Assistant Commissioner of Income-tax, V. Endurance Technologies Pvt. Ltd., Aurangabad

ITA 989/PUN/2015

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 6884 (ITAT-PUNE)
• Duration Of Justice: 7 year(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-07-2022
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 29-06-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Double taxation relief; Opportunity of being heard; Earning of tax free income; Speculation loss; Speculative transactions; Rule 8D; Set aside; Capital Gains
• Section: 28; 90; 154; 143(3); 2(14); 14A; 43(5); 43; 48; 73; 22; 255(4); 92CA

Judgement Text

आयकर अपीऱीय अधिकरण “ए” न्यायपीठ पुणे में । IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH, PUNE BEFORE SHRI S.S.GODARA, JM AND SHRI DR. DIPAK P. RIPOTE, AM आयकर अपीऱ सं. / ITA No. 989/PN/2015 ननधधारण वषा / Assessment Year : 2010-11 ACIT, Circle 1, Aurangabad. .......अपऩलधथी / Appellant बनधम / V/s. Endurance Technologies Pvt. Ltd., No.K -228,MIDC Industrial Area, Waluj, Aurangabad- 431136. PAN : AAACE7066P ......प्रत्यथी / Respondent आयकर अपीऱ सं. / ITA No’s.958/PUN/2016 & 1694/PUN/2017 ननधधारण वषा / Assessment Years : 2011-12 & 2012-13 DCIT, Circle 1, Aurangabad. .......अपऩलधथी / Appellant बनधम / V/s. Endurance Technologies Pvt. Ltd., No.K -228, MIDC Industrial Area, Waluj Aurangabad- 431136. PAN : AAACE7066P ......प्रत्यथी / Respondent Assessee by : Shri Nikhil Pathak & Abhay A. Avchat Revenue by : Shri S. P. Walimbe सपनवधई की तधरऩख / Date of Hearing : 13.05.2022 घोषणध की तधरऩख / Date of Pronouncement : 15.07.2022 ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 2 आदेश / ORDER PER S. S. GODARA, JM : 1. These Revenue’s three appeals for assessment year 2010-11 to 2012-13 arise against the CIT(A)-1 Aurangabad’s as many orders dated 27/04/2015, 10/02/2016 & 04/04/2017 passed in case No. ABD/CIT(A) -1/67/2014-15, ABD/CIT(A)-1/43/2014-15, ABD/CIT(A) -1/58/2016-17 involving proceedings u/s 143(3) (ii) in first and foremost and u/s. 143(3) r.w.s. 92CA of the Income Tax Act, 1961 in short the “Act” in latter twin assessment years, respectively. Heard both the parties. Case files perused. 2. It emerges during the course of hearing that the Revenue has raised its identical three substantive grounds in the instant many appeals since the only distinction is that of the quantum involved; assessment year wise, respectively. We thus treat the Revenue’s first appeal ITA No.989/PUN/2015 as the “lead” case. 3. The Revenue’s first and foremost substantive ground in the foregoing lead case seeks to revive section 14A r.w. Rule 8D(2)(ii) & (iii) disallowance of Rs.15,72,97,942/- made in the assessment order dated 14.03.2014 as rectified to the extent of Rs.12,53,86,012/- in his section 154 rectification dated 11.06.2014. Suffice to say, we note that not only the CIT(A)’s detailed discussion in paras 10.3 to 10.3.5 has expressed agreement with the assessee’s contentions on all factual as well as legal aspects including that of “satisfaction” u/s. 14A (2) of the Act but also he concludes that the same ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 3 could not exceed the amount of exempt income itself coming to the Rs.10,000/- out of investments made of Rs.60,000/- in shares of M/s. Indian Overseas Bank. We make it clear that the assessee has not challenged correctness of the CIT(A)’s latter limb of directions in above terms. That being the case, we quote Joint Investment Pvt. Ltd. Vs. CIT (2015) 372 ITR 674 (Delhi) and PCIT V/s M/s. Empire Packaging Pvt. Ltd. (2017) 81 taxmann.com 108 (P & H) to conclude that the CIT(A)’s direction in issue restricting the impugned section 14A r.w. Rule 8D disallowance could not exceed the exempt income figure itself. We thus reject the Revenue’s first and foremost substantive ground for this precise reason alone. 3.1 Next comes the Revenue’s Second substantive ground that the CIT(A) has erred in law and on facts in granting the assessee the relief of set off of losses derived from speculative transactions u/s.43(5) r.w.s. 73(4) Explanation of the Act. The CIT(A)’s comprehensive detailed discussion under challenge to this effect reads as under. The CIT(A)’s comprehensive detailed discussion under challenge to this effect reads as under. ―I have carefully considered the facts of the case and rival contentions. On perusal of the same it has been noticed that during the year under appeal, the appellant company has imported raw material to the tune of Rs.94 Crores and has thereby incurred huge foreign currency commitment. In order to hedge its risks arising out of adverse foreign currency fluctuation, the appellant company has entered into hedging transaction to reduce loss due to fluctuation in the value of currency by entering into forward contract. On settlement of such contract, the appellant company has realized loss of Rs. 9,38,05,174/-. The A.O. has treated the said loss as speculative loss on account of speculative transaction in terms of provisions of section 43(5) and Explanation to section 73(4) of the Act. ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 4 On the other hand, the appellant company has submitted that the provisions of section 43(5) are not applicable to the case of the appellant particularly in view of proviso (a) to section 43(5) of the Act. The appellant has further contended that the provisions of section 73(4) are also not applicable to the case of the appellant in view of Explanation to section 73(4) of the Act. The A.O. has not accepted the contentions raised by the appellant which are supported by the decisions relied on by the appellant stating that the judgements relied on by the appellant are in respect of non- applicability of section 43(5) to the case of the assessee company. The A.O. has further stated that the issues involved in those judgements are distinguishable from the issue involved in the case of appellant company. In support of the contention that the assessee has incurred speculative loss, the A.O. has relied on the decision of Delhi High Court in the case of CIT Vs. DLF Commercial Developers Ltd. (2013) 261 CTR 127, 218 Taxman 45 (Delhi) and the provisions of section 73 relied on by the Hon’ble Delhi High Court in the said decision. In the above referred case, the assessee company claimed loss on account of purchase and sale of shares in trading of derivatives as regular business loss claiming that the said loss was not a speculative loss in terms of section 43(5) of the Act. The A.O. has applied provisions of section 73 holding that the said provisions are independent of section 43(5) and according to section 73, the loss is to be treated as speculation loss. The Hon’ble ITAT has granted relief to the appellant company holding that provisions of section 43(5) are applicable to the case of the appellant. The Hon’ble High Court has held that objective of section 73 is to deny speculative business benefit of carry forward of losses; in instant case, derivatives based on stocks and shares fall squarely within Explanation to section 73(4) and accordingly held that loss in the case under appeal was a speculative loss. ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 5 The provisions of section 73(4) and 43(5) are relevant for deciding the issue under appeal and hence the same are reproduced and considered as under – ―Section 73 (4) No loss shall be carried forward under this section for more than [four] assessment years immediately succeeding the assessment year for which the loss was first computed. Explanation.— Where any part of the business of a company ([other than a' company whose gross total income consists mainly of income which is chargeable under the heads ―Interest on securities‖, ―Income from house property‖, ―Capital gains‖ and ―Income from other sources‖], or a company or granting of loans and advances) consists in the purchase and sale of shares of other companies such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.].‖ From the above provisions of Explanation to section 73(4), it is evident that the said provision is applicable where the business of the company is purchase and sale of shares of other companies then such company for the purpose of this section shall be deemed to be carrying on speculation business to the extent to which the business consists of the purchase and sale of such shares. In the case under appeal, the appellant company has not claimed any loss in respect of purchase and sale of shares of other companies as business loss but the claim of the appellant is loss on account of settlement of forward contracts in respect of raw material purchased to guard risk of foreign exchange rate fluctuation. Therefore, the provisions of section 73(4) and the decision relied on by the A.O. of Hon’ble Delhi High Court in the case of CIT Vs. DLF Commercial Developers Ltd. (2013) 261 CTR 127, 218 Taxman 45 are not applicable to the case of the appellant. Section 43 (5) ―43 In sections 28 to 41 and in this section unless context otherwise requires- (1)....... (5) ―speculation transaction‖ means transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts. ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 6 Provided that for the purpose of this clause- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or Merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) ... (c) ... (d) ... shall not be deemed to be a speculative transaction." From the above provisions of section 43(5), it is evident that in view of proviso (a) to the said section, the loss on account of a contract in respect of raw material to guard against loss through future price fluctuations shall not be deemed to be speculative transaction in view of proviso (a) to section 43(5) of the Act. The above proposition of law is supported by following decisions – (1) Essar Steel Ltd. Vs. DCIT 97 ITD 125 (TM) (Ahd.Trib.) In this case, the appellant company has taken foreign currency loan for purchase of capital assets and has entered into foreign exchange Forward Contracts to cover the liability for repayment of Currency loan. On cancellation of the said forward contract, the appellant has earned gain which has been held to be a capital receipt which is to be reduced from cost of plant & machinery and not a speculation profit. The revenue has claimed that the profit arising to the assessee company on cancellation of foreign exchange contract was a revenue receipt taxable u/s 28(4) of the Act. In this decision, it has been laid down in para-8.26 as under – ―As regards, the speculative nature of the gain, we observe that s.43(5) applies to transactions of commodities, and currency is not a commodity. A commodity ordinarily means processed or processed goods i.e. grain, fruits, vegetable, precious metal, etc. It does not include currency. Even otherwise unless one deals in currency which is permitted only to a licence holder under the RBI. Rules, it cannot be covered by section 43(5). As aforesaid, the assessee had taken forward contracts for meeting liabilities to be discharged in foreign currency and not to deal in the currency, the gain would not be speculative under section 43(5).‖ In the above referred decision, the question No.3 which has been referred to the Hon’ble Third Member u/s 255(4) of the I.T.Act, 1961 for consideration was as under – ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 7 ―Whether on the facts and in the circumstances of the case, the CIT was right in holding that the entire amount of Rs.71,93,24,207/- as related to the cancellation of all the contracts of Foreign exchange forward cover is the revenue receipt chargeable to tax as income from business/as adventure in the nature of trade/as capital income and /or profit arising on speculative transactions u/s.43(5) of the Act.‖ (2) Munjal Showa Ltd. Vs. DCIT (2005) 94 TTJ 227 (Delhi) In this case, it has been laid down as under – ―Foreign currency or any currency is neither commodity nor shares. The Sale of Goods Act specifically excludes cash from the definition of goods. Besides, no person other than authorized dealers and money changers are allowed in India to trader in foreign currency, much less speculate. Sec. 8 of the Foreign exchange Regulations Act, 1973, provides that except with prior general or special permission of the RBI, no person other than an authorized dealer shall purchase, acquire, borrow or sell foreign currency. In fact, prior to the LERMS, residents in India were not even permitted to cancel forward contracts. The presumption of any speculative transaction is, therefore, directly rebutted in view of the legal impossibility and in view of the fact that foreign currency was neither commodity nor shares. The definition of ―speculative transaction‖ will not apply to a situation where the purpose of entering a forward contract was to hedge/safeguard against any loss on account of repayment of principal amount of the loan; cancellation of the contract was identical to that object and consequently any loss/gain arising from such cancellation is directly related to repayment of the loan. Further, attention is also drawn to proviso (c) to s. 43(5) which excludes 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, etc. to guard against loss which may arise in the ordinary course of his business to such member from the definition of speculative transaction.‖ (3) Vijay Textiles Ltd. Vs. DCIT (2014) (A.Y.2009-10) 41 CCH 015 (Hyd.Trib) In this case, it has been held as under – “The contention of assessee that there was foreign currency exposure, as a result of conversion of rupee loans of the assessee into foreign currency loans and in order to hedge such exposure, the relevant derivative transactions were entered into by the assessee, as a measure of risk management was duly supported by the relevant guidelines of the Reserve Bank of India, which categorically stated that the purpose of the relevant derivative transactions was to hedge exchange rate and/or interest risk exposure for those having long term foreign currency borrowings or to transform long-term INR borrowings into foreign currency borrowings. It is also further supported by the terms and conditions agreed between the assessee and the concerned bank. After having gone through the relevant RBI guidelines, underlying the purpose of relevant derivative transactions, as well as the relevant terms and conditions of such transactions agreed between the assessee and the Axis Bank, it was held that the nature of the relevant ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 8 derivative transactions was not properly appreciated either by the Assessing Officer or by the learned CIT(A) and the said transactions were treated by them as speculative transactions by referring to the provisions of S.43(5) without appreciating the correct nature of the relevant derivative transactions. Keeping in view this position it was held that the matter should go back to the file of the AO for deciding the same afresh, after properly appreciating and ascertaining the exact nature of the relevant derivative transactions. The impugned orders of the CIT(A) was set aside and matter was restored to AO for deciding the same afresh in accordance with law, after giving proper and sufficient opportunity of being heard to the assessee." (4) Kohinoor Foods Ltd. Vs. ACIT (2014) (A.Ys.2002-03 to 2008-09) 40 CCH 611 (Delhi Trib.). In this case, it has been held as under – “Assessee is exposed to the risk of fluctuation in foreign exchange. The Assessee is eligible to cover the risk by following the RBI guidelines in this regard by way of entering into hedging contracts which also includes hedging through cross currency hedging contracts. This type of hedging contracts can be entered only through authorized dealers. The Assessee has submitted copy of invoices related to export for financial year 2007-08, copies of invoices related to import for financial year 2007-08 and a certificate from CA with regard to the export/import turnover and also submitted a certificate from CA for the financial year 2008-09 relating to export/import of goods. All the relevant details were filed by the assessee before the Assessing Officer and Assessing Officer was not justified in the absence of any particular derivative transaction was for hedging for any assets/liabilities/expenditure/ income/transaction. It is also a fact that assessee has made profit on similar hedging transactions in the Assessment Year 2006-07 and 2007-08 of Rs.3.72 crores and Rs.1.34 crores respectively and the same have been offered as business profit in the respective year. Considering all these factual aspects and also the case laws relied upon, IT AT find that the revenue was not justified in not allowing the loss incurred by the Assessee on the hedging transactions and holding the same as speculative loss." (5) ITO Vs. Pankaj Kumar & Company (2014) (A.Y.2009-10) 40 CCH 475 (Mum.Trib.) In this case, it has been laid down that loss on settlement of forward contracts entered into to hedge against fluctuation in foreign exchange rates is allowable business loss and is outside the ambit of section 43(5). The head notes of the said decision are as under – ‘‘Business loss—-Loss on account of foreign exchange fluctuation— Assessee, a partnership firm, engaged in business of export of polished diamonds in its P & L Account had debited certain sum referable to forward contract loss, which arose on account of foreign exchange fluctuations in nature of hedging and/or safeguard to business of exports and hence falls ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 9 outside ambit of section 43(5)— It was submitted that export proceeds were realised in foreign currency, which is always subject to fluctuations and hence it was absolutely necessary for assessee to hedge against such fluctuations/ variations in exchange rates by entering into forward contracts— Assessee claimed loss was allowable as business loss or to be treated as expenditure against business income from exports—AO disallowed assessee’s claim holding that there were no special provisions for treatment of Mark-to-Market method of accounting; there was no actual loss on account of dealing in forex derivatives until their final values are known—CIT(A) held that loss incurred by assessee was not a notional loss but was an actual loss suffered by assessee and was allowable as business loss u/s. 37(1)—Held, forward contracts were entered into to hedge against fluctuations in foreign exchange rates in respect of outstanding debtors as on date of transactions and they were duly supported by underlying assets—There was no element of speculation involved in transaction—CIT(A) was justified in holding that loss incurred by the assessee could not be treated as notional loss and same was an actual loss suffered, thus allowable as business loss—Revenues’ appeal dismissed.” (6) ACIT Vs. Heavy Metal & Tools Ltd. (2014) (A.Y.2008-09) 40 CCH 418 (Ahd.Trib.) In this case, it has been held that claim of loss on account of foreign exchange hedging as business loss, allowed, since the dealing of assessee in foreign exchange was in normal course of business and to safeguard the future losses against foreign exchange rates fluctuations it had entered into hedging transaction, loss was backed by the trading liability on account of import purchases and was revenue in nature and not a speculative loss and loss falls under proviso (a) to section 43(5). The Revenue’s appeal was accordingly dismissed by holding that the loss is regular business loss covered by section 28 and not speculative loss u/s 43(5) of the Act. (7) London Star Diamond Company (I) (P) Ltd. Vs. DCIT (2013) (A.Y.2009-10) 37 CCH 217 (Mum.Trib.) In this case, it has been held that forward contract transactions, when entered into with the banks for hedging the losses due to foreign exchange fluctuations on export proceeds, are to be considered integral or incidental to the export activity of the assessee and accordingly losses or gains arising from such contracts constitute the business loss or gain and not the speculation activities. (8) CIT Vs. Panchmahal Steel Ltd. (2013) 215 Taxman 140 (Guj.HC) In this case, the issue has been decided in favour of the assessee, the head notes of the said decision reads as under – “Speculative transaction — Speculative loss—Forward contract, cancellation of—AO made disallowance on account of loss ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 10 claimed due to cancellation of forward contract—However, Tribunal relying on its own decision in case of Friends and friends Shipping Pvt. Ltd. deleted disallowance—Whether, transactions in question fell within definition of speculative transaction as per section 43 (5)— Held, in impugned judgment of Friends and friends Shipping Pvt. Ltd it was held that for purpose of hedging loss due to fluctuation in foreign exchange while implementing export contracts, assessee had entered into forward contract with banks—In some cases, export could not be executed and assessee had to pay certain charges to Bank and thereby incurred certain expenses—Such expenses claimed by assessee by way of expenditure towards business could not be stated in speculation as to cover u/s. 43(5)—Impugned judgment was binding—Hence, revenue’s was appeal dismissed.” (9) CIT Vs. Friends & Friends Shipping (P) Ltd. (2013) 217 Taxman 267 (Guj.HC) In this case, the issue has been decided in favour of the assessee, the head notes of the said decision reads as under – “Business Income—Speculative Transaction—Assessee- exporter had entered into forward contracts with Bankers to hedge against any loss arising out of fluctuation in foreign currency—As per contract, assessee would buy some quantity of dollars at particular rate to cover export bill payment—Assessee had to take delivery within period indicated in contract and if for some reason it was not possible to do so, assessee had to give instructions to Bank for cancellation of contract—Since on some occasions, assessee was required to give instructions for cancellation of forward contract, assessee had to pay agreed charges to Bank—In process assessee suffered loss of Rs. 15 lacs—AO disallowed loss holding it as speculative in nature and therefore covered u/s 43(5)—CIT(A) confirmed order of AO—Tribunal reversed order of CIT(A) deleting disallowance relying on decision of Bombay High Court in case of CIT v. Badridas Gauridu (P) Ltd., 261 ITR 256— Held, Bombay High Court in case of Badridas Gaurida (P) Ltd., following decision of Calcutta High Court in case of Soorajmull Nagarmull held that expenditure would not be covered u/s 43(5) as speculative transaction—Foreign exchanges were only incidental to assessee's regular course of business and loss was thus not speculative loss but incidental to assessee's business and allowable as such—Following judgment of Bombay and Calcutta High Court, expenditure incurred by assessee, by paying charges to Bank when export could not be executed and claimed by assessee as business expenditure cannot be stated to be in speculation as to cover u/s 43(5)—Appeal Dismissed.” (10) CIT Vs. Badridas Gauridu (P) Ltd. (2003) 261 ITR 56 (Bom.HC) ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 11 In this case, it has been held as under – “The assessee was not a dealer in foreign exchange. The assessee was an exporter of cotton. In order to hedge against losses, the assessee had booked foreign exchange in the forward market with the bank. However, the export contracts entered into by the assessee for export of cotton in some cases failed. In the circumstances, the assessee was entitled to claim deduction in respect of payment made on account of cancellation of forward booking of foreign exchange with banks as a business loss. - CIT vs. Soorjmui Nagarmull (1981) 22 CTR (Cal) 8 : 1981) 129 ITR 169 (Cal concurred with." In view of the above facts and discussion and respectfully following the ratio laid down by the above mentioned decisions, I am of the considered view that the A.O. is not justified in making addition of Rs.9,38,05,174/- on account of disallowance of loss in respect of settlement of derivative trade contracts relating to import of raw material to guard against losses due to fluctuation in the value of foreign currency. The addition of Rs.9,38,05,174/- is, therefore, deleted. Ground Nos.3 is allowed.” 4. Learned CIT-DR vehemently argued that the assessee’s impugned loss(es) had in fact arisen from speculative transactions as held in the assessment discussion and disallowed in light of hon’ble Delhi high court’s decision in DLF Commercial Developers Ltd. (supra). The assessee has drawn strong support from the CIT(A)’s above extracted findings. 5. We have given our thoughtful consideration to the foregoing rival pleadings and find no merit in the Revenue’s stand. We first of all note that this assessee had in fact hedged its foreign currency exposure relating to raw material imports. It had not transacted in any kind of shares at all so far as the impugned foreign currency loss is concerned. Meaning thereby that there is hardly any scope of exigibility of speculative transaction as defined u/s. 43(5) of the Act as it is clear from the Proviso(a) thereto (supra). These is indeed coupled with the fact that section 73(4) itself is applicable “where any part of the business of a company consists in purchase and sale of shares” ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 12 only whereas the assessee has not carried out either wholly or any part of his business in such purchase or sale of shares. The CIT(A)’s factual findings to this effect have gone un-rebutted from the Revenue side both in its pleadings as well as the material on record. Faced with this situation, we hold that the CIT(A) has rightly granted the impugned set off relief to the assessee thereby distinguishing DLF Commercial Developers Ltd (supra) quoted at the assessing authority’s behest. His lower appellate findings stand upheld in entirety on both factual as well as legal aspects therefore. 6. Lastly comes the Revenue’s third substantive grievance that the CIT(A) has erred in law and on facts in holding that the assessee’s losses derived from sale of shares of M/s. Paioli Meccanica SPA, Italy of Rs.2,15,37,986/- is eligible to set off against capital gains derived in India as under. ―8. Ground No.5 is in respect of addition of Rs.2,15,37,986/- on account of disallowance of setting off capital gain derived from sale of land against capital loss pertaining to sale of shares of Paioli Meccanica SPA, Italy. Ground No.6 is in respect of carry forward of capital loss of Rs.43,72,19,080/- not allowed by the A.O. on sale of shares of Paioli Meccanica SPA, Italy. 8.1 The A.O. has made this addition and disallowed carry forward of loss in para-3.3 stating as under – ―3.3 During the year assessee company has claimed carried forward of capital loss at Rs. 43,72,19,086/-. However, on going through the computation of such capital loss, it is noticed that out of net capital gain on account of sale of land at Rs. 2,15,37,986/- is setoff against capital loss of Rs. 4,58,757,066/- pertaining to sale of share of Paioli Meccanica S.P.A, Italy(Paioli). The assessee company had purchased share of aforesaid company during the year 2006-07 and such shares are sold in the month of Nov. 2009. However, on going through the Article 14 of Comprehensive agreement- Convertion for avoidance of double taxation and prevention of fiscal evasion with respect to taxes on income with ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 13 Italy, it is noticed that gains from the alienation of shares 'in a company which is resident of Italy is taxable in Italy and accordingly such gain is exempt income in India. Thus, assessee company’s investment in shares of Paioli Meccanica S.P.A, Italy was made to derive exempt income. Hence, loss on sale of share of aforesaid company is not allowable to be set-off against profit of assessee company. Therefore, no loss on account of sale of share in aforesaid company is allowable to be set-off against the profit of assessee company as well as allowable to be carried forwarded. Accordingly, net capital gain on account of sale of land at Rs.2,15,37,986/- is added to the total income of assessee.‖ 8.2.1. The appellant has filed the details of capital loss/gain incurred during the year and carried forward to the subsequent year. The appellant has also filed copy of 11 th Annual Report for F.Y.2009-10. In this report, in Schedules Forming part of the Consolidated Accounts, by way of schedule-19 - Notes to Accounts No.ll-b, the fact about sale of shares of Paioli MeccanicaS.P.A., Italy and reasons thereof have been mentioned as under- ―During the year 2006-07, the Company acquired 40% shares for Euro 6.12 million by paying an upfront amount of EURO 2.42 Million (Rs. 142.57 Million) and provided a Bank Guarantee for balance amount of EURO 3.70 Million (Rs. 215.93 Million) payable in 5 annual equal installment commencing from 29 th September 2007. During the year 2007-08, the Company had paid the 1 st installment of Euro 0.74 Million (Rs. 43.18 Million) against the said bank guarantee & has also recapitalized loss of Paioli by remitting Euro 0.28 Million (Rs. 16.02 Million) In the previous year 2008-09, the Company held 40% stake in Paioli. However, due to the continuous losses incurred by Paioli, lack of professional management, weak financial position and financial & legal risks associated therewith, in the previous year the Company has taken a conscious decision to exit from Paioli and sold it minority stake of 40% for Euro 1 to the majority shareholder as there was no other willing buyer for the Company’s minority stake. In view of the above developments, the Company had written off the total investment amount of Rs. 376.73 Million in Paioli as at the end of previous year by debiting the BRR Account. Accordingly, in view of the above developments subsequent to 31 s March 2009, the Company has written off the total investment amount of Rs. 376.73 Million in Paioli as at 31 st March 2009 by debiting the BRR Account. Refer Note 9 (d) above. Hence Group’s share of profit / (loss) for the year 2008-09 has not been accounted in the consolidated profit and loss account. ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 14 For the purpose of consolidated financial statements, during the previous years, Group’s share in losses upto 31 st March 2008 amounting to Rs. 20.09 million has been adjusted against Reserves.‖ 8.2.2 In support of the sale of shares of Paioli Meccanica SPA, Italy, the appellant has filed copy of sale and purchase agreement dated 03/08/2009. The appellant has also filed copy of permission obtained from Reserve Bank of India in respect of sale of shares by way of letter addressed to the Manager, Standard Chartered Bank, Mumbai, informing to the said bank as under – ―M/s Endurance Technologies Ltd. (ETL) - JV in Italy (U I N BY JAZ 20060513) – Disinvestment Please refer to your letter dated December 4, 2009 on the captioned subject. We advise having noted and taken on record disinvestment of the entire stake in the JV in Italy (UIN BY JAZ 20060513) by M/s Endurance Technologies Ltd. Accordingly, the UIN BY JAX 20060513 allotted to the investment in the JV in Italy by ETL stands cancelled. ‖ Further, the appellant company has also filed copies of financial statements of Paioli Meccanica, SPA, Italy for the calendar years 2006, 2007 & 2008 showing loss incurred by the said company to justify the sale of the shares of the said company. In support of the sale of shares of Paioll Meccanica, SPA, Italy, the has pointed out that the financial position of Paioli Meccanica, SPA, Italy was very weak and the net worth was substantially negative; under Italian Law, a creditor has various means for collecting money due; there are several judicial procedures that a creditor can employ to accelerate or facilitate the collection process as long as the debtor either is located in or has asset in Italy. The appellant has further pointed out that as per the report of certified public accountant of Milan, Italy the value of the economic capital of Paioli Meccanica SPA, is negative according to the heavy indebtedness (near to 15 million Euros) and in view of feebleness ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 15 2. of the automotive supply chain it is advisable to get rid of the shares of Paioli Meccanica, SPA, Italy. 8.2.3. In this regard, the appellant has filed written submission vide letter dated 03/03/2015, as under – 1. Sub section (2) of section 90 of the Income Tax Act is reproduced below: ―Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.” Capital Asset has been defined in sub section 2(14) of section which is reproduced below: ―capital asset’’ means property of any kind held by an assessee, whether or not connected with his business or profession, but does not include— (i) any stock-in-trade, consumable stores or raw materials held for the purposes of his business or profession ; [(ii) personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes— (a) jewellery; (b) archaeological collections; (c) drawings; (d) paintings (e) sculptures; or (f) any work of art. Explanation.—For the purposes of this sub-clause, ―jewellery‖ includes— (a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel; (b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel;] ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 16 [(iii) agricultural land in India, not being land situate— (a) in any area which is comprised within the jurisdiction of a municipality (whether known as a municipality, municipal corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment board and which has a population of not less than ten thousand according to the last preceding census of which the relevant figures have been published before the first day of the previous year; or (b) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official Gazette;] [(iv) 6% per cent Gold Bonds, 1977, [or 7 per cent Gold Bonds, 1980,] [or National Defence Gold Bonds, 1980,] issued by the Central Government;] [(v) Special Bearer Bonds, 1991, issued by the Central Government;] [(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified by the Central Government;] 3. Hence the shares held of an unlisted foreign company are capital asset and capital gain from the same is taxable in India. 4. Since the capital gain from sale of shares is taxable in India, capital loss from the same allowed to be set off against any other capital gain. 5. Sub section (3) of section 70 is reproduced below: Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short-term capital asset. 6. Hence the contention of the Assessing Officer that the same not taxable in India is not tenable in law and assessee company is allowed to set off the capital loss against the capital gain. 8.3.1 I have carefully considered the facts of the case and rival contentions. On perusal of the same, it has been noticed that the appellant ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 17 has claimed loss under the head ―capital gain‖ of Rs.45,87,57,066/- on sale of unlisted shares of Paioli Meccanica SPA, Italy. The total loss claimed by the appellant company on sale of unlisted shares of Paioli Meccanica SPA, Italy has been partly set off loss against capital gain on sale of land to the extent of Rs.2,15,3 7,986/-. 8.3.2 The A.O. has disallowed the said loss and has not allowed set-off of the said loss against capital gain on sale of land. In this regard, the A.O. has stated in the assessment order that in view of the Article-14 of the comprehensive agreement in respect of avoidance of double taxation, the income from sale of shares is taxable in Italy and the same is exempt in India and hence the loss on sale of the said shares cannot be set-off against capital gain on sale of land. On the other hand the appellant has referred to the provisions of section 90(2) of the Income Tax Act, 1961 relating to avoidance of double taxation and contended that as per the said section, the provisions of the Income Tax Act, 1961 shall apply to the extent they are more beneficial to the assessee. The appellant has further referred to the provisions of section 2(14) which defines capital asset and also provisions of section 70(3) relating to set-off of loss and provisions of section 48 to 55 relating to capital gain and has contended that in view of the above provisions, the capital gain on sale of shares, of an unlisted foreign company is taxable in India. The appellant has accordingly claimed that the said loss on sale of shares of unlisted foreign company is to be set-off against capital gain on sale of land. 8.3.3 I have perused the Article l4 of comprehensive agreement referred to by the A.O. From the facts of the case, it has been observed that the appellant Indian company is holding shares of Italian company Paioli Meccanic, SPA, Italy. The said shares of the Italian company are unlisted shares and capital gain on sale of unlisted shares is taxable in India as per the provisions of Income Tax Act 1961. Therefore, loss on sale of unlisted shares of the above mentioned company is capital loss which can be set-off against the taxable capital gain on sale of asset. ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 18 The unlisted shares of Italy company are covered by definition of capital asset u/s 2(14) of the Act. Further, as per provisions of section 10(38), in order to be eligible for exemption, the equity shares are to be sold through recognized Stock Exchange and such transaction is to be chargeable to Securities Transaction Tax. In the case under appeal, the shares of the Italy company sold by the appellant are unlisted shares and hence the sale cannot be effected through recognized Stock Exchange and such transaction is not chargeable to Securities Transaction Tax. Therefore, such sale of unlisted shares is not exempt. The provisions of section 70 of the Income Tax Act provide for set-off of loss from one sources against income from other source under the same head of income. In this regard, the provisions of sub-section (3) to section 70 are relevant and hence the same are reproduced below – ―70. (3) Where the result of the computation made for any assessment year under sections 48 to 55 in respect of any capital asset (other than a short-term capital asset) is a loss, the assessee shall be entitled to have the amount of such loss set off against the income, if any, as arrived at under a similar computation made for the assessment year in respect of any other capital asset not being a short term capital asset. ‖ Therefore, in the case under appeal, the long term capital gain in respect of sale of land can be set-off against long term capital loss in respect of unlisted shares of Italy company. In view of the above facts and discussion, I am of the considered view that the A.O. is not justified in not allowing the said loss on sale of unlisted shares Paioli Meccanica SPA, Italy amounting to Rs.45,87,57,066/-. The A.O. has accordingly not allowed setting-off the capital loss on sale of unlisted shares of Paioli Meccanica SPA, Italy against the capital gain of Rs.2,15,37,986/- on sale of land. The addition of Rs.2,15,37,986/- on account of disallowance of the above set-off is, therefore, not justified and hence deleted. Further, in view of the above facts and discussion, the A.O. is also not justified in not allowing carry forward of capital loss of Rs.43,72,19,080/-. The loss of Rs.2,15,37,986/- on sale of shares of Paioli Meccanica SPA, Italy is accordingly allowed to be set off against capital gain on sale of land Rs.2,15,37,986/-. Further, the remaining loss of ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 19 Rs.43,72,19,080/- on sale of shares of Paioli Meccanica SPA, Italy is also allowed to carried forward. The A.O; is directed accordingly. Ground Nos.5 & 6 are allowed.” 7. Mr. Rajeev Kumar strongly argued in favour of the Revenue’ stand that the once India- Italy double taxation avoidance agreement “DTAA” has already provided for gains and losses to be eligible for double taxation relief in Article 14 (4 & 5), the assessee is estopped from claiming the impugned set off under the provisions of domestic law. 8. We have given our thoughtful consideration to the Revenue’s foregoing arguments and find no merit there. We make it clear that all the Revenue has not challenged the assessee’s entitlement for the impugned set- off under domestic law since its only case that the foregoing DTAA squarely covers the issue. So far as its sole substantive grievance is concerned, we deem it appropriate to refer to section 90(2) of the Act which stipulates in very clear terms that “the provisions of this Act shall apply to the extent there are more beneficial to the assessee” than the case that only the corresponding DTAA clauses shall deal with the issue. This is further followed by the CBDT’s circular 621 dated 19.12.1991; as considered in (2003) 263 ITR 706(SC) Union of India vs. Azadi Bachao Andolan, that benefits flowing from the domestic law provisions’ shall not be denied merely because the corresponding clause in the tax treaty is less beneficial. This tribunal in (2012) 19 taxmann.com 292 (Mum) Prudential Assurance Co. Ltd. V/s ADIT also holds that the Revenue authorities cannot thrust DTAA provisions on an assessee who has chosen to be governed by domestic law. We therefore conclude in this factual and legal backdrop that the CIT(A) has rightly allowed the impugned set off of loss to the assessee his lower appellate discussion. ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 20 The same stands upheld. The Revenue fails in the instant last substantive ground as well as in the corresponding “lead” appeal ITA No. 989/PUN/2015. 9. Same order to follow in Revenue’s latter twin appeals ITA 958/PUN/2016 and 1694 /PUN/ 2017 for assessment years 2011-12 and 2012-13; respectively since involving very three issue as the only difference is only of quantum(s) only in above terms. Ordered accordingly. No other ground has been pressed before us. 10. These Revenue’s three appeals are dismissed in above terms. A copy of this common order is placed in the respective case files. Order pronounced in the Open Court on this 15 th day of July, 2022. Sd/- Sd/- (DR.DIPAK P.RIPOTE) (S.S. GODARA) लेखध सदस्य/ ACCOUNTANT MEMBER न्यधनयक सदस्य/JUDICIAL MEMBER पपणे / Pune; ददनधांक / Dated : 15 th July, 2022/Ashwini आदेश की प्रनतनलनप अग्रेनषत / Copy of the Order forwarded to : 1. अपऩलधथी / The Appellant. 2. प्रत्यथी / The Respondent. 3. The CIT(A)-1, Aurangabad. 4. The Pr.CIT-1, Aurangabad. 5. नवभधगऩय प्रनतनननध, आयकर अपऩलऩय अनधकरण, “ए” बेंच, पपणे / DR, ITAT, “A” Bench, Pune. 6. गधर्ा फ़धइल / Guard File. आदेशधनपसधर / BY ORDER, / / TRUE COPY / / Senior Private Secretary आयकर अपऩलऩय अनधकरण, पपणे / ITAT, Pune ITA No.989/PN/2015, ITA Nos. 2016 & 1694/PN/2017 A.Y. 2010-11 to 2012-13, Endurance Technologies Pvt. Ltd., 21 S.No Details Date Initials Designation 1 Draft dictated on 09.06.2022 Sr. PS/PS 2 Final Draft placed before author 11.07.2022 Sr. PS/PS 3 Draft proposed & placed before the Second Member JM/AM 4 Draft discussed/approved by Second Member AM/AM 5 Approved Draft comes to the Sr. PS/PS Sr. PS/PS 6 Kept for pronouncement on Sr. PS/PS 7 Date of uploading of Order Sr. PS/PS 8 File sent to Bench Clerk Sr. PS/PS 9 Date on which the file goes to the Head Clerk 10 Date on which file goes to the A.R. 11 Date of Dispatch of order