TaxTMI 
TaxTMI 
2025 (6) TMI 792
X X X X Extracts X X X X
X X X X Extracts X X X X
....DIN & Order No.ITBA / NFAC / S / 250 / 2023-24 / 1062048589(1) dated 05.03.2024 Both the appeals filed by the assessee and Revenue are concerning same assessment year and hence for the purposes of convenience were heard together and are being adjudicated together. ITA No.1332/Chny/2024, Assessment Years - 2018-19 2.0 The first issue raised by the assessee through its grounds of appeal is regarding the violation of principles of natural justice stating that proper opportunity of being heard was not given. The Ld. Counsel for the assessee submitted that emails were sent on the email address of former employee and hence the non-compliance to the Ld. AO's notices was justified. 3.0 The Ld. DR placed reliance on the order of lower authorities. 4.0 We have heard rival submissions in the light of material available on records. The argument put forth by the assessee is not in conformity with facts on records. Apparently a case is made out that the show cause notices sent by the Ld.AO were inaccessible having been sent on the email Ids of ex-employees. At the outset, the argument per se is flawed because revenue is only bound to send notices to taxpayers on details provid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the case of Sutlej Cotton Company Limited 116 ITR 1 and Tata Locomotive and Engineering Company Limited 60 ITR 405. 6.0 The Ld. DR vehemently argued in favour of order of the Ld.AO and the action of Ld. CIT(A) in affirming it. 7.0 We have heard rival submissions in the light of material available on records. The principal issue seminal to the controversy is regarding treatment of impugned receipts as of capital in nature or are Revenue in nature. We have noted that the Ld.AO while making the addition, on page-3 of his order, observed that the assessee had failed to respond to opportunities given by him to explain the impugned transactions. The assessee had merely claimed that "as per the company the forex gain is not taxable income as it is capital in nature and not revenue". No detail explanation with any supporting documents were adduced in support of the said statement. We have also noted that the Ld. CIT(A) has discussed the issue extensively from pages 48 to 63 of his order comprehensively analysing the facts of the case in the light of judicial pronouncements relied upon by the assessee, inter-alia, including the decision of the Hon'ble Apex Court in the case of S....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ying capacity of the appellant-assessee to own such quantum of USD 60 million. That is why the contract was done for USD 60 million and not for USD 10 million or nor for USD 100 million. The rates of conversion between USD and INR along with contract conversion rate are given below... 1 USD = Rs. 65.9054 as on 29.03.2017 as taken from internet. 1 USD = Rs. 68.04 (mutually agreed price to be on 30.03.2018). 1 USD = Rs. 65.0795 as on 30.03.2018 as taken from internet. 7.4.4. There are three variables in FEFC between the two parties, viz., (i) cost of acquisition of hard currency (x), (ii) future agreed price of hard currency (y), and (iii) actual price of hard currency (z) on reaching the future date. For instance, the speculator agreed to buy 1 dollar at a price Rs. y and the seller (appellant in this case) agreed to sell at the same price Rs. y at a future date (say, after a year). Whereas the cost of acquisition of 1 dollar is Rs. x at current date. After completing the contract period of 1 year, let's say the market price of 1 dollar is Rs. z. Then the gain or loss is determined as follows... The....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e risks? Or are the exchange risks to be borne by both? Appellant's reply: 2.3.1 The appellant submits that there are no specific terms in loan agreement between the appellant and Singapore Company in regard to the exchange risks. The question is very straightforward. The appellant was asked to clarify if the exchange risks were to be borne by either the lender (i.e., the appellant) or the foreign borrower (IMOL, fully owned subsidiary) or to be borne by both. In response, the appellant has admitted that there are no specific terms in loan agreement between the appellant and IMOL (fully owned foreign subsidiary), which means that the loan repayment of USD 60 million is to be made by IMOL to the appellant with each party bearing the risk of conversion to/from USD. In other words, IMOL has to bear the risk of conversion from Singaporean dollar to USD with no impact on the appellant and at the same time, the appellant has to bear the risk of conversion from USD to INR with no impact on IMOL. So, in order to avoid the losses in Singaporean dollar, IMOL could have entered into hedging transaction with a speculator in Singapore. On the same lines the appellant enter....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... claimed as deduction in Total Income computation. That means the appellant treated the incidental charges as revenue in nature but the gain on FEFC as capital for I-T purposes. Why that contradiction? Because the appellant did not want to pay tax on gain on FEFC. Rightly the appellant claimed the gain on FEFC as revenue receipt as per Companies Act and also rightly claimed the incidental charges on FEFC as revenue expense as per Companies Act, but the appellant removed only the gain on FEFC from income in the total income computation but did not remove the incidental expenses from total income computation. Total income should not be computed so as to illegitimately give benefit to the assessee but should be computed as per the provisions of the I-T Act. It is a well-established principle if a transaction is capital in nature its associated expenses will also be capital in nature. But in the instant case the appellant claimed only the incidental expenses as deduction in Income Computation but treated the gain on FEFC as capital and removed it from taxation. 7.4.8. From this discussion it is crystal clear that the appellant-assessee itself admits that incidental charges are....
X X X X Extracts X X X X
X X X X Extracts X X X X
....oss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or toss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as a part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. " The losses/gains arising on revenue account will be an allowable deduction/taxable subject to the fulfilment of the condition that the underlying purpose for which the derivative contract is entered into in on revenue account and not on capital account. For example, loss from a forward exchange contract to hedge an export sale is an allowable deduction as it is on a revenue account. However, forward exchange contract to hedge a repayment of a loan for capital purposes may not be an allowable transaction as it is on a capital account. " 2.7.2.2 Hon'ble Supreme Court in the case of Tata Locomotive and Engineering Co. Ltd v. CIT 60 ITR 405 wherein it wa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tions raised and hence it kept quiet. The queries unanswered before the FAA cannot be taken up at higher appellate forum because the FAA loses the right of raising the supplementary queries emanating from its answers. Therefore, it is concluded that the gain on forex forward contract is taxable revenue in nature. The second sub-question is raised as under... Query 2.7(b). Nevertheless, please substantiate how and why "the loan transaction with Singapore subsidiary company" and "the forward contract with the speculator" are not different and separate. 7.4.12. Instead of answering this pin-pointed and specific query, the appellant quoted three case laws viz., (1) Hon'ble Supreme Court in the case of Sutlej Cotton Co, Ltd. vs. CIT [1979] 116 ITR 1, (2) Hon'ble Supreme Court in the case of Tata Locomotive and Engineering Co. Ltd vs CIT 60 ITR 405 and (3) Hon'ble Gujarat High court in the case of Garden Silk Mills vs DCIT 320 ITR 720. 7.4.13. Let's analyse these 3 case laws and see if they are applicable to the facts of the case. (1) Hon'ble Supreme Court in the case of Sutlej Cotton Co Ltd. vs. CIT [1979] 116 ITR 1: "The ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s. 68.04 - Rs. 65.9054 = Rs. 2.1346. Thus it is clear that the appellant-assessee earned forex hedging gain of Rs. 2.1346 per USD through the force of FEFC rather than incurring capital loss of Rs. 0.8259 per USD. Hence it is clearly demonstrated that the case law relied on by the appellant assessee is not applicable to the facts of the case on hand since there was no FEFC in the case of Sutlej Cotton Co Ltd. (2) The appellant also relied on Hon'ble Supreme Court in the case of Tata Locomotive and Engineering Co. Ltd vs CIT 60 ITR 405: "If the act of keeping the money for capital purposes was part of or a trading transaction then any trading transaction then assessment year profit that would accrue would be revenue receipt; if it was not part of or a trading transaction then the profit made would be a capital profit and not taxable." FAA's analysis: The explanation given by the undersigned in the case of Sutlej Corporation Case law in the preceding paragraphs is squarely applicable to this case law also since there is no Foreign Exchange Forward Contract for hedging the foreign currency against the future fluctuations. Hence this....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sured or whether the USD to INR conversion was only hedged/insured? If it is the case of hedging of USD to INR conversion, then please explain how the quantum of loan principal amount in dollars as repayable by the borrower gets affected with the fluctuations in conversion between USD and INR, because the principal quantum of loan in USD should remain the same as per the loan agreement between both the parties. This specific query was posed to the appellant expecting an obvious reply from the appellant stating that only the risk of USD to INR conversion was hedged with the third party. However, the appellant did not reply. Based on the obvious reply the transaction of currency conversion can be delinked from the foreign currency loan transaction. With that delinking, it becomes clear that transaction on FEFC has no linkage to the foreign currency loan transaction and hence both the transactions are independent and separate from each other. In view of this, the gain on FEFC cannot be treated on par with loan transaction and hence it is held to be taxable revenue in nature. 7.4.15. There was a last query on this subject of forex gain in notice u/s. 250 date....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of exchange of currency. 43A. Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency (as compared to the liability existing at the time of acquisition of the asset) at the time of making payment- (a) towards the whole or a part of the cost of the asset; or (b) towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any, the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making the payment, irrespective of the method of accounting adopted by the assessee, shall be added to, or, as the case may be, deducted from- (i) the actual....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ent Act, 1999 (42 of 1999), for providing him with a specified sum in a foreign currency on or after a stipulated future date at the rate of exchange specified in the contract to enable him to meet the whole or any part of the liability aforesaid, the amount, if any, to be added to, or deducted from, the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset under this section shall, in respect of so much of the sum specified in the contract as is available for discharging the liability aforesaid, be computed with reference to the rate of exchange specified therein.] 7.5.2. Whereas Sec.43AA talks about all other situations of foreign exchange fluctuation and its taxation. This section was inserted by the Finance Act, 2018, w.r.e.f. 1-4-2017 i.e., making it applicable from AY 2017-18 onwards. The AY concerned in the instant case is AY 2018-19 and therefore Sec.43AA is applicable to the case of the appellant-assessee. Section - 43AA, Income-tax Act, 1961 - FA, 2018 [Taxation of foreign exchange fluctuation. 43AA. (1) Subject to the provisions of section 43A, any....
X X X X Extracts X X X X
X X X X Extracts X X X X
....revious year. Besides the foregoing discussion prior to Sec.43AA in this Order, gain on forex forward contract is held to be taxable revenue. 7.6. Hon'ble Supreme Court in the case of PCIT v. Bangalore International Airport Ltd reported in [2023] 154 taxmann.com 395/294 Taxman 590 (SC) held that in case of assesse availing external commercial borrowing from international financiers to produce capital assets, fluctuation in rates of foreign exchange can result in either a gain or a loss because of value of currency which appreciates or depreciates on date of computation namely 31st March of relevant accounting year, thus, adjustment on account of foreign exchange rate fluctuation is required to be made to actual cost at end of every year after amendment to section 43A with effect from 1-4-2003 and gain arising on account of exchange fluctuation is not liable to tax as it is on capital account. This case law is about external commercial borrowing for the purpose of acquiring capital asset. The Hon'ble Supreme Court held that foreign exchange rate fluctuation should be adjusted to the actual cost of the asset and thus less depreciation is claimable by the ass....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the transaction entered by the assessee would fall in the nature of revenue receipt. We are therefore of the considered view that there is no case for any interference to the order of the Ld.CIT(A) at this stage. Accordingly, all the grounds of appeal raised by the assessee on this issue are dismissed. 10.0 The next issued raised by the assessee through its grounds appeal is regarding the action of the Ld.AO in making an addition of Rs. 80,85,51,659/- on account of disallowance of finance costs claimed under IGAAP and its affirmation by the Ld. First Appellate Authority. The Ld.AO has discussed the impugned addition on page 4 of his order. The addition was primarily made in view of non-submission of any reply by the assessee. The Ld. Counsel for the assessee submitted that while computing the total income, the Appellant had claimed interest computed in accordance with the ICDS-IX of INR 1,051,86,98,488 and accordingly disallowed the interest debited to P&L a/c of INR 971,01,46,829 which is as per IND AS. Thus the Appellant assessee had reportedly claimed INR 1051,86,98,488 as deduction and offered INR 971,01,46,829 as disallowance for the purpose of computing the total income u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ds of appeal raised against this issues are allowed for statistical purposes. 13.0 The next issue raised by the assessee is regarding the addition made by the Ld.AO of Rs. 38,04,30,000/- on account of notional gains on derecognition of financial liabilities and its confirmation by the Ld.CIT(A). We have noted that the Ld.AO while making the addition, on page-4 of his order, observed that the assessee had failed to respond to opportunities given by him to explain the impugned transactions. No detailed explanation with any supporting documents were adduced in support thereof. We have also noted that the Ld. CIT(A) has discussed the issue extensively from pages 72 to 76 of his order comprehensively analyzing the facts of the case. The Ld. Counsel of the assessee submitted that the appellant has entered into an onshore works and service contract dated December 22, 2010, with one Shandong Tiejun Electric Power Engineering Co Ltd (Teijun) for Construction, erection and pre-commissioning, commissioning of a thermal power plant. As per understanding the appellant had a right to retain 10% of the amounts of each invoice and proportionately release/repay them on the completion date of suc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....go any benefit in favour of the appellant by dint of extinguishment of appellant's liability towards the other party. Therefore, I am of the view that the benefit received by the appellant through derecognition of liability due to extinguishment of liability is a benefit u/s. 28(iv) of I-T Act and should be taxed accordingly. Hence the ground of appeal on this issue is rejected and accordingly dismissed...." 16.0 Thus we have noted that there is an issue of non-submission of requested details by the assessee leading to drawing of adverse conclusions by the Ld. First Appellate Authority. The reliance by the assessee to the decisions of this Hon'ble Tribunal would be relevant only when the facts are identical. In the instant case, full facts have not been brought on record by the assessee. Be that as it may be we deem it fit to restore this issue to the file of the Ld.CIT(A) for readjudication de novo, in accordance with law, after according due opportunity of being heard. The assessee shall be bounden to comply with statutory notices. In the event of any non-compliance adverse view may be taken against the assessee. All the grounds of appeal raised by the assessee against....
X X X X Extracts X X X X
X X X X Extracts X X X X
....T v. Chettinad Logistics (P) Ltd., [2017] 80 taxmann.com 221 and Redington (India) Ltd., v. Addl.CIT, [2017] 77 taxmann.com 257/392 ITR 633 (Madras) and held as under:- 6. As regards to issue of disallowance u/s. 14A, the appellant before me has submitted that no dividend income is earned during the assessment year under consideration, and therefore no disallowance u/s. 14A can be made. The appellant has relied on the judgement of Jurisdictional High Courtin the case of Redington (India) Ltd. (2017) 77 taxman. Com 257 (Madras) in support of the ground taken against the said disallowance. The assessing officer has computed the disallowance u/s. 14A at Rs. 1,84,57,282 in accordance with rule 8D of I.T. Rules. 7. Matter is considered. This issue is covered in favour of the appellant by the judgement of Apex Court in the case of Chettinad Logistics (P) Ltd. (2019) 95 taxmann.com 250(SC) whereby the judgement of Hon'ble Madras High Court in the same case in (2017) 80 taxmann.com 221 (Madras) has been upheld by dismissing the SLP filed by the Revenue on the ground of delay as well as merits. Now the law is if the appellant did not earn any exempt income like dividen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m the order of the Ld.CIT(A) and dismiss all the grounds of appeal raised by the Revenue on the issue of liquidated damages. 25.0 Another issue raised by the Revenue through its grounds of appeal is regarding the addition made by the Ld.AO on account of closing stock of Rs. 362,47,21,715/- and its deletion by the Ld. CIT(A). The Ld. AO has made the impugned addition. As per para 8 of his order, the Ld. AO had made the impugned addition since assessee had failed to offering detailed explanation. The Ld.AO proceeded to treat the non- submission as assessee's non-objection to the disallowance of Rs. 362,47,21,715/-. Before the Ld.CIT(A) the assessee had submitted that the Ld.AO had failed to correctly understand the accounting principles. The Ld. CIT(A) relied upon the argument of the assessee that the closing stock figures were reported net of material consumed, as per the ITR figures and that there was no case for making an addition. He relied upon the arguments of the assessee that closing stock were shown by reducing the value of closing stock from the opening stock and purchases. The Ld. Counsel for the assessee argued in favour of the order of Ld.CIT(A). 26.0 The Ld.DR....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r of Income Tax and Additional Commissioner of Income Tax as well as the Ld.AO. It is intriguing and thoroughly in-comprehensible as to why and how all these authorities miserably failed in discharge of their duties. We have come across cases where the Revenue has contested orders of First appellate Authority for violation of principles of natural justice in as much as Rule 46A was not adhered and adequate opportunity of being heard was denied to the Ld.AO. The present case is classical case where the First Appellate Authority chose to give the Ld.AO an opportunity to defend his order and there was no response from the Ld.AO. Strangely all the respective supervisory authorities also did not rise to the occasion of coming in support of a reasonably senior Revenue authority, i.e, CIT(A) 28.1 We have been compelled to consider this issue as we have noted that the issue of non-submission of remand report from the Ld.AO to the Ld. First Appellate Authority is not an exception but is becoming a rule. The obdurate recalcitrance is on the increase for reasons better known to the assessing officers. In another case heard by undersigned, being Revenue's appeal in ITA No.1762, the Ld.C....