Case Law Details

Case Name : Commissioner of Income Tax Vs Panchmahal Steel Ltd (Gujarat High court at Ahmedabad)
Appeal Number : Tax Appeal No. 131 of 2013
Date of Judgement/Order : 28/03/2013
Related Assessment Year :
Courts : All High Courts (3629) Gujarat High Court (305)

Admittedly, the assessee is not a dealer in foreign exchange. For the purpose of hedging the loss due to fluctuation in foreign exchange while implementing   the export contracts, the assessee had entered into forward contract with   the banks.  In some cases,   the export could not be executed and the    assessee had to pay certain charges       to the Bank and  thereby incurred certain expenses.  These expenses the    assessee   claimed by    way  of expenditure towards business.     We do not find that  the transaction can be   stated to  be  in speculation as to cover under sub-section (5)  of section 43 of the Act.

 HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL NO. 131 of 2013

 COMMISSIONER OF INCOME TAX

Versus

PANCHMAHAL STEEL LTD.

Date : 28/03/2013ORAL ORDER

(PER : HONOURABLE MR.JUSTICE AKIL KURESHI)

1.Revenue is in appeal against the judgement of the Income Tax Appellate Tribunal dated 13.7.2012 raising following questions for our consideration :

“Whether, the  Tribunal   erred   in   deleting disallowance of Rs.34,88,834/- made on account of loss claimed   due    to cancellation of forward contract thereby       overviewing the fact that transactions   in   question  fell   within  the definition of  speculative transaction as    per section 43(5) of the Income Tax Act?

2. Tribunal in the impugned judgement relied on its own decision in case of Friends  and friends Shipping Pvt.   Ltd. which was carried in appealbefore this Court. This Court had  also by judgement 23.8.2011            in Tax Appeal No.251/2010 upheld the decision of the Tribunal. In the said judgement,   this   Court had     made   following observations :

“Having thus heard the learned advocates     for the parties and having perused the documents on record, we find that the issue is covered by the decisions of the Bombay High Court in the case of  Badridas  Gaurida (P) Ltd. and the Calcutta High Court in the case of Soorajmull Nagarmull (supra).

In the decision of the Bombay High Court, the assessee   was  in the business of  export of cotton.    The assessee had entered into forward contract        with banks in  respect of foreign exchange.   Some of these contracts could not be honoured    for which the assessee had to    pay Rs.13.50  lacs which   was debited to the profit and  loss account.   The assessee claimed the sum as business         loss.    Revenue was  of the opinion that the loss was speculative in nature. Bombay High Court      following the decision of     the Calcutta  High   Court in the case of Soorajmull Nagarmull          (supra) held that     the expenditure would not be covered under section  43(5) of the Act as speculative transaction.  It was observed as under:

“The assessee was not   a dealer in foreign exchange. The assessee    was a cotton exporter. The assessee  was an export house.  Therefore, foreign exchange  contracts were booked only as incidental to the assessee’s regular   course of business.  The Tribunal has recorded 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 contract for the purchase or   sale of       commodity is settled otherwise than by the actual delivery or transfer of such commodity.    However,   as state  above, 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 caes failed.   In the circumstances, the assessee was entitled to claim deduction  in respect of    Rs.13.50 lakhs as a business loss.   This matter is squarely covered by the jdugment of the Calcutta High Court, with which we agree,  in thecase  of CIT v.Soorajmull Nagurmull(1981) 129 ITR 169.”

Before the Calcutta High Court, the assessee was  a firm engaged in the business of import and export of jute.   In course of business, the assessee   would enter into  forward contract in foreign   exchange in order to    cover the loss which may  arise due  to  difference in  foreign exchange valuation.    In one such contract, the assessee had to  pay   to the Bank difference of Rs.80,491/- which was    claimed  by the assessee as revenue expenditure.    The disallowed the claim. The High Court held that the assessee   was not a   dealer    in  foreign exchange and the foreign   exchanges were only incidental to the assessee’s   regular course  of  business and the loss was thus not a speculative loss  but incidental to the assessee’s   business and   allowable  as such.   Facts in  the  present case  are very similar. Admittedly, the assessee is not a dealer in foreign exchange.     For the purpose of hedging the loss due to fluctuation in foreign exchange while implementing   the export contracts, the assessee had entered into forward contract with   the banks.  In some cases,   the export could not be executed and the    assessee had to pay certain charges       to the Bank and  thereby incurred certain expenses.         These expenses the    assessee   claimed by    way  of expenditure towards business.     We do not find that  the transaction can be   stated to  be  in speculation as to cover under sub-section (5)  of section 43 of the Act.

It is true that   the CIT(Appeals)  has made some observations     which would    prima facie suggest that   there was no    direct co-relationbetween the exchange  document and   the precise export contract.    However,  such  observations cannot be      seen in  isolation.  CIT (Appeals) himself has noted that the assessee had entered into seven separate contracts with the bankers.In the case of M.G.Brothers  (supra), the Andhra Pradesh High   Court was concerned    with a case where the assessee was carrying on business of groundnut oil and the assessee entered into forward transactions in neem oil and cotton seed oil. In that view of the matter, the Court held that it was not a hedging transaction since there was no evidence that the assessee had adequate stock of raw materials  to the extent of hedging
transactions.

In the case of Joseph John (supra), the Apex Court observed that the burden of proof is upon the assessee to show that the transaction is not speculative transaction but a hedging transaction and further that  the finding of the Tribunal that the transaction carried out by the assessee is    speculative in nature     and not hedging transactions    is essentially a finding on a question of fact.

The above noted decisions do  not directly touch the controversy arising in     the present appeal. We find that the decisions of the Bombay High Court and the    Calcutta High  Court noted above would cover the situation.

Tax appeal is therefore dismissed.”

3. Learned counsel for the Revenue stated that said decision of this Court was not carried in appeal on the ground that it involved tax effect lower than what is prescribed by the CBDT in circular dated 9.2.2011 permitting the Revenue to carry such appeal before the Supreme Court. Counsel for the Revenue was unable to point out any factual distinction between the two cases.

4.Be that as it may, insofar as this Court is concerned, above decision is binding. In the result, this tax appeal is also dismissed.

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Category : Income Tax (24908)
Type : Judiciary (9823)
Tags : high court judgments (3935) section 43 (26)

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