M/s. Nagreeka Foils Ltd., , Kolkata V. ITO, Ward - 6(3), Kolkata , Kolkata

CO 46/KOL/2018

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 9891 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 5 month(s) 2 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 25-09-2019
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 23-04-2018
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ROBIN CHOUDHUR Y
• Assessee Lawyers: S D VERMA
• Keywords: Earning of tax free income; Speculation loss; Competent authority; Assessment record; Speculative transactions; TDS; Rule 8D
• Section: 5(2); 14A; 40(a)(ia); 43(5); 194C; 195; 201; 28

Judgement Text

1 ITA NO. 314/KOL/2018 & C.O. NO. 46/KOL/2018 M/S. NAGREEKA FOILS LTD., AY 2009-10 , B , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH: KOL KATA ( ) . . , . . ! , ' #$ ) [BEFORE SHRI P.M. JAGTAP, VICE PRESIDENT (KZ) & SHR I A. T. VARKEY, JM] I.T.A. NO. 314/KOL/2018 ASSESSMENT YEAR: 2009-10 ITO, WARD 6(3), KOLKATA VS. M/S. NAGREEKA FOILS LTD. [PAN: AAACN 8548 H] APPELLANT RESPONDENT C.O. NO. 46/KOL/2018 (ARISING OUT OF ITA NO. 314/KOL/2018) ASSESSMENT YEAR: 2009-10 M/S. NAGREEKA FOILS LTD. [PAN: AAACN 8548 H] VS. ITO, WARD 6(3), KOLKATA CROSS-OBJECTOR RESPONDENT DATE OF HEARING 10.07.2019 DATE OF PRONOUNCEMENT 25.09.2019 FOR THE REVENUE SHRI ROBIN CHOUDHURY, ADDL. CIT, S R. DR FOR THE ASSESSEE SHRI S.D. VERMA, ADVOCATE ORDER PER SHRI A.T.VARKEY, JM THIS APPEAL PREFERRED BY THE REVENUE AND CO BY ASSE SSEE ARE AGAINST THE ORDER OF LD. CIT(A)-5, KOLKATA DATED 05.12.2017 FOR AY 2009- 10. 2. THE FIRST GROUND OF THE REVENUE IS AGAINST THE A CTION OF THE LD. CIT(A) IN DELETING THE ADDITION OF RS. 34,50,335/- U/S 14A OF THE INCO ME TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS THE ACT) READ WITH RULE 8D OF THE INCOME TAX RULES, 1962 (HEREIN AFTER THE RULES) 3. BRIEF FACTS OF THE CASE IS THAT THE AO NOTED THA T THE ASSESSEE HAS EARNED DIVIDEND OF RS. 48,08,239/-. THE AO ASKED THE ASSESSEE ABOUT TH E EXPENDITURE INCURRED FOR EARNING 2 ITA NO. 314/KOL/2018 & C.O. NO. 46/KOL/2018 M/S. NAGREEKA FOILS LTD., AY 2009-10 THIS EXEMPT INCOME AND THE ASSESSEE REPLIED THAT IT HAS ALREADY DISALLOWED SUO-MOTO THE EXPENDITURE OF RS. 3,32,031/- WHICH WAS ON ACCOUNT OF DE-MAT CHARGES AND STT PAID. HOWEVER, ACCORDING TO THE AO, THE ASSESSEE HAS NOT DISALLOWED THE EXPENDITURE FOR EARNING THE EXEMPT INCOME AS PROVIDED U/S 14A OF TH E ACT READ WITH RULE 8D. THUS HE MADE A TOTAL DISALLOWANCE OF RS. 46,20,864/-. BREAK -UP OF IT IS AS UNDER: I. RULE 8D(2)(I) RS. 60,193/- II. RULE 8D(2)(II) RS. 26,05,967/- III. RULE 8D(2)(III) RS. 19,54,704/- TOTAL RS. 46,20,864/- 4. AGGRIEVED BY THE AFORESAID ACTION OF THE AO, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A) WHO WAS PLEASED TO DELETE COM PUTATION MADE BY AO UNDER RULE 8D(2) OF RS. 26,05,967/- AND RESTRICTED THE DISALLO WANCE UNDER RULE 8D(2)(III) AT RS. 11,10,336/-. AGGRIEVED BY THE AFORESAID ACTION OF T HE LD. CIT(A) GIVING PARTIAL RELIEF TO THE ASSESSEE, THE REVENUE IS BEFORE US. 5. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE R ECORDS. WE NOTE THAT THE ASSESSEE COMPANY RECEIVED DIVIDEND INCOME OF RS. 48,08,239/- AND HAD SUO MOTO DISALLOWED AN AMOUNT OF RS. 3,32,031/- (DEMAT CHARGES RS. 60,193/ - AND STT RS. 2,71,838/-). THE AO DID NOT AGREE TO THE PLEA OF THE ASSESSEE THAT OTHE R THAN THE SUO-MOTO DISALLOWANCE MADE BY THE ASSESSEE THERE WAS NO OTHER EXPENDITURE FOR EARNING THIS EXEMPT INCOME AND WAS PLEASED TO APPLY RULE 8D AND COMPUTED A SUM OF RS. 46,20,864/- AND DISALLOWED THE SAME. AGGRIEVED THE ASSESSEE PREFERRED AN APPEAL BE FORE THE LD. CIT(A) WHO GAVE PARTIAL RELIEF BY PASSING THE IMPUGNED ORDER AND THEREBY DE LETING ADDITION MADE UNDER RULE 8D(2)(II) OF RS. 26,05,967/- AND RESTRICTED THE DIS ALLOWANCES MADE UNDER RULE 8D(2)(III) AT RS. 11,30,336/-. AGAINST THE RELIEF GRANTED BY T HE LD. CIT(A), THE REVENUE HAS PREFERRED THIS GROUND OF APPEAL. IN RESPECT OF THE ACTION OF THE LD. CIT(A) IN DELETING THE ADDITION MADE APPLYING RULE 8D(2)(II) OF RS. 26,05, 967/- WE NOTE THAT THE AO HAS MADE THE DISALLOWANCE OF INTEREST BY APPLYING THE FORMUL A GIVEN IN RULE 8D(2)(II) BY TAKING NOTE THE ASSESSEE-COMPANY IN ITS P&L A/C HAS DEBITED TO TAL AMOUNT OF INTEREST OF RS. 61,18,859/- BY NETTING OF INTEREST RECEIVED AS THE ASSESSEE FAILED TO PROVE PRODUCTION OF MATERIAL THAT NO AMOUNT OF INTEREST BEARING FUNDS WERE UTILI ZED FOR MAKING INVESTMENTS SHOWN IN THE 3 ITA NO. 314/KOL/2018 & C.O. NO. 46/KOL/2018 M/S. NAGREEKA FOILS LTD., AY 2009-10 BALANCE SHEET AS ON 31.03.2008 AND 31.03.2009 SINCE THE SAID INVESTMENTS WERE MADE IN THE EARLIER YEARS. THEREFORE, THE TOTAL AMOUNT OF INTER EST DEBITED IS TAKEN FOR CALCULATION OF DISALLOWANCE OF INTEREST. THUS THE AO ADOPTED THE AMOUNT OF RS. 61,18,859/- AS A TOOK DISALLOWANCE OF INTEREST BY APPLYING FORMULA AX B/C AND COMPUTED THE RESULTANT FIGURE OF RS. 26,05,967/- WHICH WAS DISALLOWED. ON APPEAL, THE LD. CIT(A) TOOK NOTE OF THE FACT THAT THE ASSESSEE HAD SUFFICIENT FUNDS FROM ITS OWN SOURCE TO MAKE INVESTMENTS IN SHARES AND SECURITIES WHICH IN TURN YIELDED THE EXEMPT INC OME. THE CHART SHOWING THAT THE ASSESSEE HAVE OWN FUNDS CAN BE DEPICTED AS UNDER: AS ON 31.03.2008 AS ON 31.03.2009 TOTAL INVESTMENT MADE IN SHARES RS. 39,74,46,369/- RS. 38,44,35,311/- ASSESSEES OWN FUND RS. 65,96,16,868/- RS. 69,74,52 ,257/- 6. WE NOTE THAT THE LD. CIT(A) HAS GIVEN A FINDING OF FACT THAT NO FRESH INVESTMENT WAS MADE BY THE ASSESSEE IN THE RELEVANT ASSESSMENT YEAR AND THAT INVESTMENT IN SHARES RELATE TO EARLIER YEARS I.E. IN AY 2008-09. AND ALS O THAT THE ASSESSEE HAD SUFFICIENT FUNDS OF ITS OWN TO INVEST TO EARN THE EXEMPT INCOME AS S HOWN IN THE CHART SUPRA. THIS FINDING OF FACT HAS NOT BEEN CHALLENGED BY THE REVENUE IN I TS GROUNDS OF APPEAL WHILE CHALLENGING THE ACTION OF THE LD. CIT(A). THEREFORE, THIS FINDI NG OF FACT GETS CRYSTALLIZED AND, THEREFORE, SINCE THE ASSESSEE HAD SUFFICIENT FUNDS OF ITS OWN TO INVEST TO EARN EXEMPT INCOME AS SHOWN IN THE CHART SUPRA, THE IMPUGNED OR DER OF LD CIT(A) IS CORRECT IN THE LIGHT OF THE RATIO LAID BY THE HONBLE JURISDICTION AL HIGH COURT DECISION IN CIT VS BRITANNIA INDUSTRIES AS RIGHTLY REFERRED TO BY THE LD. CIT(A) AT PAGE 10 WHEREIN THE HONBLE HIGH COURT HELD AS UNDER: IF IT IS ESTABLISHED THAT THE PAYMENT WAS MADE FR OM THE MIXED ACCOUNT AND THE ASSESSEE HAD SUFFICIENT FUND THEN IT IS TO BE PRESU MED THAT THE PAYMENT WAS MADE OUT OF THE ASSESSEES OWN FUND AND THAT THE BORROWED CA PITAL WAS NOT SIPHONED OUT. 7. MOREOVER, WE NOTE THAT THE LD. CIT(A) HAS ALSO T AKEN NOTE OF THE FACT THAT THE AO IN HIS ASSESSMENT ORDER HAD RELIED UPON THE DECISIO N OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF DHANUKA & SONS VS CIT (339 ITR 319) FOR DISALLOWING INTEREST UNDER RULE 8D(2)(II). HOWEVER, THE LD. CIT(A) HAS RIGHTLY TAK EN NOTE THAT LATER THE HONBLE THE CALCUTTA HIGH COURT IN THE CASE OF CIT VS RASOI LTD . IN ITA NO. 109 OF 2016 DATED 4 ITA NO. 314/KOL/2018 & C.O. NO. 46/KOL/2018 M/S. NAGREEKA FOILS LTD., AY 2009-10 15.02.2017 HAD CONSIDERED ITS OWN DECISION IN DHANU KA & SONS LTD. (SUPRA) AND ALSO THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F CIT VS HDFC BANK (383 ITR 529) AND WAS PLEASED TO HOLD THAT WHEN THE ASSESSEE S CAPITAL, PROFIT RESERVE, SURPLUS AND CURRENT ACCOUNT DEPOSIT WERE HIGHER THAN THE INVEST MENT IN THE TAX FREE SECURITY, THEN IT WOULD HAVE TO BE PRESUMED THAT THE INVESTMENT MADE BY THE ASSESSEE WAS OUT OF THE INTEREST FREE FUNDS. AND THEREAFTER THE HONBLE CAL CUTTA HIGH COURT IN RASOI LTD. (SUPRA) HAD CONFIRMED THE DECISION OF THE TRIBUNAL IN RASOI (SUPRA) WHEREIN THE TRIBUNAL HELD AS FOLLOWS: WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH F ACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT NOW THE REVENUE COULD NOT ESTABL ISH THAT THE INVESTMENTS MADE IN SHARES GIVING EXEMPTED INCOME IS OUT OF BORROWED FU NDS ON WHICH INTEREST IS PAID BY ASSESSEE. THERE IS NO NEXUS WHATSOEVER. ON SPECIFIC QUERY LD. SR. DR COULD NOT CONTROVERT THAT THE ASSESSEE HAS MADE IN INVESTMENT IN SHARES GIVING EXEMPT INCOME OUT OF OWN FUNDS WHICH IS AT ABOUT 2429 LACS AND IN VESTMENT IS AT RS. 365 LACS ONLY. ONCE THIS FACT HAS NOT BEEN DENIED AND CIT(A) HAS C ATEGORICALLY OBSERVED THAT THE ASSESSEE HAS MADE INVESTMENT IN SHARES OUT OF ITS O WN FUNDS NO DISALLOWANCE CAN BE ATTRIBUTED QUA THE INTEREST PAID ON BORROWED FUNDS FOR INVESTING THE SAME IN INTEREST FREE FUNDS. IN VIEW OF THE ABOVE, WE CONFIRM THE OR DER OF LD. CIT(A) ON THE COMMON ISSUE 8. IN THE LIGHT OF THE AFORESAID FACTS, THE LD. CIT (A) TAKING NOTE THAT SINCE IN THIS ASSESSMENT YEAR NO INTEREST BEARING FUNDS HAVE BEEN INVESTED IN THE INVESTMENTS WHICH HAVE GENERATED THE TAX EXEMPT DIVIDEND INCOME, TH E DISALLOWANCE MADE BY THE AO U/S 14A READ WITH RULE 8D(2)(II) TO THE TUNE OF RS. 26, 05,967/- WAS DELETED, WHICH ACTION OF THE LD. CIT(A) FOR THE REASONS AFORE-STATED IS UPHE LD. THEREFORE THIS ACTION OF LD. CIT(A) TO DELETE RS. 26,05,967/- IS CONFIRMED. 9. GROUND NO. 2 OF REVENUE IS AGAINST THE ACTION OF THE LD. CIT(A) IN HOLDING THAT THE FOREIGN EXCHANGE LOSS OF RS. 1,49,10,140/- AS B USINESS LOSS INSTEAD OF SPECULATIVE LOSS. 10. BRIEF FACTS AS NOTED BY AO: THAT THE ASSESSEE COMPANY IN ITS P/L A/C. SCHEDULE M UNDER HEAD ESTABLISHMENT AND OTHER EXPENSES SUB HEAD FOREX LOSSES HAS DEB ITED AN AMOUNT OF RS. 1,49,10,140/-. DURING THE COURSE OF HEARING THE A/R OF THE ASSESSEE COMPANY WAS ASKED TO EXPLAIN THE NATURE OF SAID LOSS ALONG WITH DETAILS I.E. BANK STATEMENT, COPY OF 5 ITA NO. 314/KOL/2018 & C.O. NO. 46/KOL/2018 M/S. NAGREEKA FOILS LTD., AY 2009-10 CONTRACT AND OTHER SUPPORTING IF ANY. HE WAS FURTHE R ASKED TO SHOW CAUSE AS TO WHY THE LOSS ON FOREIGN EXCHANGE FLUCTUATION SHOULD NOT BE TREATED AS 'SPECULATION LOSS' IN VIEW OF THE PROVISION OF SECTION 43(5)(D) OF I.T . ACT, 1961. THE LD. A/R OF THE ASSESSEE COMPANY EXPLAINED THE NATURE OF SAID LOSSE S VIDE HIS WRITTEN SUBMISSION DATED 12.12.2011, AS APPARENT FROM THE SUBMISSION O F THE ASSESSEE, THE LOSS IS MAINLY ON ACCOUNT OF CANCELLATION OF THE FORWARD CONTRACTS WITH BANK RESULTING INTO NON DELIVERY OF ANY COMMODITY OR FOREIGN CURRENCY. SIMI LARLY FORWARD CONTRACTS IN FOREIGN CURRENCY WERE ALSO SETTLED WITHOUT ACTUAL D ELIVERY. AS PER SECTION 43(5) OF I.T ACT, 1961 'SPECULATIVE TRANSACTION' MEANS A TRANSAC TION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY, INCLUDING STOCKS AND SHARES, IS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DEL IVERY OR TRANSFER OF COMMODITY OR SCRIPTS.' FOR DERIVATIVE, REFERRED TO IN CLAUSE (AC ) OF SECTION 2 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 ( 42 OF 1956) CARR IED OUT IN A RECOGNIZED STOCK EXCHANGE - A DEEMING PROVISION IN CLAUSE (D ) OF SE CTION 43(5) WAS BROUGHT IN THE STATUTES MERELY THE TRANSACTION IN DERIVATIVES COVE RED BY THAT CLAUSE IS DEEMED TO BE NON SPECULATIVE. IN THE INSTANT CASE, THE DERIVATIVE WHICH INCLUDES ANY TYPE OF CONTRACTS OR REVERSE CONTRACT IN CONNECTION WITH FOREX IS NOT COVERED BY CLAUSE (D) OF THE SECTION 43(5). THEREFORE, THE ABOVE TRANSACTIONS OF THE ASSESSEE C OMPANY ARE COVERED 'SPECULATIVE IN NATURE' AND HENCE DISALLOWED AS 'NORMAL LOSSES'. THE LD. A/R. OF THE ASSESSEE COMPANY WAS FURTHER GIVEN OPPORTUNITY ON HIS OWN RE QUEST VIDE ORDER SHEET DATED 14.12.2011 TO EXPLAIN AS TO WHY THE DISALLOWANCE OF FOREX FLUCTUATION LOSSES ON ACCOUNT OF CANCELLED FORWARD CONTRACTS, AS NORMAL B USINESS LOSS, BE MADE. THE LD. A/R. REITERATED HIS EARLIER SUBMISSION. AS OBSERVED FROM THE DETAILS, BOOKING OF FORWARD CO NTRACTS AND INCURRED FOREX LOSS DUE TO CANCELLATION OF SUCH CONTRACTS WITHOUT DELIV ERY OF THE ACTUAL GOODS CANNOT BE TREATED AS BUSINESS LOSS'. SINCE NO ACTUAL TRANSACT ION /DELIVERY OF FOREIGN CURRENCY WERE MADE RATHER THE FORWARD CONTRACTS WERE SETTLED WITHOUT ANY ACTUAL DELIVERY OF FOREIGN CURRENCY WHICH SHOWS THAT THE ASSESSEE WAS TRYING TO SPECULATE THE RATES OF THE CGRRENCIES. THE LD. A/R. FAILED TO PRODUCE ANY PLAUSIBLE EXPLANATION IN RESPECT OF THE SPECIFIC QUERY REQUIRING TO CLARIFY AS TO WHY S UCH LOSS SHOULD NOT BE DISALLOWED IN VIEW OF THE CBDT'S INSTRUCTION NO. 3/2010. IN VIEW OF THE ABOVE DISCUSSION AND THE PROVISIONS OF SECTION 43(5)(D) OF THE ACT THE CLAIM OF THE ASSESSEE IS LIABLE TO BE DISALLOWED AS 'BUSINESS LOSS' AND TREATED AS 'SPECU LATION LOSS' IN NATURE AND THE AO WAS PLEASED TO DISALLOW RS. 1,49,10,140/-. 11. AGGRIEVED THE ASSESSEE PREFERRED AN APPEAL BEFO RE THE LD. CIT(A), WHO WAS PLEASED TO DELETE THE DISALLOWANCE. AGGRIEVED THE R EVENUE IS BEFORE US. 6 ITA NO. 314/KOL/2018 & C.O. NO. 46/KOL/2018 M/S. NAGREEKA FOILS LTD., AY 2009-10 12. HAVING HEARD BOTH THE SIDES AND TAKING NOTE OF THE FACTS NOTED BY THE AO (SUPRA) ARE NOT REPEATED FOR THE SAKE OF BREVITY. WE NOTE T HAT THE ASSESSEE IS ENGAGED IN THE EXPORT OF COTTON YARN AND VARIOUS MERCHANDISES. SINCE EXPO RT IS A SUBSTANTIAL PART OF ASSESSEES TURNOVER AND WHICH COMPRISES OF SALES BY WAY OF EXP ORT OF GOODS OUT OF INDIA. TO AVOID ANY POSSIBLE LOSSES ON ACCOUNT OF PROBABLE FLUCTUAT IONS IN EXCHANGE RATE IN FOREIGN CURRENCY, ASSESSEE CARRIED OUT HEDGING OF FOREIGN C URRENCY BY WAY OF FORWARD CONTRACTS/OPTIONS/DERIVATIVES. THE ASSESSEE HAS EXP LAINED THE PROCESS OF HEDGING OF FOREX LOSSES AS UNDER: I. ASSESSEE COMPANY RECEIVES AN ORDER FOR EXPORT O F GOODS FROM OVERSEAS BUYERS. II. BASED ON EXPORT ORDER, THE ASSESSEE COMPANY MA KES AN APPLICATION FOR BOOKING OF FORWARD PURCHASE CONTRACT EXPORTS WITH ITS BANKE R AT A PREDETERMINED EXCHANGE RATE. III. THE EXPIRY OF THE FORWARD CONTRACT COINCIDES W ITH THE MONTH OF APPELLANTS PROPOSED EXPORT SHIPMENT. IV. ONCE THE EXPORT CONSIGNMENT IS SHIPPED, THE ASS ESSEE COMPANY APPROACHES ITS BANKERS TO HONOR THE FORWARD CONTRACT. V. UPON HONORING OF THE CONTRACT BY THE BANKER, THE ASSESSEE COMPANY RECEIVES THE AMOUNT OF FOREIGN EXCHANGE AS MENTIONED IN THE CONT RACT AGREEMENT AT THE PRE- DETERMINED EXCHANGE RATE AND THUS AVOID ALL POSSIBL E LOSSES ON ACCOUNT OF PROBABLE FLUCTUATIONS IN EXCHANGE RATE OF FOREIGN CURRENCY. VI. AT TIMES IT ALSO HAPPENS THAT THE EXPORT ORDERS ARE CANCELLED BY THE OVERSEAS BUYERS DUE TO VARIOUS MARKET FACTORS AND CONSEQUENT LY THE ASSESSEE COMPANY ALSO HAS TO CANCEL THE FORWARD PURCHASE CONTRACTS ENTERE D INTO WITH ITS BANKERS. VII. IF THE FORWARD PURCHASE CONTRACTS ARE NOT CANC ELLED, THEN IT IS A POSSIBILITY THAT THE LOSSES ON ACCOUNT OF EXCHANGE DIFFERENCE MAY BE MUCH HIGHER ON MATURITY DATE OF THE CONTRACT AND THUS IN ORDER TO MINIMIZE THESE EX CHANGE LOSSES, THE FORWARD PURCHASE CONTRACTS WERE CANCELLED BY THE ASSESSEE C OMPANY FOLLOWING THE CONCEPT OF CONSERVATISM AND SOUND BUSINESS POLICIES TO MINIMIZ E BUSINESS LOSSES. VIII. THIS CANCELLATION OF FORWARD CONTRACT MAY RES ULT IN A GAIN/LOSS TO THE ASSESSEE COMPANY WHICH IS PART AND PARCEL OF THE BUSINESS AC TIVITY OF EXPORT OF GOODS AND THUS IS A BUSINESS GAIN / LOSS. 13. THE LD. AR URGED BEFORE US THAT A LOSS INCURRED BY AN ASSESSEE NEEDS TO ALLOWED AS A BUSINESS LOSS AS PER SECTION 28 OF THE ACT IF THE FOLLOWING CONDITIONS ARE SATISFIED. FIRSTLY IT SHOULD ARISE OR SPRING DIRECTLY FROM OR BE INCIDENTAL TO THE CARRYING ON OF A BUSINESS OPERATION. SECONDLY THERE SHOULD BE DIRECT OR PROXIMATE NEXUS BETWEEN THE BUSINESS OPERATION AND THE LOSS. 7 ITA NO. 314/KOL/2018 & C.O. NO. 46/KOL/2018 M/S. NAGREEKA FOILS LTD., AY 2009-10 THIRDLY IT SHOULD BE A REAL LOSS AND NOT NOTIONAL O R FICTITIOUS. FOURTHLY IT SHOULD BE A LOSS ON REVENUE ACCOUNT AND NO ON CAPITAL ACCOUNT. FIFTHLY IT MUST HAVE ACTUALLY ARISEN AND BEEN INCUR RED, NOT MERELY ANTICIPATED AS CERTAIN TO OCCUR IN FUTURE AND SIXTHLY THERE SHOULD BE NO PROHIBITION IN THE ACT, EXPRESS OR IMPLIED AGAINST THE DEDUCTIBILITY THEREOF. 14. THEREFORE, ACCORDING TO LD. AR, SINCE ALL THE A FORESAID CONDITIONS HAVE BEEN SATISFIED BY THE ASSESSEE COMPANY, A SUM OF RS. 1,4 9,10,140/- CLAIMED AS BUSINESS LOSS WAS RIGHTLY DELETED BY THE LD. CIT(A) AND HE RELIED ON THE FOLLOWING DECISION OF THE MUMBAI TRIBUNAL IN JAIMIN JEWELLERY EXPORTS (P) LTD . VS ACIT-5(2) MUMBAI (2014) 43 TAXMANN.COM 380 ITAT MUMBAI BENCH J FORWARD CON TRACTS WHICH ARE INTEGRAL PART OR INCIDENTAL TO CORE BUSINESS OF IMPORT/EXPORT OF DIAMONDS, IN PRINCIPLE, CONSTITUTE HEDGING, TRANSACTIONS AND NO SPECULATIVE CONTRACTS SECTION 43(5) OF THE INCOME TAX ACT, 1961 SPECULATIVE TRANSACTIONS (FORWARD CONTRACT) ASSESSMENT YEAR 2009-10 WHETHER FOREIGN EXCHANGE LOSS INCURRED BY ASSESSEE ON ACCOUNT OF ENTERING INTO FORWARD CONTRACTS WITH BANKS FOR THE PURPOSE OF HEDGING LOS S IN CONNECTION WITH HIS IMPORT/EXPORT BUSINESS OF DIAMONDS COULD NOT BE HELD TO BE A SPEC ULATIVE LOSS, IT WOULD BE A BUSINESS LOSS WHICH CAN BE SET OFF AGAINST PROFIT AND GAINS OF BUSINESS HELD, YES (PARA 120 [IN FAVOUR OF ASSESSEE].WE NOTE THAT SIMILAR ISSUE I.E. FOREIGN EXCHANGE LOSS CAME UP BEFORE THE MUMBAI TRIBUNAL IN THE CASE OF LONDON STAR DIAM OND CO (I) PVT. LTD. VS DCIT RANGE 5(2) ITA NO. 6169/M/2012 ASSESSMENT YEAR 20 09-10 [D-BENCH MUMBAI] WHEREIN BY ORDER DATED 11.10.2013 THE TRIBUNAL TOOK THE SAME VIEW AS THAT OF LD. CIT(A). IN THAT CASE THE FACTS OF THE CASE WAS THAT THE ASSESSEE WAS AN EXPORTER OF DIAMONDS WHICH ENTERED INTO FORWARD CONTRACTS WITH BANKS TO HEDGE THE EXCHANGE LOSS, IF ANY, IN RESPECT OF THE OUTSTANDING RECEIVABLE IN FO REIGN CURRENCY. THE ASSESSEE SUFFERED A LOSS OF RS. 4.69 CRORE ON ACCOUNT OF THE MATURITY & PREMATURE CANCELLATION OF THE SAID FORWARD CONTRACT. THE AO & CIT(A) HELD THAT THE FOR WARD CONTRACTS CONSTITUTED A SPECULATIVE TRANSACTION U/S 43(5) AND THAT THE LO SS SUFFERED THEREON WAS A SPECULATIVE 8 ITA NO. 314/KOL/2018 & C.O. NO. 46/KOL/2018 M/S. NAGREEKA FOILS LTD., AY 2009-10 LOSS WHICH COULD NOT BE SET OFF AGAINST THE OTHER INCOME. ON APPEAL BY THE ASSESSEE TO THE TRIBUNAL, THE TRIBUNAL HELD AS UNDER: THOUGH A FORWARD CONTRACT FOR PURCHASE OR SALE OF FOREIGN CURRENCY FALLS IN THE DEFINITION OF SPECULATING TRANSACTION U/S 43(5) A S IT IS SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY, IT CA NNOT BE REGARDED AS CONSTITUTING A SPECULATION BUSINESS UNDER EXPLANATION 2 TO SECTI ON 28. A FORWARD CONTRACT, ENTERED INTO WITH BANKS FOR HEDGING LOSSES DUE TO FOREIGN E XCHANGE FLUCTUATIONS ON THE EXPORT PROCEEDS, IS IN THE NATURE OF A HEDGING CONTRACT AND IS INTEGRAL OR INCIDENTAL TO THE EXPORT ACTIVITY OF THE ASSESSEE AND CANNOT BE CONSI DERED AS AN INDEPENDENT BUSINESS ACTIVITY. THEREFORE, THE LOSSES OR GAINS CONSTITUTE BUSINESS LOSS OR GAINS AND DO NOT ARISE FROM SPECULATION ACTIVITIES. THE FACT THAT THERE IS A PREMATURE CANCELLATION OF THE FORWARD CONTRACT DOES NOT ALTER THE NATURE OF THE T RANSACTION. THERE IS ALSO NO REQUIREMENT IN THE LAW THAT THERE SHOULD A 1:1 CORR ELATION BETWEEN THE FORWARD CONTRACTS DOES NOT EXCEED THE VALUE OF THE INVOICES , THE LOSS HAS TO BE TREATED AS A BUSINESS LOSS (SOORA) MULL MAGARMULL 129 ITR 169 (C AL), BADRIDAS GAURIDU 261 ITR 256 (BOM), PANCHAMAHAL STEEL 215 TAXMAN 140 (GUJ) A ND FRIENDS AND FRIENDS SHIPPING (GUJ) FOLLOWED; CONTRARY VIEW IN S. VINODK UMAR DIAMONDS (ITAT MUM) REFERRED. 15. THUS WE NOTE THAT THE ISSUE BEFORE US IS NO LON GER RES INTEGRA AND THE ACTION OF THE LD. CIT(A) IS IN ACCORDANCE TO THE SETTLED JUDICIAL PRECEDENTS ON THE ISSUE. TAKING NOTE THE AFORESAID JUDICIAL PRECEDENTS AND THE LAW INVOL VED ON THE ISSUE AS WELL AS TAKING NOTE OF THE FACTS INVOLVED IN THE CLAIM MADE BY THE ASSE SSEE, WE ARE OF THE OPINION THAT THE LD. CIT(A) HAS RIGHTLY APPRECIATED THE FACTS AND THE LA W INVOLVED ON THE ISSUE IN HAND AND, THEREFORE, WE UPHOLD THE IMPUGNED DECISION OF LD. C IT(A) AND DISMISS THE APPEAL OF THE REVENUE. THUS THE REVENUE APPEAL STANDS DISMISSED. 16. COMING TO THE CROSS-OBJECTION OF THE ASSESSEE W HICH IS AGAINST THE ACTION OF THE LD. CIT(A) IN CONFIRMING THE ADDITION OF RS. 11,57, 814/- U/S 40(A)(IA) OF THE ACT. THE FACTS ON THIS ISSUE AS NOTED BY AO IS THAT: THE ASSESSEE COMPANY IN ITS P/L A/C HAS DEBITED AN AMOUNT OF RS. 1,18,13,857/- UNDER HEAD FREIGHT AND TRANSPORTATION CHARGES IN SCHEDULE-L . DURING THE COURSE OF HEARING THE A/R OF THE ASSESSEE WAS ASKED TO PRODUCE THE TDS COMPLIANC E CHART. ON PERUSAL OF THE DETAILS OF SUCH 9 ITA NO. 314/KOL/2018 & C.O. NO. 46/KOL/2018 M/S. NAGREEKA FOILS LTD., AY 2009-10 PARTY-WISE PAYMENTS AND TDS THEREON, IT WAS OBSERVE D THAT THE ASSESSEE COMPANY HAD NOT DEDUCTED TAX AT SOURCE ON THE FOLLOWING PAYMENTS. PARTY NAME TOTAL AMOUNT SERVICE CHARGE INTERLINE GLOBAL LOGISTICS (P) LTD. RS. 2,53,959/- RS. 34,876/- JEENA & CO. RS. 7,00,641/- RS. 48,562/- PIVOTAL SHIPPING & LOGISTIC (P) LTD. RS. 1,19,270/- SEASKY CARGO & TRAVELS (P) LTD. RS. 1,15,997/- JAMNAGAR ROADWAYS (P) LTD. RS. 27,365/- GOA EXPRESS CARGO (P) LTD. RS. 24,020/- DURING THE COURSE OF HEARING VIDE ORDER SHEET DATED 07.12.2011 THE LD. AR WAS ASKED TO EXPLAIN AS TO WHY THE TDS WAS NOT DEDUCTED ON SAID PAYMENTS. THE AR EXPLAINED AND THESE PAYMENTS WERE MADE TO FOREIGN S HIPPING COMPANIES. ACCORDINGLY THE ASSESSEE WAS FURTHER ASKED TO SUBMI T THE COPY OF THE CERTIFICATES FOR NON DEDUCTION OF TDS ISSUED BY THE COMPETENT AUTHOR ITY. THE LD. AR COULD NOT PRODUCE THE COPY OF SUCH CERTIFICATES. IN SUCH CIRC UMSTANCES THE LD. AR WAS FURTHER SPECIFICALLY ASKED VIDE ORDER SHEET DATED 14.12.201 1 TO SHOW CAUSE AS TO WHY THE CLAIM OF THE PAYMENT OF THE FREIGHT TO THE ABOVE CI TED PARTIES BE DISALLOWED U/S 40A(IA) OF THE I.T. ACT, 1961 AS IT IS DIFFICULT TO UNDERSTAND AS ON WHAT GROUND THE CLAIM OF THE ASSESSEE BE ALLOWED. THE SUBMISSION OF THE ASSESSEE THAT THE CIRCULAR NO. 723 OF CBDT PROVIDES THAT THE PROVISION OF SECTION 194C IS NOT APPLICABLE IN HIS CASE IS NOT APPEARS TO BE ACCEPTABLE AS BECAUSE IN SUCH CIRCUMSTANCES THE FOREIGN SHIPPING COMPANIES ARE ISSUED CERTIFICATES FROM THE COMPETENT AUTHORITY (DIT, INTERNATIONAL TAXATION) WHICH PROVIDES THAT TAX IS NOT REQUIRED TO BE DEDUCTED AT SOURCE ON THE PAYMENTS MADE TO SUCH FOREIGN SHIPPIN G COMPANIES. HERE IN THE INSTANT CASE AFTER GIVING ADEQUATE OPPORTUNITY, THE LD. AR COULD NOT PRODUCE COPY OF SUCH CERTIFICATES FOR VERIFICATION. THEREFORE, IN T HE WANT OF ANY DOCUMENTARY EVIDENCES WHICH CAN PROVE THAT THE ABOVE CITED PAYM ENTS WERE MADE TO C&F AGENTS AS REIMBURSEMENT OF EXPENSES AND FURTHER IN THE WAN T OF COPY OF CERTIFICATES FOR NON- DEDUCTION OF TDS, THE CLAIM OF THE ASSESSEE IS DISA LLOWED AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE U/S 40A(IA) OF THE ACT AND D ISALLOWED RS. 11,57,814/-. 17. AGGRIEVED BY THE AFORESAID ACTION OF AO, THE AS SESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A) WHICH WAS DISMISSED BY HOLDING AS UN DER: 5.2. I HAVE CONSIDERED THE SUBMISSION OF THE APPEL LANT AND ALSO PERUSED THE RELEVANT ASSESSMENT RECORDS. THE FOREIGN COMPANIES ARE ISSUE D CERTIFICATES FROM THE COMPETENT AUTHORITY (DIT, INTERNATIONAL TAXATION) W HICH PROVIDES THAT THE TAX IS NOT REQUIRED TO BE DEDUCTED AT SOURCE ON THE PAYMENTS M ADE TO SUCH FOREIGN COMPANIES. HOWEVER, THE APPELLANT COULD NOT PRODUCE ANY SUCH C ERTIFICATE FOR VERIFICATION. THE AO THEREFORE, HAD DISALLOWED PAYMENTS U/S 40(A)(IA) . IN THE CASE OF PAYMENTS MADE 10 ITA NO. 314/KOL/2018 & C.O. NO. 46/KOL/2018 M/S. NAGREEKA FOILS LTD., AY 2009-10 TO THE C&F AGENTS OF NON-RESIDENT SHIPPING COMPANIE S THE APPELLANT HAD SUBMITTED THAT NO TDS DEDUCTIBLE AS THE COMPANIES HAD INCLUDE D PAYMENT RECEIVED FROM THE APPELLANT IN THE INCOME TAX RETURN. THE CONTENTION OF THE APPELLANT IS NOT SUPPORTED BY ANY CONCRETE EVIDENCE. THE APPELLANT HAS NOT FUR NISHED ACKNOWLEDGEMENT OF INCOME TAX RETURN OF THE DEDUCTEE AND SELF DECLARAT ION THAT THEY HAD INCLUDED THE AMOUNT ON WHICH TDS WAS SUPPOSED TO BE DEDUCTED, IN THEIR INCOME TAX RETURN. REFERENCE MAY BE MADE TO THE PROVISO TO SECTION 201 OF THE I.T. ACT WHICH READS AS FOLLOWS: PROVIDED THAT ANY PERSON, INCLUDING THE PRINCIPLE OFFICER OF A COMPANY, WHO FAILS TO DEDUCT THE WHOLE OR ANY PART OF THE TAX IN ACCORDAN CE WITH THE PROVISIONS OF THIS CHAPTER ON THE SUM PAID TO A RESIDENT OR ON THE SUM CREDITED TO THE ACCOUNT OF A RESIDENT SHALL NOT BE DEEMED TO BE AN ASSESSEE IN D EFAULT IN RESPECT OF SUCH TAX IF SUCH RESIDENT (I) IT HAS FURNISHED HIS RETURN OF INCOM E U/S 139; (II) HAS TAKEN INTO ACCOUNT SUCH SUM FOR COMPUTING INCOME IN SUCH RETURN OF INC OME AND HAS PAID THE TAX DUE ON THE INCOME DECLARED BY HIM IN SUCH RETURN OF INCOME AND THE PERSON FURNISHED A CERTIFICATE THIS EFFECT FROM AN ACCOUNTANTS IN SUCH FORM AS MAY BE PRESCRIBED. NONE OF THE ABOVE DEDUCTEES HAVE FURNISHED A CERTIF ICATE FROM ACCOUNTANT AS PRESCRIBED IN PROVISO IN SECTION 201 OF THE I.T. AC T. ACCORDING TO CIRCULAR NO. 723 DATED 19.09.1995 OF C BDT, THE PROVISION OF SECTION 195 AND 194C OF THE INCOME TAX ACT, 1961, FOR DEDUC TION FOR TAX ARE NOT APPLICABLE TO FOREIGN SHIPPING COMPANIES OR THEIR AGENTS IN RE SPECT OF PAYMENTS MADE ON ACCOUNT OF CARRIAGE OF GOODS IN INTERNATIONAL TRAFF IC. HOWEVER, FOR NON-DEDUCTION OF TDS THE FOLLOWING DOCUMENTS ARE REQUIRED. TAX EXEMPTION CERTIFICATE ISSUED BY THE INCOME TAX DEPARTMENT. NAME OF THE PRINCIPAL (FOREIGN SHIPPING LINER) AND NAME OF THE AGENT (INDIAN AGENT OF THE FOREIGN SHIPPING LINER) SHOULD BE MENTIONED IN THE TAX EXEMPTION CERTIFICATE. IF THE NAMES OF THE PRINCIPAL AND AGENT NOT MENTIONED IN T HE TAX EXEMPTION CERTIFICATE, SELF DECLARATION LETTER CAN BE OBTAINED FROM THE PR INCIPAL/AGENT IN THE LETTER PAPER ALONG WITH THE TAX EXEMPTION CERTIFICATE. THE CERTI FICATE IS VALID ONLY FOR THE PERIOD MENTIONED IN THE CERTIFICATE. USUALLY, THE MAXIMUM PERIOD OF THE CERTIFICATE WILL BE ONE YEAR ONLY. NAME OF THE PRINCIPAL (FOREIGN SHIPPING LINER) SHOU LD BE VERIFIED FOR EACH TRANSACTIONS WITH THE RELEVANT BL COPIES. THE APPELLANT HAS NOT SUBMITTED TAX EXEMPTION CERTI FICATE ISSUED BY THE INCOME TAX DEPARTMENT RECEIVED FROM THE AGENTS OF THE SHIPPING COMPANIES. THE APPELLANT COULD ALSO NOT ADDUCE ANY EVIDENCE THAT THE C&F AGAINST O F NON-RESIDENT SHIPPING COMPANIES HAVE INCLUDED THE PAYMENT RECEIVED IN THE IR INCOME TAX RETURN. THE ADDITION U/S 194C RELATING TO PAYMENTS TO SHIPPING COMPANIES AMOUNTING TO RS. 11,57,814/- IS, THEREFORE, UPHELD. 18. AGGRIEVED BY THE AFORESAID ACTION OF THE LD. CI T(A) THE ASSESSEE IS BEFORE US. AFTER HEARING BOTH PARTIES AND HAVING CAREFULLY GON E THROUGH THE RECORDS, WE FULLY AGREE / 11 ITA NO. 314/KOL/2018 & C.O. NO. 46/KOL/2018 M/S. NAGREEKA FOILS LTD., AY 2009-10 CONCUR WITH THE VIEW OF THE LD. CIT(A) AND SINCE TH E LD. AR COULD NOT POINT OUT ANY LEGAL INFIRMITY IN FACTS / LAW, THE ACTION ASSAILED CANNOT BE INTERDICTED BEING NOT ERRONEOUS OR PERVERSE, SO WE ARE INCLINED TO UPHOLD THE ACTIO N OF THE LD. CIT(A) ON THE SAME REASONING AS GIVEN BY HIM AND DISMISS THE CO OF THE ASSESSEE ON THIS ISSUE. 19. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED AND CROSS-OBJECTION OF THE ASSESSEE IS DISMISSED. ORDER IS PRONOUNCED IN THE OPEN COURT ON 25TH SE PTEMBER, 2019. SD/- SD/- (P.M. JAGTAP) (ABY. T. VARKEY) VICE-PRESIDENT JUDICIAL MEMBER DATED : 25TH SEPTEMBER, 2019 BISWAJIT (SR.P.S.) COPY OF THE ORDER FORWARDED TO: 1. ASSESSEE M/S. NAGREEKA FOILS LTD., 18, R.N. MU KHERJEE ROAD, KOLKATA 700 001. 2 REVENUE ITO, WARD 6(3), KOLKATA. 3. 4. 5. CIT(A) CIT DR, ITAT, KOLKATA. / TRUE COPY, BY ORDER, ASSISTANT REGISTRAR/H.O.O ITAT, KOLKATA