THE ACIT 17(3), MUMBAI V. M/S. K. MOHAN & CO. (EXPORTS), MUMBAI

ITA 3473/MUM/2008

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48523 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 11 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-04-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: H
• Next Hearing Date: 18-04-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 16-05-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business income
• Section: 80HHC

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES H, MUMBAI BEFORE SHRI R.S.SYAL, AM AND SMT.ASHA VIJAYARAGHAVA N, JM ITA NO.3473/MUM/2008 : ASST.YEAR 2004-2005 THE ASSTT.COMMISSIONER OF INCOME-TAX CIRCLE 17(3) MUMBAI. VS. M/S.K.MOHAN & CO. (EXPORTS) (REGD.) 61 ROSE COTTAGE, DR.S.S.RAO ROAD PAREL, MUMBAI 400 012. PAN : AAAAK0022F. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI ABANI KANTA NAYAK RESPONDENT BY : SHRI VIJAY MEHTA O R D E R PER R.S.SYAL, AM : THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A) ON 18.02.2008 IN RELATION TO ASSESSMENT YEAR 2004-2005. 2. THE ONLY EFFECTIVE GROUND READS AS UNDER:- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD.CIT(A) ERRED IN DIRECTING THE A.O. TO ALLOW DEDU CTION U/S.80HHC ON PROFIT ON FORWARD CONTRACT RECEIPTS OF RS.1,39,3 0,067/-. 3. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT TH E ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORTS OF READYMADE GARMENTS. ON THE PERUSAL OF THE PROFIT AND LOSS ACCOUNT IT WAS NOTED BY THE ASS ESSING OFFICER THAT PROFIT OF FORWARD CONTRACT RECEIPTS AT RS.1,39,30,067 WAS NET TED OFF AGAINST THE FINANCE EXPENSES PAID AND NET FINANCE EXPENSES WERE DEBITED TO THE PROFIT AND LOSS ACCOUNT. ON BEING CALLED UPON TO EXPLAIN AS TO WHY DEDUCTION U/S.80HHC SHOULD NOT BE ALLOWED IN RESPECT OF INCOME EARNED FROM FORWARD CO NTRACT, THE ASSESSEE SUBMITTED THAT FORWARD CONTRACT OF CURRENCIES HAVE BEEN BOOK ED ONLY TO SAFEGUARD THE EXCHANGE FLUCTUATIONS AGAINST THE EXPORT / IMPORT O RDERS FOR WHICH RECEIPTS / ITA NO.3473/MUM/2008 M/S.K.MOHAN & CO. (EXPORTS) (REGD.) 2 PAYMENTS WILL HAPPEN AT A LATER DATE. THE ASSESSIN G OFFICER NOTED THAT THE ASSESSEE HAD INDULGED IN HEDGING FOREIGN CURRENCY R ISK. IT WAS OPINED THAT SUCH INCOME COULD NOT BE TREATED AS INCOME DERIVED FROM EXPORT OF GOODS AND MERCHANDISE. HE, THEREFORE, TAXED PROFIT ON FORWA RD CONTRACT UNDER THE HEAD `INCOME FROM OTHER SOURCES AND DID NOT ALLOW DEDU CTION U/S.80HHC ON THE PROFIT OF FORWARD CONTRACT RECEIPT AT RS.1.39 CRORES. THE LEARNED CIT(A) RELYING ON THE ORDER PASSED BY THE MUMBAI BENCH OF THE TRIBUNAL IN D.KISHOREKUMAR & CO. VS. DCIT IN ITA NO. 3883/MUM/1997 HELD THAT INCOME FRO M CANCELLATION OF FORWARD EXCHANGE CONTRACT WAS PART OF INCOME ELIGIBLE FOR D EDUCTION U/S.80HHC. SINCE THE ASSESSEE HAD ENTERED INTO FORWARD CONTRACT TO SAFEG UARD THE LOSS ON ACCOUNT OF DEVALUATION OF FOREIGN EXCHANGE, THE LD. CIT(A) H ELD THAT SUCH PROFIT WAS NOTHING BUT SALE PROCEEDS OF GOODS AND MERCHANDISE EXPORTED OUTSIDE INDIA AND PART OF THE BUSINESS PROFIT. HE, THEREFORE, DIRECTED THE ASSESS ING OFFICER TO ALLOW DEDUCTION U/S.80HHC ON PROFIT OF FORWARD CONTRACT. 4. BEFORE US THE LEARNED DEPARTMENTAL REPRESENTATIV E RELIED ON THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SHAH ORIGINALS [(2010) 191 TAXMAN 81 (BOM.)] IN SUPPORT OF THE VIEW TAKEN BY THE ASSESSING OFFI CER. IN THE OPPOSITION THE LEARNED COUNSEL FOR THE ASSESSEE CON TENDED THAT THE ONLY DISPUTE BEFORE THE A.O. WAS ABOUT THE HEAD UNDER WHICH GAIN ON FORWARD CONTRACT WAS TAXABLE, VIZ, THE HEAD PROFITS AND GAINS OF BUSIN ESS OR PROFESSION OR INCOME FROM OTHER SOURCES. SINCE THE ASSESSING OFFICER HE LD SUCH INCOME TO BE FALLING UNDER THE HEAD`INCOME FROM OTHER SOURCES, WHICH V IEW HAS BEEN OVERTURNED BY THE LEARNED FIRST APPELLATE AUTHORITY, THE LEARNED A.R. CONTENDED THAT THE DEDUCTION WAS ALLOWABLE. HE FURTHER RELIED ON THE ORDER PASSE D IN ACIT VS. K.MOHAN & CO. (EXPORTS) (P) LTD. [(2010) 130 TTJ (BANG) 719] BY C ONTENDING THAT IN THE NEXT YEAR THE ASSESSEE WAS CONVERTED INTO A PRIVATE LIMITED C OMPANY AND THE SAID TRIBUNAL ORDER HAS BEEN PASSED HOLDING THAT THE ASSESSEE ENT ERED INTO FORWARD CONTRACT IN ITA NO.3473/MUM/2008 M/S.K.MOHAN & CO. (EXPORTS) (REGD.) 3 RESPECT OF FOREIGN EXCHANGE RECEIVABLE AS A RESULT OF EXPORT IN RESPECT OF EXPORT TURNOVER AND SETTLED THE SAME WITHOUT ACTUAL DELIVE RY THUS THE PROFIT FROM FORWARD CONTRACT WAS ASSESSABLE AS SPECULATION BUSINESS AND THE SAME COULD NOT BE INCLUDED IN THE PROFITS OF THE BUSINESS FOR THE PURPOSE OF C OMPUTING DEDUCTION U/S.10B. RELYING ON THIS ORDER THE LEARNED A.R. CONTENDED TH AT THE TRIBUNAL HAS ACCEPTED THAT THE ASSESSEE WAS HAVING ITS SEPARATE BUSINESS OF FORWARD CONTRACT AND IN THAT VIEW OF THE MATTER THE INCOME FROM THE SAME SHOULD BE TREATED AS PROFITS OF THE BUSINESS UNDER THE HEAD PROFITS AND GAINS OF BUSINE SS OR PROFESSION. IT WAS FURTHER ARGUED THAT ONCE THE HEAD OF INCOME UNDER WHICH SUC H PROFIT ON FORWARD CONTRACT WAS FALLING WAS DETERMINED AS `BUSINESS INCOME, TH EN THE FORMULA PRESCRIBED FOR THE CALCULATION OF DEDUCTION U/S 80HHC SHALL COME I NTO PLAY AND THE AMOUNT OF DEDUCTION WAS REQUIRED TO BE CALCULATED ACCORDINGLY . IN SUPPORT OF THIS PROPOSITION, HE RELIED ON THE JUDGMENT OF THE HONB LE SUPREME COURT IN MYSODET P. LTD. VS. CIT (2008) 305 ITR 276 (SC) . 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. AT THE VERY OUTSET WE WANT TO MAKE IT CLEAR THAT THE QUESTION BEFORE US IS THE ALLOWABILITY OR OTHERWISE OF DEDUCTION U/S.80HHC ON GAINS OF FORWARD CONTRACT. THE LARGER QUESTION IS WHETHER THE ASSESSEE IS ENTI TLED TO DEDUCTION U/S.80HHC AND IN DECIDING THIS QUESTION THE AUTHORITIES BELOW HAV E HELD THAT SUCH INCOME SHOULD BE TAXED UNDER THE HEAD `INCOME FROM OTHER SOURCES [BY A.O.] AND BUSINESS INCOME [BY CIT(A)]. THERE IS NO DISPUTE ABOUT THE NATURE OF INCOME ARISING ON THE FORWARD CONTRACTS AND CURRENCIES. THE HONBLE JURIS DICTIONAL HIGH COURT IN THE CASE OF SHAH ORIGINALS (SUPRA) HAS CATEGORICALLY HELD TH AT GAIN ON ACCOUNT OF EXCHANGE RATE FLUCTUATION UNDER EEFC ACCOUNT AND INTEREST TH EREON IS A FACILITY WHICH IS MADE AVAILABLE BY RBI AND FURTHER EXCHANGE FLUCTUATION I N SUCH ACCOUNT ARISES AFTER THE COMPLETION OF EXPORT ACTIVITY AND DOES NOT BEAR PRO XIMATE AND DIRECT NEXUS WITH EXPORT TRANSACTION SO AS TO FALL WITHIN THE EXPRESS ION DERIVED BY THE ASSESSEE IN ITA NO.3473/MUM/2008 M/S.K.MOHAN & CO. (EXPORTS) (REGD.) 4 SECTION 80HHC(1). IT HAS BEEN HELD THAT THE GAIN ON ACCOUNT OF EXCHANGE RATE FLUCTUATION AS WELL AS INTEREST ON SUCH ACCOUNT CAN NOT BE TREATED AS PART OF BUSINESS INCOME AND HENCE IS INELIGIBLE FOR INCLUSION IN THE PROFITS OF THE BUSINESS WHILE CALCULATING DEDUCTION U/S.80HHC. THE LAW ON THIS PO INT HAS BEEN UNEQUIVOCALLY INTERPRETED BY THE HONBLE JURISDICTIONAL HIGH COUR T DISENTITLING THE ASSESSEE TO DEDUCTION U/S.80HHC IN RESPECT OF GAIN ON ACCOUNT O F FOREIGN EXCHANGE RATE FLUCTUATION UNDER EEFC ACCOUNT. THE SIMILARITY OF T HE NATURE OF INCOME IN THE CASE OF THE ASSESSEE VIS--VIS THAT CONSIDERED IN THE CA SE OF SHAH ORIGINALS (SUPRA) HAS NOT BEEN DISPUTED. THE LEARNED A.R. HAS ACCENTUATE D ON THE HEAD UNDER WHICH SUCH INCOME SHOULD BE CONSIDERED TO FALL, FOR THE PURPOS ES OF CALCULATING DEDUCTION. IN OUR CONSIDERED OPINION THE LARGER QUESTION IS AS TO WHETHER THE ASSESSEE IS ENTITLED TO DEDUCTION U/S.80HHC ON THIS AMOUNT OR NOT. WHEN THE HONBLE JURISDICTIONAL HIGH COURT HAS CATEGORICALLY HELD THAT THE ASSESSEE IS NOT ENTITLED TO DEDUCTION U/S.80HHC ON SUCH INCOME, IN OUR CONSIDERED OPINION , THE ARGUMENT WHETHER SUCH AMOUNT SHOULD BE CONSIDERED UNDER THE HEAD INCOME FROM OTHER SOURCES OR PROFITS AND GAINS OF BUSINESS OR PROFESSION LOSES ITS SIGNIFICANCE. FURTHER THE RELIANCE OF THE LEARNED A.R. IN THE CASE OF K. MOHA N & CO. (EXPORTS) (P) LTD. (SUPRA) FOR ASSESSMENT YEAR 2005-2006 IS OF NO CON SEQUENCE FOR THE REASON THAT PRIMARILY WE ARE CONCERNED WITH THE FACTS OF THE IN STANT CASE IN WHICH THERE IS NO SUCH FINDING THAT THE ASSESSEE WAS DOING FORWARD E XCHANGE CONTRACTS AS A SEPARATE BUSINESS OR NOT AND SECONDLY, WHICH IS MORE IMPORTA NT IS THAT WHEN A POINT OF LAW HAS BEEN ADJUDICATED BY THE HONBLE JURISDICTIONA L HIGH COURT, THE DECISION BECOMES BINDING ON ALL THE AUTHORITIES ACTING UNDE R ITS JURISDICTION, UNLESS IT IS REVERSED OR MODIFIED BY THE HONBLE SUPREME COURT. IN THAT VIEW OF THE MATTER, WE ARE OF THE CONSIDERED OPINION THAT THERE REMAINS NO RELEVANCE OF THE ORDERS PASSED BY THE LOWER AUTHORITIES, WHICH ARE NOT IN CONSONAN CE WITH SUCH VIEW. RESPECTFULLY FOLLOWING THE JUDGMENT IN THE CASE OF SHAH ORIGINALS (SUPRA) , WE ARE OF THE ITA NO.3473/MUM/2008 M/S.K.MOHAN & CO. (EXPORTS) (REGD.) 5 CONSIDERED OPINION THAT THE LEARNED CIT(A) WAS NOT JUSTIFIED IN DIRECTING THE ASSESSING OFFICER TO ALLOW DEDUCTION U/S.80HHC ON P ROFIT ON FORWARD CONTRACT. WE, THEREFORE, OVERTURN THE IMPUGNED THE ORDER AND RESTORE THE VIEW OF THE AO ON THIS POINT. 6. IN THE RESULT, THE APPEAL IS ALLOWED. ORDER PRONOUNCED ON THIS 20 TH DAY OF APRIL, 2011 . SD/- SD/- (ASHA VIJAYARAGHAVAN) (R.S.SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI : 20 TH APRIL, 2011. DEVDAS* COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT CONCERNED 4. THE CIT(A) XXVII, MUMBAI. 5. THE DR/ITAT, MUMBAI. 6. GUARD FILE. TRUE COPY. BY ORDER ASSISTANT REGISTRAR, ITAT, MUMBAI.