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2022 (7) TMI 1254 - AT - Income TaxDisallowance of foreign exchange loss treating the same as capital loss - Assessee invested in bonds of Lodha Developers International (Netherlands) B.V. which were redeemed incurring a loss due to change in foreign exchange rate of Rupees to GBP - whether the investment made by the assessee in the bonds, do we need to treat the investment as capital investment and any expenditure incurred in such investment to be treated as business expenditure or not.? - HELD THAT - As investments were made in the name of the company and any related expenditure has to be charged to the business except to the extent of any exempt income earned through these investments. However, in the given case, the investments made in bond are interest bearing bonds and it is chargeable to tax, therefore, any income chargeable to tax, any related expenditure either related to earning of such income or relating to investments are business expenditures. In this case, the assessee has incurred loss while redeeming the bonds, hence it is deductible expenditure. It is also fact on record that in the subsequent AY, these bonds were redeemed and the actual loss incurred due to exchange fluctuations. The assessee normally would have claimed the loss in the subsequent AY, since it has anticipated the loss by monitoring rate fluctuations (the Mark to Market), it predicted possible loss and it booked the loss prudently. We observe that the courts have held that the Mark to Market losses are revenue in nature and it should be treated as such. In the given case, the assessee has booked the loss in two parts and once part claimed in the present AY and balance part of actual loss was claimed in the subsequent AY. It is needless to say that the loss was allowed by the Assessing Officer in the subsequent AY as revenue. Therefore, the loss claimed by the assessee is part of actual loss and it may look as claimed on the basis of provision but it is part of actual loss. Therefore, in our considered view, the loss claimed by the assessee in this AY is claimable u/s 37 - Hence, we direct the AO to allow the foreign exchange loss claimed by the assessee. Accordingly, the ground raised by the assessee is allowed. Disallowance being 50% of payment of marketing expenses paid to Lodha Developers UK Limited ( LD UK ) for lack of evidence - HELD THAT - Respectfully following the above said decision in assessee s own case for the A.Y. 2013-14 2022 (6) TMI 18 - ITAT MUMBAI we restore this ground to the file of the Assessing Officer for denovo consideration and after due verification of the evidences submitted the expenses may be allowed, it is needless to say that proper opportunity of being heard to the assessee. We allow this ground of the assessee for statistical purpose. Disallowance of regularization charges by treating the same as penalty towards infringement of law - HELD THAT - e observe that assessee paid regularization charges in order to regularize certain deviations in the construction projects. In the similar situation, the Hyderabad Bench decided the exactly similar compounding charges in favour of the assessee in the case of Keerthi Estates (P.) ltd. 2017 (8) TMI 1672 - ITAT HYDERABAD . Thus we are directing the Assessing Officer to allow the compounding fees claimed by the assessee, accordingly, ground raised by the assessee. Disallowance in respect of writing off of non-refundable security deposits for electric connections as revenue expenditure - Assessee had paid non-refundable security deposits for electricity connections for the constructions projects undertaken - AO made addition on the ground that no documentary evidence was submitted to substantiate the claim of payment of non-refundable deposits - HELD THAT - We observe that the assessee had paid certain amount as initial deposit for the purpose of obtaining new electricity connection in the new projects it undertakes. Since assessee did not submit the relevant supporting documents before tax authorities, now, these documents were filed before us an additional evidence. We are inclined to admit these evidence and remitting this issue also to the file of Assessing Officer to verify the claim of the assessee, we direct him to allow the claim as per law after providing reasonable opportunity of being heard to the assessee. Accordingly, ground raised by the assessee is allowed for statistical purpose. Reversal of provision made in respect of Transferable Development Rights - HELD THAT - We observe from the submissions of the assessee that in the earlier AY, Assessing Officer rejected the claim of the assessee relating to the provision made in respect of TDR. We understand that assessee preferred an appeal before appellate authorities in the AY 2013-14, we direct Assessing Officer to verify the outcome of the appellate proceedings, in case it is rejected by the appellate authorities, the assessee may be given due benefit. In case assessee prefers to drop the proceedings initiated before the appellate authorities, then the Assessing Officer may pass the necessary benefit to the assessee and entertain the claim of the assessee. Accordingly, additional ground raised by the assessee is allowed for statistical purpose. Education cess deductible u/s. 37(1) - HELD THAT - After considering the submissions and the latest amendments in the Finance Act, this issue is already reached finality. Accordingly, additional ground raised by the assessee is dismissed.
Issues Involved:
1. Disallowance of foreign exchange loss. 2. Disallowance of marketing expenses. 3. Disallowance of regularization charges. 4. Disallowance of write-off of non-refundable security deposit. 5. Reversal of provision for Transferable Development Rights (TDR). 6. Deduction of education cess. 7. Addition under Section 36(1)(iii) for interest expenses. 8. Addition under Section 14A read with Rule 8D for disallowed expenses. Detailed Analysis: 1. Disallowance of Foreign Exchange Loss: The assessee claimed a foreign exchange loss of ?13,10,46,670 due to the redemption of bonds in Lodha Developers International (Netherlands) B.V. The Assessing Officer (AO) categorized it as a capital loss and disallowed it. The CIT(A) upheld this decision, citing the investment in bonds as a capital asset. However, the Tribunal observed that the bonds were interest-bearing and taxable, making related expenses deductible as business expenditures. The Tribunal directed the AO to allow the foreign exchange loss under Section 37 of the Act. 2. Disallowance of Marketing Expenses: The assessee paid ?47,92,553 to Lodha Developers UK Limited for marketing expenses, but the AO disallowed 50% due to lack of evidence. The CIT(A) upheld this disallowance. The Tribunal, referencing a similar case from A.Y. 2013-14, remitted the issue back to the AO for verification of submitted evidence, directing a fresh examination and allowance of the expenses if substantiated. 3. Disallowance of Regularization Charges: The assessee paid ?1,58,42,172 to Thane Municipal Corporation (TMC) as regularization fees for construction projects. The AO disallowed the amount, treating it as a penalty for law infringement, and the CIT(A) upheld this. The Tribunal, following the decision in Keerthi Estates P Ltd., concluded that such charges are compensatory and not penalties, directing the AO to allow the regularization fees as deductible under Section 37(1). 4. Disallowance of Write-off of Non-refundable Security Deposit: The assessee claimed a write-off of ?61,21,854 for non-refundable security deposits paid for electricity connections. The AO disallowed the claim due to lack of evidence, and the CIT(A) upheld this. The Tribunal admitted additional evidence and remitted the issue back to the AO for verification, directing allowance of the claim if substantiated. 5. Reversal of Provision for TDR: The assessee reversed a provision of ?6,99,66,000 for TDR created in A.Y. 2013-14 and offered it to tax in the current year. The AO had disallowed the provision in A.Y. 2013-14 as contingent. The Tribunal directed the AO to verify the appellate outcome for A.Y. 2013-14 and adjust the current year's income accordingly, preventing double taxation. 6. Deduction of Education Cess: The assessee claimed education cess as deductible under Section 37(1). The Tribunal dismissed this additional ground, referencing the finality reached by the latest amendments in the Finance Act and the decision in Sesa Goa v. JCIT. 7. Addition Under Section 36(1)(iii) for Interest Expenses: The AO disallowed interest expenses of ?58,99,99,069, capitalizing it to inventory. The CIT(A) deleted the addition, referencing the Lokhandwala Construction India Ltd. decision. The Tribunal upheld the CIT(A)'s decision, noting that the interest on borrowed capital for stock-in-trade is deductible under Section 36(1)(iii), irrespective of the accounting method. 8. Addition Under Section 14A Read with Rule 8D for Disallowed Expenses: The AO made an addition of ?15,17,14,879 under Section 14A read with Rule 8D. The CIT(A) limited the disallowance to the extent of exempt income and directed the AO to recompute based on net interest. The Tribunal upheld the CIT(A)'s decision, finding no infirmity in the directions issued. Conclusion: The appeals filed by the assessee were partly allowed for statistical purposes, with several issues remitted back to the AO for verification and fresh consideration. The appeal filed by the revenue was dismissed, upholding the CIT(A)'s decisions on all counts.
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