Divgi Warner Pvt. Ltd., Pune V. Deputy Commissioner of Income-tax,

ITA 47/PUN/2016

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 7646 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 3 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-04-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 22-03-2018
• Assessment Year: 2010-2011
• Appeal Filed On: 12-01-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MUKESH JHA
• Keywords: Business expenditure; Speculation loss; Revenue expenditure
• Section: 143(3); 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, PUN E , ! , '# $ !% , ! & BEFORE SHRI ANIL CHATURVEDI, AM AND SHRI VIKAS AWAS THY, JM #. / ITA NO. 47/PUN/2016 ( )( / ASSESSMENT YEAR : 2010-11 DIVGI WARNER PVT. LTD. 75, GENERAL BLOCK, MIDC BHOSARI, PUNE-411 026. PAN : AABCD0659G ....... / APPELLANT / V/S. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 1(2), PUNE. / RESPONDENT ASSESSEE BY : SHRI NIKHIL PATHAK & SHRI P.D. KUDVA REVENUE BY : SHRI MUKESH JHA. / DATE OF HEARING : 21.03.2018 / DATE OF PRONOUNCEMENT : 25.04.2018 * / ORDER PER VIKAS AWASTHY, JM THIS APPEAL BY ASSESSEE IS DIRECTED AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)-1, PUNE DATED 30.10.2015 FOR THE ASS ESSMENT YEAR 2010-11. 2 ITA NO.47/PUN/2016 A.Y.2010-11 2. THE BRIEF FACTS OF THE CASE AS EMANATING FROM RECORDS ARE: THE ASSESSEE- COMPANY IS ENGAGED IN MANUFACTURING OF TRANSFER CASES, AUT OMATIC LOCKING HUBS AND TRANSMISSION COMPONENTS USED IN AUTOMOBILE INDUSTRY. T HE ASSESSEE FILED ITS RETURN OF INCOME FOR THE IMPUGNED ASSESSMENT YEAR ON 14.10.2010 DECLARING TOTAL INCOME OF RS.13,21,10,603/-. THE CASE OF ASSESSEE WAS SELECTED FOR SCRUTINY. ACCORDINGLY, STATUTORY NOTICE U/S. 143(2) OF THE I NCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) WAS ISSUED TO THE ASSESSEE. DURING THE COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS CLAIMED LOSS ON FOREIGN EXCHANGE FLUCTUAT ION RS.4,52,45,234/- AS REVENUE EXPENDITURE. THE ASSESSING OFFICER HELD THAT TH E ASSESSEE HAS TAKEN FORWARD COVER AGAINST EXPORTS, HENCE, THE TRANSACTION IS NOT REVENUE IN NATURE. THE ASSESSING OFFICER FURTHER OBSERVED THAT THE TRANSACT ION IS NOT RECURRING IN NATURE; THEREFORE, THE EXPENDITURE IS NOT FOR DAY TO DAY RUNNING OF THE BUSINESS. 3. AGGRIEVED BY THE ASSESSMENT ORDER DATED 11.03.2014 PASSED U/S. 143(3) R.W.S 144C(1) OF THE ACT, THE ASSESSEE FILED APPEAL BEFORE T HE COMMISSIONER OF INCOME TAX (APPEALS). THE COMMISSIONER OF INCOME TAX (APP EALS) NOT ONLY UPHELD THE ACTION OF ASSESSING OFFICER IN ADDING BACK FOREIGN EXCHANGE LOSS NOT BEING ON REVENUE ACCOUNT BUT WENT A STEP AHEAD IN HOLD ING FORWARD CONTRACT TAKEN BY ASSESSEE AS SPECULATIVE IN NATURE. NOW, AGAINST THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS), THE ASSESSEE IS IN SEC OND APPEAL BEFORE THE TRIBUNAL. 4. SHRI NIKHIL PATHAK APPEARING ON BEHALF OF ASSESSEE SUBM ITTED THAT THE ASSESSEE-COMPANY IS ENGAGED IN BUSINESS SINCE 1996 AND EXPORTS ARE A REGULAR FEATURE OF ITS BUSINESS. THE ASSESSEE HAD TAKEN A FORWARD COVER FROM CAYLON BANK LTD. AGAINST EXPORT SALES TO SAFEGUARD AGAINST THE FOREIGN CURRENCY FLUCTUATION. THE LD. AR REFERRED TO AGREEMENT WITH CALYON B ANK LTD. DATED 09.05.2006 AT PAGE 2 TO 5 AND MASTER AGREEMENT DATED 21.11.2007 ENTERED INTO 3 ITA NO.47/PUN/2016 A.Y.2010-11 WITH CAYLON BANK LTD. AT PAGE 6 TO 34 OF THE PAPER BOO K. THE LD. AR FURTHER REFERRED TO CONTRACT CONFIRMATIONS AT PAGE 35 TO 41 OF THE PAPER BO OK. THE LD. AR POINTED THAT AS PER AGREEMENT, THE ASSESSEE HAD COMMIT TED EXPORTS TO THE TUNE OF US $ 58,42,580 FOR THE YEAR WITH THE BANK. DUE TO REC ESSION IN ECONOMY, THE EXPORTS OF ASSESSEE-COMPANY REDUCED SUBSTANTIALLY, THUS THERE WAS SHORTFALL IN DEPOSIT OF US $ 10,00,247 WITH THE BANK. THE DIFFERENCE BETW EEN THE OPEN MARKET RATE AND DEAL RATE WAS FOREIGN CURRENCY FLUCTUATIO N LOSS WHICH WAS RECOVERED BY BANK FROM THE ASSESSEE. THE SHORTFALL IN DEP OSIT OF US $ WITH THE BANK AS PER COMMITMENT RESULTED IN LOSS OF RS.4,52,45,234/- TO THE ASSESSEE. THE LOSS ARISING ON ACCOUNT OF PAYMENT MADE BY ASSESSEE TO THE BANK AS PER AGREEMENT IS WHOLLY AND EXCLUSIVELY IN CONNECTION WITH THE BUSINESS OF ASSESSEE. THE ASSESSING OFFICER HAS NOT DISPUTED THIS FACT. THE LD. AR SUBMITTED THAT THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. BADRIDAS GAURIDU (P.) LTD. REPORTED AS 261 ITR 256 HAS ALLOWED THE LOSS ARI SING ON ACCOUNT OF SHORTFALL IN EXPORTS AGAINST WHICH THE ASSESSEE HAD TAKE N HEDGE FROM THE BANK, AS ALLOWABLE BUSINESS EXPENDITURE. THE LD. AR TO FURTHER BU TTRESS HIS SUBMISSIONS, PLACED RELIANCE OF THE FOLLOWING DECISIONS: 1. CIT VS. D. CHETAN & CO., 75 TAXMANN.COM 300 (BOMBAY) 2. DCIT VS. MAHENDRA BROTHERS EXPORTS (P.) LTD., 72 TAXMAN N.COM 301 ( MUMBAI-TRIB.) 3. CIT VS. FRIENDS AND FRIENDS SHIPPING (P.) LTD, 35 TAXMANN.CO M 58 4. ACIT VS. FINOLEX INDUSTRIES LTD., ITA NO.274/PN/2012, FOR A.Y 2005-06, DECIDED ON 28.02.2014. 5. ON THE OTHER HAND, SHRI MUKESH JHA REPRESENTING THE DEPARTMENT VEHEMENTLY DEFENDED THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS) IN CONFIRMING ADDITION AND HOLDING THE SAME TO BE SPECULATIVE T RANSACTION. THE LD. DR SUBMITTED THAT THE TRANSACTION IS SPECULATIVE IN NATUR E AS THE ASSESSEE WITHOUT ACTUAL EXPORT OF GOODS, HAS CLAIMED THE LOSS. THE LD. DR IN SUPPORT OF 4 ITA NO.47/PUN/2016 A.Y.2010-11 HIS SUBMISSIONS, PLACED RELIANCE ON THE DECISION OF MUMBAI B ENCH OF TRIBUNAL IN THE CASE OF S. VINODKUMAR DIAMONDS (P.) LTD. VS. ADDITIONAL COMMISSION ER OF INCOME TAX REPORTED AS 155 TTJ 280 (MUMBAI-TRIB). 6. WE HAVE HEARD THE SUBMISSIONS MADE BY REPRESENTATIV ES OF RIVAL SIDES AND HAVE PERUSED THE ORDERS OF AUTHORITIES BELOW. WE HA VE ALSO CONSIDERED THE DOCUMENTS PLACED ON RECORD AND THE DECISIONS REFERRED D URING THE COURSE OF MAKING SUBMISSIONS. THE SOLITARY ISSUE RAISED IN THE APPEAL IS; WHETHER FOREIGN EXCHANGE FLUCTUATION LOSS RS.4,52,45,234/- ARISING ON ACCOUNT OF SHORTFALL IN EXPORTS, IS AN ALLOWABLE BUSINESS LOSS OR SPECULATIVE LOSS? 7. THE ASSESSEE IS ENGAGED IN MANUFACTURING OF TRANSFER CASES, AUTOMATIC LOCKING HUBS AND TRANSMISSION COMPONENTS USED IN AUTOMOB ILE INDUSTRY. THE ASSESSEE HAD TAKEN FORWARD COVER FROM CAYLON BANK LTD . ON EXPORT SALES. AS PER AGREEMENT, THE ASSESSEE WAS REQUIRED TO EXPORT MINIMUM SPECIFIED QUANTITY EVERY MONTH AND DELIVER COMMITTED AMOUNT OF US $ EVERY MONTH TO THE BANK AT THE DEAL RATE OUT OF REALIZATION OF ITS EXPORT SALE PROCEE DS. THE CONTRACT ALSO PROVIDES THAT IF THE ASSESSEE-COMPANY IS UNABLE TO HONOU R ITS COMMITMENT DUE TO REDUCED EXPORTS, THE BANK WOULD BUY DOLLARS FROM TH E OPEN MARKET. THE DIFFERENCE BETWEEN THE OPEN MARKET RATE AND THE DEAL R ATE WOULD BE BORNE BY ASSESSEE-COMPANY. IT IS AN UNDISPUTED FACT THAT IN THE ASSESSMENT YEAR U NDER APPEAL, THE ASSESSEE COULD NOT MEET EXPORT TARGET. THUS, THE ASSES SEE AS PER AGREEMENT WITH THE BANK HAD TO COMPENSATE THE BANK BY DEPOSITING US $ FROM THE OPEN MARKET. THE LOSS SUFFERED BY THE ASSESSEE ON ACCOUNT O F PAYMENT TO THE BANK DIFFERENCE BETWEEN THE OPEN MARKET RATE AND DEAL RATE WITH THE BA NK IS BUSINESS LOSS SUFFERED IN NORMAL COURSE OF BUSINESS. THE ASSESSEE HA D TAKEN FORWARD CONTRACT FROM THE BANK TO HEDGE AGAINST FOREIGN CURRENC Y FLUCTUATIONS. AS PER 5 ITA NO.47/PUN/2016 A.Y.2010-11 AGREEMENT, IN THE EVENT OF ANY DEFAULT, THE ASSESSEE WAS LIABLE TO PAY THE DIFFERENCE TO THE BANK. 8. THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF BADRIDAS GAURIDU (P.) LTD (SUPRA.) UNDER SIMILAR SET OF FACTS ALLOWED PAYMENT OF CHARGE S TO BANK AS BUSINESS EXPENDITURE. IN THE SAID CASE, THE ASSESSEE HA D ENTERED INTO FORWARD CONTRACTS WITH THE BANKS IN RESPECT OF FOREIGN EXCHANGE . THE ASSESSEE COULD NOT HONOUR THE TERMS AND CONDITIONS OF THE CONTRACT, AS A R ESULT, THE ASSESSEE HAD TO PAY CHARGES TO THE BANK AND SUFFERED LOSS. THE ASSES SEE CLAIMED THE LOSS AS BUSINESS LOSS. THE REVENUE DISALLOWED THE CLAIM OF ASSESSEE HOLDING THE LOSS AS SPECULATIVE. THE TRIBUNAL REVERSED THE FINDINGS OF REVENUE HOLDING T HE CONTRACTS WERE INCIDENTAL TO THE ASSESSEES BUSINESS OF EXPORT OF C OTTON, AND HELD THAT IT IS NOT A SPECULATIVE TRANSACTION. IN APPEAL BY THE DEPARTME NT, THE HON'BLE BOMBAY HIGH COURT UPHELD THE FINDINGS OF TRIBUNAL BY OBSERVING AS UN DER: 3. THE ASSESSEE WAS NOT A DEALER IN FOREIGN EXCHANG E. THE ASSESSEE WAS A COTTON EXPORTER. THE ASSESSEE WAS AN EXPORT HOUSE . THEREFORE, FOREIGN EXCHANGE CONTRACTS WERE BOOKED ONLY AS INCIDENTAL T O THE ASSESSEE'S REGULAR COURSE OF BUSINESS. THE TRIBUNAL HAS RECORD ED A CATEGORICAL FINDING TO THIS EFFECT IN ITS ORDER. THE ASSESSING OFFICER HAS NOT CONSIDERED THESE FACTS. UNDER SECTION 43(5) OF THE INCOME-TAX ACT, ' SPECULATIVE TRANSACTION' HAS BEEN DEFINED TO MEAN A TRANSACTION IN WHICH A C ONTRACT FOR THE PURCHASE OR SALE OF A COMMODITY IS SETTLED OTHERWIS E THAN BY THE ACTUAL DELIVERY OR TRANSFER OF SUCH COMMODITY. HOWEVER, AS STATED ABOVE, THE ASSESSEE WAS NOT A DEALER IN FOREIGN EXCHANGE. THE ASSESSEE WAS AN EXPORTER OF COTTON. IN ORDER TO HEDGE AGAINST LOSSE S, THE ASSESSEE HAD BOOKED FOREIGN EXCHANGE IN THE FORWARD MARKET WITH THE BANK. HOWEVER, THE EXPORT CONTRACTS ENTERED INTO BY THE ASSESSEE O R EXPORT OF COTTON IN SOME CASES FAILED. IN THE CIRCUMSTANCES, THE ASSESSEE WAS ENTITLED TO CLAIM DEDUCTION IN RESPECT OF RS.13.50 LAKHS AS A BUSINES S LOSS. THIS MATTER IS SQUARELY COVERED BY THE JUDGMENT OF THE CALCUTTA HI GH COURT WITH WHICH WE AGREE, IN THE CASE OF CIT VS. SOORAJ MULL NAGARMULL [1981] 129 ITR 16. 9. SIMILAR VIEW WAS TAKEN BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. D. CHETAN & CO. (SUPRA). THE RELEVANT EXTR ACT OF THE ORDER OF HON'BLE JURISDICTIONAL HIGH COURT READS AS UNDER: 7.THE IMPUGNED ORDER OF THE TRIBUNAL HAS, WHILE UPH OLDING THE FINDING OF THE CIT (APPEALS), INDEPENDENTLY COME TO THE CON CLUSION THAT THE 6 ITA NO.47/PUN/2016 A.Y.2010-11 TRANSACTION ENTERED INTO BY THE RESPONDENT ASSESSEE IS NOT IN THE NATURE OF SPECULATIVE ACTIVITIES. FURTHER THE HEDGING TRAN SACTIONS WERE ENTERED INTO SO AS TO COVER VARIATION IN FOREIGN EXCHANGE R ATE WHICH WOULD IMPACT ITS BUSINESS OF IMPORT AND EXPORT OF DIAMOND S. THESE CONCURRENT FINDING OF FACTS ARE NOT SHOWN TO BE PERVERSE IN AN Y MANNER. IN FACT, THE ASSESSING OFFICER ALSO IN THE ASSESSMENT ORDER DOES NOT FIND THAT THE TRANSACTION ENTERED INTO BY THE RESPONDENT ASSESSEE WAS SPECULATIVE IN NATURE. IT FURTHER HOLDS THAT AT NO POINT OF TIME D ID REVENUE CHALLENGE THE ASSERTION OF THE RESPONDENT ASSESSEE THAT THE A CTIVITY OF ENTERING INTO FORWARD CONTRACT WAS IN THE REGULAR COURSE OF ITS BUSINESS ONLY TO SAFEGUARD AGAINST THE LOSS ON ACCOUNT OF FOREIGN EX CHANGE VARIATION. EVEN BEFORE THE TRIBUNAL, WE FIND THAT THERE WAS NO SUBMISSION RECORDED ON BEHALF OF THE REVENUE THAT THE RESPONDE NT ASSESSEE SHOULD BE CALLED UPON TO EXPLAIN THE NATURE OF ITS TRANSAC TIONS. THUS, THE SUBMISSION NOW BEING MADE IS WITHOUT ANY FOUNDATION AS THE STAND OF THE ASSESSEE ON FACTS WAS NEVER DISPUTED. SO FAR AS THE RELIANCE ON ACCOUNTING STANDARD-11 IS CONCERNED, IT WOULD NOT B Y ITSELF DETERMINE WHETHER THE ACTIVITY WAS A PART OF THE RESPONDENT-A SSESSEE'S REGULAR BUSINESS TRANSACTION OR IT WAS A SPECULATIVE TRANSA CTION. ON PRESENT FACTS, IT WAS NEVER THE REVENUE'S CONTENTION THAT T HE TRANSACTION WAS SPECULATIVE BUT ONLY DISALLOWED ON THE GROUND THAT IT WAS NOTIONAL. LASTLY, THE RELIANCE PLACED ON THE DECISION IN S. VINODKUMAR DIAMONDS (P.) LTD. (SUPRA) IN THE REVENUE'S FAVOUR WOULD NOT BY ITSELF GOVERN THE ISSUES ARISING HEREIN. THIS IS SO AS EVERY DECISION IS RENDERED IN THE CONTEXT OF THE FACTS WHICH ARISE BEFORE THE AUTHORI TY FOR ADJUDICATION. MERE CONCLUSION IN FAVOUR OF THE REVENUE IN ANOTHER CASE BY ITSELF WOULD NOT ENTITLE A PARTY TO HAVE AN IDENTICAL RELIEF IN THIS CASE. IN FACT, IF THE REVENUE WAS OF THE VIEW THAT THE FACTS IN S. VINODKUMAR (SUPRA) ARE IDENTICAL /SIMILAR TO THE PRESENT FACTS, THEN RELIA NCE WOULD HAVE BEEN PLACED BY THE REVENUE UPON IT AT THE HEARING BEFORE THE TRIBUNAL. THE IMPUGNED ORDER DOES NOT INDICATE ANY SUCH RELIANCE. IT APPEARS THAT IN S. VINODKUMAR DIAMONDS (P.) LTD. (SUPRA), THE TRIBUNAL HELD THE FORWARD CONTRACT ON FACTS BEFORE IT TO BE SPECULATIVE IN NA TURE IN VIEW OF SECTION 43(5) OF THE ACT. HOWEVER, IT APPEARS THAT THE DECI SION OF THIS COURT IN CIT V. BADRIDAS GAURIDU (P.) LTD.[2003] 261 ITR 256 [2004] 134 TAXMAN 376 ( MUM.) WAS NOT BROUGHT TO THE NOTICE OF THE TR IBUNAL WHEN IT RENDERED ITS DECISION IN S. VINODKUMAR DIAMONDS (P.) LTD.(SUPRA). IN THE ABOVE CASE, THIS COURT HAS HELD THAT FORWARD CONTRA CT IN FOREIGN EXCHANGE WHEN INCIDENTAL TO CARRYING ON BUSINESS OF COTTON E XPORTER AND DONE TO COVER UP LOSSES ON ACCOUNT OF DIFFERENCES IN FOREIG N EXCHANGE VALUATIONS, WOULD NOT BE SPECULATIVE ACTIVITY BUT A BUSINESS AC TIVITY. THE CO-ORDINATE BENCH OF TRIBUNAL IN THE CASE OF ACIT V S. FINOLEX INDUSTRIES LTD.(SUPRA) DELETED THE ADDITION WHERE THE ASS ESSEE HAD SUFFERED LOSS ON ACCOUNT OF CANCELLATION OF FOREIGN EXCHANGE CONTRACTS. 10. THE REVENUE HAS PLACED RELIANCE ON THE DECISION OF S. VINODKUMAR DIAMONDS (P.) LTD. VS. ADDL. CIT (SUPRA.). WE OBSERVE THAT THE HON'BLE HIGH COURT IN THE CASE OF CIT VS. D. CHETAN & CO. (SUPRA) HAS CONSIDERED THE SAME AND DISTINGUISHED. THUS, NO RELIANCE CAN BE PLACED ON SAID DECISION. 7 ITA NO.47/PUN/2016 A.Y.2010-11 11. THUS, IN VIEW OF THE RATIO LAID DOWN BY THE HON'BLE JURIS DICTIONAL HIGH COURT ON THIS ISSUE AND THE FACTS OF THE CASE, WE HOLD T HAT THE LOSS SUFFERED BY ASSESSEE ON ACCOUNT OF SHORTFALL IN EXPORTS ARISING FROM FO REIGN EXCHANGE CONTRACTS IS A REVENUE LOSS. THUS, THE IMPUGNED ORDER IS SET ASIDE AND THE APPEAL OF THE ASSESSEE IS ALLOWED. 12. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON WEDNESDAY, THE 25 TH DAY OF APRIL, 2018. SD/- SD/- ( / ANIL CHATURVEDI ) ( $ !% /VIKAS AWASTHY) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE; !' / DATED : 25 TH APRIL 2018 SB * + ,-$ .$) / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE CIT (APPEALS)-1, PUNE. 4. THE PR. CIT-1, PUNE. 5. %&' () , * () , + +,- , / DR, ITAT, B BENCH, PUNE. 6. './ 01 / GUARD FILE. // TRUE COPY // *2 / BY ORDER, 3 (- / PRIVATE SECRETARY * () , / ITAT, PUNE.