TMI Blog2020 (4) TMI 843X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of hedging against losses that may arise on account of adverse fluctuation in the foreign exchange rates. As decided in Hon ble High Court of Bombay in the case of CIT vs. De Chetan Co. [ 2016 (10) TMI 629 - BOMBAY HIGH COURT] wherein it is held that forward contract for purpose of hedging in course of normal business activities of import and export done to cover up losses on account of differences in foreign exchange valuation would not be speculative activity but business activity - Decided against revenue. LTCG - Addition after invoking section 50C on transaction of sale of immovable property in the form of land - HELD THAT:- It is noticed that the assessing officer has made addition of ₹ 15 lacs on the assumption that @ 20 lacs per acre the total market value works out to ₹ 1,22,50,000/- as against the consideration of ₹ 1,07,50,000/- shown by the assessee. It will be appropriate to restore this issue to the file of the assessing officer for deciding afresh after referring the issue to the departmental valuation officer for determining the fair market value of the land sold. Accordingly, the issue is restored to the file of assessing office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition on the ground that loss was of the nature of capital loss - HELD THAT:- As relying on SAGAR DRUGS PHARMACEUTICALS PVT LTD VERSUS JOINT COMMISSIONER OF INCOME TAX, RANGE-8, AHMEDABAD [ 2019 (1) TMI 1762 - ITAT AHMEDABAD] we restore this issue contested in the cross objection of the assessee to the file of assessing officer for examination of the alternate claim of the assessee to allow impugned loss as capital loss. - ITA Nos. 3069 & 3070/Ahd/2015, Cross Objection Nos. 210 & 211/Ahd/2015 (In ITA Nos. 3069 & 3070/Ahd/2015) - - - Dated:- 21-2-2020 - Shri Rajpal Yadav, Vice President And Shri Amarjit Singh, Accountant Member For the Assessee : Shri S.N. Soparkar, Sr. A.R. Shri Parin Shah And Shri Dhrunal Bhatt, ARs. For the Revenue : Shri Sanjeev Jain, CIT-D.R. ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:- These two appeals filed by revenue and two cross objections filed by assessee for A.Y. 2008-09 2010-11, arise from order of the CIT(A)-10, Ahmedabad dated 28-08-2015, in proceedings under section 143(3) 143(3) r.w.s. 92CA 144C of the Income Tax Act, 1961; in short the Act . ITA No. 3069/Ahd/2015 CO No. 210/Ahd/2015 filed by revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the appeal of the assesseee. The relevant pat of the decision of ld. CIT(A) is reproduced as under:- Decision: 7.3 I have carefully considered the Assessment Order and submission filed by the Appellant. The undisputed facts are that appellant company purchased crude palm oil from Acalpo Wilmar Pte Ltd in the month of May 2007 for consideration of $ 3674476 against which ICICI Bank has provided Buyers Credit of Swiss Franc 8000000 and such same was due in May 2008. However, due to sudden fall in the value of USD V/s Swiss currency, the company incurred huge foreign exchange loss of ₹ 8.55 crore. During the course of assessment proceedings, appellant argued that such loss arising on swap transaction cannot be treated as speculative loss. However, the Assessing Officer rejected the contention of appellant and contended that simply because as per RBI rules the companies are not expected to not to indulge in speculative transaction, same cannot be treated as business loss. The AO further contended that there was no purchase obligation in terms of Swiss Franc, there w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per the relevant RBI Rules, every transaction in foreign currency had necessarily to be conducted through a bank and that it was just not possible that a bank would permit a foreign currency transaction by a company which was speculative in nature and, therefore, not permissible under the RBI Rules because if a bank were to permit any such transaction, it would itself commit a default. The appellant further contended that, in any case, instruction relied upon by AO issued on 23/03/2010 cannot be made applicable in A.Y. 2008-2009, as it was not there in the year under consideration and it has not made effective from retrospective date. It was also submitted that such instruction is contrary to decision of CIT V/s Woodward Governor India P. Ltd. (supra), Oil and Natural Gas Corporation Ltd. v. CIT (supra), Mumbai ITAT Special bench in the case of DCIT v. Bank of Bahrain and Kuwait. The appellant stated that decision of Apex court clear states that M2M loss is not contingent loss as observed by AO. The appellant also argued that it is not a dealer in foreign exchange but is engaged in business of manufacturing of oil and during the course of business, it has entered into forward contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ahd/2011 dated 30/06/2014 decided the issue in favour of assessee. The facts of the said case are that the assessee was engaged in the business of manufacturing of steel tubes. During the year under consideration the assessee availed foreign currency loan for importing raw material and it had shifted its loan liability in dollar to Swiss franc and the loss resulted due to value in Swiss franc vis-a-vis dollar on the balance sheet date was undertaken the minimize the risk of foreign exchange fluctuation. The Assessing Officer disallowed loss claimed by assessee considering that (as discussed in para 8 of the order of I.T.A.T.) (i) Forex derivative loss on account of switching of Dollar loan to Swiss Franc Loan was unrealized loss. (ii) Assessee company has claimed loss on account of re-statement of loans/credit liability existing as on the date of balance sheet by swapping the loan from Dollar to Swiss Franc to reduce its Forex exposure risk and therefore'the loss claimed by the Assessee-was not of Revenue in nature but was an unascertained and notional loss. (iv) The loss claimed by the Assessee was speculative in nature. Thus, entire facts of present c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellant company booked the loss of ₹ 5,89,29,812/-. This facts have not been disputed by the A.O. 8.2 It is further submitted by the authorized representative of the appellant company that as per the consistent prudent practice and requirements of Accounting Standards issued by the ICAI, it follows accounting of transactions for purchase Sales in foreign currency at the prevailing foreign exchange rate at the time of executing transactions and difference if any between the amount of purchase/sales and amount at which the transactions is actually settled by the payment to/from suppliers/debtors is accounted as Loss/Gain on foreign exchange fluctuation . In the Trading Profit Loss Account, the Purchase and sales are disclosed after set off on account of the Loss or Gain due to fluctuation in rates of foreign exchange on account of transactions of import purchase and export sales in foreign exchange. Such gain or loss in foreign exchange transactions settled during the year is part of the cost of import purchase or value of export sales. It is further submitted thai at times, it happens that the forward contract to buy/sell foreign exchange remains outstanding at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncy derivative loss is of ₹ 3,93,03,528/- (₹ 5,89,29,812/-Less ₹ 1,96,26,284/-). 8.5 The appellant company made the transactions of import purchase of raw materials and export sales of manufactured goods in the normal course of business. The liability for payment to suppliers for import purchase in foreign exchange is subject to risk of losses on account of fluctuation in exchange rate of foreign currency. To safe guard against such losses and to hedge against the unforeseen future loss due to fluctuation in rate of foreign exchange transactions of purchase sales company makes the forward contract in the normal course of business to buy/sell the foreign exchange as per the market condition and advice of the bank. Thus, losses incurred in forward contracts for foreign exchange in the normal course of business are not speculative transactions and similar the said transactions nor regarded as speculative transaction as per the proviso (a) below the Section 43(5) of the Act and is a business loss covered by section 28 of the Act. It is submitted that as per the Accounting Standard-11 (AS-11) issued by the ICAI and RBI's guidelines, the companies were requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Pipes. From the copy of the balance sheet placed on record it is seen that the approximately 90% of the material consumed is from import purchases. It is also a fact that Assessee has availed financial facilities from its bankers for purchase of raw material. We find that CIT(A)while allowing the appeal of the Assessee has given a finding that the dealing of Assessee in foreign exchange was in the normal course of business and to safeguard the future losses against foreign exchange rate fluctuations it had entered into hedging transaction. He has further noted that the loss incurred by the Assessee on account of foreign exchange hedging transactions in forward contracts was backed by the trading liability on account of import purchases and therefore the loss was revenue in nature and was not a speculative loss. He is further given a finding that the loss falls under proviso(a) to Section 43(5) of the Act and therefore the loss on account of fluctuation in the rate of foreign exchange in forward contract was not speculative transaction but is a business loss covered by Section 28 of the Act. ClT(A)has further noted that the A.O has failed to bring any material evidence on record to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 45/Ahd/2014 vide its order dated 30.01.2015 after considering the provisions of section 43(5) and on issue of conversion of Rupee Loan into USD has adjudicated the entire issue in favour of assessee and held as under: 4.10 Aforesaid section applies only to such transactions in which a contract for purchase or sale of a commodity, including stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of commodity or scrips. The word commodity , by no stretch of imagination, can cover currency which is only a medium of exchange with which goods and services can be bought and so Learned The Legislature, while enacting aforesaid provision, thought it necessary to expressly include stocks and shares as being covered under commodity , which means that but for such expressed inclusion, the word commodity would not have covered even stocks and shares. Obviously, currencies cannot be covered by the word commodity . In such situation, provision of section 43(5) cannot be applied to currencies. Without prejudice to above, by virtue of the Proviso to section 43(5), hedging transaction cannot be regarded as speculative transactions. Afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... revenue. In response to query raised by Bench whether currency loss of ₹ 6.04 Crores consists of all the losses or any profit earned in this currency swap agreements. The Learned Authorized Representative drew our attention to pages 29 and 30 of the compilation where ledger account of currency swap was compiled. He also pointed out that in certain currency swap transactions, profit is also earned and hence, sum of ₹ 6.04 Crores is net figure of loss. Thus case on merit also tilt in favour of assessee. Following the ratio of above two decisions supra, it is held that Swap loss transactions, are not speculative transactions as defined in section 43(5) and such loss is required to be held as allowable business loss. So far as issue whether loss incurred by appellant on M2M is contingent loss or not, same issue is already decided in favour of assessee on identical facts by Jurisdictional Ahmedabad ITAT in the case of Heavy Metal and Tubes Ltd(supra). Even Hon'ble Mumbai ITAT on identical facts in the case of Reliance Industries Limited in I.T.A. No.7223/Mum/2011( A.Y. 2008-2009) vide its order dated 20/11/2013 has observed that in said case, The Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt Ltd. (supra) also considered a similar issue. In the said case the assessee-company was engaged in the business of granting of loans and advances against shares and securities also traded in derivative segment by entering into future and option contract. Some of the future contracts could not be squared up at the end of the financial year. The assessee booked the expected loss in such contracts on MTM basis. The assessee thus claimed a loss as calculated on MTM basis claiming that he was following this practice consistently. That it was also as per recognized Accounting Standard. AO rejected the claim on the ground that the derivative contracts were not stock in trade as there was no cost of acquisition. He finally held that the loss on account of MTM basis was thus a notional loss and was contingent in nature and could not be allowed to be set off against taxable income. On appeal, the Id. CIT(A) allowed the same by agreeing with the contention of the assessee that such loss on such valuation which is called MTM has to be allowed even though it may appear to be a notional loss. The Tribunal while confirming order of Id. CIT(A) and allowing the said loss placed reliance on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... department took the matter in appeal to the Appellate Tribunal. The Tribunal held that the loss claimed by the assassee on,,, revenue account was. allowable u/s 37(1) and also rejected the appeal1.of the department and held that the assessee was entitled to adjust actual cost on imported assets acquired in foreign currency on account of fluctuation in the rate of exchange in terms of section 43A. On appeal by the department, the Hon'ble High Court reversed the decision of the Tribunal on both the issues. On further appeal to the Apex Court, the decision of the High Court was reversed and it was held-that (a) that the loss claimed; by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet was allowable as an expenditure u/s 37(1), and (b) that the assessee was entitled to adjust the actual cost of imported assets acquired in foreign currency on account of fluctuation in the rate of exchange at each of the relevant balance sheet dates, pending actual payment of the liability u/s 43A, prior to its amendment by Finance Act, 2002. 11. In view of above decisions,- it is clear that the loss due to foreign exchange fluctuation i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e loss/expenditure claimed by the assessee on account of fluctuation in the rate of foreign exchange cannot be considered to be notional by following the Instruction No. 3 of 2010 of CBDT. The decision of Hon'ble Supreme Court in case of CIT, Delhi vs. Woodward Governor India Pvt. Ltd. (supra) and Income Tax Appellate Tribunal, Special Bench in Bank of Bahrain and Kuwait (supra) also support such a view. Therefore, considering the case of the assessee in the light of the law propounded in the judicial precedents discussed hereinabove, we are of the view that the assessee is entitled to claim the loss of ₹ 40,00,107/-. So far as the decisions relied upon by the learned Departmental Representative are concerned, they do not apply to the facts of the present case. In aforesaid view of the matter, we set aside the order of the CIT(A) and direct the Assessing Officer to delete the addition of ₹ 40,00,107/-. Further, it is pertinent to note that said instruction even otherwise brought on statue on 23/03/2010 cannot have retrospective effect. Considering the facts as discussed herein above, M2M loss incurred by appellant is not notional loss as observed by Assessing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee was engaged in the business of manufacturing of vanaspati and refining of edible oil and the forward contract has been entered in the ordinary course of its business in respect of under lying import/export business. The transactions were carried out for the sole purpose of hedging against losses that may arise on account of adverse fluctuation in the foreign exchange rates. It observed that the fact of the decision of Delhi ITAT in the case of Bachtel India (P) Ltd. referred by the ld. departmental representative are distinguishable from the case of the assessee. In that case forward contracts were not fully supported with invoices both in terms of the amount as well as tenure and there was no extra outgo for settlement of the forward contract other than already determined. On the other side, the ld. counsel has placed reliance on the decision of Hon ble High Court of Bombay in the case of CIT vs. De Chetan Co. vide 75 taxman.com 300 wherein it is held that forward contract for purpose of hedging in course of normal business activities of import and export done to cover up losses on account of differences in foreign exchange valuation would not be speculative activity but ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of raw materials only in manufacturers' cases though they could be both with regard to sales and purchases, such hedging contracts need not succeed the contract for sale and actual delivery of goods manufactured, but the latter could be subsequently entered into within reasonable time not exceeding the relevant assessment year in normal circumstances and such transactions should not exceed the total stock of the raw material or merchandise on hand including existing stocks as well as that acquired under the firms contract of purchases in order to be genuine and valid hedging contract of sales; respectively. Learned Departmental Representative fails to indicate any distinction therein vis-a-vis those involved in the instant adjudication. We therefore direct the Assessing Officer to delete the impugned disallowance. Considering the facts of the above and the findings as per the judicial pronouncements referred above in the order, we do not find any reason to interfere in the decision of the Ld. CIT(A). Therefore, the appeal of the Revenue stands dismissed. Cross Objection No. 210/Ahd/2015 filed by assessee 6. Ground Nos. 1 2 are not pressed, therefore, these ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t under transfer should be either land or building or both; (ii) There is a payment of stamp duty in respect of such transfer; (iii) There is a value adopted or assessed by Stamp Valuation Authority for the purposes of stamp duty; and (iv) The consideration received or accrued as a result of transfer of the capital asset is less than the value adopted or assessed by the Stamp Valuation Authority; - Then the value so adopted or assessed by Stamp Valuation Authority shall be deemed to be, for the purposes of section 48, the full value of the consideration received or accruing as a result of such transfer. The Hon'ble Jurisdictional Ahmedabad 1TAT in the case of Sanjaybhai J Pate! V/s ACIT [2011] 15 taxmann.com 103 has held as under : Section 50C, read with section 48, of the Income-tax Act, 1961 - Capital gains -Special provision for full value of consideration in certain cases - Assessment year 2006-07 - Assessee sold a piece of land - Value with which sale deed was registered was found to be below value determined by Stamp Valuation Authority - Assessing Officer invoked provisions of section 50C and brought to tax the differential - Whether in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erved that it will be appropriate to restore this issue to the file of the assessing officer for deciding afresh after referring the issue to the departmental valuation officer for determining the fair market value of the land sold. Accordingly, the issue is restored to the file of assessing officer for deciding afresh as directed above, therefore, this ground of Cross Objection of the assessee is allowed for statistical purposes. Ground No. 4 of Cross objection 11. This ground of Cross objection is filed against the decision of ld. CIT(A) in upholding the addition for ₹ 7,61,800/- on the ground that ₹ 19,04,500/- debited to P L account represented expenditure incurred on the acquisition of computer software and only entitled to depreciation @ 60%. 12. During the course of assessment, the assessing officer noticed that assessee has claimed an amount of ₹ 19,04,502/- debited towards software charges under the head miscellaneous expenses. The assessing officer has treated the purchase of software as capital expenditure and allowed deprecation @ 60% and added the difference amount of ₹ 7,61,800/- to the total income of the assessee. The assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commerce 256 taxman.com 24 (Del). The ld. counsel has submitted that the said expenditure was revenue in nature and the ld. CIT(A) was not justified in upholding that the said expenditure was in the nature of capital expenditure. On the other hand, the ld. D.R. has supported the order of lower authorities. We have gone through the jurisdictional pronouncement referred by the ld. counsel. It is noticed that Hon ble Gujarat High Court in the case of NJ India Invest Ltd. supra has held that software development and upgradation would include data administration services, information and technology support services, software asset management services, etc., which was in nature of maintenance, back up and support service to existing hardware and software and did not give any fresh or new benefit. Further we have seen that Hon ble Gujarat High Court in the case of Oriental Bank of Commerce vide 93 taxman.com 432 has allowed the deduction on software expenses u/s. 37(1) of the act holding that use of software did not confer any enduring right of assessee. Moreover the assessee s objective was not to augment software business rather it used computer software as a tool to maximize its purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company and claimed under the head Sauda settlement charges . The above claim was appellant was denied by Assessing Officer on the ground that KTV Health Food Pvt Limited is related party of appellant and appellant has suffered huge loss from such transaction. The Assessing Officer has also contended that when contract price on the date of entering of contract is compared with the actual price prevailing on that date, it clearly suggest that the contract in first place was entered at exaggerate rate and rate of settlement would always be less than average market price hence on such observation, Assessing Officer made disallowance of ₹ 2,14,40,000. The appellant reiterated the submission filed before Assessing Officer and further argued that contracts were entered into on commercial consideration by considering the market force on the date of contract and difference had arisen because of such declining trend in the market . It was also argued by appellant that KTV Health Food Pvt. Ltd. has duly filed income tax return for the year under consideration wherein income has been duly offered tax has been paid at maximum marginal rate which prove that there is no motive for tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lf clearly suggest that market price of Palmoelin has reduced significantly on day to day basis and clearly show declining trend in the market. It is pertinent to note that the contract price on 5.6.2009 was ₹ 43,000 and on the settlement date of 9.6.2009 which is still thereafter, the market price was ₹ 40,000, and that in view of such situation the subsequent contract was entered into on 19.6.2009, which was for ₹ 38,500 and even market price of settlement date of 22.6.2009 was ₹ 37,300. These fact clearly suggest that Assessing Officer was incorrect in observing that appellant has entered into exaggerated contract price but fact is that price of Paimoelin was reduced which lead appellant to settle the contraci without talking actual delivery of contact and appellant has settled the entire transaction at beneficial rate. The facts clearly suggest that appellant has entered into genuine business transaction and Assessing Officer has not brought any cogent evidences to prove that loss incurred by appellant is artificial loss. So far as allegation of Assessing Officer that appellant has entered into transaction with related party and incurred losses to r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied in making disallowance of ₹ 2,14,40,000. This ground of appeal is allowed. 17. During the course of appellate proceedings before us, the ld. departmental representative has supported the order of assessing officer. On other hand, ld. counsel has contended that payee M/s. KTB Health Food Pvt. Ltd. was paying tax at maximum marginal rate and ld. counsel has also placed reliance on the decision of 60 taxman.com 483 (Guj) 310 ITR 306 (Bom) 18. We have heard both the sides and perused the material on record and gone through the detail of total income and payment of taxes made by KTB Health Food Pvt. Ltd. placed at page 130 of the paper book. It is noticed that total income of the payee KTB Food Pvt. Ltd. for the assessment year 2010-11 was to the amount of ₹ 849,80,730/- on which tax was paid at higher marginal rate @ 30%. We have also gone through the decision of Hon ble High Court in the case of Pr. CIT Vs. Gujarat Gas Financer Services Ltd. vide 60 taxman.com 493 wherein it is held that where assessee company as well as assessee s parent company both were assessed to tax at maximum marginal rate, it could not be said that service charge was paid by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly conceded the assessment order and submission filed by appellant. The Assessing Officer has made disallowance of ₹ 93,26,443 being provision for advance of ₹ 88,17,112 and advance to creditor for ₹ 5,09,331 written off in year under consideration on the ground that appellant has not offered above amount as income in earlier hence condition prescribed u/s 36(2) r.w.s 36(1)(vii) of the Act is not allowable. On the other hand, appellant has referred to submission dated 06th March 2014 reproduced at page 9 of assessment order wherein appellant has given chart showing break up of bad debts advance written off along with party wise details of same along with ledger account of said party for current year as well as for the year in which income from the said party has been shown in Profit loss account. The appellant has also submitted major break up of such bad debt which includes ₹ 88,00,000 pertaining sale of DEPB license and ₹ 13,00,000 being amount receivable on account of sale of property. On careful consideration of the facts, it is observed that Assessing Officer has made disallowance of bad debt for ₹ 93,26,443 which mainly includes &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce in the actions of the authorities below and concur with the views so taken by the authorities below that the loss in question cannot be allowed as a bad debts or business loss. Having said that, however, we see merits in the plea of the learned counsel that once it is not in dispute that loss has indeed incurred even if it is not in the revenue field or bad debts, the same should be considered by the Assessing Officer for being allowed in the capital filed. The Assessing Officer having rejected the case of the assessee for the loss in the revenue field, it is only corollary thereto that as long as it is a genuine loss, as undisputed facts of the present case clearly indicate, the loss is to be treated as loss in the capital field, and the matter is to be examined further from that angle. However, this aspect of the matter is not at all examined by the Assessing Officer. Therefore, we remit this issue to the Assessing Officer for examination of the alternative claim of the assessee that the loss be allowed as capital loss. To this extend, the plea of the learned Counsel is accepted. Considering the above finding of the Co-ordinate Bench of the ITAT, we restore this issue ..... X X X X Extracts X X X X X X X X Extracts X X X X
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