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2016 (6) TMI 333 - ITAT MUMBAI

2016 (6) TMI 333 - ITAT MUMBAI - TMI - Disallowance under section 14A r.w Rule 8D - Held that:- CIT(A) has not given any proper basis for working out the disallowance under section 14A r.w. Rule 8D; specifically when the disallowance is far in excess of the exempt dividend income earned in the year under consideration. In this view of the matter, we set aside the impugned order of the learned CIT(A) on this issue and restore the matter to the file of the AO to decide the issue afresh - Decided i .....

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on club membership fees for employees is admissible business expenditure and therefore direct the AO to delete the disallowance of ₹ 1,00,000/- made in this respect.- Decided in favour of assessee.

Foreign Exchange Losses - Held that:- The orders of the learned CIT(A) for assessment years 2009-10 and 2010-11 holding that foreign exchange losses for assessment years 2009- 10 and 2010-11 respectively were business losses and directing the AO to allow the same calls for no interfer .....

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ce Act, 2010 w.e.f. 01.04.2010 was retrospective and therefore TDS has to be paid on or before the due date specified for filing the return of income under section 139(1) of the Act; in this case 30.09.2009. In view of the fact that in the case on hand, the assessee has admittedly made the payments of TDS in the next financial year but before the due date for filing the return of income under section 139(1) of the Act the assessee’s case is squarely covered in its favour by the aforesaid decisio .....

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hujle ORDER Per Jason P. Boaz, A.M. These are appeals for A.Y. 2007-08 by the assessee and by the Revenue for assessment years 2009-10 and 2010-11. The assessee has also preferred Cross Objectoins (CO) for assessment years 2009-10 and 2010-11. These appeals and Cos are directed against the orders of the CIT(A)-21, Mumbai dated 01.10.2010 for A.Y. 2007-08, order dated 19.07.2012 for A.Y. 2009-10 and order dated 17.07.2014 for A.Y. 2010-11. Having interconnected issues, these appeals were heard to .....

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ailed to appreciate that the disallowance is arbitrary and illegal. 3. The learned Commissioner of Income Tax (Appeals) failed to appreciate that the disallowance is excessive and unreasonable. 4. The appellant craves leave to add, amend, alter and/or delete any of the grounds of appeal. 2.2 Revenue s appeal in ITA No. 6629/Mum/2012 for A.Y. 2009-10 1.(a) Whether on the facts and in the circumstances of the case as well as in law, the Ld. CIT(A) erred in deleting the disallowances of foreign exc .....

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side and that of the Assessing Officer be restored. 4. The appellant craves leave to add, amend vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal. 2.3 Assessee s CO No. 291/Mum/2013 for A.Y. 2009-10 On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeals) has erred in confirming- a) The Disallowance of ₹ 18,86,195/- under the provisions of section 14A read with rule 8D .....

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. 2.4 Revenue s appeal in ITA No. 6271/Mum/2014 for A.Y. 2010-11 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of interest while working of disallowance u/s. 14A r.w. Rule 8D of the IT Rules and directing the AO to compute 0.5% of average investment for administrative expenses. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of loss of foreign exchange by holdin .....

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the Disallowance at 0.5% of the total average investments on the opening and closing day of the previous year for administrative expenses under the provisions of section 14A read with rule 8D of the Income Tax rules without assigning any reasons which is wrong and contrary to the facts and circumstances of the case, provisions of Income Tax Act 1961 and rules made there under and disregarded that such disallowance can only be made on the average investments yielding tax free income and not on t .....

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as claimed that no expenditure was incurred. The Assessing Officer (AO) invoked the provisions of section 14A r.w. Rule 8D and proceeded to disallow an amount of ₹ 15,38,089/- thereunder. On appeal, the learned CIT(A) restricted the disallowance thereunder to ₹ 10,00,000/- on an adhoc basis. 3.2.2 The assessee is in appeal before us on this issue challenging the decision of the learned CIT(A) in sustaining the disallowance to the extent of ₹ 10,00,000/- as being arbitrary, ille .....

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7.2013; by which time the Coordinate Bench had disposed off Revenue s appeal (viz. in ITA No. 6556/Mum/2011 vide order dated 28.01.2013). In that order, the Coordinate Bench restored the matter back to the file of the AO to decide the issue of disallowance under section 14A of the Act afresh. In these factual circumstances, since the issue in the cross appeal stands prejudged by the order of the Coordinate Bench (supra), it would not be appropriate for us to comment on the correctness or otherwi .....

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examination and adjudication in accordance with law after affording the assessee adequate opportunity of being heard. Consequently, grounds 1 to 4 of assessee s appeal are treated as allowed for statistical purposes. 3.2.3 In the result, the assessee s appeal for A.Y. 2007-08 is treated as allowed for statistical purposes. 3.3.1 For assessment years 2009-10 and 2010-11 The assessee had earned exempt dividend income of ₹ 41,126/- and ₹ 40,003/- respectively, but suo moto disallowed a .....

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y of COs for A.Y. 2009-10 and 2010-11 have assailed the orders of the learned CIT(A) in respect of his finding/decision on the issue of disallowance under section 14A r.w. Rule 8D. Revenue in A.Y. 2009-10 assails the orders of the learned CIT(A) in restricting the disallowance to ½% of the average investment for administrative expenses. On the other hand, the assessee in its COs for assessment years 2009-10 and 2010-11 has challenged the impugned orders of the learned CIT(A) in directing .....

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; 41,216/- in A.Y. 2009-10 and ₹ 40,003/- in A.Y. 2010-11 and that while the assessee had claimed that no expenditure had been incurred for earning this income in A.Y. 2009-10, ₹ 40,000/- was shown to have been incurred for earning the exempt income in A.Y. 2010-11 It was contended that in the light of the decisions of the Hon'ble Punjab & Haryana High Court in the case of Empire Package P. Ltd. in ITA NO. 415 of 2015 dated 12.01.2016 and of the Hon'ble Delhi High Court i .....

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hold that the disallowance made under section 14A read with Rule 8D cannot exceed exempt income, in the absence of any such instruction being there in the relevant section or rule? The Hon'ble High Court dismissed Revenue s appeal holding as under at paras 3 to 5: - 3. We have heard learned counsel for the appellant-revenue. 4. The Tribunal has only remanded the matter to the Assessing Officer after considering the factual position and the relevant case law on the point. It relied upon the d .....

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section (2) of Section 14A of the Act was required to collect such material evidence to determine expenditure if any incurred by the assessee in relation to earning of exempt income. The income from dividend had been shown at ₹ 1,11,564/- whereas disallowance under Section 14A read with Rule 8D of the Rules worked out by the Assessing Officer came to ₹ 4,09,675/-. Thus, the Assessing Officer disallowed the entire tax exempt income which is not permissible as per settled position of .....

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lear that the AO has disallowed the entire tax exempt income which is not permissible in view of the judgment of the Hon'ble Delhi High Court referred to above. The Hon'ble Delhi High Court held that the window for disallowance is indicated in section 14A, and is only to the extent of disallowing expenditure incurred by the assessee in relation to the tax exempt income . The disallowance under section 14A read with Rule 8D as worked out by the Assessing officer is not in accordance with .....

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ition and the relevant case law on the point, does not warrant any interference by this Court. Learned counsel for the appellant-revenue has not been able to show any illegality or perversity in the impugned order. Thus, no substantial question of law arises. Consequently, the appeal stands dismissed. 3.3.5 Respectfully following the decision of the Hon'ble Punjab & Haryana High Court in Empire Package P. Ltd. (supra) and of the Hon'ble Delhi High Court in the case of Deepak Mittal ( .....

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id down by the above judicial pronouncements (supra) after affording reasonable opportunity to the assessee of being heard and to file submissions/details required in this regard. Consequently, assessee s ground No. (a) in CO for 2009-10 and CO for A.Y. 2010-11 and Revenue s ground No. 1 for A.Y. 2010-11 are treated as allowed for statistical purposes. 4. Assessee s CO ground No. (b) for A.Y. 2009-10 - Disallowance of Corporate Club Membership Fee 4.1 In this CO for A.Y. 2009-10 the assessee has .....

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assessee s claim, following the decision of another Coordinate Bench in the assessee s own case for A.Y. 2004-05 in ITA No. 123/Mum/2009 dated 28.09.2009. It was also contended that the issue is presently settled by the Hon'ble Apex Court s decision in the case of CIT, Bangalore vs. United Glass Mfg. Co. Ltd. in Civil Appeal Nos. 6447 to 6449 of 2012 dated 12.09.2012 wherein it was held that club membership fee paid by the company is an admissible business expenditure. 4.2 Having heard the .....

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1,00,000/- incurred by the assessee on club membership fees for employees is admissible business expenditure and therefore direct the AO to delete the disallowance of ₹ 1,00,000/- made in this respect. Consequently the CO s ground (b) for A.Y. 2009-10 is allowed. 5. Revenue s ground No. 1(a) & (b) for A.Y. 2009-10 and Ground No.2 for A.Y. 2010-11 - Foreign Exchange Losses 5.1 In these grounds, Revenue assails the impugned orders of the learned CIT(A) for assessment years 2009-10 and 2 .....

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e under section 37(1) of the Act. The learned D.R. submits that the AO after examining the matter, while not doubting the genuineness of the aforesaid foreign exchange losses on account of forward contracts held the same to be speculative losses, inter alia, on the grounds that (i) the aforesaid losses were on account of forward trading in foreign exchange, whereas the assessee was dealing in fruit pulp and allied items and not in foreign exchange; (ii) the delivery of foreign exchange was not g .....

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booked losses thereon and not on account of hedging forward contracts in respect of raw material dealt in by him, i.e. fruit pulp. The learned D.R. contends that in the above factual matrix the AO has correctly held that these transactions were speculative in nature as per section 43(5) of the Act and having been settled otherwise than by actual delivery, were correctly disallowed by the AO for both assessment years 2009-10 and 2010-11. 5.2.1 Per contra the learned A.R. for the assessee supporte .....

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n the forward contracts, the assessee did not deal in foreign exchange but entered into these forward contracts with the object of safeguarding against foreign exchange losses on account of export sales proceeds to be received by it. Therefore it is clear that the AO s finding were based on factually incorrect assumption that the assessee was indulging in forward contracts in foreign exchange and not in the export material/products it dealt in. According to the learned A.R. for the assessee, the .....

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ations. It is in these circumstances, that the learned CIT(A) held that the proviso (a) to section 43(5) was squarely applicable to the case on hand and therefore the losses suffered on account of foreign exchange forward contracts were not speculative in nature. 5.2.2 The learned A.R. for the assessee submitted that the learned CIT(A) also observed that the foreign exchange forward contracts entered into by the assessee could not be said to be derivative within the meaning of proviso (d) to sec .....

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sses of ₹ 16,72,65,011/- and ₹ 6,53,06,057/- as business losses in the respective years. 5.3.1 We have heard the rival submissions and perused and carefully considered the material on record, including the judicial pronouncements referred to in the orders of the authorities below. Form the fact on record, it is not disputed that the assessee is engaged in the manufacture and export of processed food products such as fruit pulp and other allied items, for which it was receiving export .....

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in the relevant periods under consideration, were made against confirmed export orders and export of goods by the assessee. 5.3.2 In our view the AO s findings to the contrary that the aforesaid foreign exchange losses suffered by the assessee are speculative in nature was factually flawed as it was based on a factually incorrect assumption that the assessee not being dealer in foreign exchange, its forward contracts were only for foreign exchange which were settled without delivery thereof. The .....

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anks to safeguard itself against possible foreign exchange losses on account of export sale proceeds to be received. 5.3.3 We concur with the view of the learned CIT(A) in the impugned order that the facts and circumstances of the case establish that the proviso (a) to section 43(5) of the Act is squarely applicable in the case on hand since the foreign exchange forward contracts entered into by the assessee with banks, in the course of its manufacturing and export business of fruit pulp and all .....

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and incidental to the assessee s business of manufacture and export of fruit pulp and allied products and therefore, in our view, do not represent speculative transactions. Therefore, the concept of delivery and nondelivery thereof is of no consequence and is irrelevant in the context of the facts of the case on hand. As long as the aforesaid transactions of foreign exchange forward contracts are concerned, they are directly linked with the assessee s business of manufacture and export of fruit .....

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ich it had to pay some amount which was debited to the P & L account. The assessee claimed the same as business loss being payment on account of cancellation of forward booking of forex with the banks in respect of exports orders. Finally, when the issue came up for consideration the Hon'ble Bombay High Court held as under: - The assessee was not a dealer in foreign exchange. The assessee was a cotton exporter. The assessee was an export house. Therefore, foreign exchange contracts were .....

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see was not a dealer in foreign exchange. The assessee was an exporter of cotton. In order to hedge against losses, the assessee had booked foreign exchange in the forward market with the bank. However, the export contracts entered into by the assessee for export of cotton in some cases failed. In the circumstances, the assessee was entitled to claim deduction in respect of ₹ 13.50 lakhs as a business loss. This matter is squarely covered by the judgment of the Calcutta High Court, with wh .....

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business losses and directing the AO to allow the same calls for no interference from us and we therefore confirm an uphold the same. Consequently, Revenue s grounds No. 1(a) and (b) for A.Y. 2009-10 and ground No. 2 for A.Y. 2010-11 are dismissed. 6. Revenue s Ground No. 2 for A.Y. 2009-10 - Disallowance under section 40(a)(ia) of the Act 6.1 In this ground Revenue assails the order of the learned CIT(A) as erroneous for deleting the disallowance of ₹ 10,04,650/- made by the AO under sec .....

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T vs. Virgin Creations (ITA No. 302 of 2011 dated 23.11.2011). 6.3.1 We have heard the rival contentions of both the parties and perused and carefully considered the material on record, including the judicial pronouncements cited. The facts of the matter as emerge from the record are that even though payments amounting to ₹ 10,04.650/- were made and debited to the books and the TDS was due to be paid before the close of the year, the same has been paid subsequently in the next financial ye .....

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