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2020 (10) TMI 983 - AT - Income TaxAddition u/s 14A read with Rule 8D - sufficiency of own funds - HELD THAT - As decided in own case 2018 (5) TMI 420 - ITAT KOLKATA the own funds of the assessee are sufficient to make the cost of the investments which yielded exempt income. A.O. has not brought anything on record which proves that the investment was made out of the borrowed funds. We are, therefore, of the view that the investment made out of the assessee s own funds and accordingly the addition made by the A.O. and confirmed by the Ld. CIT(A) under section 14A read with rule 8D(2)(ii) is to be deleted. Disallowing deduction on account of provision for future loss on derivative due to foreign exchange fluctuation - HELD THAT - As relying on S VINODKUMAR DIAMONDS PVT LTD 2013 (11) TMI 408 - ITAT MUMBAI and HINDUSTAN GUM CHEMICALS LTD 2017 (3) TMI 1173 - ITAT KOLKATA allowability of the loss on actual payment in AY 2009-10 has been made subject to the allowability of the loss for AY 2008-09. This stand of the DRP itself negates the observations of assessing officer that it is a notional loss and establishes that it is a business loss incurred by the assessee on mercantile system which method is consistently followed by the assessee. Under these circumstances, we are inclined to allow the foreign exchange fluctuation loss to assessee in this year. This ground of the assessee is allowed.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of Income Tax Rules, 1962. 2. Deduction on account of provision for future loss on derivatives due to foreign exchange fluctuation. Detailed Analysis: 1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of Income Tax Rules, 1962: The assessee, a company engaged in various manufacturing activities, filed its return declaring a loss and claimed exempt income from dividends under Section 10(34) of the Income Tax Act. The assessee offered a disallowance of ?1.20 lakhs for expenses related to earning the exempt income. However, the Assessing Officer (AO) was not satisfied and invoked Rule 8D, calculating a disallowance of ?2,80,64,837/-. The AO made a further disallowance of ?2,79,44,837/- after considering the suo motu disallowance by the assessee. The assessee challenged this disallowance before the Commissioner of Income-tax (Appeals) [CIT(A)], who deleted the interest expenditure disallowance of ?2,51,26,736/- under Rule 8D(2)(ii), citing sufficient own funds for investments. For the disallowance under Rule 8D(2)(iii), the CIT(A) directed the AO to re-compute based on investments that yielded exempt income. The assessee appealed to the Tribunal, arguing that the AO erred in mechanically invoking Rule 8D without identifying defects in the assessee’s claim and partially confirming the AO's computation. The Tribunal, after hearing both sides, found the issue covered by its earlier order in the assessee’s own case for previous years. It upheld the CIT(A)’s order, dismissing the assessee’s appeal. 2. Deduction on Account of Provision for Future Loss on Derivatives Due to Foreign Exchange Fluctuation: The Revenue filed an appeal against the CIT(A)'s deletion of the AO’s disallowance of ?3,67,22,220/- for provision for future loss on derivatives due to foreign exchange fluctuation. The AO had disallowed this, considering it notional and not allowable as per CBDT Instruction No. 3/2010. The CIT(A) deleted the disallowance, noting that the loss was recognized scientifically as per Accounting Standard-11 (AS-11) and was not notional. The CIT(A) cited the Supreme Court’s decisions in Woodward Governor Pvt. Ltd. and ONGC, which recognized such losses as real and allowable under mercantile accounting. The CIT(A) also distinguished the facts from those covered by the CBDT instruction, which pertained to trading in foreign exchange derivatives, whereas the assessee’s transactions were for hedging business risks. The Tribunal, after considering arguments and relevant judicial precedents, upheld the CIT(A)’s order. It noted that the issue was covered by various judicial pronouncements and Tribunal decisions, including Hindustan Gum & Chemical Ltd. and South Asian Petrochem Ltd., which supported the assessee’s claim for such losses as real and allowable. The appeal by the Revenue was dismissed. Conclusion: Both the appeals, one by the assessee and the other by the Revenue, were dismissed. The Tribunal upheld the CIT(A)’s orders on both issues, confirming the disallowance adjustments under Section 14A read with Rule 8D and allowing the deduction for provision for future loss on derivatives due to foreign exchange fluctuation.
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