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TMI Blog2013 (8) TMI 963X X X X Extracts X X X X X X X X Extracts X X X X ..... nd another by the assessee firm are directed against the order of the CIT (A)-II, Bangalore, dated 6.7.2012. The relevant assessment year is 2009-10. ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore I. ITA No.1112/B/12 By the Revenue: 2. The Revenue has, in its Memorandum of appeal, raised three grounds. However, all the grounds are confined to the solitary issue, namely: Whether the claim of expenditure of ₹ 32,17,578/- incurred for relaying of the floor with marble is capital or revenue? II. ITA No.1320/B/12 By the assessee: 3. The assessee has raised seventeen grounds in an illustrative manner. However, during the course of hearing, the learned A.R. has pressed for adjudication of the ground No.4 only which states as under: that the authorities below have erred in disallowing the expenditure on cancellation of forward contract amounting to ₹ 65,17,187/- by wrongly treating it as speculation loss. 3.1. As the issues raised in these appeals are inter-linked and pertaining to the same assessee, for the sake of convenience, they are heard, considered together and disposed of in this consolidated order. 3.2. We shall first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in CIT v. Saravana Spinning Mills Ltd reported in 293 ITR 201. It was held that such expenditure on repairs, reinforcement, replacement of dilapidated beams, pillars, walls etc., of existing press building was not capital expenditure but only revenue expenditure as the assessee did not bring into existence any new asset over and above existing building. Expenditure on replacing the flooring in the present case would also be in the nature of revenue expenditure and allowable 4.4. Aggrieved, the Revenue has come up before us with the present appeal. During the course of hearing, it was submitted that the CIT (A) had failed to refer to the amended provisions to s. 30(a)(i) (ii) by way of insertion of Explanation below this section by the Finance Act 2003 w.e.f. 1.4.2004 which reads For the removal of doubts, it is hereby declared that the amount paid on account of the cost of repair referred to in sub-clause (i) and the amount paid on account of current repairs to in sub-section (ii) of clause (a) shall not include any expenditure in the nature of capital expenditure. It was, therefore, pleaded that the action of the AO requires to be restored. To strengthen its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., requires repairs and when the need arises must be decided not by any academic or theoretical test but by the test of commercial expediency. The learned Chief Justice observed: The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as expenditure for repairs what is really done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of repairs because it is only by reason of this definition of repairs that the expenditure is revenue expenditure. If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which is Legislature has permitted under section 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure Accepting the ratio laid down by the Hon ble Bombay High Court (supra), the Hon ble Supreme Court ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urnished a lengthy submission by justifying its action as recorded in the assessment order under dispute. However, the AO noted that the difference in foreign exchange arises for the assessee as exporter of silk fabrics and cloth at the time of realisation of export proceeds received in foreign currency. That the assessee receives export proceeds as per invoices, but, at the time of realising the same, what the assessee gets is on the basis of prevalent market rate of the foreign currency i.e., if the rate is higher, the benefit is credited to P L account or, if the rate is lower, the loss is debited. The AO had, further, noted that the assessee had debited to the P L account a sum of ₹ 96.86 lakhs due to the fluctuation in foreign currency out of the total amount of ₹ 1.56 crores. The difference of ₹ 65,17,187/-between the two was found to have been debited to P L account as loss arising from the cancellation of forward contract in foreign exchange. The AO also found that the assessee had entered into forward contract agreement with the State Bank of India for delivering a fixed amount of foreign exchange in a month at a fixed rate. Cancellation of the forw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y speculative transactions under the I.T. Act. However, it still remains to be seen, whether or not these speculative transactions constitute a speculation business to which Explanation 2 to section 28 applies. 4.5. It is seen that the appellant has traded in foreign exchange derivate with bank and volume of such trade is based on the average receipt of the past 3 years as stated by the appellant. It is not the case of the appellant that each export order is directly protected against foreign exchange risk. Instead, the appellant has entered into a series of speculative transactions every month, keeping in view his expected foreign exchange availability on the strength of export orders in his regular business of export. These transactions are, therefore, in the nature of a parallel business over and above the regular business, the connection with the regular business being only incidental and not direct. The transactions in foreign exchange market are with a profit intent separate from his regular business and not merely to exclusively protect risks in foreign exchange fluctuation as claimed by the appellant. 4.6. On such facts and circumstances of the case, the spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve in nature, but, entered into with the object of protecting business profits and business interest would not bring to the fore any speculative business. As a consequence, explanation to s. 28 is not attracted in the assessee s case; - that it is not correct to say that the assessee has traded in foreign exchange derivatives with bank. It is a fact that all such transactions have been entered into based on the average business receipts of the past three years. This in itself is an indication that transactions of forward contracts have not been done in isolation and, therefore, cannot be considered as speculative transactions; - that differing with the suggestion of the CIT (A) that each export order should have been protected against foreign exchange risk which would have brought the transactions outside the scope of speculative transactions etc., it was claimed that it would make no difference whether each export order is directly protected or the portion is through a series of transactions. As long as the transactions of forward contract are hinged on real business transactions and are not done in isolation and, the assessee has no exclusive business interest in such forwa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt proceeds and there were others that had to be cancelled on account of lower receipts than were anticipated; this obviously is the outcome of the business dynamics and, therefore, has to be treated as part of the business process; (d) loss on account of forward contracts springs directly from and incidental to the carrying on the business of export of silk fabric by the assessee; (e) the loss is not incurred on a capital account or fixed assets so as to make it capital loss; (f) there exists a direct and proximate nexus between its export business and the loss on account of forward contract. 5.4.1. In conclusion, it was submitted that the loss incurred on cancellation of forward contract of foreign currency amounting to ₹ 65.17 lakhs is a business loss and not speculative loss and, therefore, the same requires to the allowed for set off. 5.4.2. On the other hand, the learned DR supported the action of the authorities below on the issue. It was, further, submitted that the issue has since been discussed by the first appellate authority elaborately and arrived at a right conclusion that the loss incurred by the assessee cannot be wholly or exclusively termed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat each export order should have been protected against foreign exchange risk which would have brought the transaction outside the scope of speculative transactions. According to us, it would make no difference whether each export order is directly protected or the protection is through a series of transactions. As long as the transactions of forward contracts are concerned, we find that they are directly linked with the assessee s business of export of silk fabrics and, as such, it cannot by any stretch of imagination be classified as speculative business . 5.5.3. The AO and the CIT (A) have placed strong reliance in the case of K. Mohan Exports (supra) to come to a conclusion that the assessee s claim of business expenditure debited to forex loss in forward contract cannot be an allowable deduction. In K.Mohan Exports case, it was concluded by the Hon ble earlier Bench that - Assessee-exporter having entered into forward contracts in respect of foreign exchange receivable as a result of export in respect of the export turnover and settled the same without actual delivery, the profit from such forward contracts is assessable as profit from speculation business in view of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in which a contract for the purchase or sale of a commodity is settled otherwise than by the actual delivery or transfer of such commodity. However, as stated above, the assessee was not a dealer in foreign exchange. The assessee was an exporter of cotton. In order to hedge against losses, the assessee had booked foreign exchange in the forward market with the bank. However, the export contracts entered into by the assessee for export of cotton in some cases failed. In the circumstances, the assessee was entitled to claim deduction in respect of ₹ 13.50 lakhs as a business loss. This matter is squarely covered by the judgment of the Calcutta High Court, with which we agree, in the case of CIT vs. Soorajmull Nagarmull (1981) 22 CTR (Cal) 8 : (1981) 129 ITR 169 (Cal). (ii The Hon ble Gujarat High Court has, in the case of CIT III v. Panchmahal Steel Ltd reported in (2013) 33 taxmann.com 10 (Guj) on a similar issue, held as under: .Admittedly, the assessee is a not a dealer in foreign exchange. For the purpose of hedging the loss due to fluctuation in foreign exchange while implementing the export contracts, the assessee had entered into forward contract with bank ..... X X X X Extracts X X X X X X X X Extracts X X X X
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