2019 (10) TMI 1061 - AT - Income Tax

Tribunal's Decision: Partial Appeal Success, Interest Inclusion, Deduction Disallowance Upheld

The Tribunal partially allowed the appeals, remanding the derivative transactions issue for verification by the Assessing Officer. It directed the ... Deduction u/s 10AA - profit earned from derivative transactions claimed as hedging transactions by way of forward contracts - assessee is a partnership firm and engaged in the business of manufacturing and trading of jewellery - assessee having 100% export oriented unit (EOU) at SEZ, Sitapura, Jaipur. In the return of income, the assessee has claimed entire income under the head “business and profession” and claimed exemption/deduction U/s 10AA - HELD THAT:- There is no dispute that the forward contracts entered into by the assessee in respect of the purchase of gold and silver are without actual delivery of goods and therefore, except to the extent of such contracts are entered into to cover or safeguard the future loss due to price fluctuation in respect of actual transaction of sales/export, the same would be speculative transaction in terms of Section 43(5) of the Act. Thus, if the forward contract is entered into as an integral or incidental to the activity of actual export of goods then as per the exceptions provided under proviso to Section 43(5) of the Act, the same would not be treated as speculative transaction. A forward contract is regarded as hedging transaction only when it is entered into with a view to safeguard the losses in respect of a contract for actual sales or purchase of goods in future. Any profit or loss arising from such hedging transaction will be treated as business profit or allowable business loss. Since in the case in hand, the assessee has entered into forward contract only in respect of price of the gold and silver and not in respect of foreign exchange rate which is directly affecting the export proceeds or import outgo in foreign exchange. Therefore, the profit or loss arising from such forward contracts cannot be treated as integral or incidental to the export activity but it is certainly an integral part of business activity of the assessee. Since the assessee is purchasing raw material in local market, therefore, such profit or loss shall have a bearing on the cost of raw material and consequently the profits and gain from the export of the jewellery is directly affected by the profit or loss of forward contract. In order to hold that the forward contracts entered into by the assessee are hedging transaction to hedge the loss due to fluctuation of the price of gold and silver it is required to ascertain whether the forward contracts are covering the quantity to the extent of the order for export in hand of the assessee during the year under consideration. Since the purpose of hedging transaction was to minimize the assessee’s risk on account of fluctuation of prices in future and covered by these contracts was limited to the extent of actual exposure in respect of purchase of raw material and export of finished goods. The assessee has claimed that the total quantity under the forward contract during the year never exceeds the quantity of export or purchases made by the assessee. Assessee has entered into the forward contracts for purchase as well as sale of gold and silver, however, the exact details are required to be verified which has not been considered either by the A.O. or by the ld. CIT(A) but the deduction U/s 10AA has been denied by the authorities below only on the observation that the assessee has failed to demonstrate that the transactions which have yielded profit were hedging transactions. It is the duty of the A.O. to first ascertain whether the forward contracts are only in respect of covering the actual transaction of purchase and sale and not beyond actual transaction of purchase and sale then such forward contracts would be regarded as hedging transaction and cannot be treated as speculative transaction. Accordingly, the rulling relied upon by the ld. AR of the assessee is not in dispute as far as the principle laid down in the case of Pankaj Oil Mills Vs CIT [1976 (5) TMI 3 - GUJARAT HIGH COURT] but the facts remained unverified whether the forward contracts entered into by the assessee during the year are covering only actual transaction of purchase and sale so as to refer the hedging transaction to safeguard the future loss due to fluctuation of prices. Accordingly, this issue is set aside to the record of the A.O. to verify the actual details of forward contract as well as the actual transaction of purchase and sale made by the assessee during the year. Denial of deduction U/s 10AA of the Act on the interest received from JVVNL/RESB - HELD THAT:- There is no dispute that the interest was earned by the assessee from the security deposits with JVVNL for getting the electricity connection, therefore, the said interest income is integral part of the business of the assessee for availing the electricity connection for its manufacturing activity. Hence, the interest received on security deposit with JVVNL will be included in the business profits of undertaking for the purpose of computing the deduction U/s 10AA of the Act in terms of sub-Section (7) of the said provision. Consequently, the deduction will be computed as per the formulae given in sub-Secdtion (7) of Section 10AA of the Act and the profits of the business undertaking includes said interest income and the profits derived from the export of the articles or things of services shall be computed in proportionate to the export turnover to total turnover. This amount will be part of the business profits undertaking but shall not be part of the export turnover. The A.O. is directed to recompute the deduction as per the formulae given in sub-section (7) of Section 10AA Disallowance of deduction U/s 10AA of the Act in respect of miscellaneous income - HELD THAT:- Assessee has not advanced any argument as to why the disallowance of deduction U/s 10AA of the Act in respect of Misc. income is not justified. In absence of any explanation or argument on this issue, we do not find any reason to interfere with the orders of the authorities below qua this issue. Hence, this ground of appeal is dismissed. Issues Involved:1. Disallowance of deduction u/s 10AA in respect of income.2. Disallowance of deduction u/s 10AA in respect of profit from derivative transactions.3. Disallowance of deduction u/s 10AA in respect of interest from RSEB.4. Disallowance of deduction u/s 10AA in respect of miscellaneous income.Detailed Analysis:1. Disallowance of Deduction u/s 10AA in Respect of Income:The primary issue revolves around the disallowance of deduction under Section 10AA of the Income Tax Act, 1961, concerning various components of the assessee's income. The assessee, a partnership firm engaged in manufacturing and trading of jewelry with a 100% export-oriented unit (EOU) at SEZ, Sitapura, Jaipur, claimed the entire income under 'business and profession' and sought exemption/deduction u/s 10AA. The Assessing Officer (A.O.) disallowed the deduction, treating certain incomes as speculative and not integral to the business.2. Disallowance of Deduction u/s 10AA in Respect of Profit from Derivative Transactions:The assessee contended that the forward contracts were hedging transactions to mitigate future losses due to price fluctuations in gold and silver. The A.O. and the Commissioner of Income Tax (Appeals) [CIT(A)] disallowed the deduction, treating the profits from these transactions as speculative. The Tribunal noted that forward contracts without actual delivery are speculative unless they are integral to the export activity. The Tribunal remanded the issue back to the A.O. to verify if the forward contracts were limited to actual transactions of purchase and sale, thereby qualifying as hedging transactions under Section 43(5).3. Disallowance of Deduction u/s 10AA in Respect of Interest from RSEB:The interest earned from deposits with JVVNL for factory electric connections was another point of contention. The A.O. and CIT(A) denied the deduction, but the Tribunal held that this interest is integral to the business, as it pertains to securing electricity for manufacturing. The Tribunal directed the A.O. to include this interest in the business profits for computing the deduction u/s 10AA, as per the formula in sub-section (7) of Section 10AA.4. Disallowance of Deduction u/s 10AA in Respect of Miscellaneous Income:The assessee did not provide any substantial argument or evidence regarding the disallowance of deduction on miscellaneous income of Rs. 883. The CIT(A) and the Tribunal upheld the A.O.'s decision, finding no reason to interfere with the disallowance.Conclusion:The Tribunal allowed the appeals in part, remanding the issue of derivative transactions back to the A.O. for verification, and directed the inclusion of interest from JVVNL in business profits for deduction computation. The disallowance of miscellaneous income deduction was upheld. The order was pronounced on 23rd September 2019.