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of <h1>Tribunal decision: Interest expenditure recalculated, mark-to-market loss disallowed.</h1> <h3>S VINODKUMAR DIAMONDS PVT LTD Versus ADDL COMMISSIONER OF INCOME TAX RANGE-5(3), MUMBAI</h3> S VINODKUMAR DIAMONDS PVT LTD Versus ADDL COMMISSIONER OF INCOME TAX RANGE-5(3), MUMBAI - TMI Issues Involved:1. Disallowance of proportionate interest expenditure.2. Disallowance of mark-to-market (M to M) loss on outstanding forward contracts.Detailed Analysis:1. Disallowance of Proportionate Interest Expenditure:The assessee-company challenged the disallowance of Rs. 13,52,741/- as proportionate interest expenditure. The Assessing Officer (AO) found that the assessee had given an advance of Rs. 2,08,40,685/- for purchasing office premises at Bharat Diamond Bourse (BDB), which increased to Rs. 2.48 Crores by the end of the assessment year (AY). The AO concluded that the interest expenditure should be capitalized as per the proviso to Section 36(1)(iii) of the Income Tax Act, 1961, since the asset was not put to use during the year. The First Appeal Authority (FAA) upheld this view, noting that the appellant failed to provide evidence that interest-free funds were used for the investment.Upon appeal, the assessee argued that adequate interest-free funds were available and that the disallowance should be restricted to the investment made during the year, amounting to Rs. 40.01 lakhs. The tribunal agreed with the lower authorities that the proviso to Section 36(1)(iii) was applicable, as the asset was not put to use. However, it directed the AO to recalculate the interest disallowance based on the investment made during the year only, not the total investment.Outcome: Ground No.1 is partly decided in favor of the assessee, with directions to recalculate the interest disallowance.2. Disallowance of Mark-to-Market (M to M) Loss on Outstanding Forward Contracts:The assessee claimed a loss of Rs. 4,02,96,635/- due to exchange rate fluctuations on outstanding forward contracts. The AO disallowed this claim, treating the loss as speculative under Section 43(5) of the Act and CBDT Instruction No. 3/2010, which considers such losses as notional and contingent. The FAA upheld this decision, stating that the forward contracts were settled without actual delivery, making them speculative transactions.The assessee contended that the forward contracts were hedging transactions to mitigate foreign exchange risk and should not be treated as speculative. The tribunal examined the nature of forward contracts and hedging transactions, concluding that the assessee's transactions did not qualify as hedging under the proviso to Section 43(5). The tribunal noted that the assessee failed to prove that the transactions were not speculative and that the losses were due to forward contracts settled without actual delivery.Outcome: Ground No.2 is decided against the assessee, affirming the disallowance of the M to M loss.Conclusion:The appeal filed by the assessee-company is partly allowed. The tribunal directed the AO to recalculate the interest disallowance for the investment made during the year but upheld the disallowance of the mark-to-market loss on forward contracts. The order was pronounced in the open court on 3.5.2013.
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