TaxTMI 
TaxTMI 
2017 (11) TMI 181
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.... 2. Whether on the facts and in the circumstances 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....
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....e same, else the plant would dry out and no oil could be extracted from it. This crop 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 contr....
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....widely depending upon the demand and supply position. The appellant company sells the product 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 ....
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....res- in "lock-in" a sale price say, on 1st April, of a particular year for their future production. In this way, 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 ....
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....TR (Guj) 22: (1993(203 ITR 304 (Guj). This decision was subsequently followed in CIT vs. Ashokbhai B. Shah (1996) 131 CTR (guj) 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 me....
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....2000-2001 and 2001-2002 have held that loss on forward exchange contract was not hit by the provisions of Section 43(5) of the Act. Appellant in Asstt. Year 1998-1999, 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....
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....ordingly credited into the Profit and Loss Account of the appellant company. Whenever the appellant has incurred losses from such hedging transactions the appellant has reduced its profit and has claimed less deduction U/s. 80IB suo 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 nece....
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.... s. 80-lB of the Act. While s. 80HH requires that the profits and gains should be derived from the industrial undertaking, s. 80-B of the Act 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". 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 deduct....
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....f the relevant assessment order that the question in the case of the appellant was not regarding the nature of transaction. According to him, the issue was whether profit from hedging transaction through commodity exchange, was profit derived from manufacturing or producing of an article or a thing. For this proposition, he 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 fluctuatio....
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.... into hedging contracts from May 2005 to September 2005 as initially the Assessee was not aware of operational modalities like how the trade will take place, how the deliveries would be made and by whom etc. Further the Assessee had never done any trading in any of the commodities earlier and hence it was not possible to enter into such 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 bu....
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.... out of squaring off future contracts is profit earned on account of hedging transaction. Thus there is a direct nexus between the activity of Jammu unit and the profit earned in the hedging contracts. The hedging Mentha Oil stemmed from the activity of Jammu unit of manufacturing Menthol Products. Thus the income from hedging in Mentha oil formed 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 earli....
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....ulars Amount(Rs..) Electricity expenses 26,080 Professional fees 50,000 Repairs 35,000 Sundry Bal W/off 18,386 Bank charges 110 Total expenses 1,29,576 Since the entire expenses are revenue in nature, we direct the Assessing Officer to allow the same. 21. In the result, appeals filed by the assessee are allowed in part whereas the appeals filed by 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 ....
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....d for earning tax free income. 16. In the case of H.T Media Limited v. Pr. CIT in ITA.No.548/2015 dated 23.08.2017, the Hon'ble Delhi High Court considered what constitutes proper recording of satisfaction by the Assessing Officer and it was held that in order to disallow the expenditure the Assessing Officer had to first record on examining the accounts that he was not satisfied with the correctness of the assessee's claim of the assessee. It was held that this was mandatorily necessitated by section 14A(2) of the Act r.w. Rule 8D(1)(a) of the rules. Hon'ble High Court held that on the aspect of administrative expenses being disallowed since there was a failure by the Assessing Officer to comply with the mandatory requirement of section 14A(2) of the Act r.w. Rule 8D(1)(a) of the rules and recording of his satisfaction is required there under, the question of complying Rule 8D(2)(iii) of the Rules did not arise. 17. Similarly, in this case the Assessing Officer did neither examine the accounts of the assessee nor examined the correctness of claim of the assessee's calculation. He did not record any dissatisfaction with the correctness of the assessee's claim of Rs..7....