M/s Vijay Textiles Limited, Secunderabad V. Dy.CIT, Circle 3(3), Hyderabad

ITA 134/HYD/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 82221 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 6 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-08-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 05-02-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: LAKSHMI NIWAS SHARMA
• Keywords: Rule of consistency; Speculation loss

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI P.M.JAGTAP, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.134/HYD/13 (ASSESSMENT YEAR 2009 - 10) M/S. VIJAY TEXTILES LIMITED, SECUNDERABAD ( PAN - AAACV 8195 L ) V/S. DY. COMMISSIONER OF INCOME - TAX CIRCLE 3(3), HYDERABAD (APPELLANT) (RESPONDENT) APPELLANT BY : S HRI LAKSHMI NIWAS SHARMA RESPONDENT BY : SHRI SOLGY JOSE T.KOTTARAM DR DATE OF HEARING 06 .0 8 .2014 DATE OF PRONOUNCEMENT 08.08.2014 O R D E R PER P.M.JAGTAP, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LEARNED COMMISSIONER OF INCOME - TAX(APPEALS) IV, HYDERABAD, DATED 10.12.2012 AND THE SOLITARY ISSUE ARISING OUT OF THE SAME RELATES TO THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LEARNED CIT(A), ON ACCOUNT OF ASSESSEES CLAIM FOR LOSS OF R.1,41,07,623, ARISING FROM THE DERIVATIVE TRANSACTIONS, TR EATING THE SAME AS SPECULATIVE IN NATURE. 2. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY, WHICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND TRADING OF HOUSEHOLD FURNISHINGS. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED BY IT ON 20.8.2010, DECLARING A TOTAL INCOME OF RS .3,73, 47,310. I N THE SAID RETURN, A LOSS OF R S .1,41,07,623 ARISIN G FROM THE T RANSACTION S IN DERIVATIVES RESORTED TO BY THE ASSESSEE WAS CLAIMED AS A BUSINESS LOSS. ACCOR D ING TO THE ASSESSEE COMPANY, IT HAD AVAILED INTER E ST RATE SWAPS AND ITA NO. 134 /H YD/201 3 M/S. VIJAY TEXTILES, SECUNDE RA BAD. 2 DERIVATIVES AND THES E TRANSACTIONS HAD R E S U LTED IN LO S S DURING THE Y E AR UNDER CON S I D E R ATION, WHI C H WAS CLAIMED AS A BUSINESS LOSS, BEING INCIDENTAL TO THE CARRYING ON OF THE BU S IN E SS OPERATION S . THIS EXPLANATION OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE BY THE ASSESSING OFFIC ER. AFTER REFERRING TO THE DEFINITION OF THE TERM S INT E REST SWAP AND FOREIGN EXCH A NGE FORWARD GIVEN IN TH E RELEVANT RBI GUIDELINES, HE NARRATED THE NATURE OF THE DERIVATIVE TRANSACTIONS ENTERED INTO BY THE ASSESSEE IN PARAGRAPH N O.4.3 OF H ER ORDER AS UNDER - 4.3 THE MODE OF TRANSACTION IN THE CASE OF CURRENCY OPTIONS I S THAT THERE IS NO ACTUAL PURCHASE OF LOAN/CURRENCY OR SALE OF THE SAME. IT IS JUST THAT THE ARRANGEMENT IS MADE FOR THE RATE AT WHICH THE F OREX LOAN/ C UR R ENCY IS TO B E PU R CHA S ED AN D SOLD. THU S , THE DIFFEREN C E IN THE F OREX RATES AT TIME OF OPTING TO PURCHASE OR SALE, IS WHAT SETTLED AS PAY M ENT MADE TO THE BANK OR TO BE RECEIVED F R OM THE BANK. THER E FORE, THE RE IS NO ACTUAL SALE OR PURCHASE OF CURRENCY. SIMILARLY, IN CASE OR INT ER E ST RATE SWAPS, W H A T ARE AGREED ARE THE R AT E S OF IN T E R EST PA Y M E N T S ON A NOTIONAL PRINCIPAL AMOUN T AND THE DIFFERENCE IN TH E RATES IS WHAT IS SETTLED ON THE PAYM E N T DATE. THUS, THESE ARE TR A NSAC T ION S WITHOUT ANY AC T UAL TRANSFER OF GOODS, I.E., TRANSACTION S WITHOUT ACTUAL DELIVERY O F GOODS. IN FACT, THE UNDERLYING VALUE IS A NOTIONAL PRINCIPAL, WHAT IS DRIVING THESE FINANCIAL INSTRUMENTS IS SIMPLY CHANGES IN THE EXCHANGE RATES OR IN T ER E ST RATES OF TH E SE NO T ION A L PRINCIPLES. 3. KEEPING IN VIEW THE NATURE OF THE REL EVANT DERIVATIVE TRANSACTIONS, AS UNDERSTOOD AND ASCERTAINED BY H ER , THE ASSESSING OFFICER PROCEEDED TO CONSIDER WHETHER THE SAID TR A N S ACTION S W ERE IN THE NATURE OF SPECULATIVE TR A NS A CT I ON S AS PER THE PROVIS I ONS OF S .43(5 ) OF THE ACT, AND HELD THAT THE FOLLOWING CONDITIONS STIPULATED IN S.43(5) IN ORDER TO CONSIDER THE TRANSACTIONS TO BE NOT IN THE NATURE OF SPECULATIVE TRANSACTIONS, WERE NOT FULFILLED IN THE CASE OF THE ASSESSEE - ITA NO. 134 /H YD/201 3 M/S. VIJAY TEXTILES, SECUNDE RA BAD. 3 ( A ) THE INTEREST SWAPS OR CURRENCY OPTION S ARE NO T AGREEMENTS F OR ANY COMMODITY/SCRIPS/STOCK/SHARES. IT IS IN RESPE C T OF C URRENCY WHICH IS NO T A COMMODITY/STOCK OR SHARE OR ANY SCRIP OF ANY KIND. ( B ) THERE IS NO AC T UAL D E LI V ERY O F THE CURRENCY. WHAT I S SETTLED IS ONLY DIFFERENCE IN PU R CH AS E AND SALE RATES. ( C ) THE TRANSACTIO NS ARE AS DEFINED BY THE RBI GUIDELINES (M ASTER CIRCUL A R OF RBI), AS STATED EARLIER. ( D ) THE TR A N SA C T ION S ARE NO T THROUGH BROKERS OR IN TE RMEDIARIES REGI S TERED UNDER SEBI, BUT THROUGH BANKS ( E ) THE TRANSACTIONS ARE NOT CARRIED OUT IN RECOGNIZED STOCK EXCHANGES. ACCORDIN G LY, THE LO S S ARISING FROM THE F OREX DERIVATIVE TR A N S ACTIONS OF THE ASSESSEE WAS TREATED BY THE ASSESSING OFFICER AS SPECULATIVE LOSS AND THE SAME WAS NO T ALLOWED TO BE SET OFF BY H IM AGAINST BU S IN E SS IN C OM E . 4. THE DISALLOWANCE MADE BY THE AS SESSING OFFICER ON ACCOUNT OF ITS CLAIM FOR LOSS ARISING FROM THE F OREX DERIVATIVE TR A NSAC T ION S IN TE R - ALIA WAS DISPUTED BY TH E ASSESSEE IN AN APPEAL FIL E D BEFORE THE LEARNED CIT(A), AND AFTER CON S I D ERING THE SUBMI S SION S MADE ON BEHALF OF TH E ASSESSEE AS WE LL AS THE M A TE R IAL AVAILABLE ON RECORD, THE LEARNED CIT(A) CONFIRMED THE DISALLO W AN C E MADE BY THE ASSESSING OFFICER ON THIS ISSUE, FOR THE FOLLOWING RE A SON S GIVEN IN PARAGRAPHS 6.8 AND 6.9 OF THE IMPUGNED ORDER. 6.8 THE RE IS NO DISPUTE THAT INTEREST RATE SWAPS ARE A FORM OF DERIVATIVES. IT IS A FORWARD CON T RA C T FOR HEDGING AGAINST INTEREST RATE FLU C T U ATIONS IN FUTURE. THE CONT RA CT ARE SETTLED NOT BY PAYM E N T O F THE P R IN C I P A L AMOUNT WHICH IS ONLY NOTIONAL BUT BY PAYM E N T O F T H E DIFFEREN C E ITA NO. 134 /H YD/201 3 M/S. VIJAY TEXTILES, SECUNDE RA BAD. 4 IN TH E INTEREST RATES. TH E DECISION IN TH E CASE OF R AJSHREE SUGARS, RELIED ON BY THE AR, ALSO EXPLICITLY RECOGNIZES INTE RE ST RATE SWAPS AS A FORM OF DERIVATIVE. 6.9. UNDER SEC.43(5), ALL TRANSACTION S THAT ARE SETTLED OTHERWISE THAN BY ACTUAL D ELIVERY OF THE COMMODITY CONCERNED ARE DEFINED TO B E SPECULATIVE TRAN S AC T IONS. TRADING IN DERIVATIVES HAS B E EN SP EC IFICALLY EXCLUDED FROM THE PU R VIEW OF THIS DEFINITION W .E.F. 1.4.2006. HOWEVER, PROVISO (D) OF SEC.43(5 ) READ WITH THE EXPLANATION SIMULTA NEOUSLY CIRCUMSCRIBES WHAT CAN B E CON S I D ERED AS DERIVATIVE TRANSACTION EXEMPT FROM THE DEFINITION OF A SPECULATIVE TRANSA C TION. AN INTEREST RATE SWAP IS, OBVIOUSLY, NOT ON E SUCH TRANSACTION. AS D ISCUSSED BY TH E ASSESSING OFFICER IN HER ORDER, IT DOES NO T SATISFY ANY OF TH E CONDIT I ONS LAID DOWN IN THE EXPLANA T ION TO SEC.43(5) OF AN ELIGIBL E TRANSACTION. IT CANNOT THEREFORE, BE SAID TO ENJOY THE IMMUNITY CLAIMED BY TH E APPELLANT. UNDER THE CIR C UM S TANCES AND IN VIEW OF THIS L EG AL PO S ITION, THE DECISION OF THE ASSESSING OFFICER IS UPHELD AND THE THI R D AND FOU R TH G R OUN D S OF APPEAL ARE DISMISSED. 5. AGGRIEVED BY THE O R DER OF THE CIT(A) , ASSESSEE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUNAL. 6. THE LEARNED COUN S EL FOR THE ASSESSEE SUBMI T TED T HAT THE EXACT NATURE OF THE D ERIVATIVE TRAN S A C TIONS ENTERED INTO BY THE ASSESSEE COMPANY W AS NOT UNDERSTOOD PROPERLY EITHER BY THE ASSESSING OFFICER OR BY THE CIT(A) AND THE LOSS ARISING FROM THE TRANS A CTIONS W A S TRE A TED AS SPECULATIVE LOSS BY APPLYING T H E PROVISIONS OF S.43(5), WHICH IN FACT, WERE NOT APPLI C ABLE IN THE CASE OF THE ASSESSEE. HE EXPLAINED THAT RUPEE LOANS AVAILED BY THE ASSESSEE COMPA N Y WERE CONVERTED INTO FOREIGN EXCHANGE LOANS AS PER THE UNDERSTANDING WITH TH E CON C ERNED BANK AND CON S EQU ENTLY, THE RE WAS FOREIGN C URRENCY EXPOSURE IN TERMS OF THE SAID LOAN REPAYABLE IN FOREIGN CURRENCY, INCLUDING INTER E ST THEREON. HE SU B MI T TED THAT IN ORDER TO HEDGE THIS E X CH A N G E RATE AND IN T ER E ST RISK EXPOSURE, THE RELEVANT DERIVATI V E TR A N S AC T ION S WERE ENTE R ED ITA NO. 134 /H YD/201 3 M/S. VIJAY TEXTILES, SECUNDE RA BAD. 5 INTO BY THE ASSESSEE AND THE SAME, THEREFORE, WERE NO T FOR THE PURPOSE O F SPECULATION. TO SUBSTANTIATE THIS SUBMISSION, HE INVITED OU R ATTENTION TO THE RELE V ANT GUIDELINES ISSUED BY THE R ESERVE BANK OF I N D IA, PLACED AT PAGE NOS. 9 TO 12 OF H IS PAPER - BOOK, AS WELL AS COPY OF TH E TERMS AND CONDITIONS OF THE RELEVANT DERIVATIVE TR A N S AC T IONS WITH AXIS BANK, PLACED AT P AGE NOS. 13 AND 14 OF HIS PAPER - BOOK. HE CONTENDED THAT THE RELEVANT DERIVATIVE TRANSACTIONS THUS WERE NOT IN THE NATURE OF SPECU LATIVE TR A N S AC T IONS AND THE LOSS ARISING F R OM TH E SAID TR A N S ACTION S WAS WRONGLY TREATED BY TH E AUTHORITIES BELO W AS OF SPECULATIVE NA T URE, WITHOUT APPRECIATING THE EXACT NATURE O F TH E RELEV A NT DERIVA T I V E TR A N S AC T IONS. IN SUPPORT OF THESE CON T ENTION S , HE RELIED ON THE FOLLOWING DECISIONS O F THE TRIBUNAL - ( A ) LEO EDIBLES & FATS V/S. DCIT (ITA NO.396/HY D /2012 FOR ASSESSMENT YEAR 2008 - 09 DATED 31.5.2013) ( B ) DCIT V/S. CLIMATE SYSTEM P V T. LTD. NEW DELHI (ITA N O .5243/DEL/2010 DATED 21.2.2014) ( C ) RELIANCE INDUSTRIES V/S. DEPARTMENT ( ITA NO. 7223/ M UM/2011 FOR ASSESSMENT YEAR 2008 - 09 DATED 20.11.2013) 7. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SUBMI T TED THAT SIMIL A R TR A N S ACTIONS HAD RESULTED IN PROFIT IN THE IMMEDIATELY P R ECEDING YEAR, I.E. ASSESSMENT YEAR 2008 - 09 , AND T HE SAID PROFIT DULY OFFERED TO TAX BY THE ASSESSEE AS BUSIN E SS INCOME, WAS ACCEPTED BY THE ASSESSING OFFICER. HE CONTENDED THAT THE CLAIM O F THE ASSESSEE FOR LOSS FROM SIM I LAR TRANS A CTIONS BE I NG BUSINESS LOSS, THUS , SHOUL D BE ACCEPTED FOLLO WI N G THE RULE O F CONSISTENCY. 8. THE LEARNED DEPARTMENTAL REPRESENTATIVE, ON THE OTHER HAND, ALTHOUGH INITIALLY SUPPORTED THE CA S E OF THE REV E NUE ON THE ITA NO. 134 /H YD/201 3 M/S. VIJAY TEXTILES, SECUNDE RA BAD. 6 ISSUE UNDER CONSIDERATION, BY RELYING ON PARAG R APHS 6.8 AND 6.9 OF THE IMPU G N E D ORDER OF THE LEARNED CIT(A), FINA LLY SUBMI T TED THAT, IF AT ALL, TH E N A TURE OF THE RELEVANT DERIVATIVE TR A N S AC T IONS I S FOUND TO B E NOT PROPERLY APP R ECIATED BY TH E AUTHO RITI ES BELOW, AS CONTENDED BY TH E LEARNED C OUN SE L FOR THE ASSESSEE , THE MATTER MAY BE RESTORED TO THE FILE O F THE ASSESSING OFFICER FOR DECIDING THE SAME AFRESH, AFTER PROPERLY APPRECIATING THE NATURE OF THE RELEVANT TRANSACTIONS. 9. W E HAVE CONSIDERED THE RI V AL CON TEN TION S AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. AS CONTENDED BY THE LEARNED COUN SEL FOR THE ASSESSEE, THERE WAS FOREIGN CURRENCY EXPOSURE, AS A RESULT OF CONVERSION OF RUPEE LOANS OF THE ASSESSEE INTO FOREIGN CURRENCY LOANS AND IN ORDER TO HEDGE SUCH EXPOS U RE, THE REL E VANT DERIVATIVE TR A NSACTION S WERE ENT E RED INTO BY THE ASSESSEE, AS A MEASURE OF RISK MANAGEMENT. THIS CONTENTION OF THE LEARNED COUNSEL F OR THE ASSESSEE IS DULY SUPPO R TED BY THE REL E VANT GUIDELINES OF THE RESERVE BANK OF I NDIA, WHICH CATEGORICALLY STATED THAT THE PURPOSE OF THE RELEVANT DERIVATIVE TR A N S ACTIONS WAS TO HE D GE EXCHANGE RATE AND/OR INTEREST RISK EXPOSURE FOR THOS E HAVING LONG TERM FOREIGN CURRENCY BORROWINGS OR TO TRANSFORM LONG - TERM INR BORROWINGS INTO F OREIGN CURRENCY BORROWINGS. IT IS ALSO FURTHER SUPPORTED BY TH E TERMS AND CON D ITION S AGREED BETWEEN THE ASSESSEE AND THE CONCERNED B A NK, VIZ. AXIS BANK, WHILE E NTERING INTO THE REL E VANT DERIVATIVE TRANS A CTION S , AND THE SAME, AS GIVEN IN THE RELEVANT DOCUM E N T S, PL A CED AT PAGES 13 AND 14 OF THE PAPER - BOOK, ARE AS UNDER - A) IF THE COUNTER PARTY IS AN ENTITY OTHER THAN A BANK OR PRIMARY DEALER, THEN TH E COUN T ER P ARTY REPRESENTS AND WARRANTS AS FOLLOWS - ITA NO. 134 /H YD/201 3 M/S. VIJAY TEXTILES, SECUNDE RA BAD. 7 I) THE COUN TE R PARTY I S ENTERING INTO THI S TRANSACTION S OLELY FOR TH E PU R PO S E O F HE D GING ITS FOREIGN CURRENCY BALANCE SH E ET EX POSURE. II) THE SIZE AND TENOR OF THI S TR A N S AC T ION IS NO T IN EXCESS O F THE COUN TE R PARTYS UNDERLYING FOREIGN CURRENCY EXPO S URE, AND III) ALL NECESSARY CORPORATE AUTHORI S ATION S AND APPROVALS HAVE BEEN OBTAINED FOR ENTERING INTO AND PER F ORM A N CE O F THIS TR A NSAC T ION. B. ASSESSMENT AND UNDE RS TANDING : EACH PARTY I S CAPABLE OF ASSESSING BY ITSELF (ON ITS OWN BEHALF OR THROUGH INDEPENDENT PROFESSION A L ADVICE ) THE M E RITS AND UNDERSTANDS AND ACCEPTS THE TERMS, C ONDITIONS AND RISKS OF THIS S WAP TRANS AC TION. C. STATUS OF PARTIES : THE COUNTER PARTY IS NOT ACTING AS A FIDUCIARY FOR OR AN ADVISER TO IT IN RESPECT OF THIS TRANSACTION. D. RISK MANAGEMENT: IT HAS ENTERED INTO THIS TRANSACTION FOR THE PURPOSE OF HEDGING ITS ASSETS OR LIABILITIES OR IN CONNECTION WITH A LINE OF BUSINESS OR MARKET MAKING, AND NOT FOR THE PURPOSE OF SPECULATION. 10. AFTER HAVING GONE THROUGH THE RELEVANT RBI GUIDELINES, UNDERLYING THE PURPOSE OF RELEVANT DERIVATIVE TRANSACTIONS, AS WELL AS THE RELEVANT TERMS AND CONDITIONS OF SUCH TRANSACTIONS AGREED BETWEEN THE ASSESSEE AND THE AXIS BANK, WE FIND OURSELVES IN AGREEMENT WITH THE CONTENTION OF THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE NATURE OF THE RELEVANT DERIVATIVE TRANSACTIONS WAS NOT PROPERLY APPRECIATED EITHER BY THE ASSESSING OFFICER OR BY THE LEARNED CIT(A) AND THE SAID TRANSACTIONS WERE TREATED BY THEM AS SPECULATIVE TRANSACTIONS BY REFERRING TO THE PROVISIONS OF S.43(5) ITA NO. 134 /H YD/201 3 M/S. VIJAY TEXTILES, SECUNDE RA BAD. 8 WITHOUT APPRECIATING THE CORRECT NATURE OF THE RELEVANT DERIVAT IV E TRANSACTIONS. KEEPING IN VIEW THIS POSITION , CLEARLY EMANATING FROM THE RELEVANT DOCUMENTS AS WELL AS THE ORDERS OF THE AUTHORITIES BELOW, WE ARE OF THE VIEW THAT THE MATTER SHOULD GO BACK TO THE FILE OF THE ASSESSING OFFICER FOR DECIDING THE SAME AFRESH, AFTER PROPERLY APPRECIATING AND ASCERTAININ G THE EXACT NATURE OF THE RELEVANT DERIVATIVE TRANSACTIONS. ACCORDINGLY, WE SET ASIDE THE IMPUGNED ORDERS OF THE LEARNED CIT(A) ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE ASSESSING OFFICER FOR DECIDING THE SAME AFRESH IN ACCORDANCE WITH LAW, AFTER GIVING PROPER AND SUFFICIENT OPPORTUNITY OF BEING HEAR D TO THE ASSESSEE. THE ASSESSING OFFICER IS ALSO DIRECTED TO CONSIDER THE DECISIONS OF THIS TRIBUNAL CITED BY THE LEARNED COUNSEL FOR THE ASSESSEE AND ALSO THE ARGUMENT OF THE LEARNED COUNSEL FOR THE ASSESSEE, BASED ON THE RULE OF CONSISTENCY. 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT ON 8 TH AUGUST, 2014 SD/ - SD/ - ( SAKTIJIT DEY ) ( P.M.JAGTAP ) JUDICIAL MEMBER ACCOUNTANT MEMBER DT/ - 8 TH AUGUST, 2014 COPY FORWARDED TO: 1. M/S. VIJAY TEXTILES LIMITED, GROUND FLOOR, SURYA TOWERS, 104, SP ROAD, SECUNDERABAD 2 . DY. COMMISSIONER OF INCOME - TAX CIRCLE 3(3), HYDERABAD ITA NO. 134 /H YD/201 3 M/S. VIJAY TEXTILES, SECUNDE RA BAD. 9 3. COMMISSIONER OF INCOME - TAX(APPEALS) IV, HYDERABAD 4. COMMISSIONER OF INCOME - TAX III, HYDERABAD 5. DEPARTMENTAL REPRESENTATIVE, ITAT, HYDERABAD. B.V.S