Conclusion: Forward contracts in the nature of hedging transactions in course of normal import export activities to cover up losses on account of foreign exchange valuation difference results in business losses and not speculative one.
Held: Assessee in order to hedge against the foreign currency liability had entered a foreign option contract with ICIC Bank in July, 2007. Due to sudden and unexpected fall in the value of USD Vs. Swiss currency in the math of March 2008, assessee had incurred foreign exchange loss. AO disallowed the claim of deduction for loss arising from foreign exchange fluctuation in respect of a hedging contract to cover foreign exchange credit provided by ICIC Bank for payment for the purpose of imported raw material upon accounting of the outstanding hedging contract on market to marked basis at the end of the year. CIT(A) had allowed the claim of deduction of the assessee. It was held that forward contracts in the nature of hedging transactions in course of normal import export activities to cover up losses on account of foreign exchange valuation difference resulted in business losses and not speculative one.
FULL TEXT OF THE ITAT JUDGEMENT
These two appeals filed by revenue and two cross objections filed by assessee for A.Y. 2008-09 & 2010-11, arise from order of the CIT(A)-10, Ahmedabad dated 28-08-2015, in proceedings under section 143(3) & 143(3) r.w.s. 92CA & 144C of the Income Tax Act, 1961; in short “the Act”.
ITA No. 3069/Ahd/2015 & CO No. 210/Ahd/2015 filed by revenue
2. The fact in brief is that assessee has filed return of income declaring total income of 9,64,51,680/-. The case was subject to scrutiny assessment and notice u/s. 143(2) of the act was issued on 26th August, 2012. The assessee is a company engaged in the business of manufacturing of Vanaspati and refining of edible oil. The assessment u/s. 143(3) of the act was finalized on 10th October, 2011 and total income was determined at Rs. 20,89,84,427/- after making various additions. The issue in the instant appeal is pertained to disallowance of contingent liability to the amount of Rs. 6,55,33,334/- claimed as loss on account of market to market transactions. During the course of assessment, the assessing officer noticed that the assessee company used to import its raw material i.e. crude palm oil from Malasia for which it has to pay in dollars. To hedge the tariff in dollar rate i.e. rate the assessee company had entered into a number of forward contracts/ option contracts/tariff etc. with banks on which it had booked huge foreign exchange losses. The assessee had booked foreign exchange losses to the amount of Rs. 12,75,74,806/- which also included Rs. 6,55,33,334 on account of provisions made on market to market transactions entered with the ICICI bank. On query, the assessee explained that it had purchased crude palm oil from one Acalpo Wilmar Pte Ltd. in the month of May, 2007 for a consideration of USD of 36,74,476/- vide invoice dated 25th May, 2007 & 29th May, 2007 and in order to hedge against the foreign currency liability the assessee entered into a contract called option contract with ICICI Bank in July, 2007 and as per said option contract the assessee had suffered a loss of Rs. 6,95,53,334/-. It was also stated that it was not speculative loss as the transaction was entered through banking channel. The assessing officer was not satisfied with the explanation of the assessee. He was of the view that the loss booked was on account of market to market derivative operation only and it was not in the nature of normal forward contract and it was the contingent loss. Therefore, after treating the same as contingent liability not yet crystalized the assessing officer has disallowed foreign exchange loss of Rs. 6,55,53,334/- towards provision for exchange loss as on forward cover payment for buyers credit.
3. The aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the appeal of the assesseee. The relevant pat of the decision of CIT(A) is reproduced as under:-
7.3 I have carefully considered the Assessment Order and submission filed by the Appellant. The undisputed facts are that appellant company purchased crude palm oil from Acalpo Wilmar Pte Ltd in the month of May 2007 for consideration of $ 3674476 against which ICICI Bank has provided Buyers Credit of Swiss Franc 8000000 and such same was due in May 2008. However, due to sudden fall in the value of USD V/s Swiss currency, the company incurred huge foreign exchange loss of Rs 8.55 crore. During the course of assessment proceedings, appellant argued that such loss arising on swap transaction cannot be treated as speculative loss. However, the Assessing Officer rejected the contention of appellant and contended that simply because as per RBI rules the companies are not expected to not to indulge in speculative transaction, same cannot be treated as business loss. The AO further contended that there was no purchase obligation in terms of Swiss Franc, there was not much depreciation of rupee V/s USD which means that loss arising on account of converting USD into Swiss franc is nothing but speculative transaction. The Assessing Officer alternatively contended that loss or gain occurs on expiry of contract and not earlier hence marked-to-market loss in these type of derivative contracts are contingent loss. He has also referred to CBDT, New Delhi, instruction No 3/2010 dated 21/03/2010 wherein it is stated that such loss is notional loss and contingent in nature, hence cannot be allowed to be set off against the taxable income.
The appellant argued that it had actually imported certain raw material and incurred a foreign currency liability in US Dollars for the same, that this foreign currency liability to the foreign supplier of raw material had been paid by the appellant by borrowing a foreign currency loan in US Dollars from ICICI Bank Ltd. Further, the appellant had entered into a hedging contract with the ICICI Bank Ltd. for the specific purpose of hedging its aforesaid Foreign Currency Loan liability to ICICI Bank which was to fall due for repayment in about eight months. It was further stated that as per Accounting Standard 11 “The Effects of Changes in Foreign Exchange Rates” issued by ICAI, appellant has provided marked-to-market loss in books of account. It was also stated that even though actual marked-to-market loss was of Rs 7.39 crore but actual loss suffered by appellant was Rs 6.55 crore, appellant has claimed such loss in current year. With regards to argument of Assessing Officer that appellant should not have entered into transaction of USD V/s Swiss Franc, it was submitted that it was a very well settled position of law that it was for the assessee to decide how he should carry on his business and that it was no part of the Assessing Officer’s jurisdiction to prescribe to the assessee how he should carry on his business, therefore, if the appellant took its own business decision, on the basis of its own wisdom and understanding about business exigencies at the relevant time, to take a hedging contract in a different currency. It should not be viewed adversely. The appellant’s contention that the relevant rules of the RBI did not permit companies to indulge in speculative transactions in foreign currency had been clearly misunderstood by Assessing Officer, because as per the relevant RBI Rules, every transaction in foreign currency had necessarily to be conducted through a bank and that it was just not possible that a bank would permit a foreign currency transaction by a company which was speculative in nature and, therefore, not permissible under the RBI Rules because if a bank were to permit any such transaction, it would itself commit a default. The appellant further contended that, in any case, instruction relied upon by AO issued on 23/03/2010 cannot be made applicable in A.Y. 2008-2009, as it was not there in the year under consideration and it has not made effective from retrospective date. It was also submitted that such instruction is contrary to decision of CIT V/s Woodward Governor India P. Ltd. (supra), Oil and Natural Gas Corporation Ltd. v. CIT (supra), Mumbai ITAT Special bench in the case of DCIT v. Bank of Bahrain and Kuwait. The appellant stated that decision of Apex court clear states that M2M loss is not contingent loss as observed by AO. The appellant also argued that it is not a dealer in foreign exchange but is engaged in business of manufacturing of oil and during the course of business, it has entered into forward contract to mitigate risk of fluctuation hence such loss cannot be treated as speculative loss as held by Hon’ble Gujarat High court in the case of CIT v. Friends and Friends Shipping Pvt. Ltd. delivered on 23.8.2011 in Tax Appeal No. 251 of (supra). The appellant also relied upon two more decisions of Ahmedabad ITAT in the case of Heavy Metal and Tubes Ltd. in ITA No. 1951/Ahd/2011 dated 30/06/2014(supra) and Adani Enterprise Ltd. in ITA No.1545/Ahd/2014 pronounced on 30/01/2015(supra) in support of its argument that such loss is not speculative loss as observed by Assessing Officer.
On careful consideration of entire facts, it is observed that the two issues emerging out of above discussion are that whether conversion of USD into Swiss Franc resulting into loss is speculation loss or business loss and whether M2M loss provided by appellant on above derivative contract is contingent loss or actual business loss. So far as first issue is concerned, it is observed that appellant has imported material in USD and in terms of RBI guidelines; it converted its liability of USD into Swiss Franc. It is not the case that appellant has not at all incurred any liability and entered into transaction of buying USD and selling Swiss Franc dependency or vice a versa hence conversion of foreign currency liability in another foreign currency liability is hedging transaction not covered by speculative transactions as defined in section 43(5) of the Act. It is pertinent to note that Appellant is engaged in the business of manufacturing of oil wherein significant business activity is from import and export of goods. During the year under consideration, the Appellant has shown consumption of raw material of Rs. 902.22 crores including consumption of imported material of Rs.824.75 crores, which constitutes 91.41 % of total purchase. Thus, it appears that Appellant Company requires dealing in foreign currency during the course of its business and to safeguard the future loss against foreign exchange fluctuation it has entered into hedging transaction with ICICI Bank Limited. Considering the overall business transactions carried out by Appellant the transaction in which Appellant has converted its Dollar liability to Swiss Franc is a small fraction.
On this very issue, Hon’ble Ahmedabad ITAT in the case of Heavy Metal and Tubes Ltd. in ITA No. 1951/Ahd/2011 dated 30/06/2014 decided the issue in favour of assessee. The facts of the said case are that the assessee was engaged in the business of manufacturing of steel tubes. During the year under consideration the assessee availed foreign currency loan for importing raw material and it had shifted its loan liability in dollar to Swiss franc and the loss resulted due to value in Swiss franc vis-a-vis dollar on the balance sheet date was undertaken the minimize the risk of foreign exchange fluctuation. The Assessing Officer disallowed loss claimed by assessee considering that (as discussed in para 8 of the order of I.T.A.T.)
(i) Forex derivative loss on account of switching of Dollar loan to Swiss Franc Loan was unrealized
(ii) Assessee company has claimed loss on account of re-statement of loans/credit liability existing as on the date of balance sheet by swapping the loan from Dollar to Swiss Franc to reduce its Forex exposure risk and therefore’the loss claimed by the Assessee-was not of Revenue in nature but was an unascertained and notional
(iv) The loss claimed by the Assessee was speculative in nature.
Thus, entire facts of present case are similar to facts before Hon’ble Ahmedabad ITAT As observed by Hon’ble Ahmedabad ITAT in above case that when the matter brought before the Hon’ble CIT(A), the CIT(A) decided the issue in favour of sssee by holding as under :-
“8. I have carefully considered the observations and findings of the A.O. as well as submissions of the appellant. The appellant company is engaged in the manufacturing of Tubes & Pipes. It purchases the required raw materials mainly from import source. During the previous year relevant to assessment year under consideration, approx. 90% of the value of materials consumed is from import purchase. There are export sales also. Thus, it appears that the appellant company requires dealing in foreign exchange in normal course of business and to safeguard the future losses against foreign exchange rate fluctuation it enters in to hedging transaction. It has availed the fund based and non- fund based financial facilities from its bankers in the form of Letter of Credit, Buyer’s Credit, Cash Credit Limits in foreign currency for purchase of raw materials & payment to overseas suppliers, against stock of raw materials & collection of book debts. It is submitted that since the appellant company uses the fund and non-fund based facilities in foreign currency, the bankers have advised the company to cover up the foreign exchange payment liabilities against the risk of fluctuation in rate of foreign exchange. There is always an inherent risk of fluctuation in the rates of foreign exchange, i.e. the rates of foreign exchange changes between the time of purchase of raw materials and actual payment to suppliers or bank, which depends on (he demand and supply position of the foreign exchange in the international market.
8.1 During the previous year, the appellant company has swap its working capital bank liability against purchase of raw-materials in Dollar Currency to Swiss Frank currency by entering into derivative contracts with bank. The stated logic for such swap from Dollar to Swiss Frank currency was that the Swiss Frank is considered as one of the most stable currency as compared to Dollar and accordingly, the loss, if any on account of foreign exchange fluctuation can be However, there was fall in the value of Swiss Frank vis-a-vis Dollar and on the balance sheet date i.e. 31-03-2008, the appellant company booked the loss of Rs. 5,89,29,812/-. This facts have not been disputed by the A.O.
8.2 It is further submitted by the authorized representative of the appellant company that as per the consistent prudent practice and requirements of Accounting “” Standards issued by the ICAI, it follows accounting of transactions for “purchase &Sales in foreign currency at the prevailing foreign exchange rate at the time of executing transactions and difference if any between the amount of purchase/sales and amount at which the transactions is actually settled by the payment to/from suppliers/debtors is accounted as “Loss/Gain on foreign exchange fluctuation”. In the Trading & Profit & Loss Account, the Purchase and sales are disclosed after set off on account of the Loss or Gain due to fluctuation in rates of foreign exchange on account of transactions of import purchase and export sales in foreign exchange. Such gain or loss in foreign exchange transactions settled during the year is part of the cost of import purchase or value of export sales. It is further submitted thai at times, it happens that the forward contract to buy/sell foreign exchange remains outstanding at the last date of Balance Sheet. As per the prudent accounting policy of mercantile/accrual system of accounting and Accounting Standards issued by the ICAI, the unsettled outstanding foreign exchange forward contracts have to be evaluated at an exchange rate prevailing on the date of Balance Sheet and loss, if any, on evaluation of such unsettled forward contracts have to be accounted in the books. As such there is no difference between the loss on account of evaluation of unsettled outstanding foreign exchange forward contracts and loss on account of settled foreign exchange forward contracts during the year. Loss, under both the situations, i.e. settled and unsettled forward contracts in foreign exchange, is revenue loss incurred in the normal course of business to hedge the risk of fluctuations in foreign exchange rates. Further, it is also submitted that as per the Accounting Standard-11 (AS-11) issued by the ICAI and RBI’s guidelines, the companies are required to revalue un-matured contracts as per rates of exchange notified by Foreign Exchange Dealer’s Association of India (FEDAI).
8.3 During the previous year relevant to assessment year under consideration, there were 2 unsettled forward contracts aggregating to US $ 76.00 lacs as on the last date of Balance Sheet i.e. 31-03- 2008 to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period. The loss is incurred by the appellant company on account of evaluation of these unsettled outstanding forward foreign exchange contracts on the last date of the accounting period i.e. before the date of maturity of the forward contracts. It was further submitted by the authorized representative that the gain/loss in forward contract for foreign exchange transactions backed by liability in foreign exchange on account of purchase/sales of goods are business losses covered by Section 28 of the Act and not losses in the nature of ‘speculation’ as defined in section 43(5) of the Act.
8.4 It has been further submitted that in the subsequent year i.e. Financial Year 2008-09 relevant to A.Y.2009-10 on settlement of the said 2 forward contracts, there was a gain of 1,96,26,284/- which is credited to the Profit & Loss A/c and shown as business income in the financial year 2008-09 relevant to A.Y.2009-10. Hence, the net foreign currency derivative loss is of Rs.3,93,03,528/- (Rs.5,89,29,812/-Less Rs.1,96,26,284/-).
8.5 The appellant company made the transactions of import purchase of raw materials and export sales of manufactured goods in the normal course of business. The liability for payment to suppliers for import purchase in foreign exchange is subject to risk of losses on account of fluctuation in exchange rate of foreign currency. To safe guard against such losses and to hedge against the unforeseen future loss due to fluctuation in rate of foreign exchange transactions of purchase & sales company makes the forward contract in the normal course of business to buy/sell the foreign exchange as per the market condition and advice of the bank. Thus, losses incurred in forward contracts for foreign exchange in the normal course of business are not speculative transactions and similar the said transactions nor regarded as speculative transaction as per the proviso (a) below the Section 43(5) of the Act and is a business loss covered by section 28 of the Act. It is submitted that as per the Accounting Standard-11 (AS-11) issued by the ICAI and RBI’s guidelines, the companies were required to revalue un-matured contracts as per rates of exchange notified by Foreign Exchange Dealers’ Association of India (FEDAI). Accordingly, on the balance sheet date, based on the exchange rate on that date, provision of profit/loss substitutes the figures booked at the time of contract. Thus, revalued loss/profit is debited to the profit ancf loss account. Further, this treatment is as per principles of accounting which required the current assets to be marked to the market rate.
8.6 The ratio laid down in the decision of Income-tax Appellate Tribunal, Mumbai Bench-“C” Special Bench, Mumbai in the case of DCIT vs. M/s. Bank of Bahrain & Kuwait (ITA No.4404 & 1883/Mum72004) is squarely applicable to the appellant company.
8.7 The loss incurred by the appellant company on account of evaluation of contract on the last day of accounting year i.e. before the date of maturity of forward contract be allowed as business loss for the following reasons …………………….
8.8 Considering all the above facts together, I am inclined to agree with the contention of the appellant company that the loss incurred by the appellant company on account of foreign exchange hedging transactions in forward contracts which is backed by the trading liability of the appellant company on account of import purchases, is a business revenue loss and not speculative loss as held by the A.O. The case of the appellant company squarely falls under proviso (a) to Sec. 43(5) of the Act and accordingly, the transactions entered into by the appellant company in respect of hedging of the probable loss on account of fluctuation in the rate of foreign exchange in forward contract are not speculative transactions. The O. has failed to bring on record any cogent material evidence is support of his finding that the loss suffered by the appellant company is speculative loss. Therefore, the action of the A.O to disallow the same as speculative loss is unjustified on the facts of the case and accordingly, the disallowance made by him is deleted. The appellant, accordingly, gets the relief of Rs.. 5,89,29,812/-.”
The Ahmedabad ITAT relying on decision of CIT(A) referred supra has held as under:
“11. We have heard the rival submissions and perused the material on record. It is an undisputed fact, that the Assessee is engaged in the business of manufacturing Tubes and Pipes. From the copy of the balance sheet placed on record it is seen that the approximately 90% of the material consumed is from import purchases. It is also a fact that Assessee has availed financial facilities from its bankers for purchase of raw material. We find that CIT(A)while allowing the appeal of the Assessee has given a finding that the dealing of Assessee in foreign exchange was in the normal course of business and to safeguard the future losses against foreign exchange rate fluctuations it had entered into hedging transaction. He has further noted that the loss incurred by the Assessee on account of foreign exchange hedging transactions in forward contracts was backed by the trading liability on account of import purchases and therefore the loss was revenue in nature and was not a speculative loss. He is further given a finding that the loss falls under proviso(a) to Section 43(5) of the Act and therefore the loss on account of fluctuation in the rate of foreign exchange in forward contract was not speculative transaction but is a business loss covered by Section 28 of the Act. ClT(A)has further noted that the A.O has failed to bring any material evidence on record to support its stand that the loss suffered by the Assessee was speculative loss. We further find that in the case of CIT vs. Woodward Governor the head notes of the decision of Hon’ble Apex Court reads asunder:-
“Business expenditure—Year of allowability—Additional liability due to exchange rate fluctuation—Expression “expenditure” as used in s. 37 may, in the circumstances of a particular case, cover an amount which is re-ally a “loss” even though the said amount has not gone out from the pocket of the assesses—Word “paid” in s. 43(2) means actually paid or incurred according to the method of accounting on the basis of which profits or gains are computed under s. 28/29—Sec.37(1) has to be read with ss, 28, 29 and 145(1)— There is no finding of iti<s AO on the correctness or completeness of thfi accounts of the assessee or that the assessee has not complied with the Accounting Standards—Therefore, loss suffered by the assessee in respect of a revenue liability on account of exchange difference as on the date of the balance sheet is an item of expenditure allowable under s. 37(1)—Under para 9 of AS-11, exchange differences arising on foreign currency transactions have to be recognized as income or expense in the period in which they arise, except as stated in para 10 and para 11—An enterprise has to report the outstanding liability relating to import of raw materials using closing rate or exchange—Any loss arising on conversion of said liability at the closing rate has to be recognized in the P&L a/c for the reporting period.”
12. Before us, Revenue has not brought any material on record to controvert the findings of CIT(A). In view of the aforesaid facts and relying on the decision of Apex Court in the case of Woodward Governor (supra) we find no reason to interfere with the order of CIT(A) and thus this ground of Revenue is dismissed.”
Thus Hon’ble Ahmedabad ITAT on identical facts has decided the issue in favour of appellant and held that swap loss incurred by converting USD into Swiss Franc is not speculative loss and M2M loss is not contingent loss for which reliance is placed on decision of Hon’ble Supreme court in the case of CIT V/s. Woodward Governor.
Further, Hon’ble Ahmedabad ITAT in the case of Adani Enterprise Limited in ITA No. 1545/Ahd/2014 vide its order dated 30.01.2015 after considering the provisions of section 43(5) and on issue of conversion of Rupee Loan into USD has adjudicated the entire issue in favour of assessee and held as under:
“4.10 Aforesaid section applies only to such transactions in which a contract for purchase or sale of a commodity, including stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of commodity or scrips. The word “commodity”, by no stretch of imagination, can cover currency which is only a medium of exchange with which goods and services can be bought and so Learned The Legislature, while enacting aforesaid provision, thought it necessary to expressly include stocks and shares as being covered under “commodity”, which means that but for such expressed inclusion, the word “commodity” would not have covered even stocks and shares. Obviously, currencies cannot be covered by the word “commodity”. In such situation, provision of section 43(5) cannot be applied to currencies. Without prejudice to above, by virtue of the Proviso to section 43(5), hedging transaction cannot be regarded as speculative transactions. Aforesaid proviso does not contain anything to provide for an exception on account of hedging contracts in respect of currencies whereas it specially covers raw material, merchandise, stock and shares. It shows that legislature was clear in its mind that since the word “commodity” itself cannot take in any currency as such, there can be no question for providing an exception in that regard in the proviso.
4.11 We find that ITAT Chennai Bench in case of DCIT vs. Patersons Securities Pvt. Ltd. (127 ITD 386) has held as under:
It shows that set off of loss of derivative trading against the profit of share trading business is permissible.
Thus, it emerged from above legal discussion that once transactions in currencies cannot attract the very definition of expression “speculative transaction” contained in clause  of Section 43, there is no room for suggesting that the exception contained in clause (d) of Proviso thereto does not apply to transactions by way of currency swap in foreign currency. In the result, loss on account of such contracts, entered into for the purpose of hedging, is deductible as business expenditure. According to us, Assessing Officer has adopted legally tenable view in its facts and circumstances though not discussed specifically.
4.19 Regarding merit of the claim, we find that currency swap loss of Rs. 6.04 Crores was directly covered in favour of assessee by the decision of the jurisdictional High court in the case of CIT v. Friends and Friends Shipping Pvt, Ltd [supra], wherein assessee had entered into forward _contracts with banks to hedge against any loss arising to fluctuation in foreign currency. In some cases, export could not be executed and assessee had to pay certain charges to banks. Assessee treated said charges as —— business loss and claimed deduction. However, Assessing Officer disallowed said loss holding it to be speculative in nature. Matter travelled up to Hon’ble High Court, wherein it was held that foreign exchange contracts as incidental to assessee’s export business and incurred loss in said contracts, said loss was not in nature of speculative loss but same was allowed as business loss. Thus, matter was decided in favour of assessee. In such situation, order passed by Assessing Officer cannot be said to be erroneous so as to be prejudicial to the interest of revenue. In response to query raised by Bench whether currency loss of Rs. 6.04 Crores consists of all the losses or any profit earned in this currency swap agreements. The Learned Authorized Representative drew our attention to pages 29 and 30 of the compilation where ledger account of currency swap was compiled. He also pointed out that in certain currency swap transactions, profit is also earned and hence, sum of Rs. 6.04 Crores is net figure of loss. Thus case on merit also tilt in favour of assessee.”
Following the ratio of above two decisions supra, it is held that Swap loss transactions, are not speculative transactions as defined in section 43(5) and such loss is required to be held as allowable business loss.
So far as issue whether loss incurred” by appellant on M2M is contingent loss or not, same issue is already decided in favour of assessee on identical facts by Jurisdictional Ahmedabad ITAT in the case of Heavy Metal and Tubes Ltd(supra). Even Hon’ble Mumbai ITAT on identical facts in the case of Reliance Industries Limited in I.T.A. No.7223/Mum/2011( A.Y. 2008-2009) vide its order dated 20/11/2013 has observed that in said case, The Commissioner of Income Tax stated the deduction claimed on forex derivative on account of losses arising out of the “Mark to Market” transactions (hereinafter to be referred as MTM) of Rs.43.78 crores, since these losses are notional losses, as no such sale or settlement has taken place and therefore, are contingent in nature. The Hon’ble ITAT relying on settled legal law of Hon’ble Supreme court referred supra decided the issue in favour of appellant and observed as under:
8. We have carefully considered the order of Commissioner of Income Tax and the submissions of Id. Representatives of the parties. We have also carefully considered the cases cited before us (supra). It is relevant to state that in the case of Woodward Governor India (P.) Ltd. (supra), the Hon’ble Apex Court observed and held that the . assessee debited to its profit and loss account certain unrealized loss due to foreign exchange fluctuation in foreign currency transactions towards revenue items as on the last day of the accounting year. The A.O. held that the liability as on the last date of the previous year was not an ascertained but a contingent liability. Resultantly, the same was added back to the total income. The C1T(A) echoed the assessment order. However, the Tribunal held that the claim of the assessee for deduction of unrealized loss due to foreign exchange fluctuation as on the last date of the previous year was deductible. The said order of the Tribunal was upheld by the Hon’ble High Court. On further appeal by the department, the Hon’ble Supreme Court held that the loss suffered by the assessee is on revenue account towards foreign exchange difference as on the date of balance sheet and is an item of expenditure deductible u/s 37(1). It further observed than an enterprise has to report outstanding liability relating to import of raw material using closing rate of. foreign exchange and any difference, loss or gain, arising on conversion of said liability at closing rate should be recognized in profit and loss account for reporting period. From the judgment of the Hon’ble Supreme Court it can be clearly deduced that unrealized loss due to foreign exchange fluctuation in foreign I.T.A. No.7223/Mum/2011 Scurrency transactions on revenue item as on the last date of the accounting year is deductible.
9. ITAT, in the case of Kotak Mahindra Investment Ltd. (supra) also considered a similar issue. In the said case the assessee-company was engaged in the business of granting of loans and advances against shares and securities also traded in derivative segment by entering into future and option contract. Some of the future contracts could not be squared up at the end of the financial year. The assessee booked the expected loss in such contracts on MTM basis. The assessee thus claimed a loss as calculated on MTM basis claiming that he was following this practice consistently. That it was also as per recognized Accounting Standard. AO rejected the claim on the ground that the derivative contracts were not stock in trade as there was no cost of He finally held that the loss on account of “MTM” basis was thus a notional loss and was contingent in nature and could not be allowed to be set off against taxable income. On appeal, the Id. CIT(A) allowed the same by agreeing with the contention of the assessee that such loss on such valuation which is called “MTM” has to be allowed even though it may appear to be a notional loss. The Tribunal while confirming order of Id. CIT(A) and allowing the said loss placed reliance on the decision of Hon’ble Apex Court in the case of Woodward Governor India (P.) Ltd. (supra) and also the decision of Tribunal in the case of Edelweiss Capital Ltd V/s ITO in ITA No.5324/Mum/2007 (AY-2004-05) dated 10.11.2010 and the decision in the case of Ramesh Kumar Damani V/s Addl.CIT in ITA No.1443/Mum/2009 (AY-2006-07)dated 26.11.2010. Copies of which are placed in the compilation of case laws at pages 76 to 84 and pages 85 to 90 respectively.
10. We also observe that similar issue was considered by Hon’ble Apex Court in the case of ONGC Ltd (supra).? The.assessee- a public sector undertaking was engaged in the capital intensive/exploration and production of petroleum products for which it had to heavily depend on foreign loans- to cover its expenses, both capital and revenue and for payment to non-resident contractors, in foreign currency for various services rendered. The assessee made three types of foreign exchange borrowings i.e.(i) on revenue account; (ii) on capital account, and (iii) for general purposes. Some of the loans became repayable in the relevant accounting year and the date of payment of some loans fell after the end of the relevant accounting year. The assessee revalued its foreign exchange loans, in foreign exchange on revenue account, on capital account and for general purposes outstanding as, on 31-3-1991, and claimed the differences IT.A. No.7223/Mum/2011 6be.tw,eerv their respective amounts in Indian currency as on 3f-3- 1990 and 31-3-1991 as revenue loss under section 37(1) in respect of loans used in revenue account. The assessee also treated the similar difference in foreign .exchange as an, increased, liability u/s 43A. The AO allowed the deduction claimed u/s 37(1), taking into consideration the increased foreign exchange liability and repaid in the accounting year for the purpose of depreciation. He did not however, allow the claim for foreign exchange loss on loans both in relation to capital as well as revenue, account which were, outstanding on the last day of accounting year. On appeal, the CIT(A) affirmed the view of AO. in relation to deduction u/s 37 of the interest on loans outstanding on the last day of.the accounting year but allowed the benefit of increased liability for computation u/s 43A in relation to loss outstanding on the last day of the’ accounting year. Hence, the assessee as well as department took the matter in appeal to the Appellate Tribunal. The Tribunal held that the loss claimed by the assassee on,,, revenue account allowable u/s 37(1) and also rejected the appeal1.of the department and held that the assessee was entitled to adjust actual cost on imported assets acquired in foreign currency on account of fluctuation in the rate of exchange in terms of section 43A. On appeal by the department, the Hon’ble High Court reversed the decision of the Tribunal on both the issues. On further appeal to the Apex Court, the decision of the High Court was reversed and it was held-that (a) that the loss claimed; by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet was allowable as an expenditure u/s 37(1), and (b) that the assessee was entitled to adjust the actual cost of imported assets acquired in foreign currency on account of fluctuation in the rate of exchange at each of the relevant balance sheet dates, pending actual payment of the liability u/s 43A, prior to its amendment by Finance Act, 2002.
11. In view of above decisions,- it is clear that the loss due to foreign exchange fluctuation in foreign currency transactions in derivatives has to be considered on the last date of accounting .year and it is deductible u/s 37(1) of the Act. Therefore, in allowing the said claim of the assessee by AO, the action of the AO is in consonance with the decisions of the Hon’ble Apex Court and also the view taken by the Tribunal in the cases cited hereinabove (supra). Hence, the view taken by AO to allow loss of Rs.43.78 crores while making assessment u/s 143(3) on account of derivative contract outstanding is not an erroneous view taken by AO, nor the action of AO is prejudicial to the interest of revenue. Hence, the order of Commissioner of Income Tax u/s 263 of the Act .to hold that the action of AO is erroneous to the extent the loss considered as ITA. No.7223/Mum/2011 7allowable on account of derivative contracts outstanding as on the date of balance sheet i.e. 31.3.2008 is neither justified nor in accordance with law.. Hence, we quash the said order of Id. Commissioner of Income Tax by allowing the grounds of appeal taken by the assessee.”
Hon’ble Hyderabad ITAT in the case of VST Industries Ltd. Vs. Additional CIT ,TA No: 647/HYD/2012) vide its order dated 23rd August, 2013 has held as under:
“10. The Hon’ble Gujarat High Court in case of Friends and Friends Shipping Pvt. Ltd. (Tax Appeal No. 251 of 2010 dated 23-08-2011) (supra) after following the decisions of the Hon’ble Bombay High Court in case CIT Vs. Badridas Gaurida (P) Ltd. (261 ITR 256) and the decision of Hon’ble Calcutta High Court in case of CIT vs. Soorajmull Nagarmull (129 ITR 169) held that when the assessee is not dealer in foreign exchange and for the purpose of hedging the loss due to fluctuation in foreign exchange into the forward contract with the bank, then the loss arising as a result of such forward contract cannot be said to be speculative as per section 43(5)(d) of the Act. Considered in the light of ratio in the judicial precedents mentioned hereinabove, it is admitted fact that the assessee is not a dealer in foreign exchange but engaged in the business of export/import of cigarettes and tobacco. In fact, the CIT (A) himself has accepted the fact that the forward contract has been entered into in the ordinary course of its business in respect of underlying import/export business transactions of the assessee. In the circumstances, the loss/expenditure claimed by the assessee on account of fluctuation in the rate of foreign exchange cannot be considered to be notional by following the Instruction No. 3 of 2010 of CBDT. The decision of Hon’ble Supreme Court in case of CIT, Delhi vs. Woodward Governor India Pvt. Ltd. (supra) and Income Tax Appellate Tribunal, Special Bench in Bank of Bahrain and Kuwait (supra) also support such a view. Therefore, considering the case of the assessee in the light of the law propounded in the judicial precedents discussed hereinabove, we are of the view that the assessee is entitled to claim the loss of Rs. 40,00,107/-. So far as the decisions relied upon by the learned Departmental Representative are concerned, they do not apply to the facts of the present case. In aforesaid view of the matter, we set aside the order of the CIT(A) and direct the Assessing Officer to delete the addition of Rs. 40,00,107/-.”
Further, it is pertinent to note that said instruction even otherwise brought on statue on 23/03/2010 cannot have retrospective effect. Considering the facts as discussed herein above, M2M loss incurred by appellant is not notional loss as observed by Assessing Officer and disallowance made by Assessing Officer for Rs 6,55,33,334 is deleted. This Ground of appeal is allowed.”
4. During the course of appellate proceedings before us, the ld. departmental representative has supported the order of assessing officer and placed reliance on the decision of the ITAT Delhi in the case of Bechtel India (P) Ltd. V. ACIT 82 taxman.com 301 (Delhi). On the other hand, the ld. counsel has placed reliance on the decision of Cadila Pharmaceutical Ltd. 85 taxman.com 354 (Ahd.). The ld. counsel has also referred decision of ITAT Ahmedabad in the case of ACIT vs. Heavy Metal & Tubes Ltd. vide ITA No. 1951/Ahd/2011 and CO. No. 232/Ahd/2011 order dated 30-06-2014 and decision of Hon’ble Mumbai High Court in the case of CIT-16 Vs. Chetan & Co. (2016) 75 taxman.com 33 (Bombay) dated 1st October, 2016
5. We have heard the rival contentions and perused the material on record carefully. The assessing officer has disallowed the claim of deduction for loss arising from foreign exchange fluctuation in respect of a hedging contract to cover foreign exchange credit provided by ICIC Bank for payment for the purpose of imported raw material upon accounting of the outstanding hedging contract on market to marked basis at the end of the year. There was an outstanding liability in foreign currency towards import either to the suppliers or to the bank. The buyer’s credit liability was due in May, 2008 and it was an option contract. In order to hedge against the foreign currency liability the assessee entered a foreign option contract with ICIC Bank in July, 2007. Due to sudden and unexpected fall in the value of USD Vs. Swiss currency in the math of March 2008, the assessee has incurred foreign exchange loss of 6,55,53,334/-. The ld. CIT(A) has allowed the claim of deduction of the assessee after placing reliance on the following judicial pronouncements:-
(i) Ahmedabad ITAT in the case of Heavy Metal and Tubes ITA No. 1951/Ahd/2011 dated 30-06-2014
(ii) Ahmedabad ITAT in the case of Adani Enterprise Ltd. ITA No. 1545/Ahd/2014 dated 31-01-2015.
In addition to above the ld. CIT has also placed reliance on the other judicial pronouncement as elaborated in the findings of ld. CIT(A) reported above in this order.
We have perused the findings and judicial pronouncement referred by the ld. CIT(A) in his decision. The assessee was engaged in the business of manufacturing of vanaspati and refining of edible oil and the forward contract has been entered in the ordinary course of its business in respect of under lying import/export business. The transactions were carried out for the sole purpose of hedging against losses that may arise on account of adverse fluctuation in the foreign exchange rates. It observed that the fact of the decision of Delhi ITAT in the case of Bachtel India (P) Ltd. referred by the ld. departmental representative are distinguishable from the case of the assessee. In that case forward contracts were not fully supported with invoices both in terms of the amount as well as tenure and there was no extra outgo for settlement of the forward contract other than already determined. On the other side, the ld. counsel has placed reliance on the decision of Hon’ble High Court of Bombay in the case of CIT vs. De Chetan & Co. vide 75 taxman.com 300 wherein it is held that forward contract for purpose of hedging in course of normal business activities of import and export done to cover up losses on account of differences in foreign exchange valuation would not be speculative activity but business activity. The ld. counsel has also placed reliance on the decision of ITAT Ahmedabad in the case of Cadila Pharmaceuticals Ltd. 85 taxmann.com 354 (Ahd). The relevant part of decision in the identical issue is reproduced as under:-
“26. We have heard rival submissions. The assessee’s case throughout has been that it had entered into a forex contract with the State j Bank of India on the basis of its foreign currency exposure in import/export transactions with public sector banks to cover fluctuation ! risk upto Rs. 200 crores. One of the bank namely Bank of Baroda is stated to have issued a certificate dated 12.02.2015 claiming realization of Rs. 123,71,57,417/- which could be realized to the tune of Rs. 111,72,18,0927- as on 31.03.2011. Its SBI contract enabled it to book losses against the above unrealized bills. Lower authorities as well as learned Departmental Representative do not rebut this factual position. The assessee claims to have been inter alia recording its sales to overseas clients on the day of transaction in its books in Indian currency at the rate prevailing on the very day, it would lodge conversion claim upon payment of its consideration money by said customers, this currency settlement took time after lodgment to be realized resulting in fluctuation loss as is the case herein. We notice in this backdrop that hon’ble jurisdictional high court’s decision in CIT v. Friends & Friends Shipping (P.) Ltd.  35 taxmann.com 553/217 Taxman 267 (Guj.) holds losses arising from similar foreign exchange contracts to be business losses than speculative ones. Their lordships conclude that such exchange transactions are hedging transactions instead of being speculative transactions in nature. Next comes hon’ble Bombay high court’s decision in CIT v. D. Chetan & Co.  75 taxmann.com 300/243 Taxman 356/ 390 ITR 36 (Bom.) holding that forward contracts in the nature of hedging transactions in course of normal import export activities to cover up losses on account of foreign exchange valuation difference results in business losses and not speculative one. We find that hon’ble jurisdictional high court’s decision in Pankaj Oil Mills v. CTT 115 ITR 824 ! Guj) (Full Bench) also holds inter alia that hedging contracts; in order to be out of speculative transactions, must be in respect of raw materials only in manufacturers’ cases though they could be both with regard to sales and purchases, such hedging contracts need not succeed the contract for sale and actual delivery of goods manufactured, but the latter could be subsequently entered into within reasonable time not exceeding the relevant assessment year in normal circumstances and such transactions should not exceed the total stock of the raw material or merchandise on hand including existing stocks as well as that acquired under the firms contract of purchases in order to be genuine and valid hedging contract of sales; respectively. Learned Departmental Representative fails to indicate any distinction therein vis-a-vis those involved in the instant adjudication. We therefore direct the Assessing Officer to delete the impugned disallowance.”
Considering the facts of the above and the findings as per the judicial pronouncements referred above in the order, we do not find any reason to interfere in the decision of the Ld. CIT(A). Therefore, the appeal of the Revenue stands dismissed.
Cross Objection No. 210/Ahd/2015 filed by assessee
6. Ground Nos. 1 & 2 are not pressed, therefore, these two grounds of cross objection are dismissed as not Pressed.
7. Ground No. 3 is filed against the decision of CIT(A) in upholding addition of Rs. 15 lacs after invoking section 50C of the Act on transaction of sale of immovable property in the form of land. During the course of assessment, the assessing officer noticed that assessee has sold land situated at Manaspali village for a consideration of Rs. 1,07,50,000/- to 8 different vendors which resulted in profit of Rs. 49,35,280/-. The assessing officer has stated instead of offering the amount for tax under the head capital gain the amount was merged in the normal income. On query, the assessee explained that the profit being short term capital gain having same tax rate therefore it was not separately shown under the head capital gain. On verification of the sale deeds the assessing officer noticed that in some cases the value of sale consideration received was less than the fair market value. Consequently, after invoking the provision of section 50C of the act, the assessing officer has added an amount of Rs. 15 lacs to the total income of the assessee after estimating the total market value at the rate of Rs. 20 lacs per acre.
8. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee. The relevant part of the decision of CIT(A) is as under:-
9.3 I have carefully considered the Assessment Order and the submission filed by the Appellant. The Assessing Officer has observed that appellant has sold land of 6 acres and 5 guntas situated at survey no 53 &54 .Manasapalli Village, Mandal for consideration of Rs 1,07,50,000 whereas JANTRI Value for such land reveals that market value is Rs 1,22,50,000 hence differential amount of Rs 15,00,000 was added to total income of appellant invoking provision of section 50C of the Act. The appellant has argued that it has not received over and above amount mentioned in sale deed hence Assessing Officer without bringing any evidences are not justified in JANTRI Value as market value of the
On careful consideration of the entire facts, it is observed that provisions of Section 50C indicate that for invoking • the provisions of section 500, following mil ens are required to be satisfied:
(i) The capital asset under transfer should be either land or building or both;
(ii) There is a payment of stamp duty in respect of such transfer;
(iii) There is a value adopted or assessed by Stamp Valuation Authority for the purposes of stamp duty; and
(iv) The consideration received or accrued as a result of transfer of the capital asset is less than the value adopted or assessed by the Stamp Valuation Authority; –
Then the value so adopted or assessed by Stamp Valuation Authority shall be deemed to be, for the purposes of section 48, the full value of the consideration received or accruing as a result of such transfer. The Hon’ble Jurisdictional Ahmedabad 1TAT in the case of Sanjaybhai J Pate! V/s ACIT  15 taxmann.com 103 has held as under :
“Section 50C, read with section 48, of the Income-tax Act, 1961 – Capital gains -Special provision for full value of consideration in certain cases – Assessment year 2006-07 – Assessee sold a piece of land – Value with which sale deed was registered was found to be below value determined by Stamp Valuation Authority – Assessing Officer invoked provisions of section 50C and brought to tax the differential – Whether in view of fact that assessee had accepted valuation determined by Stamp Valuation Authority for purpose of payment of stamp duty for registration of deed and further in view of fact that assessee had not availed opportunity under sub-section (2) of section 50C as to demonstrating that fair market value was less than stamp duty valuation, it was to be held that Assessing Officer had rightly invoked section 50C -Held, yes [In favour of revenue]”
In the present case, appellant has also accepted valuation determined by Stamp Valuation officer nor made any objections as per provisions of section 50C(2) hence Assessing Officer was correct in adopting JANTRI Value as market value of property for the purpose of computing income from capital gain. The appellant has relied upon decision of Hon’ble Punjab & Haryana High court in the case of CIT V/s Chandni Gucchar wherein Assessing Officer has made addition for unexplained investments at the time of purchase by relying on JANTRI rate of purchase of land. However, in the present case, Assessing Officer has made addition invoking revisions of section 50C for sale value of land and it is settled legal law that such provisions do not apply in the hands of purchasers hence ratio of said decision is not applicable in present case. Even decision of Jurisdictional Ahmedabad ITAT relied upon by appellant was for the case of purchase of asset hence even ratio of said decision is not applicable in present case. Considering the facts discussed herein above, addition made by Assessing Officer is upheld and this ground of appeal is dismissed.”
9. During the course of appellate proceedings before us, the ld. counsel has placed reliance on the decision of Chandra Narain Chaudhary 38 com 275 (All). The ld. counsel has submitted that no evidence had been brought to show that any amount in excess and declared consideration was received by the assessee therefore the decision of ld. CIT(A) was not justified. The ld. D.R. has supported the order of the ld. CIT(A).
10. We have heard both the sides and perused the material on It is noticed that the assessing officer has made addition of Rs. 15 lacs on the assumption that @ 20 lacs per acre the total market value works out to Rs. 1,22,50,000/- as against the consideration of Rs. 1,07,50,000/- shown by the assessee. In the light of the above facts, we observed that it will be appropriate to restore this issue to the file of the assessing officer for deciding afresh after referring the issue to the departmental valuation officer for determining the fair market value of the land sold. Accordingly, the issue is restored to the file of assessing officer for deciding afresh as directed above, therefore, this ground of Cross Objection of the assessee is allowed for statistical purposes.
Ground No. 4 of Cross objection
11. This ground of Cross objection is filed against the decision of CIT(A) in upholding the addition for Rs. 7,61,800/- on the ground that Rs. 19,04,500/- debited to P & L account represented expenditure incurred on the acquisition of computer software and only entitled to depreciation @ 60%.
12. During the course of assessment, the assessing officer noticed that assessee has claimed an amount of 19,04,502/- debited towards software charges under the head miscellaneous expenses. The assessing officer has treated the purchase of software as capital expenditure and allowed deprecation @ 60% and added the difference amount of Rs. 7,61,800/- to the total income of the assessee. The assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee. The relevant part of the decision of ld. CIT(A) is reproduced as under:-
10.4 1 have carefully considered the Assessment Order and submission filed by Appellant. The Assessing Officer has observed that appellant, has debited Rs 19,04,502 being Software Charges paid towards purchase of license fee, customization and trading charges for new software purchased from them. The Assessing Officer referred to depreciation schedule and contended that computer including computer software is eligible for depreciation @ 60% hence after allowing depreciation on such software, Assessing Officer made net addition of Rs 7,61,800. The appellant has argued that it has purchased application software and such technology is rapidly changes hence such software are not for enduing benefit and allowable as revenue expenditure. The appellant relied upon decision of CIT V/s Asahi India Safety Glass Limited (supra).
On careful consideration of entire facts, it is held that appellant is entitled to depreciation @ 60% on computer and computer software from A.Y. 2003-2004. The depreciation chart as provided in Income Tax Rules does not make any distinction between application software or other software and clearly depicts that assessee is entitled to depreciation @ 60%. Even the decision of CIT V/s Asahi India Safety . Glass Limited relied upon by appellant pertains to assessment year prior to A.Y. ‘2003-2004 and same is not applicable in year under consideration. Considering these facts, Assessing Officer was justified in holding that software expenditure cannot be allowed as revenue expenditure and appellant is entitled to depreciation @ 60% on such expenditure. However, as appellant is granted depreciation on Software expenditure of Rs 19,04,502, closing block of ” Software” in the case of appellant is increased by addition of.Rs 7,61,800 and Assessing Officer is directed to allow depreciation as per provisions of Income Tax Act in subsequent assessment years. In the result, this ground of appeal along with additional ground of appeal is partly allowed.”
13. During the course of appellate proceedings before us, the ld. counsel has placed reliance on the decision of J. India Invest Ltd. 215 taxman.com 78 (Guj), Oriental Bank of Commerce 256 taxman.com 24 (Del). The ld. counsel has submitted that the said expenditure was revenue in nature and the ld. CIT(A) was not justified in upholding that the said expenditure was in the nature of capital expenditure. On the other hand, the ld. D.R. has supported the order of lower authorities. We have gone through the jurisdictional pronouncement referred by the ld. counsel. It is noticed that Hon’ble Gujarat High Court in the case of NJ India Invest Ltd. supra has held that software development and upgradation would include data administration services, information and technology support services, software asset management services, etc., which was in nature of maintenance, back up and support service to existing hardware and software and did not give any fresh or new benefit. Further we have seen that Hon’ble Gujarat High Court in the case of Oriental Bank of Commerce vide 93 taxman.com 432 has allowed the deduction on software expenses u/s. 37(1) of the act holding that use of software did not confer any enduring right of assessee. Moreover the assessee’s objective was not to augment software business rather it used computer software as a tool to maximize its purpose and streamline its efficiency. In the light of the above facts, and jurisdictional pronouncement as cited above the Cross Objection of the assessee is allowed.
ITA No. 3070/Ahd/2015 filed by the revenue
14. The first ground of appeal of revenue is against the decision of CIT(A) in deleting the disallowance of Rs. 2,14,40,000/- u/s. 40A(2) of the act.
15. The fact in brief is that the assessment u/s. 143(3) of the act was completed on 31st March, 2014. During the course of assessment, the assessing officer noticed from the audit report that assessee has made payment on account of Sauda settlement charges of 2,14,14,000/- to KTV Health Food Pvt. Ltd. who was specified u/s. 40A(2) of the act. On query, the assessee explained that it has entered into contract with KTV Health Food Pvt. Ltd. for sale of RBD palm oil on various dates and various quantities. However afterwards the assessee company could not take delivery of contracted quantity of RBD palm oil within the stipulated time schedule and requested for settlement. The assessee has further submitted that it has paid settlement charges below the price prevailing in the market hence it cannot be said to have been unjustifiable. The assessee has submitted copies of credit notes along with daily rates published by the solvent extractor association of India. The assessing officer has not accepted the submission of the assessee. He was of the view that the contract in first place were entered at exaggerated rate and the rate of settlement will always be less than the average market price. He has stated that the said transactions within the group was a mere artificial or employed so as to reduce the tax liability of the assessee company. Therefore, Sauda settlement charges of Rs. 2,14,40,000/- was disallowed and added to the total income of the assessee.
16. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee. The relevant part of the decision of CIT(A) is reproduced as under:-
“7.3 I have carefully considered the assessment order and submission filed by appellant. The appellant company has entered into contract to purchase Paimolien from KTV Health Food Pvt Limited and it was claimed by appellant that as it cannot take delivery of contracted goods within stipulated time, settlement charges were paid to said company and claimed under the head ” Sauda settlement charges”. The above claim was appellant was denied by Assessing Officer on the ground that KTV Health Food Pvt Limited is related party of appellant and appellant has suffered huge loss from such transaction. The Assessing Officer has also contended that when contract price on the date of entering of contract is compared with the actual price prevailing on that date, it clearly suggest that the contract in first place was entered at exaggerate rate and rate of settlement would always be less than average market price hence on such observation, Assessing Officer made disallowance of Rs 2,14,40,000. The appellant reiterated the submission filed before Assessing Officer and further argued that contracts were entered into on commercial consideration by considering the market force on the date of contract and difference had arisen because of such declining trend in the market . It was also argued by appellant that KTV Health Food Pvt. Ltd. has duly filed income tax return for the year under consideration wherein income has been duly offered tax has been paid at maximum marginal rate which prove that there is no motive for tax avoidance as observed by Assessing Officer.
On careful consideration of entire facts, it is observed that appellant is engaged in manufacturing and trading of oil and during the course of its business, it has entered into various contract for purchase of Palmolien from KTV Health Food Pvt limited at predetermined rate but appellant could not take delivery of contracted quantity as there was reduction in prices and settlement was made with said party at agreed rate and difference between contracted rate and settlement rate was claimed as loss in year under consideration. The tabular chart showing contract dale, contract rate, settlement price, settlement date and price as per SEA on settlement date as reproduced in assessment order as well as appellant’s submission, clearly suggest that appellant has agreed upon settlement price which is lower than contract price but higher than price as per SEA which clearly suggest that appellant has settled the contract for minimizing the losses incurred in contract executed with above party. During the course of assessment proceedings, appellant has submitted Price as per SEA on settlement date and no adverse inference is drawn by Assessing Officer which clearly support the contention of appellant that settlement was agreed upon to reduce the losses incurred to execution of purchase contract. For better appreciation of facts and from tabular chart reproduced in assessment order, it is observed that appellant has made purchase contract of Rs 43,500 PMT and on the date of settlement, rate as per SEA was Rs 40,000 but appellant has agreed upto to settle the transaction at Rs 42,000 PMT which means that appellant has incurred loss of Rs 1500 PMT as against actual loss of Rs 3000 PMT. Even in balance transactions, appellant has agreed upon settlement rate as discussed herein above.
It is further observed that while making addition, Assessing Officer has observed that on 09.06.2009, market price was Rs 40000 PMT whereas on 05.06.2009, contract price was Rs 43,500 which means that appellant has executed contract at higher rate. The similar observation was made by Assessing Officer for market price of Rs 37300 on 22.06.009 and contract price was Rs 38500. However, above contention of Assessing Officer cannot be accepted as tabular chart referred by Assessing Officer itself clearly suggest that market price of Palmoelin has reduced significantly on day to day basis and clearly show declining trend in the market. It is pertinent to note that the contract price on 5.6.2009 was Rs.43,000 and on the settlement date of 9.6.2009 which is still thereafter, the market price was Rs.40,000, and that in view of such situation the subsequent contract was entered into on 19.6.2009, which was for Rs.38,500 and even market price of settlement date of 22.6.2009 was Rs.37,300. These fact clearly suggest that Assessing Officer was incorrect in observing that appellant has entered into exaggerated contract price but fact is that price of Paimoelin was reduced which lead appellant to settle the contraci without talking actual delivery of contact and appellant has settled the entire transaction at beneficial rate. The facts clearly suggest that appellant has entered into genuine business transaction and Assessing Officer has not brought any cogent evidences to prove that loss incurred by appellant is artificial loss.
So far as allegation of Assessing Officer that appellant has entered into transaction with related party and incurred losses to reduce tax liability, it is observed that said company is also assessed to tax at maximum marginal rate and has filed return of income showing total income at Rs 8,49.80,726 which is after considering above transactions and this fact clearly suggest that when other party has already paid taxes on above amount, there cannot be any intention to evade taxes as allegeged by Assessing Officer. The Hon’ble Supreme court in the case of CIT vs. 3laxo Smithkline (Asia) reported in 195 Taxman 35 has observed as under:
The main issue which needed to be addressed was, whether Transfer Pricing Regulations should be limited to cross-border transactions or be extended to domestic transactions. In the case of domestic transactions the under-invoicing of sales and over-invoicing of expenses ordinarily wou!d be revenue neutrai in nature, except in the following two circumstances having tax arbitrage—
(i) lf one of the related companies is a loss making company and the other is a profit making company and profit is shifted to the loss making concern; and
(ii) lf there are different rates for two related units [on account of different status, area- based incentives, nature of activity, etc.] and if profit is diverted towards the unit on the lower side of the tax arbitrage. For example, sale of goods or services from non-SEZ area, [taxable division] to SEZ unit [non-taxable unit] at a price below the market price so that taxable division will have less taxable profit and non-taxable division will have a higher profit exemption. [Para 4]
The ratio of above decision squarely applies to present case as KTV Health Food Pvt. Ltd. has already paid maximum marginal tax on income disclosed in year under consideration hence question of making disallowance of loss on the ground that transaction is with related party covered u/s 40A(2)(b) does not arise. It is pertinent to note that during the year under consideration, appellant has earned net Sauda settlement income of Rs 1,11,24,002 and same is disclosed in Schedule 14 ” Sales and other operational income(net)” which clearly prove that from similar transaction, appellant has also earned profit and when profit is taxed as such, there is no reasons for making disallowance of loss treating it as excessive expenditure. Thus, after consideration of all facts , it is held that Assessing Officer was not justified in making disallowance of Rs 2,14,40,000. This ground of appeal is allowed.”
17. During the course of appellate proceedings before us, the ld. departmental representative has supported the order of assessing officer. On other hand, ld. counsel has contended that payee M/s. KTB Health Food Pvt. Ltd. was paying tax at maximum marginal rate and ld. counsel has also placed reliance on the decision of 60 taxman.com 483 (Guj) 310 ITR 306 (Bom)
18. We have heard both the sides and perused the material on record and gone through the detail of total income and payment of taxes made by KTB Health Food Pvt. Ltd. placed at page 130 of the paper book. It is noticed that total income of the payee KTB Food Pvt. Ltd. for the assessment year 2010-11 was to the amount of 849,80,730/- on which tax was paid at higher marginal rate @ 30%. We have also gone through the decision of Hon’ble High Court in the case of Pr. CIT Vs. Gujarat Gas Financer Services Ltd. vide 60 taxman.com 493 wherein it is held that where assessee company as well as assessee’s parent company both were assessed to tax at maximum marginal rate, it could not be said that service charge was paid by the assessee company to parent company at unreasonable rate to evade tax. Since revenue could not point out that assessee evaded payment of tax therefore, invocation of section 40A(2) was not valid. In the light of the above facts and decision of Hon’ble High Court as cited above, we do not find any reason to interfere in the finding of ld. CIT(A). This ground of appeal of revenue is dismissed.
19. Ground No. 2 is against the decision of CIT(A) in deleting the disallowance of Rs. 5,18,246/- u/s. 14A of the act.
20. During the course of hearing the ld. counsel at the outset has brought to our notice that no exempt income was earned by the assessee therefore following the decision of Hon’ble Jurisdictional High Court of Gujarat in the case of Corrtech Energy Pvt. Ltd. 372 ITR 97 no disallowance is to be made. Ld. departmental representative could not controvert this undisputed fact and finding of Hon’ble Gujarat High Court. Considering the same, we do not find any merit in the appeal of the revenue, therefore, the same is also dismissed.
Cross Objection No. 211/Ahd/2015 filed by the assessee
21. Ground No. 1 of the cross objection is not pressed, therefore, the same is dismissed as not Pressed.
22. Ground No. 2 of the cross objection is against the decision of CIT(A) in upholding disallowance of Rs. 13 lacs claimed as bad debts written off on the ground that amount in question had been taken into income under the head capital gains in earlier assessment years. During the course of assessment, the assessing officer noticed that assessee has claimed bad debt advance written off to the amount of Rs. 51,603,770/-. On verification, the assessing officer has observed that assessee has written off provision for advances of Rs. 88,17,112/- and advance to creditors amounting to Rs. 5,09,331/-. The assessing officer has further observed that this amount was in nature of advance written off which was not offered to tax in earlier year. Therefore condition as laid down in section 36(2) of the act were unfulfilled. Therefore, amount of Rs. 93,26,443/- was disallowed and added to the total income of the assessee.
23. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has partly allowed the appeal of the assessee. The relevant part of the decision of CIT(A) is as under:-
“8.3 I have carefully conceded the assessment order and submission filed by appellant. The Assessing Officer has made disallowance of Rs 93,26,443 being provision for advance of Rs 88,17,112 and advance to creditor for Rs 5,09,331 written off in year under consideration on the ground that appellant has not offered above amount as income in earlier hence condition prescribed u/s 36(2) r.w.s 36(1)(vii) of the Act is not allowable. On the other hand, appellant has referred to submission dated 06th March 2014 reproduced at page 9 of assessment order wherein appellant has given chart showing break up of bad debts & advance written off along with party wise details of same along with ledger account of said party for current year as well as for the year in which income from the said party has been shown in Profit & loss account. The appellant has also submitted major break up of such bad debt which includes Rs 88,00,000 pertaining sale of DEPB license and Rs 13,00,000 being amount receivable on account of sale of property.
On careful consideration of the facts, it is observed that Assessing Officer has made disallowance of bad debt for Rs 93,26,443 which mainly includes Rs 75,00,000 being amount of dues receivable from K.N. resources on account of sale of DEPB license. During the course of assessment proceedings, appellant has submitted ledger account of party whose bad debt written off in current year along with year in which such amount is offered as income and this fact is not found incorrect by Assessing Officer. It is pertinent to note that Rs 75 lacs due from K.N resources was out of sale proceeds of DEPB income and as appellant has already offered above sales as income in earlier year and amount is written off in the year under consideration, same is allowable bad debt as per decision of Hon’ble Supreme court in the case of TRF limited.
So far as bad debt pertaining to Rs. 13,00,000 on account of amount receivable on account of sale of property, it is observed that appellant has not proved that sales proceeds from property was offered to tax as business income whereas appellant itself has admitted that income is shown under the head ” Capital gains” which means that loss arising on account of non- recovery of sale proceeds would be capital loss for appellant and not business loss as claimed by appellant, thus, addition of Rs 13,00,000 made by Assessing Officer is upheld.”
24. During the course of appellate proceedings before us, the ld. counsel has contended that ld. CIT(A) is not justified in restricting the addition to the extent of 13 lacs on the ground that loss was of the nature of capital loss. It is further contended that if the loss is of the nature of capital loss then the same should have been allowed as capital loss. The ld. counsel has placed reliance on the decision of Co-ordinate Bench in the case of Sagar Drugs & Pharmaceutical Pvt. Ltd. Vs. Joint CIT vide ITA No. 345/Ahd/2016 order dated 18-01-2016. On the other hand, ld. departmental representative has supported the order of ld. CIT(A).
25. We have heard both the sides and perused the material on We have gone through the decision of the Co-ordinate bench as cited above in the case of the Sagar Drugs and Pharmaceutical Pvt. Ltd. supra. The relevant part of the decision of Co-ordinate Bench is reproduced as under:-
“8. It is only elementary that what” can be allowed as bad debts or business loss is only put in the revenue filed in connection with the business operation. We, therefore, see substance in the actions of the authorities below and concur with the views so taken by the authorities below that the loss in question cannot be allowed as a bad debts or business loss. Having said that, however, we see merits in the plea of the learned counsel that once it is not in dispute that loss has indeed incurred even if it is not in the revenue field or bad debts, the same should be considered by the Assessing Officer for being allowed in the capital filed. The Assessing Officer having rejected the case of the assessee for the loss in the revenue field, it is only corollary thereto that as long as it is a genuine loss, as undisputed facts of the present case clearly indicate, the loss is to be treated as loss in the capital field, and the matter is to be examined further from that angle. However, this aspect of the matter is not at all examined by the Assessing Officer. Therefore, we remit this issue to the Assessing Officer for examination of the alternative claim of the assessee that the loss be allowed as capital loss. To this extend, the plea of the learned Counsel is accepted.”
Considering the above finding of the Co-ordinate Bench of the ITAT, we restore this issue contested in the cross objection of the assessee to the file of assessing officer for examination of the alternate claim of the assessee to allow impugned loss as capital loss as directed above in the finding of Co- ordinate bench, therefore, this ground of cross objection of the assessee is allowed for statistical purposes.
26. In the result, appeal ITA 3069/Ahd/2015 & 3070/Ahd/2015 filed by Revenue are dismissed and Cross Objection 210/Ahd/2015 & 211/Ahd/2015 filed by assessee are partly allowed for statistical purposes. Order pronounced in the open court on 21-02-2020