Case Law Details
La Opala RG Ltd. Vs DCIT (ITAT Kolkata)
In the case of La Opala RG Ltd. Vs DCIT, heard in the Income Tax Appellate Tribunal (ITAT) Kolkata, the appellant, La Opala RG Ltd., filed two appeals against separate orders of the Commissioner of Income Tax (Appeals) [CIT(A)], National Faceless Appeal Centre (NFAC), Delhi. These orders were passed against the assessment orders by the Deputy Commissioner of Income Tax (DCIT), Circle-12(1), Kolkata, under section 143(3) of the Income-tax Act, 1961, for the assessment years 2013-14 and 2014-15.
The grounds taken by the appellant for the assessment year 2013-14 included objections to the CIT(A)’s decision to pass the order under section 250 without providing an opportunity for a hearing via Video Conferencing (VC), and the upholding of the disallowance of Rs. 39,19,131/- made by the DCIT on account of Forward Contract Loss incurred towards hedging the foreign exchange fluctuation loss on the FCNRB Loan Account. For the assessment year 2014-15, the grounds included similar objections regarding the opportunity of hearing via VC and the upholding of various disallowances made by the DCIT.
In both appeals, the first ground was dismissed as not pressed by the appellant.
The appeal for the assessment year 2013-14 primarily focused on the disallowance of the claim for hedging foreign exchange fluctuation loss on FCNRB loan interest. The appellant argued that the premium paid for hedging should be treated as a revenue expenditure, not a capital loss, as it was incurred to reduce the effective cost of funds. The tribunal agreed with the appellant, emphasizing that the payment was not speculative and was a legitimate business expense. Therefore, the tribunal allowed the appellant’s claim.
In the appeal for the assessment year 2014-15, one of the grounds related to the disallowance of the claim under section 80IC of the Income Tax Act. The appellant contended that the export incentives and scrap sales should be considered as part of eligible profit. The tribunal upheld the appellant’s claim, citing precedents from the appellant’s own case in previous years.
Another ground for the assessment year 2014-15 involved the disallowance of foreign exchange loss on a marked-to-market basis. The appellant argued that the loss was accounted for in compliance with Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI) and was not speculative. The tribunal agreed with the appellant, noting that the loss arose from normal business activities and was in accordance with the mercantile accounting system consistently followed by the appellant. Therefore, the tribunal allowed the appellant’s claim.
In conclusion, both appeals of the appellant were partly allowed by the tribunal, providing relief on the grounds related to hedging foreign exchange fluctuation loss, claim under section 80IC, and disallowance of foreign exchange loss on a marked-to-market basis.
FULL TEXT OF THE ORDER OF ITAT KOLKATA
Both these appeals filed by the assessee are against the separate orders of Ld. CIT(A), National Faceless Appeal Centre (NFAC), Delhi vide order No. ITBA/NFAC/S/250/2023-24/1055178036(1) dated 17.08.2023 and ITBA/NFAC/S/250/2023-24/1055181950(1) dated 17.08.2023 passed against the assessment order by DCIT, Circle-12(1), Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 28.03.2016 and 07.12.2016 for AYs 2013-14 and 2014-15 respectively.
2. Grounds taken by the assessee for AY 2013-14 are reproduced as under:
“1. That the Ld. CITA)- NFAC was wrong in passing the order u/s 250 without giving an opportunity of hearing via Video Conferencing (VC). The appellant requested for an opportunity of video conferencing on 05.12.2022 and then again on 24.07.2023 to explain the written submission, Paper Book, etc. Thus, passing the appellate order u/s. 250 without giving an opportunity of hearing to the appellant via Video Conferencing (VC) is denial of Natural Justice.
2. That the Ld. CIT (A) – NFAC erred in upholding the disallowance of Rs.39,19,131/- made by the Ld. AO on account of Forward Contract Loss incurred towards hedging the foreign exchange fluctuation loss on the FCNRB Loan Account. The Ld. CIT failed to consider that the Hedging of forward contract to avoid foreign exchange fluctuation loss is a revenue loss and is allowable as business expenditure. Hence, addition made by AO and confirmed by Ld. CIT(A)-NFAC is wrong and needs to be deleted.”
3. Grounds taken by the assessee for AY 2014-15 are reproduced as under:
“1 That the Ld. CIT (A) NFAC was wrong in passing the order u/s 250 without giving an opportunity of hearing via Video Conferencing (VC). The appellant requested for an opportunity of video conferencing on 03.12.2022 and then again on 24.07.2023 to explain the written submission, Paper Book, etc. Thus, passing the appellate order u/s 250 without giving an opportunity of hearing to the appellant via Video Conferencing (VC) is denial of Natural Justice.
2. That the Ld. CIT (A) – NFAC erred in upholding the disallowance of Rs. 48,19,495/- made by the Ld. AO on account of deduction claimed u/s 80lC of the 1. Tax Act by treating the receipts from export incentives & scrap sales not to be part of eligible profit. The Ld. CIT (A) – NFAC failed to take cognizance that the said issue is already covered by assessee in its own case by the Hon’ble ITAT for AY 2013-14 bearing ITA No. 559/Kol/2018 dated 31.10.2019 and for AY 2015-16 bearing ITA No.153/Kol/2021 dated 18.05.2022. The Ld. C!T(A) – NFAC has failed to consider that the appellant has duly filed Audit Report in Form 10CCB for the A.Y. 2014-15 which certifies the financials of eligible unit. Hence addition made by AO and confirmed by Ld. CIT(A)-NFAC is wrong and needs to be deleted.
3. That the Ld. CIT (A) – NFAC erred in upholding the disallowance of 12,27,108/- made by the Ld. AO on account of Foreign Exchange Loss on mark to market basis. The Ld. CIT(A) – NFAC has failed to consider the fact that all the gains/losses of foreign exchange fluctuation have been duly accounted in compliance with the Accounting Standards issued by the Institute of Chartered Accountants of India and treated the loss on Foreign Exchange to be notional in nature. Hence, addition made by AO and confirmed by Ld. CIT(A)-NFAC wrong and needs to be deleted.”
4. In both the appeals ground no. 1 has not been pressed by the assessee. Accordingly, ground no. 1 is dismissed as not pressed.
5. First we take up ITA No. 964/Kol/2023 for AY 2013-14. Brief facts of the case are that assessee is engaged in the business of manufacturing of Opal and crystal glassware and generation and sale of electricity from Wind Farm. Assessee filed its return of income on 29.09.2013 reporting total income of Rs.22,55,40,450/- which was revised on 30.11.2013 reporting the same total income. In the course of assessment, AO noted from the P&L Account that assessee had claimed an amount of Rs.39,19,130/- towards loss on Forward Contracts under the head finance cost. After calling for explanation of the assessee, he disallowed the said claim by holding that this loss is a capital loss and not a revenue, it is notional/marked to market loss and that being speculative in nature is not allowable. Despite detailed explanation made by the assessee, disallowance was made for which assessee went in appeal before the Ld. CIT(A) who also sustained the said disallowance. Aggrieved, assessee is in appeal before the Tribunal.
6. Before us, ld. Counsel for the assessee referred to the detailed submissions made before the authorities below. Ld. Counsel
submitted that assessee had taken rupee loan from State Bank of India for the purpose of acquisition of certain assets. The asset was purchased in the preceding year and was put to use. Subsequently the existing rupee loan was converted by the assessee with the bank into a FCNRB loan for the purpose of availing the benefit of lower rate of interest. Therefore, in order to reduce the interest charge on the loan assessee converted to rupee loan into FCNRB loan. This conversion into FCNRB took place much after the asset was purchased. This asset was never purchased with the foreign currency loan. It was put to use and had started commercial production.
6.1. In order to protect itself from loss due to change in rate of interest in foreign currency, assessee hedged the FCNRB loan and entered into Forward Contract for this hedging by way of Forward Contracts. Assessee paid premium of Rs.39,19,131/- to the bank and charged the same in its P&L Account as loss on Forward Contract. According to the assessee, the premium paid by it for the Forward Contracts to hedge against the foreign exchange fluctuations on the interest payment for the converted rupee loan into FCNRB loan, can in no way be connected with the purchase of asset and, therefore, cannot be treated as capital loss as alleged by the AO. It was further contended that facts relating to asset purchased from rupee loan and put to use for commercial production have never been disputed. It is a well established law that any interest on loan taken for purchase of an asset is allowed as revenue expenditure once the commercial production of the asset starts. According to the assessee, interest incurred by it on FCNRB loan has been allowed as revenue expenditure by the AO in the said assessment. Contrary to this, premium paid by the assessee for hedging the foreign exchange fluctuations on the said interest payment is being held by the AO as a capital loss/notional loss/speculative loss which is nothing but a double view taken by the AO himself. Converting rupee loan into FCNRB loans and hedging the same is a business decision of the assessee for reducing the effective cost of funds and, therefore, is a revenue expenditure to be allowed.
6.2. To buttress its contention, assessee placed reliance on the decision of Hon’ble High Court of Delhi in the case of CIT Vs. Climate System Pvt. Ltd. 90 CCH 40 wherein it was held that AO had accepted that loan was not for acquisition of an asset, he did not specify or hold that an asset was acquired payment was to save and protect assessee from foreign exchange fluctuation loss which was in the nature of payment of interest for loan taken having regard to nature and type of loan which was taken i.e. FCNRB loan account. Hence, revenue in nature. It was part and parcel of payment towards debt servicing.
6.3. Assessee had also contended that it had accounted for hedging of foreign exchange fluctuation in compliance with the Accounting Standards issued by Institute of Chartered Accountants of India (ICAI). Assessee had submitted that hedging is defined as to enter into transaction to reduce the risk of adverse movement of currency. Any person having exposure to foreign currency may enter into hedging to fix its loss of profits at a particular level. It is dealt by Accounting Standards 11.
6.4. Further, assessee claimed that it is not a speculative transaction within the meaning of section 43(5). Assessee placed reliance on the decision of Coordinate Bench of ITAT, Kolkata in the case of ITO Vs. LGW Ltd. in (2017) 83 taxmann.com 68 (Kol. Trib.) wherein it was held that Forward Contract in question which was purely hedging transaction entered into by the assessee to safeguard against loss arising out of fluctuation in foreign currency, loss of such transaction could not be held as speculative transaction falling within the ambit of section 43(5).
6.5. Assessee also contended that in the preceding years i.e. AYs 2010-11, 2011-12 and 2012-13 have been assessed u/s. 143(3) wherein no such disallowance has been made by the AO. Further, in the subsequent year i.e. AY 2014-15 which is also in appeal before the Tribunal, no such disallowance has been made. Accordingly, the disallowance so made in the impugned assessment is ought to be allowed.
7. Ld. Sr. DR asserted that the loan was obtained for procuring capital asset and, therefore, it is on capital account. Ld. AO has rightly disallowed the loss of Forward contracts. He placed reliance on the orders of authorities below.
8. We have heard the rival contentions and perused the material on record. Admittedly, it is undisputed that assessee had obtained rupee loan for purchase of an asset. The asset was purchased in the preceding year, put to use with commencement of commercial production. Conversion of rupee loan took place subsequently to save interest cost in foreign currency, which was at lower rate. In order to hedge itself from the foreign exchange fluctuation towards interest payment of the converted loan, assessee had entered into forward contracts for which it paid premium to the bank. It is this payment of premium which has been claimed by the assessee as an expenditure in its P&L Account.
8.1. In the said factual matrix of the case, we find force in the submission made by the assessee that interest on loan taken for purchase of an asset is allowed as revenue expenditure once the commercial production of the asset starts. Furthermore, interest expenses incurred by the assessee on its FCNRB loan has been allowed as revenue expenditure by the AO himself. The premium paid to hedge be exchange fluctuation on its interest expenses has been disallowed which in our view is not justified. Also the claim of the assessee is not notional or marked to market loss but actual premium paid by it for entering into forward contracts for hedging exchange fluctuation in servicing foreign currency loan. It is also not a speculative loss within the meaning of section 43(5) which deals with speculative transaction and are those where actual delivery of contracts do not take place. Drawing our force from the judicial precedents referred above, we agree with the contentions made by the assessee and allow the amount claimed by the assessee of Rs. 39,19,131/-. Accordingly, ground no.2 taken by the assessee is allowed.
9. We now take up ITA No. 965/Kol/2023. Ground no. 2 is in respect of disallowance of claim for Rs.48,19,495/- u/s. 80IC of the Act by treating the receipts from export incentive and scrap sales as not part of eligible profit.
10. Brief facts are that assessee filed its return of income on 29.11.2014 reporting total income of Rs.26,29,13,840/-. Assessment u/s. 143(3) was completed by making, inter alia, disallowance u/s. 80IC of Rs.48,19,495/- and disallowance of foreign exchange loss of Rs.12,27,108/- for which the assessee is in appeal before the Tribunal.
11. During the year under consideration, assessee had received export incentive of Rs.1,53,81,824/- and claimed a deduction of Rs.46,14,397/-. Also, there was a sale of scrap of Rs.6,83,658/-which arose from sale of discarded goods arising due to manufacturing process in the production of finished goods eligible for deduction u/s. 80IC. On the disallowance of claim u/s. 80IC, the issue is no longer res integra as it is covered by the assessee’s own case decided by the Coordinate Bench of ITAT, Kolkata for AY 2013-14 in ITA No. 559/Kol/2018 dated 31.10.2019, for AY 2015-16 in ITA No. 153/Kol/2021 dated 18.05.2022 and for AY 2017-18 in ITA No. 296/Kol/2022 dated 24.11.2022. Decisions in all the three years are placed on record in the paper book which have been perused. All these decisions dealt with revisionary proceeding initiated u/s. 263 in the assessee’s own case on the issue of AO allowing the claim of assessee u/s. 80IC on export incentive and sale of scrap. The Coordinate Bench in all these years have set aside the revisionary proceedings. On confrontation of these facts to the Ld. Sr. DR, nothing contrary was brought on record to dislodge the claim of the assessee. Considering the facts on record and no change in the applicable law, we do not find any reason to interfere with the settled issue in the assessee’s own case in respect of claim of deduction u/s. 80IC on the export incentive and sale of scrap. Accordingly, ground no. 2 taken by the assessee is allowed.
12. Ground no. 3 refers to disallowance of Rs.12,27,108/- on account of foreign exchange loss on marked to market basis. In this respect assessee has accounted for foreign exchange fluctuation in compliance with the Accounting Standards issued by ICAI. Assessee had submitted that in compliance with the Accounting Standard – 11, it has reinstated with its foreign debtors as well as creditor as per the foreign currency rate as on 31.03.2014. This resulted into a foreign exchange loss at the end of the financial year. The underlying debtors and creditors are on account of revenue transaction and, therefore, loss on their reinstatement have been rightfully claimed through P&L Account. According to the assessee, the AO is wrong in applying the provisions of section 43(5) which deals with speculative transaction. This section itself provides for exception whereby any transaction or contract entered into the business of import or export of goods then, such transactions are kept outside the purview of definition of speculative transaction.
12.1. Assessee submitted that it is a recognized export house. It is engaged in exports and imports. Thus, debtors and creditors arising out of import and export transactions are on account of normal business activities. Accounting Standard issued by ICAI are mandatory, based on which its accounts have been drawn. Assessee had placed reliance on the decision of Hon’ble Supreme Court in the case of CIT Vs. Woodward Governor India Pvt. Ltd. (2009) 179 taxmann.com 326 (SC). Assessee also contended that it is following mercantile system of accounting consistently and the foreign exchange loss is due to the reinstatement of account at the end of the financial year as per the Accounting Standard issued by ICAI. Thus, the disallowance so made is not warranted.
13. On the other hand, Ld. Sr. DR placed reliance on the orders of the authorities below.
14. Having considered the factual matrix of the case which are undisputed and backed by the judicial precedence referred above, we note that the AO has incorrectly applied the provisions of section 43(5) to dislodge the claim of the assessee. Assessee follows mercantile accounting system consistently and has drawn its accounts in compliance of Accounting Standard issued by ICAI. The same are audited and not disputed by the AO. Furthermore, this similar claim has been allowed in the assessee’s own case both for the preceding and subsequent years. Being convinced with the above narrated submissions of the assessee, factual matrix and the judicial precedents, we allow the claim of the assessee. Accordingly, ground no. 3 is allowed.
15. In the result, both the appeals of the assessee are partly allowed.
Order pronounced in the open court on 3rd April, 2024.
Author Bio
