Assistant Commissioner of Income Tax, Circle-1(1), Panaji., Panaji V. M/s Goa Carbon Ltd., Panaji

ITA 405/PAN/2014

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 2231 (ITAT-PANAJI)
• Duration Of Justice: 9 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-09-2015
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 07-09-2015
• Assessment Year: 2011-2012
• Appeal Filed On: 18-11-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: RAMESH S MUTAGAR
• Assessee Lawyers: K RAGHU
• Keywords: Business expenditure; Speculation loss
• Section: 37(1); 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI BEFORE SHRI N.S. SAINI , HONBLE ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN, HONBLE JUDICIAL MEMBER ITA NO. 405 /PNJ/201 4 (ASST. YEAR : 20 11 - 1 2 ) ACIT, CIRCLE - 1(1), PANAJI GOA. VS. M/S. GOA CARBON LTD., DEMPO HOUSE, CAMPAL, PANAJI GOA. PAN NO. AAACG 6842 K (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI K. RAGHU C A DEPARTMENT BY : SHRI RAMESH S. MUTAGAR - D R DATE OF HEARING : 07 / 0 9 /2015 . DATE OF PRONOUNCEMENT : 07 / 0 9 /201 5 . O R D E R PER N.S. SAINI , ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) , PANAJI , DATED 2 8 /0 8 /201 4 . 2. THE SOLE ISSUE INVOLVED IN THIS APPEAL IS THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN DELETING THE ADDITION OF 5,10,83,152/ - ON ACCOUNT OF FORWARD PREMIUM EXPENSES. 3 . FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSING OFFICER OBSERVED THAT DURING THE YEAR UNDER CONSIDERATION , THE ASSESSEE HAS CLAIMED LOSS ON ACCOUNT OF FORWARD PREMIUM EXPENSES OF 5,10,83,152/ - INCURRED ON FORWARD CONTRACT AGREEMENT WITH BANK OF INDIA. ON A SHOW - CAUSE BY THE ASSESSING OFFICER WHY THE ABOVE LO SS SHOULD NOT BE TREATED AS SPECU LATIVE LOSS, THE ASSES SEE EXPLAINED THAT THE COMPANY H AS ENTERED 2 ITA NO. 40 5 /PNJ/201 4 INTO FORWARD CONTRACTS IN FOREIGN EXCHANGE TO HEDGE THE LOSSES ON PAYMENTS OF IMPORTS. IT WAS EXPLAINED THAT THE LOSS WAS TO BE TREATED AS HED G ING LOSS AND NOT AS A SPECULATIVE LOSS. THE ASSESSING OFFICER HELD THAT THE EXPLANATION OF THE ASSESSEE WAS NOT ACCEPTABLE. ACCORDING TO HIM, AS PER THE PROVISIONS OF SEC. 43(5), THE HED G ING CONTRACT SHOULD BE IN THE SAME GOODS WHICH ARE MANUFACTURED/TRADED BY THE ASSESSEE. THE ASSESSEE IS NOT A FOREIGN EXCHANGE DEALER AND THEREFORE, HED G ING LOSS IN FOREIGN EXCHANGE IS NOT ALLOWABLE TO THE ASSESSEE. 4 . ON APPEAL, COMMISSIONER OF INCOME TAX (APPEALS) OBSERVED THAT THE ASSESSING OFFICER HAS MADE THE DISALLOWANCE ON THE BASIS OF A CONCLUSION DRAWN THAT THE LOSS INCURRED ON FORWARD CONTRACTS IS THAT OF SPECULATIVE IN NATURE AND IT IS NOT A HEDGING LOSS. THE ASSESSEE - COMPANYS BUSINESS IS TO MANUFACTURE CALCINED PETROLEUM COKE, AVAILED SHORT TERM FOREIGN CURRENCY LOAN FROM FOREIGN BANKS, IN ORDER TO FINANCE IMPORT OF RAW MATERIALS . THE ASSESSEE COMPANY ENTERED INTO FORWARD CONTRACT WITH BANK OF INDIA TO SAFEG UARD AGAINST EXCHANGE LOSS WHICH MAY OCCUR DUE TO EXCHANGE RATE FL U CTUATIONS. THE SPECIFIC FOREIGN EXCHANGE LOAN WAS TAKEN FOR PURCHASE OF RAW MATERIAL S . THUS, FACTS OF THIS CASE CLEARLY ESTABLISH THAT THE LOSS ON FORWARD CONTRACT IS HEDGING LOSS AND NOT SPECULATIVE LOSS WITHIN THE MEANING AND SCOPE OF SEC. 43(5) AND CBDTS INSTRUCTION NO. 3/2010 DATED 20/03/2010 . ACCORDINGLY, HE HELD THAT LOSS OF 5,10,83,152/ - ON FORWARD CONTRACTS IS HEDGING LOSS AND THEREFORE, ALLOWABLE AS BUSINESS EXPENDITURE. 5. BEING AGGRIEVED BY THE SAID ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), THE REVENUE IS IN APPEAL BEFORE US . 6 . DEPARTMENTAL REPRESENTATIVE RELIE D ON THE ORDER OF THE ASSESSING OFFICER WHEREAS AUTHORIZED REPRESENTATIVE OF THE ASSESSEE SUPPORTED THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS). 3 ITA NO. 40 5 /PNJ/201 4 7 . AUTHORIZED REPRESENTATIVE OF THE ASSESSEE HAS FILED BEFORE US IN THE PAPER BOOK , COPY OF LETTER FROM BANK OF INDIA CERTIFYING FORWARD CONTRACT S TAKEN BY GOA CARBON LTD. TOWARDS FOREIGN CURRENCY LOANS AVAILED FOR PURCHASE OF RAW MATERIALS. THIS IS PLACED AT PAGE NO. 1 OF THE PAPER BOOK. AT PAGE NO S . 2 TO 7 OF THE PAPER BOOK, THE ASSESSEE HAS FILED DETAILS OF FOREIGN CURRENCY LOANS AVAILED FOR PURCHASE OF RAW MATERIALS AND FORWARD PREMIUM PAID TO BANK OF INDIA IN RESPECT OF FORWARD CONTRACTS TAKEN . FURTHER AT PAGE NO. 8 TO 9, DETAILS OF FORWARD PREMIUM RECEIVED FROM BANK OF INDIA FOR THE SALE OF EXPORTS PROCEEDS TO BANK OF INDIA ARE FILED . AT PAGE NO. 10 OF THE PAPER BOOK, COPY OF LETTER FROM BANK OF BARODA , MEMBER BANK IN CONSORTIUM, CERTIFYING FORWARD CONTRACTS TAKEN BY THE GOA CARBON LTD. TOWARDS FOREIGN CURRENCY LOAN AVAILED FOR PURCHASE OF RAW MATERIALS IS FILED . AT PAGE NO. 11 OF THE PAPER BOOK, DETAILS OF FOREIGN CURRENCY LOANS AVAILED FOR PURCHASE OF RAW MATERIALS AND FORWARD PREMIUM PAID TO BANK OF BARODA IN RESPECT OF FORWARD CONTRACTS TAKEN IS FILED. 8 . WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE ORD ERS OF THE LOWER AUTHORITIES AND THE MATERIAL AVAILABLE ON RECORD . IN THE INSTANT CASE, THE ASSESSEE CLAIMED DEDUCTION FOR 5,10,83,152/ - UNDER THE HEAD FORWARD PREMIUM EXPENSES, THE SAME WAS DISALLOWED BY THE ASSESSING OFFICER ON THE GROUND THAT AS PER THE PROVISIONS OF SEC. 43(5), THE HEDGING CONTRACT SHOULD BE IN THE SAME GOOD S WHICH ARE MANUFACTURED/TRADED BY THE ASSESSEE. THE ASSESSEE IS NOT A FOREIGN EXCHANGE DEALER AND THEREFORE, HEDGING LOSS IN FOREIGN EXCHANGE IS NOT ALLOWABLE TO THE ASSESSEE. 9. ON APPEAL , COMMISSIONER OF INCOME TAX (APPEALS) ALLOWED THE CLAIM OF THE ASSESSEE BY OBSERVING THAT THE ASSESSEE WAS IN THE BUSINESS OF MANUFACTURING CALCINED PETROLEUM COKE AND A VAILED SHORT TERM FOREIGN CURRENCY LOAN FROM FOREIGN BANKS IN ORDER TO FIN ANCE IMPORT OF RAW MATERIALS. IN ORDER TO SAFEGUARD AGAINST FOREIGN EXCHANGE LOSS 4 ITA NO. 40 5 /PNJ/201 4 WHICH MAY OCCUR DUE TO EXCHANGE RATE FLUCTUATION , THE ASSESSEE ENTERED INTO FORWARD CONTRACT WITH BANK OF INDIA. HE OBSERVED THAT SPECIFIC FOREIGN EXCHANGE LOAN WAS TAKEN F OR PURCHASE OF RAW MATERIAL AND THEREFORE, IN THE FACTS OF THE ASSESSEES CASE, LOSS ON FORWARD CONTRACT IS HED G ING LOSS AND NOT SPECULATIVE LOSS . 10 . WE FIND THAT IN THE PAPER BOOK FILED , THE ASSESSEE HAS NOT CERTIFIED WHETHER THE DOCUMENTS FILED AT PAGE NOS. 1 TO 11 WERE FILED BEFORE THE ASSESSING OFFICER OR BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS). WE FIND THAT THE COMMISSIONER OF INCOME TAX (APPEALS) WHILE ALLOWING THE CLAIM FO R THE ASSESSEE AS HEDGING LOSS IN FOREIGN EXCHANGE H AS HELD THAT THE EXCHANGE LO AN WAS TAKEN FOR PURCHASE OF RAW MATERIALS . H OWEVER , FROM THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) IT IS NOT EVIDENT ON THE BASIS OF WHICH EVIDENCE AND DOCUMENTS HE HAS ARRIVED AT SUCH A FI N DING AND CONCLUSION. IT IS SETTLED POSITION OF LAW THAT LOSS SUFFERED ON ACCOUNT OF FLUCTUATION IN RATE S OF FOREIGN EXCHANGE IS ALLOWABLE AS A BUSINESS EXPENDITURE UNDER SEC. 37(1) OF THE ACT AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA P. LTD. , 312 ITR 254 . FURTHER, THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. BADRIDAS GAURIDU (P) LTD. , 261 ITR 256 HAS HELD THAT LOSS DUE TO FLUCTUATION IN FOREIGN EXCHANGE WHILE IMPLEMENTING THE EXPORT CONTRACTS WAS EXPENDITURE INCURRED TOWARDS THE BUSINESS OF THE ASSESSEE AND ALLOWABLE DEDUCTION UNDER SEC. 37(1) OF THE ACT. RECENTLY, THE CHENNAI BENCH OF THE TRIBUN AL IN THE CASE OF MAJESTIC EXPORTS VS. JCIT IN I.T.A.NOS. 1336 & 3072/MDS/2014 ORDER DATED 24/07/2015 HAS HELD THAT THE TOTAL TRANSACTION CONSIDERED FOR DETERMINING THE EXCHANGE FLUCTUATION LOSS FROM THE HEDGING CONTRACT CANNOT BE MORE THAN THE TOTAL EXPOR T TURNOVER OF THE ASSESSEE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION AND IF IT IS IN EXCESS THEN THE LOSS SUFFERED IN RESPECT OF THAT OPERATION OF THE EXCESS TRANSACTIONS IS TO BE CONSIDERED AS SPECULATIVE LOSS ONLY A S IT HAS NO PROXIMITY WITH THE EXPORT TURNOVER AND DIRECTED THE ASSESSING OFFICER TO RE - COMPUTE 5 ITA NO. 40 5 /PNJ/201 4 ACCORDINGLY . IN THE INSTANT CASE, WE ALSO FIND THAT THE DOCUMENTS PLACED BEFORE US IN THE PAPER BOOK AT PAGE NOS. 1 TO 11 ARE NOT VERIFIED BY EITHER OF THE LOWER AUTHORITIES . T HEREFORE, WE FEEL T HAT IN ORDER TO ADJUDICATE THE ISSUE COMPLETELY, THE MATTER HAS TO BE RESTORED BACK TO THE FILE O F THE ASSESSING OFFICER FOR VERI F Y ING THE SAME WITH THE DOCUMENTS FILED BEFORE US BY THE ASSESSEE AND TO ALLOW THE LOSS INCURRED BY THE ASSESSEE IN HEDGING TRA NSACTIONS OF FOREIGN EXCHANGE TO THE EXTENT OF IMPORTS MADE BY THE ASSESSEE. IF THE TOTAL OF THE HEDGING TRANSACTIONS ARE MORE THAN THE TOTAL OF THE IMPORTS MADE BY THE ASSESSEE , THEN THE EXCESS AMOUNT IS TO BE CONSIDERED AS SPECULATIVE LOSS AND DISALLOWED BY THE ASSESSING OFFICER WHILE COMPUTING THE INCOME OF THE ASSESSEE. NEEDLESS TO MENTION THAT THE ASSESSING OFFICER SHALL ALLOW REASONABLE AND PROPER OPPORTUNITY TO THE ASSESSE E BEFORE ADJUDICATING THE ISSUE AFRESH. THUS, THE APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSE. 11 . IN THE RESULT, APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES . ORDER PRONOUNCED IN THE COURT AT THE CLOSE OF THE HEARING ON MONDAY , THE 07 TH DAY OF SEPTEMBER , 201 5 AT GOA . S D / - S D / - (GEORGE MATHAN) (N.S.SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER D ATED : 07 TH SEPTEMBER , 201 5 . VR/ - 6 ITA NO. 40 5 /PNJ/201 4 1 . THE ASSESSEE. 2 . THE REVENUE. 3 . THE CIT 4 . THE CIT(A) 5 . THE D.R . 6 . GUARD FILE. BY ORDER ASSISTANT REGISTRAR I.T.A.T., PANAJI 7 ITA NO. 40 5 /PNJ/201 4 DATE INITIAL ORIGINAL DICTATION PAD & DRAFT ARE ENCLOSED IN THE FILE 1. DRAFT DICTATED ON 07 .0 9 .2015 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 0 8 .09 .2015 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 08 /0 9 /2015 JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 08 /0 9 /2015 JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS 08 /0 9 /2015 SR.PS 6. DATE OF PRONOUNCEMENT 07 /0 9 /2015 SR.PS 7. FILE SENT TO THE BENCH CLERK 08 /0 9 /2015 SR.PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK 9. DATE OF DISPATCH OF ORDER