M/s Poggenamp Powertronics Pvt. Ltd., Ahmedabad V. The ITO, Ward-3(1)(1), Ahmedabad

ITA 1020/AHD/2019

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Poggenamp Powertronics Pvt. Ltd. appealed against several additions made by the Assessing Officer and confirmed by the CIT(A) for the assessment year 2015-16. The main issues included the treatment of a loss on foreign exchange forward contracts, disallowances of legal and professional expenses, discrepancies in reported interest income, and reversal of gratuity liability. The Tribunal found that the loss on forward contracts was integral to the business and not speculative, thus allowing the deduction. However, the Tribunal upheld the other additions due to lack of sufficient evidence from the assessee to substantiate their claims.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 131407 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-07-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: C
• Next Hearing Date: 14-06-2023
• Assessment Year: 2015-2016
• Appeal Filed On: 13-06-2019
• Other Referred Cases: CIT vs. Friends and Friends Shipping Pvt. Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Speculation loss; Revenue expenditure; Set aside
• Section: 43(5); 251

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “C” BENCH Before: Ms. Annapurna Gupta, Accountant Member And Shri Siddhartha Nautiyal, Judicial Member Poggenamp Power tronics Pvt. Ltd. , C-1/B, 440 2, GIDC Estate, Phase IV, Vatv a, Ah medabad -3 83445 PAN: AAACP913 0B (Appellant) Vs ITO, Ward-3(1)(1), Ah med abad (Resp ondent) Asses see b y : Shri Vasant Ta nna, A. R. Revenue by : Shri M. Anand Kumar, Sr. D. R. Date of hearing : 15-06 -2 023 Date of pronouncement : 12-07 -2 023 आदेश /ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:- This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax, CIT(A)-9, Ahmedabad, in proceeding u/s. 143(3) vide order dated 16/04/2019 passed for the assessment year 2015-16. 2. The assessee has taken the following grounds of appeal:- ITA No. 1020/Ahd/2019 Assessment Year 2015-16 I.T.A No. 1020/Ahd/2019 A.Y. 2015-16 Page No. M/s. Poggenamp Powertronics Pvt. Ltd. vs. ITO 2 “Your appellant being dissatisfied with the order passed by the Commissioner of Income Tax (Appeals) -1, Ahmedabad presents this appeal against the same on the following amongst other grounds. 1. The order passed by Commissioner of Income Tax (Appeals) is bad in law and on facts and hence, it is submitted that the same be cancelled and be suitably modified. 2. (a) The learned Commissioner of Income Tax (Appeals), has erred in law and on facts in confirming addition of Rs. 24,77,450/- being loss on account of foreign exchange rate fluctuation. It is therefore prayed that the impugned disallowance may please be deleted. (b) The learned Commissioner of Income Tax (Appeals) has erred in law and on facts of the case in confirming the addition/disallowance for a sum of Rs. 20,000/- out of legal and professional expenses, which had been incurred wholly and exclusively for the purpose of business of the appellant. It is therefore prayed that the impugned disallowance may please be deleted. (c) The learned Commissioner of Income Tax (Appeals) has erred in law and on facts of the case in confirming the addition of Rs. 3,34,626/- on account of alleged difference in the interest credited to the Profit &. Loss Account. It is therefore prayed that the impugned disallowance may please be deleted. (d) The learned Commissioner of Income Tax (Appeals) has erred in law and on facts of the case in confirming the addition/disallowance of Rs. 12,57,515/- on account of reversal of gratuity liability. It is therefore prayed that the impugned disallowance may please be deleted. 3. The appellant craves leave to add and or alter any ground at the time of hearing of appeal.” 3. Ground No. 1 is general and does not require any specific adjudication. Ground No. 2 (ld. CIT(A) erred in confirming addition of Rs. 24,77,450/- being loss on account of foreign exchange fluctuation) I.T.A No. 1020/Ahd/2019 A.Y. 2015-16 Page No. M/s. Poggenamp Powertronics Pvt. Ltd. vs. ITO 3 4. The brief facts in relation to this ground of appeal is that the assessee is a private ltd company and is engaged in the business of manufacturing of electrical stamping and electrical motors and pumps. During the year under consideration, the assessee debited loss on foreign exchange fluctuation, including loss on forward contract of Rs. 24,77,450/- which the Assessing Officer disallowed treating the same in the nature of speculative loss which is debited under the head “foreign exchange rate difference”. 5. In appeal, the ld. CIT(A) confirmed the addition with the following observations: “4.2.4 In the above referred decision, the Hon'ble High Court has considered the issue of the forward contract loss as integral part of the business and it was not an isolated transaction. The appellant's case has been once again examined with reference to the transaction as to whether this was an isolated one or integral part of the business. The main business of the appellant company was to manufacture stamping for electrical motors and pumps. The bifurcation as provided by the A.O. clearly showed that there were import, OT(lmport), rate difference and forward contract which have either credit balance or debit balance adjustments leaving positive or negative balance being the difference of credits and debits under each item. Simple forward contracts without placing booking orders on a particular date for particular goods and then cancelling the delivery of such goods before it was actually delivered can be considered to be integral part of the business. Further, during the course of appellate proceedings also, the appellant did not substantiate its claim that there were booking of goods which were actually cancelled in special circumstances which can be treated as integral part of the business. Therefore, the relied upon case is found to be distinguishable as the appellant had already accounted for the foreign rate difference as on 31.03.2015 for the purpose of valuation of its inventory and profit & loss account separately.” 6. Before us, the counsel for the assessee produced copy of statement of account in respect of forward contract gain/loss from the books of accounts and submitted that on perusal of the statement of account, it is evident that I.T.A No. 1020/Ahd/2019 A.Y. 2015-16 Page No. M/s. Poggenamp Powertronics Pvt. Ltd. vs. ITO 4 every entry recorded adequate narration clearly stating the particulars of import of goods for which forward contract was booked. However, the Assessing Officer has erred in facts in concluding that the assessee company had booked the forward contracts without linking the same with the order for procurement of raw materials and components. It was submitted that the Assessing Officer and ld. CIT(A) failed to take into cognizance the statement of accounts in respect of forward contract gain/loss wherein for each debit and credit entry, full narration of the transaction has been mentioned and for all the entries related to forward contract there was an underlying specific export towards imports made by the assessee during its ordinary course of business. Therefore, the aforesaid loss cannot be termed a speculative loss given the facts of the case. It was submitted that since the import of raw material is an integral part of the business carried on by the assessee, the loss of forward contract made with banks to hedge the position/exposure with regard to import payments and that too for an underlying specific exposure to make the payment in foreign currency towards goods imported should not be treated as speculative loss. The counsel for the assessee further submitted that as per Master Circular on Risk Management and Inter-Bank dealing issued by the RBI dated July 2, 2007, the RBI informed banks to sanction limit for forward contracts to speculative in foreign currency. The counsel for the assessee submitted that the assessee had booked the forward contracts in compliance with the requirements of RBI and therefore loss incurred on forward contract is incidental to the activities of imports and exports carried out by the assessee company and the same cannot be termed as speculative loss. Further, the counsel for the assessee submitted that the case of assessee is directly I.T.A No. 1020/Ahd/2019 A.Y. 2015-16 Page No. M/s. Poggenamp Powertronics Pvt. Ltd. vs. ITO 5 covered in its favour by the decision of CIT vs. Friends and Friends Shipping Pvt. Ltd. in ITA 251 of 2010 vide order dated 23-08-2011 wherein the Hon’ble Gujarat High Court observed that the assessee, who was an exporter had entered into forward contract with the banks to hedge against any losses arising out of the fluctuation in foreign currency and on some actions, the assessee was required to give instructions for cancellation of forward contract and for which the assessee had to pay charges to the banks. The Gujarat High Court held that the charges that the assessee had to pay to the banks were in the nature of revenue expenditure in the course of business and counsel for the assessee submitted that in the facts in the instant case, the assessee had booked the forward contract with the Banks and the loss on forward contract is not a notional marked to market loss but an actual settlement or conclusion of the contract and therefore, cannot be regarded as a speculative loss in terms of section 43(5) of the Act. The ld. Departmental Representative placed reliance on the observations made by the ld. CIT(A) in the appellate order. 7. We have heard the rival contentions and perused the material on record. After going through the facts of the case and taking into account the arguments put forth by the counsel for the assessee, we are of the considered view that the aforesaid loss does not qualify as a speculative loss/gain in the facts of the instant case. Accordingly, in view of the decision of the Gujarat High Court in the case of Friends and Friends Shipping Pvt. Ltd. supra, we are of the view that the aforesaid loss is not a speculative loss and the assessee is eligible to claim deduction thereof. I.T.A No. 1020/Ahd/2019 A.Y. 2015-16 Page No. M/s. Poggenamp Powertronics Pvt. Ltd. vs. ITO 6 8. In the result, ground no. 1 of the assessee’s appeal is allowed. Ground No. 2 ( ld. CIT(A) erred in confirming the addition for a sum of Rs. 20,000/- out of legal and professional expenses) 9. The brief facts in relation to this ground of appeal are that during the course of assessment, the Assessing Officer disallowed expenditure amounting to Rs. 20,000/- towards fee paid to advocates for participating in criminal proceedings. 10. In appeal, the ld. CIT(A) confirmed the addition with the following observations: “5.2 I have carefully considered the rival contentions, facts of the case as well as the observation of the A.O. The appellant has not disputed the fact that the expenditure of Rs.20,000/- was incurred towards fees paid to the advocates for participating in the criminal proceedings and now it has been contended that the appellant-company had filed the prosecution cases against certain persons and it is not the case that the appellant company had been prosecuted for any criminal offence and the fees had been paid for defending the appellant company or its directors. As observed by the A.O. and now by the undersigned that the appellant did not substantiate the details of cases so filed by way of filing the copies of criminal cases or notices, copies of bills so raised by the respective advocates to prove that they were either civil proceedings or the criminal proceedings initiated by the appellant company and not against it. Therefore, in absence of these vital details, the A.O.'s finding that the expenditure was against defending the appellant company or its directors cannot be disputed. Considering these factual aspects of the issue, the disallowance of Rs.20,000/- made by the A.O. is confirmed. Accordingly, ground no.2 of the appeal is dismissed.” 11. Before us, the counsel for the assessee submitted that the ld. CIT(A) has incorrectly treated the aforesaid expenses as having been incurred for defending the Directors of the company against criminal proceedings for I.T.A No. 1020/Ahd/2019 A.Y. 2015-16 Page No. M/s. Poggenamp Powertronics Pvt. Ltd. vs. ITO 7 alleged activities prohibited by law. The counsel for the assessee submitted that the aforesaid professional fees was paid to advocates towards professional fees in respect of proceedings against the Company under the Factories Act, 1948 and not for defending the Directors of the assessee company against criminal proceedings for alleged activities prohibited by law. 12. On going through the facts of the case, we observe that ld. CIT(A) upheld the addition on the ground that assessee did not substantiate the details of cases so filed by filing copy of criminal cases or notices issued to the assessee in respect of the case and neither has the assessee filed copies of invoices raised by the advocates for providing professional services. 13. Even before us, no details have been filed which would throw light on the nature of proceedings for which professional fees was incurred. The assessee has not been able to support his assertions with any documentary evidence. Accordingly, looking into the facts of the instant case, we are of the considered view that ld. CIT(A) has not erred in facts and in law in upholding the addition in absence of any details filed by the assessee. 14. In the result, ground no. 3 of assessee’s appeal is dismissed. Ground No. 4 ( Ld. CIT(A) erred in confirming addition of Rs. 3,34,626/- on account of alleged difference in the interest credited to the profit and loss account) I.T.A No. 1020/Ahd/2019 A.Y. 2015-16 Page No. M/s. Poggenamp Powertronics Pvt. Ltd. vs. ITO 8 15. The brief facts in relation to this ground of appeal are that during the course of assessment, the Assessing Officer observed that the assessee company had reported total receipts of interest of Rs. 36,47,866/- whereas as per Form 26AS, total receipts on account of interest were shown at Rs. 31,76,677/-. The Assessing Officer further observed that the assessee company had credited interest of Rs. 33,13,239/- and thus there is difference of Rs. 3,34,627/-, which was added to the income of the assessee as “Income from Other Sources” in absence of assessee having failed to furnish any details regarding difference of Rs. 3,34,626/-. 16. In appeal, the ld. CIT(A) confirmed the additions with the following observations:- “8.2 I have carefully considered the rival contentions, facts of the case as well as the observation of the A.O. The appellant's main contention is that there were two debit entries of Rs. 1,04,079/- and of Rs. 2,30,547.60 totaling to Rs.3,34,626.60/-. The addition has been mainly warranted for the failure of the appellant to adduce necessary evidences to prove that these two amounts had been considered in the earlier assessment years on the basis of reverse entries for accounting the interest in those assessment years. During the course of appellate proceedings also, no such evidences were made available except providing the copy of ledger account for FY 2014-15 relevant to AY 2015-16 and not for any other earlier year to prove that the corresponding credit entries were made in those accounts and the interest income to that extent has been increased and offered to tax. In absence of such details, it is difficult to disapprove the action of the A.O. to tax the difference of Rs.3,34,627/- which was made to safeguard the interest of revenue and in absence of details of prior period adjustments which ought to have been incorporated in the Tax Audit report. In view of these facts, the disallowance of Rs.3,34,627/- is confirmed. Accordingly, ground no.5 of the appeal is dismissed.” 17. Before us, the counsel for the assessee submitted that the statement on account of interest shows that the sum total of credit is Rs. 36,47,866/- and I.T.A No. 1020/Ahd/2019 A.Y. 2015-16 Page No. M/s. Poggenamp Powertronics Pvt. Ltd. vs. ITO 9 the ld. CIT(A) has wrongly considered the above sum total of Rs. 36,47,866/- as interest income ignoring the sum total of debit transaction of Rs. 3,34,626/- being the reversal of unearned interest or interest received in advance from one of its customers Rotomotive Power Drives India Ltd. of Rs. 1,04,07,97/- and reversal of accrued interest of preceding financial year to Rs. 2,30,547/-, which are credited to the interest received account during the year under review. The counsel for the assessee further submitted that the amount of Rs. 2,30,547/- being the interest reversed in respect of accrued interest. 18. On going through the records of the case, we observe that assessee’s primary contention is that for F.Y. 2013-14 has been duly offered for taxation in A.Y. 2014-15 and therefore, nothing has escaped assessment. The aggregate amount of interest of Rs. 36,47,866/- in the interest account is inclusive of an amount of Rs. 3,34,626/- being the interest received during the year, which has already been accounted for in the books on accrual basis in the immediately preceding year. However, we note that despite having been given several opportunities, the assessee has not furnished any evidence whatsoever that the aforesaid amount has been offered to tax by the assessee in the immediately preceding assessment year i.e. 2014-15. Further, even before us, no evidence whatsoever has been furnished to prove that the aforesaid amount has been offered to tax as income in the immediately preceding assessment year. I.T.A No. 1020/Ahd/2019 A.Y. 2015-16 Page No. M/s. Poggenamp Powertronics Pvt. Ltd. vs. ITO 10 19. In view of the above, we are of the considered view that the ld. CIT(A) has not erred in facts and in law in confirming the aforesaid addition. 20. In the result, ground no. 4 of assessee’s appeal is dismissed. Ground No. 5 (Ld. CIT(A) erred in confirming addition of Rs. 12,57,511/- on account of reversal of gratuity liability) 21. The brief facts in relation to this ground of appeal are that during the course of assessment, the Assessing Officer observed that assessee company had claimed deduction of Rs. 12,57,515/- on account of reversal of gratuity liability which was claimed to be disallowed by the assessee in earlier assessment years. However, the Assessing Officer observed that the assessee company did not furnish the details of computation of total income of the assessment year in which the above amount to Rs. 12,57,515/- is disallowed u/s. 40A(7) of the Act. Further, the Assessing Officer observed that from the case records available for assessment year 2013-14 and assessment year 2014-15 it is seen that there is disallowance u/s. 401A(7) of the Act in these two assessment years. 22. In appeal, the ld. CIT(A) confirmed the addition on the ground that despite opportunity of hearing, the assessee did not furnish details of disallowance made u/s. 40A(7) of the Act for provision of payment of gratuity to an approved gratuity fund. However, the ld. CIT(A) directed the assessee to make a separate application to the Assessing Officer for furnishing the details of disallowances made u/s. 40A(7) of the Act in earlier I.T.A No. 1020/Ahd/2019 A.Y. 2015-16 Page No. M/s. Poggenamp Powertronics Pvt. Ltd. vs. ITO 11 assessment years by filing the computation of total income of the respective years, which the Assessing Officer may grant subject to carrying out necessary verification. The ld. CIT(A) made the following observations in the appellate order:- “9.2 I have carefully considered the rival contentions, facts of the case as well as the observation of the A.O. The A.O. has made the disallowance of Rs.12,57,515/- for the reason that the appellant did not furnish the details of disallowances made u/s.40A(7) of the Act in the earlier years for the provisions for payment of gratuity to an approved gratuity fund set up. Since the appellant also failed to adduce such evidences and escaped from its liability to provide the details from its own records of earlier assessment years, the disallowance made by the A.O. for such reversed amount which was claimed as deductible on the very ground that the same had been considered in earlier years but could not be substantiated, is required to be confirmed. However, the appellant may make a separate application to the A.O. for furnishing the details of disallowances made u/s.40A(7) of the Act in earlier years by filing the computation of total income of the respective years and seek such relief which the A.O. is directed to grant subject to verification at his end. In the result, this ground no.6 of the appeal is dismissed subject to above direction to the appellant to make a fresh claim before the A.O. who will decide the matter afresh by referring to the case records.” 23. Before us, the counsel for the assessee submitted that as per AS 15, every year, the assessee is required to obtain actual valuation of its gratuity liability and if there is an incremental liability, it is debited to the profit and loss account and disallowed u/s. 40A(7) of the Act and if there is any reversal in liability it is credited to the profit and loss account. The counsel for the assessee submitted that above the amount only represents reversal of provision and it was not claimed in any of the earlier assessment years. Accordingly, looking into the facts of the case, the issue is being set aside to the file of Assessing Officer to carry out necessary verification and grant relief in accordance with law. I.T.A No. 1020/Ahd/2019 A.Y. 2015-16 Page No. M/s. Poggenamp Powertronics Pvt. Ltd. vs. ITO 12 24. In the result, ground no. 5 of assessee’s appeal is allowed statistical purposes. 25. In the result, the appeal of the assessee is partly allowed for statistical purposes. Order pronounced in the open court on 12-07-2023 Sd/- Sd/- (ANNAPURNA GUPTA) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 12/07/2023 (TRUE COPY) आदेश क त ल प अ े षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/ आदेश से, उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद