TaxTMI 
TaxTMI 
2017 (11) TMI 181
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....es of the case and in law, the Ld.CIT(A) was right in holding that deduction u/s. 80IB is allowable to the assessee on the Gross total income without appreciating that deduction u/s. 80IB is to be restricted to profits taxable under the head Business income 3. whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was right in granting deduction u/s. 80IB to the assessee on income other than business income and which are taxable under the head income from other sources. 4. whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) was right in not following the decision of the Hon'ble Supreme Court in the case of M/s. Liberty India Ltd., reported in 183 Taxman 249 (SC), which is applicable to the facts of the case." 3. Learned Counsel for the assessee submits that the issue in appeal is squarely covered in favour of the assessee as has been decided by the Coordinate Bench in assessee's own case for the Assessment Year 2006-07 in ITA.No. 3885/Mum/2009 by order dated 20.11.2015, wherein it was held that the income from hedging contracts in Menthol Oil formed integral part of the income of the Jammu unit and was eligibl....
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....is seasonal and is grown only during certain period of the year. The plant or the oil is not available throughout the year making its prices vulnerable to fluctuation on either side. The assessee company has therefore to store the goods during the harvesting season for the entire year. The product manufactured by the company is used in oral health care products such as toothpaste, shaving cream, certain food items, medicines, etc. The demand for the product is continuous and buyers (both national as well as international) in order to maintain its costs would like to enter in to long term fixed price contracts with the companies. The company is therefore faced with the problem of supplying finished products at fixed price, whereas the price of raw material keeps varying depending on the season and availability of scarce product in the market. It was contended by Id. AR that the company would not be able to supply finished goods and make profits if the prices of the raw material fall after the harvesting season and therefore to protect its stock from price fluctuation the assessee enters in to contracts in commodity exchange. Accordingly, the assessee has hedged only part of the stoc....
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....t manufactured from Mentha Oil throughout the year. The prices of Menthol products fluctuate widely in the domestic as well as in the international markets. These fluctuations in Mentha Oil prices severely affects the cost of company's product and the profitability of the company as the raw materials are already purchased and stored for the entire year's production. Therefore, the appellant had to carry the inventory at a very high value since the supply after the harvest season is meagre. Further, export order/sales commitments are made at predetermined prices. The appellant company has to safeguard against adverse price fluctuations of the raw material product i.e. Mentha Oil. For this purpose, the appellant company enters into future sale contracts through the recognized commodity exchanges. 3.3.1 It was explained by the Ld. AR that the hedging transactions were only in respect of its raw material products i.e. Mentha Oil. He, further submitted that the quantity of Mentha Oil available with the company is substantially higher than the quantity of future contracts entered into by the appellant and squared off Ld. AR added that if the appellant was made to hand over the....
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....y, the said company protect its profit margins and revenue stream should copper price fall in the future. Should copper price rise, the said copper manufacturing company will loose on its future position, but the value of its physical copper metal shall rise. In this illustration, the cooper manufacturing company is just trying to offset, or hedge, its price risk. A hedger can be a buyer or seller. 3.3.3.1. A copper vessel manufacturer who buys copper as a raw material in the production of copper vessel, might buy copper futures to "lock-in" its cost of copper for future purchase. If the price of copper rises, it will have a profit on its hedge, which can be used to offset the higher price of physical copper it will need to purchase in the market. If the copper prices fall, it will show a loss on the future side of the transaction, but it will be able to buy the copper cheaper in the market. This is the essence of hedging transactions. 3.3.4 Hedging transactions differ from speculative transactions on account of the fact that they are not entered into, to make profits only. Their purpose is entirely different. Their purpose is to create a "hedge" primarily to provide an insur....
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....234: (1996) 218 ITR 331 (Guj). Hedging contracts contemplated by proviso to section 43(5): Proviso to section 43(5) lays down that for the purpose of section 43(5) contracts mentioned in cls. (a) to (c) of the proviso would not be deemed to be speculative transactions. In other words, although contracts mentioned in cls. (a) to (c) would otherwise fall within the definition of speculative transactions, by virtue of deeming provisions contained in the proviso they would not be regarded as speculative transactions. The contracts mentioned in cls. (a) to (c) are hedging contracts of specific category. When the question arises as to whether a particular transaction represents hedging transaction, the fact that such transaction comes within the general concept of hedging transaction would not be enough: it should come strictly within the ambit of one of the three clauses, viz. c/s. (a),(b) or (c) of the proviso. 3.3.6. Clause (a) deals with the case of a person carrying on business of manufacturing of goods and a person carrying on merchanting business. Clause (b) deals with the case of a person who is a dealer or an investor in stocks and shares while ci. (C) deals with the pe....
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....99, 2000- 2001 and 2001-2002 as reported had earned income by entering into speculative transactions in foreign exchange, on whose profit deduction U/s. 80HHC was claimed. Ld. Assessing Officer held it has a speculative income Ld. CIT(A)-III accepted the appellant's claim by relying on CIT Vs. Badridas Gauridas P.Ltd. (2004) 261 - ITR - 256 (Bom.) Hon'ble ITAT 'C' Bench, Mumbai in Appeal Nos. ITA No. 5549/M/2005, 5550/M/2005, 5489/M/2005 and 5490/M/2005 dated 30th "September, 2008 for Asstt. Years 2000- 2001 and 2001- 2002 clearly held that loss suffered by the appellant on account of failure to honour certain contracts was not speculation loss but was allowable as business loss. Hon'ble ITAT 'H' Bench, Mumbai in the case of the present appellant in ITA No. 4637/M/2003 for Asstt Year 1998-99 in its order dated 151312007 has also held vide para 8 on page 4 of the impugned order that the loss on forward exchange contract was not hit by the provisions of Section 43(5) of the Act. Hon'ble ITAT 'C' Bench, Mumbai have relied on Hon'ble Bombay High Court decision in the case of CIT Vs. Badridas Gauridas P.Ltd. (supra). In the said case, the asse....
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....uo motu. 3.3.11 Once it is resolved that the profit from hedging transactions in Mentha Oil used for manufacturing by Jammu unit of the appellant was business profit, the second question arises whether such business profit is eligible for deduction U/s. 80IB or not. Ld. Assessing Officer has followed the decisions of Hon'ble Supreme Court in the cases of Pandian Chemicals Ltd. vs. CIT - 262 ITR 278 (supra) and CIT Vs. Sterling Foods 237 - ITR 579 and has held that the Industrial undertaking itself had to be source of the profit for claiming deduction. 3.3.12 It is observed that there is a material difference between the language used in Section 80HH, section 801 and section 80IB. Whereas section 80HH, requires that the profit and gains should be derived from the Industrial undertaking, Section 80IB requires that the profits and gains should be derived from any business of the Industrial Undertaking. In other words, there need not necessarily be a direct nexus between the activity of an Industrial Undertaking and the profits and gains. This view has been taken by the Hon'ble Delhi High Court in the case of CIT Vs. Eltek SGS (P) Ltd, reported in (2008) -300- ITR-6 (Del)....
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....not necessarily be a direct nexus between the activity of an industrial undertaking and the profits and gains". 3.3.15. Having regard to the facts and circumstances of the case and in the light of the provisions of Section 80IB and in accordance with the latest judgments of Section 80IB as pronounced by Hon'ble Delhi High Court and Hon'ble Mumbai Tribunal and other decisions as noted below. lam of the considered opinion that the language used in Section 80IB is distinct from the language used in Section 80HH and Section 80I of the Act. There was no occasion for Hon'ble Supreme Court to consider the deduction U/s. 80IB of the Act in the cases of Pandian Chemicals Ltd. (supra) and in the case of Sterling Foods Ltd. (supra). Therefore, the decisions of Hon'ble Supreme Court given in the context of Section 80HH and in the context of Section 80I are not squarely applicable in deciding the deduction U/s. 80IB of the Act because there is a clear departure in the language used in Section 80IB of the Act from the languages used in section 80HH and Section 80I of the Act. (i) CIT Vs. Eltek SGS (P) Ltd. -(2008) 300- ITR -6 (Del). (ii) CIT vs. Dharam Pal Prem Chand ltd....
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....discussed the cases of CIT Vs. Tata Locomotive & Engg. Co. Ltd. (1968) 68 - ITR - 325 (Bom.) and the decision of Hon'ble Supreme Court in the cases of CIT Vs. Sterling Foods - 237 - ITR - 579 and Pandian Chemicals Ltd. Vs. CIT - 262 - ITR - 278 (S.C.). To come to a conclusion that hedging profit has not earned by manufacturing or producing an article or a thing, he also was of the opinion that the hedging profit was not derived from the Jammu Industrial Undertaking in view of the decisions of Hon'ble Apex Court in the cases of Sterling Foods (supra) and Pandian Chemicals Ltd. (supra). He, therefore, disallowed the appellant's claim for Section 80IB on such hedging profits of Rs. 18,23,08,181/-. 9.3 From the record we found that the assessee entered into forward contracts of sale of Mentha Oil for the purpose of hedging against the fluctuation in price of raw material i.e. Mentha oil which is used for manufacturing at its Jammu Unit. This product is an agro based product, which is grown only in some parts of India where the environment is suitable for the growth. In view of the peculiarity of the raw material, the raw material had to be purchased in the harvesting sea....
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.... transactions unless entire concept was understood and trading pattern was studied for initial months. Hence, the Assessee did not enter into hedging transactions till December 2005. Copy of relevant circular issued by Multi Commodity Exchange was also placed on record. We also found that the assessee has continued to undertake the hedging transactions in subsequent years. However, in subsequent years, the assessee has incurred a loss from such hedging transactions. The assessee has reduced the loss from the profits eligible for deduction under section 80-lB in the Return of income for subsequent year. 9.5 We have also carefully gone through the order of the Tribunal in assessee's own case for AY 1998-99 and AY 2000-01 and 2001-02, wherein the Tribunal has held that the foreign exchange fluctuation gain on forward contract constituted business income and was eligible for deduction under section 80HHC. The profit from hedging transactions is similar to the exchange fluctuation gain on forward contract and hence is in the nature of business income eligible for deduction under section 80-IB dispute that profit derived from hedging transaction is business income. For this purpos....
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....an integral part of the income of the Jammu unit and was eligible for deduction u/s. 80-IB. 9.7 The detailed finding recorded by the CIT(A) while concluding that when such profit was eligible for deduction u/s 80IB is as per material on record and the same has not been controverted by bringing any positive material by Ld. DR. Accordingly, we do not find any reason to interfere with the finding recorded by the CIT(A) holding that assessee is eligible for deduction u/s 80IB in respect of such profit." 6. This year it appears that the assessee incurred loss from hedging contracts in Menthol Oil and the Assessing Officer treated such loss as speculation loss following the stand taken in earlier years that the income from hedging contracts is the income from speculation business. In assessee's own case the Coordinate Bench in earlier years held that income from hedging contracts is a business income thus respectfully following the said decision we uphold the order of the Ld.CIT(A) in holding that he hedging loss is the business loss in the case of the assessee not a speculation loss. Grounds raised by the Revenue on this issue are dismissed. 7. Coming to the assessee's appeal the ....
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.... the Revenue are dismissed. The cross objections filed by the assessee are allowed in terms indicated above." 11. Following the said order, we direct the Assessing Officer to allow the said expenditure as deduction in computing the income of the assessee. This ground of appeal is allowed. 12. The next issue in the appeal of the assessee is regarding the disallowance of Rs..14,57,608/-.u/s. 14A r.w. Rule 8D(2)(iii) of I.T. Rules. 13. Learned Counsel for the assessee submits that in the course of Assessment Proceedings the assessee was required to explain as to why there should not be any disallowance u/s. 14A r.w. Rule 8D and the assessee has filed detailed submissions before the Assessing Officer by explaining the allocation of expenses made by the assessee towards tax free income and objected for invoking of section 14A r.w. Rule 8D. Learned Counsel for the assessee referring to page 22 of the Paper Book submits that a detailed quantification of expenses attributable to tax free income out of the total expenses was furnished before the Assessing Officer stating that the expenses attributable for earning dividend income is Rs..76,354/- only. Learned Counsel for the assessee sub....