2019 (9) TMI 905 - AT - Income Tax

Addition on account of revenue recognition in respect of Freight and contract activity - addition on account of liquidated damages and addition on account of claim of depreciation at 80% on certain plant and machinery - Decided in favour of assessee. Disallowance u/s 14A r.w.r. 8D on account of interest - HELD THAT - The issue of disallowance of interest under rule 8D(2)(ii) is now no more res integra in view of the judgment delivered by the Hon'ble Supreme Court in Godrej Boyce Manufacturing Company Ltd. vs. DCIT 2017 (5) TMI 403 - SUPREME COURT upholding the view of the lower authorities that when interest free funds in the form of share capital and reserves etc. are more than the amount of investment, then no disallowance of interest can be made u/s 14A. The Hon'ble Karnataka High Court in CIT Anr vs. Microlabs 2016 (4) TMI 219 - KARNATAKA HIGH COURT has also held that when investments are made from a common pool and non-interest bearing funds are more than the investment in tax free securities, no disallowance of interest expenditure u/s 14A can be made. Respectfully following the precedents, we order to delete the disallowance under Rule 8D(2)(ii). Disallowance under Rule 8D(2)(iii) is concerned, it is seen that ordinarily the disallowance is made at 0.5% of the average value of investments, as has been done by the AO. AR contended that the assessee did not earn exempt income from certain investments and hence they should be excluded. Since the relevant facts for determining such an issue are not available on record, we set-aside the impugned order and remit the matter to the file of AO with a direction to decide it accordingly. Disallowance on account of Foreign Fluctuation Exchange loss and loss suffered in a separate contract in the next year - HELD THAT - Neither the AO nor the ld. first appellate authority has disputed the fact that the first item of loss of ₹ 2.18 crore is on account of a transactions otherwise of revenue nature and this transaction resulted due to marking the liability to market rate as at the end of the year. The Special Bench of the Tribunal in DCIT Vs. Bank of Bahrain and Kuwait 2010 (8) TMI 578 - ITAT, MUMBAI has held that such loss or profit is of revenue character. After considering the adverse Instruction No.03/2010, the Hon ble Delhi High Court in Munjal Showa Vs. DCIT 2016 (2) TMI 1061 - DELHI HIGH COURT has held that such loss/profit to be of revenue character. It further held that the CBDT Instruction cannot override the judicially settled position. In view of the foregoing, we overturn the impugned order and direct to delete the addition of ₹ 2.18 crore. As regards the loss authorities below have correctly viewed this transaction as not affecting the profit for the year under consideration. The contract, resulting into loss of ₹ 8.88 crore, was actually cancelled in April/May of 2009, which falls in the succeeding year. Even though it is an event occurring after the balance sheet date, but it falls in the category of Non-Adjusting Events , for which the accounts closing before that date are not to be adjusted. Incurring of loss in a succeeding year is something quite different from marking transaction to market rate as at the close of the year. Since the instant loss of ₹ 8.88 crores actually fell upon the assessee in the succeeding year, the same cannot be allowed as deduction in the year under consideration.

Issues:
1. Revenue recognition in respect of Freight and contract activity
2. Addition on account of liquidated damages
3. Claim of depreciation at 80% on certain plant and machinery
4. Addition in respect of Prior period expenses
5. Disallowance under section 14A read with Rule 8D
6. Provision of warranty
7. Sales commission
8. Legal and professional fees
9. Foreign Fluctuation Exchange loss and loss in a separate contract
10. Disallowances made on various expenses
11. Provision for Medical and LTA expenses
12. Unpaid amount of provision of Short term incentive plan

Analysis:
1. The appeals involved issues related to revenue recognition, liquidated damages, depreciation, prior period expenses, disallowance under section 14A, provision of warranty, sales commission, legal and professional fees, foreign exchange losses, and various expense disallowances. The Tribunal noted that several issues had been decided in favor of the assessee in earlier years, and accordingly, allowed the grounds of the assessee and dismissed those of the Revenue for certain issues.

2. The Tribunal addressed the disallowance under section 14A read with Rule 8D concerning interest and average value of investments. Following judicial precedents, the Tribunal ruled to delete the disallowance of interest under Rule 8D(2)(ii) as the interest-free funds exceeded the investments. Regarding the second part of the disallowance under Rule 8D(2)(iii), the Tribunal remitted the matter to the AO for further examination as certain investments might not have yielded exempt income.

3. The Tribunal considered the provision of warranty and sales commission, ruling in favor of the assessee based on consistent decisions in previous years. Similarly, the Tribunal allowed the ground concerning legal and professional fees. In the case of foreign exchange losses, the Tribunal deleted the addition related to a specific loss but upheld the disallowance for another loss as it occurred in a succeeding year.

4. Various expense disallowances were also reviewed, with the Tribunal following previous decisions to delete certain additions made by the AO. The Tribunal upheld the deletion of the provision for medical and LTA expenses, as well as the unpaid amount of provision for a short-term incentive plan. Ultimately, the appeal of the assessee was partly allowed, while that of the Department was dismissed.

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