2020 (9) TMI 1022 - HC - Income Tax

Disallowance u/s 14A r.w.r. 8D - Whether no exempt income received by assessee? - non recording of satisfaction - HELD THAT - To apply the provisions of Section 14A AO should have recorded a finding as to how Sub-Section (1) of Section 14A would stand attracted. In the absence of any such finding, the disallowance made was not justifiable. AO straightaway proceeded to the second limb of Section 14(2) which is impermissible. The Tribunal rightly took note of the decision in the case of Redington India Ltd. 2017 (1) TMI 318 - MADRAS HIGH COURT wherein it was held that the provisions of Section 14A r.w.r 8D cannot be made applicable in vacuum i.e in the absence of exempt income. Therefore, we find that the Tribunal was right in deciding the issue against the Revenue and in favour of the assessee. Disallowance of foreign exchange fluctuation loss - HELD THAT - As considered the reasons assigned by the Tribunal in the assessee's own case for the earlier assessment year wherein the Tribunal rightly took note of the earliest decision on the said point in the case of Soorajmull Nagarmull 1980 (9) TMI 69 - CALCUTTA HIGH COURT and pointed out that under Section 43(5) of the Act, 'speculative transaction' has been defined to mean a transaction, in which, a contract for the purchase or sale of commodity is settled otherwise than by the actual delivery or transfer of such commodity. Assessee herein was not a dealer in foreign exchange, but was an exporter of cotton. Therefore, the Tribunal rightly took note of the transaction done by the assessee though, in order to hedge against the losses, the assessee booked foreign exchange in the forward market with the bank. Export contracts entered into by the assessee for the export of cotton in some cases failed and therefore, the assessee was held to be entitled to claim deduction in respect of the said amount as business loss. - Decided in favour of assessee.

Summary

Issues Involved:
1. Applicability of Section 14A read with Rule 8D in the absence of exempt income.
2. Treatment of loss incurred on account of cancellation of forward contracts under Section 43(5) of the Income Tax Act.

Detailed Analysis:

Issue 1: Applicability of Section 14A read with Rule 8D in the absence of exempt income

The Revenue challenged the Tribunal's decision that Section 14A read with Rule 8D does not apply if no exempt income is received. The Assessing Officer (AO) had disallowed expenses under Section 14A, assuming that the assessee incurred costs to earn potential dividend income from investments in mutual funds. The assessee argued that no expenditure was incurred for such investments, and no exempt income was earned.

The Tribunal and the High Court agreed with the assessee, referencing the case of Redington India Ltd. vs. CIT, which held that Section 14A and Rule 8D cannot be applied in the absence of exempt income. The court emphasized that the AO must record a finding on how Section 14A(1) is attracted before proceeding to Section 14A(2). The Tribunal's decision was upheld, stating that disallowance under Section 14A was unjustifiable without any exempt income.

Issue 2: Treatment of loss incurred on account of cancellation of forward contracts under Section 43(5)

The AO treated the loss from forward contract cancellations as speculative under Section 43(5). The assessee contended that these were business losses allowable under Section 28, not speculative losses. The assessee cited the Supreme Court's decision in CIT vs. Woodward Governor India Pvt. Ltd., which allowed notional foreign exchange losses, and argued that their losses were real and tangible.

The Tribunal, referencing the assessee's own case for the assessment year 2009-10 and the Calcutta High Court's decision in CIT vs. Soorajmull Nagarmull, ruled in favor of the assessee. The Tribunal found that the assessee, being an exporter and not a dealer in foreign exchange, incurred these losses as part of its regular business operations. The High Court concurred, distinguishing the case from CIT vs. Bharat R. Ruia (HUF) and Snowtex Investment Ltd. vs. PCIT, where the nature of transactions differed significantly.

The High Court reiterated that the forward contracts were incidental to the assessee's business, not speculative transactions. The decision in CIT vs. Badridas Gauridu Pvt. Ltd. further supported this view, emphasizing that such losses are business losses when the assessee is not a dealer in foreign exchange but an exporter.

Conclusion:

The High Court dismissed the Revenue's appeal, affirming the Tribunal's decisions on both issues. The court held that Section 14A read with Rule 8D does not apply in the absence of exempt income and that losses from forward contract cancellations are business losses, not speculative losses, under Section 43(5). The substantial questions of law were answered in favor of the assessee.