2018 (11) TMI 1104 - AT - Income Tax

Assess the rental income under the head Income from House Property and not income from other sources . Allowability of busniss loss - decision to prematurely cancel the forward contracts - speculation loss OR business loss - Held that - The entire conspectus of facts and circumstances show that merely because assessee took a decision to prematurely cancel the forward contracts cannot be a ground to say that it is a speculation loss and not a business loss , when otherwise entering of forward contracts in order to hedge against foreign exchange fluctuations with respect to import and export is accepted to be an activity carried out in the course of business. In fact, in the present case, assessee has sufficiently demonstrated that the action of premature cancellation of forward contracts was to contain avoidable future loss on account of adverse movement in the value of foreign exchange and the circumstances under which such a decision was taken, has also been sufficiently narrated. In the absence of any controversion of the same, we find that the assessee has discharged the onus cast on it to explain the incurrence of loss in question and, therefore, we deem it fit and proper to allow the stand of the assessee of treating the amount of ₹ 3,55,95,000/- as a business loss . Thus, on this aspect, assessee succeeds. Addition u/s 14A - disallowance of interest expenditure - Held that - In any case, in the earlier assessment year of 2009-10, no interest disallowance was made by the Assessing Officer himself qua the said investment. The said assertion of the appellant is borne out of record inasmuch as in the earlier paras we have already dealt with the disallowance u/s 14A of the Act for Assessment Year 2009-10 wherein the only investment was in the shares of BSE and the Assessing Officer himself has not made any disallowance out of interest expenditure. In such a factual background, the disallowance computed by the Assessing Officer out of interest expenditure by applying Rule 8D(2)(ii) of the Rules is misplaced and is hereby directed to be deleted. So far as the disallowance out of Administrative expenses made by the Assessing Officer by applying Rule 8D(2)(iii) of the Rules is concerned, no specific arguments have been raised before us and the same is hereby affirmed. Thus, on this aspect, assessee partly succeeds.

Summary

Issues Involved:

1. Change of income head from "Income from Other Sources" to "Income from House Property."
2. Disallowance under section 14A of the Income Tax Act, 1961.
3. Treatment of loss on premature cancellation of forward exchange contracts as speculation loss.

Detailed Analysis:

1. Change of Income Head:

The first issue pertains to the assessability of income received by the assessee from renting of property along with facilities of a 'Business Service Centre.' The assessee claimed this income under the head 'Income from Other Sources,' whereas the income-tax authorities assessed it under the head 'Income from House Property.' The Tribunal noted that a similar controversy arose in Assessment Year 2008-09, where the matter was restored to the Assessing Officer, who subsequently assessed the income under 'Income from House Property.' This position was accepted by the assessee. Consequently, the Tribunal sustained the action of the income-tax authorities for the instant year and dismissed Ground of appeal no. 1.

2. Disallowance under Section 14A:

For Assessment Year 2009-10, the disallowance of ? 6,88,272/- made under section 14A by applying Rule 8D(2)(iii) was contested. The assessee argued that no exempt income was earned during the year as the dividend was received by the erstwhile partnership firm, not the current company. The Tribunal referred to the decision of the Hon'ble Delhi High Court in Joint Investments Pvt. Ltd. vs CIT and found no reason to uphold the disallowance, thereby directing it to be deleted.

For Assessment Year 2010-11, the disallowance of ? 1,13,21,041/- was challenged. The assessee contended that no fresh investment was made and the only exempt income earned was from the shares of BSE. The Tribunal observed that no interest disallowance was made in the previous year and directed the deletion of the disallowance computed out of interest expenditure. However, the disallowance of ? 21,47,174/- out of administrative expenses was affirmed due to lack of specific arguments.

3. Treatment of Loss on Premature Cancellation of Forward Exchange Contracts:

The third issue involved treating the loss of ? 3,55,95,000/- on premature cancellation of forward exchange contracts as 'speculation loss.' The assessee explained that the loss was a 'business loss' incurred during the course of import and export activities. The CIT(A) upheld the Assessing Officer's decision, but the Tribunal noted that the CIT(A) accepted that forward contracts in foreign exchange for exporters/importers are hedging transactions. The Tribunal emphasized that the reasons for premature cancellation provided by the assessee were convincing and related to business prudence to avoid over-hedging and potential losses. Thus, the Tribunal allowed the assessee's claim of treating the amount as a 'business loss.'

Conclusion:

The appeals for both Assessment Years 2009-10 and 2010-11 were partly allowed. The Tribunal sustained the income-tax authorities' action on the change of income head, deleted the disallowance under section 14A for interest expenditure but affirmed the administrative expenses disallowance, and treated the loss on premature cancellation of forward contracts as a business loss.