TMI Blog2022 (7) TMI 1321X X X X Extracts X X X X X X X X Extracts X X X X ..... paid off accordingly the net liability for such hedging had been provided in the books of account as foreign exchange hedging loss and claimed as a revenue expenditure. In our opinion the derivative transaction entered into with the bank for the purpose of securing expected business loss arising out of foreign exchange fluctuation cannot not termed as speculative since the same is particularly carried out to safeguard expected business loss. In the present case the assessee during the course of its regular business entered into derivative contract for the purpose of hedging its business loss arising out of exchange fluctuation in its day to day business activity and there was no element of speculation involved. No derivative contract could be entered into without underlying assets. A derivative means a financial instrument whose value changes in response to change in a specific interest rate, security price, commodity price, foreign exchange rate, index of price or rates, a credit rating or credit index which requires no initial net investment or little net investment relative to other types of contract that have a similar response to changes in market condition and it is set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO was not justified. Similar issue having identical facts was a subject matter of the assesse s appeal for the preceding assessment year 2010-11 [ 2019 (7) TMI 1601 - ITAT CHANDIGARH] direct the AO to verify the calculation made by the assessee vis a vis the calculation made in the earlier year which were accepted by the ITAT and restrict the disallowance accordingly to Rs. 4,39,093/- and since the assessee had already disallowed a sum of Rs. 66,419/- under section 14A(1) of the Act, the said amount is to be reduced and the remaining amount may only be disallowed. Disallowance of the interest paid on working capital loan and long term loan - HELD THAT:- As noticed various Courts in the case of Hero Cycles (P) Ltd. [ 2015 (11) TMI 1314 - SUPREME COURT] , Bright Enterprises Pvt. Ltd.[ 2015 (11) TMI 342 - PUNJAB HARYANA HIGH COURT] held that no disallowance of interest is called for where the assessee has got sufficient own funds. The Assessing Officer is directed to go through the fund position namely capital and interest free advances, reserves and surplus to determine whether any borrowed funds have been utilized more than available own funds and take a decision keep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese Cross Appeals by the different Assesses and Department are directed against the separate order each dated 18/12/2014 of the Ld. CIT(A)-3, Ludhiana. 2. Since the issues involved are common and the appeals were heard together, so these are being disposed off by this consolidated order for the sake of convenience and brevity. 3. At the first instance, we will deal with the appeal in ITA No. 153/Chd/2015 relating to M/s Oswal Woolen Mills Ltd. for the A.Y. 2011-12. 4. Following grounds have been raised by the assessee in this appeal: 1. That the worthy CIT(A)-3, Ludhiana erred in law and on facts in upholding the addition of Rs. 13,32,96,175/- being the amount of foreign exchange hedging loss incurred during the course of appellant's regular business by treating the same as speculative transaction. Direction may be given to allow the said loss as business loss. Without prejudice and in alternative, directions be given to Assessing Officer to carry forward the unabsorbed loss of this year under derivative transactions to the subsequent year. 2. a. That the worthy CIT(A)-3, Ludhiana erred in law and on facts in upholding the disallowance of Rs. 1,32,24,640/- u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated by the assessing officer. 4. That the worthy CIT(A)-3, Ludhiana erred in law and on facts in not deleting the whole addition of Rs.2632429/- made by assessing officer under proviso to section 36(i)(iii) on account of borrowed amount utilized from mixed funds from C.C A/c for purchase of fixed assets. Directions be given to delete the total addition sustained by worthy CIT (A) -3 made out of interest paid to bank on C.C. A/c for working capital which was actually utilized for the said specific purpose.. 5. That the appellant craves, leave to add, amend, alter, modify or substitute all or any of the above mentioned Ground of appeal before the appeal is finally heard and disposed off. 5. Vide Ground No. 1 the grievance of the assessee relates to the sustenance of addition of Rs. 13,32,96,175/- made by the AO on account of foreign exchange hedging loss incurred during the course of regular business by treating the same as speculative transaction. 6. The facts relating to this issue in brief are that the assessee was engaged in the manufacturing and export of cotton /blended yarn and manufacturing of hosiery garments. The assessee also had a wholly owned subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a chart. Produce documentary evidence in support of your claims. 6.2 In response the assessee submitted as under: The complete detail of foreign exchange difference of Rs, 4.25 Crore is enclosed as annexure - 4. The net amount of foreign exchange difference pertains to booking of foreign currency in the course of its regular business. The Company booked foreign exchange against import commitments and export obligations. This is a necessary business expenditure and may be allowed. The company has not followed AS-11, had the company followed the accounting standard with regard to foreign exchange rates, the net profit before Tax would have been lower by Rs. 49 Lacs approx. This has been clarified in notes on accounts at item No. C(iv) on page 24 of the Printed Balance Sheet. The-company has been adjusting foreign currency exchange rate difference to the fixed assets which pertains to the purchase of fixed assets. 6.3 The AO again asked the assessee vide notice under section 142(1) of the Act dated 18/12/2013, the following questions: '11. From the computation of income is has been observed that an amount of Rs. 12,53,86,979/- has been reduced from the total inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relatable to the business. iii) The loss has crystallized and finally ascertained during the year, therefore, the same may be allowed as claimed in the return. 6.8 The AO mentioned in para 3.8 and 3.8.1 of the assessment order dt. 21/03/2014 that the issue relating to mark to market had been clarified by instruction no. 3/2010 of 23/03/2010 and that the speculative transaction is defined by section 43(5) of the Act, for the cost of repetition these are not reproduced herein. The AO after considering the submissions of the assessee observed that the loss claimed by the asessee was as a result of agreement with ICICI Bank and the assessee had incurred loss as per following details : Murex strategy Deal date Deal type Maturity Date Outstanding (Rs.Millions) Initial Credit in account -0.15 MX03943 10-Aug-07 INR to CHF POS 14-may-08 -1.47 MX03943 10-Aug-07 INR to CHF ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er and that therefore the matter required to be expeditiously resolved. We have agreed to pay to you (lump sum amount of Rs. 15,43,90,000/- (Rupees Fifteen Crores Forty Lacs Ninety Thousand only) which amount you have agreed to accept, in full and final settlement of all your claims in all the derivatives transactions entered between the company and your bank under ISDA Agreement executed on 17.03.2007. On realization of the said amount of Rs. 15,43,90,000/-(Rupees Fifteen Crores Forty Lacs Ninety Thousand only) vide cheque No. 572624 dated 29.06.2010 your bank's entire claim with respect to dues under ISDA Agreement and transactions executed there under shall stand satisfied. We also confirm 'that in view of the settlement having been arrived at as aforesaid we shall withdraw suit No.83 of 2008. filed on/or around 03/04/2008 ( Oswal Woolen Mills Lid. Vs.- ICICI Bank Ltd.) any other proceedings initiated against the bank pending in the court of the Hon'ble Civil Judge Junior Division, Ludhiana or'any other forum. Pursuant to which you will forthwith withdraw the Original Application No.225 of 2008 and 153 of 2009 as well as subsequent misc. applications fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o observed that there was a dispute between the assessee and the ICICI Bank Ltd. in the court of law, therefore the claim that the loss pertained to the year under consideration was also factually incorrect. The reliance was placed on the judgment of the ITAT Mumbai Bench in the case of M/s S. Vinodkumar Diamond Pvt. Ltd. Vs. Addl. CIT Range 5(3), Mumbai in ITA No. 506/Mum/2013 order dt. 03/05/2013. 6.12 The AO observed that the assessee had not fulfilled the conditions as laid down by the ITAT, Mumbai Bench in the aforesaid referred to order, therefore, the provisions of section 43(5)(a) of the Act were not applicable in the case of the assessee and that the assessee could not demonstrate how the transactions were not speculative transaction and were directly linked with the business. The AO treated the loss incurred by the assesee as speculative in nature by observing as under: 3.11 In view of the discussion made above, facts of the case and case law cited it is clear that the loss incurred by the assessee is speculative in nature. The fact is evident from the following:- I. The loss is on account of exchange rate difference in currency transactions. II. The loss has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted that the case laws relied by the assessee were not applicable and were distinguishable on facts. The Ld. CIT(A) provided the copy of the AO s report to the assessee for the comments, in response the assessee furnished the written submissions dt. 17/11/2014 and stated that the assessee company during the course of business entered into derivative transaction for the purposes of hedging its business loss arising out of foreign exchange fluctuation or interest fluctuation in its day to day business activities and there was no element of speculation involved in this case. The Ld. CIT(A) after considering the submissions of the assessee observed that the following facts emerged in the assessee s case : (i) The appellant is carrying on the business of manufacturing of yarn, grey processed fabrics and white crystal sugar etc. (ii) During the F.Y. 2005-06, the appellant company had raised money from investors through FCCB (Foreign Currency Convertible Bond) for company's business. (iii) This FCCB instrument had provided the option to the investors to convert the amount covered by FCCB into equity shares of the company at a fixed price or alternately retain FCCB so as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (ii) A contract in respect of stocks and shares entered into by a dealer or investor to guard against loss in his holding of stocks and shares through price fluctuations. (iii) A contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member. (iv) An eligible transaction carried out in respect of trading in derivatives in a recognised stock exchange. 8.2 The Ld. CIT(A) was of the view that if the contract was settled otherwise than by actual delivery, then it would be a speculative transaction notwithstanding that the nature of the commodity was not one lending itself the possibilities of speculation or that the intention of the parties at the time when the contracts were entered into might have been to take actual delivery but this intention could not be effectuated for one reason or the other. The reference was made to the following case laws: (i) Juvvi Subbaramaiah Co. v. CIT (1964) 51 ITR 742 (AP), (ii) Hoosen Kasam Dada (India) Ltd. v. CIT (1964) ITR 171 (Cal) (iii) Abdul Gani Haji Hab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f currency could not be done from Indian rupees to Swiss Frank or from U.S. Dollar to Swiss Frank etc. 8.6 As regards to the another claim of the assessee that the provisions of section 43(5) of the Act were not applicable in the assessee s case as currency was not a commodity as referred to section 43(5) of the Act for the reason that it had not been defined in the Act and currency was not a commodity. The Ld. CIT(A) observed that there was no intention of the legislature to exclude the foreign exchange transactions not involving actual delivery out of the preview of section 43(5) of the Act, a reference was made to Notification No. 46/2009 dt. 22/05/2009 vide which MCS Stock Exchange Limited had been notified as a recognized stock exchange for the purpose of clause (ii) of Explanation to clause (d) of the proviso to sub-section (5) of section 43 and that the provision of transactions in foreign exchange not involving actual delivery were covered by the section 43(5) of the Act. The reliance as placed on the following decisions of ITAT, Mumbai Bench : S.Vinodkumar Diamonds Pvt. Ltd., vs. Addl. CIT, Mumbai in ITA No. 506/Mom/2013 vide order dt. 03/05/2013 Araska Diamon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 99,56,40,721/- 2008-09 97,37,99,631/- 2009-10 84,48,31,610/- 2010-11 1,00,63,87,312/- 2011-12 1,58,36,81,214/- 10.1 It was stated that the assessee was not carrying on any trading activity of foreign exchange either in India or outside India for the assessment year under consideration namely A.Y. 2011-12, either before thereto since its incorporation and / or thereafter till date it had actually not carried out any trading activity of foreign exchange either in India or outside India dehors the object clause contained in the Momorandum and Article of Association. It was further stated that the assessee during the year under consideration claimed Rs. 13,32,96,175/-(Rs. 79,09,196 debited in P L A/c Rs. 12,53,86,979/- shown as disputed liability in Balance Sheet) as foreign exchange hedging loss in the computation of taxable income, the said amount was claimed as revenue expenditure. It was further stated that the AO during the proceeding under section 143(3) of the Act required the assessee to furnish the workin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability had arisen during the course of business in the year under consideration; therefore, the amount was claimed as a revenue expenditure. 10.2 The Ld. Counsel for the assessee submitted that the Ld. CIT(A) as well as the AO misdirected themselves in law as well as on facts in holding that the transactions relating to foreign exchange could not be held to be hedging transaction, and furnished the submissions in writing which is reproduced verbatim as under: a) The findings recorded by the CIT(A) that the transactions relating to foreign exchange were not hedging transactions in the absence of the essential prerequisite that the transaction is in respect of goods manufactured and/or sold by the appellant, is not correct in view of the admitted factual position emerging from the material on record namely, that the transaction for hedging business loss if caused as a result of fluctuation in the foreign currency as a matter of business preposition had a direct nexus between the derivative product and the business activity namely import of goods for manufacturing activity by the assessee company and selling of goods and augmentation of the same for its utilization for said b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tive as such a transaction is not in respect of goods manufactured and/or sold and the assessee is not dealing in foreign currency, is not tenable in law both on principle and precedent. The judgments relied upon by the CIT(A) while holding that the transactions in foreign exchange on account of financial liability were not hedging transaction and fell within the purview of Section 43(5) of the Act are not at all applicable to the case of the assessee leave alone an answer to the preposition that hedging transaction of financial liability is not a speculative transaction and/or an assessee engaged in the business of manufacturing entering into a transaction of hedging its liability cannot be said to be a speculative business and/or a speculative transaction so as to invite the applicability of the provisions of Section 28 read with Section 43(5) of the Act. The assessee in view of its Board's resolution and copy of ISDA master agreement establishing that the transaction relating to foreign exchange were hedging transactions discharged its burden and in the circumstances namely, when the assessee was not engaged in the trading of foreign currency, no evidence has been brought ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered by the provisions of Section 43(5) of the Act. It is submitted that when admittedly the assessee is not a dealer in foreign exchange, and the transaction was entered with the Bank to cover the financial liability against import export business, the provisions of Section 43(5) of the Act did not apply to the case of the assessee as the prerequisite condition for invocation of the said provision namely, that there should be a transaction of purchase and sale of any commodity including stocks and shares, which is periodically and untimely settled otherwise than by actual delivery or transfer of commodity; and on a true and correct interpretation of the word commodity especially in the absence of the said word not having been defined under the Act and in view of the succeeding words 'stocks and shares' would not include a transaction of 'foreign currency' Foreign exchange i.e currency is the price to be paid in the terms of any contract for the purchase or sale of any commodity but would not be a commodity.More over during the Asstt proceedings no enquiry was made from the bank by Assessing officer u/s 133(6) or 133 of the act to constraint the stand of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 43(5) of the Act. The Ld. CIT(A) also sustained the view of the AO and held that the transactions relating to foreign exchange were not hedging transaction. In the present case the assessee on the suggestion of the ICICI Bank and to cover up the expected loss on fluctuation of foreign exchange and the liability incurred during the course of regular business hedged the liability as permitted under FEMA and RBI Act through derivative contract. The assessee obtained the approval of the Board of Directors vide resolution dt. 12/09/2006 copy of which was placed before the AO during the course of assessment proceedings and the same is placed at page no. 33 of the assessee s paper book. As per the claim of the assessee, the foreign exchange market started fluctuation in a very unusual and unexpected manner, thus the liability for hedging, the contract entered by the assessee with the ICICI Bank in the normal course of business started generating heavy liability on account of unexpected fluctuation in foreign exchange in global market and the hedging contracts were abandoned by the assessee, whatever the liability arose for the purpose of hedging, the assessee chose to pay off and the net ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced that the assessee furnished the submission dt. 17/11/2014 before the Ld. CIT(A) copy of which is placed at page no. 34 to 37 of the assessee s compilation, on the issue that foreign currency transactions were made to hedge the financial liability related to normal business of goods imported for the manufacturing of sale and export of goods. In the instant case the liability for the hedging contract entered by the assessee with the bank claimed to be in normal course of business started generating heavy liability on account of unexplained fluctuation in the foreign exchange in global market, therefore, the hedging contract were abandoned by the assessee and whatever the liability arose was paid off accordingly the net liability for such hedging had been provided in the books of account as foreign exchange hedging loss and claimed as a revenue expenditure. In our opinion the derivative transaction entered into with the bank for the purpose of securing expected business loss arising out of foreign exchange fluctuation cannot not termed as speculative since the same is particularly carried out to safeguard expected business loss. 13.3 In the present case the assesse during the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issions and perused the material on record. The forward contracts were entered into mainly to hedge the import payments and working capital loans repayment which is in the ordinary course of trade or business of the assessee. The hedging contracts are in the nature of foreign exchange contract to purchase foreign exchange on a specified future date at a predetermined date. The bankers levied premium for entering into such forward contract. These are in the nature of actual charges levied by the bankers. It is nothing but bank charges which is purely revenue in nature. The said expenditure is incurred to secure the assessee s business from foreign exchange fluctuation risk. In case the assessee would not have taken the forward contract to cover itself from fluctuation risk, it can lead to making higher payment of imports and incurring huge losses, which could result in lesser profit. The Hon ble Calcutta High Court in the case of CIT v. Britannia Industries Ltd. reported in [2015] 376 ITR 299 (Calcutta) had held that consideration paid by the assessee to the authorized dealer of foreign exchange, which is the bank in this case, in order to obtain protection from fluctuation of fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commerce. Commodities include agricultural products, fuels, metals, etc., and are traded in bulk on a commodity exchange or on spot market. 5.10 The Delhi Bench of ITAT in the case of Munjal Showa Ltd. v. DCIT, has held as under: Foreign currency or any 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. S. 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. In fact, prior to the LERMS, residents in India were not even permitted to cancel forward contracts. The presumption of any speculative transaction is, therefore, directly rebutted in view of the legal impossibility and in view of the fact that foreign currency was neither commodity nor shares. 5.11 Based on the above, foreign currency does not fall within the purview of the term commodity and hence this characteristic of a speculative tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee and we ourselves do not subscribe to the reasons given by the AO for the simple reason that the assessee being an export of goods to Japan Company had entered into hedging transactions with State Bank of India by entering into Forex derivatives to minimize possible loss in fluctuation in USD, because the Japanese Companies agreed to make the payments through their Chinese Intermediaries by USD. Further, during the year under consideration, the assessee achieved an export turnover of Rs.50.53 Crs. which is much more than the amount of derivative contracts entered into by the assessee with State Bank of India. We further noted that when the assessee enters into a hedging transaction to minimize the possible loss from fluctuation in foreign currency, then profit or loss arises on account of appreciation or depreciation in the value of foreign currency held by it on conversion into another currency, such profit or loss would ordinarily be a 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, if the underline asset is more than the amount of forward contracts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... scounting limits. Latter on we submit the documents for collection/discount against this dollar booking contracts. Firstly we only sales the dollars and never purchase dollars. After dollar booking we give sales documents for collection/discount. Before the expiry of the contract if we cannot submit the documents then the unutilized part of contract is settled by the bank. Thus the forward contracts done by us are only one sided and only for the purpose of hedging and not the purpose of doing any speculative gain or loss. Thus if we book dollar for latter period then we get more rate i e. we get premium as per RBI Banking premium rules. Similarly if we give the documents against future period of booking then the bank get back the premium of the same and this charges they debit to our account under the head of Forward Contract early delivery charges. Thus the forward contract early delivery charges paid by us are just return back of excess premium which we get at the time of booking of dollar. This amount is not at all speculative but it is routine practice and part and partial of the banking and export business transactions. Though in spite of the same the AO term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he above contention of the Id. AR. It is also seen that the issue is now squarely covered by the decision of the Hon. Gujarat High Court in the case of CIT v. Panchmahal Steel Ltd. where it relied upon its own decision in the case of Friends and Friends Shipping (R) Ltd., wherein it was held that though the assessee is not a dealer in foreign exchange, it entered into forward contracts with banks for the purpose of hedging the loss due to fluctuation in foreign exchange while implementing the export contracts. The transactions in foreign exchanges were incidental to the assessee's regular course of business and the loss was thus not a speculative loss under section 43(5) but was incidental to the assessee's business and allowable as such. Thus, the hedging of currency is incidental to the appellant's business and the same is therefore held as allowable business expenditure. The disallowance made by the AO is therefore directed to be deleted. Thus, from the above it appears that it is specific observation made by the Ld. CIT(A) that though the assessee is not a dealer in foreign exchange it had entered into forward contracts with banks for the purpose of hedging the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gn currency derivatives. Section 45 of the Reserve Bank India Act, 1949 defines derivative as a financial instrument whose value depends on the value of the underlying exposures. In the case before us, the underlying exposure is the foreign currency. The commonly used forex derivatives are Forward contracts, Options contracts and Swap contracts. These instruments are used to hedge the currency risk on account of adverse currency movements. In the present case before us, the assessee has selected to book Options Contract as per the advice of its bankers in order to hedge its foreign exchange risk. Options contract is a right to exercise the option of buying or selling of a foreign currency at a particular price. However, the assessee is not compelled to buy or sell, if the spot market prices are favorable or not favorable. The cost of this option is called Option Premium . Upon the payment of the same, the exporter is hedged against adverse currency movement and also not liable to loose in case of favorable currency movement. Therefore, it is apparent in the case of the assessee that the assessee had entered into Options Contract (derivative) with the bank in order to hedge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect them from foreign exchange exposure by using their expertise and these services cannot be obtained by the assessee in the stock exchange where their scope of service is very limited. (ix) In the present case the assessee has taken a hedging position to the extent of ₹ 1.05 crores and USD ₹ 3 crores during the period 2007-2009 based on the RBI guidelines. The guidelines permitted hedging to the extent of last three years annual average turnover, or current year s actual export turnover whichever is higher. Where exact amount of underline transaction was not ascertainable according to RBI guidelines, the contracts could be booked on the basis of reasonable estimate. The assessee has taken its hedging position in accordance with the guidelines of RBI and the same is not disputed. (x) The claim of the assessee was that the underlying exposure both in respect of Euro and USD is more than adequate to cover the hedging positions taken in respect of cross currency derivative contracts entered into by the assessee. The Revenue has not brought out any material on record to controvert to this claim of the assessee. (xi) Since the assessee has entered into foreign curr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value of an underlying commodity. It is used as medium of exchange for goods and services. The currency value of one country with another country fluctuates according to the economic factors prevalent in those countries. Therefore holding foreign currency is placing reliance on the economic factors prevalent in that country and Stock/Shares is placing reliance in the economic strength and business policies of the company. Section 43(5) of the Act defines speculative transactions as under:- Section 43 (Relevant provisions are highlighted herein below) (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 scrips: 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 merchanting 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts provided under the Act when traded through recognized stock exchange. 9. Now the question is whether to treat the foreign currency derivatives as commodities, or stocks and shares. If it is treated as commodities, Section 43(5)(a) of the Act comes to the rescue of the assessee because in the present case, the assessee is a manufacturer and exporter of garments and the assessee has entered into foreign currency derivative transactions to guard against future currency fluctuations which has a close proximity to the business of the assessee. On the other hand, if it is treated as stock /shares, such transactions will not be treated as speculative transactions if the transaction is carried out through a recognized stock exchange. The argument of the Revenue is that, if the transactions are made though banking sectors, then the same will fall within the scope of speculative transactions. This argument appears to be absurd and illogical because both Recognized Stock Exchange and Nationalized Banks are either Government regulatory body or extended arm of the Government. Further the characteristic of the currency and stock/shares are not the same and therefore, currency cannot be hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese transactions, the assessee had to enter into foreign exchange contract in order to cover up these transactions. In those foreign exchange contracts, if any loss occurred then such loss was a loss referable to and related to the business carried on and arising out of the business of the assessee. Here there is no finding that entering into foreign exchange contract was the nature of the business operation for the export and import of the goods by the assessee. The assessee was not a dealer in foreign exchange contract as such. Here in this case, the contract was for a full amount and what the assessee paid in fulfillment of the obligation which was an implied term at the time of entering into the contract did not amount to breach of contract. The breach of contract did not come within the meaning of contract settled as used in Expln.2 of s.24(1) of IT Act, 1922, contract settled meant contract settled before breach. Where the money which the assessee paid was in settlement of the amount of damages suffered by the assessee by reason of breach of the contract to delivery, it is to be held that the payment was not a loss from a speculative transaction as defined in Expln.2 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e treated as stock or shares because inherently they have different characteristic. Further, in the case of the assessees, the foreign exchange exposure for the relevant period specified by R.B.I regulations is quiet substantial in order to justify the forex derivative transactions made by the assessee through Government recognized channel, otherwise the RBI would not have entertained these transactions and would have restrained the banks from entering into such transaction with its clients. Thus considering the totality of the facts and circumstance of the case and the decisions relied upon herein above, we allow the grounds raised by the assessee s on this issue for all the three appeals in favour of the assessee and accordingly we hereby direct the Revenue to set off of the losses incurred by the assessee on account of forex derivatives contracts against the business income of the assessee. Thus, the ground raised in the assessee M/s.SCM Garments Pvt Ltd in ITA Nos.1645/13 2275/Mds./2014 for the assessment years 2009-10 2010-11 and the first ground raised by the assessee M/s.Gajaananda Jewellery Maart Pvt Ltd. in ITA No.1646/Mds./2013 for the assessment year 2009-10 are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia by entering into Forex derivatives to minimize possible loss in fluctuation in USD, because the Japanese Companies agreed to make the payments through their Chinese Intermediaries by USD. Further, during the year under consideration, the assessee achieved an export turnover of Rs.50.53 Crs. which is much more than the amount of derivative contracts entered into by the assessee with State Bank of India. We further noted that when the assessee enters into a hedging transaction to minimize the possible loss from fluctuation in foreign currency, then profit or loss arises on account of appreciation or depreciation in the value of foreign currency held by it on conversion into another currency, such profit or loss would ordinarily be a 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, if the underline asset is more than the amount of forward contracts entered into by the assessee. This legal principle is supported by the decision of the Hon'ble Supreme Court in the case of Woodward Governor India (P.) Ltd. (supra), and it is also supported by the principl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to year. He asked the assessee to explain as to why provisions under section 14A of the Act should not be applied. 15.1 In response, the assessee submitted as under: During the year under consideration the assessee company has earned exempt income u/s 10(34) comprising of dividend income of Rs. 6,003,156/- The investment made during the year as well as in earlier year was made from current accruals, reserves and surplus available with the company. Your kind self would appreciate that sufficient funds in the form of reserves were available with the company to make the investments. No specific amount was borrowed for the purpose of making investments. However, some expenses are attributable for earning the said - dividend income of Rs. 6,003,156/-. Accordingly the assessee itself the disallowance u/s 14A as Rs. 66,419/- and added in its return on the principle as laid down by the Hon'ble ITAT in CO.No. 17/2001 for Asstt.Year 1997-98 in case of Nahar Industrial Enterprises Ltd one of the group company and also followed by your predecessor in Assessment proceedings for Asstt. Year 2006-07. The calculation is given as under. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtion as mentioned by the Apex Court Bombay High Court. Rule 8 D can be applied only in the cases where the assessing officer is not satisfied with the disallowance made by the assessee on the basis of expenditure shown in the books. In our case the expenditure to be disallowed u/s 14A has been rightly computed as approved by the courts in the cases mentioned above. You are therefore requested not to apply Rule 8D in our case. However, without prejudice to the above submissions and as desired computation of disallowance u/s 14A as per rule 8D of the Income Tax Act is enclosed. 15.2 The AO also observed that the assesee company had computed the disallowance by taking the proportionate of operating income and dividend earned, but only administrative expenses had been proportionately divided. In support of its computation, the assessee submitted that computation was based upon the principle laid down by the ITAT in the case of M/s Nahar Industrial Enterprises Ltd., a group company for the A.Y. 1997-98 and the same had been accepted by the Department for the A.Y. 2006-07. It was also emphasized that the same principle had been accepted by the Hon ble Bombay High Court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 442.11 Cr. Loans Advance 118.05 Cr. 560.16 Cr. Less: Current Liabilities Provisions 182.49 Cr. 377.67 Cr. Working capital loan 199.38 Cr. 1.89:1 In view of above it is clear that the interest paid on term loan and working capital was for the purpose of income earned which is subjected to tax. The interest paid to others has been apportioned for computing disallowance u/s 14A. Further, it is submitted that investments during the year under consideration has reduced to 29.05 Cr. from 58.09 Cr. of the immediately preceding year which can be verified from pages 16 17 of. the printed balance sheet. The fresh investments made during the year are out of the proceeds of the investments sold during the same year. Further, the investments made in the earlier years were made from net internal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as the gross block was of Rs. 516.75 crores. He was of the view that normally the interest free funds available with the assessee would have been invested in the fixed assets and nothing was left for investment in shares except the interest bearing funds i.e working capital loan and other unsecured loans. According to the AO the disallowance on this account came to Rs. 1,82,24,640/- and as the assessee had already disallowed a sum of Rs. 66,419/- in the computation of income, further disallowance of Rs. 1,81,58,221/- was made under section 14A of the Act. 16. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and submitted that the application of Rule 8D in the assessee s case was not justified as the assessee had itself worked out the disallowance under section 14A of the Act on the basis of well recognized method of proportion i.e; dividend income vis- -vis operating income which had been upheld by the ITAT Chandigarh Bench in other group company cases. It was further stated that for the purpose of Rule 8D, only the interest which was not directly attributable to any particular income or receipt was to be taken for calculating the disallowance under the said Rul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in ITA No. 803/Chd/2011 vide order dt. 17/05/2012 (Chd Trib) JCIT (OSD) Circle-1, Ludhiana Vs. Sunder Forging in ITA No. 1059/Chd/2011 vide order dt. 17/05/2012 (Chd Trib) ACIT, C-V, Ludhiana Vs. Sigma Cartons(P) Ltd. in ITA No. 769/Chd/2011 vide order dt. 10/07/2012 (Chd Trib) CIT Vs. Walfort Share Stock Brokers(P) Ltd. (2010) 326 ITR 1 (SC) ACIT C-V, Ludhiana Vs. M/s Chadha Super Cars P. Ltd., in ITA No. 36/Chd/2012 vide order dt. 28/12/2012 (Chd Trib) M/s Chadha Super Cars P. Ltd., Vs. ACIT C-V, Ludhiana in ITA No. 1241/Chd/2011 vide order dt. 28/12/2012 (Chd Trib) HSBC Invest Direct (India) Ltd. Vs. DCIT, Range 8(ii) in ITA No. 3485 3944/Mum/2012 vide order dt. 17/10/2014 (Chd Trib) M/s Munjal Castings Vs. ACIT in ITA No. 774/Chd/2012 vide order dt. 15/09/2014 (Chd Trib) 16.3 The Ld. CIT(A) held that the AO was fully justified in holding that the provisions of section 14A of the Act were applicable in the case of the assessee and disallowance was required to be made under Rule 8D of the Income Tax Rule. As regards to this contention of the assessee that the disallowance under section 14A of the Act should not exceed the amount of exempt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tially during the year under consideration. It was further submitted that the funds available with the assessee company as on first day of the previous year were of Rs. 194.06 Crores as per the balance sheet on the assessment records, therefore, in view of the settled principles of law that where the assessee received dividend by way of exempt income from the investments made in the earlier years from interest free funds (own funds) available with the assessee and such own funds were much larger as compared to investment, the disallowance by applying the provisions of section 14A of the Act would be erroneous and unsustainable. 18.2 It was contended that as against the addition made under section 14A of the Act read with rule 8D of the Income Tax Rule 1962 by the AO and sustained by the Ld. CIT(A) to the tune of Rs. 1,81,58,221/-, the assessee worked out disallowance on proportionate basis to the tune of Rs. 66,935/- in respect of dividend income of Rs. 60,03,156/-. It was pointed out that in the preceding assessment year out of the total dividend income of Rs. 1.06 Crores earned by the assessee disallowance on proportionate basis had been worked out at an amount of Rs. 1,33,928 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tant case, facts set out above demonstrates the income is derived by the dividends u/s. 10[33] of the Act and interest on tax free bonds u/s. 10[15][h] of the Act and interest on long term finance to infrastructure companies u/s. 10[23G] of the Act. In other words, the persons with whom the amounts are invested by the assessee are crediting the aforesaid amount to the assessee's account by way of a bank transfer. Therefore, no human agency is involved in collecting these dividends and interest for which the assessee has to incur any expenditure. This is the consequence of computerization, online transaction through NEFT [National Electronic Fund Transfer], RTGS [Real Time Gross Settlement] and also DEM AT Accounts. The assessing authority should take note of these developments in deciding whether any expenditure is incurred in earning the said income. The discussion by the assessing authority clearly demonstrates these aspects has not been taken note of and the notional expenditure is calculated pre-modernization. Therefore, in the light of the aforesaid judgment, when the assessee has not incurred any expenditure for realizing this income, the question of holding that 2% of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... puted as under:- Disallowance u/s 14A In case of regular computation Amount (In Rs.) 1.Amount of dividend income 10656014 2. Operating income 6336864325 3 % of dividend income 0.00168 4. Amount of expenses 556724538 5. Proportionate amount of disallowance of expensed to earn dividend 936183 Details of expenses a. Interest paid to others 21202161 b. Administrative expenses 130240267 c. Personal expenses and allowances other 405282110 556724538 7. None of the lower authorities have pointed out any defect in the computation of proportionate disallowance computed by the assessee except that certain part of the administrative expenses were not taken into consideration which has been taken into consideration in the computation m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... satisfaction as laid down by the Hon'ble Bombay High Court in the case of Godrej Boyce (supra) while making the disallowance. Neither the Assessing Officer nor the Ld. CIT(A) has pointed out any defect in the working given by the assessee in computing suomotu disallowance except that a certain part of tax relating to the personnel expenditure and other allowances were not taken into consideration. In the working given before us, as reproduced above, whereby, the proportionate amount of disallowance of expenditure to earn dividend income has been computed at Rs. 9,36,183/- by including the personnel expenditure and certain other expenses, as noted above. In view of this, the disallowance of administrative expenses is restricted to Rs. 9,36,183/-. However, the assessee will get the benefit /set off at the suomotu disallowance offered by the assessee in the return of income at Rs. 1,33,928/- and accordingly the addition is restricted to Rs. 8,02,255/-. In view of our findings given above, the appeal of the assessee is treated as partly allowed. 20.4 For the year under consideration also the assessee had given calculation at page no. 20 of the submission dt. 17/02/2020 as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to why interest in investment in shares etc should not be allocated and made part of cost and disallowed under section 36(1)(iii) of the I.T. Act. In response the assessee submitted as under: Regarding this query in respect of disallowance of interest u/s 36(l)(iii). It is submitted that the total investments as on 31.03.2011 were Rs. 29.05 Cr. as against Rs.58.09 Cr. of last year as is apparent from the schedule VI of the printed balance sheet at Pages 16 17. Fresh Investments made during the year of Rs. 11.57 Cr were made out investments sold in the same year. Hence, no investment was made out of fresh funds, during the year.. The investment made in earlier years were from the sufficient funds out of internal accruals and own funds available with the company. The amount of interest on term loan and working capital limit debited in financial expenses are not attributable to long term, investment. These amounts of loan was directly utilized for the purpose of business for which the loans were obtained. This fact is obvious from the figures of term loan as well as the investment in fixed assets by the company. Your kind self would observe from the balance sheet at page 14 that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ame amount can be made under two different sections. The Hon'ble legislative in its wisdom has categorically stated in Section 14A not to allow any expenses which are relatable to exempt income. The exempt income is derived from investments. That was the reason that amount of interest which is to be considered relatable to investments from where exempt income is derived, is to be considered for disallowance. You would appreciate that intention of Hon'ble Legislature is very clear that any element of interest which is relatable to investment / exempt income are to be considered for the purpose of disallowance. It is therefore humbly prayed that no disallowance u/s 36(l) (iii) should be made on the basis of presumption, surmises conjecture, especially when there is no fresh investment made by the assessee during the year. More so when the amount of interest is being considered for disallowance under a particular section u/s 14A of the Act. 22.1 The AO however did not find merit in the aforesaid submissions of the assessee and observed that interest on any fund utilized for the purpose of long term investment was not allowable under section 36(1)(iii) of the Act. He ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t bearing funds i.e; working capital loan and other unsecured loans. He was of the view that the assessee had made investment in shares only out of the working capital and unsecured loans on which interest had been paid. Therefore entire amount of interest attributable to investment could have been disallowed under section 36(1)(iii) of the Act. He also observed that the assessee had failed to submit any evidence to prove that investment in shares had been made out of interest free funds, at the same time the AO observed that keeping in view the assessee s submissions that it had also made investment in the shares out of its own capital, the interest attributable to investment was to be worked out by applying the debt equity ratio. The AO observed that the total debt of the assessee were at Rs. 416.36 crores and equity including reserve and surplus was Rs. 275.97 crores and the debt equity ratio came to 60:40. The AO worked out the interest allowable to investment in shares by applying the debt equity ratio, at Rs. 3,13,63,200/-. The AO also held that the interest component which had not been allowed under section 36(1)(iii) of the Act, being funds utilized for non business purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the total investment in shares of Rs. 140.86 Cr. was reduced from 141.17 Cr. of the immediately preceding year. No fresh investments were made during the year. The investment made in earlier year was from the funds sufficiently available out of internal accruals and Company's own funds. The detailed submissions were given in this regard vide our letter dated 14.03.2014 enclosed as Annexure-V, which was also reproduced by the assessing officer in its order at page 30 31. It was also submitted before Id. Assessing Officer that the interest expenses have also been considered for the purpose of disallowance u/s 14A of the Act. No disallowance can be made under two different sections. The Hon 'ble legislative in its wisdom has categorically stated in Section 14A not to allow any expenses which are relatable to exempt income. The exempt income is derived from investments. That was the reason the amount of interest which is to be considered relatable to investments from where exempt income is derived, is to be considered for disallowance. You would appreciate that intention of Hon'ble Legislature is very clear that any element of interest which is relatable to investment/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment in shares, and that there was no linkage on the day of making investment in shares as regards the position of cash available with the assessee i.e; with reference to the own funds or borrowed funds. The Ld. CIT(A) referred to the judgment of the Hon ble Punjab Haryana High Court in the case of M/s Abhishek Industries Limited, 286 ITR 1. A reference was also made to the following case laws : Umesh Trehan in ITA No. 1022/Chd/2012 (Chd Trib) Vishal Coaters Pvt. Ltd. in ITA No. 281 282/Chd/2013 (Chd Trib) CIT Vs. Smt. Leena Ramchandran, 339 ITR 296 (Kerala) Dhanuka Sons Vs. CIT, 339 ITR 319 (Karnataka) ACIT Vs. M/s Kisco Casting, Proprietor Circle, M/s Khanna Iron and Steel Corpn Khanna in ITA No. 32/Chd/2011 (Chd Trib) dt. 26/06/2011 M/s Jamna Auto Industries Ltd. Vs. JCIT in ITA No. 438/Chd/2011 dt. 04/01/2012 (Chd Trib) DCIT Vs. M/s Jamna Auto Industries Ltd. in ITA No. 418/Chd/2011 dt. 04/01/2012 (Chd Trib) 23.3 The Ld. CIT(A) sustained the addition made by the AO by observing in para 6.17 of the impugned order which read as under: 6.17 The appellant has contended that the interest expenses have also ben considered for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under: 10. We have heard Ld. Representatives of both the parties and perused the material available on record. 11. It is also to be noted that the Finance Act 2003 has amended Section 36(1)(iii) by inserting a proviso to the existing provision w.e.f 01.04.2004 relevant to assessment year 2004-05. The proviso inserted to the existing provision of section 36(1)(iii) is reproduced as under: Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. The judgment of various Courts in the case of Hero Cycles (P) Ltd. Vs. CIT, Ludhiana C.A. No. 514 of 2008 dt. 05/11/2015, Bright Enterprises Pvt. Ltd. Vs. CIT, Jalandhar (2016) 381 ITR 107 (P H) held that no disallowance of interest is called for where the assessee has got sufficient own funds. The Assessing Officer is directed to go through the fund position namely capital and interest fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as per accounting norms. The said interest for the purpose of capitalization in the case of fixed assets is normally computed from the date of purchase of machinery vis-a-vis the date of amount borrowed if any. This is evident from the detail filed by us. Even your kind self has asked us to compute the amount of interest from the date of payment upto the date of machinery installed irrespective of the fact that the machinery was lying in work in progress in earlier year. That the amount of interest was computed only for sake of cooperation and without prejudice to our legal objection that no interest from c.c. amount should be capitalized because the money borrowed from CC account was for business purpose only. The amount of interest can only be capitalized from the interest paid on long term borrowings only which has already been considered by the assessee. 29.1 The AO after considering the submission of the assessee observed that the assessee had submitted only working of interest on machineries which had been put to use during the Financial year relating to the Assessment Year under consideration and that the interest had been worked out from the date of payment to date of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distinction as to whether the loan funds or the profits of business were used for purchase of assets cannot be made. Accordingly, contention of the assessee company that it has not incurred any interest is not acceptable in view of the clear provision of explanation 8 of section 43(1) of the I.T. Act. As per the provision of Explanation to Section 43(1) which was inserted by the Finance Act, 1986, with retrospective effect from April 1, 1974 where any amount is paid or is payable as interest in connection with acquisition of an asset, so much of such amount as is relatable to any period after such assets is first put to use is not to be included and is deemed never to have been included in the actual cost of such asset. The explanation intends to clarify the position of law as regards the capitalization of the interest paid in connection with acquisition of an asset after it has been put to use. Had it been the intention of the legislature to exclude interest from the actual cost, prior to the period the assets was first put to use the language of the explanation would certainly have been different. The explanation lays stress on the non inclusion of interest after the assets has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1473.90 Unit 6 - Unit 7 - Denim Lalru 486944.13 SPG Lalru 18909.98 Chennai 1,407.04 Overseas 13361.05 Denim Bhopal - Total 2632429.63 It is believed that the assessee has made correct calculations. Later on, if it is found that there is error in calculation the same would be rectified. The interest to the extent of Rs. 26,32,429/- is therefore capitalized under provision to section 36(1)(iii) of the I.T. Act. The same would form part of the assets and depreciation would be allowed accordingly if the assesse does not contest this addition before the appellate authority. Disallowance on this account comes to Rs. 26,32,429/-. 30. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and submitted that the term loan raised for the purpose of purchase of fixed assets was mostly disbursed after the machinery was purchased and installed. The interest on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r.w.s 14A of the Act. The Ld. CIT(A) deem it fair and reasonable to limit disallowance on account of capitalization of interest, fixed assets and capital work in progress to the extent of debt equity ratio. He accordingly asked the AO to recompute the disallowance by adopting the debt equity ratio and restrict the disallowance accordingly and that any excess depreciation allowed on account of capitalization of interest may be withdrawn. 31. Now the assessee is in appeal. 32. The Ld. Counsel for the assessee at the very outset stated that this issue is squarely covered in favour of the assessee in the case of Group Company i.e; M/s Monte Carlo Fashions Ltd. Vs. Asst. CIT in ITA No. 1341/Chd/2016 vide order dt. 12/10/2017, copy of the same was furnished. 33. In his rivals submissions the Ld. CIT DR strongly supported the impugned order passed by the Ld. CIT(A) and reiterated the observations made therein. 34. We have considered the submissions of both the parties and perused the material available on the record, it is noticed that an identical issue having similar facts has already been decided by the ITAT Chandigarh Bench in ITA No. 1341/Chd/2016 for the A.Y 2012-13 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oolen Mills Ltd. Vs. Addl. CIT, shall apply mutatis mutandis to the aforesaid appeals of the assessees. 36. Now we will deal with the appeal of the Department in ITA No. 200/Chd/2015. 37. Following grounds have been raised in this appeal : 1. Whether in the facts and circumstances of the case, Ld. CIT(A) has erred in law in directing the AO to allow the claim of the assessee on the issue of additional depreciation and carbon credits entitlements during assessment proceedings ignoring that there are no provision under the Income Tax Act to make amendment in the return of income at the assessment stage without revising the return. 2. Whether in the facts and circumstances of the case, Ld. CIT(A) has erred in law in directing the AO to allow the claim of the assessee on the issue of additional depreciation and carbon credits entitlements during assessment proceedings ignoring the decision of Hon'ble Supreme Court in the case of Goetz (India) Ltd. Vs CIT 284 ITR 323 wherein it was held by the Apex Court that assessee could not make a claim for deduction other than filing a revised return. 3. Whether on the facts and circumstances of the case Ld. CIT(A) has erred in l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se therefore the eligibility for claiming balance additional depreciation cannot be denied by invoking proviso to section 32(l)(iia) of the Act. The contention of the appellant is substantiated by various benches of the ITAT. The humble appellant relies upon the following decisions: 1) Apollo Tyres Ltd. Vs. ACIT (Cochin Bench). 2) MITC Roling Mills Pvt. Ltd. Vs. ACIT (Bombay Bench). 3) DIVIS Laboratory Ltd. Vs. DCIT (Hyderabad Bench)... IT A No. ll/HYD/2012. 4) DCIT Vs. SIL Investment Ltd.... 148 TTJ 213(Delhi). 5) Addl. CITVs. Cosmo Films Ltd 13ITR (Trib) 340-ITAT (Delhi). 39.1 The copy of the submission made by the assessee was forwarded to the AO who reported as under: In this ground the assessee has taken a plea that the AO has erred in law ^and on facts in not allowing the addition depreciation of Rs. 2,14,83,532/-being balance 10% on the cost of machinery which was put to use for less than 180 days during the preceding year and restricted during the said year. This plea of the assessee is completely incorrect. It is to be noted that the second proviso to clause (ii) of section 32(1) read with clause (iia) of section 32(1) of the IT. Act, 1961 expressl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d claim. Reference in this regard may be made to the case of Budhewal Co-operative Society Ltd. In this case claim of deduction u/s 80P was disallowed by the AO on the ground that the claim was not made in the original return of income nor any revised return was filed for this claim. The claim had been made during the assessment proceedings through the letter filed before the AO. The disallowance made by the AO was confirmed by me vide order dated 24.08.2012 in Appeal No. 44/ROT/IT/CIT(A)-II/Ldh relying on the case of Goetze India Ltd. Hon'ble ITAT Chandigarh Bench, vide its decision dated 24.5.2013, in the case of Budhewal Co-operative Society Ltd., in ITA No. 1077/Chd/2012, reversed my order and held that an assessee can raise additional grounds and make claims during the assessment proceedings and even during the appellate proceedings. The Hon'ble ITAT held as under:- We find that the Hon 'ble Punjab Haryana High Court in CIT vs. Ramco International (supra) allowed the claim of deduction under section 80IB of the Act as the form No. 10CCB in respect of the said claim was filed during the assessment proceedings and it was held that the assessee was not to make a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the AO himself allowed the claim of the assessee in subsequent assessment years i.e; A.Y. 201415 to 2017-18 copies of which are placed at page no. 47 to 102 of the assessee s paper book. 43. We have considered the submissions of both the parties and perused the material available on the record. It is noticed that the Ld. CIT(A) rightly allowed the claim of the assessee by following the decision dt. 24/05/2013 of the ITAT Chandigarh Bench in the case of Budhewal Co-operative Society Ltd. in ITA No. 1077/Chd/2012 wherein it was held as under: We find that the Hon 'ble Punjab Haryana High Court in CIT vs. Ramco International (supra) allowed the claim of deduction under section 80IB of the Act as the form No. 10CCB in respect of the said claim was filed during the assessment proceedings and it was held that the assessee was not to make any fresh claim and had duly furnished and submitted the form for deduction, there was no requirement of filing any revised return. The plea of the Revenue before the Hon 'ble High Court that the judgment of Hon 'ble Supreme Court in Goetze (India) Ltd., vs. CIT (supra) was applicable and deduction was not allowable, was not acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the production of environmental unfriendly substance only when the complete facts were produced before CIT (A) and was found to be covered under second proviso of Section 28 (va) of Lncome Tax Act. Notwithstanding discussion above the department has not accepted the view of ITAT and has preferred appeal before the Hon'ble High Court. More over the assessee itself has offered it taxation. No claim can be made without filing a revised return. The assessee has not furnished any revised return. Hence the claim of the assessee is rejected and the same is treated as revenue receipt. 46. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and submitted as under: 'That the appellant had shown receipt of Rs. 2,55,55,850/- under the head Carbon Credit Receipts' Curing the course of assessment proceedings the humble appellant claimed vide our letter dated 14.02.2014 enclosed as Annexure-VII that the amount of Carbon Credit receipts were capital receipts and not a revenue receipt. The said claim was made on the basis that C.E.R undoubtedly known as Carbon Credits commodity and are quoted in stock exchanges like MCX and NCDE. The gain from the carbon credits r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Tribunal in My Home Power Ltd Vs. DCIT [supra], have, after detailed examination, concluded that the receipts from Carbon credit are capital in nature. We are inclined tofollow the said decision and the other two decisions of Chennai Tribunal in Sri Velayudhaswamy Spinning Mills (P.) Ltd. Vs. DCIT [supra] and Ambika Cotton Mills Ltd. Vs. DCIT (supra) where also it has been held that receipt on account of Carbon Credit is capital in nature neither chargeable to tax under the head Business Income nor liable to tax under the head Capital Gains. Our above view is also supported by the decision of Supreme Court in the case of Vodafone International Holdings Vs. UOI [supra] wherein Supreme Court has held that treatment of any particular item in different manner in the 1961 Act and DTC serves as an important guide in determining the taxability of said item. Since DTC by virtue of the deeming provisions specifically provides for taxability of 37 carbon credit as business receipt and Income Tax Act does not do so, our view gets duly fortified by the principles stated in the above decision of Supreme Court. Accordingly this ground of the assessee is allowed and the addition made by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of M/s Nahar Industrial Enterprises Ltd. dated 19.02.2014 allowed the appeal of the assessee. 3. The ld. counsel for the assessee, at the outset submitted that the issue is covered in favour of the assessee by order of ITAT Chandigarh Bench dated 15.04.2015 in ITA No. 389/CHD/2013 for assessment year 2009-10 in the case of DCIT Vs Kotla Hydro Power Pvt. Ltd., copy of the same is placed on record in which in para 7 to 9, the Tribunal held as under : 7. We have considered the rival submissions carefully. The facts of the case are identical to the facts of the case decided by Hyderabad Bench of the Tribunal in the case of My Home Power Ltd Vs. DCIT (supra). In that case it was held as under:- Held, that carbon credit was in the nature of an entitlement received to improve world atmosphere and environment reducing carbon, heat and gas emissions. It was not an offshoot of business but an offshoot of environmental concerns. No asset was generated in the course of business. Credit for reducing carbon emission or greenhouse effect could be transferred to another party in need of reduction of carbon emission. It does not increase profits in any manner and does not need any expe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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