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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 ..... 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 Rs. 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 take up the issue raised by the Revenue for consideration as under: I. ITA No.1112/B/12 - By the Revenue: 4. Briefly stated, the facts of the issue are as below: 4.1. The assessee firm is an exporter of silk fabrics involving the process of reeling, twisting, dyeing, weaving, printing, embroidery work etc. During the year under dispute, the assessee had furnished its return of income, admitting an income of Rs. 2,24,34,844/- which was, initially, processed u/s 143(1) of the Act. Subsequently, the case was subjected to scrutiny u/s 143(3) of the Act. During the course of assessment proceedings, the AO noticed that the assessee had incurred an expenditure of Rs. 35,75,087/- towards cost of marbles for re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay 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 stand, the revenue had placed reliance on the following case laws: (i) Ballimal Naval Kishore v. CIT (1997) 224 ITR 414; (ii) Punjab State Industrial Dev. Corporation Ltd v. CIT 225 ITR 792; (iii) CIT v. Madras Auto Services (P) Ltd 233 ITR 468 4.5. On the other hand, the learned AR supported the findings of the CIT (A) on the issue. It was, further, submitted that the stand of the CIT (A) was based on the judgments of the Hon'ble Delhi High Court (supra) and also the Hon'ble Supreme Court in the case of CIT v. Saravana Spinning Mills Limited (supra) and, hence, the same requires to be sustained. 4.6. We have carefully considered the submissions of both the parties and also perused the relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inging 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 observed that in our opinion the test involved by Chagla C.J., in New Shorrock Spinning and Manufacturing Co. Ltd's case (1956) 30 ITR 338 (Bom), is the most appropriate one having regard to the context in which the said expression occurs. It has been followed by a majority of the High Court in India. We respectfully accept and adopt the test. Applying the aforesaid test, if we look at the facts of this case, it will be evident that what the assessee did was not mere repairs but a total renovation of the theatre. New machinery, new furniture, new sanitary fittings and new electrical wiring were installed besides extensively repairing the structure of the building. By no stretch of imagination, can it be said that the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urrency out of the total amount of Rs. 1.56 crores. The difference of Rs. 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 forward contract results in recovery of the difference between contracted rate and the rate at which the contract is cancelled known in the international business parlance as 'swap charges'. The ledger account of the assessee also reveals that the assessee had paid such swap charges amounting to Rs. 65.17 lakhs due either to difference in foreign currency on forward contract or cancellation of forward contract on fifteen occasions between 15.5.2008 and 31.3.2009. The AO had further noticed that the assessee's case was one of forward contracts relating to transaction in financial asset coming within the concept of speculative transactions and not coming with the exception contemplated in the proviso (a) to s. 43(5) of the Act. The AO also noticed a clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore, 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 speculative transactions entered into by the appellant clearly constitute a 'speculation business' to which Explanation 2 to section 28 and also section 73 of the I.T. Act apply. This aspect has been dealt with in detail by the Hon'ble ITAT, Bangalore in the case of Shri K.Mohan Exports & Co in 126 ITD 0059 (Bang) ........................." 5.3.1. Though the CIT (A) had fairly conceded that the issue on hand was in a different context as to whether income from speculation profits can be said to be income 'derived from exports' for the purpose of section 10B or not, she, however, observed that the decision of the Hon'ble Calcutta High Court in the case of CIT v. Sooraj Mull Nagarmull (129 ITR 169) which has been relied on by the High Court of Bombay in its decision i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k 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 forward contract transactions, it cannot be classified either as speculative transactions or business; - contradicting with the CIT (A) presumption that the assessee carried on parallel business over and above the regular business, it was claimed that the transactions of forward contract were in relation to the average foreign exchange business receipt of the earlier three years, and that it was not done in isolation, but, was connected with receipt of business proceeds from foreign buyers/customers. The cancellation of forward contract was contingent upon the business receipts in foreign currency and, therefore, was not in isolation and not a parallel business as alleged by the CIT (A); - relies on the ruling of the Hon'ble Madras High Court ion the case of Sri R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eculative 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 from its regular business, but, arising out of the separate 'speculative business and, therefore, the stand of the CIT(A) deserves to be sustained. 5.5. We have carefully examined the rival submissions and also perused the relevant materials on record. Briefly, the assessee had debited to its P& L account a sum of Rs. 90,86,277/- due to the fluctuation in forex out of the total amount of Rs. 1.56 crores and the difference thereof, amounting to Rs. 65.17 lakhs was claimed as loss arising from the cancellation of forward contract in forex. The AO, however, for the reasons recorded in his order under dispute and also relying on certain case laws, held that the assessee was not entitled to claim the said expenditure due to forex loss and, accordingly, brought to tax. The CIT (A), relying o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Expln. 2 to s. 28 r/w s. 43(5), and speculation business not being the business of assessee's undertaking, profit from forward contracts could not be included in the profits of the business of the undertaking for the purposes of computing deduction under s. 10B". With due regards, we have perused the above findings and of the firm view that the issue itself was on the different footing. To be precise, the issue before the earlier Bench was deduction u/s 10B and whether the profits from forward contracts can be said to be derived from the assessee's undertaking for the purpose of deduction u/s 10B of the Act whereas the issue on hand is entirely different. The above reasoning has been fairly conceded by the CIT (A) in her findings. For ready reference, the relevant portion of her reasoning is extracted as und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 banks. In some cases, the export could not be executed and the assessee had to pay certain charges to the bank and thereby incurred certain expenses. These expenses, the assessee claimed by way of expenditure towards business. We do not find that the transaction can be stated to be in speculation as to cover under sub-section (5) of section 43 of the Act." 5.5.5. Taking into account the above facts into consideration and also in conformity with the ruling of various judiciaries (supra), we are of the considered view that the CIT (A) was not justified in sustaining the order of the AO on the issue. In substance, the issue goes in favour of the assessee. 6. In the result: (i) the Revenue's appeal is dismissed; & (ii) the assessee's appeal is allowed. Order pronounced at the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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