2020 (4) TMI 481 - AT - Income Tax

Disallowance of deduction u/s 80JJA - assessee has claimed deduction u/s 10JA - AO disallowed the claim holding that employees working in software unit cannot be treated as workmen as envisaged under the Act and deduction u/s 80JJAA cannot be allowed in respect of additional wages paid to be employees who are working in 10A units, by virtue of provisions of section 80A(iv) - HELD THAT -As per the decision rendered by the co-ordinate bench in the case of Manhattan Associates (India) Development Centre (P.) Ltd 2019 (10) TMI 1192 - ITAT BANGALORE salary paid to software engineers are eligible for deduction u/s 80JJAA of the Act . Hence the first reasoning given by the AO shall fail. With regard to the second reasoning, as per the submission made by the learned AR, there appears to be some confusion with regard to facts relating to the deduction u/s 80JJAA of the Act claimed by the assessee. The assessee has also furnished certain additional evidences to substantiate its claim. Under the set of facts, we are of the view that this issue requires fresh examination at the end of the Assessing Officer. Accordingly, we set aside the order passed by the learned CIT(A) on this issue and restore the same to the file of the Assessing Officer for examining it afresh. Disallowance u/s 14A - HELD THAT - We find force in the submission made by the learned AR. As per the decision rendered by Delhi Special Bench of the Tribunal in the case of Vireet Investments Ltd 2017 (6) TMI 1124 - ITAT DELHI only those investments which have yielded exempt income should be considered for computing the average value of investment. In view of the above, we direct the A.O. to re-compute the disallowance u/s 14A of the Act by excluding the investments made in foreign subsidiaries while computing average value of investments. Disallowance of Provision made by valuing derivatives at the year end, i.e, marked to market rate of valuation of derivatives - AO by following the CBDT Circular No.3/2010 dated 23.03.2010, disallowed the claim of the assessee by holding that the loss arising on account of revaluation of foreign exchange derivatives on marked to market basis is a notional loss - CIT(A) also confirmed the same - HELD THAT - When a specific query was put to the learned AR as to whether the assessee has revalued all foreign exchange derivatives, trade receivables and trade payables in respect of import and export activities, the learned AR submitted that the matter may be restored to the file of the Assessing Officer for examining the claim of the assessee afresh. It is pertinent to mention here that the assessee should have valued all trade payables and trade receivables and foreign exchange forward contract entered in foreign currencies, which are outstanding as at the year end, in order to avail the claim of deduction of net amount of loss, in any, arising on account of marked to market valuation of those items at the year end. Since this aspect has not been examined by the Assessing Officer, we deem it appropriate to restore the same to the file of the Assessing Officer for examining it afresh. The order of Ld CIT(A) passed on this issue is accordingly set aside.

Summary

Issues:
1. Disallowance of deduction u/s 80JJA of the Act.
2. Disallowance made u/s 14A of the Act.
3. Disallowance of provision for mark to market loss on derivatives.

Issue 1 - Disallowance of deduction u/s 80JJA of the Act:
The assessee, engaged in software development, claimed deduction u/s 80JJA. The AO disallowed it, stating software unit employees are not workmen as per the Act. The CIT(A) upheld this. The AR argued that the deduction was claimed for a non-10AA unit, not covered under 80A(iv). Citing a similar case, the AR contended software professionals qualify as workmen under 80JJAA. The Tribunal found the AO's reasoning flawed and directed a fresh examination by the AO.

Issue 2 - Disallowance made u/s 14A of the Act:
The AO disallowed a sum under 14A, computed using Rule 8D(2)(iii), which the CIT(A) affirmed. The AR argued for excluding investments in foreign subsidiaries from the calculation. The Tribunal agreed, citing a Delhi Special Bench decision, directing the AO to recompute the disallowance by excluding foreign subsidiary investments.

Issue 3 - Disallowance of provision for mark to market loss on derivatives:
The AO disallowed the claim based on a CBDT circular, treating the loss as notional. The CIT(A) upheld this. The AR cited a precedent where losses on derivatives were allowed. The Tribunal noted the need to revalue all relevant items and directed the AO to reexamine the claim, emphasizing the importance of valuing trade payables, receivables, and derivatives for deduction eligibility. The matter was remanded to the AO for fresh consideration.

The appeal was allowed for statistical purposes, emphasizing the need for the assessee to be given a fair hearing. The judgment was pronounced on February 6, 2020, by the ITAT Bangalore.