DCIT, Circle-3(2), Hyd, Hyderabad V. Suven Life Sciences Ltd., Hyd, Hyderabad

ITA 1222/HYD/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 2613 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-09-2017
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 14-09-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 19-09-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUMAN MALIK
• Assessee Lawyers: P MURALIKRISHNA
• Keywords: Additional evidence
• Section: 143(3); 115JB; 37(1)

Judgement Text

ITA NO 1222 OF 2016 SUVEN LIFE SCIENCES LTD HYDER ABAD PAGE 1 OF 8 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S.RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO.1222/HYD/2016 (ASSESSMENT YEAR: 2012-13) DY. COMMISSIONER OF INCOME TAX, CIRCLE 3(2) HYDERABAD VS M/S. SUVEN LIFE SCIENCES LTD HYDERABAD PAN: AADCS 4044 C (APPELLANT) (RESPONDENT) FOR REVENUE: SMT. SUMAN MALIK, DR FOR ASSESSEE : SHRI P. MURALI KRISHNA O R D E R PER SMT. P. MADHAVI DEVI, J.M. THIS IS REVENUES APPEAL FOR THE A.Y 2012-13 AGAINS T THE ORDER OF THE CIT (A)-3, HYDERABAD DATED 6.6.201 6. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE LEARNED CIT (A) ERRED BOTH IN LAW AND ON FACTS OF THE CASE. 2. THE LD.C1T (A) ERRED IN ALLOWING WEIGHTED DEDUCTION U/S 35(2AB) BY ADMITTING ADDITIONAL EVIDENCE VIOLATING RULE 46A OF I. T RULES. 3. THE LD.CIT(A) ERRED IN DELETING THE DISALLOWANCE OF DERIVATE LOSS OF RS. (-)3,48,06,000/- 4. THE LD.CIT(A) OUGHT TO HAVE APPRECIATED THE FACT THAT THE LOSS CLAIMED BY ASSESSEE IS DATE OF HEARING : 14.09.2017 DATE OF PRONOUNCEMENT : 27.09.2017 ITA NO 1222 OF 2016 SUVEN LIFE SCIENCES LTD HYDER ABAD PAGE 2 OF 8 ONLY A NOTIONAL LOSS AND SUCH NOTIONAL LIABILITY WOULD BE CONTINGENT IN NATURE WHICH IS NOT ALLOWABLE UNDER ANY OF THE PROVISIONS OF THE ACT. 5. ANY OTHER GROUND(S) THAT MAY BE URGED AT THE TIME OF HEARING. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY WHICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING O F BULK DRUGS AND INTERMEDIATES, FILED ITS RETURN OF INCOME FOR T HE A.Y 2012-13 ON 28.09.2012 DECLARING A NET LOSS OF RS.12,10,65,2 28. THE ASSESSEE PAID TAX U/S 115JB OF THE ACT ON BOOK PROF ITS OF RS.4,88,65,338. DURING THE ASSESSMENT PROCEEDINGS U /S 143(3) OF THE ACT, THE AO OBSERVED THAT THE ASSESSEE HAS CLAI MED WEIGHTED DEDUCTION U/S 35(2AB) OF THE ACT. THE ASSESSEE WAS THEREFORE, ASKED TO PRODUCED THE PRESCRIBED FORM AS APPROVED B Y THE PRESCRIBED AUTHORITY I.E. SECRETARY, DEPARTMENT OF SCIENTIFIC RESEARCH AND INDUSTRIAL RESEARCH (DSIR) IN ORDER TO JUSTIFY THE CLAIM OF WEIGHTED DEDUCTION ON THE R&D EXPENDITURE U/S 35(2AB) OF THE ACT. THE AO HELD THAT SINCE THE ASSESSEE HAS NOT SUBMITTED THE PRESCRIBED FORM, THE ASSESSEE IS NOT ELIGIBLE F OR THE WEIGHTED DEDUCTION. HOWEVER, HE ALLOWED A SUM OF RS.25,04,92 ,882 U/S 35(1) OF THE ACT. 3. FURTHER, FROM THE P&L A/C OF THE ASSESSEE, THE AO ALSO OBSERVED THAT THE ASSESSEE HAS DEBITED AN AMOUNT OF RS.3,48,06,000 TOWARDS MARK TO MARKET (IN SHORT M TM) LOSS ON FORWARD CONTRACTS. THE ASSESSEES EXPLANATION WAS C ALLED FOR AS TO WHY THE SAME SHOULD NOT BE DISALLOWED. THE ASSESSEE FILED ITS DETAILED OBJECTIONS. HOWEVER, THE AO WAS NOT CONVIN CED WITH THE ITA NO 1222 OF 2016 SUVEN LIFE SCIENCES LTD HYDER ABAD PAGE 3 OF 8 CONTENTIONS OF THE ASSESSEE AND OBSERVED THAT THE M TM LOSS ON FORWARD CONTRACTS IS ONLY A NOTIONAL LOSS AND THERE FORE, IS NOT TO BE ALLOWED. HE ACCORDINGLY BROUGHT IT TO TAX. AGGRIEVE D, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT (A) ALONG WITH T HE FORM 3CM I.E. REPORT ISSUED BY THE PRESCRIBED AUTHORITY DATE D 7.7.2015 APPROVING THE ITEMS CLAIMED BY THE ASSESSEE U/S 35( 2AB) OF THE ACT. TAKING THE SAME INTO CONSIDERATION, THE CIT (A ) ALLOWED THE BALANCE OF THE CLAIM OF THE ASSESSEE I.E. @ 200% OF THE EXPENDITURE PROVIDED. AS REGARDS THE DISALLOWANCE O F THE DERIVATIVE LOSS, THE CIT (A) FOLLOWED THE DECISION OF THE I.T.A.T. IN THE ASSESSEES OWN CASE FOR THE A.Y 2006-07 TO 2009- 10 IN ITA NOS.109, 124 TO 126/HYD/2013, DATED 29.07.2013 TO A LLOW THE SAME. AGGRIEVED BY THE RELIEF GIVEN BY THE CIT (A), THE REVENUE IS IN APPEAL BEFORE US. 4. THE LEARNED DR SUBMITTED THAT THE CIT (A) HAS ACCEPTED THE ADDITIONAL EVIDENCE FILED BY THE ASSES SEE IN THE FORM OF FORM 3CL I.E. THE REPORT OF THE PRESCRIBED AUTHOR ITY U/S 35(2AB) OF THE ACT TO ALLOW THE CLAIM OF THE ASSESS EE WITHOUT SENDING THE SAME TO THE AO FOR VERIFICATION. THUS, ACCORDING TO THE LEARNED DR, IT IS IN CLEAR VIOLATION OF THE RUL E 46A OF THE I.T. RULES. 5. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTH ER HAND, SUBMITTED THE DETAILS BEFORE US AND STATED TH AT THE FORMS SUBMITTED BY THE ASSESSEE ARE ISSUED BY A GOVT. AGE NCY I.E. THE PRESCRIBED AUTHORITY AND THEREFORE, THE CIT (A), ON VERIFICATION OF THE SAME AND BEING SATISFIED WITH THE VERACITY OF T HE SAME, HAS ITA NO 1222 OF 2016 SUVEN LIFE SCIENCES LTD HYDER ABAD PAGE 4 OF 8 ALLOWED THE SAME. THEREFORE, ACCORDING TO HIM, THER E WAS NO VIOLATION OF RULE 46A. 6. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL ON RECORD, WE FIND THAT THE CERTIFICATE IS ISSUED B Y THE PRESCRIBED AUTHORITY I.E. THE SECRETARY TO THE GOVT. OF INDIA, MINISTRY OF SCIENCE & TECHNOLOGY, DEPARTMENT OF SCIENTIFIC RESE ARCH AND INDUSTRIAL RESEARCH (DSIR), NEW DELHI. THE PRESCRIB ED AUTHORITY HAS APPROVED THE EXPENSES CLAIMED BY THE ASSESSEE U /S 35(2AB) OF THE ACT. HOWEVER, ONLY FOR THE LIMITED PURPOSE O F VERIFYING THE AUTHENTICITY OF THE SAID DOCUMENTS SO PRODUCED BY T HE ASSESSEE, THIS ISSUE IS SET ASIDE TO THE FILE OF THE AO. GROU ND NO.2 IS THUS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 7. AS REGARDS GROUNDS OF APPEAL 3 & 4, WE FIND THAT THIS ISSUE HAD ARISEN IN THE ASSESSEES OWN CASE IN THE EARLIER A.YS 2006-07 TO 2009-10 AND THE TRIBUNAL HAS CONSIDERED THE ISSUE AT LENGTH AT PARAS 21 TO 28 AND HAS HELD AS UNDER: 21. ACCORDING TO THE REVENUE .THE 'MARKED TO MARKET LOSS' IS ONLY NOTIONAL OR CONTINGENT LOSS UN TIL THE CONTRACT IS SETTLED AND AS PER THE GROUND OF APPEAL RAISED BY THE REVENUE, SUCH DERIVATIVE LOSS IS NOT BE ALLOWED AS IT IS AGAINST THE CBDT INSTRUCTION NO.3 OF2010 . 22. THE BRIEF FACTS OF THE CASE RELATING TO THIS IS SUE ARE THAT THE ASSESSEE HAD DEBITED A DERIVATIVE LOSS OF RS.50.35 LAKHS UNDER THE HEAD 'FINANCE CHARGES' TO ITS PROFIT AND LOSS ACCOUNT. THE ASSESSEE'S EXPLANATION WITH REGARD TO ITS ABOVE CLAIM WAS CALLED FOR. THE ASSESSEE, VIDE ITS REPLY DATED 12/9/2011, EXPLAINED THAT THE ASSESSEE HAD ENTERED INTO FORWARD CURRENCY EXCHANGE ITA NO 1222 OF 2016 SUVEN LIFE SCIENCES LTD HYDER ABAD PAGE 5 OF 8 DERIVATIVE CONTRACTS TO HEDGE THE RISK AGAINST FOREIGN CURRENCY EXCHANGE FLUCTUATIONS. ALTHOUGH THE FORWARD DERIVATIVE CONTRACTS HAVE NOT MATURED DURING THE YEAR 2008-09, THE ASSESSEE COMPANY HAS RECOGNIZED THE 'MARK TO MARKET LOSS' OF RS.50.35 LAKHS ON ACCOUNT OF CURRENCY FLUCTUATION AS ON 31.3.2009 AND THE SAME HAS BEEN DEBITED TO THE PROFIT AND LOSS ACCOUNT. THE AO, THEREAFTER CONSIDERED THE CBDT INSTRUCTION NO.3 OF 2010, WHEREIN A CLARIFICATION WAS ISSUED REGARDING ALLOWING OR OTHERWISE OF THE LOSSES ON FOREX DERIVATIVES. HE OBSERVED THAT VIDE THIS INSTRUCTION, IT. WAS CLARIFIED THAT A 'MARK TO MARKET LOSS' IS ON LY A NOTIONAL LOSS UNTIL THE CONTRACT IS SETTLED OR MATURED AND IF IN A PARTICULAR YEAR, A CONTRACT DOES NOT MATURE, THEN THE DERIVATIVES LOSS HAS TO BE TREATED AS A CONTINGENT LIABILITY AND HAS TO BE ADDED BACK TO THE BOOK PROFIT. HE FURTHER OBSERVED THAT SUCH A LOSS CANNOT BE ALLOWED TO BE SET OFF AGAINST THE TAXABLE INCOME UNDER THE NORMAL PROVISIONS OF THE ACT ALSO AND ACCORDINGLY DISALLOWED THE SAME UNDER BOTH THE NORMAL PROVISIONS OF THE ACT AS WELL AS BOOK PROFITS RETURNED UNDER CLAUSE (C) OF EXPLANATION 1 OF SECTION 115JB OF THE INCOME-TAX ACT. 23. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) REITERATING THE SUBMISSIONS MADE BEFORE THE AO. THE CIT(A), TAKING - NOTE OF THE DECISION OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DCIT V S. BANK OF BAHRAIN AND KUWAIT IN ITA NO.4404 AND 1883/MUM/2004 DATED 19/8/2010 REPORTED IN [2010] 132 TTJ (MUM) (SB) 505,] [(2010) 41 SOT .290 (MUM) (SB)] HELD THAT THE 'MARKED TO MARKET LOSS' DEBITED BY THE ASSESSEE IS NOT A CONTINGENT LIABILITY BUT IS AN 'ACCRUED LIABI LITY' AND IS, THEREFORE, ALLOWABLE AS AN EXPENSE. 24. AGGRIEVED BY THE RELIEF GIVEN BY THE CIT (A), TH E REVENUE IS IN APPEAL BEFORE US. 25. THE LEARNED DR PLACED RELIANCE UPON THE ORDER OF THE AO AS WELL AS THE CBDT INSTRUCTION NO.3 OF ITA NO 1222 OF 2016 SUVEN LIFE SCIENCES LTD HYDER ABAD PAGE 6 OF 8 2010 DATED 23.3.2010. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTHER HAND, SUPPORTED. THE ORDER OF THE CIT(A). 26. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDERED THEIR RIVAL CONTENTIONS, WE FIND THAT UNDISPUTEDLY, THE ASSESSEE HAD ENTERED INTO FOREIGN EXCHANGE FORWARD CONTRACT TO HEDGE AGAINST RISKS OF FOREIGN EXCHANGE FLUCTUATIONS AND THOUGH THE CONTRACT HAS NOT MATURED DURING THE RELEVANT FINANCIAL YEAR, IN ORDER TO ARRIVE AT ACTU AL PROFITS OR LOSS TO THE ASSESSEE, IT FOLLOWED THE ACCOUNTING STANDARD 11 AND 31 ISSUED BY ICAI AS NOTIFIED BY SEC. 211(3C) OF ME COMPANIES ACT AND HAD DEBITED THE LOSS ON ACCOUNT OF 'MARK TO MARKET LOSSES' AS ON THE CLOSING DAY OF THE ACCOUNTS AND CLAIMED IT AS ALLOWABLE AS BUSINESS LOSS. WE FIND THAT INSTRUCTION NO.3 OF 2010 OF CBDT HAS BEEN REPRODUCED BY THE CIT (A) AT PARA 7.4 OF HIS ORDER. AS PER THIS INSTRUCTION, WHERE NO SALE OR SETTLEMEN T HAS ACTUALLY TAKEN PLACE AND THE LOSS OIL, CONTRACT HAS NOT MATURED, THE LOSS ON 'MARKED TO MARKET' BASIS HAS RESULTED IN REDUCTION OF BOOK PROFITS, SUCH A NOTIONAL LOSS WOULD BE CONTINGENT IN NATURE AND CANNOT BE ALLOWED TO BE SET OFF AGAINST THE TAXABLE INCOME AND SHOULD, THEREFORE, BE ADDED BACK FOR THE PURPOSE OF COMPUTING THE TAXABLE INCOME OF AN ASSESSEE. NO DOUBT, THIS INSTRUCTION I S CLEARLY ON THE POINT AND IS BINDING ON THE ASSESSING AUTHORITY. HOWEVER AS RIGHTLY POINTED OUT BY THE CIT(A) AND AS HELD BY THE HON'BLE SUPREME COURT IN THE CASE OF HERO CYCLE PVT. LTD., (CITED SUPRA), SUCH INSTRUCTIONS ARE NOT BINDING ON THE ASSESSEES NOR ON THE APPELLATE AUTHORITY, WHO ARE ENTITLED TO EXAMINE THE ISSUE ON MERITS AND ARRIVE AT THEIR OWN CONCLUSIONS. THE HON'BLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR OF INDIA PVT. LTD., REPORTED IN 312 ITR 254, HAS HELD THAT THE LOSS SUFFERED BY THE ASSESSEE ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS ON THE DATE OF THE BALANCE SHEET IS AN ITEM OF EXPENDITURE U/S 37(1) OF THE I.T. ACT, 1961 . ITA NO 1222 OF 2016 SUVEN LIFE SCIENCES LTD HYDER ABAD PAGE 7 OF 8 27. THE DECISION OF THE SUPREME COURT HAS BEEN FOLLOWED BY THE SPECIAL BENCH OF ITAT IN THE CASE OF BANK OF BAHRAIN AND KUWAIT (CITED SUPRA), A FOREIGN BANK CARRYING ON BUSINESS IN INDIA, WHICH ENTERED INTO FORWARD CONTRACTS WITH ITS CLIENTS TO BUY OR SELL FOREIGN EXCHANGE AT AN AGREED PRICE ON A FUTURE DATE AND IN RESPECT OF CONTRACTS. WHERE THE DATE OF MATURITY FELL BEYOND ACCOUNTING PERIOD, THE ASSESSEE VALUED THE FORWARD CONTRACTS ON THE LAST DAY OF THE ACCOUNTING PERIOD ON THE BASIS OF RATE OF FOREIGN EXCHANGE PREVAILING ON THE DATE AND ACCOUNTED FOR THE LOSS OR PROFIT AS THE CASE MAY BE. THE SPECIAL BENCH HAS CONSIDERED THE QUESTION AS TO WHETHER THE LOSS WAS NOTIONAL OR CONTINGENT OR WHETHER IT WAS ACCRUED LOSS. AFTER CONSIDERING THE COMMERCIAL PRINCIPLES OF POLICY OF PRUDENCE, THE SPECIAL BENCH HAS HELD THAT THE LOSS WHICH IS INCURRED ON ACCOUNT OF FORWARD CONTRACT TO SELL CURRENCY AT AN AGREED PRICE AT A FUTURE DATE FALLING BEYOND THE LAST DATE OF ACCOUNTING PERIOD IS A LOSS INCURRED BY THE ASSESSEE ON ACCOUNT OF THE VALUATION OF THE CONTRACT ON THE LAST DATE OF THE ACCOUNTING PERIOD AND BEFORE THE DATE OF THE MATURITY OF THE FORWARD CONTRACT AND HENCE IS NOT A CONTINGENT LIABILITY BUT AN ACCRUED LIABILITY AND IS ALLOWABLE AS AN EXPENDITURE. WE FIND THAT THE FACTS OF THE CASE BEFORE US ARE SIMILAR TO THE FACTS OF T HE CASE BEFORE THE SPECIAL BENCH IN THE CASE OF BANK OF BAHRAIN AND KUWAIT (CITED SUPRA) AND THE CIT(A) HAS ONLY FOLLOWED THE DECISION OF THE SPECIAL BENCH. 28. THE LEARNED DR HAD NOT BEEN ABLE TO BRING TO OUR NOTICE ANY OTHER DECISION TO THE CONTRARY. IN VIEW OF THE SAME, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER' OF THE CIT(A) AND THE REVENUE'S APPEAL FOR THE ASSESSMENT YEAR 2009- 10 IS ALSO DISMISSED. 8. SINCE THE CIT (A) HAS ONLY FOLLOWED THE PRECEDEN T ON THE ISSUE IN THE ASSESSEES OWN CASE, WE DO NOT SEE ANY REASON TO ITA NO 1222 OF 2016 SUVEN LIFE SCIENCES LTD HYDER ABAD PAGE 8 OF 8 INTERFERE WITH HER ORDER. THUS, GROUNDS OF APPEAL N OS. 3 & 4 ARE REJECTED. 9. IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOWE D FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH SEPTEMBER, 2017. SD/- SD/- (S.RIFAUR RAHMAN) ACCOUNTANT MEMBER (P. MADHAVI DEVI) JUDICIAL MEMBER HYDERABAD, DATED 27 TH SEPTEMBER, 2017. VINODAN/SPS COPY TO: 1 DY. COMMISSIONER OF INCOME TAX, CIRCLE 3(2) 7 TH FLOOR, SIGNATURE TOWERS, OPP: BOTANICAL GARDEN, KONDAPUR, HYDERABAD 2 M/S. SUVEN LIFE SCIENCES LTD, 8-2-334, 6 TH FLOOR, SDE SERENE CHAMBER AVENUE 7, ROAD NO.5, BANJARA HILLS, HYDERAB AD 3 CIT (A)-3, HYDERABAD 4 PR. CIT 3 HYDERABAD 5 THE DR, ITAT HYDERABAD 6 GUARD FILE BY ORDER