ITAT Mumbai Upholds Unrealized Forex Loss, Sets Aside Interest Disallowance

The ITAT Mumbai upheld the allowance of unrealized foreign exchange loss based on accounting standards and judicial precedents. However, the disallowance of interest under Rule 8D(2)(ii) was set aside for fresh examination to determine the actual expenditure incurred by the assessee.

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Issues:
1. Disallowance of unrealized foreign exchange loss
2. Disallowance of interest under Rule 8D(2)(ii) of the I.T. Rules

Issue 1: Disallowance of Unrealized Foreign Exchange Loss:
The appeal pertains to the disallowance of Rs.20,27,115 as unrealized foreign exchange loss for the assessment year 2008-09. The Assessing Officer (AO) disallowed the claim, considering it neither an accrued nor an actual loss. However, the Ld CIT(A) allowed the claim, citing the AS-11 and various judicial precedents, including the decision by the Special Bench of Tribunal and judgments of the Hon'ble Apex Court. The ITAT Mumbai upheld the decision of the Ld CIT(A), emphasizing the consistent accounting practice of the assessee and the compliance with AS-11. The Tribunal affirmed the order, noting the conscious decision-making process of the Ld CIT(A) based on established authorities.

Issue 2: Disallowance of Interest under Rule 8D(2)(ii) of the I.T. Rules:
The assessee contested the disallowance of interest amounting to Rs.99,537 under Rule 8D(2)(ii) of the I.T. Rules for the assessment year 2008-09. The assessee argued that the investments were made from own funds, not borrowed funds, hence no interest disallowance should apply. The Ld CIT(A) confirmed the disallowance, rejecting the applicability of a co-ordinate bench decision cited by the assessee. The ITAT Mumbai referred to a recent decision of the Punjab and Haryana High Court in CIT Vs. Deepak Mittal, emphasizing the onus on the assessee to prove expenditure incurred for earning tax-free income. The Tribunal found that the assessing officer had not considered all aspects, directing a fresh examination of the issue to determine the expenditure incurred by the assessee. Consequently, the appeal filed by the assessee was treated as allowed for statistical purposes, while the revenue's appeal was dismissed.

In summary, the ITAT Mumbai upheld the allowance of unrealized foreign exchange loss based on accounting standards and judicial precedents. However, the disallowance of interest under Rule 8D(2)(ii) was set aside for fresh examination to determine the actual expenditure incurred by the assessee.

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