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2020 (4) TMI 843
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....e act was issued on 26th August, 2012. The assessee is a company engaged in the business of manufacturing of Vanaspati and refining of edible oil. The assessment u/s. 143(3) of the act was finalized on 10th October, 2011 and total income was determined at Rs. 20,89,84,427/- after making various additions. The issue in the instant appeal is pertained to disallowance of contingent liability to the amount of Rs. 6,55,33,334/- claimed as loss on account of market to market transactions. During the course of assessment, the assessing officer noticed that the assessee company used to import its raw material i.e. crude palm oil from Malasia for which it has to pay in dollars. To hedge the tariff in dollar rate i.e. rate the assessee company had entered into a number of forward contracts/ option contracts/tariff etc. with banks on which it had booked huge foreign exchange losses. The assessee had booked foreign exchange losses to the amount of Rs. 12,75,74,806/- which also included Rs. 6,55,33,334 on account of provisions made on market to market transactions entered with the ICICI bank. On query, the assessee explained that it had purchased crude palm oil from one Acalpo Wilmar Pte Ltd. i....
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....s or gain occurs on expiry of contract and not earlier hence marked-to-market loss in these type of derivative contracts are contingent loss. He has also referred to CBDT, New Delhi, instruction No 3/2010 dated 21/03/2010 wherein it is stated that such loss is notional loss and contingent in nature, hence cannot be allowed to be set off against the taxable income. The appellant argued that it had actually imported certain raw material and incurred a foreign currency liability in US Dollars for the same, that this foreign currency liability to the foreign supplier of raw material had been paid by the appellant by borrowing a foreign currency loan in US Dollars from ICICI Bank Ltd. Further, the appellant had entered into a hedging contract with the ICICI Bank Ltd. for the specific purpose of hedging its aforesaid Foreign Currency Loan liability to ICICI Bank which was to fall due for repayment in about eight months. It was further stated that as per Accounting Standard 11 "The Effects of Changes in Foreign Exchange Rates" issued by ICAI, appellant has provided marked-to-market loss in books of account. It was also stated that even though actual marked-to-market loss....
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....011 in Tax Appeal No. 251 of 2010. (supra). The appellant also relied upon two more decisions of Ahmedabad ITAT in the case of Heavy Metal and Tubes Ltd. in ITA No. 1951/Ahd/2011 dated 30/06/2014(supra) and Adani Enterprise Ltd. in ITA No.1545/Ahd/2014 pronounced on 30/01/2015(supra) in support of its argument that such loss is not speculative loss as observed by Assessing Officer. On careful consideration of entire facts, it is observed that the two issues emerging out of above discussion are that whether conversion of USD into Swiss Franc resulting into loss is speculation loss or business loss and whether M2M loss provided by appellant on above derivative contract is contingent loss or actual business loss. So far as first issue is concerned, it is observed that appellant has imported material in USD and in terms of RBI guidelines; it converted its liability of USD into Swiss Franc. It is not the case that appellant has not at all incurred any liability and entered into transaction of buying USD and selling Swiss Franc dependency or vice a versa hence conversion of foreign currency liability in another foreign currency liability is hedging transaction not covered by spe....
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....cided the issue in favour of sssee by holding as under :- "8. I have carefully considered the observations and findings of the A.O. as well as submissions of the appellant. The appellant company is engaged in the manufacturing of Tubes & Pipes. It purchases the required raw materials mainly from import source. During the previous year relevant to assessment year under consideration, approx. 90% of the value of materials consumed is from import purchase. There are export sales also. Thus, it appears that the appellant company requires dealing in foreign exchange in normal course of business and to safeguard the future losses against foreign exchange rate fluctuation it enters in to hedging transaction. It has availed the fund based and nonfund based financial facilities from its bankers in the form of Letter of Credit, Buyer's Credit, Cash Credit Limits in foreign currency for purchase of raw materials & payment to overseas suppliers, against stock of raw materials & collection of book debts. It is submitted that since the appellant company uses the fund and non-fund based facilities in foreign currency, the bankers have advised the company to cover up....
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....tstanding foreign exchange forward contracts have to be evaluated at an exchange rate prevailing on the date of Balance Sheet and loss, if any, on evaluation of such unsettled forward contracts have to be accounted in the books. As such there is no difference between the loss on account of evaluation of unsettled outstanding foreign exchange forward contracts and loss on account of settled foreign exchange forward contracts during the year. Loss, under both the situations, i.e. settled and unsettled forward contracts in foreign exchange, is revenue loss incurred in the normal course of business to hedge the risk of fluctuations in foreign exchange rates. Further, it is also submitted that as per the Accounting Standard-11 (AS-11) issued by the ICAI and RBI's guidelines, the companies are required to revalue un-matured contracts as per rates of exchange notified by Foreign Exchange Dealer's Association of India (FEDAI). 8.3 During the previous year relevant to assessment year under consideration, there were 2 unsettled forward contracts aggregating to US $ 76.00 lacs as on the last date of Balance Sheet i.e. 31-03- 2008 to sell the foreign currency at an ag....
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....based on the exchange rate on that date, provision of profit/loss substitutes the figures booked at the time of contract. Thus, revalued loss/profit is debited to the profit ancf loss account. Further, this treatment is as per principles of accounting which required the current assets to be marked to the market rate. 8.6 The ratio laid down in the decision of Income-tax Appellate Tribunal, Mumbai Bench-"C" Special Bench, Mumbai in the case of DCIT vs. M/s. Bank of Bahrain & Kuwait (ITA No.4404 & 1883/Mum72004) is squarely applicable to the appellant company. 8.7 The loss incurred by the appellant company on account of evaluation of contract on the last day of accounting year i.e. before the date of maturity of forward contract be allowed as business loss for the following reasons I.......................... 8.8 Considering all the above facts together, I am inclined to agree with the contention of the appellant company that the loss incurred by the appellant company on account of foreign exchange hedging transactions in forward contracts which is backed by the trading liability of the appellant company on account of import purchases, is a business revenue....
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....otes of the decision of Hon'ble Apex Court reads asunder:- "Business expenditure-Year of allowability-Additional liability due to exchange rate fluctuation-Expression "expenditure" as used in s. 37 may, in the circumstances of a particular case, cover an amount which is re-ally a "loss" even though the said amount has not gone out from the pocket of the assesses-Word "paid" in s. 43(2) means actually paid or incurred according to the method of accounting on the basis of which profits or gains are computed under s. 28/29-Sec.37(1) has to be read with ss, 28, 29 and 145(1)- There is no finding of iti<s AO on the correctness or completeness of thfi accounts of the assessee or that the assessee has not complied with the Accounting Standards-Therefore, loss suffered by the assessee in respect of a revenue liability on account of exchange difference as on the date of the balance sheet is an item of expenditure allowable under s. 37(1)-Under para 9 of AS-11, exchange differences arising on foreign currency transactions have to be recognized as income or expense in the period in which they arise, except as stated in para 10 and para 11-An enterprise has to report the outstandi....
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....t legislature was clear in its mind that since the word "commodity" itself cannot take in any currency as such, there can be no question for providing an exception in that regard in the proviso. 4.11 We find that ITAT Chennai Bench in case of DCIT vs. Patersons Securities Pvt. Ltd. (127 ITD 386) has held as under: It shows that set off of loss of derivative trading against the profit of share trading business is permissible. 4.12 ........... Thus, it emerged from above legal discussion that once transactions in currencies cannot attract the very definition of expression "speculative transaction" contained in clause [5] of Section 43, there is no room for suggesting that the exception contained in clause (d) of Proviso thereto does not apply to transactions by way of currency swap in foreign currency. In the result, loss on account of such contracts, entered into for the purpose of hedging, is deductible as business expenditure. According to us, Assessing Officer has adopted legally tenable view in its facts and circumstances though not discussed specifically. 4.19 Regarding merit of the claim, we find that currency swap loss of Rs. 6.04 ....
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....these losses are notional losses, as no such sale or settlement has taken place and therefore, are contingent in nature. The Hon'ble ITAT relying on settled legal law of Hon'ble Supreme court referred supra decided the issue in favour of appellant and observed as under: 8. We have carefully considered the order of Id. Commissioner of Income Tax and the submissions of Id. Representatives of the parties. We have also carefully considered the cases cited before us (supra). It is relevant to state that in the case of Woodward Governor India (P.) Ltd. (supra), the Hon'ble Apex Court observed and held that the . assessee debited to its profit and loss account certain unrealized loss due to foreign exchange fluctuation in foreign currency transactions towards revenue items as on the last day of the accounting year. The A.O. held that the liability as on the last date of the previous year was not an ascertained but a contingent liability. Resultantly, the same was added back to the total income. The C1T(A) echoed the assessment order. However, the Tribunal held that the claim of the assessee for deduction of unrealized loss due to foreign exchange fluctuation as on the....
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....007 (AY-2004-05) dated 10.11.2010 and the decision in the case of Ramesh Kumar Damani V/s Addl.CIT in ITA No.1443/Mum/2009 (AY-2006-07)dated 26.11.2010. Copies of which are placed in the compilation of case laws at pages 76 to 84 and pages 85 to 90 respectively. 10. We also observe that similar issue was considered by Hon'ble Apex Court in the case of ONGC Ltd (supra).? The.assessee- a public sector undertaking was engaged in the capital intensive/exploration and production of petroleum products for which it had to heavily depend on foreign loans- to cover its expenses, both capital and revenue and for payment to non-resident contractors, in foreign currency for various services rendered. The assessee made three types of foreign exchange borrowings i.e.(i) on revenue account; (ii) on capital account, and (iii) for general purposes. Some of the loans became repayable in the relevant accounting year and the date of payment of some loans fell after the end of the relevant accounting year. The assessee revalued its foreign exchange loans, in foreign exchange on revenue account, on capital account and for general purposes outstanding as, on 31-3-1991, and claimed t....
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....aim of the assessee by AO, the action of the AO is in consonance with the decisions of the Hon'ble Apex Court and also the view taken by the Tribunal in the cases cited hereinabove (supra). Hence, the view taken by AO to allow loss of Rs. 43.78 crores while making assessment u/s 143(3) on account of derivative contract outstanding is not an erroneous view taken by AO, nor the action of AO is prejudicial to the interest of revenue. Hence, the order of Commissioner of Income Tax u/s 263 of the Act .to hold that the action of AO is erroneous to the extent the loss considered as ITA. No.7223/Mum/2011 7allowable on account of derivative contracts outstanding as on the date of balance sheet i.e. 31.3.2008 is neither justified nor in accordance with law.. Hence, we quash the said order of Id. Commissioner of Income Tax by allowing the grounds of appeal taken by the assessee." Hon'ble Hyderabad ITAT in the case of VST Industries Ltd. Vs. Additional CIT ,TA No: 647/HYD/2012) vide its order dated 23rd August, 2013 has held as under: "10. The Hon'ble Gujarat High Court in case of Friends and Friends Shipping Pvt. Ltd. (Tax Appeal No. 251 of 2010 dated 23....
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....the ld. departmental representative has supported the order of assessing officer and placed reliance on the decision of the ITAT Delhi in the case of Bechtel India (P) Ltd. V. ACIT 82 taxman.com 301 (Delhi). On the other hand, the ld. counsel has placed reliance on the decision of Cadila Pharmaceutical Ltd. 85 taxman.com 354 (Ahd.). The ld. counsel has also referred decision of ITAT Ahmedabad in the case of ACIT vs. Heavy Metal & Tubes Ltd. vide ITA No. 1951/Ahd/2011 and CO. No. 232/Ahd/2011 order dated 30-06-2014 and decision of Hon'ble Mumbai High Court in the case of CIT-16 Vs. D. Chetan & Co. (2016) 75 taxman.com 33 (Bombay) dated 1st October, 2016 5. We have heard the rival contentions and perused the material on record carefully. The assessing officer has disallowed the claim of deduction for loss arising from foreign exchange fluctuation in respect of a hedging contract to cover foreign exchange credit provided by ICIC Bank for payment for the purpose of imported raw material upon accounting of the outstanding hedging contract on market to marked basis at the end of the year. There was an outstanding liability in foreign currency towards import either to the suppliers or to ....
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.... of decision in the identical issue is reproduced as under:- "26. We have heard rival submissions. The assessee's case throughout has been that it had entered into a forex contract with the State j Bank of India on the basis of its foreign currency exposure in import/export transactions with public sector banks to cover fluctuation ! risk upto Rs. 200crores. One of the bank namely Bank of Baroda is stated to have issued a certificate dated 12.02.2015 claiming realization of Rs. 123,71,57,417/- which could be realized to the tune of Rs. 111,72,18,0927- as on 31.03.2011. Its SBI contract enabled it to book losses against the above unrealized bills. Lower authorities as well as learned Departmental Representative do not rebut this factual position. The assessee claims to have been inter alia recording its sales to overseas clients on the day of transaction in its books in Indian currency at the rate prevailing on the very day, it would lodge conversion claim upon payment of its consideration money by said customers, this currency settlement took time after lodgment to be realized resulting in fluctuation loss as is the case herein. We notice in this backdrop that hon'....
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.... the Act on transaction of sale of immovable property in the form of land. During the course of assessment, the assessing officer noticed that assessee has sold land situated at Manaspali village for a consideration of Rs. 1,07,50,000/- to 8 different vendors which resulted in profit of Rs. 49,35,280/-. The assessing officer has stated instead of offering the amount for tax under the head capital gain the amount was merged in the normal income. On query, the assessee explained that the profit being short term capital gain having same tax rate therefore it was not separately shown under the head capital gain. On verification of the sale deeds the assessing officer noticed that in some cases the value of sale consideration received was less than the fair market value. Consequently, after invoking the provision of section 50C of the act, the assessing officer has added an amount of Rs. 15 lacs to the total income of the assessee after estimating the total market value at the rate of Rs. 20 lacs per acre. 8. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee. The relevant part of the decision of ld. CIT(A) is as unde....
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....ailed opportunity under sub-section (2) of section 50C as to demonstrating that fair market value was less than stamp duty valuation, it was to be held that Assessing Officer had rightly invoked section 50C -Held, yes [In favour of revenue]" In the present case, appellant has also accepted valuation determined by Stamp Valuation officer nor made any objections as per provisions of section 50C(2) hence Assessing Officer was correct in adopting JANTRI Value as market value of property for the purpose of computing income from capital gain. The appellant has relied upon decision of Hon'ble Punjab & Haryana High court in the case of CIT V/s Chandni Gucchar wherein Assessing Officer has made addition for unexplained investments at the time of purchase by relying on JANTRI rate of purchase of land. However, in the present case, Assessing Officer has made addition invoking revisions of section 50C for sale value of land and it is settled legal law that such provisions do not apply in the hands of purchasers hence ratio of said decision is not applicable in present case. Even decision of Jurisdictional Ahmedabad ITAT relied upon by appellant was for the case of purchas....
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....nsidered the Assessment Order and submission filed by Appellant. The Assessing Officer has observed that appellant, has debited Rs. 19,04,502 being Software Charges paid towards purchase of license fee, customization and trading charges for new software purchased from them. The Assessing Officer referred to depreciation schedule and contended that computer including computer software is eligible for depreciation @ 60% hence after allowing depreciation on such software, Assessing Officer made net addition of Rs. 7,61,800. The appellant has argued that it has purchased application software and such technology is rapidly changes hence such software are not for enduing benefit and allowable as revenue expenditure. The appellant relied upon decision of CIT V/s Asahi India Safety Glass Limited (supra). On careful consideration of entire facts, it is held that appellant is entitled to depreciation @ 60% on computer and computer software from A.Y. 2003-2004. The depreciation chart as provided in Income Tax Rules does not make any distinction between application software or other software and clearly depicts that assessee is entitled to depreciation @ 60%. Even the decisio....
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....round of appeal of revenue is against the decision of ld. CIT(A) in deleting the disallowance of Rs. 2,14,40,000/- u/s. 40A(2) of the act. 15. The fact in brief is that the assessment u/s. 143(3) of the act was completed on 31st March, 2014. During the course of assessment, the assessing officer noticed from the audit report that assessee has made payment on account of Sauda settlement charges of Rs. 2,14,14,000/- to KTV Health Food Pvt. Ltd. who was specified u/s. 40A(2) of the act. On query, the assessee explained that it has entered into contract with KTV Health Food Pvt. Ltd. for sale of RBD palm oil on various dates and various quantities. However afterwards the assessee company could not take delivery of contracted quantity of RBD palm oil within the stipulated time schedule and requested for settlement. The assessee has further submitted that it has paid settlement charges below the price prevailing in the market hence it cannot be said to have been unjustifiable. The assessee has submitted copies of credit notes along with daily rates published by the solvent extractor association of India. The assessing officer has not accepted the submission of the assessee. He was of ....
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....ract for purchase of Palmolien from KTV Health Food Pvt limited at predetermined rate but appellant could not take delivery of contracted quantity as there was reduction in prices and settlement was made with said party at agreed rate and difference between contracted rate and settlement rate was claimed as loss in year under consideration. The tabular chart showing contract dale, contract rate, settlement price, settlement date and price as per SEA on settlement date as reproduced in assessment order as well as appellant's submission, clearly suggest that appellant has agreed upon settlement price which is lower than contract price but higher than price as per SEA which clearly suggest that appellant has settled the contract for minimizing the losses incurred in contract executed with above party. During the course of assessment proceedings, appellant has submitted Price as per SEA on settlement date and no adverse inference is drawn by Assessing Officer which clearly support the contention of appellant that settlement was agreed upon to reduce the losses incurred to execution of purchase contract. For better appreciation of facts and from tabular chart reproduced in assessmen....
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....paid taxes on above amount, there cannot be any intention to evade taxes as allegeged by Assessing Officer. The Hon'ble Supreme court in the case of CIT vs. 3laxo Smithkline (Asia) reported in 195 Taxman 35 has observed as under: The main issue which needed to be addressed was, whether Transfer Pricing Regulations should be limited to cross-border transactions or be extended to domestic transactions. In the case of domestic transactions the under-invoicing of sales and over-invoicing of expenses ordinarily wou!d be revenue neutrai in nature, except in the following two circumstances having tax arbitrage- (i)lf one of the related companies is a loss making company and the other is a profit making company and profit is shifted to the loss making concern; and (ii)lf there are different rates for two related units [on account of different status, areabased incentives, nature of activity, etc.] and if profit is diverted towards the unit on the lower side of the tax arbitrage. For example, sale of goods or services from non-SEZ area, [taxable division] to SEZ unit [non-taxable unit] at a price below the market price so that taxable division will ha....
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....ind any reason to interfere in the finding of ld. CIT(A). This ground of appeal of revenue is dismissed. 19. Ground No. 2 is against the decision of ld. CIT(A) in deleting the disallowance of Rs. 5,18,246/- u/s. 14A of the act. 20. During the course of hearing the ld. counsel at the outset has brought to our notice that no exempt income was earned by the assessee therefore following the decision of Hon'ble Jurisdictional High Court of Gujarat in the case of Corrtech Energy Pvt. Ltd. 372 ITR 97 no disallowance is to be made. Ld. departmental representative could not controvert this undisputed fact and finding of Hon'ble Gujarat High Court. Considering the same, we do not find any merit in the appeal of the revenue, therefore, the same is also dismissed. Cross Objection No. 211/Ahd/2015 filed by the assessee 21. Ground No. 1 of the cross objection is not pressed, therefore, the same is dismissed as not pressed. 22. Ground No. 2 of the cross objection is against the decision of ld. CIT(A) in upholding disallowance of Rs. 13 lacs claimed as bad debts written off on the ground that amount in question had been taken into income under the head capital gains in earlier as....
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....ct by Assessing Officer. It is pertinent to note that Rs. 75 lacs due from K.N resources was out of sale proceeds of DEPB income and as appellant has already offered above sales as income in earlier year and amount is written off in the year under consideration, same is allowable bad debt as per decision of Hon'ble Supreme court in the case of TRF limited. So far as bad debt pertaining to Rs. 13,00,000 on account of amount receivable on account of sale of property, it is observed that appellant has not proved that sales proceeds from property was offered to tax as business income whereas appellant itself has admitted that income is shown under the head " Capital gains" which means that loss arising on account of nonrecovery of sale proceeds would be capital loss for appellant and not business loss as claimed by appellant, thus, addition of Rs. 13,00,000 made by Assessing Officer is upheld." 24. During the course of appellate proceedings before us, the ld. counsel has contended that ld. CIT(A) is not justified in restricting the addition to the extent of Rs. 13 lacs on the ground that loss was of the nature of capital loss. It is further contended that if the loss....