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ADP Pvt. Ltd., Hyderabad Versus Dy. Commissioner of Income-tax, Circle – 1 (1) , Hyderabad.

2015 (9) TMI 496 - ITAT HYDERABAD

Transfer pricing adjustment - selection of comparable - Held that:- The issue relating to comparability of companies objected by assessee are covered by various decisions of different benches of the Tribunal for the very same AY. In case of Ness Innovative Business Pvt. Ltd. Vs. DCIT [2014 (7) TMI 303 - ITAT HYDERABAD] the coordinate bench rejected Bodh tree consulting ltd. Exensys Software Solutions Ltd., Sankhya Infotech Ltd., Foursoft Ltd., Thirdware solutions Ltd. Tata Elxsi Ltd. and Infosys .....

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Inclusion of reimbursement cost in the operating cost for the purpose of determining ALP of software development services segment - Held that:- reimbursement cost should be excluded from the OC for determining ALP. As far as the contention of ld. DR that TPO may be directed to determine the ALP of the reimbursement cost on stand alone basis, we are unable to accept the same as the same does not arise out either from the order of TPO or ld. CIT(A). Since, while considering assessee’s appeal we .....

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assessee’s business. Therefore, if assessee can prove that loss on account of foreign exchange fluctuation was not notional but actually incurred same cannot be disallowed. We, therefore, remit this issue to the AO for deciding afresh after due opportunity of being heard to assessee. Decided in favour of assessee for statistical purposes.

Disallowance of leave encashment expenses - Held that:- We failed to locate any disallowance on account of leave encashment made by AO. As observed .....

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ase of software - Held that:- No infirmity either in the order of A.O. or in the order of ld. CIT(A). As could be seen, assessee itself, before A.O. had agreed for allowance of depreciation on the expenditure claimed on software. That being the case, we do not see any reason to interfere with the order of ld. CIT(A) on this issue. - Decided against assessee. - ITA No. 471/Hyd/2011 - Dated:- 26-8-2015 - SHRI B. RAMAKOTAIAH AND SHRI SAKTIJIT DEY, JJ. For The Assessee : Shri Ravi Bharadwaj For The .....

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Associated Enterprises (AE) in two segments i.e. software development segment and information technology enabled services (ITES) segment on a cost plus markup basis. For the AY under consideration, assessee filed its return of income on 01/11/2005 declaring loss of ₹ 1,38,41,745 after claiming exemption u/s 10A of the Act. In course of the assessment proceeding, A.O. noticed that assessee has entered into international transaction with its AE and has earned revenue from such international .....

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profit level indicator (PLI). In the search process undertaken in databases, assessee selected 12 companies as comparables in the software development services segment and 13 companies in ITES segment. As the arithmetic mean of the comparable companies under both the segments were within the tolerance band of margin declared by assessee, the price charged to the AE in respect to the international transactions under both the segments were claimed to be within arm s length. The TPO after examining .....

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After rejecting the TP document, TPO undertook a fresh search in the data bases for selection of comparables. In this process, TPO also called for relevant information from companies u/s 133(6) of the Act and after verifying the informations gathered by him and confronting the same to assessee, he proceeded to determine the ALP of international transaction. In the software development services segment, TPO selected 17 companies as comparables with average arithmetic mean of 26.59%. After allowi .....

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orking capital adjustment of 1.17%, ALP of the international transaction in ITES segment was determined at ₹ 17,05,92,283 as against the price charges by assessee to AE at ₹ 15,38,62,358. The resultant shortfall of ₹ 1,67,29,925 was treated as adjustment to be made to the ALP u/s 92CA(I) of the Act. In terms with the order passed by TPO, A.O. completed the assessment by incorporating the TP adjustments recommended by TPO. Being aggrieved of the additions so made, assessee prefe .....

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of the comparables selected by TPO. Thus, as far as ITES segment is concerned, ld. CIT(A) did not entertain any of the objections of assessee as far as selection of comparables is concerned. 4. Being aggrieved of the order of ld. CIT(A), assessee is before us raising as many as 14 grounds on TP issues. However, at the time of hearing ld. AR advanced his argument only in respect of ground Nos. 7, 8, 9, 10 and 12. In view of the aforesaid, the rest of the grounds on TP issues, viz., Ground Nos. 1, .....

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odhtree Consulting Ltd. 2) Exensys Software Solutions Ltd. 3) Sankhya Infotech Ltd. 4) Foursoft Ltd. 5) Thirdware Solutions Ltd. 6) Tata Elxsi Ltd. 7) Infosys Technologies Ltd 8) Flexitronics Ltd. 7. The submissions of the learned AR against selection of these comparables, in brief, are as under: 1. Bodhtree Consulting Ltd. i) This company should be rejected on the basis of filters applied by TPO himself, which are as under: • Related party transactions filter: As per schedule 4 of the bala .....

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r the category of IT enabled services. ii) In support of his contention, ld. AR relied upon the following rulings: 1. Intergraph Consulting Pvt. Ltd., (ITA No. 923/Hyd/2010) 2. Invensys Development Centre (India) Pvt. Ltd. (ITA No. 1256/H/2010) 3. Ness Innovative Business Services Pvt. Ltd., (ITA No. 472/Hyd/2011) 2. Exensys Software Solutions Ltd. i) The learned counsel submitted that this company should be rejected for the following reasons: a) Functionally different: The company is a software .....

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any for financial year ended March 31, 2005 and confirmed by the company in its response to 133(6) notice. c) Error in margin computation: The ld TPO has excluded the deferred revenue expenditure while computing the net margin of the company. If the same is included, the net margin of the company would be 32.68%. ii) It was submitted that the following rulings have analysed and rejected this company as it has software products and held as not comparable to a software development service provider .....

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hat the company is into software products (services are supplementary to products licensing) • The TPO has in subsequent year rejected this company as comparable relying on the same 133(6) response. ii) He submitted, following rulings have analysed and rejected this company as it has software products : • Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014 • Intergraph Consulting Pvt. Ltd., (ITA No. 923/Hyd/2010) • Ness Innovative Business Services .....

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Vs. M/s Hellosoft India Pvt. Ltd. (ITA No. 645/Hyd/09) - Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014 - Intergraph Consulting Pvt. Ltd., (ITA No. 923/Hyd/2010) - Ness Innovative Business Services Pvt. Ltd., (ITA No. 472/Hyd/2011) - Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010) 5. Thirdware Solutions Ltd.: i) Ld. Counsel submitted that this company is functionally different for the following reasons: • As per reply to notice issued u/s 133(6), the .....

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ompany has partnered with QAD Inc to deliver the entire business cycle of MGF/PRO, a product of QAD Inc. from Presales, sales, training, consulting, implementation and support to application management services. ii) He submitted, the following rulings have analysed and rejected this company as it is into trading of software licenses: - Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010) - Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014 - Intergraph Consulting .....

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rulings have analysed this company and relying on the same 133(6) response, rejected it as a comparable to software services provider: - Intergraph Consulting Pvt. Ltd., (ITA No. 923/Hyd/2010) - Ness Innovative Business Services Pvt. Ltd., (ITA No. 472/Hyd/2011) - Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014 7. Infosys Technologies Ltd. i) The learned counsel submitted that this company is engaged in diversified activities including products, consultancy & .....

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on various parameters to a small software service provider and rejected it: - Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010) - Patni Telecom Solutions Pvt. Ltd. Vs. ACIT (ITA No. 1846/Hyd/2012) - DCIT Vs. M/s Hellosoft India Pvt. Ltd. (ITA No. 645/Hyd/09) - Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014 - Intergraph Consulting Pvt. Ltd., (ITA No. 923/Hyd/2010) - Ness Innovative Business Services Pvt. Ltd., (ITA No. 472/Hyd/2011) 8. Flexitronics Ltd. i) O .....

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duct development. In support of such contention, the learned AR relied upon the following rulings: - Intoto Software India Pvt. Ltd. (ITA No. 1196/Hyd/2010) - DCIT Vs. M/s Hellosoft India Pvt. Ltd. (ITA No. 645/Hyd/09) 8. The learned DR, though, agreed that issue of selection of comparables are covered by the decisions of ITAT referred to by learned AR, but, he nevertheless supported the reasoning of TPO and learned CIT(A). 9. After considering the submissions on either side and examining the ma .....

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nologies Ltd. by observing as under: 1. Bodhtree Consulting Ltd. The learned counsel submitted that this company should be rejected under the following TPO s f ilters: • Related party transactions f ilter: As per schedule 4 of the balance sheet, the company has investments in Perigon, LIC, USA and as per the response u/s 133(6); the company has export sales to Perigon LIC, USA of ₹ 133.90 lakhs, being 34.68% of the total turnover. • Functionally different f ilter: The company in .....

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The company owns signif icant brand intangibles (almost 60% of its net block of assets), unlike the appellant, which is a contract captive services provider. Further, various disclosures on the site of the company also indicate that it is into product development. e) Exceptional year of Operations: There was amalgamation of the company with Holool India Ltd. with retrospective effect from April 01, 2004, which had a material/signif icant impact on the results of the company for f inancial year .....

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1196/Hyd/2010) - ITO Vs. Colt Technology Services India Pvt. Ltd. (ITA No. 609/Del/2011) - Integrated Decisions & Systems India (P) Ltd. Vs. DCIT (ITA No. 27/JP/2011) - ACIT Vs. Sonata Sof tware (ITA No. 3514/Mum/2010) - Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014 3. Sankhya Infotech Ltd. The learned counsel submitted that this company is functionally different as evident from the following: • Various disclosures in the annual report and response to 1 .....

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Vs. Sonata Sof tware (ITA No. 3514/Mum/2010) - DCIT Vs. M/s Hellosof t India Pvt. Ltd. ( ITA No. 645/Hyd/09) - Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014 4. Foursof t Ltd. The learned counsel submitted that this company is functionally different as evident from various disclosures in the annual report (Directors report, Management discussion and website information) indicates clearly that the company is into sof tware products. The following rulings have anal .....

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aged in implementation and customer services which include training, customized development and help desk services for ERP sof tware and distribution of products of Quad Inc. and Hyperion Solutions Corporation. • Various news articles available on the internet http://www.hinduonnet.com/2001/07/11/stories/0611 000h.htmstated that the company is a distributor of products; • As per the company s website www.thirdware.net/ourcapabilities.htm. has stated the company has partnered with QAD I .....

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tions (P) Ltd. Vs. ITO, 23 SOT 385. 6. Tata Elxsi Ltd. The learned counsel submitted that this company shall be rejected as comparable since it is a specialized embedded sof tware development company and this company has in fact clearly stated in its response to 133(6) notice that due to the complex segments in which they are operating, it is not comparable to any other sof tware services company. The following rulings have analysed this company and relying on the same 133(6) response, rejected .....

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y commands a premium in the pricing of its products and services due to its goodwill, reputation and brand value. Further due to scale of operations, Infosys enjoys economies of scale, which results in lower cost of infrastructural facil ities and overheads. Further, he submitted that the issue of comparabil ity of Infosys to a small captive service provider is no longer res-integra. The following cases have specif ically anlaysed in detail the comparabil ity of Infosys on various parameters to .....

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No. 7821/Mum/2011 - Para 7.4) - Cordys Sof tware India Pvt. Ltd. Vs. ACIT (ITA No. 1972/H/2011) - Agnity India Technologies Vs. ITO (ITA No. 3856/Del/2010) - Agnity India Technologies Pvt. Ltd. Vs. ITO (High Court decision - ITA 1204/2011) - Invensys Development Centre India P. Ltd. in ITA no 1256/Hyd/2010 dt.20-02-2014 6. We have considered the issue and examined the record including paper books placed on record. There is a merit in assessee s contentions about non-comparabil ity of various co .....

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pany. Further, that company has charged deferred expenditure and the amount claimed in this year is ₹ 1.22 crores as against ₹ 30.21 lakhs in earlier year. This was clearly stated in Notes that claim was with reference to the AS-14 and also due to amalgamation of two companies. Vide page 957 of paper book, it was seen that out of gross assets of ₹ 7.95 crores, Brands alone consist of ₹ 5 crores, therefore, intangible assets comprising of substantial part of this company s .....

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ed operating prof it of the company and this cannot be taken as comparable. Other issues were also analysed and accepted in various cases as relied upon by the learned counsel. In the case of Intoto Sof tware India Pvt. Ltd.,(supra) this comparable case was analysed and held as under: 17. Having heard both parties and having considered the material available on record, we find that there is no dispute that Assessee has accepted the Exensys Sof tware Solutions Limited as one of the comparable com .....

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However, where there are extraordinary events such as this, then those events have to be taken note of and where no adjustment can be made on account of this extraordinary event, then such company cannot be considered as a comparable. The objections to this company by Assessee are made for the f irst time before the Tribunal. The Tribunal being the f inal fact f inding authority is bound to take note of the objections of Assessee. As the material relied upon by the learned Counsel for Assessee .....

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, then, we direct the Assessing Off icer/TPO to exclude this company from the list of comparables. 8. In view of the above, we are of the opinion that there is an extra-ordinary event which resulted in high operating margin of that company and we, therefore, direct the AO to exclude this company from the list of comparables. In the above referred case of Intoto Sof tware India Pvt. Ltd., complete details were not placed on record, therefore, the matter was sent to AO for verif ication whereas in .....

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(seg) etc, are also to be excluded as they are considered and analysed in various cases relied on about functionality and why the same are not comparable to the companies l ike assessee. Bodhtree consulting Ltd also fails RPT f ilter as contended. In view of this, we are not discussing above comparables in detail, but, suff ice to say that assessee s submissions are valid. The AO is directed to exclude the above comparables and re-work out the arm s length margin accordingly. 10. Following the a .....

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ate bench in this regard is extracted hereunder: 10. As far as Flextronics Software Limited is concerned, we find that in case of Intoto Software India Pvt. Ltd., (supra) the co-ordinate Bench of this Tribunal having found it to be functionally different as it is into product development has directed excluding it for comparability analysis. Respectfully following the decision of the coordinate bench of this Tribunal in case of M/s Intoto Software India Pvt.Ltd. (supra) we also direct the Assessi .....

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se two companies cannot be considered as comparables to assessee. Accordingly, upholding the order of ld. CIT(A), we dismiss the ground raised by assessee. 13. In Ground No. 10 assessee has objected to selection of certain comparables under the ITES segment. 14. Out of 10 comparables selected by TPO, assessee has objected to four comparables. The objections of assessee in respect of these comparables are as under: 1. Mapple E Solutions: Ld. AR submitted, this company cannot be selected as compar .....

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relied upon the following decisions: 1. HSBC Electronic Data Processing India Pvt. Ltd., ITA No. 1623/Hyd/2010, dt. 28/06/2013. 2. Market Tools Research Pvt. Ltd., ITA No. 1150/Hyd/2011, dt. 05/02/2014. 2. Nucleus Net Soft and GIS India Ltd., Ld. AR submitted, this company cannot be considered as comparable as it fails employee cost filter. Ld. AR submitted, the employee cost of this company as a percentage of operating revenue is only 19.60 percent. In support of his contentions, ld. AR relied .....

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onic Data Processing India Pvt. Ltd., ITA No. 1623/Hyd/2010, dt. 28/06/2013. 2. Market Tools Research Pvt. Ltd., ITA No. 1150/Hyd/2011, dt. 05/02/2014. 4. Wipro BPO Solutions Ltd., Ld. AR submitted, this company cannot be considered as comparable as it is functionally different and significant intangible is owned by it. Moreover, ITAT has rejected this company as comparable in various cases. In support of his contentions, ld. AR relied upon the following decisions: 1. DE Shaw India Software P. L .....

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red the submissions of the parties and perused the materials on record. On going through the decisions of the coordinate benches placed before us by ld. AR, we find that the issue relating to comparability of these four companies have been settled in these decisions. Different benches of The Tribunal after considering relevant facts and materials, have consistently held that these four companies for various reasons are not comparable to a captive ITES provider. Reference in this regard is invite .....

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3) Vishal Infomration Technologies Ltd., and 4) Wipro BPO Solutions Ltd., from the list of comparables as far as ITES segment is concerned. 17. In ground No. 9, assessee has objected to rejection of certain comparables selected by it. Though in the grounds raised assessee has named six comparables, but, at the time of hearing, ld. AR submitted that he would like to only press for Pentasoft technologies Ltd. as rest of the companies have been rejected as comparables in case of ITES company by th .....

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Processing India Ltd. Vs. DCIT (supra), the coordinate bench while considering assessee s argument for inclusion of the aforesaid company as a comparable, held as under: 14. As far M/s Pantasoft Technologies Ltd., even though the assessee included the same, no arguments were available for its exclusion. Since segmental data has to be examined by the TPO, we direct the TPO to examine whether there is any segmental data and if so, whether the company is eligible for selection as comparable. There .....

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be removed. In that event, the remaining limited number of companies may not give an appropriate comparability analysis for determining the arm s length margin. However, we are unable to accept the aforesaid contention of ld. DR. The provision contained under rule 10B lays down the manner and mode for determining the ALP under different method. As far as TNMM is concerned, the ALP has to be determined on the basis of the margin of the comparable companies. The rule does not prescribe that a part .....

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o comparability of the companies. In the aforesaid view of the matter, we do not agree with the ld. DR for directing the TPO to undertake a fresh search for selection of comparables. In view of the aforesaid, we direct the A.O./TPO to determine the ALP of assessee after keeping in view our observations in the preceding paragraphs. 23. The next issue which arises for consideration as raised in Ground No. 12 is with regard to inclusion of reimbursement cost of ₹ 6,55,57,576 in the operating .....

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e ITAT, Hyderabad bench in case of M/s HSBC Electronic Data Process India Ltd. Vs. DCIT, ITA No. 1624/Hyd/2010, dt. 28/06/2013. 25. The ld. DR submitted before us, if the reimbursement cost according to the Tribunal cannot form part of the OC, then, the TPO may be directed to determine the ALP of reimbursement cost separately. 26. We have considered the submissions of the parties and perused the material on record. The ITAT, Hyd. Bench in case of HSBC Electronic Data Process India Ltd. Vs. DCIT .....

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have considered the rival submissions and perused the material on record. First, we will take up the issue relating to the adjustments made by the assessing officer in respect of the international transactions with its associated enterprises in the software development services. It is the contention of the assessee that bad debts incurred by the assessee company are in respect of transactions, which are not related to associated enterprises. This contention of the assessee has not been controver .....

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at if the bad debts/reimbursements are excluded for the purpose of computing the margins on the transactions relating to the associated enterprises, the net margin comes to 19.07%, which is well comparable with the Arms Length Margin of 19% determined by the Transfer Pricing Officer. In our considered view, for computing the net margin of the assessee for the purposes of transfer pricing, only the cost related to the transaction with the Associated Enterprises has to be considered and accordingl .....

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been noted hereinabove. That being so, the TPO should have determined the Arms Length Price for the international transactions with associated enterprises considering only the operating cost allocable to the Associated Enterprises segment. Since the assessing officer had no occasion to verify the veracity of the segmental financials prepared by the assessee company, for limited purpose, we direct the assessing officer to verify the segmental financials prepared by the assessee company and adopt .....

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ing ALP. As far as the contention of ld. DR that TPO may be directed to determine the ALP of the reimbursement cost on stand alone basis, we are unable to accept the same as the same does not arise out either from the order of TPO or ld. CIT(A). Since, while considering assessee s appeal we have to restrict ourselves to the grounds raised by assessee, this issue raised by ld. DR is left open to be decided in an appropriate case. In view of the aforesaid, we direct A.O./TPO to compute ALP afresh .....

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it has incurred foreign exchange fluctuation loss on account of restatement of current account receivable and payables in accordance with AS 11. Relying upon the decision of Hon ble Supreme Court in case of Sutlej Vs. CIT, 116 ITR 01, it was submitted by assessee that loss incurred on revenue account as a result devaluation of currency is an allowable deduction. A.O. however was not convinced with assessee s explanation. He observed that as per the information available on record, assessee had r .....

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n exchange might be reasonable but determining loss at the end of the year on a notional basis is unacceptable. Accordingly, he disallowed the amount of ₹ 52,14,198. Though assessee challenged the disallowance before ld. CIT(A), but, ld. CIT(A) also confirmed the disallowance by agreeing with A.O. that the loss being a notional one cannot be allowed. 30. Ld. AR reiterating the submissions made before the departmental authorities, submitted, loss on account of foreign exchange fluctuation b .....

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be seen from the discussions made by A.O., he has disallowed assessee s claim of loss on foreign exchange by treating it as notional. He has not said that loss is not connected with assessee s business. Therefore, if assessee can prove that loss on account of foreign exchange fluctuation was not notional but actually incurred same cannot be disallowed. We, therefore, remit this issue to the AO for deciding afresh after due opportunity of being heard to assessee. This ground is allowed for stati .....

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Further, ld. CIT(A) observed that neither there is any discussion with regard to assessee s claim in this regard in the assessment order nor assessee furnished any evidence to indicate that such claim was made by assessee before A.O. during the assessment proceeding. He, therefore, refused to entertain the ground raised by assessee. 35. Ld. AR submitted before us, A.O. has not only disallowed deduction claimed on account of leave encashment but has also made the addition after computing deducti .....

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perused the materials on record. On careful reading of the impugned assessment order, we failed to locate any disallowance on account of leave encashment made by AO. As observed by ld. CIT(A), there is absolutely no mention of this issue in the assessment order. That being the case, we fail to understand how and why this ground was raised by assessee. When this factual position was pointed out to the ld. AR, he also agreed that no specific disallowance has been made by AO. In the aforesaid view .....

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