Cotton Blossom (India) P Ltd., CHENNAI V. ACIT, Tiruppur

ITA 1642/CHNY/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 86280 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 5 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-01-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 12-01-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 13-08-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S DASGUPTA
• Keywords: Reasonable cause; Speculation loss; Condonation of delay
• Section: 80IB; 43(5)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , B B ENCH, CHENNAI . , ' $ % , & ' BEFORE SHRI A.MOHAN ALANKAMONY ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ./I.T.A.NO. 1642/MDS/2013 ( / ASSESSMENT YEAR: 2007-08) M/S. COTTON BLOSSOM (INDIA) P.LTD. 189, TEKIC TEA NAGAR, MUDALIPALAYAM, COIMBATORE. VS ASSISTANT COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-I, TIRUPUR. PAN: AACFC0694L ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : MR. SAROJ KUMAR PARIDA, ADVOCATE /RESPONDENT BY : MR. S.DAS GUPTA, JCIT /DATE OF HEARING : 12TH JANUARY, 2015 /DATE OF PRONOUNCEMENT : 30 TH JANUARY, 2015 / O R D E R PER CHALLA NAGENDRA PRASAD, JM: THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE O RDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-II, COI MBATORE DATED 04.01.2013 FOR THE ASSESSMENT YEAR 2007-08. 2. THE APPEAL FILED BY THE ASSESSEE IS BARRED BY 60 DAYS. THE ASSESSEE FILED AN AFFIDAVIT EXPLAINING R EASONS FOR DELAY IN FILING OF APPEAL STATING THAT HE MET WITH AN ACCIDENT, SERIOUSLY INJURED AND HOSPITALIZED FOR MORE THAN TH REE MONTHS AND COULD NOT HAND OVER THE COMMISSIONER OF INCOME TAX (APPEALS) ORDER TO A.R. FOR FILING APPEAL TIME. THU S PRAYS FOR 2 ITA NO.1642/MDS/2013 CONDONATION OF DELAY. WE HAVE PERUSED THE REASONS AND ARE SATISFIED THAT THERE IS A REASONABLE CAUSE FOR THE DELAY IN FILING OF THE APPEAL. IN THE INTEREST OF JUSTICE, WE CONDO NE THE DELAY OF 60 DAYS IN FILING OF THE APPEAL. THE PETITION FO R CONDONATION OF DELAY IS THUS, ALLOWED AND THE APPEAL IS ADMITT ED. 3. COUNSEL FOR THE ASSESSEE SUBMITS THAT BOTH THE I SSUES IN THIS APPEAL ARE DECIDED BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR AND HE PLACES A COPY OF THE ORDER OF THIS TRIBUNAL IN ITA NO.2032/MDS/2012 DATE D 21.02.2013. COUNSEL SUBMITS THAT GROUND NO.2 RAISED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEAL S) IN CONFIRMING THE DISALLOWANCE OF FOREIGN CURRENCY DER IVATIVE LOSS BY TREATING IT AS SPECULATION LOSS AND HOLDING THAT IT CANNOT BE ALLOWED TO SET OFF AGAINST INCOME OF REGU LAR BUSINESS OF THE ASSESSEE IS DECIDED IN FAVOUR OF TH E ASSESSEE BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN ITA NO.2032/MDS/2012. WITH REGARD TO GROUND NO.4 I.E DE NYING DEDUCTION UNDER SECTION 80IB OF THE ACT ON DUTY DRA W BACK, HE SUBMITS THAT THE ISSUE HAS BEEN DECIDED AGAINST THE ASSESSEE BY THE CO-ORDINATE BENCH IN THE AFORESAID ORDER. 3 ITA NO.1642/MDS/2013 4. DEPARTMENTAL REPRESENTATIVE SUPPORTS THE ORDERS OF THE LOWER AUTHORITIES. 5. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHOR ITIES AND THE DECISION RELIED ON. ON A PERUSAL OF THE DEC ISION OF CO- ORDINATE BENCH OF THIS TRIBUNAL IN ITA NO.2032/MDS/ 2012 DATED 21.02.2013 WE FIND THAT BOTH THE ISSUES IN TH E APPEAL OF THE ASSESSEE ARE SQUARELY COVERED BY THIS DECISION. IN RESPECT OF DISALLOWANCE OF FOREIGN CURRENCY DERIVAT IVE LOSS BY TREATING IT AS SPECULATION LOSS AND NOT ALLOWING SE T OFF AGAINST REGULAR BUSINESS, THE TRIBUNAL HELD AS UNDER:- 9. WE HAVE HEARD BOTH SIDES. PERUSED THE MATERIAL S ON RECORDAND THE ORDERS OF AUTHORITIES BELOW. THE ASSESSEE IS AN EXPORTER OF HOSIERY GARMENTS. THERE IS NO DISPUTE THAT THE ASSESSEE IS NOT A DEALER IN FOR EIGN EXCHANGE. THE ASSESSEES FOREX TRANSACTIONS ARE REGULATED BY RBI. THE ASSESSEE IS CARRYING ON THE FOREX TRANSACTIONS ONLY IN THE COURSE OF ITS BUSINE SS AND NOT AS A SEPARATE BUSINESS AS OBSERVED BY THE ASSESSING OFFICER BECAUSE THE ASSESSEE IS NOT A DEALER IN FOREIGN EXCHANGE. THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT V. BADRIDAS GAURIDU (P) LT D (SUPRA) HELD THAT AN ASSESSEE WHO IS AN EXPORTER OF COTTON ENGAGED IN FORWARD CONTRACTS WITH BANKS IN FOREIGN EXCHANGE IS NOT A SPECULATIVE TRANSACTION. IT WAS HELD THAT LOSS DEDUCTIBLE IS BUSINESS LOSS. WHI LE HOLDING SO, THE HON'BLE BOMBAY HIGH COURT HELD AS UNDER :- THE ASSESSEE-COMPANY CARRIED ON BUSINESS AS EXPORT HOUSE. THE ASSESSEE-COMPANY IS AN EXPORTER OF COTTON. ON 3 0TH DEC., 1992, THE ASSESSEE FILED ITS RETURN OF INCOME SHOW ING AN INCOME OF RS.1,13,100. THE ASSESSEE HAD ENTERED INTO FORWA RD CONTRACTS WITH THE BANKS IN RESPECT OF FOREIGN EXCHANGE. SOME OF THESE CONTRACTS COULD NOT BE HONOURED BY THE ASSESSEE FOR WHICH IT HAD TO PAY RS.13.50 LAKHS, WHICH WAS DEBITED TO THE P&L A/C. THE ASSESSEE CLAIMED THE SAME AS BUSINESS LOSS BEING PA YMENT 4 ITA NO.1642/MDS/2013 MADE ON ACCOUNT OF CANCELLATION OF FORWARD BOOKING OF FOREIGN EXCHANGE WITH THE BANKS IN RESPECT OF EXPORT ORDERS . THE AO DISALLOWED THE DEDUCTION ON THE GROUND THAT THE ASS ESSEE HAD SHORT SOLD THE FOREIGN EXCHANGE AND THAT THE PAYMEN TS MADE WERE NOT IN THE NATURE OF DAMAGES, BUT THEY WERE MA DE TO SETTLE THE TRANSACTION WITHOUT DELIVERY AND, THEREFORE, TH E SAID AMOUNT OF RS. 13.50 LAKHS WAS A SPECULATION LOSS, WHICH CAN O NLY BE ALLOWED TO BE CARRIED FORWARD AND SET OFF AGAINST S PECULATION PROFITS. BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL TO THE CIT(A). THE FIRST APPELLATE AUTHORITY CONFIRMED THE ASSESSMENT ORDER. BEING AGGRIEVED, THE ASSESSEE CAR RIED THE MATTER IN APPEAL TO THE TRIBUNAL, WHICH TOOK THE VI EW THAT THE ASSESSEE WAS AN EXPORTER OF COTTON; THAT THE ASSESS EE WAS AN EXPORT HOUSE; THAT IT HAD ENTERED INTO TRANSACTIONS FOR EXPORT OF COTTON; THAT THE ASSESSEE WAS ENTITLED TO BOOK FORE IGN EXCHANGE AGAINST EXPORT ORDERS RECEIVED BY IT; THAT THE TRAN SACTION WAS DONE WITH THE PERMISSION OF THE RESERVE BANK OF IND IA; THAT SUCH CONTRACTS WERE INCIDENTAL TO THE ASSESSEE'S BUSINES S OF EXPORT OF COTTON; AND, THEREFORE, THEY DID NOT REPRESENT SPEC ULATIVE TRANSACTIONS. ACCORDINGLY, THE TRIBUNAL ALLOWED THE APPEAL. BEING AGGRIEVED, THE DEPARTMENT HAS COME BY WAY OF APPEAL TO THIS COURT. FINDINGS THE ASSESSEE WAS NOT A DEALER IN FOREIGN EXCHANGE. THE ASSESSEE WAS A COTTON EXPORTER. THE ASSESSEE WAS AN EXPORT HOUSE. THEREFORE, FOREIGN EXCHANGE CONTRACTS WERE B OOKED ONLY AS INCIDENTAL TO THE ASSESSEE'S REGULAR COURSE OF B USINESS. THE TRIBUNAL HAS RECORDED A CATEGORICAL FINDING TO THIS EFFECT IN ITS ORDER. THE ASSESSING OFFICER HAS NOT CONSIDERED THE SE FACTS. UNDER S. 43(5) OF THE IT ACT,'SPECULATIVE TRANSACTI ON' HAS BEEN DEFINED TO MEAN A TRANSACTION IN WHICH A CONTRACT F OR THE PURCHASE OR SALE OF A COMMODITY IS SETTLED OTHERWIS E THAN BY THE ACTUAL DELIVERY OR TRANSFER OF SUCH COMMODITY. HOWE VER, AS STATED ABOVE, THE ASSESSEE WAS NOT A DEALER IN FOREIGN EXC HANGE. THE ASSESSEE WAS AN EXPORTER OF COTTON. IN ORDER TO HED GE AGAINST LOSSES, THE ASSESSEE HAD BOOKED FOREIGN EXCHANGE IN THE FORWARD MARKET WITH THE BANK. HOWEVER,THE EXPORT CONTRACTS ENTERED INTO BY THE ASSESSEE FOR EXPORT OF COTTON IN SOME CASES FAILED. IN THE CIRCUMSTANCES, THE ASSESSEE WAS ENTITLED TO CLAIM D EDUCTION IN RESPECT OF RS. 13.50 LAKHS AS A BUSINESS LOSS. THIS MATTER IS SQUARELY COVERED BY THE JUDGMENT OF THE CALCUTTA HI GH COURT, WITH WHICH WE AGREE, IN THE CASE OF CIT VS. SOORAJMULL N AGARMULL (1981) 22 CTR (CAL) 8 : (1981) 129 ITR 169. IN THE CIRCUMSTANCES, THERE IS NO MERIT IN THE APPE AL. THE APPEAL FAILS AND THE SAME IS DISMISSED WITH NO ORDE R AS TO COST. THE HON'BLE CALCUTTA HIGH COURT IN THE CASE OF CIT V. SOORAJMULL NAGARMULL (SUPRA) HAS ALSO TAKEN SIMILAR VIEW. THE DELHI BENCH OF THE TRIBUNAL IN THE CASE O F MUNJAL SHOWA LTD V. DCIT (SUPRA) HELD THAT FOREIGN CURRENCY OR ANY CURRENCY IS NEITHER COMMODITY NOR SHARES. IT WAS ALSO HELD THAT IN VIEW OF THE PROVIS IONS OF FERA, IT IS LEGALLY IMPOSSIBLE TO ENTER INTO A SPECULATIVE TRANSACTION IN RESPECT OF FOREIGN CURRE NCY AND SUCH A FORWARD CONTRACT IS EXCLUDED FROM THE AM BIT 5 ITA NO.1642/MDS/2013 OF SPECULATIVE TRANSACTION BY PROVISO (C) TO SEC.43 (5) OF THE I.T. ACT. RELEVANT PARAS ARE EXTRACTED BELOW :- 31. FOREIGN CURRENCY OR ANY CURRENCY IS NEITHER CO MMODITY NOR SHARES. THE SALE OF GOODS ACT, SPECIFICALLY EXC LUDES CASH FROM THE DEFINITION OF GOODS. BESIDES, NO PERS ON OTHER THAN AUTHORIZED DEALERS AND MONEY CHANGERS ARE ALLO WED IN INDIA TO TRADE IN FOREIGN CURRENCY, MUCH LESS SPECU LATE. SEC.8 OF THE FOREIGN EXCHANGE REGULATIONS ACT, 1973 , PROVIDES THAT EXCEPT WITH PRIOR GENERAL OR SPECIAL PERMISSION OF THE RBI, NO PERSON OTHER THAN AN AUTHORIZED DEAL ER SHALL PURCHASE, ACQUIRE, BORROW OR SELL FOREIGN EXCHANGE. 32. IN FACT, PRIOR TO THE LERMS, RESIDENTS IN INDIA WERE NOT EVEN PERMITTED TO CANCEL FORWARD CONTRACTS. THE PRESUMPTION OF ANY SPECULATIVE TRANSACTION IS, THER EFORE, DIRECTLY REBUTTED IN VIEW OF THE LEGAL IMPOSSIBILIT Y AND IN VIEW OF THE FACT THAT FOREIGN CURRENCY WAS NEITHER COMMO DITY NOR SHARES. 33. THE DEFINITION OF SPECULATIVE TRANSACTION, WI LL NOT APPLY TO A SITUATION WHERE THE PURPOSE OF ENTERING A FORW ARD CONTRACT WAS TO HEDGE/SAFEGUARD AGAINST ANY LOSS ON ACCOUNT OF REPAYMENT OF PRINCIPAL AMOUNT OF THE LOA N: CANCELLATION OF THE CONTRACT WAS IDENTICAL TO THAT OBJECT AND CONSEQUENTLY ANY LOSS/GAIN ARISING FROM SUCH CANCEL LATION IS DIRECTLY RELATED TO REPAYMENT OF THE LOAN. 34. FURTHER, ATTENTION IS ALSO DRAWN TO PROVISO (C) TO S.43(5) OF THE ACT, WHICH EXCLUDES A CONTRACT ENTERED INTO BY A MEMBER OF A FORWARD MARKET OR A STOCK EXCHANGE IN T HE COURSE OF ANY TRANSACTION IN THE NATURE OF JOBBING, ETC. TO GUARD AGAINST LOSS WHICH MAY ARISE IN THE ORDINARY COURSE OF HIS BUSINESS TO SUCH MEMBER FROM THE DEFINITION OF SPECULATIVE TRANSACTION. RESPECTFULLY FOLLOWING THE ABOVE DECISIONS, WE HOLD THAT FOREX CONTRACTS ENTERED INTO BY THE ASSESSEE W ILL NOT FALL UNDER THE DEFINITION OF SPECULATIVE TRANS ACTION. THE GROUNDS TAKEN BY THE ASSESSEE ON THIS ISSUE ARE ALLOWED. 6. RESPECTFULLY FOLLOWING THE SAID DECISION, WE ALL OW THIS GROUND OF APPEAL OF THE ASSESSEE. 6 ITA NO.1642/MDS/2013 7. IN RESPECT OF DENYING DUTY DRAW BACK WHILE COMPUTING DEDUCTION UNDER SECTION 80IB OF THE ACT, THE TRIBUNAL IN ITA NO.2032/MDS/2012 DATED 21.02.2013 HELD AS UNDER:- 10. THE NEXT ISSUE IN THE GROUNDS OF APPEAL IS TH AT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING THE EXCLUSION OF DUTY DRAW BACK FROM ELIGIBLE PROFITS WHILE COMPUTING DEDUCTION UNDER SEC.80IB OF THE I.T. ACT. 11. THE ASSESSING OFFICER, WHILE COMPLETING ASSESSMENT RESTRICTED THE RELIEF UNDER SEC.80IB OF THE ACT BY EXCLUDING DUTY DRAW BACK FROM THE PROFITS DERIVED FROM INDUSTRIAL UNDERTAKING. THE ASSESSEE CLAIMED DEDUCTION UNDER SEC.80IB OF THE ACT INCLUDI NG THE DUTY DRAW BACK AMOUNT AS PROFIT DERIVED FROM INDUSTRIAL UNDERTAKING. ON APPEAL, THE COMMISSIONER OF INCOME TAX (APPEALS) FOLLOWING THE DECISION OF HON' BLE SUPREME COURT IN THE CASE OF LIBERTY INDIA V. CIT ( 317 ITR 218) UP HELD THE ACTION OF THE ASSESSING OFFICE R IN EXCLUDING DUTY DRAW BACK FOR THE PURPOSE OF COMPUTI NG RELIEF UNDER SEC.80IB OF THE ACT. THE COMMISSIONER OF INCOME TAX (APPEALS) HELD AS UNDER: 7.1 THE ASSESSEE HAD CLAIMED DEDUCTION U/S.80IB WH EREIN THEY HAD INCLUDED DUTY DRAW BACK AMOUNT AS PROFITS DERIVED FROM INDUSTRIAL UNDERTAKING. THE ASSESSING OFFICER HAS DENIED THIS BENEFIT ON THE BASIS THAT DUTY DRAW BACK AMOUNT CANNOT BE INCLUDED IN THE ELIGIBLE PROFIT FO R CLAIMING DEDUCTION U/S80IB. THIS ISSUE IS SQUARELY COVERED I N FAVOUR OF THE REVENUE BY THE DECISION OF HON'BLE APEX COUR T IN THE CASE OF LIBERTY INDIA VS. CIT REPORTED IN 183 TAXMA N 349(2009)(SC),WHEREIN IT IS HELD AS UNDER :- DEBP IS AN INCENTIVE. IT IS GIVEN UNDER DUTY EXEMP TION REMISSION SCHEME. ESSENTIALLY, IT IS AN EXPORT INCE NTIVE. NO DOUBT, THE OBJECT BEHIND DEBP IS TO NEUTRALIZE THE INCIDENCE OF CUSTOMS DUTY PAYMENT ON THE IMPORT CONTENT OF EX PORT PRODUCT. THIS NEUTRALIZATION IS PROVIDED FOR BY CRE DIT TO CUSTOMS DUTY AGAINST EXPORT PROJECT. UNDER DEPB, AN EXPORTER MAY APPLY FOR CREDIT AS PERCENTAGE OF FOB VALUE OF EXPORTS MADE IN FREELY CONVERTIBLE CURRENCY. CREDIT IS AVAILABLE ONLY AGAINST THE EXPORT PROJECT AT RATES SPECIFIED BY DGFT FOR IMPORT OF RAW MATERIALS, COMPONENTS, ET C. DEPB CREDIT UNDER THE SCHEME HAS TO BE CALCULATED B Y 7 ITA NO.1642/MDS/2013 TAKING INTO ACCOUNT THE DEEMED IMPORT CONTENT OF TH E EXPORT PRODUCT AS PER BASIC CUSTOMS DUTY AND SPECIAL ADDIT IONAL DUTY PAYABLE ON SUCH DEEMED IMPORTS. THEREFORE, DEPB/DUTY DRAW BACK REMISSIONS ARE INCENTIVES WHICH FLOW FROM THE SCHEMES FRAMED BY THE CENTRAL GOVERNMENT O R FROM SECTION 75 OF THE CUSTOMS ACT, 1962. HENCE, IN CENTIVE PROFITS ARE NOT PROFITS DERIVED FROM THE ELIGIBLE B USINESS UNDER SECTION 80-IB. THEY BELONG TO THE CATEGORY OF ANCILLARY PROFITS OF SUCH UNDERTAKINGS CONCLUSION THE DUTY DRAW BACK RECEIPT/DEPB BENEFITS DO NOT FOR M PART OF THE NET PROFITS OF ELIGIBLE INDUSTRIAL UNDERTAKI NG FOR THE PURPOSE OF SECTION 80-I/80-IA/80-IB. [PARA 24]. 7. 2 RESPECTFULLY FOLLOWING THE ABOVE DECISION, THIS GRO UND OF APPEAL IS DISMISSED AND ADDITION MADE BY THE ASSESS ING OFFICER IS UPHELD. ON GOING THROUGH THE ORDER OF COMMISSIONER OF INCOM E TAX (APPEALS) WE DO NOT FIND ANY INFIRMITY OR GOOD REASON TO INTERFERE WITH THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) SINCE THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ONLY FOLLOWED THE DECISION OF HON'BLE SUPREME COURT IN CONCLUDING THAT DUTY DRAWBACK IS NOT PROFITS DERIVED FROM INDUSTRIAL UNDERTAKING FOR THE PURPOSE OF COMPUTING RELIEF UND ER SEC.80IB OF THE ACT. THE GROUNDS RAISED BY THE ASSESSEE ON THIS ISSUE ARE REJECTED. 8. RESPECTFULLY FOLLOWING THE SAID DECISION, WE REJ ECT THE GROUNDS RAISED BY THE ASSESSEE ON THIS ISSUE. 9. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON FRIDAY, THE 30 TH DAY OF JANUARY, 2015 AT CHENNAI. SD/- SD/- ( . ) ( ( *+ ) ( A.MOHAN ALANKAMONY ) ( CHALLA NAGENDRA PRASAD ) - / ACCOUNTANT MEMBER * - / JUDICIAL MEMBER * /CHENNAI, / /DATED 30 TH JANUARY, 2015 SOMU 8 ITA NO.1642/MDS/2013 12 32 /COPY TO: 1. APPELLANT 2. RESPONDENT 3. 4 () /CIT(A) 4. 4 /CIT 5. 2 7 /DR 6. /GF .