AI Drafter 
TaxTMI 
TaxTMI 
2016 (12) TMI 623
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....g contracts with the banks. The assessee had due to certain circumstances cancelled some contracts in FY 2007-08 itself, which resulted into these losses. In November, 2007, the assessee became aware that one of its senior employees being the Company's Secretary and A VP Legal and Treasury, had exercised unauthorized fiduciary powers and entered into contracts with various banks. The employee was authorized by the company to enter into hedging contracts with banks as part of his normal duties. However, some of these contracts were not authorized and the concerned employee cancelled/intentionally withheld the contracts information from the Board of Directors and Senior Management, the loss has occurred on cancellation of contracts. On being aware of these circumstances, the assessee company conducted investigation and suspended the employee. Later the services of the employee were terminated and criminal complaint has been filed. Based on the investigation it was found that such contracts were entered into with the various banks as under: i. Yes Bank ii. Kotak Mahindra Bank iii. IDBI iv HSBC v. Deutsche Bank The assessee on the advice of Foreign Exchange consul....
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....elp of falsification of documents cannot be considered as an act committed by the company. A loss caused by committing serious crime under various sections of IPC is not allowable under the, Income Tax Act and therefore, the said loss was disallowed. Further in para 6.7 the AO held that in view of section 73(1) r.w.s. 43(5) that since the transactions were settled, other than by delivery, it is a loss on account of speculative business and is allowable only against another speculative business and not against normal business. 4. By the impugned order, the CIT(A) deleted the disallowance after observing as under :- 5.5 I have considered the submissions of the appellant and the order of the AO. In November, 2007 the appellant became aware that one of its senior employees, Shri Naishad Desai, who was working as Company Secretary and AVP Legal arid Treasury has exercised unauthorized fiduciary powers and entered into contracts with various banks. It is pertinent to note that this employee was authorized to enter into hedging contracts with banks as a part of his normal duties and hedging contracts were entered by the said employee on specific authorization by the appellant's ....
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.... be seen from the above that in order to enter into these contracts with Yes Bank the appellant had used Board of Resolution dated 21.03.2006 which is almost a year before he entered into the first contracts with Yes Bank. 5.9 Similarly, the accused had filed a true copy of resolution based on the meeting of Board of Directors held on 27.04.2007 to Kotak Mahiridra Bank. However, in the meeting held on 27.04.2007 there was no such resolution or item passed in that Board meeting. However, the appellant had entered into transactions with Kotak Mahindra Bank from 5.03.2007 and had resulted in loss of Rs. 29,84,09,355/-. It can be seen that majority of the losses of Rs. 102 crores had resulted due to transactions with Yes Bank and Kotak Mahindra Bank and the appellant argued that any losses incurred on account of misconduct / negligence by an employee, but which is incidental to the carrying of the business is allowed as business loss. In support of this preposition the appellant relied on the following cases: * Badridas Daga vs. CIT (1958) 34 ITR 10 (SC) * ClT vs. Nainital bank (55 ITR 707) (SC) * G.G:Dandekar machine Works Ltd. Vs. ClT (202 ITR 161) (Born) * Pandyan Bui....
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....the view which it might take of its rights, and consequently, if the whole of the commission is under the law liable to the deducted against the Indian profits, the respondent cannot be estopped from claiming the benefit of such deduction, by reason of the fact it erroneously allocated a pan of it towards the profits earned in Karachi. What has therefore to be determined is whether, notwithstanding the apportionment made by the respondent in the profit and loss statement, the deduction is admissible under the law" * ClT vs India Discount Co. Ltd. (75 ITR 191) (SC) "It is well established that a receipt which in law cannot be regarded as income cannot become so merely because the assessee erroneously credited it to the profit and loss account." * ClT vs Godavari Sugar Mills Ltd. (208 ITR 878) (Born) "It is now a well settled that the entries in the books of accounts of an assessee or the description given to a particular transaction or any assets or liability in its accounts is not conclusive. It is necessary to consider the true nature of the transaction or assets or liability" * Fort Properties Pvt. Ltd. vs CIT {208 ITR 232} (Bom) "It is well-settled that the way....
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....aw the attention of your Honour to the following judicial precedents, wherein it has been held that 'foreign currency' is not a 'commodity'. * The Delhi ITAT in the case of Munjal Showa Ltd vs Dcn (191 Taxation 15.3), has held that foreign currency is not a commodity, placing reliance on the definition of the term 'goods' as defined in the Sale of Goods Act, 1930, relevant extract reproduced below: "Foreign currency, or any other currency, is neither commodity nor shares. The sale of Goods Act, specifically excludes cash from the definition of goods. Besides, no 'person other than authorised dealers and money changers are allowed in India to trade in foreign currency, much less speculate. Section 8 of the Foreign Exchange Regulations Act, 1973 provides that except with prior general or special permission of the RBI, no person other than an authorised dealer shall purchase, acquire, borrow or sell foreign currency." (emphasis supplied) * The Mumbai ITAT in case of Thomas Cook India Ltd vs DC IT (293 ITR 283), he id that foreign exchange cannot be considered as 'goods' (in terms of erstwhile Section 80HHC of the Act). While rendering the s....
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....ovisions of section 73 and Explanation 2 to section 28 of the ITAct, 1961. The appellant also relied in the case of "In the case of Sri Ranga Vikas Ginning and Oils Mills vs ClT (133 ITR 85) (Mad), the Madras High Court emphasised that when a business is carried on in speculative transactions, that business is deemed by the said explanation 2 to Section 28 of the Act to be distinct and separate from any other business." 5.17 The appellant also argued that foreign currency hedging transactions are incidental to the main business activity of the appellant and not in the nature of business for which he relied on the following case laws: "CIT vs Badridas Gauridu (P) Ltd (2611TR 256) (Bombay HC) CIT vs Soorajmull Nagarmull (129lTR 169) (Kolkata HC) D Kishore kumar Co vs DClT (2 SOT 769) (Mumbai ITAT) DClT vs Beautiful Diamonds Ltd (57ITATlNDIA 1024) (Mum ITAT) 5.18 Therefore, the appellants argument is that the loss arising on account of abuse of fiduciary powers by an employee are allowable as business loss u/s. 28(1) and the loss arisen out of cancellation of foreign exchange transactions does not partake the character of speculative transactions nor it qualified ....
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....eriod, the nature and amount of such items should be disclosed separately" 5,21 Therefore, it can be seen that just by qualifying it as exceptional loss does not lose the character of business loss and hence has to be allowed. The AO has also without prejudice to the above mentioned that the loss is speculative in nature, In this regard, it is necessary to examine the definition of speculative transactions as given in section 43(5) which reads as under: 43 (5) "speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts: Provided that for the purposes of this clause- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or mercanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss....
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....nal) In this case, the assessee had entered into a contract for purchase of rice from an Indian party and contract for export of rice to a foreign party. The consideration receivable for export or rice was fixed in terms of the foreign currency. To hedge itself against exposure of fluctuation risk, the assessee had entered into forward contract with SBI for sale of foreign exchange to be received on export of rice. The Indian supplier defaulted on delivery of rice which consequentially led to cancellation of export as well as cancellation of forward contract. The ITAT held that the loss was an allowable loss and did not come within the purview of section 43(5). It was held that it is not a case of settlement of a contract but it is a case of cancellation of a contract, as is evident from the cancellation charges paid to the bank and such cancellation charges are in the nature of damages paid for non-performance of contract and thus, the transaction cannot be said to be transaction for settlement of the contract to attract the provisions of section 43(5). The ITAT also held that the case was covered by Bombay High Court decision in the case of CIT vs. Badridas Gauridu (P) Ltd.....
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....r; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. (3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business, (4) No loss shall be carried forward under this section for more than 1[four] assessment .years immediately succeeding the assessm.ent year for which the loss was first computed. 2[Explanation.:-Where any part of the business of a company (3[other than a company whose gross total income consists 'mainly of income which is, chargeable under the heads, "Interest on securities"4, "Income from house property",' "Capital gains" and "Income from other sources"], or a company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying a speculation business to the extent to which the business con....
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....the assessee was not a dealer in foreign exchange. The assessee was an exporter of cotton. In' order to hedge against losses, the assessee had booked foreign exchange in the' forward market with the bank. However, the export cantracts entered into by the assessee for export of cotton in some cases failed. In the circumstances, the assessee was entitled to claim deduction in respect of Rs. 13.50 lacs as a business loss. This matter is squarely covered by the judgment of the Calcutta High Court, with which we agree, in the case of ClT v. Soorajmull NagarmulJ". (emphasis supplied) ClT vs Soorajmull Nagarmull (1291TR 169) (Kolkata HC) "Here there is no finding that entering into foreign exchange contract was the nature of the business of the assessee. This was only an incidental part of the business operation for the export and import of the goods by the assessee. The assessee was not a dealer in foreign exchange contracts as such. Foreign exchange contracts were only incidental to the assessee's regular course of business. Therefore, all the arguments regarding whether it comes within the Explanation 2, in our opinion, is not quite relevant because the loss was not s....
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.... pays when he has to pay for imports in foreign currency does not also go up. Since it is an undisputed position that the imports, in connection with which the assessee had entered into forward contracts, actually took place, this profit on cancellation of forward foreign exchange contracts effectively only reduces the costs of purchases in respect of those imports, and cannot be, by any logic, construed as transactions independent of assessee's business of importing rough diamonds and exporting cut and polished diamonds." The fact of premature cancellation, therefore, cannot alter the nature of transaction. For all these reasons, the credit shown in the P&L a/c as 'profit on cancellation of forward contracts' is as integral part of the export business, as purchases or imports". {emphasis supplied} * DCIT vs Beautiful Diamonds Ltd {57ITATlNDIA 1024} {Mum ITAT} "Hearing the rival submissions and going through the orders of the lower authorities we are of the view that the ClT{A} has rightly pointed out that the Assessing Officer completely missed the point. At one point the Assessing Officer says that the assessee has not actually delivered or transferred any co....
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.... From the record we found that the assessee is engaged in the business of export of software services to various customers across the world. In the course of carrying out its above export business, the assessee enters into customer contracts denominated in foreign currency. There existed an inherent foreign currency fluctuation risk with respect to such exports. For the purpose of de-risking the foreign currency fluctuation risk, the assessee has a treasury department which attempts to de-risk the above risk, by inter-alia, entering into foreign currency hedging contracts/options with the banks. The said contracts are either short-term or long-term. In around November, 2007, the assessee became aware that one of its senior employees had exercised unauthorized fiduciary powers and entered into foreign currency contacts with various banks which resulted into huge losses. The assessee company took a prudential business decision to cancel some of the said contracts to safe guard further loss, in the subject financial year (FY) itself i.e. FY 2007-08, consequently resulting in loss of Rs. 1,02,99,48,137/-. In support of its above claim regarding allowability of said loss as business los....
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....gs recorded by the CIT(A), we found that foreign currency hedging transaction so entered into on behalf of assessee company are incidental to the main business activity of the assessee company and not in the nature of main business. Our view is duly supported by the decision of Bombay High Court in case of Badridas Gauridu (supra), ITAT Mumbai Bench in case of D Kishore kumar Co (2 SOT 769) and Beautiful Diamonds Ltd (57 ITD 1024). 9. Keeping in view the responsibility given to the particular Officer with the powers to execute the same, the loss so arisen were on account of abuse of fiduciary powers by the employee therefore allowable as business loss u/s. 28(1). We also found that loss arisen out of cancellation of foreign exchange transactions does not partake the character of speculative transactions nor it qualified as a separate and distinct business to constitute the speculative business. 10. We also found that at the advice of Foreign Exchange Consultants, the assessee company has cancelled the contracts which were unauthorized and booked the loss. The said employee was later terminated from services and criminal complaint was also filed against him. All this shows tha....
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....to claim deduction in respect of business loss so occasioned due to foreign exchange contracts so entered. 13. For each and every aspect, the CIT(A) has dealt with the issue threadbare and after controverting the objections of AO and after applying judicial pronouncements to each aspect reached to the conclusion that loss so incurred was allowable as business loss. The detailed findings so recorded by CIT(A) are as per the material on record, therefore, do not require any interference on our part. 14. In the result, appeal filed by the revenue is dismissed. 15. With regard to the disallowance u/s.14A, we found that during the year under consideration, the assessee had earned dividend income of mainly from Mutual Funds, which has been claimed as exempt u/s. 10(35) of the Act. In its return of income for the subject AY, the assessee had made a suo-mote disallowance of Rs. 3,56,103/- under section 14A as being expenditure attributable to earning of such exempt dividend income. In the course of the assessment proceedings, assessee's representative filed written submissions explaining the basis of 14A disallowance made by the assessee company. 16. On asking by the AO, the as....
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.... per Rule 8D. It is only when the AO is not satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure having been incurred in relation to exempt income, that the mandate of Rule 8D will operate" ii) DClT Vs Jindal Photo Ltd Delhi ITAT ,ITA 814 (Del) 2011 it is a pre-requisite that before invoking Rule 80, the AO must record his satisfaction on how the assessee's calculation is incorrect. The AO cannot apply Rule 8D without pointing out any inaccuracy in the method of apportionment or allocation of expenses. Further, the onus is on the AO to show that expenditure has been incurred by the assessee for earning tax-free income. Without discharging the onus, the AO is not entitled to make an ad hoc disallowance. A clear finding of incurring of expenditure is necessary. No disallowance can be made on the basis of presumptions (law laid down in assessee's own case for AY 2007-08 reiterated) iii) The ITAT Pune bench in the case of Kalyani Steels Ltd., ITA No.1733/PN/2012, order dated 30-1-2014, held as under :- 8. We have carefully considered the rival submissions. Section 14A of the Act contemplates that fo....
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...., merits emphasis that sub-section (2) of section 14A does not authorize or empower the Assessing Officer to apply the prescribed method irrespective of the nature of the claim made by the assessee. The Assessing Officer has to first consider the correctness of the claim of the assessee having regard to the accounts of the assessee. The satisfaction of the Assessing Officer has to be objectively arrived at on the basis of those accounts and after considering all the relevant facts and circumstances. The application of the prescribed method arises in a situation where the claim made by the assessee in respect of expenditure which is relatable to the earning of income which does not form part of the total income under the Act is found to be incorrect. In such a situation a method had to be devised for apportioning the expenditure incurred by the assessee between what is incurred in relation to the earning of taxable income and that which is incurred in relation to the earning of non-taxable income. As a matter of fact, the memorandum explaining the provisions of the Finance Bill, 2006, and the Central Board of Direct Taxes circular dated December 28, 2006, state that since the existi....
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....early show that the satisfaction of the Assessing Officer with regard to the correctness or otherwise of the claim made by the assessee must be based on reasons and on relevant considerations. Ostensibly, the invoking of rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act is to be understood as being conditional on the objective satisfaction of the Assessing Officer with regard to the incorrectness of the claim of the assessee, having regard to the accounts of the assessee. At this stage, we may also touch-upon a similar view expressed by the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. & Ors. vs. CIT, (2012) 247 CTR 162 (Del), wherein reference has been made to the judgment of the Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra). As per the Hon'ble Delhi High Court, the requirement of the Assessing Officer embarkingupon a determination of the amount of expenditure incurred in relation to exempt income in term of rule 8D of the Rules would be triggered only if the Assessing Officer records a finding that he was not satisfied with the correctness of the claim of the assessee in respect of such expenditu....
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.... the shares which have yielded exempt income were acquired long back out of own funds and no borrowings were utilized. The mutual fund investments were claimed to be also made out of surplus funds. It was specifically claimed that no fresh investments have been made during the year under consideration in shares yielding exempt income. All the aforesaid points raised by the assessee have not been addressed by the Assessing Officer and the same have been brushed aside by making a bland statement that the disallowance is "not acceptable". Therefore, in our view, in the present case, the Assessing Officer has not recorded any objective satisfaction in regard to the correctness of the claim of the assessee, which is mandatorily required in terms of section 14A(2) of the Act and therefore his action of invoking rule 8D of the Rules to compute the impugned disallowance is untenable. Accordingly, the orders of the authorities below are set-aside on this aspect and the Assessing Officer is directed to retain the disallowance u/s 14A of the Act to the extent of Rs. 5,00,000/-, as returned by the assessee. 11. Before parting, we may refer to the objection of the learned Departmental ....