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2020 (4) TMI 843 - AT - Income TaxDeduction for loss arising from foreign exchange fluctuation - hedging contract to cover foreign exchange credit provided by ICICI Bank for payment for the purpose of imported raw material upon accounting of the outstanding hedging contract on market to marked basis at the end of the year - outstanding liability in foreign currency towards import either to the suppliers or to the bank - buyer s credit liability was due in May 2008 and it was an option contract and in order to hedge against the foreign currency liability the assessee entered a foreign option contract with ICICI Bank - sudden and unexpected fall in the value of USD Vs. Swiss currency in the math of March 2008 the assessee has incurred foreign exchange loss - HELD THAT - The assessee was engaged in the business of manufacturing of vanaspati and refining of edible oil and the forward contract has been entered in the ordinary course of its business in respect of under lying import/export business. The transactions were carried out for the sole purpose of hedging against losses that may arise on account of adverse fluctuation in the foreign exchange rates. As decided in Hon ble High Court of Bombay in the case of CIT vs. De Chetan Co. 2016 (10) TMI 629 - BOMBAY HIGH COURT wherein it is held that forward contract for purpose of hedging in course of normal business activities of import and export done to cover up losses on account of differences in foreign exchange valuation would not be speculative activity but business activity - Decided against revenue. LTCG - Addition after invoking section 50C on transaction of sale of immovable property in the form of land - HELD THAT - It is noticed that the assessing officer has made addition of 15 lacs on the assumption that @ 20 lacs per acre the total market value works out to 1, 22, 50, 000/- as against the consideration of 1, 07, 50, 000/- shown by the assessee. It will be appropriate to restore this issue to the file of the assessing officer for deciding afresh after referring the issue to the departmental valuation officer for determining the fair market value of the land sold. Accordingly the issue is restored to the file of assessing officer for deciding afresh as directed above therefore this ground of Cross Objection of the assessee is allowed for statistical purposes. Addition for expenditure incurred on the acquisition of computer software - entitled to depreciation @ 60% - HELD THAT - It is noticed that Hon ble Gujarat High Court in the case of NJ India Invest Ltd. 2013 (7) TMI 738 - GUJARAT HIGH COURT has held that software development and upgradation would include data administration services information and technology support services software asset management services etc. which was in nature of maintenance back up and support service to existing hardware and software and did not give any fresh or new benefit. Further we have seen that Hon ble Gujarat High Court in the case of Oriental Bank of Commerce 2018 (4) TMI 1534 - DELHI HIGH COURT has allowed the deduction on software expenses u/s. 37(1) of the act holding that use of software did not confer any enduring right of assessee. Moreover the assessee s objective was not to augment software business rather it used computer software as a tool to maximize its purpose and streamline its efficiency. Disallowance u/s. 40A(2) - HELD THAT - Total income of the payee KTB Food Pvt. Ltd. for the assessment year 2010-11 was to the amount of 849, 80, 730/- on which tax was paid at higher marginal rate @ 30%. We have also gone through the decision of Hon ble High Court in the case of Pr. CIT Vs. Gujarat Gas Financer Services Ltd. 2015 (7) TMI 743 - GUJARAT HIGH COURT wherein it is held that where assessee company as well as assessee s parent company both were assessed to tax at maximum marginal rate it could not be said that service charge was paid by the assessee company to parent company at unreasonable rate to evade tax. Since revenue could not point out that assessee evaded payment of tax therefore invocation of section 40A(2) was not valid. Disallowance u/s. 14A - HELD THAT - No exempt income was earned by the assessee therefore following the decision of Hon ble Jurisdictional High Court of Gujarat in the case of Corrtech Energy Pvt. Ltd. 2014 (3) TMI 856 - GUJARAT HIGH COURT no disallowance is to be made. Disallowance as bad debts written off - amount in question had been taken into income under the head capital gains in earlier assessment years - CIT(A) justification in restricting the addition on the ground that loss was of the nature of capital loss - HELD THAT - As relying on SAGAR DRUGS PHARMACEUTICALS PVT LTD VERSUS JOINT COMMISSIONER OF INCOME TAX RANGE-8 AHMEDABAD 2019 (1) TMI 1762 - ITAT AHMEDABAD we restore this issue contested in the cross objection of the assessee to the file of assessing officer for examination of the alternate claim of the assessee to allow impugned loss as capital loss.
Issues Involved:
1. Disallowance of contingent liability claimed as loss on account of market-to-market transactions. 2. Addition under Section 50C of the Income Tax Act, 1961. 3. Disallowance of software expenditure treated as capital expenditure. 4. Disallowance under Section 40A(2) of the Income Tax Act, 1961. 5. Disallowance under Section 14A of the Income Tax Act, 1961. 6. Disallowance of bad debts written off. Issue-wise Detailed Analysis: 1. Disallowance of Contingent Liability Claimed as Loss on Account of Market-to-Market Transactions: The assessee, engaged in manufacturing Vanaspati and refining edible oil, claimed a loss of ?6,55,33,334/- on market-to-market transactions with ICICI Bank. The Assessing Officer (AO) disallowed this, treating it as a contingent liability not yet crystallized. The CIT(A) allowed the appeal, stating the loss was incurred due to a hedging contract and not speculative. CIT(A) noted that the transaction was in the normal course of business to hedge against foreign exchange fluctuation, referencing the Supreme Court decision in CIT vs. Woodward Governor India P. Ltd. and other ITAT decisions. The Tribunal upheld CIT(A)’s decision, emphasizing that the loss was not speculative or contingent but a business loss. 2. Addition under Section 50C of the Income Tax Act, 1961: The AO added ?15 lacs to the assessee's income, invoking Section 50C, as the sale consideration of land was less than the fair market value determined by the Stamp Valuation Authority. The CIT(A) upheld this addition, noting the assessee did not contest the stamp valuation. The Tribunal restored the issue to the AO to refer it to the Departmental Valuation Officer for determining the fair market value. 3. Disallowance of Software Expenditure Treated as Capital Expenditure: The AO treated software expenditure of ?19,04,502/- as capital expenditure, allowing depreciation at 60% and disallowing ?7,61,800/-. CIT(A) upheld this, stating software expenditure should be capitalized. The Tribunal, referencing Gujarat High Court decisions in NJ India Invest Ltd. and Oriental Bank of Commerce, allowed the expenditure as revenue, noting it did not confer an enduring benefit. 4. Disallowance under Section 40A(2) of the Income Tax Act, 1961: The AO disallowed ?2,14,40,000/- paid as Sauda settlement charges to a related party, suspecting tax evasion. CIT(A) allowed the appeal, noting the transactions were genuine and the related party paid taxes at the maximum marginal rate. The Tribunal upheld CIT(A)’s decision, referencing the Supreme Court’s decision in CIT vs. Glaxo Smithkline (Asia) and Gujarat High Court’s decision in Pr. CIT vs. Gujarat Gas Financer Services Ltd. 5. Disallowance under Section 14A of the Income Tax Act, 1961: The AO disallowed ?5,18,246/- under Section 14A. The Tribunal dismissed the Revenue’s appeal, noting the assessee did not earn any exempt income, referencing the Gujarat High Court decision in Corrtech Energy Pvt. Ltd. 6. Disallowance of Bad Debts Written Off: The AO disallowed ?93,26,443/- claimed as bad debts, stating the amounts were not offered as income in earlier years. CIT(A) partly allowed the appeal, disallowing ?13 lacs related to the sale of property, treating it as a capital loss. The Tribunal restored the issue to the AO for examining the alternative claim of allowing it as a capital loss, referencing the ITAT decision in Sagar Drugs & Pharmaceutical Pvt. Ltd. vs. Joint CIT. Conclusion: The Tribunal upheld CIT(A)’s decisions on issues 1, 3, 4, and 5, providing detailed reasoning and referencing relevant judicial precedents. On issues 2 and 6, the Tribunal restored the matters to the AO for further examination, ensuring a thorough and fair assessment.
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