Dy. Commissioner of Income Tax, Circle-2(2), Hyderabad V. Gemini Edible & Fats India Private Limited, Hyderabad

ITA 1375/Hyd/2017

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 6533 (ITAT-HYDERABAD)
• Duration Of Justice: 11 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-07-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2012-2013
• Appeal Filed On: 04-08-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PALLAVI AGARWAL
• Assessee Lawyers: T S AJAI
• Keywords: Capital asset
• Section: 43(5)

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI V. DURGA RAO, JUDICIAL MEMBER ITA NO.1375/HYD/2017 ASSESSMENT YEAR: 2012-13 THE DY. CIT, CIRCLE-2(2), HYDERABAD. VS. M/S. GEMINI EDIBLES & FATS INDIA PRIVATE LIMITED, HYDERABAD. PAN AADCG5150F. (APPELLANT) (RESPONDENT) REVENUE BY : SMT. PALLAVI AGARWAL ASSESSEE BY : SHRI T.S. AJAI DATE OF HEARING : 27-06-2018 DATE OF PRONOUNCEMENT : 31-07-2018 ORDER PER SHRI B. RAMAKOTAIAH, AM: THIS IS AN APPEAL BY REVENUE AGAINST THE ORDER OF LD. CIT(A)-2, HYDERABAD DATED 31.05.2017. THE ISSUE IN THIS APPEAL IS WITH REFERENCE TO ALLOWANCE OF FOREIGN EXCHANGE FLUCTUATION LOSS CONSIDERED BY A.O AS NOTIONAL. 2. BRIEFLY STATED FACTS ARE THAT ASSESSEE-COMPANY IS IN THE BUSINESS OF MANUFACTURING AND TRADING OF REFINED/CRUDE EDIBLE OILS AND VANASPATHI. IN THE COURSE OF ASSESSMENT PROCEEDINGS, A.O EXAMINED THE FOREIGN EXCHANGE LOSS REPORTED BY ASSESSEE AND AFTER DISCUSSION CONSIDERED THE FOLLOWING DISALLOWANCES. (I) FOREIGN EXCHANGE LOSS IN PURCHASES OF CAPITAL ASSETS OF RS. 41,76,716/-. 2 ITA NO. 1375/HYD/2017 GEMINI EDIBLES & FATS INDIA PVT. LTD., HYD. (II) FOREIGN EXCHANGE LOSS ON COMMODITY HEDGING OF RS. 4,05,15,922/-. (III) FOREIGN EXCHANGE FLUCTUATION LOSS OF RS. 20,11,60,005/-. 1.1 AGGRIEVED ON THE ABOVE, ASSESSEE PREFERRED AN APPEAL BEFORE LD. CIT(A). AFTER CONSIDERING THE DETAILED SUBMISSIONS AND FACTS OF THE CASE, LD. CIT(A) ALLOWED THE COMMODITY HEDGING LOSS BY FOLLOWING THE COORDINATE BENCH DECISION ON SIMILAR FACTS AND REVENUE HAS ACCEPTED THE SAME. 2. COMING TO THE CLAIM OF FOREIGN EXCHANGE FLUCTUATION LOSS OF RS. 20,11,60,005/- LD. CIT(A) ANALYZED THE LOSS WHICH CONSISTS OF UNREALIZED FOREX LOSS OF RS. 14,23,39,631/- AND REALIZED FOREX LOSS OF RS. 5,88,20,372/- LD. CIT(A) HAS ALLOWED BOTH. REVENUE IS AGGRIEVED ON ALLOWANCE OF UNREALIZED FOREX LOSS OF RS. 14,23,39,631/- WHICH IT CONSIDERED AS MARKED TO MARKET LOSS WHICH IS NOTIONAL IN NATURE AS PER CBDT INSTRUCTION NO. 3/2010. REVENUE HAS RAISED THE FOLLOWING TWO GROUNDS: 1. WHETHER, IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WHETHER THE CIT(A) IS CORRECT IN HOLDING THAT THE LOSS CLAIMED BY THE ASSESSEE HAS TO BE ALLOWED IN CONTRAVENTION OF CIRCULAR NO. 3/2010 OF CBDT. 2. WHETHER, IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WHETHER THE CIT(A) IS CORRECT IN ALLOWING THE MTM LOSSES AND NOT TREATING THEM TO BE NOTIONAL LOSSES. 3. LD. DR RELIED ON THE ORDER OF A.O, WHEREAS LD. COUNSEL FOR ASSESSEE RELIED ON THE ORDER OF LD. CIT(A) AND 3 ITA NO. 1375/HYD/2017 GEMINI EDIBLES & FATS INDIA PVT. LTD., HYD. THE HONBLE HIGH COURT IN THE SAME FACTS WHICH THE LD. CIT(A) HAS FOLLOWED. 4. WE HAVE CONSIDERED THE FACTS OF THE CASE AND THE ISSUE RAISED BY REVENUE. EVEN THOUGH BOARD CIRCULAR NO. 3/2010 CONSIDERED THE MARKED TO MARKET LOSSES HAS NOTIONAL. THIS ISSUE WAS EXAMINED BY THE COORDINATE BENCH AND HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF VST INDUSTRIES LTD. IN ITTA NO. 284 OF 2014 HAS UPHELD THE ISSUE AND DISTINGUISHED THAT CBDT INSTRUCTION NO. 3/2010 WOULD ONLY APPLY TO DERIVATIVE TRANSACTIONS AND NOT TO TRANSACTIONS IN THE COURSE OF BUSINESS. LD. CIT(A) HAS ANALYZED THE ISSUE AS UNDER: 7.3. DURING APPEAL PROCEEDINGS, THE AR CONTENDS THAT AS FAR AS THE UNREALISED FOREX LOSS OF RS. 14.23 CROES IS CONCERNED, THE ASSESSEE HAS SUBMITTED THAT THE METHOD OF ACCOUNTING OF MTM IS MANDATED BY THE ACCOUNTING STANDARD OF THE ICAI, AND FURTHER SUCH LOSS IS KNOWN AS MTM (MARK TO MARKET). IT IS ALSO CONTENDED THAT THE ASSESSEE FOLLOWS THIS CONSISTENTLY AND PROFIT OR LOSS IS ALWAYS TAKEN INTO ACCOUNT. IT IS FURTHER SUBMITTED THAT THIS PROFIT OR LOSS ON ACCOUNT OF MTM IS ACTUAL PROFIT OR LOSS AND IS NOT A NOTIONAL ENTRY AND HENCE, IT IS ALLOWABLE AS A DEDUCTION FOR INCOME TAX PURPOSES IN VIEW OF THE DECISION OF THE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA PVT LTD .. WITH REGARD TO REALIZED FOREX LOSS, THE AR CONTENDS THAT THE AO'S CONCLUSION THAT THE ASSESSEE'S FOREX TRANSACTIONS ARE' SPECULATIVE IN NATURE IS NOT ACCEPTABLE, AS THE CIRCULAR NO.3 OF 2010 OF CBDT IS APPLICABLE ONLY TO 'DERIVATIVE TRANSACTIONS' AND NOT TO TRANSACTIONS IN THE COURSE OF BUSINESS. 7.5. IT IS TO BE MENTIONED HERE THAT THE AR RELIED ON THE DECISIONS OF HON'BLE ITAT, HYDERABAD 'A' BENCH, HYDERABAD IN THE CASE OF VST INDUSTRIES FOR THE A.Y.2008-09 IN ITA NO.647/HYD/2012, DT: 23-08-2013 AND JURISDICTIONAL HIGH COURT WHEREIN IT WAS HELD THAT IF THE ASSESSEE IS NOT A DEALER IN FOREIGN EXCHANGE AND THE ASSESSEE HAD ENTERED INTO THE FORWARD CONTRACT, THEN THE LOSS ARISING AS A RESULT OF SUCH FORWARD CONTRACT CANNOT BE SAID TO BE SPECULATIVE AS PER SECTION 43(S)(D) OF THE ACT. IT IS ALSO HELD THAT THE LOSS/EXPENDITURE CLAIMED BY 4 ITA NO. 1375/HYD/2017 GEMINI EDIBLES & FATS INDIA PVT. LTD., HYD. THE ASSESSEE ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE CANNOT BE CONSIDERED TO BE NOTIONAL BY FOLLOWING THE INSTRUCTION NO. 3 OF 2010 OF CBDT. RELEVANT PORTIONS OF THE ORDERS OF HON'BLE ITAT, HYDERABAD AND JURISDICTIONAL HIGH COURT ARE REPRODUCED AS UNDER: HON'BLE ITAT'S ORDER 'THE HONOURABLE GUJARAT HIGH COURT IN CASE OF FRIENDS AND FRIENDS SHIPPING PV.T LTD. (TAX APPEAL; NO. 251 OF 2010 DATED 23.08.2011) (SUPRA) AFTER FOLLOWING THE DECISIONS OF THE HONOURABLE BOMBAY HIGH COURT IN CASE OF CIT VS. BADRIDAS GAURIDA (P) LTD (261 ITR 256) AND THE DECISION OF HAN'BLE CALCUTTA HIGH COURT IN CASE OF CIT VS. SOORAJMULL NAGARMUL1 (129 ITR 169) HELD THAT WHEN THE ASSESSEE IS NOT A DEALER IN FOREIGN EXCHANGE AND FOR THE PURPOSE OF HEDGING THE LOSS DUE TO FLUCTUATION IN FOREIGN EXCHANGE WHILE IMPLEMENTING EXPORT CONTRACT THE ASSESSEE HAD ENTERED INTO THE FORWARD CONTRACT WITH THE BANK, THEN THE LOSS ARISING AS A RESULT OF SUCH FORWARD CONTRACT CANNOT BE SAID TO BE SPECULATIVE AS PER SECTION 43(5)(D) OF THE ACT. CONSIDERED IN THE LIGHT OF RATIO IN THE JUDICIAL PRECEDENTS MENTIONED HEREIN ABOVE IT IS ADMITTED FACT THAT THE ASSESSEE IS NOT A DEALER IN FOREIGN EXCHANGE BUT ENGAGED IN THE BUSINESS OF EXPORT / IMPORT OF CIGARETTES AND TOBACCO. IN FACT THE CIT(A) HIMSELF HAS ACCEPTED THE FACT THAT THE FORWARD CONTRACT HAS BEEN ENTERED INTO IN THE ORDINARY COURSE OF ITS BUSINESS IN RESPECT OF UNDERLYING IMPORT/EXPORT BUSINESS TRANSACTIONS OF THE ASSESSEE. IN THE CIRCUMSTANCES, THE LOSS / EXPENDITURE CLAIMED BY THE ASSESSEE ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE CANNOT BE CONSIDERED TO BE NOTIONAL BY FOLLOWING THE INSTRUCTION NO.3 OF 2010 OF CBDT. THE DECISION OF HONOURABLE SUPREME COURT IN CASE OF CIT DELHI VS. WOODWARD GOVERNOR INDIA PVT LTD, (SUPRA) AND INCOME TAX APPELLATE TRIBUNAL, SPECIAL BENCH IN BANK OF BAHRAIN AND KUWAIT (SUPRA) ALSO, SUPPORT SUCH A VIEW.' HON'BLE JURISDICTIONAL HIGH COURT'S ORDER. I. T. T.A.NO.284 OF 2014 'THIS APPEAL IS SOUGHT TO BE PREFERRED AND ADMITTED AGAINST THE JUDGMENT AND ORDER OF THE LEARNED TRIBUNAL DATED 23RD AUGUST 2013 IN RELATION TO THE ASSESSMENT YEAR 2008-09 ON THE FOLLOWING SUGGESTED QUESTIONS OF LAW: (I) IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WHETHER THE LEARNED TRIBUNAL IS CORRECT IN LAW IN HOLDING THAT THE LOSS / 5 ITA NO. 1375/HYD/2017 GEMINI EDIBLES & FATS INDIA PVT. LTD., HYD. EXPENDITURE CLAIMED BY THE RESPONDENT-ASSESSEE ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE I.E MARKET TO MARKET (MTM) LOSS CANNOT BE CONSIDERED TO BE NOTIONAL AS PER THE CBDT INSTRUCTION NO.3 OF 2010, WHEN THE SAID AMOUNT WAS RIGHTLY DISALLOWED BY THE ASSESSING OFFICER IN TERMS OF PROVISO '0 OF SECTION 43(5) OF THE ACT ? (II) IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WHETHER THE LEARNED TRIBUNAL IS CORRECT IN LAW IN DIRECTING THE ASSESSING OFFICER TO DELETE THE SUBJECT ADDITION MADE WITH REGARD TO MARKET TO MARKET (MTM) LOSS CLAIMED BY THE RESPONDENT- ASSESSEE? WE HAVE HEARD THE LEARNED COUNSEL FOR THE PARTIES AND HAVE GONE THROUGH THE JUDGMENT AND ORDER OF THE LEARNED TRIBUNAL. IT APPEARS THAT THE LEARNED TRIBUNAL ON FACT FOUND AS FOLLOWS: 'THE ASSESSEE IS NOT A DEALER IN FOREIGN EXCHANGE. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF CIGARETTES AND IN THE PROCESS OF ITS BUSINESS ACTIVITY IT EXPORTS CIGARETTES TO FOREIGN COUNTRIES. IT IS ALSO A FACT THAT FOR THE PURPOSE OF ITS EXPORT / IMPORT ACTIVITIES, THE ASSESSEE HAS ENTERED INTO FORWARD CONTRACTS WITH BANKS RELATING TO ITS EXPORT / IMPORT BUSINESS TRANSACTIONS.' ON AFORESAID FACTUAL POSITION, THE LEARNED TRIBUNALS CONSISTENTLY HELD THAT THE LOSS/EXPENDITURE CLAIMED BY THE ASSESSEE ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE COULDN'T BE CONSIDERED TO BE NOTIONAL BY FOLLOWING THE INSTRUCTION NO.3 OF 2010 OF CBDT. THEREFORE, WE DO NOT FIND ANY ELEMENT OF LAW TO BE DECIDED IN THIS APPEAL. ACCORDINGLY, WE DISMISS THE APPEAL. MISCELLANEOUS PETITIONS PENDING, IF ANY, SHALL ALSO STAND CLOSED. NO ORDER AS TO COSTS. SINCE THE ISSUE INVOLVED IS SIMILAR, THE RATIO LAID DOWN IN THE JUDICIAL PRECEDENTS CITED SUPRA, IS SQUARELY APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. THEREFORE, THE DISALLOWANCE OF RS. 20,11,60,005/- MADE IN THIS REGARD, IS DIRECTED TO BE DELETED. AS A RESULT, THE GROUNDS OF RAISED ARE ALLOWED. 4.1 SINCE THE LD. CIT(A) FOLLOWED THE PRINCIPLES LAID DOWN BY THE JURISDICTIONAL HIGH COURT AND SINCE THERE IS A FINDING THAT THE LOSS INCURRED IS NOT OUT OF DERIVATIVES AND WAS INCURRED IN THE COURSE OF THE NORMAL BUSINESS ON THE 6 ITA NO. 1375/HYD/2017 GEMINI EDIBLES & FATS INDIA PVT. LTD., HYD. TRANSACTIONS ENTERED INTO BY ASSESSEE, WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A). THERE IS NO MERIT IN REVENUE GROUNDS AND ACCORDINGLY THE SAME ARE REJECTED. 5. IN THE RESULT, APPEAL FILED BY REVENUE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 31 ST JULY, 2018. SD/- SD/- (V. DURGA RAO) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER HYDERABAD, DATED 31 ST JULY, 2018. KRK 1) M/S GEMINI EDIBLES & FATS INDIA PVT LTD., 8-2-334/70 & 71, ROAD NO. 5, BANJARA HILLS, HYDERABAD. 2) THE DY. CIT, CIRCLE-2(2), HYDERABAD. 3) CIT(A) -2, HYDERABAD. 4) THE ADDL. CIT, RANGE-2, HYDERABAD. 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDERABAD. 6) GUARD FILE