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TMI Blog2014 (7) TMI 1065X X X X Extracts X X X X X X X X Extracts X X X X ..... ny forward contracts - Loss notional in character – Held that:- Assessee is engaged in the business of manufacturing Tubes and 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 - assessee has availed financial facilities from its bankers for purchase of raw material - 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 - the loss falls under proviso (a) to Section 43(5) of the Act and 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 - the AO has failed to bring any material evidence on record to support its stand that the loss suffered by the Assessee was speculative loss – the decision in CIT Versus M/s Woodward Governor India P. Ltd. & M/s Honda Siel Power Products Ltd. [2009 (4) TMI 4 - SUPREME COURT] – there was no reason to interfere with th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing up of new machinery of plant should have any operational connectivity with article manufactured by the Assessee was not found acceptable to the A.O. The reliance placed on various decisions by the Assessee was also not accepted by the A.O. He in the absence of any decision of the jurisdictional High Court in favour of the Assessee disallowed the claim of additional depreciation. Aggrieved by the order of A.O, Assessee carried the matter before CIT(A). CIT(A) decided the issue in favour of the Assessee by holding as under:- 4.3 In the present case, the appellant company already engaged in the business of manufacturing of production of pipes and tubes which is an article or things and the appellant company has also installed a windmill, through which the production/generation of electricity is done. The provision of section 32(1)(iia) of the Act does not state that setting up a new plant and machinery which is acquired and installed after March 31, 2005 should have any operational connectivity to the article or things that was already been manufactured by the appellant company. Therefore, the appellant company has fulfilled all the conditions for claim of additional depreciati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aim additional depreciation is that setting up of new machinery or plant should have been acquired and installed by an Assessee who was already engaged in the business of manufacture or production of any article or thing. Further before us Revenue has not brought any binding contrary decision in its support. Considering the fact that Assessee is already engaged in the business of manufacturing and the Assessee has installed a windmill during the year and seen in the light of the decision of Hon ble Gujarat High Court we find no reason to interfere with the order of CIT(A). In view of the aforesaid facts, this ground of Revenue is dismissed. 2nd ground is with respect to deletion of disallowance on account of foreign exchange hedging loss. 8. On perusing the Profit and Loss account, A.O noticed that Assessee has claimed loss on account of foreign exchange derivative amounting to ₹ 5,89,29,812/-. It was assessee s submission that it had availed foreign currency loan for importing raw materials and it had shifted its loan liability in dollar to Swiss Franc and the loss resulted due to fall in the value of Swiss Franc vis- -vis dollar on the Balance sheet date was undertake ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the foreign exchange in the international market. 8.1 During the previous year, the appellant company has swap its working capital bank liability against purchase of raw-materials in Dollar Currency to Swiss Frank currency by entering into derivative contracts with bank. The stated logic for such swap from Dollar to Swiss Frank currency was that the Swiss Frank is considered as one of the most stable currency as compared to Dollar and accordingly, the loss, if any on account of foreign exchange fluctuation can be minimized. However, there was fall in the value of Swiss Frank vis-a-vis Dollar and on the balance sheet date i.e. 31-03-2008, the appellant 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 transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss in forward contract for foreign exchange transactions backed by liability in foreign exchange on account of purchase/sales of goods are business losses covered by Section 28 of the Act and not losses in the nature of 'speculation' as defined in section 43(5) of the Act. 8.4 It has been further submitted that in the subsequent year i.e. Financial Year 2008-09 relevant to A.Y.2009-10 on settlement of the said 2 forward contracts, there was a gain of ₹ 1,96,26,284/- which is credited to the Profit Loss A/c and shown as business income in the financial year 2008-09 relevant to A.Y.2009-10. Hence, the net foreign currency derivative loss is of ₹ 3,93,03,528/- (Rs.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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rial evidence is support of his finding that the loss suffered by the appellant company is speculative loss. Therefore, the action of the A.O to disallow the same as speculative loss is unjustified on the facts of the case and accordingly , the disallowance made by him is deleted. The appellant, accordingly, gets the relief of Rs.. 5,89,29,812/-. 9. Aggrieved by the order of CIT(A) Revenue is now in appeal before us. 10. Before us, ld. D.R. strongly supported the order of A.O. He further submitted that the Assessee has not placed on record the agreement entered by it with the bank wherein the bank was authorised to hedge the loss. On the other hand ld. A.R. reiterated the submissions made before CIT(A) and further placed reliance on the decision in the case of CIT vs. Woodward Governor India Pvt. Ltd. 312 ITR 354 (SC), CIT vs. Panchmahal Steel Ltd. 215 Taxman.com 140 (Guj.) and CIT vs. Friends and Friends Shipping Pvt. Ltd. 217 Taxman.com 267 (Guj.). The ld. A.R. thus supported the order of CIT(A). 11. We have heard the rival submissions and perused the material on record. It is an undisputed fact, that the Assessee is engaged in the business of manufacturing Tubes and Pip ..... X X X X Extracts X X X X X X X X Extracts X X X X
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