BS & B Safety Systems (India) Ltd., CHENNAI V. The Additional CIT, CHENNAI

ITA 2937/CHNY/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6071 (ITAT-CHENNAI)
• Duration Of Justice: 11 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-09-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 28-06-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 17-10-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C YAMUNA
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Business income; Speculation loss

Judgement Text

, , IN THE INCOME-TAX APPELLATE TRIBUNAL B BENCH, CHENNAI . . . , , BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER & SHRI S. JAYARAMAN, ACCOUNTANT MEMBER ./ I.T.A. NO. 2937/MDS/2016 /ASSESSMENT YEAR:2009-10 M/S. BS & B SAFETY SYSTEMS (INDIA) LTD., 9, CATHEDRAL ROAD, CHENNAI 600 086. [PAN: AAACB1438Q] VS. THE ADDL. COMMISSIONER OF INCOME TAX, COMPANY RANGE I, 121, MAHATMA GANDHI HIGH ROAD, CHENNAI 600 034. ( /APPELLANT ) ( / RESPONDENT ) ! ' / APPELLANT BY : SHRI R. VIJAYARAGHAVAN, ADVOCATE $%! ' /RESPONDENT BY : MS. C. YAMUNA, JCIT ' ) / DATE OF HEARING : 03.07.2017 ' ) /DATE OF PRONOUNCEMENT : 25.09.2017 /O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER : THE ASSESSEE FILED THIS APPEAL AGAINST THE ORDER O F THE COMMISSIONER OF INCOME TAX (APPEALS) 1, CHENNAI, IN ITA NO. 25/C IT(A)-1/2012-13 [OLD ITA I.T.A. NO.2937/MDS/2016 :-2- : NO. 261/12-13/A-III] DATED 16.08.2016 PERTAINING TO THE ASSESSMENT YEAR 2009-10. 2. M/S. BS & B SAFETY SYSTEMS (INDIA) LTD., THE ASSE SSEE, IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND SALE OF RUPTURE DISKS, SAFETY HEADS AND ACCESSORIES. ITS BUSINESS INCLUDES BOTH EXPORTS OF ITS PRODUCTS AS WELL AS IMPORTS OF RAW MATERIALS. DURING THE ASSESSMENT YEA R 2009-10, THE ASSESSEE ADMITTED A NET GAIN ON ACCOUNT OF DIFFERENCE IN FOR EIGN EXCHANGE AT RS. 19,95,107/-. THE AO REQUIRED THE ASSESSEE TO FU RNISH A DETAILED NOTE ON FOREIGN CURRENCY TRANSACTIONS AND ASKED IT TO EXPL AIN WHY THE LOSS ON CANCELLATION OF FORWARD CONTRACT SHOULD NOT BE DISA LLOWED. THE ASSESSEE SUBMITTED THAT THE ABOVE SUM INCLUDED A LOSS O F F. 10,66,499/- ON ACCOUNT OF CANCELLATION OF FORWARD CONTRACTS ENTERED BY IT WAS ON ACCOUNT OF IMPORTS AND EXPORTS AND IT IS A BUSINESS LOSS. IT RELIED ON THE DECISION OF INCOME TAX APPELLATE TRIBUNAL, MUMBAI, IN THE CASE OF DCIT C IRCLE 3(1) VS. BOMBAY DIAMOND CO. LTD., WHEREIN THE TRIBUNAL, BASED ON TH E DECISIONS RENDERED BY THE HONBLE SUPREME COURT IN THE CASE OF CIT V. WOO DWORD GOVERNOR (I) PVT. LTD. AND BY THE HONBLE MUMBAI HIGH COURT IN THE CASE OF ITO VS. BADRADAS GAURIDU PVT. LTD, HAS HELD THAT LOSS ON ACCOUNT OF CANCELLATION OF FOREIGN EXCHANGE FORWARD CONTRACT IS A BUSINESS LOSS . THE AO AFTER PERUSING THE DETAILS FILED BY THE ASSESSEE HELD THAT THE ASSE SSEE'S TRANSACTIONS ARE I.T.A. NO.2937/MDS/2016 :-3- : REGARDED AS SPECULATIVE TRANSACTIONS SINCE IT SATIS FIES THE PROVISIONS OF SEC.43(5) FOR THE FOLLOWING REASONS: (I) THESE ARE CONTRACTS ENTERED INTO BETWEEN THE A SSESSEE COMPANY AND THE BANK AND THERE IS NO UNDERLYING ASSET/EXPOS URE. (II) THE ACT SPECIFICALLY PROVIDES EXCLUSION OF ONL Y THOSE TRANSACTIONS DONE THROUGH RECOGNIZED STOCK EXCHANGES. IN THE INS TANT CASE, THE ASSESSEES TRANSACTIONS ARE ALL WITH THE BANKS AND ARE NOT COVERED UNDER THE EXEMPTION CLAUSE OF SEC. 43(5). (III) THE ASSESSEE HAS NOT ACTUALLY DELIVERED THE U NDERLYING CURRENCY TO THE BANKS WITH WHOM IT HAD ENTERED INTO SUCH CONTRA CTS. IN THE INSTANT CASE, THE ASSESSEE HAD CANCELLED MOST OF TH E FOREX FORWARD CONTRACTS WITHOUT DELIVERY OF AN UNDERLYING ASSET EITHER THE FOREIGN CURRENCIES OR THE EXPORT PROCEEDS IN TH E DENOMINATED CURRENCIES. 2.1 IN VIEW OF THE ABOVE FACTS, RELYING ON THE H ONBLE MADRAS HIGH COURT DECISION IN THE CASE OF SRI RANGA VILAS GINNING & OIL MILLS V. CIT (1982) 133 ITR 85 WHICH HELD THAT THE LOSS ON FORWARD CONTRA CT SETTLED NOT BY ACTUAL DELIVERY BUT BY PAYMENT OF DIFFERENCES AS SPECULAT IVE BUSINESS AND THE DECISION OF THE HONORABLE ITAT, BANGALORE A' BENCH IN THE CASE OF ASSISTANT COMMISSIONER OF INCOME-TAX VS. K. MOHAN & CO. (EXPO RTS) (P) LTD. (2010) 39 DTR 97 WHEREIN IT WAS HELD THAT SETTLEMENT OF FORWA RD CONTRACTS WITHOUT ACTUAL DELIVERY OF CURRENCY IS A SPECULATIVE TRANSA CTION UNDER SECTION 43(5), THE AO HELD THAT THE NET LOSS OF F.10,66,499/- CLAIMED BY THE ASSESSEE TOWARDS I.T.A. NO.2937/MDS/2016 :-4- : CANCELLATION OF FORWARD CONTRACT FALLS WITHIN THE AMBIT OF SPECULATIVE BUSINESS WHICH CANNOT BE ALLOWED TO BE SET OFF AGAINST THE NORMAL BUSINESS INCOME AS PER SEC.73 AND ALLOWED IT TO BE CARRIED FORWARD F OR SET OFF AGAINST ANY SPECULATION INCOME THAT MAY ARISE IN ANY SUCCEEDING FINANCIAL YEARS. 3. AGGRIEVED, THE ASSESSEE FILED AN APPEAL BEFORE THE CIT(A). THE CIT (A) ASKED THE ASSESSEE TO PROVIDE THE RELEVANT DETAIL S AND AFTER CONSIDERING THEM HELD THAT THE JURISDICTIONAL ITAT IN AMBATTUR C LOTHING LTD. V. JCIT IN ITA NO. 1436, 1643/MDS/2014, 910/MDS/2015 IN ITS ORD ER DATED 12.10.2015 TOOK THE VIEW THAT LOSS ARISING OUT OF DERIVATIVE TRANSA CTION IN EXCESS OF EXPORT TURNOVER HAS TO BE CONSIDERED AS SPECULATIVE LOSS B ECAUSE EXCESSIVE DERIVATIVE TRANSACTION HAS NOT PROXIMITY WITH EXPORT TURNOVER. THE OBSERVATION OF THE ITAT WAS SUBSEQUENT TO THE FINDING WHICH UPHELD THE DIRECTION OF THE CIT (A) FOR THE AO TO VERIFY ANY FORWARD CONTRACTS WHICH HA VE BEEN CANCELLED PREMATURELY AND VERIFY THE REASONS FOR PREMATURE CA NCELLATION IN THE LIGHT OF THE ORDER OF THE TRIBUNAL IN LONDON STAR DIAMOND CO MPANY (INDIA) P LTD V. DCIT IN ITA NO. 6169/M/2012 DATED 11.10.2013 WHEREIN IT WAS OBSERVED THAT LOSS ARISING FROM CANCELLATION OF PREMATURE CONTRAC T IS NOT TO BE ALLOWED AS BUSINESS LOSS. APPLYING THE RATIO TO THE PARTICULA RS FURNISHED BY THE APPELLANT WITH REGARD TO FORWARD CONTRACTS AND THE UNDERLYING EXPORT ORDERS SHOW THAT OUT OF THE SIX EXPORT ORDERS ONLY ONE EXPORT ORDER BEING P/2008-2009/00051 I.T.A. NO.2937/MDS/2016 :-5- : FOR WHICH BOOKING DATE WAS 21 ST JULY 08 WAS TERMINATED PREMATURELY RESULTING IN A LOSS OF RS.2,39,430. THE AO IS DIRECTED TO EXC LUDE THIS SUM FROM THE CLAIM AND ALLOW THE BALANCE AS BUSINESS LOSS IN THI S CASE BEING RS. 8,27,069/- (RS.10,66,499 - RS.2,39,430). THIS GROUND OF APPEAL IS PARTLY ALLOWED. AGGRIEVED AGAINST THAT ORDER, THE ASSESSEE F ILED THIS APPEAL WITH FOLLOWING GROUNDS : (A) THE ORDER OF THE LEARNED COMMISSIONER OF INCOM E TAX (APPEALS) - 15, IS CONTRARY TO THE LAW, FACTS AND C IRCUMSTANCES OF THE CASE. (B) THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) - 1, ERRED IN CONFIRMING THE CANCELLATION OF FORWARD CONTRACTS AS SPECULATION LOSS AMOUNTING TO RS.2,39,430/- (C) THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) - 1 FAILED TO APPRECIATE THE FACT THAT THE CANCELLATION OF FOR WARD CONTRACTS ENTERED INTO BY THE APPELLANT IS IN THE NORMAL COUR SE OF BUSINESS AND THE SAME HAS TO BE TREATED AS BUSINESS LOSS. (D) THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) - 1 FAILED TO APPRECIATE THE FACT THE APPELLANT IS NOT A DEALE R IN FOREIGN EXCHANGE AND HENCE THE LOSS ON CANCELLATION CANNOT BE TREATED AS SPECULATION LOSS IN THIS CASE. 4. THE AR SUBMITTED THAT THE CANCELLATION OF FORW ARD CONTRACTS ENTERED INTO BY THE APPELLANT IS IN THE NORMAL COURSE OF BUSINESS AND THE SAME HAS TO BE TREATED AS BUSINESS LOSS. THE APPELLANT IS NOT A DEALER IN FOREIGN EXCHANGE I.T.A. NO.2937/MDS/2016 :-6- : AND HENCE THE LOSS ON CANCELLATION CANNOT BE TREATE D AS SPECULATION LOSS AND RELIED ON THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT V FRIENDS AND FRIENDS SHIPPING ( P)(2013) 217 TAXMAN 276(GUJ). PER CONTRA, THE DR RELIED ON THE ORDER OF THE CIT (A) . 5. WE HEARD THE RIVAL CONTENTIONS, GONE THROU GH RELEVANT ORDERS AND MATERIAL. THE ASSESSE SUBMITTED BEFORE THE AO THAT THE COMPANY MADE A NET FOREIGN EXCHANGE GAINS / LOSS AS FOLLOWS: TABLE A: PARTICULARS AMOUNT GAIN ON ACCOUNT OF EXPORTS 26,76,469 LOSS ON ACCOUNT OF IMPORTS (7,01,222) GAIN ON ACCOUNT OF OTHERS 19,860 TOTAL 19,95,107 5.1 THE ASSESSEE ALSO SUBMITTED THAT THE ABOVE S UM INCLUDED A LOSS OF F.10,66,499/- ON ACCOUNT OF CANCELLATION OF FORWARD CONTRACTS ENTERED INTO BY THE COMPANY ON ACCOUNT OF IMPORTS AND EXPORTS. AFTE R EXAMINING THE ASSSESSEES CLAIM, THE AO HELD THAT ITS CLAIM OF RS 10,66,499/- TOWARDS CANCELLATION OF FORWARD CONTRACT FALLS WITHIN THE AMBIT OF SPECULATIVE BUSINESS. FURTHER, THE CIT (A) EXAMINED THE CLAIM AS UNDER : I.T.A. NO.2937/MDS/2016 :-7- : TABLE B DETAILS OF LOSS ON FORWARD CONTRACT: EXPORT CONTRACTS : CONTACT NO. BOOKING DATE DATE ON WHICH TO BE UTILISED CANCELLED DATE NAME OF THE BANK CURRENCY USD BOOKED IN USD UTILIZATION IN USD CANCELL ATION IN USD PROFIT/LOSS 102033865 102033865 102033865 102033865 04.02.08 04.02.08 04.02.08 04.02.08 30.04.08 30.04.08 ICICI BANK ICICI BANK ICICI BANK ICICI BANK USD 165755 95701 11670 36405 21979 -124,446 P/2008 - 2009/00049 21.07.08 01.08.08 TO 29.08.08 08.08.08 CORP BANK USD 196000 48443 147557 92,223 P/2008 - 2009/00050 21.07.08 01.08.08 TO 29.08.08 09.08.08 CORP BANK USD 205000 39971 165029 - 112,853 P /2008 - 2009/00051 21.07.08 01.08.08 TO 29.08.08 09.09.08 CORP BANK USD 138000 138000 - 239,430 P/2008 - 2009/00051 08.08.08 01.08.08 TO 29.08.08 06.10.08 CORP BANK USD 116000 49843 66157 - 334,247 P/2008 - 2009/00052 08.08.08 01.08.08 TO 29.08.08 04.11.08 CORP BANK USD 109000 48827 60173 - 366,153 TOTAL A 929755 187084 742671 (1,084,095 ) I.T.A. NO.2937/MDS/2016 :-8- : IMPORT CONTRACTS GRAND TOTAL = A +B = (-) F.10,66,499 AND HELD , INTER ALIA, THAT OUT OF THE SIX EXPORT ORDERS ONLY ONE EXPORT ORDER BEING P/2008-2009/00051 FOR WHICH BOOKING DATE WAS 21 ST JULY 08 WAS TERMINATED PREMATURELY RESULTING IN A LOSS OF RS. 2 ,39,430 . 5.2 FROM THE TABLE A, SUPRA, THE ASSESSEE ADMITTED A NET FOREIGN EXCHANGE GAINS AT RS 19,95,107. HOWEVER, LATER ON, IT CLAIMED THAT IT INCLUDED A LOSS OF F10,66,499/-.THE CIT (A) EXAMINED THE T RANSACTIONS AS PER TABLE B, SUPRA, AND TOOK COGNIZANCE THAT THE LOSS FROM EXPOR T CONTRACTS IS AT RS. 1,084,095 AND THE GAIN FROM IMPORT CONTRACTS IS A T RS 18,406 AND TOTAL LOSS IS AT RS.10,66,499. IF WE SEE TABLE A , THE ASSESS EE HAS SHOWN A NET LOSS ON CONTACT NO. BOOKING DATE DATE ON WHICH TO BE UTILISED CANCELLED DATE NAME OF THE BANK CURRENCY USD BOOKED UTIL IZATION CANCELLATION PROFIT/LOSS 102092829 11.03.08 ICICI BANK EUR 2291 2291 3,729 102131502 02.04.08 ICICI BANK EUR 6278 6278 1,031 102108174 USD 3317 3084 233 - 169 S/2009 - 2010/13007 06.02.09 10.02.09 TO 27.02.09 27.02.09 CORP BANK GBP 510 00 49865 1135 829 S/2009 - 2010/13014 06.03.09 06.03.09 TO 31.03.09 31.03.09 CORP BANK EUR 13378 5337 8041 12,987 TOTAL B 76264 58285 17979 18,406 I.T.A. NO.2937/MDS/2016 :-9- : ACCOUNT OF IMPORTS AT RS 7,01,222. IF THE ASSESSEE S STAND IS CORRECT , THEN THE IMPORT GAIN OF RS 18,406 AS PER TABLE B, SHOU LD HAVE BEEN NETTED AGAINST THE NET LOSS ON ACCOUNT OF IMPORTS SHOWN AT RS 7,01,222 IN TABLE A, SUPRA. FURTHER, THE CIT (A) HELD THAT EXPORT ORDER BEING P/2008-2009/00051 FOR WHICH BOOKING DATE WAS 21 ST JULY 08 WAS TERMINATED PREMATURELY RESULTING IN A LOSS OF RS. 2,39,430. IF WE SEE THE 4 TH ITEM IN TABLE B , SUPRA, THE BOOKING DATE IS GIVEN AS 21.07.2008 , THE DATE ON WHICH TO BE UTILISED AS 01.08.2008 TO 21.08.2008 AND CANCELLED DATE IS GIVEN AS 09.9.200 8 BUT A FINDING IS GIVEN AS PREMATURELY TERMINATED. THUS, IT IS NOT CLEAR FR OM THE ABOVE, WHETHER THE IMPUGNED CLAIM OF LOSS OF F10,66,499/-, IS AN INDE PENDENT TRANSACTIONS OF EXPORT OR IMPORT OR PART OF THE TRANSACTIONS SPEC IFIED IN TABLE A. ON THE FACTS AND CIRCUMSTANCES, WE DEEM IT FIT TO RESTORE THIS M ATTER TO THE AO FOR A FRESH EXAMINATION. THE AO SHALL DECIDE THE ISSUE IN ACCORDANCE WITH LAW AFTER GIVING DUE OPPORTUNITY TO THE ASSESSEE. IF THE ASSESSEE ESTABLISHES THAT EACH AND EVERY OF THE IMPUGNED FOREIGN EXCHANGE LOS S TRANSACTION AROSE ON ACCOUNT OF AN INTEGRAL OR INCIDENTAL ACTIVITY TO TH E EXPORT OR IMPORT , AS THE CASE MAY BE, AND ON OR AFTER THE MATURITY DATE, T HEN, THE AO SHALL TREAT SUCH LOSS AS BUSINESS LOSS . IN RESPECT OF PREMATUR E TERMINATIONS, THE ONUS IS ON THE ASSESSEE TO EXPLAIN AND PLACE RELEVANT MATERIALS BEFORE THE AO. THEREAFTER, THE AO SHALL PASS A SPEAKING ORDER IN A CCORDANCE WITH LAW ON THEM. I.T.A. NO.2937/MDS/2016 :-10- : 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS TREATED AS ALLOWED. ORDER PRONOUNCED ON MONDAY, THE 25 TH DAY OF SEPTEMBER, 2017 AT CHENNAI. SD/- ( . . . ) (N.R.S. GANESAN) /JUDICIAL MEMBER SD/- ( ) (S. JAYARAMAN) /ACCOUNTANT MEMBER /CHENNAI, - /DATED: 25 TH SEPTEMBER, 2017 JPV ' $./ 0/ /COPY TO: 1. !/ APPELLANT 2. $%! /RESPONDENT 3. 2 ( )/CIT(A) 4. 2 /CIT 5. / $4 /DR 6. /GF