2015 (12) TMI 47 - AT - Income Tax

Disallowance of loss on eligible derivate transactions in foreign exchange - Held that - The assessee company has entered into derivative transactions in foreign currency through recognised stock exchange and has complied with the other conditions as stipulated in Section 43(5) read with proviso(d) and explanation 1 to the said Section 43(5) of the Act for which cogent material is brought on record. The contract for derivatives in foreign currency are commodity as defined u/s 43(5) of the Act, the underlying asset being foreign currency and are hence entitled for exemption from being treated as speculative provided all other conditions as stipulated u/s 43(5) are complied with. A binding obligation accrued against the assessee the minute it entered into contract for derivative in foreign currency. A liability is said to have crystallized when a pending obligation on the balance sheet date is determinable with reasonable certainty. The considerations for accounting the income are entirely on different footing. As per AS-11, when the transaction is not settled in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting period. The contract for derivative in foreign currency have all the trappings of stockin- trade. In the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit and in case the derivative contract is squared off/settled in the succeeding year, the difference in loss/profit will be brought to tax in the succeeding assessment year and hence its allowability in the current year is tax neutral. Hence, we order that loss incurred by the assessee company on the contract for transaction in un-expired contracts as on the date of Balance Sheet as at 31st March 2009 in derivatives in foreign currency complies with the provisions of Section 43(5) of the Act read with proviso (d) and explanation 1 of the Section 43(5) of the Act and is exempt to be categorised as speculation loss and further hold that the said loss as at the date of financial statement as at 31st March 2009 arising due to adverse movement in exchange rate between United States Dollars vis-avis in relation to Indian Rupee as on the date of Balance Sheet as at 31st March 2009 is not a notional or contingent loss rather it is a ascertained liability which has crystallized on the date of Balance Sheet as at 31st March 2009 and can be computed with reasonable certainty and accuracy, hence allowable as non-speculation loss. - Decided in favour of assessee. Payment of stamp duty and fee to Ministry of Corporate Affairs, New Delhi towards increase in authorized capital - revenue v/s capital expenditure - Held that - Hon ble Supreme Court in the case of Brooke Bond India Ltd. v. CIT (1997 (2) TMI 11 - SUPREME Court) and Punjab State Ind. Corp. Ltd. v. CIT (1996 (12) TMI 6 - SUPREME Court ) has clearly held that these stamp duties/fees to Ministry of Corporate Affairs, GOI paid towards the increase in authorized capital of the company is held to be for expansion of capital base of the company and hence these are capital expenditure and cannot be allowed. Respectfully following the above decisions of the Hon ble Supreme Court, we uphold the orders of assessing officer as confirmed by the CIT(A) and decide this issue against the assessee company and in favour of the Revenue by holding that payment by assessee company towards stamp duty and fee to Ministry of Corporate Affairs, New Delhi towards increase in authorized capital of the assessee company is capital expenditure and disallowed as revenue expenditure as claimed by the assessee company. - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of loss on eligible derivative transactions in foreign exchange.
2. Disallowance of stamp duty and fees paid to the Ministry of Corporate Affairs.

Issue-wise Detailed Analysis:

1. Disallowance of loss on eligible derivative transactions in foreign exchange:

The assessee company, engaged in Knowledge Process Outsourcing (KPO) and Revenue Cycle Management (RCM) for US clients, reported a loss of Rs. 1,09,98,560/- on derivative transactions in foreign exchange. The Assessing Officer (AO) disallowed this loss, categorizing it as speculative under Section 43(5) of the Income Tax Act, 1961, and not as an eligible transaction for hedging against foreign exchange fluctuations. The AO argued that the transactions were not entered into to hedge against foreign exchange positions and were speculative in nature, thus not qualifying for the benefits under the proviso to Section 43(5).

The CIT(A) upheld the AO's decision, considering the loss as notional and contingent, relying on CBDT Instruction No. 17/2008 and treating it as a speculative transaction. The assessee company contended that the transactions were hedging against foreign currency receivables and were marked to market losses as per Accounting Standard-11 (AS-11) issued by ICAI. The company cited several judgments, including CIT v. Woodward Governor India Pvt. Ltd. and DCIT v. Bank of Bahrain & Kuwait, to support their claim that such losses are not speculative and should be allowed as business losses.

Upon appeal, the Tribunal analyzed the provisions of Section 43(5) along with the proviso and explanation, determining that the derivative transactions in foreign currency were carried out through recognized stock exchanges and fulfilled the conditions stipulated under Section 43(5). The Tribunal held that these transactions were not speculative, as they were entered into to hedge against foreign exchange losses on receivables from US clients, and the loss was not notional or contingent but an ascertained liability that crystallized on the balance sheet date. The Tribunal relied on the Special Bench decision in DCIT v. Bank of Bahrain & Kuwait, which allowed similar losses as business expenses.

2. Disallowance of stamp duty and fees paid to the Ministry of Corporate Affairs:

The assessee company paid Rs. 10,31,096/- towards stamp duty and fees to the Ministry of Corporate Affairs, New Delhi, for increasing its authorized capital. The AO disallowed this expenditure, treating it as capital in nature under Section 37 of the Act. The CIT(A) upheld this disallowance, relying on the Supreme Court judgments in Brooke Bond India Ltd. v. CIT and Punjab State Ind. Corp. Ltd. v. CIT, which held that such expenses for increasing authorized capital are capital expenditures and not allowable as revenue expenses.

The Tribunal, upon reviewing the case, agreed with the CIT(A) and upheld the disallowance, confirming that the payment towards stamp duty and fees for increasing authorized capital is a capital expenditure and not allowable as a revenue expense.

Conclusion:

The Tribunal allowed the appeal regarding the disallowance of the loss on derivative transactions, holding it as a non-speculative business loss. However, it upheld the disallowance of stamp duty and fees paid to the Ministry of Corporate Affairs as capital expenditure. The appeal was thus partly allowed.