2014 (6) TMI 333 - AT - Income Tax

Disallowance of claim of unrealized foreign exchange loss Held that - Following CIT Versus M/s Woodward Governor India P. Ltd. & M/s Honda Siel Power Products Ltd. 2009 (4) TMI 4 - SUPREME COURT loss suffered by the Assessee in respect of a revenue liability, on account of exchange difference as on the date of Balance Sheet, is an item of expenditure allowable u/s 37(1) in the year of accrual - the assessee has been following the accounting system consistently and the same is in accordance with the AS-11 issued by the ICAI thus, there is no reason to interfere with the order of the CIT(A) Decided against Revenue. Disallowance of interest u/s 14A of the Act Held that - Following CIT Vs. Deepak Mittal 2013 (9) TMI 764 - PUNJAB & HARYANA HIGH COURT - the onus is placed upon the assessee to prove the quantum of expenditure incurred on earning of tax free income of dividend - as per the provisions of sub. sec (2) of sec. 14A of the Act, the AO is required to examine the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income and if he is not satisfied with the correctness of claim only, he can proceed to determine the amount of expenditure in terms of sec. 14A(2) of the Act - the AO is required to proceed further to collect materials or evidence to determine expenditure, if any, incurred by the assessee thus, the matter is required to be remitted back to the AO for fresh adjudication Decided in favour of Assessee.

Summary

Issues:
1. Disallowance of unrealized foreign exchange loss
2. Disallowance of interest under Rule 8D(2)(ii) of the I.T. Rules

Issue 1: Disallowance of Unrealized Foreign Exchange Loss:
The appeal pertains to the disallowance of Rs.20,27,115 as unrealized foreign exchange loss for the assessment year 2008-09. The Assessing Officer (AO) disallowed the claim, considering it neither an accrued nor an actual loss. However, the Ld CIT(A) allowed the claim, citing the AS-11 and various judicial precedents, including the decision by the Special Bench of Tribunal and judgments of the Hon'ble Apex Court. The ITAT Mumbai upheld the decision of the Ld CIT(A), emphasizing the consistent accounting practice of the assessee and the compliance with AS-11. The Tribunal affirmed the order, noting the conscious decision-making process of the Ld CIT(A) based on established authorities.

Issue 2: Disallowance of Interest under Rule 8D(2)(ii) of the I.T. Rules:
The assessee contested the disallowance of interest amounting to Rs.99,537 under Rule 8D(2)(ii) of the I.T. Rules for the assessment year 2008-09. The assessee argued that the investments were made from own funds, not borrowed funds, hence no interest disallowance should apply. The Ld CIT(A) confirmed the disallowance, rejecting the applicability of a co-ordinate bench decision cited by the assessee. The ITAT Mumbai referred to a recent decision of the Punjab and Haryana High Court in CIT Vs. Deepak Mittal, emphasizing the onus on the assessee to prove expenditure incurred for earning tax-free income. The Tribunal found that the assessing officer had not considered all aspects, directing a fresh examination of the issue to determine the expenditure incurred by the assessee. Consequently, the appeal filed by the assessee was treated as allowed for statistical purposes, while the revenue's appeal was dismissed.

In summary, the ITAT Mumbai upheld the allowance of unrealized foreign exchange loss based on accounting standards and judicial precedents. However, the disallowance of interest under Rule 8D(2)(ii) was set aside for fresh examination to determine the actual expenditure incurred by the assessee.