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2021 (4) TMI 902 - AT - Income TaxAddition of unrealized hedging loss on forward contracts - HELD THAT - As relying on M/S WOODWARD GOVERNOR INDIA P. LTD. M/S HONDA SIEL POWER PRODUCTS LTD. 2009 (4) TMI 4 - SUPREME COURT the addition on a/c of unrealized hedging loss on forward contracts made by the Assessing Officer and confirmed by the CIT (A) is deleted. Additional ground to claim deduction of education cess paid on income tax for the year under section 37(1) - HELD THAT - As these grounds being legal and not raised either before the Assessing Officer or the CIT (A), we deem it fit and proper to admit the same and remand the same to the file of the Assessing Officer for examination of the issues raised therein in accordance with law.
Issues Involved:
1. Disallowance of unrealized hedging loss on forward contracts. 2. Deductibility of expenditure on the issue of Employee Stock Options (ESOPs). 3. Non-consideration of Tax Deducted at Source (TDS) relating to a merged entity. 4. Deduction of education cess and secondary and higher secondary education cess. 5. Restriction of Dividend Distribution Tax (DDT) rate as per applicable Double Taxation Avoidance Agreement (DTAA). Detailed Analysis: 1. Disallowance of Unrealized Hedging Loss on Forward Contracts: The assessee company, engaged in ITeS and BPO services, declared a total income of ?458,11,74,170/- under normal provisions and ?425,46,44,130/- under section 115JB of the Income Tax Act. During assessment proceedings, the Assessing Officer (AO) disallowed the unrealized hedging loss of ?49,11,07,448/- on forward contracts, citing CBDT instruction No.3 of 2010. The assessee appealed, citing the Supreme Court's decision in the case of Woodward Governor India (P) Ltd, which held that losses due to foreign exchange differences as on the date of the balance sheet are allowable under section 37(1). The Tribunal, following the Supreme Court's decision, allowed the assessee's appeal and deleted the addition. 2. Deductibility of Expenditure on the Issue of ESOPs: The AO disallowed the expenditure of ?2,86,26,000/- on ESOPs despite the Special Bench of ITAT's decision in the case of Biocon Pharmaceuticals Ltd, as the department's appeal was pending before the Karnataka High Court. The CIT (A) allowed the deduction, and the Revenue appealed. The Tribunal dismissed the Revenue's appeal, noting that the Karnataka High Court had confirmed the Special Bench's decision, making the ESOP expenditure deductible under section 37(1). 3. Non-Consideration of TDS Relating to a Merged Entity: The assessee raised an issue regarding the non-consideration of TDS of ?8,25,60,213 related to HSBC Operations and Processing Enterprise (India) Private Limited, which merged with the assessee pursuant to the Mumbai High Court's order. However, this ground was not pressed by the assessee during the appeal, and thus, it was rejected as not pressed. 4. Deduction of Education Cess and Secondary and Higher Secondary Education Cess: The assessee raised additional grounds claiming deduction of education cess and secondary and higher secondary education cess under section 37(1), citing recent judicial decisions. The Tribunal admitted these additional grounds and remanded them to the AO for examination in accordance with the law. 5. Restriction of Dividend Distribution Tax (DDT) Rate as per Applicable DTAA: The assessee also raised an additional ground for restricting the DDT rate on dividends paid to non-resident shareholders as per the applicable DTAA, seeking a refund for the excess tax paid. The Tribunal admitted this ground and remanded it to the AO for examination, referencing judicial precedents that support the refund of excess DDT paid in accordance with treaty rates. Conclusion: The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, remanding certain issues to the AO for further examination. The judgment emphasized the applicability of Supreme Court and High Court decisions in determining the allowability of hedging losses and ESOP expenditures, as well as the necessity to consider additional grounds raised by the assessee regarding education cess and DDT rates.
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