DCIT, CHENNAI V. Sundaram Brake Linings Ltd., CHENNAI

ITA 1301/CHNY/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 4419 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 29-03-2017
• Assessment Year: 2012-2013
• Appeal Filed On: 11-05-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R DURAIPANDIAN
• Assessee Lawyers: N DEVANATHAN SH K RAMAKRISHNAN
• Keywords: Reopening of assessment; Speculation loss
• Section: 43(5)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, CHENNAI . . . , !' .$%$&, ( ') BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ./ ITA NOS.1299, 996, 997, 1302 & 1301/MDS/2016 & C.O. NOS.87, 71, 72, 88 & 89/MDS/2016 (IN ITA NOS.1299, 996, 997, 1302 & 1301/MDS/2016) & +& / ASSESSMENT YEARS : 2009-10, 2008-09, 2011-12, 201 0-11 & 2012-13 THE DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE 6(2), CHENNAI - 600 034. V. M/S SUNDARAM BRAKE LININGS LTD., B-1, MTH ROAD, PADI, CHENNAI - 600 050. PAN : AADCS 4888 E (-./ APPELLANT) ( RESPONDENT & CROSS-OBJECTOR) -. / 0 / APPELLANT BY : SHRI R. DURAI PANDIAN, JCIT 12-. / 0 / RESPONDENT BY : SH. N. DEVANATHAN, ADVOCATE SH. K. RAMAKRISHNAN, CA 3 / 4( / DATE OF HEARING : 29.03.2017 56+ / 4( / DATE OF PRONOUNCEMENT : 31.05.2017 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: ALL THE APPEALS OF THE REVENUE ARE DIRECTED AGAI NST THE RESPECTIVE ORDERS OF THE COMMISSIONER OF INCOME TAX (APPEALS)-15, CHENNAI, FOR THE ASSESSMENT YEARS 2009-10, 2008-09, 2011-12, 2010-11 AND 2012-13. THE ASSESSEE HAS ALSO FILED C ROSS- 2 I.T.A. NOS.1299, 996, 997, 1302 & 1301/MDS/16 C.O. NOS.87, 71, 72, 88 & 89/MDS/16 OBJECTIONS AGAINST THE VERY SAME ORDERS OF THE CIT( APPEALS). THEREFORE, WE HEARD ALL THE APPEALS OF THE REVENUE AND CROSS- OBJECTIONS OF THE ASSESSEE TOGETHER AND DISPOSING O F THE SAME BY THIS COMMON ORDER. 2. SHRI R. DURAI PANDIAN, THE LD. DEPARTMENTAL REPR ESENTATIVE, SUBMITTED THAT THE ASSESSEE IS ENGAGED IN THE BUSIN ESS OF MANUFACTURING OF BRAKE LININGS FOR EXPORT. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE EXPORTED THE BRAKE LINI NGS AND ALSO ENTERED INTO FORWARD CONTRACT IN FOREIGN EXCHANGE I N ORDER TO PROTECT THE ASSESSEE FROM FOREIGN EXCHANGE FLUCTUATION. AC CORDING TO THE LD. D.R., FORWARD CONTRACT IN FOREIGN EXCHANGE FOR THE PURPOSE OF PROTECTING THE ASSESSEE FROM LOSS IN FOREIGN EXCHAN GE FLUCTUATION IS NOTHING BUT A HEDGING TRANSACTION. THE ASSESSEE-CO MPANY, IN FACT AUTHORIZED TWO OF ITS EMPLOYEES TO DEAL WITH BANKS FOR ENTERING INTO FORWARD CONTRACT. ACCORDING TO THE LD. D.R., THE A SSESSEE CLAIMED BEFORE THE ASSESSING OFFICER THAT THE TWO EMPLOYEES AUTHORIZED BY THE ASSESSEE-COMPANY, IN FACT, EXCEEDED THEIR AUTHO RITY AND ENTERED INTO THE TRANSACTION WHICH WAS NOT IN THE N ORMAL COURSE OF BUSINESS. IN FACT, THE ENTIRE TRANSACTION WAS DONE BY THE EMPLOYEES AS PER THE AUTHORITY GIVEN BY THE ASSESSEE-COMPANY. 3 I.T.A. NOS.1299, 996, 997, 1302 & 1301/MDS/16 C.O. NOS.87, 71, 72, 88 & 89/MDS/16 MOREOVER, ACCORDING TO THE LD. D.R., THE EMPLOYEES CLAIMED BEFORE THE ASSESSING OFFICER THAT THEY ENTERED INTO TRANSA CTION ONLY WITH AUTHORISATION OF THE COMPANY AND THE MANAGING DIREC TOR OF THE ASSESSEE-COMPANY HIMSELF ENTERED INTO SUCH A FACILI TY WITH KOTAK MAHINDRA BANK. BOTH THE EMPLOYEES WERE AVAILABLE F OR CROSS EXAMINATION BY THE ASSESSEE-COMPANY. THEREFORE, AC CORDING TO THE LD. D.R., THE CLAIM OF THE ASSESSEE THAT THE EMPLOY EES ENTERED INTO UNAUTHORIZED TRANSACTION WAS FOUND TO BE NOT CORREC T. 3. THE LD. DEPARTMENTAL REPRESENTATIVE FURTHER SUBM ITTED THAT THE EMPLOYEES OF THE ASSESSEE ENTERED INTO A TRANSA CTION WHICH WAS VERY MUCH AUTHORIZED BY THE ASSESSEE-COMPANY. THEREFORE, AT THE BEST, THE TRANSACTION CAN BE DESCRIBED AS SPECU LATIVE LOSS INCURRED BY THE EMPLOYEES. HENCE, ACCORDING TO THE LD. D.R., THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSES SEE AND MADE ADDITION FOR ALL THE YEARS. THE CIT(APPEALS), HOWE VER, BY PLACING RELIANCE ON THE ORDER OF THIS TRIBUNAL IN MAJESTIC EXPORTS V. JCIT (2015) 62 TAXMANN.COM 307, ALLOWED THE CLAIM OF THE ASSESSEE. ACCORDING TO THE LD. D.R., THE DEPARTMENT HAS ALREA DY FILED AN APPEAL BEFORE THE HIGH COURT AND THE SAME IS PENDIN G FOR ADJUDICATION. THE LD. D.R. FURTHER SUBMITTED THAT THE LOSS ON 4 I.T.A. NOS.1299, 996, 997, 1302 & 1301/MDS/16 C.O. NOS.87, 71, 72, 88 & 89/MDS/16 DERIVATIVE TRANSACTION IS A SPECULATIVE LOSS. WHEN NO ACTUAL DELIVERY WAS TAKEN PLACE, THE TRANSACTION HAS TO BE TREATED AS SPECULATIVE TRANSACTION AS PROVIDED IN SECTION 43(5) OF THE INC OME-TAX ACT, 1961 (IN SHORT 'THE ACT'). THEREFORE, ACCORDING TO THE LD. D.R., THE CIT(APPEALS) IS NOT JUSTIFIED IN ALLOWING THE CLAIM OF THE ASSESSEE. 4. ON THE CONTRARY, SH. N. DEVANATHAN, THE LD.COUNS EL FOR THE ASSESSEE, SUBMITTED THAT THE ASSESSEE IN THE COURSE OF ITS BUSINESS ACTIVITY, EXPORTED BRAKE LININGS MANUFACTURED BY IT . IN ORDER TO PROTECT THE ASSESSEE FROM EXPECTED LOSSES DUE TO FO REIGN EXCHANGE FLUCTUATION, THE ASSESSEE ENTERED INTO FORWARD CONT RACT. IN FACT, ONE OF THE EMPLOYEES, NAMELY, M.S. SUBRAMANIAN, DEPUTY FINANCIAL CONTROLLER AND SECRETARY AND G. MANIKANDAN WERE AUT HORIZED BY THE COMPANY TO ENTER INTO TRANSACTION WITH ANY BANK OR FOREIGN EXCHANGE DEALER. ACCORDING TO THE LD. COUNSEL, THE SAID EMPLOYEE EXCEEDED THE POWER IN ENTERING INTO TRANSACTION AFT ER OBTAINING SIGNATURE OF THE MANAGERS IN BLANK PAPER WHICH WAS NOT NORMAL IN THE COURSE OF BUSINESS ACTIVITY OF THE ASSESSEE. T HEREFORE, THE ASSESSEE WAS FORCED TO SETTLE THE DISPUTE WITH BANK S. IN FACT, THE ASSESSEE AFTER NEGOTIATIONS, ENTERED INTO SETTLEMEN T WITH BANKS ON 5 I.T.A. NOS.1299, 996, 997, 1302 & 1301/MDS/16 C.O. NOS.87, 71, 72, 88 & 89/MDS/16 15.08.2008. AS PER THIS AGREEMENT, THE ASSESSEE H AD INCURRED HEAVY LOSS IN SETTLING THE DUES WITH BANKS. 5. THE LD.COUNSEL FOR THE ASSESSEE FURTHER SUBMITTE D THAT THE COMPANY HAS ALSO INITIATED CRIMINAL PROCEEDING AGAI NST BOTH THE EMPLOYEES WHO HAD INVOLVED IN THE TRANSACTIONS. IN FACT, DISCIPLINARY PROCEEDING WAS ALSO INITIATED AGAINST SHRI M.S. SUBRAMANIAN AND SHRI G. MANIKANDAN, THE EMPLOYEES O F THE ASSESSEE-COMPANY, WHICH SHOWS THAT THEY EXCEEDED TH E AUTHORITY. IN FACT, THE EMPLOYEES WERE NOT AUTHORIZED TO ENTER INTO ANY DERIVATIVE TRANSACTION. THEREFORE, THE LOSS SUFFER ED BY THE ASSESSEE-COMPANY FOR SETTLING THE SO-CALLED DERIVAT IVE TRANSACTION, WHICH WAS ENTERED INTO BY THE EMPLOYEES IN UNAUTHOR IZED MANNER, AGAINST THE INTEREST OF THE ASSESSEE, HAS TO BE ALL OWED AS BUSINESS LOSS. EVEN OTHERWISE, ACCORDING TO THE LD. COUNSEL , FOR THE PURPOSE OF PROTECTING THE ASSESSEE FROM LOSS THAT MAY BE SU FFERED DUE TO FOREIGN EXCHANGE FLUCTUATION, THE ASSESSEE ENTERED INTO THE TRANSACTION, THEREFORE, IT HAS TO BE ALLOWED IN VIE W OF THE DECISION OF THIS BENCH OF THE TRIBUNAL IN MAJESTIC EXPORTS (SUP RA). ACCORDING TO THE LD. COUNSEL, MOREOVER, MERE PENDING OF APPEAL B EFORE THE HIGH COURT CANNOT BE A REASON TO DISALLOW THE CLAIM OF T HE ASSESSEE. 6 I.T.A. NOS.1299, 996, 997, 1302 & 1301/MDS/16 C.O. NOS.87, 71, 72, 88 & 89/MDS/16 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE ASSESSEE ADMITTEDLY IS ENGAGED IN THE BUSINESS OF MANUFACTUR ING OF BRAKE LINING AND EXPORTING OF SAME. IN ORDER TO PROTECT THE ASSESSEE- COMPANY FROM LOSS DUE TO FOREIGN EXCHANGE FLUCTUATI ON, A FORWARD CONTRACT WAS ENTERED INTO. THE ASSESSEE CLAIMS THA T TWO OF ITS EMPLOYEES, NAMELY, SHRI M.S. SUBRAMANIAN AND SHRI G . MANIKANDAN EXCEEDED THEIR AUTHORITY AND ENTERED INT O FORWARD CONTRACT BY OBTAINING SOME OF THE SIGNATURES OF MAN AGER IN BLANK PAPER. THE ASSESSEE-COMPANY APPEARS TO HAVE SETTLE D THE DISPUTE BY PAYING HEAVY AMOUNTS AFTER NEGOTIATIONS. FROM T HE ORDERS OF THE LOWER AUTHORITIES IT APPEARS YES BANK INITIATED PRO CEEDING BEFORE DEBT RECOVERY TRIBUNAL FOR RECOVERY OF MONEY FROM A SSESSEE- COMPANY. THE ASSESSEE-COMPANY ULTIMATELY HAD GIVEN BANK GUARANTEE TO THE EXTENT OF ` 99 LAKHS. KOTAK MAHINDRA BANK ALSO INVOKED ARBITRARY PROCEEDING. 7. FROM THE ORDER OF THE ASSESSING OFFICER IT APPEA RS SHRI G. MANIKANDAN GAVE A STATEMENT BEFORE THE ASSESSING OF FICER ADMITTING THAT THE ACT DONE BY THEM WAS UNAUTHORIZE D. IT IS ALSO NOT IN DISPUTE THAT DISCIPLINARY PROCEEDING WAS INITIAT ED AGAINST BOTH THE 7 I.T.A. NOS.1299, 996, 997, 1302 & 1301/MDS/16 C.O. NOS.87, 71, 72, 88 & 89/MDS/16 EMPLOYEES. THE FACT REMAINS THAT IN THE COURSE OF BUSINESS ACTIVITY, THE ASSESSEE ENTERED INTO FORWARD CONTRACT FOR THE PURPOSE OF INSULATING THE ASSESSEE FROM LOSSES THAT MAY BE SUF FERED DUE TO FOREIGN EXCHANGE FLUCTUATION. IN SETTLING THE FORW ARD CONTRACT PERMANENTLY, THE ASSESSEE SUFFERED A LOSS. THEREFO RE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE LOSS SUFFERED BY THE ASSESSEE IS IN THE COURSE OF BUSINESS ACTIVITY, HENCE, THE C IT(APPEALS) HAS RIGHTLY DELETED THE ADDITION MADE BY THE ASSESSING OFFICER BY PLACING RELIANCE ON THE ORDER OF THIS TRIBUNAL IN M AJESTIC EXPORTS (SUPRA). THEREFORE, THIS TRIBUNAL DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LOWER AUTHORITY AND ACCORDING LY THE SAME IS CONFIRMED. 8. FOR THE ASSESSMENT YEAR 2011-12, THE REVENUE HAS RAISED ONE MORE GROUND WITH REGARD TO FOREIGN AGENT COMMIS SION. 9. SHRI R. DURAI PANDIAN, THE LD. DEPARTMENTAL REPR ESENTATIVE, SUBMITTED THAT THE CIT(APPEALS) BY FOLLOWING THE DE CISION OF THIS TRIBUNAL IN ACIT V. M.M. FORGING LTD. IN I.T.A. NO. 2679/MDS/2014 DATED 19.06.2015, ALLOWED THE CLAIM OF THE ASSESSEE . ACCORDING TO THE LD. D.R., THE REVENUE HAS ALREADY FILED AN APPE AL AGAINST THE ORDER OF THIS TRIBUNAL IN M.M. FORGING LTD. BEFORE THE HIGH COURT AND 8 I.T.A. NOS.1299, 996, 997, 1302 & 1301/MDS/16 C.O. NOS.87, 71, 72, 88 & 89/MDS/16 THE SAME IS PENDING FOR ADJUDICATION, THEREFORE, TH E REVENUE HAS FILED THIS APPEAL BEFORE THIS TRIBUNAL. 10. WE HAVE HEARD SH. N. DEVANATHAN, THE LD.COUNSEL FOR THE ASSESSEE ALSO. THE CIT(APPEALS) FOUND THAT ALL THE RECIPIENTS OF THE COMMISSION ARE NON-RESIDENTS AND THEY HAVE NO PERMA NENT ESTABLISHMENT IN INDIA. THE COMMISSION WAS PAID TO FOREIGN AGENTS FOR PROCURING ORDERS. THE ASSESSEE HAS ALSO PLACED ITS RELIANCE ON THE ORDER OF THIS TRIBUNAL IN THE ASSESSEE'S OWN CA SE FOR THE ASSESSMENT YEAR 2008-09 IN I.T.A. NO.143/MDS/2012. THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT WHEN THE SERVICES WERE RENDERED OUTSIDE THE COUNTRY FOR PROCURING ORDERS, AS RIGHTL Y OBSERVED BY THE CIT(APPEALS), IT CANNOT BE CONSIDERED TO BE EITHER FOR TECHNICAL SERVICES OR MANAGERIAL SERVICES. THEREFORE, THE CI T(APPEALS) HAS RIGHTLY DELETED THE ADDITION OF ` 87,15,000/-. THIS TRIBUNAL DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LOWER AUTHORITY AND ACCORDINGLY THE SAME IS CONFIRMED. 11. THE REVENUE HAS ALSO RAISED ANOTHER GROUND WITH REGARD TO DISALLOWANCE OF ` 8,36,000/- UNDER SECTION 35(2AB) OF THE INCOME- TAX ACT, 1961 (IN SHORT 'THE ACT'). 9 I.T.A. NOS.1299, 996, 997, 1302 & 1301/MDS/16 C.O. NOS.87, 71, 72, 88 & 89/MDS/16 12. SHRI R. DURAI PANDIAN, THE LD. DEPARTMENTAL REP RESENTATIVE, SUBMITTED THAT THE ASSESSEE CLAIMS ` 6,02,42,000/- UNDER SECTION 35(2AB) OF THE ACT. THE ASSESSING OFFICER, HOWEVER , DISALLOWED THE CLAIM OF THE ASSESSEE TO THE EXTENT OF ` 8,36,000/-. ACCORDING TO THE LD. D.R., THE DEDUCTION CLAIMED BY THE ASSESSEE WIT H PRESCRIBED FORM 3CL COMES TO NEARLY ` 5,94,06,000/-. THEREFORE, THE DIFFERENCE OF ` 8,36,000/- WAS DISALLOWED. THE CIT(APPEALS), HOWEVER, WITHOUT ANY BASIS DIRECTED THE ASSESSING O FFICER TO RESTRICT THE DISALLOWANCE TO 50%. ACCORDING TO THE LD. D.R. , THE CIT(APPEALS) IS NOT JUSTIFIED IN ALLOWING THE CLAIM OF THE ASSESSEE TO THE EXTENT OF ` 4,18,000/-. 13. ON THE CONTRARY, SH. N. DEVANATHAN, THE LD.COUN SEL FOR THE ASSESSEE, SUBMITTED THAT THE ASSESSEE CLAIMED WEIGH TED DEDUCTION OF ` 6,02,42,000/- UNDER SECTION 35(2AB) OF THE ACT. TH E ASSESSING OFFICER, HOWEVER, RESTRICTED THE CLAIM TO THE EXTEN T OF ` 5,94,06,000/- AS PER FORM 3CL ISSUED BY DEPARTMENT OF SCIENTIFIC AND INDUSTRIAL RESEARCH. THE ASSESSEE CLAIMED BEFORE THE ASSESSIN G OFFICER THAT THE DISALLOWANCE SHOULD BE RESTRICTED TO 50% OF CLA IM. REFERRING TO THE TABULAR COLUMN IN THE ORDER OF THE CIT(APPEALS) , MORE PARTICULARLY AT PARA 5.4.1 AT PAGE 15, THE LD.COUNS EL SUBMITTED THAT 10 I.T.A. NOS.1299, 996, 997, 1302 & 1301/MDS/16 C.O. NOS.87, 71, 72, 88 & 89/MDS/16 THE ASSESSEE CLAIMED AT THE RATE OF 200% UNDER SECT ION 35(2AB) OF THE ACT. THE ELIGIBLE CLAIM AS PER FORM 3CL IS 50% . THEREFORE, THE DISALLOWANCE CAN BE MADE ONLY AT ` 4,18,000/-. THE ENTIRE EXPENDITURE WAS ADDED BACK IN THE TAX COMPUTATION S TATEMENT, THEREFORE, ACCORDING TO THE LD. COUNSEL, THE CIT(AP PEALS) HAS RIGHTLY FOUND THAT THE DISALLOWANCE SHOULD BE RESTRICTED TO ONLY ` 4,18,000/- AND NOT ` 8.36 LAKHS. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. WE HAVE CAREFULLY GONE THROUGH THE ORDERS OF BOTH THE AUTHO RITIES BELOW. THE CIT(APPEALS) FOUND THAT THE ASSESSEE ADDED BACK THE ENTIRE EXPENDITURE IN THE TAX COMPUTATION STATEMENT WHILE COMPUTING THE TAXABLE INCOME. THEREFORE, THE DIFFERENCE IN FORM 3CL SHALL BE RESTRICTED TO ` 4.18 LAKHS. THE FACT THAT THE ENTIRE EXPENDITURE W AS ADDED BACK FOR COMPUTATION OF TOTAL INCOME IS NOT I N DISPUTE. THEREFORE, THIS TRIBUNAL DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF THE LOWER AUTHORITY AND ACCORDINGLY THE SA ME IS CONFIRMED. 15. NOW COMING TO THE CROSS-OBJECTIONS, ALL THE FIV E CROSS- OBJECTIONS ARE ONLY TO SUPPORT THE ORDERS OF THE CI T(APPEALS). THE ASSESSEE HAS ALSO RAISED A GROUND WITH REGARD TO RE OPENING OF 11 I.T.A. NOS.1299, 996, 997, 1302 & 1301/MDS/16 C.O. NOS.87, 71, 72, 88 & 89/MDS/16 ASSESSMENT. SINCE THE APPEALS OF THE REVENUE ARE D ECIDED IN FAVOUR OF THE ASSESSEE ON MERIT, THIS TRIBUNAL IS O F THE CONSIDERED OPINION THAT IT MAY NOT BE NECESSARY TO GO INTO THE ISSUE OF REOPENING OF ASSESSMENT RAISED IN THE CROSS-OBJECTI ONS. 16. IN THE RESULT, ALL THE APPEALS OF THE REVENUE A ND CROSS- OBJECTIONS OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED ON 31 ST MAY, 2017 AT CHENNAI. SD/- SD/- ( !' .$%$& ) ( . . . ) (ABRAHAM P. GEORGE) (N.R.S. GANESAN) ( / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 8 /DATED, THE 31 ST MAY, 2017. KRI. / 149: ;:+4 /COPY TO: 1. -. /APPELLANT 2. 12-. /RESPONDENT 3. 3 <4 () /CIT(A)-15, CHENNAI-34 4. 3 <4 /CIT-6, CHENNAI-34 5. := 14 /DR 6. & > /GF.