2024 (2) TMI 101 - AT - Income Tax

Disallowance of mark to market losses - AO held that the mark to market losses claimed are in the nature of liability that is not crystallized and, therefore, cannot be claimed as a deduction as business loss - CIT(A), upheld the order of AO stating that the MTM loss is notional and that the assessee s claim that particular method of accounting continuously followed for a long period does not entail the assessee to presume that the method followed is correct - HELD THAT - We notice that the Special Bench of the Tribunal in the case of DCIT vs Bank of Bahrain Kuwait 2010 (8) TMI 578 - ITAT, MUMBAI has considered the issue of allowability of loss arising out of MTM re-investment of foreign exchange contracts and held that where a forward contract is entered into by the assessee to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period, the loss is incurred to the assessee on account of evaluation of the contract on the last date of the accounting period i.e. before the date of maturity of the forward contract Loss claimed by the assessee is to be allowed as a deduction. During the course of hearing, the Ld.AR fairly conceded that the gain on MTM which has been held to be treated as income of the assessee in the order passed under section 154 can be reversed in case the MTM loss is held to be allowed as a deduction. Accordingly, we direct the Assessing Officer to reconsider the order passed under section 154 reversing the MTM gain and bring the same to tax accordingly. Disallowance u/s 14A - assessee has not discharged the onus of evidencing the source of investment is from own funds - assessee has made a suo motu disallowance - HELD THAT - Though AO admits that Rule 8D is prospective he proceeded to make the disallowance, stating that the assessee in its without prejudice submission has furnished the working of disallowance under section 14A as per Rule 8D. This, in our view, is not a correct approach, since for the year under consideration, Rule 8D is not applicable. It is an undisputed fact acknowledged by the assessing officer that the assessee had its own funds which are more than the investment and, it is a settled position that when own funds are more than the investments there cannot be any disallowance towards interest. As assessee has made a disallowance of 1% on the exempt income excluding long term capital gain on which STT is paid, which, in our considered view, is reasonable towards administrative expenses. Accordingly, we hold that no disallowance is warranted and the addition made by the Assessing Officer is deleted. Disallowance of Bad debts written off - AO held that only writing off of the debts as bad debt in the accounts is not enough and that the assessee is required to furnish complete information to the Assessing Officer to prove with conclusive evidence that the debts have become bad - HELD THAT - We notice that the co-ordinate bench in assessee s own case for A.Y. 2004-05 and 2005-06 2017 (11) TMI 1839 - ITAT MUMBAI as noted that in case of some of the debtors the Assessing Officer has alleged that they are in the nature of mere provisions, which requires examination - we direct the Assessing Officer to allow assessee s claim in respect of debts which are actually written-off by applying the principle laid down in the decisions referred to above. Further, the Assessing Officer is also required to examine whether there is any claim of write-off- of bad debt in the nature of mere provisions, hence; not allowable in terms of section 36(1)(vii) and even if the assessee's claim of write-off in respect of a particular, debt having become bad is allowed, in the impugned assessment year, the Revenue is protected under section 41(4) of the Act to bring the amount to tax in case such debt is recovered by the assessee in any subsequent assessment year. With the aforesaid observation, we restore the issue to file of the Assessing Officer for adjudicating afresh - Thus we restore this issue back to the Assessing Officer with similar directions. Business loss claimed on re-possessed assets - AO disallowed the said business loss following the similar disallowance made for A.Y. 2006-07 and that the assessee has not furnished the details - HELD THAT - We notice that in the details furnished by the assessee before the Assessing Officer, the assessee has furnished the loan account number, party name, and the amount. However in our considered view it is important to examine the amount of loan given, amount realized from the borrower, un-recovered amount, the amount realized on sale, how the net loss is computed etc., and these need to be factually verified. From the details submitted, it is not clear as to how the loss finally claimed is computed i.e. the loss is arising out of the difference between the unrecovered portion of the loan after setting off the amount realized from sale of the re-possessed assets. We, therefore, remit the issue back to the Assessing Officer for fresh examination and direct the assessee to furnish the complete details of loans given, the nature of assets re-possessed, sale value of the re-possessed assets and how loss is computed. It is ordered accordingly. Disallowance towards proportionate claim of issue and discount expenses on bonds while completing assessment under section 143(3) - CIT(A) dismissed the ground stating that the same is not arising out of the assessment order and there is no finding given by the Assessing Officer in this regard in the assessment order - HELD THAT - We notice that the co-ordinate bench in assessee s own case for A.Y. 2002-03 2015 (2) TMI 1267 - ITAT MUMBAI had considered the similar issue and has issued a direction to spread the expenditure over the tenure of the bond. We see merit in the contention claim of the assessee that proportionate expenditure pertaining to the year under consideration should be allowed as a deduction. Accordingly, we direct the Assessing Officer to consider the claim of the assessee and allow the deduction in accordance with the directions given by the Tribunal. Rebate u/s 88E - CIT(A) rejected the ground raised by the assessee in this regard stating that the AO has not made any discussion in the assessment order and, therefore, the impugned issue does not arise out of the findings of AO - HELD THAT - From the submissions of the Ld.AR it is noticed that the assessee has been allowed the rebate under section 88E in the subsequent assessment years, i.e. A.Ys 2006-07 and 2008-09 when the same is claimed in the return of income by the assessee. We, therefore, direct the Assessing Officer to consider the submissions made by the assessee in this regard vide letter dated 26/11/2010 and allow the claim in accordance with law. Needless to say that the assessee be given a reasonable opportunity of being heard. MAT applicability u/s 115JB - HELD THAT - Respectfully following the decision of the coordinate bench for A.Y. 2004-05 2017 (11) TMI 1839 - ITAT MUMBAI we hold that provisions of section 115JB is not applicable to assessee and allow the ground. TP Adjustment - A djustment towards margin under charged on Back officer support services - comparable selection - HELD THAT - Companies functionally dissimilar with that of assessee need to be deselected. Adjustment towards margin under charged on business support services - HELD THAT - With regard to the pass through cost for which the TPO has added a margin of 11.59, we notice that from the nature of expenses that these costs are incurred on behalf of the AE and the same is allocated to the AE, using allocation key. Therefore, we are of the considered view that since the costs are pass-through costs and no value addition is made by the company by paying the cost on behalf of the AE and claiming the reimbursement there is no requirement of a mark up. Accordingly, we delete the adjustment made in this regard. Depreciation on leased assets - HELD THAT - We noticed that the Co-ordinate Bench in assessee s own case for AY 2004-05 and 2005-06 2017 (11) TMI 1839 - ITAT MUMBAI has considered there is no new lease transaction. The assessee has claimed depreciation on its own fixed assets and depreciation claimed on leased assets were continuing from past lease transactions. Decided against revenue. Addition of non-cash write back made u/s 41(4) - assessee in the financial statements has shown as write back of bad-debts in respect of interest and principle of loan credit card right off in earlier year - AO held that since the assessee is following mercantile system of accounting even though no cash recovery is made, the non-cash write backs also should be brought to tax - HELD THAT - The Co- ordinate Bench in assessee s own case 2017 (11) TMI 1839 - ITAT MUMBAI for AY 2004-05 and 2005-06 restored the matter back to the file of the Assessing Officer for considering afresh. Respectfully following the above decision of the Tribunal, the issue is restored to the file of the AO with similar directions. This ground of the Revenue is allowed for statistical purposes. Nature of expenses - expenses towards club entrance fees and subscription - revenue or capital expenditure - HELD THAT - The facts for the year under consideration being similar in assessee s own case for AY 2004-05 and 2005-06 2017 (11) TMI 1839 - ITAT MUMBAI wherein held that club membership fees for employees are to be treated as business expenditure of a company under section 37 of the Act - Thus respectfully following the above decision of the Co-ordinate Bench, we uphold the decision of the Ld. CIT(A). Both assessee s and revenues appeals are partly allowed.

Summary

Issues Involved:
1. Disallowance of Mark to Market (MTM) Losses
2. Disallowance under Section 14A
3. Disallowance of Bad Debts Written Off
4. Disallowance of Business Loss Claimed on Re-Possessed Assets
5. Disallowance of Proportionate Claim of Issue and Discount Expenses on Bonds
6. Rebate under Section 88E
7. Short Grant of Relief under Section 90
8. Applicability of Provisions of Section 115JB
9. Transfer Pricing Adjustments
10. Depreciation on Leased Assets
11. Addition of Non-Cash Write Back under Section 41(4)
12. Club Membership Fees

Summary:

1. Disallowance of Mark to Market (MTM) Losses:
The Assessing Officer (AO) disallowed MTM losses claimed by the assessee, considering them as notional and non-deductible. The Tribunal, referencing the Special Bench decision in DCIT vs. Bank of Bahrain & Kuwait and the Supreme Court in Woodward Governor Pvt. Ltd v/s CIT, allowed the MTM losses as a deduction. The AO was directed to reverse the MTM gains previously taxed.

2. Disallowance under Section 14A:
The AO disallowed Rs. 458.866 crores towards interest and Rs. 17.37 crores towards administrative expenses under Section 14A. The Tribunal noted that Rule 8D is applicable only from A.Y. 2008-09 and held that since the assessee had sufficient own funds, no disallowance towards interest was warranted. The suo motu disallowance of 1% on exempt income was deemed reasonable.

3. Disallowance of Bad Debts Written Off:
The AO disallowed the bad debts of Rs. 437,82,57,646/- claimed by the assessee, requiring proof of irrecoverability. The Tribunal, following the Supreme Court in TRF Ltd. v/s CIT and Vijaya Bank Ltd. v/s CIT, restored the issue to the AO for fresh adjudication, emphasizing that mere write-off in books is sufficient post-amendment of Section 36(1)(vii).

4. Disallowance of Business Loss Claimed on Re-Possessed Assets:
The AO disallowed Rs. 178,09,16,700/- claimed as a business loss on re-possessed assets. The Tribunal remitted the issue back to the AO for fresh examination, directing the assessee to furnish detailed computations of the loss.

5. Disallowance of Proportionate Claim of Issue and Discount Expenses on Bonds:
The AO disallowed the claim under Section 154, following a previous disallowance in 2002-03. The Tribunal directed the AO to allow the proportionate expenditure as per the directions of the Tribunal in earlier years.

6. Rebate under Section 88E:
The CIT(A) rejected the rebate claim under Section 88E as it was not discussed in the assessment order. The Tribunal directed the AO to consider the claim as per the submissions made by the assessee.

7. Short Grant of Relief under Section 90:
The Tribunal directed the AO to consider the assessee's claim of short grant of relief under Section 90 and allow it in accordance with the law.

8. Applicability of Provisions of Section 115JB:
The Tribunal, following the decision in the assessee's own case for A.Y. 2004-05, held that the provisions of Section 115JB are not applicable to banks.

9. Transfer Pricing Adjustments:
The Tribunal excluded several comparables used by the TPO for benchmarking back office support services, directing the TPO to re-compute the ALP. The Tribunal also deleted the adjustment made for pass-through costs, as no value addition was made by the assessee.

10. Depreciation on Leased Assets:
The AO disallowed depreciation on leased assets, treating them as finance transactions. The Tribunal upheld the CIT(A)'s decision to allow depreciation, noting no new lease transactions were entered during the year and following the consistent view in earlier years.

11. Addition of Non-Cash Write Back under Section 41(4):
The AO added non-cash write back of Rs. 56,19,378/- to income under Section 41(4). The Tribunal restored the issue to the AO for fresh consideration, following the decision in earlier years.

12. Club Membership Fees:
The AO treated club membership fees as capital expenditure. The Tribunal upheld the CIT(A)'s decision to allow the fees as business expenditure, following the Supreme Court's decision in United Glass Manufacturing Co. Ltd.

Conclusion:
Both the assessee's and revenue's appeals were partly allowed. The Tribunal provided specific directions for each issue, emphasizing the need for consistent application of legal principles and thorough examination of facts.