THE Dy. CIT, CIRCLE - 2(1), Guntur V. M/s Polisetty Somasundaram, Guntur

ITA 77/VIZ/2013

• Counselvise Citation: [2016] 130 COUNSELVISE.COM (IT) 9703 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 3 year(s) 9 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-11-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2009-2010
• Appeal Filed On: 14-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R S ARAVINDAKSHAN
• Keywords: Capital asset; Gift; Depreciation; Speculation loss
• Section: 143(3); 142(1); 43(5)

Judgement Text

ITA NO.77/VIZAG/2013 P. SOMASUNDARAM, GUNTUR 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . , $ BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./I.T.A.NO.77/VIZAG/2013 ( / ASSESSMENT YEAR: 2009-10) DCIT, CIRCLE - 2(1), GUNTUR VS. P. SOMASUNDARAM, GUNTUR [PAN: AACFP7251J ] ( % / APPELLANT) ( &'% / RESPONDENT) / APPELLANT BY : SHRI R.S. ARAVINDAKSHAN, DR / RESPONDENT BY : SHRI G.V.N. HARI, AR / DATE OF HEARING : 20.10.2016 / DATE OF PRONOUNCEMENT : 25.11.2016 / O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST ORDER OF THE CIT(A), GUNTUR DATED 15.10.2012 AND IT PERTAINS TO THE ASSESSMENT YEAR 2009-10. ITA NO.77/VIZAG/2013 P. SOMASUNDARAM, GUNTUR 2 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E FIRM IS ENGAGED IN THE BUSINESS OF TRADING IN TOBACCO, FILED ITS RETUR N OF INCOME FOR THE ASSESSMENT YEAR 2009-10 ON 30.9.2009 DECLARING TOTA L INCOME OF ` 5,13,17,830/-. THE CASE HAS BEEN SELECTED FOR SCRU TINY AND ACCORDINGLY, NOTICES U/S 143(2) & 142(1) OF THE INCOME TAX ACT, 1961 (HEREINAFTER CALLED AS 'THE ACT') WERE ISSUED. IN RESPONSE TO N OTICES, THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE APPEARED FROM TIME T O TIME AND FURNISHED BOOKS OF ACCOUNTS ALONG WITH OTHER DETAIL S CALLED FOR. THE ASSESSMENT WAS COMPLETED U/S 143(3) OF THE ACT ON 3 1.12.2011 DETERMINING THE TOTAL INCOME OF ` 7,23,76,151/-. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE ASSESSEE HAS CHALLENGED ADDI TIONS MADE TOWARDS DISALLOWANCE OF LOSS INCURRED ON DERIVATIVE TRANSAC TIONS, DISALLOWANCE OF BUSINESS PROMOTION EXPENSES AND DISALLOWANCE OF PAY MENT OF GRATUITY. THE CIT(A) AFTER CONSIDERING THE EXPLANATIONS OF TH E ASSESSEE DELETED ADDITIONS MADE BY THE A.O. TOWARDS DERIVATIVE LOSS OF ` 1,35,36,895/-, BUSINESS PROMOTION EXPENSES AMOUNTING TO ` 32,82,830/- AND PAYMENT OF GRATUITY TO EMPLOYEES FOR ` 1,24,165/-. AGGRIEVED BY THE CIT(A) ORDER, THE REVENUE IS IN APPEAL BEFORE US. ITA NO.77/VIZAG/2013 P. SOMASUNDARAM, GUNTUR 3 3. THE FIRST ISSUE THAT CAME UP FOR OUR CONSIDERATI ON IS DISALLOWANCE OF DERIVATIVE LOSS OF ` 1,35,36,895/- BY TREATING THE SAME AS SPECULATIVE LOSS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS CLAIMED DEDU CTION OF ` 1,35,36,895/- AS DERIVATIVES, ON BEING ASKED WHICH WAS STATED TO HAVE LOSS INCURRED ON FORWARD CONTRACTS MATURED ON ACCOU NT OF CHANGE IN THE RATE OF FOREIGN EXCHANGE. THE A.O. FURTHER OBSERVE D THAT THE ASSESSEE FIRM HAS PURCHASED US DOLLARS BY ENTERING INTO CONT RACT WITH ICICI BANK QUOTING CERTAIN SPOT RATE ON A FUTURE DATE AND CANC ELLED THE CONTRACT EITHER BEFORE THE FIXED DATE OR ON THE FIXED DATE W ITHOUT TAKING THE POSSESSION OF SUCH FOREX AND CONSEQUENT ON SUCH CAN CELLATION, THE AMOUNT RECEIVABLE IN INDIAN CURRENCY WILL RESULT IN EITHER GAIN OR LOSS WHICH IS SPECULATIVE IN NATURE. THE A.O., TO ASCER TAIN THE NATURE OF DERIVATIVES LOSS CLAIMED BY THE ASSESSEE ISSUED A S HOW CAUSE NOTICE AND ASKED TO EXPLAIN WHY THE LOSS CLAIMED ON ACCOUNT OF SUCH TRANSACTION SHOULD NOT BE TREATED AS SPECULATIVE LOSS. 4. IN RESPONSE TO SHOW CAUSE NOTICE, THE ASSESSEE H AS FILED THE DETAILS OF FORWARD EXCHANGE CONTRACTS ENTERED INTO WITH ICICI BANK ALONG WITH OPTION NUMBER, CONTRACT, PAY OUT, TRADE DATE, EXPIRY DATE, SETTLEMENT DATE, MODE OF PAYMENT, STRIKE RATE, NOTI ONAL AMOUNT, OPTIONS ITA NO.77/VIZAG/2013 P. SOMASUNDARAM, GUNTUR 4 STYLE, ETC. AND DETAILS OF THE AMOUNT IN INDIAN RUP EES EITHER TO BE PAID BY THE BANK OR TO BE RECEIVED BY THE BANK ON ACCOUN T OF SUCH TRANSACTION. THE ASSESSEE FURTHER SUBMITTED THAT I T WAS HAVING A PROPOSAL TO CONSTRUCT TOBACCO THRESHING FACTORY FOR WHICH MACHINERY WAS TO BE IMPORTED FROM M/S. DAVID COALMAN INTERNATIONA L INC., USA FOR USD 74,54,430 WHICH WAS AGREED TO BE DELIVERED WITHIN A PERIOD OF 6 MONTHS AFTER PAYMENT. SINCE, IT HAS ENTERED INTO AN AGREE MENT FOR PURCHASE OF MACHINERY WITH FOREIGN SUPPLIER, THE BANKERS WAS AD VISED THAT CHF IS MORE STABLE AGAINST USD DURING THE PAST 20 YEARS AN D HENCE THE CROSS CURRENCY HEDGING WAS DONE AGAINST USD VS. CHF. HOW EVER, DURING THE PERIOD OF 2007-08, THERE WAS A FLUCTUATION IN THE R ATE OF USD/CHF AND THE ASSESSEE WAS ASKED BY ITS BANKERS TO PAY MARGIN MONEY OF ` 39 LAKHS WHICH IS THE ACTUAL LOSS INCURRED AS ON 31.3. 2008. IT WAS FURTHER SUBMITTED THAT SUBSEQUENTLY, THE FIRM HAS DROPPED T HE IDEA OF INSTALLING TOBACCO THRESHING FACTORY AND COULD NOT IMPORT THE MACHINERY AND FINALLY THE FORWARD CONTRACT WITH ICICI BANK WAS CLOSED ON 29.8.2008 AS PER THE TERMS OF THE CONTRACT AND HAS PAID THE BALANCE AMOUNT OF ` 96,36,895/-. THE TOTAL LOSS ON THE SAID CONTRACT H AS COME TO ` 1,35,36,895/- AND SAID LOSS IS THE ACTUAL LOSS AND NOT NOTIONAL LOSS OR MTM LOSS, THEREFORE, IT CANNOT BE CONSIDERED AS SPE CULATIVE LOSS WITHIN THE MEANING OF SECTION 43(5) OF THE ACT. ITA NO.77/VIZAG/2013 P. SOMASUNDARAM, GUNTUR 5 5. THE A.O. AFTER CONSIDERING THE EXPLANATIONS OF T HE ASSESSEE, HELD THAT THE LOSS INCURRED BY THE ASSESSEE TOWARDS FORW ARD EXCHANGE CONTRACTS WITH ICICI BANK IS A SPECULATIVE LOSS WHI CH CANNOT BE ALLOWED AS A DEDUCTION WHILE COMPUTING INCOME FROM BUSINESS . THE A.O. FURTHER OBSERVED THAT THOUGH THE ASSESSEE CLAIMS THAT IT HA D INTENDED TO PURCHASE MACHINERY FOR THE PURPOSE OF SETTING UP TO BACCO THRESHING FACTORY, THE ASSESSEE COULD NOT SUBSTANTIATE THE CL AIM WITH NECESSARY EVIDENCES. THE ARGUMENT OF INTENTION TO PURCHASE M ACHINERY IS SIMPLY AN AFTERTHOUGHT TO CLAIM THE LOSS ON SPECULATION AS FOR HEDGING LOSS. THE ASSESSEES CLAIM OF CARRYING ON THE TRANSACTION S UNDER REFERENCE IN ORDER TO MITIGATE FLUCTUATION RISK IN FOREX IS DEVO ID OF ANY CREDENCE IN VIEW OF THE NATURE, NUMBER AND TIMING OF SUCH TRANS ACTIONS. THE A.O. FURTHER OBSERVED THAT THE ASSESSEE DID NOT CARRY ON MERELY A SINGLE TRANSACTION FOR THE SAKE OF SAFEGUARDING ITS INTERE ST AGAINST POSSIBLE FOREX FLUCTUATION FORESEEN ON ACCOUNT OF PURPORTEDL Y INTENDED PURCHASE OF MACHINERY THAT WAS ACTUALLY NEVER PURCHASED LATE R, BUT CONTINUED THE ACTIVITY BEYOND SUCH REQUIREMENT. SINCE, THE ASSES SEE HAS DONE REPETITIVE TRANSACTIONS BY ENTERING INTO NUMBER OF FORWARD CONTRACTS, IT CANNOT BE CONSIDERED THAT THE TRANSACTIONS ENTERED BY THE ASSESSEE WITH ITS BANKERS IS FOR THE PURPOSE OF HEDGING THE LOSS IN FLUCTUATION IN FOREIGN CURRENCY TOWARDS PURCHASE OF PLANT AND MACHINERY. THE A.O. AFTER ITA NO.77/VIZAG/2013 P. SOMASUNDARAM, GUNTUR 6 ANALYZING THE FACTS OF THE CASE WITH REFERENCE TO T HE PROVISIONS OF SECTION 43(5) OF THE ACT CAME TO THE CONCLUSION THA T THE LOSS INCURRED BY THE ASSESSEE IS A SPECULATIVE LOSS WITHIN THE MEANI NG OF SECTION 43(5) OF THE ACT AND CANNOT BE ALLOWED AS A DEDUCTION. 6. THE LD. D.R. SUBMITTED THAT THE TRANSACTIONS CAR RIED ON BY THE ASSESSEE ARE NOT FULFILLED THE CONDITIONS LAID DOWN IN EXPLANATION TO SECTION 43(5)(D) OF THE ACT, HENCE, THE ASSESSEES CLAIM OF HEDGING LOSS CANNOT BE ALLOWED. THE LD. D.R. FURTHER SUBMITTED THAT THE ASSESSEE FAILED TO PROVE WITH NECESSARY EVIDENCES THAT IT HA D ENTERED INTO FORWARD EXCHANGE CONTRACTS WITH ITS BANKERS TO HEDGE THE PO SSIBLE FLUCTUATION IN FOREIGN CURRENCY. THOUGH THE ASSESSEE CLAIMS TO HA VE INTENDED TO PURCHASE PLANT AND MACHINERY FOR THE PURPOSE OF SET TING UP TOBACCO THRESHING FACTORY, FAILED TO SUBSTANTIATE THE CLAIM WITH NECESSARY EVIDENCES. IN THE ABSENCE OF NECESSARY EVIDENCES T O THE EFFECT THAT THE ASSESSEE HAS ENTERED FORWARD CONTRACTS TO MITIGATE THE POSSIBLE FLUCTUATION IN FOREIGN CURRENCY, THE LOSS INCURRED BY THE ASSESSEE CANNOT BE CONSIDERED AS BUSINESS LOSS. 7. ON THE OTHER HAND, THE LD. A.R. SUBMITTED THAT T HE LOSS INCURRED BY THE ASSESSEE IS A BUSINESS LOSS, AS THE ASSESSEE HAS ENTERED INTO FORWARD EXCHANGE CONTRACTS WITH ITS BANKERS FOR THE PURPOSE OF ITA NO.77/VIZAG/2013 P. SOMASUNDARAM, GUNTUR 7 MITIGATING THE LOSS IN FLUCTUATION IN FOREIGN CURRE NCY. THE A.R. FURTHER SUBMITTED THAT THE ASSESSEE HAS ENTERED INTO FORWAR D CONTRACT WITH ITS BANKERS FOR THE PURPOSE OF HEDGING THE LOSS ON ACCO UNT OF FLUCTUATION IN USD VS. CHF. SINCE, THERE IS A FLUCTUATION IN CURR ENCIES, THE ASSESSEE HAS INCURRED LOSSES, IT CANNOT BE CONSIDERED AS SPE CULATION LOSS WITHIN THE MEANING OF SECTION 43(5)(D) OF THE ACT. 8. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATER IALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. THE A.O. DISALLOWED LOSS INCURRED ON FORWARD CONTRACTS FOR THE REASON THAT THE LOSS CLAIMED BY THE ASSESSEE IS A SPECULATIVE L OSS, WHICH CANNOT BE ALLOWED AS A DEDUCTION WHILE COMPUTING INCOME FROM BUSINESS. THE A.O. WAS OF THE OPINION THAT THE TRANSACTIONS ENTER ED BY THE ASSESSEE WITH ITS BANKERS IS FOR THE PURPOSE OF TRADING IN C URRENCY, BUT NOT FOR THE PURPOSE OF HEDGING THE CURRENCY TO MITIGATE THE FLU CTUATION IN CURRENCY. THE A.O. FURTHER WAS OF THE OPINION THAT THOUGH, TH E ASSESSEE CLAIMS THAT IT HAS INTENDED TO PURCHASE A PLANT AND MACHIN ERY FOR WHICH IT NEEDS TO MAKE PAYMENT, FAILED TO PROVE THE INTENT W ITH NECESSARY EVIDENCES. ACCORDING TO THE A.O., THE LOSS INCURRE D BY THE ASSESSEE IS A SPECULATIVE LOSS, WHICH CAN BE SET OFF ONLY AGAINST SPECULATIVE INCOME. ACCORDING TO THE A.O., THE TRANSACTIONS ENTERED BY THE ASSESSEE WITH ITS ITA NO.77/VIZAG/2013 P. SOMASUNDARAM, GUNTUR 8 BANKERS ARE NOT FULFILLED, THE CONDITIONS LAID DOWN IN EXPLANATION TO SECTION 43(5)(D) OF THE ACT THEREFORE, OPINED THAT THE LOSS CANNOT BE ALLOWED AS A DEDUCTION. 9. BEFORE, WE GO INTO THE FACTS OF THE CASE, LET US UNDERSTAND THE TERMS OF FORWARD CONTRACTS, SPECULATIVE TRANSACTION S, HEDGING, FOREIGN EXCHANGE LOSS AND TREATMENT OF SUCH LOSS IN THE BOO KS OF ACCOUNTS OF THE ASSESSEES. A FORWARD CONTRACT IS AN AGREEMENT BETWEEN AN ENTERPRISE AND A BANKER TO PURCHASE OR SALE A PARTI CULAR QUANTITY OF CURRENCY FOR A MUTUALLY AGREED PRICE AT A PARTICULA R DATE. THESE FORWARD CONTRACTS ARE USED BY THE EXPORTERS TO HEDGE AGAINS T ADVERSE CURRENCY MOVEMENTS. HEDGING IS DEFINED AS TO ENTER INTO TRA NSACTIONS TO REDUCE THE RISK OF ADVERSE MOVEMENT OF CURRENCY. ANY PERS ON HAVING EXPOSURE TO FOREIGN CURRENCY, MAY ENTER INTO HEDGING TO FIX HIS COST AND PROFITS AT A PARTICULAR LEVEL. THEREFORE, FORWARD CONTRACT ME ANS ENTERING INTO AGREEMENT WITH BANKERS TO HEDGE THE CURRENCY FLUCTU ATIONS TO MITIGATE THE LOSS IN THE COURSE OF IMPORT/EXPORT BUSINESS. 10. FORWARD EXCHANGE CONTRACTS AND TREATMENT OF ANY PROFIT/LOSS ARISING ON CANCELLATION OR RENEWAL OF SAID CONTRACT S HAS BEEN DEALT BY AS-11 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTA NTS OF INDIA. AS PER AS-11, ANY FORWARD EXCHANGE CONTRACTS ENTERED TO HE DGE THE FOREIGN ITA NO.77/VIZAG/2013 P. SOMASUNDARAM, GUNTUR 9 CURRENCY EXPOSURE TO MITIGATE UNEXPECTED LOSS WITH ITS IMPORT/EXPORT BUSINESS HAS TO BE REGARDED AS BUSINESS LOSS AND IN COME AS THE CASE MAY BE. IN CASE OF SUCH FORWARD EXCHANGE CONTRACT IS NOT IN THE NATURE OF HEDGING, THEN SUCH LOSS SHOULD BE IGNORED. SIMI LARLY, THE PROVISIONS OF SECTION 43(5) OF THE ACT, DEFINES THE TERM SPECU LATIVE TRANSACTIONS, TO MEAN A TRANSACTION IN WHICH A CONTRACT FOR THE PURC HASE OR SALE OF ANY COMMODITY, INCLUDING STOCK AND SHARES IS PERIODICAL LY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TR ANSFER OF THE COMMODITY OR SCRIPTS. SUB CLAUSE (A) TO SECTION 43 (5) OF THE ACT, EXCLUDES CERTAIN TRANSACTIONS WITHIN THE MEANING OF SPECULATIVE TRANSACTION. ACCORDING TO SUB-SECTION (A), A CONTR ACT IN RESPECT OF RAW MATERIALS OR MERCHANDISE ENTERED INTO BY A PERSON I N THE COURSE OF HIS BUSINESS TO HEDGE AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATIONS IN RESPECT OF HIS CONTRACTS FOR ACTUAL DELIVERY OF GOO DS MANUFACTURED BY HIM OR MERCHANDISE SOLD BY HIM. A PLAIN READING OF SUB CLAUSE (A) TO SECTION 43(5) OF THE ACT, MAKES IT CLEAR THAT ANY F ORWARD EXCHANGE CONTRACTS ENTERED INTO IN THE BUSINESS OF IMPORT/EX PORT OF GOODS TO HEDGE THE POSSIBLE FLUCTUATION IN FOREIGN CURRENCY, THEN SUCH TRANSACTIONS ARE KEPT OUTSIDE THE PURVIEW OF THE DE FINITION OF SPECULATIVE TRANSACTIONS. THEREFORE, TO SEE WHETHER A PARTICUL AR TRANSACTION IS A SPECULATIVE TRANSACTION OR A MERE HEDGING TRANSACTI ON, THE UNDERLYING ITA NO.77/VIZAG/2013 P. SOMASUNDARAM, GUNTUR 10 EXPOSURE IN THE NATURE OF EXPORT TURNOVER IS NECESS ARY TO THE EXTENT OF VALUE OF FORWARD EXCHANGE CONTRACTS. 11. THE TREATMENT TO BE METED OUT TO FOREIGN CURREN CY ITEMS AS PER THE AMENDED AS-11 OF ICAI NOTIFIED BY THE CENTRAL G OVERNMENT U/S 211(3C) OF THE COMPANIES ACT, DOES NOT MAKE ANY DIS TINCTION BETWEEN ITEMS OF CAPITAL NATURE AND REVENUE NATURE, BOTH AR E REQUIRED TO BE RECOGNISED IN THE PROFIT & LOSS ACCOUNT. IN VIEW O F THE AFORESAID AMENDMENT, THERE EXIST A DIVERGENCE VIEWS ON THE TR EATMENT TO BE GIVEN IN THE BOOKS OF ACCOUNTS AND IN THE INDIAN TA X LAWS. FURTHER, WITH AN INCREASED FLOW OF INBOUND/OUTBOUND TRANSACTIONS AND THEIR COMPLEX DYNAMIC STRUCTURING, THE TAX TREATMENT OF FOREIGN E XCHANGE HAS BEEN A GREAT LITIGATION AND VARIOUS COURTS HAVE DISCUSSED THE SAME IN DETAIL. EXCHANGE FLUCTUATION DIFFERENCE AND TAX TREATMENT O F THE CAPTIONED ISSUE WAS DISCUSSED AT LENGTH IN THE RECENT LAND MARK RUL ING OF HONBLE SUPREME COURT, IN THE CASE OF CIT VS. WOODWORD GOVER NOR INDIA PVT. LTD. 312 ITR 254, WHEREIN THE HONBLE SUPREME COURT BY RELYING UPON THE EARLIER JUDGEMENT IN THE CASE OF SUTLUZ COTTON MILLS LTD. VS. CIT (116 ITR 1) OBSERVED THAT THE LAW, THEREFORE NOW BE TAKE N TO BE WELL SETTLED THAT WHERE PROFIT OR LOSS ARISES TO ANY PERSON ON A CCOUNT OF APPRECIATION OR DEPRECIATION IN THE VALUE OF FOREIGN CURRENCY HE LD BY IT, ON CONVERSION ITA NO.77/VIZAG/2013 P. SOMASUNDARAM, GUNTUR 11 INTO ANOTHER CURRENCY, SUCH PROFIT OR LOSS WOULD OR DINARILY BE A TRADING PROFIT OR LOSS, IF THE FOREIGN CURRENCY IS HELD BY THE PERSON ON REVENUE ACCOUNT OR AS A TRADING ASSET OR AS PART OF CIRCULA TING CAPITAL EMBARKED IN THE BUSINESS. BUT, IF ON THE OTHER HAND, THE FO REIGN CURRENCY IS HELD AS A CAPITAL ASSET OR AS A FIXED CAPITAL, SUCH PROF IT OR LOSS SHOULD BE OF CAPITAL NATURE. FURTHER IN THE AFORESAID RULING OF THE APEX COURT ALSO AFFIRMED THE PRINCIPLE LAID DOWN IN THE RULING OF C IT VS. DEMPO AND COMPANY PVT. LTD. 206 ITR 291, WHEREIN IT WAS HELD THAT A LOSS ARISING IN THE PROCESS OF CONVERSION OF FOREIGN CURRENCY, W HICH IS PART OF TRADING ASSET OF THE ASSESSEE IS A TRADING LOSS AS ANY OTHE R LOSS. IN DETERMINING THE TRUE NATURE AND CHARACTER OF THE LOSS, THE CASE WHICH OCCASIONED THE LOSS IS IMMATERIAL. WHAT IS MATERIAL IS WHETHER TH E LOSS HAS OCCURRED IN THE COURSE OF CARRYING ON THE BUSINESS OR IS INCIDE NTAL TO IT. IF THERE IS A LOSS IN THE TRADING ASSET, IT WOULD BE A TRADING LO SS WHATEVER BE ITS CAUSE BECAUSE IT WOULD BE A LOSS IN THE COURSE OF CARRYIN G ON THE BUSINESS. FOR DETERMINING WHETHER DEVALUATION LOSS IS REVENUE LOSS OR CAPITAL LOSS WHAT IS RELEVANT IS THE UTILIZATION OF THE AMOUNT A T THE TIME OF DEVALUATION AND NOT THE OBJECT FOR WHICH THE CURREN CY IS OBTAINED. THEREFORE, ONCE LOSS INCURRED ON ACCOUNT OF FLUCTUA TION IN FOREIGN CURRENCY, WHETHER IT IS ON ACCOUNT OF CAPITAL OR RE VENUE, THEN SUCH LOSS ITA NO.77/VIZAG/2013 P. SOMASUNDARAM, GUNTUR 12 SHALL BE ALLOWED AS BUSINESS LOSS UNLESS IT IS IN T HE NATURE OF SPECULATION LOSS. 12. COMING TO THE FACTS OF THE PRESENT CASE. IN TH E PRESENT CASE ON HAND, THE ASSESSEE IS IN THE BUSINESS OF TRADING IN TOBACCO. DURING THE FINANCIAL YEAR RELEVANT TO ASSESSMENT YEAR, THE ASS ESSEE HAS ACHIEVED AN EXPORT TURNOVER OF MORE THAN ` 200 CRORES. IT IS ALSO AN UNDISPUTED FACT THAT THE ASSESSEE INTENDED TO PURCHASE A PLANT AND MACHINERY FOR THE PURPOSE OF SET UP TOBACCO THRESHING FACTORY. IN TH E PROCESS, IT HAS ENTERED INTO A FORWARD CONTRACT WITH ITS BANKERS TO HEDGE THE POSSIBLE FLUCTUATION IN FOREIGN CURRENCY. THOUGH, THE ASSES SEE COULD NOT PURCHASE THE PLANT AND MACHINERY, THE LOSS INCURRED ON ACCOUNT OF TERMINATION OR CLOSURE OF FORWARD CONTRACTS IS ON A CCOUNT OF BUSINESS TRANSACTIONS OF THE ASSESSEE AND HENCE, THE LOSS IN CURRED BY THE ASSESSEE CANNOT BE CONSIDERED AS SPECULATIVE LOSS W ITHIN THE MEANING OF SECTION 43(5) OF THE ACT. WE FURTHER OBSERVED THAT LOSS INCURRED BY THE ASSESSEE IS AN ACTUAL LOSS, WHICH WAS AROUSED ON AC COUNT OF CLOSURE OF FORWARD EXCHANGE CONTRACTS. WHEN THE ASSESSEE PROVE D THE PURPOSE OF ENTERING FORWARD EXCHANGE CONTRACTS, WHICH IS IN TH E NATURE OF BUSINESS TRANSACTION AND THE LOSS INCURRED ON ACCOUNT OF FOR WARD EXCHANGE IS AN ACTUAL LOSS, THE A.O. WAS ERRED IN DISALLOWING THE LOSS BY STATING THAT THE ITA NO.77/VIZAG/2013 P. SOMASUNDARAM, GUNTUR 13 LOSS INCURRED BY THE ASSESSEE IS A SPECULATIVE LOSS . THEREFORE, WE ARE OF THE VIEW THAT FOREIGN EXCHANGE LOSS INCURRED BY THE ASSESSEE ON ACCOUNT OF ENTERING INTO FORWARD CONTRACTS WITH THEIR BANKE RS FOR THE PURPOSE OF HEDGING LOSS IN CONNECTION WITH ITS IMPORT/EXPORT B USINESS HAS TO BE REGARDED AS BUSINESS LOSS, BUT NOT SPECULATIVE LOSS WITHIN THE MEANING OF SECTION 43(5)(D) OF THE ACT. THOUGH, THE ACT DO ES NOT SPECIFY TRANSACTIONS WHICH COMES UNDER THE TERM SPECULATIVE LOSS, BECAUSE OF THE EXPLANATIONS PROVIDED TO EXCLUDE CERTAIN TRANSA CTIONS WITHIN THE PURVIEW OF SPECULATIVE TRANSACTIONS, A GENUINE TRAN SACTION WHICH ARE IN THE NATURE OF BUSINESS TRANSACTIONS IN THE FORM OF IMPORT/EXPORT CANNOT BE CONSIDERED UNDER SPECULATIVE TRANSACTIONS. IN T HE PRESENT CASE ON HAND, ON PERUSAL OF THE FACTS AVAILABLE ON RECORD, WE FIND THAT THE LOSS INCURRED BY THE ASSESSEE ON FORWARD CONTRACTS IS IN THE NORMAL COURSE OF ITS BUSINESS AND SUCH LOSS CANNOT BE CONSIDERED AS SPECULATIVE LOSS. THE CIT(A) AFTER CONSIDERING THE RELEVANT FACTS RIGHTLY DELETED THE ADDITIONS MADE BY THE A.O. WE DO NOT SEE ANY ERROR OR INFIRMI TY IN THE ORDER OF CIT(A). HENCE, WE INCLINED TO UPHOLD THE CIT(A) OR DER AND REJECT THE GROUND RAISED BY THE REVENUE. 13. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON IS DISALLOWANCE OF BUSINESS PROMOTION EXPENSES. THE A.O. DISALLOWE D ` 32,85,830/-BY ITA NO.77/VIZAG/2013 P. SOMASUNDARAM, GUNTUR 14 STATING THAT THE ASSESSEE HAS DEBITED PERSONAL EXPE NDITURE UNDER THE HEAD BUSINESS PROMOTION EXPENDITURE. THE A.O. OBSE RVED THAT THE ASSESSEE HAS DEBITED CREDIT CARD EXPENDITURE IN THE NATURE OF PERSONAL EXPENDITURE BEING PURCHASE OF GIFT ITEMS AND SPENDI NG IN HOTELS OF PARTNERS. THEREFORE, OPINED THAT EXPENDITURE INCUR RED BY THE ASSESSEE IS IN THE NATURE OF PERSONAL EXPENDITURE NOT INCURR ED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. IT IS THE CONTENTION OF THE ASSESSEE THAT THE MANAGING PARTNER OF THE FIRM HAS SPENT CERTAIN EXPENDITURE BY USING HIS CREDIT CARD TO ENTERTAIN T HE CUSTOMERS WHO COME TO INDIA IN PROSECUTION OF THEIR BUSINESS ACTI VITIES WITH THE ASSESSEE FIRM. SINCE, THIS EXPENDITURE IS NEEDED A ND ESSENTIAL FOR THE PURPOSE OF BUSINESS OF THE FIRM, SUCH EXPENDITURE I S EXPENDED BY THE PARTNER THROUGH HIS CREDIT CARD AND SUBSEQUENTLY TH E SAME WAS PAID BY THE FIRM. WE FIND FORCE IN THE ARGUMENTS OF THE ASS ESSEE, FOR THE REASON THAT THE ASSESSEE IS IN THE BUSINESS OF EXPORT OF T OBACCO PRODUCTS. THE MANAGING PARTNER OF THE FIRM HAS SPENT CERTAIN EXPE NDITURE TOWARDS PURCHASE OF GIFT AND ALSO TO ENTERTAIN THE FOREIGN CUSTOMERS ON THEIR VISIT TO INDIA. THE EXPENDITURE INCURRED BY THE PARTNER HAS BEEN PAID BY THE ASSESSEE FIRM. IT IS NOT THE CASE OF THE A.O. THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IS NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THEREFORE, WE ARE OF THE VIEW THAT ITA NO.77/VIZAG/2013 P. SOMASUNDARAM, GUNTUR 15 THE A.O. WAS NOT CORRECT IN DISALLOWING THE BUSINES S EXPENDITURE WITHOUT SPECIFYING THAT THE ASSESSEE HAS INCURRED SUCH EXPE NDITURE FOR HIS PERSONAL PURPOSES. THE CIT(A) AFTER CONSIDERING TH E RELEVANT FACTS HAS RIGHTLY DELETED ADDITIONS MADE BY THE A.O. WE DO NO T SEE ANY REASONS TO INTERFERE WITH THE ORDER OF CIT(A). HENCE, WE I NCLINED TO UPHOLD THE CIT(A) ORDER AND REJECT GROUND RAISED BY THE REVENU E. 14. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATI ON IS ADDITION TOWARDS PAYMENT OF GRATUITY TO EMPLOYEES. THE A.O. DISALLOWED AN AMOUNT OF ` 1,24,165/- FOR THE REASON THAT PAYMENT OF GRATUITY IS NOT TOWARDS APPROVED GRATUITY FUND. THE A.O. WAS OF TH E OPINION THAT ONLY PAYMENT OUT OF APPROVED GRATUITY FUND IS ALLOWED AS DEDUCTION. IT IS THE CONTENTION OF THE ASSESSEE THAT PAYMENT TOWARDS GRA TUITY TO ITS EMPLOYEES IS NOT A PROVISION CREATED IN THE BOOKS O F ACCOUNTS, BUT ACTUAL PAYMENT ON SUPERANNUATION OF ITS EMPLOYEES. THE AS SESSEE FURTHER CONTENDED THAT PROVISIONS OF SECTION 40A(7) ATTRACT S ONLY WHEN PROVISION IS MADE IN THE BOOKS OF ACCOUNTS, BUT IT DOES NOT A TTRACT TO ACTUAL PAYMENT OF GRATUITY. THEREFORE, NO DISALLOWANCE CA N BE MADE, WHEN THE SAME HAS BEEN PAID ON ACTUAL PAYMENT BASIS. WE FIND FORCE IN THE ARGUMENTS OF THE ASSESSEE, FOR THE REASON THAT PAYM ENT OF GRATUITY IS A ACTUAL PAYMENT, BUT NOT PROVISION IN THE BOOKS. T HEREFORE, WE ARE OF ITA NO.77/VIZAG/2013 P. SOMASUNDARAM, GUNTUR 16 THE VIEW THAT THE A.O. WAS ERRED IN INVOKING THE PR OVISIONS OF SECTION 40A(7) OF THE ACT TO DISALLOW ACTUAL PAYMENT OF GRA TUITY. WE FURTHER WAS OF THE OPINION THAT PROVISIONS OF SECTION 40A(7 ) OF THE ACT WILL ATTRACT, ONLY WHEN PROVISION IS MADE IN THE BOOKS O F ACCOUNTS WITHOUT THERE BEING ANY ACTUAL PAYMENT. IN THE PRESENT CAS E ON HAND, THE ASSESSEE PROVED THAT THE PAYMENT OF GRATUITY IS NOT A PROVISION, BUT ACTUAL PAYMENT ON ACCOUNT OF SUPERANNUATION OF ITS EMPLOYEES. THE CIT(A) AFTER CONSIDERING THE RELEVANT SUBMISSIONS R IGHTLY DELETED ADDITIONS MADE BY THE A.O. WE DO NOT SEE ANY ERROR OR INFIRMITY IN THE ORDER OF CIT(A). HENCE, WE INCLINED TO UPHOLD THE CIT(A) ORDER AND REJECT GROUND RAISED BY THE REVENUE. 15. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 25 TH NOV16. SD/- SD/- ( . ) ( . ) (V. DURGA RAO) (G. MANJUNATHA) /JUDICIAL MEMBER /ACCOUNTANT MEMBER # /VISAKHAPATNAM: ' /DATED : 25.11.2016 VG/SPS ITA NO.77/VIZAG/2013 P. SOMASUNDARAM, GUNTUR 17 )# *# /COPY OF THE ORDER FORWARDED TO:- 1. / THE APPELLANT THE DCIT, CIRCLE-2(1), GUNTUR 2. / THE RESPONDENT M/S. POLISETTY SOMASUNDARAM, 8- 24-31, MANGALAGIRI ROAD, GUNTUR 3. + / THE CIT, GUNTUR 4. + ( ) / THE CIT (A), GUNTUR 5. # . , . , # / DR, ITAT, VISAKHAPATNAM 6 . / GUARD FILE / BY ORDER // TRUE COPY // 12 . (SR.PRIVATE SECRETARY) . , # / ITAT, VISAKHAPATNAM