for damages and shortages. The CIT(A) allowed the deduction, and the Tribunal upheld this decision, noting the reasonableness of the claim given the turnover. Assessment Year 2008-09: - The Tribunal followed the same reasoning as for AY 2007-08, upholding the CIT(A)’s decision to allow the deduction for damages and shortages. 5. Disallowance Under Section 14A: Assessment Year 2007-08: - The AO applied Rule 8D to compute disallowance under Section 14A. The CIT(A) restricted the disallowance to 1% of the dividend income. The Tribunal upheld this restriction, noting that Rule 8D was not applicable to AY 2007-08 as per the Supreme Court’s decision in Godrej & Boyce Manufacturing Company Ltd. vs. DCIT. Assessment Year 2008-09: - The Tribunal upheld the CIT(A)’s decision to restrict the disallowance to 1% of the dividend income, consistent with the previous year’s ruling. Conclusion: The Tribunal’s consolidated order addressed various issues related to hedging premiums, interest expenses, deductions under Section 80IB, treatment of short-term capital gains, and disallowances under Section 14A. The Tribunal provided detailed reasoning for each issue, often relying on principles of matching expenses with liabilities incurred and consistency with prior years’ treatment. The appeals were partly allowed for the assessee and dismissed for the Revenue.
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