Tribunal rules on derivative loss as non-speculative business loss, disallows stamp duty and fees as capital expenditure.

Inventurus Knowledge Services Pvt. Ltd. C/o Seren Properties Pvt. Ltd. Versus Income Tax Officer-5 (2) (1), Mumbai

Inventurus Knowledge Services Pvt. Ltd. C/o Seren Properties Pvt. Ltd. Versus Income Tax Officer-5 (2) (1), Mumbai - [2016] 45 ITR (Trib) 57 Issues Involved:
1. Disallowance of loss on eligible derivative transactions in foreign exchange.
2. Disallowance of stamp duty and fees paid to the Ministry of Corporate Affairs.

Issue-wise Detailed Analysis:

1. Disallowance of loss on eligible derivative transactions in foreign exchange:

The assessee company, engaged in Knowledge Process Outsourcing (KPO) and Revenue Cycle Management (RCM) for US clients, reported a loss of Rs. 1,09,98,560/- on derivative transactions in foreign exchange. The Assessing Officer (AO) disallowed this loss, categorizing it as speculative under Section 43(5) of the Income Tax Act, 1961, and not as an eligible transaction for hedging against foreign exchange fluctuations. The AO argued that the transactions were not entered into to hedge against foreign exchange positions and were speculative in nature, thus not qualifying for the benefits under the proviso to Section 43(5).

The CIT(A) upheld the AO's decision, considering the loss as notional and contingent, relying on CBDT Instruction No. 17/2008 and treating it as a speculative transaction. The assessee company contended that the transactions were hedging against foreign currency receivables and were marked to market losses as per Accounting Standard-11 (AS-11) issued by ICAI. The company cited several judgments, including CIT v. Woodward Governor India Pvt. Ltd. and DCIT v. Bank of Bahrain & Kuwait, to support their claim that such losses are not speculative and should be allowed as business losses.

Upon appeal, the Tribunal analyzed the provisions of Section 43(5) along with the proviso and explanation, determining that the derivative transactions in foreign currency were carried out through recognized stock exchanges and fulfilled the conditions stipulated under Section 43(5). The Tribunal held that these transactions were not speculative, as they were entered into to hedge against foreign exchange losses on receivables from US clients, and the loss was not notional or contingent but an ascertained liability that crystallized on the balance sheet date. The Tribunal relied on the Special Bench decision in DCIT v. Bank of Bahrain & Kuwait, which allowed similar losses as business expenses.

2. Disallowance of stamp duty and fees paid to the Ministry of Corporate Affairs:

The assessee company paid Rs. 10,31,096/- towards stamp duty and fees to the Ministry of Corporate Affairs, New Delhi, for increasing its authorized capital. The AO disallowed this expenditure, treating it as capital in nature under Section 37 of the Act. The CIT(A) upheld this disallowance, relying on the Supreme Court judgments in Brooke Bond India Ltd. v. CIT and Punjab State Ind. Corp. Ltd. v. CIT, which held that such expenses for increasing authorized capital are capital expenditures and not allowable as revenue expenses.

The Tribunal, upon reviewing the case, agreed with the CIT(A) and upheld the disallowance, confirming that the payment towards stamp duty and fees for increasing authorized capital is a capital expenditure and not allowable as a revenue expense.

Conclusion:

The Tribunal allowed the appeal regarding the disallowance of the loss on derivative transactions, holding it as a non-speculative business loss. However, it upheld the disallowance of stamp duty and fees paid to the Ministry of Corporate Affairs as capital expenditure. The appeal was thus partly allowed.