Tribunal orders reevaluation of deduction disallowances, emphasizing accurate valuation for eligibility

The Tribunal allowed the appeal for statistical purposes, directing a fresh examination by the AO on the disallowance of deduction u/s 80JJA, disallowance made u/s 14A, and provision for mark to market loss on derivatives. The Tribunal found flaws in the AO's reasoning and directed a reevaluation, emphasizing the importance of valuing relevant items for deduction eligibility. The judgment was pronounced on February 6, 2020, by ITAT Bangalore.

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Issues:
1. Disallowance of deduction u/s 80JJA of the Act.
2. Disallowance made u/s 14A of the Act.
3. Disallowance of provision for mark to market loss on derivatives.

Issue 1 - Disallowance of deduction u/s 80JJA of the Act:
The assessee, engaged in software development, claimed deduction u/s 80JJA. The AO disallowed it, stating software unit employees are not workmen as per the Act. The CIT(A) upheld this. The AR argued that the deduction was claimed for a non-10AA unit, not covered under 80A(iv). Citing a similar case, the AR contended software professionals qualify as workmen under 80JJAA. The Tribunal found the AO's reasoning flawed and directed a fresh examination by the AO.

Issue 2 - Disallowance made u/s 14A of the Act:
The AO disallowed a sum under 14A, computed using Rule 8D(2)(iii), which the CIT(A) affirmed. The AR argued for excluding investments in foreign subsidiaries from the calculation. The Tribunal agreed, citing a Delhi Special Bench decision, directing the AO to recompute the disallowance by excluding foreign subsidiary investments.

Issue 3 - Disallowance of provision for mark to market loss on derivatives:
The AO disallowed the claim based on a CBDT circular, treating the loss as notional. The CIT(A) upheld this. The AR cited a precedent where losses on derivatives were allowed. The Tribunal noted the need to revalue all relevant items and directed the AO to reexamine the claim, emphasizing the importance of valuing trade payables, receivables, and derivatives for deduction eligibility. The matter was remanded to the AO for fresh consideration.

The appeal was allowed for statistical purposes, emphasizing the need for the assessee to be given a fair hearing. The judgment was pronounced on February 6, 2020, by the ITAT Bangalore.

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