2018 (1) TMI 398 - AT - Income Tax

Disallowance u/s.14A - Held that - During the year under consideration also assessee has not earned any exempt income accordingly following the order of the Tribunal in assessee s own case we do not find any merit for the disallowance made u/s.14A. Disallowing foreign exchange loss on forward contracts treating the same as speculation loss - Held that - As the facts and circumstances during the year under consideration are same respectfully following the order of the Tribunal in assessee s own case we do not find any merit for the disallowance of foreign exchange loss so made by the AO treating the same as speculation loss. Disallowance of interest explained u/s.36(1)(iii) - Held that - The assesses has incurred expenses on behalf of certain foreign subsidiaries and Indian subsidiary and shown them under the head Advances Recoverable. The assessee has not made any non business advance to the these companies but these amount represents various debits in the nature of sale of spares royalty receivable service charges and the expenses incurred on their behalf such as traveling expenses establishment expenses financial guarantees communications expenses etc. The assessee does not have system of charging interest on such debits of expenses incurred on their behalf. Such advances did not attract any adjustment in Transfer Pricing order also. However the Ld. AO considered these debit balances as advances without interest and disallowed 1, 07, 54, 398/- out of interest u/s 36(1)(iii). We do not find any merit for the disallowance so made by the AO.

Summary

Issues:
Cross appeals filed by assessee and revenue against the order of CIT(A)-12, Mumbai for A.Y.2009-10 regarding disallowance u/s.14A, disallowance of foreign exchange loss on forward contracts, and disallowance of interest u/s.36(1)(iii).

Disallowance u/s.14A:
The Tribunal analyzed the issue based on the assessee not earning any exempt income during the year under consideration. Referring to the Tribunal's decision for A.Y.2008-09, where disallowance u/s.14A was deleted, the Tribunal found no merit for disallowance in the current case as well. Citing precedents from the Hon'ble Delhi High Court and the Hon'ble Bombay High Court, the disallowance made by the AO and sustained by the CIT(A) was deleted.

Disallowance of Foreign Exchange Loss on Forward Contracts:
The Tribunal examined the issue in light of the definition of speculative transactions under Section 43(5) of the Income-tax Act. Relying on legal interpretations and precedents, including decisions from the ITAT Kolkata Special Bench and the Jurisdictional Bombay High Court, the Tribunal concluded that foreign currency cannot be considered a commodity under Section 43(5). The Tribunal referred to various cases where similar issues were decided in favor of the assessee, emphasizing that the transactions were not speculative but part of regular business activities. Following the decisions of the Hon'ble Bombay High Court, the Tribunal deleted the disallowance of foreign exchange loss treated as speculation loss.

Disallowance of Interest u/s.36(1)(iii):
The Tribunal noted that similar disallowances made by the AO were consistently deleted by the CIT(A) since A.Y.2003-04 to 2008-09 on identical issues, which were accepted by the Department without appeal. Considering the nature of expenses incurred by the assessee on behalf of subsidiaries and the absence of any system for charging interest on such debits, the Tribunal found no merit in the disallowance made by the AO under section 36(1)(iii). Consequently, the appeal of the assessee was allowed, and the appeal of the Revenue was dismissed.

In conclusion, the Tribunal pronounced the order on 08/01/2018, upholding the appeals of the assessee and dismissing the appeal of the Revenue, based on the detailed analysis and legal interpretations provided for each issue raised in the cross appeals.