PCL Foods Pvt. Ltd. Vs ACIT (ITAT Delhi)
ITAT Delhi held that forward contract was purely hedging transactions entered into by assessee to safeguard against loss arising out of fluctuation in foreign currency, loss on such transactions could not be held as speculative transactions felling within ambit of section 43(5).
Facts-
The assessee is engaged in the business of purchasing paddy, removing husk and bran layers there from, extracting rice from the purchased paddy and polishing and grading the extracted rice. Thus, the assessee can be said to be engaged in ‘Rice milling activity’. The case of the assessee was picked up for assessment under Section 143(3) of the Income Tax Act, 1961.
The Assessing Officer treated the foreign exchange fluctuation loss of Rs. 89 lac as speculated loss u/s. 43(5) r.w.s. 28 of IT Act. The CIT(A) held that that transactions done in currency derivatives do not fall in proviso to section 43(5) and hence nothing but speculative transactions. The CIT(A) held that loss incurred in respect of currency derivatives is treated as speculation loss governed by Section 73. Thus, the main contention of the revenue was that the currency derivatives as referred in Section 2 of the Securities Act, 1956 and hence the contract for differences are part of derivatives and hence the derivatives loss cannot be treated as a trading loss.
Conclusion-
We find that the assessee company has taken derivatives to hedge against foreign currency and to take cover of risk associated with foreign currency transactions. The currency derivatives which are purchased by the assessee are integral part of the assessee’s business and incidental to the core business of the assessee who is in the business of export of Rice. The assessee had and export turnover of Rs.580 Cr. during the year under consideration and the total loss incurred by the assessee on hedging of foreign currency was Rs.89 lacs. Hence, it can be treated as a business expenditure.
In LGW Ltd. vs. ITO, the Tribunal held that where forward contract in question was purely hedging transactions entered into by assessee to safeguard against loss arising out of fluctuation in foreign currency, loss on such transactions could not be held as speculative transactions felling within ambit of section 43(5).
FULL TEXT OF THE ORDER OF ITAT DELHI
The present appeal has been filed by the assessee against the order of ld. CIT(A)-7, New Delhi dated 06.02.2019.
2. Following grounds have been raised by the assessee:
“1) That the order of CIT(A) u/s 250 of the Act is bad in law and on facts of the assessee’s case.
2) That the Ld. CIT(A) has grossly erred in law in confirming the disallowances made by the AO on account of Depreciation on Boiler, amounting to Rs. 35,59,587 and disallowing loss Rs. 89,20,326/- and brokerage and commission expense Rs. 22,78,228/-in respect of Currency Derivatives aggregating Rs. 1,11,98,554/- on wholly illegal, erroneous and untenable grounds.
3) That the Ld. CIT(A)/Assessing Officer has erred in facts and law in allowing depreciation amounting to Rs. 35,59,587/-on boiler @ 15% only instead of @ 80% by-
a. Holding that assessee inability to prove its assertion that it is an energy saving device.
b. Not appreciating that Energy saving device, i.e. Boiler is covered by item-ill of Machinery and Plant, Sub Item 8(ix) A (a) of Appendix-1 of Income Tax Rules, 1962.
c. Not appreciating that inspection certificate depicts not only boiler, it also depict other information such as type of boiler, pressure and loading of valve used in boiler.
d. By examining the utility of Boiler in isolation, neither examining the function for which Boiler is used nor considering the key highlights of the boiler describe in the description manual. Thereby ignoring the functional test.
e. Without appreciating the fact that assessee has utilized the specialized boilers which has been developed using advanced technology in order to establish as energy saving device.
4) That the Ld. CIT(A)/Assessing Officer has erred in facts and law in disallowing loss Rs. 89,20,326/-and brokerage and commission expense Rs. 22,78,228/- in respect of Currency Derivatives aggregating Rs. 1,11,98,554/- by-
a. Holding that transactions done in currency derivatives do not fall in proviso to section 43(5) and hence nothing but speculative transactions.
b. Holding that loss incurred in respect of currency derivatives is treated as speculation loss governed by section 73.
c. Without appreciating the fact that currency derivate are being taken to hedge the foreign currency exposures in future created out of export sales invoices raised in foreign currency i.e. USD.
d. Not appreciating the judgments on which the assessee relied upon and not distinguished the facts of the assessee’s case with these judgments.
5) That the interest under section 234B and section 234C of the Act is not chargeable.”
3. The assessee is engaged in the business of purchasing paddy, removing husk and bran layers therefrom, extracting rice from the purchased paddy and polishing and grading the extracted rice. Thus, the assessee can be said to be engaged in ‘Rice milling activity’. The case of the assessee was picked up for assessment u/s 143(3) of the Income Tax Act, 1961. Various details as were called by the AO and by the ld. CIT(A) at the appellate stage.
Depreciation on Boilers:
4. During the assessment proceeding it was observed that assessee has claimed Rs.1,43,35,249/- as ‘depreciation as per Income Tax Act’ in its profit and loss account. Vide para 2(ii) of questionnaire issued dated 25.08.2017 assessee was asked to justify the depreciation on boilers which has been claimed @ 80%.
5. In response, assessee replied as follows vide submission dated 04.09.2017.
“Depreciation as per Income Tax act, 1961 and Rules:
Depreciation is an allowable expense in income Tax act, 1961 on the basis of block of assets on written Down Method (WDV). Rates of depreciation have been prescribed under rule 5(1 A) of the act which is re produced below:
[(1A) The allowance under clause (i) of sub-section (1) of section 32 of the Act in respect of depreciation of assets acquired on or after 1s t April, 1997 shall be calculated at the percentage specified in the second column of the Table in Appendix IA of these rules on the actual cost thereof to the assessee as are used for the purpose of the business of the assessee at any time during the previous year.
