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2016 (8) TMI 1094 - ITAT MUMBAI

2016 (8) TMI 1094 - ITAT MUMBAI - TMI - Addition u/s 14A - Held that:- The investments which has not yielded dividend or tax free income during the year should only be included, no supporting decision has been placed before us by the ld. Counsel before us that only the investments which have not yielded the exempt income during the year has to be excluded. Rule 8D(2)(iii) lays down that, “an amount equal to ½% of the average value of the investment, income from which does not or shall not form p .....

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ure’. Hence in our opinion, the phrase “shall not” covers a situation where income earned in future or whenever it is earned, then it shall not form part of the total income at any time. Thus, this contention of the assessee prima facie does not appears to be in correct interpretation or in line with the Rule 8D(2)(iii). Accordingly, we direct the AO to remove the strategic investments only from the working and from the balance, he should work out the disallowance as per Rule 8D (2)(iii). - .....

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to bill exposure. Hedging contracts need not succeed the contract for sale and actual goods manufactured but may get settled within a reasonable time. Quantity and timing may not be relevant for a short period in a continuous transaction as long as transaction construed is based on genuine hedging and finally it coincides with the actual exposure undertaken. It is only at the year end that one can still reconcile the hedging transactions with the actual exposure or delivery and come to a conclus .....

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HRI G S PANNU, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER For The Assessee : Shri Vijay Mehta For The Revenue : Shri N P Singh ORDER PER AMIT SHUKLA, JM: The aforesaid cross appeals have been filed by the revenue as well as by the assessee against the impugned order dated 25.08.2011 passed by CIT(Appeals)-9, Mumbai for the quantum of assessment passed under section 143(3), for the assessment years 2008-09. 2. We will take-up assessee s appeal wherein the assessee has raised followin .....

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/- as speculation business loss . 3. The assessee is a Star Trading House engaged in the business of diamonds. The main activities of the assessee consists of purchase of rough and polished diamonds mainly through import from various countries, manufacturing of rough diamonds into polished diamonds and sell polished diamonds mainly by way of export to various countries. The brief facts qua the issue of disallowance under section 14A of ₹ 25,85,318/- as raised vide ground no.1 are that, the .....

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o why the disallowance under section 14A should not be made as per Rule 8D, the assessee submitted that, all the loans taken were utilized for the business purpose and also gave the details of payment of interest on various kinds of loans. Thus, the entire interest payment was stated to be for the various business purposes including that of export. The Ld. AO, did not accept completely the assessee s contention and held that only the interest on packaging credit, post shipment credit, specific o .....

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the disallowance of 0.5% of the average value of investments which worked out to ₹ 11,85,278/-. Accordingly, the disallowance u/s 14A aggregated to ₹ 25,83,318/-. 4. The Ld. CIT(A) confirmed the said disallowance by holding that, now in view of the decision of Hon ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd, the disallowance has to be made under Rule 8D. Thus, he dismissed the assessee s ground on this point. 5. Before us, the Ld. Counsel Shri Vijay Mehta, submitt .....

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e submitted that, firstly, the most of the investments were made by way of strategic investment in subsidiaries and associated companies and, therefore, it cannot be held that they were meant for earning of exempt income and secondly, only those investment which has yielded dividend or tax free during the year should only be considered for working of the disallowance under section 14A under Rule 8D(2)(iii). 6. On the other hand, Ld. DR strongly relied upon the order of the AO and CIT(A) and subm .....

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to ₹ 25,85,318/-. So far as the disallowance of interest is concerned, it has been submitted before us that the surplus and interest free funds available with the assessee far exceeded the investment made by the assessee. This contention of the assessee appears to be correct from the perusal of the Balance-sheet as on 31st March, 2008 from where it is evident that, the share capital and reserve & surplus itself was at ₹ 183,33,70,726/- whereas, the investment which has been made .....

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and principle laid down by the Hon ble jurisdictional High Court, we hold that no disallowance of interest under Rule 8D(2)(ii) can be made and accordingly, the same is directed to be deleted. 8. So far as the disallowance of indirect expenditure, under Rule 8D(2)(iii), by taking 0.5% of the average value of investments, the contention of the assessee before us is twofold, firstly, most of the investments have been made in the subsidiary and associated companies as a strategic investment and, t .....

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investment for the purpose of disallowance, because the said investment cannot be said to be made for the purpose of earning the exempt income but for business and strategic compulsions which falls within the realm of business purpose and this view has been upheld by the Tribunal in various decisions including that of Hon ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT (ITA NO. 749/2014 dated 2.09.2015). Thus, we direct the AO to exclude the strategic investment made in subsidiary co .....

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investment, income from which does not or shall not form part of the total income, as appearing in the Balance-sheet of the assessee ,on the first day and the last day of the previous year shall be taken. What is required to be seen is, whether the income from the investment which does not or shall not form part of the income. The phrase does not conveys something done or to be done in present, that is, income during the year ; and shall not conveys something about in future, a strong assertion .....

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e disallowance as per Rule 8D (2)(iii). With this direction, ground No.1 is treated as partly allowed. 10. The brief facts qua the second ground are that, the assessee had debited a sum of ₹ 26,18,34,176/- on account of foreign exchange rate difference (net) under the head raw materials consumed/trading goods utilized . The break-up of this head was given in Schedul-17 to the audited account. On the perusal of the exchange difference, it was found that the assessee has reduced the sum of & .....

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assessee on account of its forward and option contract any foreign currency which are not deliverables at first place. He further noted that, no break-up of currency forward / option contract, however, it is given by the assessee but he admitted that majority of the contracts on which this loss was suffered is of forward and option contracts . The contract-wise details of the loss as furnished by the assessee have been incorporated by the AO form pages 7 to 17 of the assessment order. After anal .....

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ystematic business. Assessee deals in diamonds and contract are of foreign currency. b. The transactions entered into by the assessee are not of hedging transactions as: (i) None of the contracts are against any specific bills; (ii) These contracts are not delivered; (iii) Assessee is not dealing in currency purchase and sale so as to say that hedging is against the outstanding in the same commodity. c. He observed that no break-up of option and contract given Position of exposure on date of con .....

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CIT(A) after considering the observations and finding of the AO as well as submissions made by the assessee held that, loss of ₹ 8,33,76,649/- would be considered as speculation loss and loss of ₹ 40,89,46,448/- is to be considered as business loss. The sum and substance of assessee s submissions before CIT(A) are as under: a. Assessee is in the business of import and export Diamonds which transactions are executed in foreign currency. It also meets its working capital needs by way o .....

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ment's case that transactions entered by the Assessee are not legal. Assessee has entered into derivative contracts permitted as per norms mentioned in Master Circular and other guidelines of the Reserve Bank of India. c. RBI allows business entitles to manage their foreign exchange exposure by undertaking derivative products offered by Authorized Dealers for hedging group of assets and liabilities, e.g. export receivables, payments for imports, borrowings in foreign currency for imports and .....

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based on expected levels of business and the RBI does not require such business entities to hedge their exposures on a bill to bill (or one to one basis). Section 43(5) of the Act and also no other provision of the Income Tax Act requires establishing the hedging relationship on bill to bill basis. Non delivery of the foreign exchange under these contracts will not attract the provisions of section 43(5). 12. After considering the submissions of the assessee, the Ld. CIT(A) held that foreign cu .....

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t a speculative loss. However, out of total losses of ₹ 49,23,23,597/- incurred by the assessee, he held that, assessee has been able to substantiate the underlying exposure for the derivative contracts to the tune of loss of ₹ 40,89,46,948/- on month-wise bill to bill basis and for the balance loss of ₹ 8,33,76,649/- he observed that assessee could not substantiate with respect to its underlying risk exposure and accordingly he held that loss of ₹ 8,33,76,649/- is to be .....

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affirmed by the Hon ble Bombay High Court also vide order dated 17.01.2011, following the decision of Bombay High Court in the case of Badridas Gauridu, reported in 261 ITR 256. He further submitted that, transactions are carried out as per the Foreign Management Act, 1999 as well as circular issued by the RBI. So far as allegation of the AO that, break-up of option and contracts and position on date of contract and cancellation has not been provided, he submitted that it is not correct observat .....

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he hedging cannot be done in the currency. In support, reliance was placed on the decision of Bombay High Court in the case of CIT v Badridas Gauridu, 261 ITR 256. The hedging of value of diamond which is subject to variation in foreign exchange, thus, hedging of currency is nothing but hedging in the value of diamond, because it is connected with the commodities. In support of his contention he relied upon the following decisions: Sr.N. Case Law Citation a M/s Friends and Friends Shipping Pvt L .....

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considered rival submissions and also perused the relevant findings given in the impugned orders as well as materials placed before us. The assessee imports rough diamonds which are its principle raw material for manufacturing of polished diamonds, procured mainly form Diamond Trading Company which allocates and indicates on annual basis in advance for supply of rough diamonds through intention to offer . The assessee also exports finished goods (polished diamonds) to various parties on credit a .....

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nts in the goods it deals in, but also wide fluctuations in foreign exchange rates in international markets having major impact on its revenue, receivables and payables. It is clearly evident that, due to large import and export of diamonds, which is the main business activity of the assessee, it is exposed to high risk of foreign exchange gain or loss which is arising only because of the said business only. In other words, all its receipts, payments, receivables and payables are in foreign curr .....

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re entered are within the amount of the underlying transactions of imports and exports. There is no independent transaction of foreign exchange on standalone basis. The details of transaction on which the assessee has made profit and loss on various foreign exchange contracts has already been discussed in the impugned orders along with the copy of the contract entered with the banks. Thus, such a loss cannot be in any manner equated with hedging of foreign currency alone, but ceases to fall with .....

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assessee is not dealing in foreign exchange per se but has hedged against the foreign exchange loss in the forward market with the bank, then any loss or gain thereto is to be treated as business loss or business gain only. The Hon ble Bombay High Court in the case of Badridas Gauridu (supra), held that, if the assessee is not dealer in foreign exchange but an exporter and has hedged against the foreign exchange losses and for that purpose it had booked foreign exchange in the forward market wit .....

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Shipping Pvt. Ltd [2013] 35 taxmann.com 553 (Gujarat) came to the same conclusion and finding. ITAT Mumbai Bench in the case of London Star Diamond Company (I) P Ltd had also held and relied upon aforesaid decisions and held that, if the assessee is not a dealer in foreign exchange but in regular business of import and export then fluctuation in foreign exchange during the forward contract with the banks for the export would be business transaction and for the business purpose only and will not .....

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ar as the CIT(A) s contention that assessee has been unable to substantiate the underlying exposure of derivative contracts to the tune of ₹ 8,23,26,649/- and, therefore, it should be substantiated, the assessee before us, has contended that in any genuine hedging transaction where there is huge volume of purchase exposure and sales exposure, the hedging transaction keeps on fluctuating. The Ld. CIT(A) has upheld the disallowance keeping in mind the fact that in any particular month the he .....

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g cannot be done in a continuum business and nothing has been brought on record that RBI puts such kind of condition or bar for hedging of foreign currency based on actual bill to bill exposure. Hedging contracts need not succeed the contract for sale and actual goods manufactured but may get settled within a reasonable time. Quantity and timing may not be relevant for a short period in a continuous transaction as long as transaction construed is based on genuine hedging and finally it coincides .....

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