Mark to Market Losses on open forward exchange contract is allowable

Pre-requisite to invoke the provisions of section 14A r.w.r.8D of the Rules is that the assessee should have claimed some expenditure against exempt income

assessee had not claimed any exempt income in its return.However he made disallowance of Rs. 1.25 crores(Rs. 1.19 crores interest expenditure + Rs.6.89 lakhs administrative expenses) and same was upheld by the FAA. The pre-requisite to invoke the provisions of section 14A r.w.r.8D of the Rules is that the assessee should have claimed some expenditure against exempt income.In the case under consideration, no exempt income was shown by the assessee in its return, so, there was no justification for making disallowance of any kind.The Hon’ble Delhi High Court in the case of Cheminvest (supra) has held as under :-

“The expression “does not form part of the total income” in section 14A of the Income-tax Act, 1961, envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year.”

Respectfully, following the above we allow first ground of appeal.

Mark to Market Losses on open forward exchange contract is allowable

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