TMI Blog2016 (1) TMI 133X X X X Extracts X X X X X X X X Extracts X X X X ..... hat:- Disallowance u/s.14A r.w. Rule 8D should not exceed the exempt income. The Mumbai Bench in the case of M/s. Daga Global Chemicals Pvt. Ltd. [2015 (1) TMI 1204 - ITAT MUMBAI] sustained the disallowance on applicability of provisions of sec.14A r.w. Rule 8D. However, the alternative claim of the assessee was that disallowance if at all should be made, it should be restricted to exempt income earned and not beyond that. Accordingly, the AO is directed to look at this issue on this angle and decide it afresh. Loss on account of cancellation of forward contracts in forex derivatives - business loss OR speculation loss - Held that:- In this case, the Commissioner of Income Tax (Appeals) given an direction to the Assessing Officer to verify any forward contracts have been cancelled prematurely and verify the reasons for premature cancellation in the light of the order of the Tribunal in the case of London Star Diamond Company (I) P. Ltd vs. DCIT [2013 (11) TMI 424 - ITAT MUMBAI] wherein it was observed that loss arising from cancellation of premature is allowed as business loss. Being so, the assessee cannot have any grievance on this issue as Commissioner of Income Tax (Appeals) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld. Authorised Representative further relied on the following orders of the Various High Courts and Tribunals:- a. CIT vs Hero Cycles (323 ITR 518) P H High Court. b. DCIT vs. Jindal Photo Ltd in ITA No.4539/Del/2010, dt. 22.12.2010. c. Auchtel Products vs. ACIT in ITA No.3183/Mum/2011, dt. 30.4.2012. d. Justice Sam P. Bharucha vs. ACIT in ITA No.3859/Mum/2011. e. CIT vs. Hotel Savera 23 ITR 795 Mad. Without prejudice to the above, he submitted that, if at all, the expenses can be reasonably estimated as being attributable to management of investment portfolios, salary and associated administrative expenses, the expenses may be restricted to 2% of the dividend income earned by the assessee in the current year. 5. On the other hand, the ld. Departmental Representative relied on the orders of the lower authorities. 6. We have heard both the sides and perused the material on record. Though Rule 8D of Income Tax Rules 1962 is not applicable, and provisions of Sec.14A of the Act is only applicable for the assessment year 2008-2009 as the Rule was introduced w.e.f. 24.03.2008. The assessee might have incurred certain administrative expenditure to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the result, the appeal of the assessee in ITA No.1436/Mds/2014 is partly allowed. 13. Now, we take up ITA No.1643/Mds/2014 and ITA No.910/Mds/2015 for adjudication:- The first common ground raised in these two appeals are with regard to violation of principles of natural justice. This ground of the appeal of the assessee is dismissed has not pressed. 14. The next common ground raised in these appeals are with regard to disallowance u/s.14A read with Rule 8D of the Act. 15. The facts as narrated in assessment year 2009-2010 are that the assessee accounted an amount of F29,55,654/- as dividend during the year and claimed the same as exempt u/s.10(34) of the Act. As per the provisions of Sec.14A of the act, no deduction shall be allowed in respect of expenditure incurred in relation to such income which does not form part of the total income. The Assessing Officer has not accepted the contention of the assessee counsel stating that assessee has incurred an amount of F10,11,58,000/- as interest on its borrowed capital during the year. Though the assessee claimed that such borrowed funds were not utilized for making investment, it could not clearly establish the same. Funds f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred by him in relation to income which does not form part of the total income under this Act . 16.1 Which means to say that provisions of Sec.14A are applicable even if the assessee claims that it has not incurred any expenditure in earning exempt income. With regard to satisfaction/reasoning of the AO in rejecting the claim of the assessee, the ITAT Mumbai in the case of Auchtel Products v. ACIT in ITA No.3183/Mum/2011 dated 30.4.2012 held that satisfaction of AO is the sine qua non for disallowance u/s 14A. However, this satisfaction should be with due regard to the accounts . The provisions of s.14A(2) states that .... if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with correctness of the claim of the assessee, .... . 16.2 In the case of CIT v. Hero Cycles Ltd (323 ITR 518) (P H) (2010) this factual requirement has been laid out very clearly. It reads as under (para 4): Disallowance under sec.14A requires finding of incurring of expenditure, where it is found that for earning exempted income no expenditure has been incurred, disallowance u/s 14A. cannot stand. The Commissioner of Income Tax (Appeals) submits th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions. Before me also, the assessee has not produced any cogent evidence to show that it has not incurred any expenditure for earning exempt income except giving verbal arguments. Therefore, I am satisfied that AO has rightly invoked the provisions. With regard to onus, the Special Bench of Mumbai Tribunal in the case of Daga Capital Management P Ltd (117 ITD 169) (2008) has observed the decision of Punjab Haryana High Court in the case of Haryana Land Reclamation and Development Corporation (302 ITR 218) wherein it has held that, From the judgment of the Punjab and Haryana High Court in Haryana Land Reclamation Development Corpn. v. CIT (2008) 302 ITR 218, two things are noticeable, viz., first, the onus to prove that the expenditure was incurred in the taxable business operations and not the exempt income is upon the Assessee and secondly . 16.4 With regard to another line of argument that the income disallowed is more than the dividend income earned, it is decided in the case of Cheminvest Ltd (121 ITO 318) (2009) (Del) (SB) that disallowance u/s 14A r.w.Rule 8D can be made irrespective of the fact whether the assessee has earned exempt income or not duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als) confirmed the order of the Assessing Officer. Against this, the assessee is in appeal before us. 17. We have heard both the sides, perused the written submissions filed by the assessee and well as the decisions relied by the assessee. The main contention of the assessee s counsel is that the assessee has not incurred any expenditure for earning exempted income and the assessee has not used any interest bearing funds for investment. On the contrary, the ld. DR submitted that the assessee has given sufficient opportunity to explain that the expenditure was incurred for earning exempted income and the assessee has not produced necessary evidence to support its case. In our opinion, the decision of the Mumbai Bench of the Tribunal in the case of M/s. Daga Global Chemicals Pvt. Ltd. in ITA No.5592/Mum/2012 dated 1.1.2015 and the decision of the Delhi High Court in the case of Joint Investments Pvt. Ltd. vs. CIT in ITA No.117 of 2015 dated 25.2.2015 is having bearing on this issue, wherein it was observed as under: 6. Heard both the parties. On a perusal of the order of Mumbai Bench of the Tribunal in the case of M/s. Daga Global Chemicals Pvt. Ltd. (supra), we find that an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 14A r.w. Rule 8D under the facts available on record. It was also explained by the ld. counsel for the assessee that on identical fact in earlier years, no disallowance was made. In the present assessment year also, no borrowed funds were invested by the assessee for making investment in shares or for earning dividend income . At best, if any disallowance could be made that can be restricted to ₹ 1,485/- which were claimed as demat charges. Disallowance u/s 14A r.w. Rule 8D cannot exceed the exempt income. In view of this fact, we find merit in the claim of the assessee. The appeal of the assessee is therefore, allowed. Following the above decision of the Mumbai Bench of the Tribunal, we are of the opinion that disallowance u/s.14A r.w. Rule 8D should not exceed the exempt income. The Mumbai Bench in its order sustained the disallowance on applicability of provisions of sec.14A r.w. Rule 8D. However, the alternative claim of the assessee was that disallowance if at all should be made, it should be restricted to exempt income earned and not beyond that. Accordingly, the AO is directed to look at this issue on this angle and decide it afresh in the light of the above de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loss in foreign exchange, if any, as at the end of the year would be deductible u/s 37 by valuing the outstanding liability at the rate marked to market as on date of closing of accounts, and the method of accounting that has been regularly followed would have to be continued for the sake of consistency. In coming to these conclusions, the Supreme Court followed the rationale of its earlier decision in Sutlej Cotton Mills Ltd. vs. CIT 116 ITR 1 where it was held that profit or loss in fluctuation of foreign currency would ordinarily be a trading profit or loss, if held on the revenue account as a trading asset or as part of circulating capital earmarked in business. The Id. AR has clarified that the forward contract was on revenue account and not for capital assets. The decision so rendered in Woodward Governor India (supra) was applied and the law was reiterated in ONGC vs CIT, 322 ITR 180 (SC) reversing the decision of the Uttarakhand High Court in the same case reported in 301 ITR 415 (Uttarakhand), which had treated the exchange loss both relating to current and capital account as a contingent liability. Supreme Court in CIT v. Maruti Udyog, 320 ITR 729 (SC) decided that de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal for statistical purposes. Against this, the assessee is in appeal before us. 21. We have heard both the sides and perused the material on record. In this case, the Commissioner of Income Tax (Appeals) given an direction to the Assessing Officer to verify any forward contracts have been cancelled prematurely and verify the reasons for premature cancellation in the light of the order of the Tribunal in the case of London Star Diamond Company (I) P. Ltd vs. DCIT in ITA No.6169/M/2012, dated 11.10.2013 wherein it was observed that loss arising from cancellation of premature is allowed as business loss. Being so, the assessee cannot have any grievance on this issue as Commissioner of Income Tax (Appeals) has given direction to follow the Tribunal order. Further, we make it clear that loss arising out of derivative transaction in excess of export turnover has to be considered as speculative loss because excess derivative transaction has no proximity with export turnover. With these observations, we reject the ground of the assessee. The appeals of the assessee in ITA No.1643/Mds/2014 and ITA No.910/Mds/2015 are partly allowed. 22. In the result, the appeals of the assessee i ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
