DCIT, Coimbatore V. KPR Mill Limited, Coimbatore

ITA 2942/CHNY/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 7697 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 3 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2016
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 03-02-2016
• Assessment Year: 2011-2012
• Appeal Filed On: 04-12-2014
• Court: TRIBUNAL
• Department Lawyers: R MOHAN
• Assessee Lawyers: S SRIDHAR
• Keywords: Business income; Depreciation; Deemed to accrue or arise in india; Speculation loss; Competent authority
• Section: 43(5); 10

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, CHENNAI , . ! ' , # '$ BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ ITA NOS. 775 & 2685 /MDS/2014 / ASSESSMENT YEARS : 2010-11 & 2011-12 M/S. KPR MILL LIMITED, NO.9, GOKUL BUILDING, ASK NAGAR, THADAGAM ROAD, COIMBATORE 641 001. PAN AACCK0893N (/ APPELLANT) V. THE DEPUTY COMMISSIONER OF INCOME-TAX, COMPANY CIRCLE-I(3) COIMBATORE. (/ RESPONDENT) ./ ITA NOS. 1557 & 2942/MDS/2014 / ASSESSMENT YEARS : 2010-11 & 2011-12 THE DEPUTY COMMISSIONER OF INCOME-TAX, COIMBATORE. (/ APPELLANT) V. M/S. KPR MILLS LIMITED, COIMBATORE 641 001. (/ RESPONDENT) ASSESSEE BY : SHRI S. SRIDHAR, ADVOCATE D EPARTMENT BY : SHRI R. MOHAN, CIT / DATE OF HEARING : 03.02.2016 !' / DATE OF PRONOUNCEMENT : 18.03.2016 - - ITA 775, 2685/14 ETC. 2 % / O R D E R PER CHANDRA POOJARI, ACCOUNTANT MEMBER THESE CROSS APPEALS ARE DIRECTED AGAINST DIFFERE NT ORDERS OF THE COMMISSIONER OF INCOME-TAX(APPEALS) FOR THE ASSESSMENT YEARS 2010-11 AND 2011-12. SINCE, TH E ISSUES INVOLVED IN THESE APPEALS ARE COMMON, THESE ARE CLU BBED TOGETHER, HEARD TOGETHER AND DISPOSED OFF BY THIS C OMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. FIRST, WE TAKE UP THE ASSESSEES APPEAL IN ITA N OS.775 & 2685/MDS/2014 : 2.1 THE GROUND IN THESE APPEALS IS WITH REGARD TO C ONFIRMING THE ADDITION MADE BY THE ASSESSING OFFICER BY TREAT ING THE BUSINESS LOSS AS SPECULATION LOSS IN STEAD OF LOSS IN FOREIGN CURRENCY TRANSACTIONS. 3. THE FACTS OF THE CASE AS NARRATED FOR THE ASSESS MENT YEAR 2010-11 ARE THAT THE ASSESSEE CLAIMED IN THIS ASST. YEAR, LOSS OF ` 28,77,36,636/- OUT OF BUSINESS INCOME, WHICH IS SA ID TO BE REMUNERATED FROM THE DIRECT TRANSACTIONS UNDERTAKEN BY THE - - ITA 775, 2685/14 ETC. 3 ASSESSEE WITH STATE BANK OF INDIA(SBI). THE ASSESS EE ENTERED INTO 13 NUMBERS OF SWAP OPTIONS CONTRACT WITH SBI A ND THE SWAPS WERE MADE AGAINST SWISS FRANC(CHF). UNDER C URRENCY SWAP, HE TERM LOAN WAS TAKEN AS A NOTIONAL LOAN FOR FOREIGN EXCHANGE OF SAID TRANSACTION. THREE CONTRACTS WERE SIGNED BETWEEN 22.2.2007 AND 3.7.2007 AND SIGNED FOR ONE Y EAR. SINCE, LOSS INCURRED ON MATURITY AFTER ONE YEAR, TH E SAME CONTRACTS WERE WITH FRESH CONTRACT WITHOUT DEBITING THE LOSS FOR ONE MORE YEAR. SUBSEQUENT YEAR ALSO INCURRED LOSS AND THE SAME WAS CLAIMED AS LOSS BY THE ASSESSEE. THE ASSE SSEE ENTERED INTO A CONTRACT FOR PURCHASE AND SALE OF US DOLLARS/SWISS FRANC WHICH ARE COMMODITIES AND THE C ONTRACT IS FINALLY SETTLED NOT BY THE ACTUAL DELIVERY OF THE D OLLAR OR THE SWISS FRANC BUT BY PAYING THE LOSS IN INDIAN RUPEE COMPUT ED ON THE NOTIONAL PURCHASE AND SALE OF THE FOREIGN CURRENCY. THEREFORE, THE INGREDIENTS OF PROVISIONS OF SEC.43(5)(D) OF TH E ACT WERE NOT SATISFIED. FURTHER, IT WAS OBSERVED THAT THE TRANS ACTION HAS NOT BEEN DONE FOR THE PURCHASE OF RAW-MATERIALS OR MERC HANDIZE OR PURCHASE OF ANY CAPITAL GOODS, BUT STATED TO BE CON VERSION OF TERM LOAN INTO A FOREIGN LOAN. HOWEVER, THE TERM L OAN HAS NOT - - ITA 775, 2685/14 ETC. 4 BEEN CONVERTED BUT SPECULATED WITH FOREIGN CURRENCY ONLY AND THIS LOSS BEARS NO NEXUS TO THE TERM LOAN WHICH IND ICATES THAT IT WAS NOT DONE TO REDUCE THE INTEREST. THE ASSESSEE IS NOT A DEALER IN STOCKS AND SHARES AND IS NOT A MEMBER OF A FORWARD MARKET OR STOCK EXCHANGE, NOR WAS THE TRANSACTION C ARRIED OUT THROUGH A RECOGNIZED STOCK EXCHANGE. THEREFORE, TH E EXCEPTIONS PROVIDED IN SEC.43(5) ARE NOT APPLICABLE TO THE ASSESSEES CASE AND ACCORDINGLY, THE ASSESSING OFFI CER REJECTED THE LOSS CLAIMED BY THE ASSESSEE. ON APPEAL, CIT(A PPEALS) CONFIRMED THE FINDING OF THE AO PLACING RELIANCE ON THE JUDGMENT OF THE MUMBAI HIGH COURT IN THE CASE OF CIT V. BHAR AT R. RUIA (HUF) (337 ITR 452). 4. BEFORE US, THE ASSESSEE ARGUED THAT THE POSITIO N IN THE ASSESSMENT YEAR 2010-11 ON THE ISSUE IS DIFFERENT A ND THE COMMISSIONER OF INCOME-TAX(APPEALS) DECIDED THE ISS UE AGAINST THE ASSESSEE. THE LD. AR RELIED ON VARIOUS DECISIO NS OF THE TRIBUNAL, WHICH IS AS FOLLOWS: 1) M/S. MAJESTIC EXPORTS V. JCIT IN ITA NOS.1336 & 3072/MDS/2014 DATED 24.7.2015 2) M/S. S.P.APPARELS LTD. V. DCIT [ITA NO.1327/MDS/ 2014 DT. 17.4.2015] - - ITA 775, 2685/14 ETC. 5 3) M/S. COTTON BLOSSOM (INDIA) P. LTD. V. ACIT [ITA NO.1642/MDS/13 DATED 30.1.2015] 4) M/S. SCM GARMENTS (P) LTD. V. DCIT & OTHERS [ITA NO.1645 & 2275/MDS/2014 DATED 27.2.2015] 5. THE LD. DR RELIED ON THE JUDGMENT OF THE BOMBAY HIGH COURT IN THE CASE OF CIT V. SHRI BHARAT R. RUIA(HUF ) [337 ITR 452]. 6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL ON RECORD. IT IS APPROPRIATE TO GO THROUGH THE PRO VISIONS OF SEC.43(5) OF THE ACT, WHICH READS AS FOLLOWS : 43(5) : SPECULATIVE TRANSACTION MEANS A TRANSACT ION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY, INCLUDING STOCKS AND SHARES, IS PERIODIC ALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY OR SCRIPS: PROVIDED THAT FOR THE PURPOSES OF THIS CLAUSE- (A) A CONTRACT IN RESPECT OF RAW MATERIALS OR MERCHAND ISE ENTERED INTO BY A PERSON IN THE COURSE OF HIS MANUFACTURING OR MERCHANTING BUSINESS TO GUARD AGAI NST LOSS THROUGH FUTURE PRICE FLUCTUATIONS IN RESPECT O F HIS CONTRACTS FOR ACTUAL DELIVERY OF GOODS MANUFACTURED BY HIM OR MERCHANDISE SOLD BY HIM; OR (B) A CONTRACT IN RESPECT OF STOCKS AND SHARES ENTERED INTO BY A DEALER OR INVESTOR THEREIN TO GUARD AGAIN ST LOSS IN HIS HOLDINGS OF STOCKS AND SHARES THROUGH PRICE FLUCTUATIONS; OR - - ITA 775, 2685/14 ETC. 6 (C) A CONTRACT ENTERED INTO BY A MEMBER OF A FORWARD MARKET OR A STOCK EXCHANGE IN THE COURSE OF ANY TRANSACTION IN THE NATURE OF JOBBING OR ARBITRAGE T O GUARD AGAINST LOSS WHICH MAY ARISE IN THE ORDINARY COURSE OF HIS BUSINESS AS SUCH MEMBER; [OR] (D) AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING I N DERIVATIVES REFERRED TO IN CLAUSE [(AC)] OF SECTION 2 OF THE SECURITIES CONTRACTS (REGULATION ACT, 1956 (42 OF 1 956) CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE;] SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION . THE CLAIM OF THE ASSESSEE COULD BE ALLOWED ONLY WHE N IT SATISFIES THE EXCEPTIONS PROVIDED IN SEC.43(5)(D) O F THE ACT. HOWEVER, IN THE PRESENT CASE, IT IS ADMITTED THAT T HE TRANSACTION CARRIED OUT BY THE ASSESSEE DOES NOT FALL IN ANY EX CEPTIONS PROVIDED ABOVE AND IT IS NOT AT ALL CARRIED OUT THR OUGH ANY RECOGNIZED STOCK EXCHANGE. THE CLAIM OF THE ASSESS EE IS RIGHTLY DENIED BY THE AO AS WELL AS BY CIT (APPEALS) AS BUS INESS LOSS, AS THERE IS NO RELATIONSHIP WITH TERM LOAN AVAILED BY THE ASSESSEE OR INTEREST PAYABLE ON THE SAID TERM LOAN WITH LOSS INCURRED BY THE ASSESSEE AND IN VIEW OF THE JUDGMEN T OF THE BOMBAY HIGH COURT IN THE CASE OF CIT V. SHRI BHARAT R. RUIA(HUF) CITED SUPRA, WHEREIN IT WAS HELD THAT WH EN THE SPECULATIVE TRANSACTIONS WERE COVERED UNDER SEC.43( 5) OF THE ACT - - ITA 775, 2685/14 ETC. 7 AND THE LOSS INCURRED IN THOSE TRANSACTIONS WAS LIA BLE TO TREATED AS SPECULATIVE LOSS AND NOT BUSINESS LOSS. IN OUR OPINION, VARIOUS DECISIONS RELIED ON BY THE ASSESSEE IN EARL IER PARA WERE DELIVERED ON DIFFERENT SET OF FACTS AND THOSE TRANS ACTIONS FALL UNDER THE EXCEPTIONS PROVIDED IN SEC.43(5) OF THE A CT. ACCORDINGLY, THIS GROUND OF APPEAL OF THE ASSESSEE IS REJECTED. 7. COMING TO THE REVENUES APPEAL IN ITA NOS.1557 & 2942/MDS/14, THE FIRST COMMON GROUND IS WITH REGARD TO DELETING THE ADDITIONS MADE TOWARDS GRATUITY PAYMEN T WHEN THERE IS NO MANDATORY APPROVAL FROM THE COMMISSIONE R OF INCOME-TAX. THE CIT(APPEALS) OBSERVED THAT THE ASS ESSEE HAS APPLIED TO THE COMMISSIONER OF INCOME-TAX, CIRC LE-I, SEEKING APPROVAL FOR GROUP GRATUITY SCHEME ON 19.3. 2007 AND THE SIMILAR CLAIM WAS ALLOWED IN THE ASST. YEAR 2007-08, 2008-09 AND 2009-10. ON THIS BASIS, THE CIT(APPEAL S) ALLOWED THE CLAIM OF THE ASSESSEE IN THE ASST. YEAR S UNDER CONSIDERATION. HOWEVER, THERE IS MANDATORY REQUIRE MENT OF APPROVAL OF GRATUITY SCHEME BY THE CIT, BUT NO SUCH APPROVAL WAS PRODUCED BY THE ASSESSEE, BEFORE US. IN VIEW OF THIS, WE REMIT THIS ISSUE TO THE FILE OF AO WITH A - - ITA 775, 2685/14 ETC. 8 DIRECTION TO DECIDE THE ISSUE AFTER EXAMINING WHETH ER THERE IS MANDATORY REQUIREMENT OF APPROVAL OF GRATUITY SC HEME BY THE COMPETENT AUTHORITY. ACCORDINGLY, THIS GROUND OF APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. 8. THE NEXT COMMON GROUND IS WITH REGARD TO ALLOWABILITY OF DEDUCTION U/S.80IA OF THE ACT BY FO LLOWING THE JUDGMENT OF THE MADRAS HIGH COURT IN THE CASE OF VELAYUDHASWAMY SPINNING MILLS (P) LTD. V. ACIT (340 ITR 477), WHEREIN IT WAS HELD THAT LOSSES AND DEPRECIATION OF THE YEARS EARLIER TO THE INITIAL ASSESSMENT YEAR WHICH HAVE A LREADY BEEN ABSORBED AGAINST THE PROFITS OF OTHER BUSINESS CANN OT BE NOTIONALLY BROUGHT FORWARD AND SET OFF AGAINST THE PROFITS OF THE ELIGIBLE BUSINESS FOR COMPUTING THE DEDUCTION U/S.8 0IA OF THE ACT AND THERE IS NO MANDATE IN SEC.80IA(5), CLAIM OF DE DUCTION U/S. 80IA OF THE ACT IS TO BE ALLOWED TO THE ASSESSEE. IN OUR OPINION, THE FINDINGS OF THE COMMISSIONER OF INCOME-TAX(APPE ALS) ON THIS ISSUE IS BASED ON THE JUDGMENT OF JURISDICTIONAL HI GH COURT IN THE CASE OF VELAYUDHASWAMY SPINNING MILLS (P) LTD. V. ACIT(SUPRA), THE SAME IS CONFIRMED. ACCORDINGLY, THIS GROUND OF APPEAL OF THE REVENUE IS DISMISSED. - - ITA 775, 2685/14 ETC. 9 9. THE NEXT GROUND IN REVENUES APPEAL IN ITA NO1557/MDS/2014 IS WITH REGARD TO ALLOWABILITY OF E XPENDITURE SAID TO BE INCURRED TOWARDS SALES COMMISSION THOUGH THERE WAS NO DEDUCTION OF TDS BY THE ASSESSEE ON THAT PAYMENT . 10. THE ASSESSEE MADE THE PAYMENT TO NON-RESIDENT FOREIGNERS SAID TO BE EXPENDITURE TOWARDS SALES COM MISSION. THE SAME WAS DISALLOWED BY THE AO ON THE REASON THAT TH ERE IS NO TDS ON THAT PAYMENT. HOWEVER, THE COMMISSIONER OF INCOME- TAX(APPEALS) ALLOWED THE CLAIM OF THE ASSESSEE, AS THERE IS NO REFERRING OF ANY TECHNICAL OR MANAGERIAL SERVICE OU TSIDE INDIA AND IT IS THE PAYMENTS MADE TO NON-RESIDENTS AS COMMISS ION ON SALES PROCURED AND INCOME EARNED BY SUCH NON-RESIDE NTS COULD NOT BE DEEMED TO ACCRUE OR ARISE IN INDIA AND ALLOW ED THE CLAIM OF THE ASSESSEE. AGAINST THIS, THE REVENUE IS IN A PPEAL BEFORE US. 11. WE HAVE HEARD BOTH THE SIDES AND PERUSED THE MA TERIAL ON RECORD. IN OUR OPINION, SIMILAR ISSUE WAS CONS IDERED BY THE TRIBUNAL IN THE CASE OF ACIT V. EURO LEDER FASHION S LTD. (156 ITD 280), WHEREIN IT WAS HELD AS UNDER : - - ITA 775, 2685/14 ETC. 10 SECTION 40(A)(I) MAKES IT CLEAR THAT THE DISALLOWA NCE SHALL BE MADE IN CASE OF ANY PAYMENT MADE WHICH IS CHARGEABLE UNDER THIS ACT AND IS PAYABLE OUTSIDE IN DIA OR IN INDIA TO A NON- RESIDENT NOT BEING A COMPANY OR TO A FOREIGN COMPANY ON WHICH TAX IS DEDUCTIBLE AT SOURC E. THEREFORE, THE FIRST CONDITION REQUIRED TO BE FULFI LLED IS THE PAYMENT MUST BE CHARGEABLE UNDER THE ACT, THEREAFTE R THE QUESTION OF DEDUCTION OF TAX WILL ARISE. SECTION 195(1) ALSO PRESCRIBES THAT TAX HAS TO BE DEDUCTED WHILE MAKING PAYMENT TO NON- RESIDENT WHICH IS CHARGEABLE UNDER THE PROVISIONS OF THE ACT. THEREFO RE, THE CONDITION PRECEDENT FOR DEDUCTION OF TAX IS THA T INCOME MUST BE CHARGEABLE UND ER THE PROVISIONS OF THE ACT. IN THE FACTS OF THE PRESENT CASE, THE ASSESSEE HAS NOT PRODUCED THE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH FOREIGN AGENTS TO SHOW THAT THEY WERE APPOINTED TO ACT AS COMMISSION AGENTS OUTSIDE INDIA IN THEIR RESPECTIVE COUNTRIES. AS SEEN FROM THE ORDERS OF THE LOWER AUTHORITIES, T HE ASSESSEE HAS NOT DISCHARGED THE BURDEN CAST UPON IT TO SHOW THE NATURE OF SERVICES RENDERED BY NON- RESIDENT AGENT. IF THERE ARE SERVICES RENDERED BY NON- RESIDENTS, WHO HAVE NO PERMANENT ESTABL ISHMENT IN INDIA OR HAVE ANY BUSINESS CONNECTION IN INDIA, BY VIRTUE OF WHIC H THE PAYMENT OF COMMISSION ACCRUED OR AROSE IN INDIA THE N, IT IS EXEMPTED, IF THE ASSESSEE IS ABLE TO PROVE THAT THE SERVICES WERE RENDERED BY THOSE NON-RESIDENTS ABROA D. IN THE PRESENT CASE, THE ASSESSEE HAD NOT ESTABLISHED THAT THE NON- RESIDENT HAD RENDERED SERVICES ABROAD AND THERE WAS NO BUSINESS CONNECTION IN INDIA BY PRODUC ING - - ITA 775, 2685/14 ETC. 11 RELEVANT RECORDS, VIZ., EITHER AGREEMENT ENTERED IN TO BY THE ASSESSEE WITH THEM OR CORRESPONDENCE TOOK BETWEEN THE PARTIES. WITHOUT EXAMINING THESE DETAILS, ONE I S NOT IN A POSITION TO DECIDE THE NATURE OF SERVICES RENDERE D BY THE NON-RESIDENT AGENT. THEREFORE, IT IS APPROPRIATE TO REMIT THE ENTIRE IS SUE BACK TO THE FILE OF THE ASSESSING OFFICER WITH DIRECTION TO THE ASSESSEE TO PROVE THAT IT WAS SALES COMMISSION TOWA RDS PROCUREMENT OF ORDERS FROM ABROAD. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. IN VIEW OF THIS, WE REMIT THIS ISSUE TO THE FILE OF THE AO FOR FRESH CONSIDERATION IN THE LIGHT OF THE ABOVE DIRECTION O F THE TRIBUNAL. 12. IN THE RESULT, THE APPEALS OF THE ASSESSEE ARE DISMISSED AND THE APPEALS OF THE REVENUE ARE ALLOWED FOR STAT ISTICAL PURPOSES. ORDER PRONOUNCED ON FRIDAY, THE 18 TH OF MARCH, 2016 AT CHENNAI. SD/- SD/- ( #. % ) ( & ' ( # ) (G. PAVAN KUMAR) (CHANDRA POOJARI) 9 :; /JUDICIAL MEMBER < :;/ACCOUNTANT MEMBER &<9 /CHENNAI, C: /DATED, THE 18 TH MARCH, 2016. MPO* - - ITA 775, 2685/14 ETC. 12 :