DCIT, V. M/s Indus Garments India p. Ltd.,

ITA 209/BANG/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 8617 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 1 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-03-2016
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 10-03-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 14-02-2013
• Court: TRIBUNAL
• Department Lawyers: S PRAVEEN
• Keywords: Business income; Depreciation; Speculation loss
• Section: 43(5); 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI NARENDRA KUMAR CHOUDHARY, JUDICIAL MEMBER ITA NO.209/BANG/2013 ASSESSMENT YEAR : 2009-10 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(4), BANGALORE. VS. M/S. INDUS GARMENTS INDIA P. LTD., NO.117/A, 5 TH MAIN, INDUSTRIAL SUBURB, 2 ND STAGE, YESHWANTPUR, BANGALORE 560 022. PAN: AABCI 2620Q APPELLANT RESPONDENT APPELLANT BY : SHRI S. PRAVEEN, ADDL. CIT(DR) RESPONDENT BY : MS. SHEETAL, ADVOCATE DATE OF HEARING : 10.03.2016 DATE OF PRONOUNCEMENT : 16.03.2016 O R D E R PER B. RAMAKOTAIAH, ACCOUNTANT MEMBER THIS IS A REVENUES APPEAL AGAINST THE ORDER DATE D 9.11.2012 OF THE CIT(APPEALS)-I, BANGALORE ON THE ISSUE OF CLAIM OF LOSS ON ACCOUNT OF FLUCTUATION IN FOREIGN EXCHANGE. 2. BRIEFLY STATED, THE ASSESSEE IS A PRIVATE LIMITE D COMPANY ENGAGED IN THE MANUFACTURE AND EXPORT OF READYMADE GARMENTS. T HE ASSESSING OFFICER ITA NO.209/BANG/2013 PAGE 2 OF 6 NOTICED THAT ASSESSEE HAS CLAIMED FOREIGN EXCHANGE LOSS OF RS.2,32,20,805 IN THE PROFIT & LOSS ACCOUNT IN SCHE DULE-X AND AFTER ISSUING SHOW CAUSE NOTICE TO THE ASSESSEE, DISALLOWED THE S AME STATING THAT LOSS INCURRED BY THE ASSESSEE WAS SPECULATIVE LOSS WITHI N THE MEANING OF SECTION 43(5). THE AO ALSO RELIED ON THE BOARD CIR CULAR NO.3/2010 DATED 22.3.2010 TO HOLD THAT THE TRANSACTIONS ENTERED BY THE ASSESSEE ARE SPECULATIVE TRANSACTIONS, ACCORDINGLY THE LOSS CANN OT BE ALLOWED. HE ADDED THE SAME AS BUSINESS PROFIT AND DID NOT EVEN QUANTIFY THE LOSS TO BE CARRIED FORWARD AS EVEN SPECULATIVE LOSS. 3. BEFORE THE LD. CIT(APPEALS), THE ASSESSEE MADE D ETAILED SUBMISSIONS (WHICH ARE EXTRACTED IN PARA 3.1 OF THE IMPUGNED ORDER) TO SUBMIT THAT ASSESSEE HAS RECEIVED ABOUT RS.84.38 CR ORES OF FOREIGN EXCHANGE DURING THE F.Y. 2007-08 AND CONSEQUENTLY E NTERED INTO A MASTER AGREEMENT WITH STANDARD CHARTERED BANK IN DEC. 2007 COVERING ITS EXPORT RISKS FOR THE SUBSEQUENT PERIOD. CONSEQUENT TO TH IS AGREEMENT, FROM JANUARY 2008 ONWARDS VARIOUS FOREIGN CURRENCY OPTIO NS WERE ENTERED INTO AND THE RATE WAS FIXED IN THE FORWARD RATE OF CONVE RTING USD INTO INR AT RS.40.53. IT WAS INFORMED THAT THIS AGREEMENT WAS ENTERED INTO ONLY TO PROTECT AND ENSURE THAT ASSESSEE EARNS INDIAN RUPEE S AT A SPECIFIED RATE FOR EVERY DOLLAR OF EXPORT EARNINGS. IT WAS SUBMIT TED THAT THE TRANSACTIONS WERE BUSINESS TRANSACTIONS AND IS VERY WELL COVERED BY EXPLANATION TO SECTION 43(5). IT WAS FURTHER SUBMITTED THAT IN TH E IMPUGNED YEAR, ASSESSEE HAD EARNED FOREIGN CURRENCY OF RS.72.14 CRORES IN B OTH USD AND EUROS AND ITA NO.209/BANG/2013 PAGE 3 OF 6 THESE TRANSACTIONS WERE ENTERED INTO IN THE BUSINES S INTEREST. ASSESSEE ALSO RELIED ON VARIOUS CASE LAWS AND JUSTIFIED THE LOSS TO AN EXTENT OF RS.2,32,20,805. 4. THE LD. CIT(APPEALS) AFTER CONSIDERING THE SUBMI SSIONS HELD AS UNDER:- 3.5 I HAVE CAREFULLY CONSIDERED THE APPELLANTS SU BMISSIONS AND THE REASONS GIVEN BY THE AO IN THE ASSESSMENT O RDER. THE AMOUNT OF RS.2,32,20,805/- CLAIMED AS EXCHANGE LOSS WAS DISALLOWED BY THE AO ON THE GROUND THAT IT WAS A SP ECULATIVE LOSS. THE AO RELIED ON THE PROVISIONS SECTION 43(5) OF TH E ACT IN THIS REGARD APART FROM THE FOLLOWING JUDICIAL DECISIONS: I) MUNJAL SHOWS LTD- V. DCIT (94 TTJ 227)(ITAT, MUM BAI) (94 TTJ 227)(ITAT, MUMBAI) II) SHREE CAPITAL SERVICES LTD. V. ACIT (111 ITD 49 8) (SP1. BENCH OF ITAT, KOLKATA) 3.6 THE APPELLANT BEING AN EXPORTER ENTERED INTO D ERIVATIVE TRANSACTIONS WITH STANDARD CHARTERED BANK TO COVER THE POSSIBLE FOREIGN EXCHANGE FLUCTUATION LOSS. THOUGH THE AO RE LIED ON THE PROVISIONS OF SECTION 43(5) OF THE ACT, HE HAD OVER LOOKED THE EXPLANATION CLAUSE (D) OF THE PROVISO TO SUB-SECTIO N (5) WHICH OF SECTION 43, READS AS UNDER: (5) SPECULATIVE TRANSACTION MEANS A TRANSACTION I N WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODIT Y, INCLUDING STOCKS AND SHARES, IS PERIODICALLY OR ULT IMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TR ANSFER OF THE COMMODITY OR SCRIPS: PROVIDED THAT FOR THE PURPOSES OF THIS CLAUSE . [(D) AN ELIGIBLE TRANSACTION IN RESPECT OF TRADIN G IN DERIVATIVES REFERRED TO IN CLAUSE [(AC)] OF SECTION 2 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956) CARRIED OUT IN A RECOGNISED STOCK EXCHANGE;] SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION ; ITA NO.209/BANG/2013 PAGE 4 OF 6 EXPLANATION--FOR THE PURPOSES OF THIS CLAUSE, THE EXPRESSIONS -- (I) ELIGIBLE TRANSACTION MEANS ANY TRANSACTION - (A) CARRIED OUT ELECTRONICALLY ON SCREEN-BASED SYST EMS THROUGH A STOCK BROKER OR SUB-BROKER OR SUCH OTHER INTERMEDIARY REGISTERED UNDER SECTION 12 OF THE SEC URITIES AND EXCHANGE BOARD OF INDIA ACT, 1992 (15 04 1992) IN ACCORDANCE WITH THE PROVISIONS OF THE SECURITIES CO NTRACTS (REGULATION) ACT, 1956 (42 OF 1956) OR THE SECURITI ES AND EXCHANGE BOARD OF INDIA ACT, 1992 (15 OF 1992) OR T HE DEPOSITORIES ACT, 1996 (22 OF 1996) AN THE RULES, REGULATIONS OR BYE-LAWS MADE OR DIRECTIONS ISSUED U NDER THOSE ACTS OR BY BANKS OR MUTUAL FUNDS ON A RECOGNI ZED STOCK EXCHANGE, 3.7. FROM THE ABOVE, IT IS CLEAR THAT SPECULATIVE TRANSACTION DOES NOT INCLUDE TRADING IN DERIVATIVES IF CARRIED OUT ELECTRONICALLY ON SCREEN-BASED SYSTEM THROUGH A STOCK-BROKER OR SU B-BROKER OR SUCH OTHER INTERMEDIARY REGISTERED U/S 12 OF THE SE BI ACT 1992. IN THE INSTANT CASE, THE DERIVATIVE TRANSACTIONS AR E CARRIED OUT BY THE APPELLANT THROUGH THE STANDARD CHARTERED BANK, WHICH IS AN APPROVED INTERMEDIARY FOR CARRYING OUT THE DERIVATI VE TRANSACTIONS. THE SAID EXPLANATION WAS INSERTED BY THE FINANCE ACT 2005 WITH EFFECT FROM 1/4/2006. THE DECISIONS R ELIED ON BY THE AO ARE RELATING TO THE PERIOD PRIOR TO THE INTR ODUCTION OF THE AMENDMENT AND DISTINGUISH EVEN OR FACT. THEREFORE, THE LOSS SUFFERED BY THE APPELLANT ON ACCOUNT OF DERIVATIVE TRANSACTIONS CARRIED OUT BY THEM CANNOT BE CATEGORIZED AS SPECUL ATIVE TRANSACTION IN VIEW OF THE SAID EXPLANATION, WHICH IS APPLICABLE TO THE PERIOD UNDER CONSIDERATION. HENCE, THE AO IS D IRECTED TO ALLOW THE SAID LOSS AS AN ALLOWABLE BUSINESS LOSS. 5. AFTER CONSIDERING THE RIVAL CONTENTIONS, WE DO N OT SEE ANY REASON TO INTERFERE WITH THE WELL REASONED ORDER OF LD. CIT(A ). AS CLEARLY STATED BY THE LD. CIT(APPEALS), THE SAID TRANSACTIONS ARE IN A WAY HEDGING TRANSACTIONS AND NOT COVERED BY PROVISIONS OF SECTI ON 43(5). NOT ONLY THAT, ITA NO.209/BANG/2013 PAGE 5 OF 6 AS SEEN FROM SCHEDULE 10 TO PROFIT & LOSS ACCOUNT, THE ASSESSEE HAD INDEED EARNED A PROFIT IN EARLIER YEAR TO AN EXTENT OF RS.56,17,976 WHICH WAS TREATED AS BUSINESS INCOME. IN VIEW OF THAT AL SO, THE STAND TAKEN BY THE AO CANNOT BE JUSTIFIED. THEREFORE, WE DO NOT F IND ANY MERITS IN THE CONTENTIONS RAISED BY THE REVENUE. VARIOUS CASE LA W ON THE ISSUE ALSO SUPPORT THE ASSESSEES CONTENTIONS WHICH NEED NOT B E REITERATED HERE. SUFFICE TO SAY THAT FOREIGN EXCHANGE TRANSACTIONS W ITH VARIOUS INTERMEDIARIES APPROVED BY RBI CANNOT BE TREATED AS SPECULATIVE TRANSACTIONS. 5.1 HOWEVER, THERE ARE NO DETAILS ON RECORD AS TO H OW THE LOSSES OF RS.2,32,20,805 HAVE BEEN SUFFERED BY THE ASSESSEE. THE DETAILS ARE NOT PLACED ON RECORD FOR VERIFICATION OF QUANTITY OF LO SS SUFFERED. THEREFORE, WHILE ACCEPTING IN PRINCIPLE THAT THE LOSS IS TO BE ALLOWED AS A BUSINESS LOSS, THE AO IS DIRECTED TO EXAMINE THE LOSS VIS-- VIS TRANSACTIONS ENTERED INTO BY THE ASSESSEE AND QUANTIFY THE LOSS. IT IS A LSO NOTICED THAT ASSESSEE HAS FILED THE RETURN ADMITTING NET LOSS OF RS.33,57 ,230 AFTER SETTING OFF INCOME FROM OTHER SOURCES. HOWEVER, IN THE AMOUNT TO BE CARRIED FORWARD, THE ASSESSEE HAS QUANTIFIED THE SAME AT RS.99,10,74 6 CONSISTING OF BUSINESS LOSS OF RS.24,55,202 AND DEPRECIATION OF R S.74,55,544. WE FIND THAT THE AO HAS NOT QUANTIFIED THE LOSSES/ DEPRECIA TION TO BE CARRIED FORWARD. WHILE GIVING EFFECT TO THIS ORDER, AO IS DIRECTED TO EXAMINE THE LOSS SUFFERED IN THE FOREIGN EXCHANGE TRANSACTIONS AND THEN DIRECTED TO QUANTIFY THE LOSSES TO BE CARRIED FORWARD ALONG WIT H ANY UNABSORBED ITA NO.209/BANG/2013 PAGE 6 OF 6 DEPRECIATION WHICH IS TO BE CARRIED FORWARD TO NEXT YEAR, BASED ON THE RECORD. WITH THESE DIRECTIONS, THE REVENUES APPEA L IS TREATED AS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS 16 TH DAY OF MARCH, 2016. SD/- SD/- ( NARENDRA KUMAR CHOUDHURY ) ( B. RAMAKO TAIAH ) JUDICIAL MEMBER ACCOUNTAN T MEMBER BANGALORE, DATED, THE 16 TH MARCH, 2016. /D S/ COPY TO: 1. APPELLANT 2. RESPONDENTS 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE.