2024 (1) TMI 1031 - AT - Income Tax

ITAT allows CSR deduction under section 80G, restricts bogus purchase addition to 2%, permits forex losses

ITAT Mumbai ruled on multiple issues in assessee's favor. For bogus purchases, addition restricted to 2% following precedent from assessee's own case. CSR ... Estimation of income - bogus purchases - HELD THAT:- Since the issue is exactly similar and grounds as well as the facts are also identical, respectfully following the above decision in assessee’s own case for the A.Y. 2014-15 & 2015-16 [2023 (5) TMI 358 - ITAT MUMBAI] we direct the AO to restrict the addition to 2% of the alleged bogus purchases for the year under consideration. Disallowance of deduction u/s 80G - CSR expense was disallowed u/s 37 and deduction was claimed under Chapter VI-A of the Act being 50% of eligible amount - HELD THAT:- We find that CIT(A) considered this aspect of the matter elaborately with reference to the submissions of the assessee and the averments in the Assessment Order and deleted the disallowance of deduction under section 80G - While deleting the disallowance CIT(A) has followed the decisions of Allegis Services (India) (P.) Ltd. [2020 (5) TMI 378 - ITAT BANGALORE] and the decision of Seafoods Pvt Ltd., v. CIT [2021 (11) TMI 1168 - ITAT MUMBAI] Various courts have held that donation on account of CSR Expenditure made to institutions registered under section 80G are eligible for deduction u/s 80G - Accordingly, we do not find any infirmity in the order of the Ld. CIT(A) in deleting the disallowance of deduction u/s 80G. Accordingly, ground raised by the revenue is dismissed. Disallowance of mark to market losses - Nature of loss - allowable business loss or not? - HELD THAT:- We observe from the record that identical issue is decided in assessee’s own case for the A.Y. 2011-12 has decided the issue in favour of assessee observing assessee has regular export business and in order to mitigate the forex exposure, it has booked the forward contract. At the end of the year, assessee has accounted for mark to market loss and profit in the pending forward contracts. In this year, assessee has incurred net loss. It is also observed that in the subsequent Assessment Years the assessee has accounted the net profit and the same was accepted by the revenue and charged to tax. The assessee is consistently following the method of accounting. Therefore, the net loss accounted by the assessee is supported by the export business carried on by the assessee. Therefore, in our view the loss claimed by the assessee is for the purpose of business and allowable business loss - Decided against revenue. Disallowance u/s 14A r.w.r. 8D - AO held that the administration activities carried by the assessee are towards making investments and assessee was asked why the above Rule 8D should not be considered - Assessee submitted that assessee has not earned any income and has not incurred any expenses and also not made any disallowance of expenditure relating to exempt income - HELD THAT:- AO asked the assessee why the assessee has not made any disallowance u/s 14A of the Act. In response assessee has clearly responded that it is not warranted. Considering all we do not see any reason to accept the submissions of the Ld.AR of the assessee that there is no satisfaction recorded in this case, as per the observations of the AO, the provisions of section 14A are applicable. Therefore, we reject the submissions made by the assessee. We observe that AO has disallowed adopting Rule 8D(2)(ii) of I.T. Rules and applied 1% of the average value of investments and we are not sure whether he has considered only those investments which has actually earned the exempt income. Accordingly, we direct the AO to consider only those investments which are actually earned exempt income. Accordingly, we direct the AO to disallow the expenses under section 14A as per our above said directions. Accordingly, this ground is allowed for statistical purpose. Issues Involved:1. Bogus Purchases2. Deduction under Section 80G3. Mark to Market Losses4. Disallowance of Education Cess and Employees Contribution to Provident Fund5. Disallowance under Section 14ASummary:1. Bogus Purchases:The revenue challenged the Ld. CIT(A)'s decision to restrict the addition to the Gross Profit (G.P.) basis rather than the entire purchases, citing the Supreme Court's decision in N.K. Proteins which held that the entire transaction should be considered bogus if found so. The assessee argued that the purchases were genuine and supported by evidence, and that the material was received and utilized in manufacturing. The Tribunal noted that in previous years, a similar issue was resolved by restricting the addition to 2% of the alleged bogus purchases. Following this precedent, the Tribunal directed the Assessing Officer to restrict the addition to 2% of the alleged bogus purchases for the year under consideration.2. Deduction under Section 80G:The revenue contended that the Ld. CIT(A) erred in allowing the deduction under Section 80G for CSR expenditures. The assessee argued that the CSR expenditures were donations to eligible institutions under Section 80G. The Tribunal upheld the Ld. CIT(A)'s decision, noting that various courts have held that donations made to institutions registered under Section 80G are eligible for deduction, even if they are CSR expenditures.3. Mark to Market Losses:The revenue argued that the mark to market losses should not be allowed as they are notional and cited CBDT Circular No. 3 of 2010. The assessee contended that the losses were real and incurred in the course of business, supported by the Supreme Court's decision in Woodward Governor India Pvt. Ltd. The Tribunal, following its previous decision in the assessee's own case, held that the mark to market losses were allowable as they were incurred in the regular course of business and consistently accounted for.4. Disallowance of Education Cess and Employees Contribution to Provident Fund:The assessee did not press these grounds during the hearing, and thus, they were dismissed as not pressed.5. Disallowance under Section 14A:The Assessing Officer disallowed 1% of the average value of investments under Section 14A, which was upheld by the Ld. CIT(A). The assessee argued that no expenditure was incurred to earn the exempt income and that the Assessing Officer did not record any satisfaction. The Tribunal directed the Assessing Officer to consider only those investments which actually earned exempt income and to disallow expenses accordingly under Section 14A.Conclusion:The revenue's appeal was dismissed, and the assessee's appeal was partly allowed. The Tribunal directed specific adjustments and upheld the Ld. CIT(A)'s decisions on key issues, ensuring consistency with previous rulings and relevant legal precedents.