Covalent Laboratories Private Limited, Hyderabad V. Asst.CIT,Circle-1(2), Hyderabad

ITA 1715/HYD/2013

• Counselvise Citation: 171522514 RSA 2013
• Duration Of Justice: 1 year(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 24-12-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 12-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJAT MITRA
• Assessee Lawyers: S RAMA RAO
• Keywords: Speculation loss
• Section: 143(3); 43(5)

Judgement Text

ITA NO.1715 OF 2013 COAVALENT LABORATORIES PVT LTD HYDERABAD PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD B BENCH, HYDERABAD BEFORE SHRI P.M. JAGTAP, ACCOUNTANT MEMBER AND SMT.ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO.1715/HYD/2013 (ASSESSMENT YEAR: 2009-10) M/S. COVALENT LABORATORIES PRIVATE LIMITED H.NO.8-3-677/18, 2 ND FLOOR, SKD NAGAR, YELLAREDDYGUDA HYDERABAD PAN: AABCC 9544 R VS. ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 1(2) HYDERABAD (APPELLANT) (RESPONDENT) ASSESSEE BY: SHRI S.RAMA RAO, ADVOCATE DEPARTMENT BY: SHRI RAJAT MITRA, (DR) DATE OF HEARING: 24/12/2014 DATE OF PRONOUNCEMENT: 31/12/2014 O R D E R PER ASHA VIJAYARAGHAVAN, J.M. THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE LD CIT (A) DATED 7.10.2013 RELATING TO A.Y 2009-10 U/S 143(3) OF THE I.T. ACT. 2. THE FACTS RELATING TO THE CASE ARE THAT THE ASSE SSEE IS A COMPANY IN WHICH THE PUBLIC ARE NOT SUBSTANTIALLY I NTERESTED. THE ASSESSEE FILED ITS RETURN OF INCOME FOR A.Y 2009-10 ON 29.09.2009 DECLARING A TOTAL INCOME OF RS.10,60,83,370/-. THE CASE WAS SELECTED FOR SCRUTINY AND THE ASSESSMENT WAS COMPLE TED U/S 143(3) VIDE ORDER DATED 28.12.2011 DETERMINING THE TOTAL I NCOME AT RS.11,17,82,650/-. AFTER MAKING THE FOLLOWING DISAL LOWNACES: ITA NO.1715 OF 2013 COAVALENT LABORATORIES PVT LTD HYDERABAD PAGE 2 OF 6 (I) LOSS ON FOREIGN EXCHANGE DERIVATIVES, WHICH REP RESENT HEDGING CONTRACTS = RS.56,86,072/- (II) FEES PAID TO REGISTRAR OF COMPANIES = RS.1,00, 500/- 3. WITH RESPECT TO LOSS ON FOREIGN EXCHANGE DERIVAT IVES TRANSACTIONS, THE ASSESSEE ACCOUNTED FOR THE LOSS A S PER THE METHOD OF ACCOUNTING REGULARLY AND CONSISTENTLY FOLLOWED B Y IT. IT WAS SUBMITTED THAT THE SAME HAS BEEN RECORDED IN NOTES TO ACCOUNTS OF THE ASSESSEE COMPANY FOR THE YEAR UNDER CONSIDER ATION. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE COMPANY HAD EXP OSURE TO FOREIGN CURRENCY DEBT, IN THE FORM OF AMOUNTS PAYA BLE TO VARIOUS OVERSEAS SUPPLIERS. IN ORDER TO GUARD AGAINST THE R ISK OF ADVERSE MOVEMENTS OF THE FOREIGN CURRENCY CONCERNED VIS--V IS INDIAN RUPEE, THE ASSESSEE HAD THOUGHT IT PRUDENT TO HEDGE ITS RUPEE-TERM LIABILITY WITH ITS BANKERS SBI, BALANAGAR, HYDERABA D BY ENTERING INTO A FOREX DERIVATIVE CONTRACT. THE BANK HAPPENS TO BE AN AUTHORISED DEALER IN FOREIGN EXCHANGE, AND HAD ACCEPTED FOR SU CH HEDGING TRANSACTIONS. IT WAS SUBMITTED THAT THE IMPUGNED T RANSACTIONS WAS PRIMARILY A HEDGING CONTRACT AIMED AT MITGATING THE PROBABLE RISK OF ANY ADVERSE MOVEMENT IN FOREIGN CURRENCY AND AS SUC H DOES NOT CONSTITUTE A SPECULATIVE TRANSACTION. THE ASSESSEE CLAIMED THAT IT HAD INCURRED A LOSS OF RS.56,86,072/- ON CONCLUSION OF SUCH CONTRACT AND AS SUCH THE LOSS INCURRED WAS A CRYSTALLIZED BU SINESS LOSS AND ACCORDINGLY ALLOWABLE AS DEDUCTION. 4. THE AO HAD TREATED SUCH TRANSACTION AS SPECULATI VE IN TERMS OF SECTION 43(5) OF THE ACT AND ACCORDINGLY DISALLO WED THE LOSS ARISING THEREFROM. AGGRIEVED THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT (A). ITA NO.1715 OF 2013 COAVALENT LABORATORIES PVT LTD HYDERABAD PAGE 3 OF 6 5. THE AO HELD THAT THE ASSESSEE FAILED TO PROVE TH E NEXUS BETWEEN THE BUSINESS AND THE DERIVATIVE LOSS WITH S UPPORTING EVIDENCES I.E. BANK ADVICCES FOR CONTRACTS ETC. THE ISSUE WAS DEALT IN DETAIL IN CBDT INSTRUCTION NO.03/2010 DATED 23.03.2 010 IN WHICH IT WAS STATED THAT IN CASE OF LOSS ON FOREIGN DERIVATI VE TRANSACTION ON ACCOUNT OF SETTLEMENT/CONCLUSION OF CONTRACT AND IS NOT A NOTIONAL OR MARKED TO MARKET BOOK ENTRY, A FURTHER QUESTION WIL L ARISE AS TO WHETHER SUCH LOSS IS ON ACCOUNT OF SPECULATIVE TRAN SACTION AS CONTEMPLATED IN SECTION 43(5). THE AO FURTHER HELD THAT SINCE THE LOSS IS OF SPECULATIVE NATURE, THE SAME CAN BE SET OFF ONLY AGAINST PROFIT FROM SPECULATIVE TRANSACTIONS. 6. THE ASSESSEE SUBMITTED BEFORE THE CIT (A) THAT T HE THE ASSESSEE IS A MANUFACTURER AND EXPORTER OF BULK DRU GS. IT IMPORTS RAW MATERIAL FROM FOREIGN COUNTRIES BY SUBMITTING F OREIGN LETTER OF CREDIT FROM ITS BANKERS. THE BANKERS ARRANGE A BUYE RS CREDIT FACILITY TO THE ASSESSEE FROM OVERSEAS BANKERS TO OVERCOME T HE ADVERSE EFFECT OF VOLATILITY OF US$. A COMPANY HEDGES ITS P OSITION BY SWAPPING INTO A MORE STABLE AND SAFE CURRENCY I.E. SWISS FRANCS. HOWEVER, IN THE INSTANT CASE EVEN THE SWISS CURRENC Y WAS VOLATILE AND ULTIMATELY THE TRANSACTION RESULTED IN LOSS. IN THIS REGARD RELIANCE WAS PLACED ON CIT VS. BHADRIDAS GOURADU PV T LTD (261 ITR 256)(BOM.) AND CIT VS. PANCHMAHAL STEEL PVT LTD (20 13) (215 TAXMAN 140)(GUJ.) 7. THE CIT (A) NOTED THAT THE SUMMARY OF THE SUBMIS SIONS MADE BY THE ASSESSEE WERE THAT IT HAD TAKEN A TERM LOAN OF RS.15.00 CRORES IN F.Y 2007-08 AND THIS LOAN WAS IN RUPEE. T HE CIT(A) OBSERVED THAT SINCE THE RUPEE LOANS WERE ALWAYS GIV EN AT A HIGHER RATE OF INTEREST, THE ASSESSEE THOUGHT IT WAS PRUDE NT TO CONVERT THE RUPEE LOAN TO DOLLAR LOAN WHICH WAS AVAILABLE AT CH EAPER RATE. AFTER ITA NO.1715 OF 2013 COAVALENT LABORATORIES PVT LTD HYDERABAD PAGE 4 OF 6 CONVERTING THE LOAN FROM RUPEE TO DOLLAR, SINCE THE DOLLAR WAS HIGHLY VOLATILE IT WAS THOUGHT APPROPRIATE TO HEDGE THE PO SITION IN MORE STABLE CURRENCY LIKE SWISS FRANCS (CHF). UNFORTUNAT ELY, AT THE TIME OF SETTLEMENT, EVEN THE SWISS CURRENCY HAD MOVED AG AINST THE ASSESSEE AND THE ENTIRE HEDGING TRANSACTION RESULTE D IN LOSS. THE CIT(A) FURTHER OBSERVED THAT WHETHER A PARTICULAR T RANSACTION IS A HEDGING TRANSACTION OR SPECULATIVE TRANSACTION IS E SSENTIALLY A QUESTION OF FACT. FOR THIS PURPOSE, THE ASSESSEE WA S REQUIRED TO GIVE THE QUANTUM OF TERM LOAN LIABILITY ON THE DATE OF E NTERING THE HEDGING CONTRACT. THE TERM LOAN LIABILITY AND THE A MOUNT FOR WHICH FOREIGN CURRENCY POSITIONS WERE TAKEN BY THE ASSESS EE SHOULD BE MORE OR LESS SAME AMOUNT. THE CIT(A) POINTED OUT TH AT THIS CRUCIAL INFORMATION IS NOT SUBMITTED, THOUGH THE INFORMATIO N WAS CALLED FOR AND IT IS EVIDENT FROM THE SUMMARY OF TRANSACTIONS GIVEN SBI THAT ON ACCOUNT OF THESE TRANSACTIONS, THE ASSESSEE MADE PROFIT ON TWO OCCASIONS AND LOSS ON SIX OCCASIONS TOTAL RESULTING IN LOSS OF RS.56,86,072/-. DURING THE APPELLATE PROCEEDINGS, T HE ASSESSEE WAS ASKED TO GIVE FOREIGN EXCHANGE GAIN OR LOSS SUFFERE D BY HIM FOR THE LAST 5 YEARS. IT WAS EXPLAINED BY THE ASSESSEE THAT THESE TRANSACTIONS WERE CARRIED OUT ONLY DURING THIS YEAR , NEITHER BEFORE NOR LATER. IT WAS STATED BY THE CIT(A) THAT THERE I S NOTHING ON RECORD TO SUGGEST THAT THESE TRANSACTIONS WERE HEDGING TRA NSACTIONS TO MITIGATE RISK AGAINST DOLLAR LOANS. IN THESE CIRCUM STANCES, THE ACTION OF THE AO TREATING SUCH LOSS AS SPECULATIVE LOSS WA S CONFIRMED BY CIT(A). 8. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US A ND HAS RAISED THE FOLLOWING GROUNDS: 2. THE LD CIT (A) ERRED IN CONFIRMING ADDITION OF RS.56,86,012 MADE BY THE AO ON THE GROUND THAT IT ITA NO.1715 OF 2013 COAVALENT LABORATORIES PVT LTD HYDERABAD PAGE 5 OF 6 REPRESENTS SPECULATIVE LOSS. THE LD CIT (A) OUGHT T O HAVE SEEN THAT THE SAID LOSS WAS BECAUSE OF HEDGING TRANSACTIONS TO MITIGATE THE BUSINESS RISK AND THEREFORE, IS A BUSINESS LOSS ALLOWABLE FOR THE YEA R UNDER CONSIDERATION 9. THE LD COUNSEL FOR THE ASSESSEE REITERATED HIS A RGUMENTS PUT FORTH BEFORE THE LOWER AUTHORITIES. THE LD DR ON TH E OTHER HAND STATED THAT NO EVIDENCES HAVE BEEN SHOWN THAT IT A HEDGING TRANSACTION BY THE ASSESSEE. THE LD COUNSEL FOR THE ASSESSEE IN THE COUNTER POINTED OUT AT PAGE 22 OF THE PAPER BOOK WH EREIN IT HAS BEEN STATED BY LETTER DATED 23.10.2007 WHICH READ A S UNDER: THE CUSTOMER HAS THE FOLLOWING EXPOSURE WHICH IS INTENDED TO BE HEDGED BY THE CUSTOMER. RUPEE TERM LIABILITIES TO THE EXTENT OF RS.17.50 CRORES WITH S BI BALANAGAR BRANCH. NOW THE CUSTOMER PROPOSES TO HEDGE THE ABOVE LOAN FOR A PERIOD OF 12 MONTHS. 10. THE LD COUNSEL DREW OUR ATTENTION TO PAGE NOS.2 7 & 28 OF THE PAPER BOOK WITH RESPECT TO INITIAL DETAILED CONFIRM ATION AND THE TRANSACTION DETAILS GIVING THE DATE OF THE TRANSACT ION AND THE AMOUNT INVOLVED. WE FIND THAT THE CIT (A) HAS NOT G ONE THROUGH THE PAPER BOOK FILED BY THE ASSESSEE, ESPECIALLY AT PAG E NOS.22 27 & 29 AND THE SAME WERE NOT PRODUCED BEFORE THE AO. IN TH ESE CIRCUMSTANCES, WE DEEM IT FIT TO REMIT BACK THE ISS UE TO THE FILE OF THE AO TO VERIFY THE EVIDENCES BROUGHT OUT BY THE A SSESSEE FOR PROVING THAT THEY WERE HEDGING TRANSACTIONS AND IN CASE IT IS A HEDGING CONTRACT, THE LOSS ARISING ON ACCOUNT OF SU CH CONTRACT IS IN THE NATURE OF TRADING OR A BUSINESS LOSS WHICH WOUL D BE ALLOWABLE AS DEDUCTION. THE AO SHALL GIVE REASONABLE OPPORTUNITY TO THE ASSESSEE TO REPRESENT HIS CASE. ITA NO.1715 OF 2013 COAVALENT LABORATORIES PVT LTD HYDERABAD PAGE 6 OF 6 11. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST DECEMBER, 2014. S D/ - S D/ - (P.M. JAGTAP) (ASHA VIJAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED 31 ST DECEMBER, 2014. VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, ITAT, HYDERABAD 6. GUARD FILE BY ORDER