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DCIT, Circle-2 (1) , Guntur Versus Maddi Lakshmaiah & Co. Ltd.

2017 (10) TMI 476 - ITAT VISAKHAPATNAM

Disallowance of premium charges on FC forward contracts/underlying options - Held that:- In this case, the assessee is into the business of processing and export of tobacco. The assessee also is into the business of warehousing. The assessee has purchased a software park at Navi Mumbai from M/s. Maharashtra Industrial Development Corporation Limited for which it has borrowed certain term loans from banks. Subsequently, those term loans were converted into foreign currency loans for the purpose o .....

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further observed that the forward contracts entered by the assessee does not falls within the definition of section 43(5)(d) of the Act. Therefore, we are of the view that the A.O. was erred in disallowing premium charges on FC forward contracts on the ground that the loss incurred by the assessee is a speculative loss, which falls u/s 43(5)(d) of the Act. The CIT(A) after considering the relevant provisions of the Act and also relied upon certain judicial precedents, directed the A.O. to delete .....

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t of interest, these loans cannot be considered as foreign currency loans acquired for the purpose of acquiring an asset from a country outside India. Therefore, we are of the view that the provision of section 43A, of the Act has no application to the facts of the present case. - The assessee has incurred exchange loss due to rise in dollar rate, which has been treated as revenue in nature. The assessee has acquired term loans in foreign currency and repaid the said loan in instalments over .....

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f the view that the A.O. was erred in treating exchange loss incurred by the assessee due to adverse movement of currency as capital in nature, which is not allowable u/s 37(1) of the Act. The CIT(A) after considering the relevant provisions of the Act, has rightly deleted additions made by the A.O. - Disallowance of additional depreciation claimed u/s 32(iia) - activity of drying and threshing of tobacco does not amount to manufacture - Held that:- The activity of drying and threshing of to .....

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eddy, DR Respondent by : Shri G.V.N. Hari, AR O R D E R PER Shri G. Manjunatha, Accountant Member: This appeal filed by the revenue is directed against order of the CIT(A), Guntur dated 13.9.2012 and it pertains to the assessment year 2009-10. 2. The brief facts of the case are that the assessee is a company engaged in the business of tobacco processing, export and warehousing filed its return of income for the assessment year 2009-10 on 21.10.2009 admitting total income of ₹ 10,71,04,320/ .....

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s disallowance of speculative loss from foreign exchange derivatives, disallowance of foreign exchange fluctuation loss and disallowance of additional depreciation. 3. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the CIT(A), assessee has filed elaborate written submissions. The assessee further contended that the A.O. was erred in treating premium charges on FC forward contracts/underlying options as speculative in nature, ignoring the fact that t .....

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it has converted its existing term loans borrowed from Indian banks into foreign currency loan to reduce the cost of interest. In the process, it has incurred loss due to increased dollar rate and the resultant loss has been debited to exchange loss account. As regards disallowance of additional depreciation, the assessee submitted that it is in the business of processing and export of tobacco which involves processing of raw tobacco leaves into stem tobacco by threshing and cutting into differ .....

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currency term loans for the purpose of construction of software technology park and after some time, the Indian currency loans were converted into foreign currency term loans. Some of the loans were obtained by assessee company for the purpose of working capital in Indian rupees and foreign currency as well. The CIT(A) further observed that since the asset has been acquired in India and also the loans were borrowed in Indian currency and subsequently converted into foreign currency loans, the pr .....

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cco Packers Pvt. Ltd. reported in (2006) 284 ITR 222, held that drying and threshing of tobacco amounts to manufacturing activity. Therefore, following the decision of Hon ble High Court of Madras, held that the activity of the assessee is amounts to manufacture and hence, eligible for additional depreciation, accordingly, directed the A.O. to delete additions made towards additional depreciation. Aggrieved by the CIT(A) order, the revenue is in appeal before us. 5. The first issue that came up .....

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further contended that it has entered into forward contracts to mitigate the possible loss in currency movement and total value of forward contracts does not exceed total underlying exposure in foreign currency. The assessee further contended that it has borrowed foreign currency term loans and to hedge the foreign currency term loans, entered into forward contracts to mitigate the loss arising in course of currency movement and the resultant loss has been treated as premium charges on FC forwa .....

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act that the forward contracts are meant only to hedge or to recover a crystalised loss only though the correct size of the forward contracts throughout the year is more than the exposure of the company. The size of forward contracts are co-relatable to the then existing export at any point of time in the year, therefore, the A.O. was erred in holding that the total value of forward contracts are exceeds the value of underlying exposure to foreign currency. 6. We have heard both the parties, per .....

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ation in currency. The A.O. further was of the opinion that though the assessee claims to have hedged the exposure in the form of external borrowings, on perusal of the details filed by the assessee in the form of contract details proves that it is in trading of currency by repetitive transactions by entering into number of forward exchange contracts. Therefore, it cannot be considered that the assessee is hedging its foreign currency exposure to mitigate the possible loss in foreign currency. A .....

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hedging, foreign exchange loss and treatment of such loss in the books of accounts of the assessees. A forward contract is an agreement between an enterprise and a banker to purchase or sale a particular quantity of currency for a mutually agreed price at a particular date. These forward contracts are used by the exporters to hedge against adverse currency movements. Hedging is defined as to enter into transactions to reduce the risk of adverse movement of currency. Any person having exposure t .....

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racts entered to hedge the foreign currency exposure to mitigate unexpected loss with its import/export business has to be regarded as business loss and income as the case may be. In case of such forward exchange contract is not in the nature of hedging, then such loss should be ignored. Similarly, the provisions of section 43(5) of the Act, defines the term speculative transactions, to mean a transaction in which a contract for the purchase or sale of any commodity, including stock and shares i .....

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d by him or merchandise sold by him. A plain reading of sub clause (a) to section 43(5) of the Act, makes it clear that any forward exchange contracts entered into in the business of import/export of goods to hedge the possible fluctuation in foreign currency, then such transactions are kept outside the purview of the definition of speculative transactions. Therefore, to see whether a particular transaction is a speculative transaction or a mere hedging transaction, the underlying exposure in th .....

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ven in the books of accounts and in the Indian tax laws. Further, with an increased flow of inbound/outbound transactions and their complex dynamic structuring, the tax treatment of foreign exchange has been a great litigation and various courts have discussed the same in detail. Exchange fluctuation difference and tax treatment of the captioned issue was discussed at length in the recent land mark ruling of Hon ble Supreme Court, in the case of CIT Vs. Woodword Governor India Pvt. Ltd. 312 ITR .....

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or as a trading asset or as 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 a fixed capital, such profit or loss should be of capital nature. Further in the aforesaid ruling of the apex court also affirmed the principle laid down in the ruling of CIT Vs. Dempo and Company Pvt. Ltd. 206 ITR 291, wherein it was held that a loss arising in the process of conversion of foreign currency, which is part of trading a .....

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r capital loss what is relevant is the utilization of the amount at the time of devaluation and not the object for which the currency is obtained. Therefore, once loss incurred on account of fluctuation in foreign currency, whether it is on account of capital or revenue, then such loss shall be allowed as business loss unless it is in the nature of speculation loss. 10. Coming to the facts of the present case. In this case, the assessee is into the business of processing and export of tobacco. T .....

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s in fluctuation of currency. In the process, it has incurred loss, which has been debited to profit & loss account under the head premium charges on FC forward contracts. The total forward contracts entered into with the bankers, does not exceed the value of underlying exposure to foreign currency at any point of time. We further observed that the forward contracts entered by the assessee does not falls within the definition of section 43(5)(d) of the Act. Therefore, we are of the view that .....

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the revenue. 11. The next issue that came up for our consideration is disallowance of foreign exchange fluctuation loss amounting to ₹ 7,92,51,868/-. The A.O. disallowed foreign exchange fluctuation loss on the ground that the loss incurred by the assessee is a capital loss, which cannot be allowed as a revenue expenditure u/s 37(1) of the Act. The A.O. further observed that the assessee has incurred exchange loss mainly on account of repayment of term loan which is in the nature of capit .....

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into foreign exchange loans to reduce the higher interest cost to the company. In the process, it has incurred exchange loss due to adverse movement of dollar, which resulted in exchange loss which has been considered as revenue in nature. The assessee further contended that the A.O. has disallowed said loss u/s 43A of the Act, by assuming that the assessee has acquired the asset from a country outside India for the purpose of his business or profession. The assessee further contended that the .....

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as loss incurred on account of capital expenditure. 12. We have heard both the parties, perused the materials available on record and gone through the orders of the authorities below. The factual matrix which leads to the addition are that the assessee has acquired Information Technology Park named M.L. Towers at Navi Mumbai from M/s. Maharashtra Industrial Development Corporation Limited during the financial years 2001 to 2005. The assessee company has entered into an agreement on 17.11.2000 wi .....

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oss as foreign exchange loss on fluctuation and debited to the profit & loss account. Whenever the assessee gets gains, the same has been treated as revenue in its books of accounts. The assessee has followed AS-11 issued by the ICAI, which deals with treatment of the effects of change in foreign exchange rates in the books of accounts, which suggest that any difference in exchange rate has to be dealt as on the closing date in its books of accounts, accordingly, the assessee has recognised .....

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of accounts and in the Indian tax laws. Further, with an increased flow of inbound/outbound transactions and their complex dynamic structuring, the tax treatment of foreign exchange has been a great litigation and various courts have discussed the same in detail. Exchange fluctuation difference and tax treatment of the captioned issue was discussed at length in the recent land mark ruling of Hon ble Supreme Court, in the case of CIT Vs. Woodword Governor India Pvt. Ltd. 312 ITR 254, wherein the .....

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ding asset or as 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 a fixed capital, such profit or loss should be of capital nature. Further in the aforesaid ruling of the apex court also affirmed the principle laid down in the ruling of CIT Vs. Dempo and Company Pvt. Ltd. 206 ITR 291, wherein it was held that a loss arising in the process of conversion of foreign currency, which is part of trading asset of the .....

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ss what is relevant is the utilization of the amount at the time of devaluation and not the object for which the currency is obtained. Therefore, once loss incurred on account of fluctuation in foreign currency, whether it is on account of capital or revenue, then such loss shall be allowed as business loss unless it is in the nature of speculation loss. 14. The provisions of section 43A of the Act, deals with treatment of changes in rate of exchange of currency, where an assessee has acquired a .....

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or indirectly in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any shall be adjusted to the cost of the asset. A plain reading of section 43A of the Act, makes it clear that the said provisions is applicable only when the assessee has acquired an asset from a country outside India for the purpose of its business or profession. The said section does not apply when the asset is acquired in India. Therefore, to apply the provisions of section 43A .....

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banks. Though the assessee subsequently converted Indian currency loan into foreign currency loans for the purpose of reducing cost of interest, these loans cannot be considered as foreign currency loans acquired for the purpose of acquiring an asset from a country outside India. Therefore, we are of the view that the provision of section 43A, of the Act has no application to the facts of the present case. 16. The assessee has incurred exchange loss due to rise in dollar rate, which has been tre .....

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rocess, it has incurred exchange loans due to adverse movement of currency, which resulted in exchange loss. Therefore, we are of the view that the A.O. was erred in treating exchange loss incurred by the assessee due to adverse movement of currency as capital in nature, which is not allowable u/s 37(1) of the Act. The CIT(A) after considering the relevant provisions of the Act, has rightly deleted additions made by the A.O. We do not find any error in the order of the CIT(A), hence, we inclined .....

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y, therefore, the assessee is not eligible for additional depreciation under the provisions of section 32(iia) of the Act. It is the contention of the assessee that it is in the business of drying and threshing of tobacco leaves, which amounts to manufacture, therefore, it is eligible for additional depreciation as per the provisions of section 32(iia) of the Act. In support of his arguments, relied upon the decision of Hon ble High Court of Madras, in the case of CIT Vs. Premier Tobacco Packers .....

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kcers Pvt. Ltd. (2006) 284 ITR 222, held that drying and threshing of tobacco leaves is manufacture and accordingly, entitled for additional depreciation as per the provisions of section 32(iia) of the Act. The relevant portion of the CIT(A) order is extracted below: I have considered the submissions made by the appellant, gone through the order of the AO and heard the AR in person besides perusing all other material available on record. The AO has not allowed the appellant s claim on the ground .....

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question of whether drying and threshing of tobacco amounts to manufacturing activity? And it was answered in favour of the appellant. In this case the appellant is engaged in the activity7 of processing tobacco for others, which is known as thrashing. In the return filed, entire income was claimed deductible under section 80HH, as its activity is manufacturing or production. The AO disallowed the claim. But on appeal, the CIT(A) following the earlier order of the Tribunal, allowed the appeal a .....

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