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TMI Blog2020 (4) TMI 843X X X X Extracts X X X X X X X X Extracts X X X X ..... essee is a company engaged in the business of manufacturing of Vanaspati and refining of edible oil. The assessment u/s. 143(3) of the act was finalized on 10th October, 2011 and total income was determined at Rs. 20,89,84,427/- after making various additions. The issue in the instant appeal is pertained to disallowance of contingent liability to the amount of Rs. 6,55,33,334/- claimed as loss on account of market to market transactions. During the course of assessment, the assessing officer noticed that the assessee company used to import its raw material i.e. crude palm oil from Malasia for which it has to pay in dollars. To hedge the tariff in dollar rate i.e. rate the assessee company had entered into a number of forward contracts/ option contracts/tariff etc. with banks on which it had booked huge foreign exchange losses. The assessee had booked foreign exchange losses to the amount of Rs. 12,75,74,806/- which also included Rs. 6,55,33,334 on account of provisions made on market to market transactions entered with the ICICI bank. On query, the assessee explained that it had purchased crude palm oil from one Acalpo Wilmar Pte Ltd. in the month of May, 2007 for a consideration o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d-to-market loss in these type of derivative contracts are contingent loss. He has also referred to CBDT, New Delhi, instruction No 3/2010 dated 21/03/2010 wherein it is stated that such loss is notional loss and contingent in nature, hence cannot be allowed to be set off against the taxable income. The appellant argued that it had actually imported certain raw material and incurred a foreign currency liability in US Dollars for the same, that this foreign currency liability to the foreign supplier of raw material had been paid by the appellant by borrowing a foreign currency loan in US Dollars from ICICI Bank Ltd. Further, the appellant had entered into a hedging contract with the ICICI Bank Ltd. for the specific purpose of hedging its aforesaid Foreign Currency Loan liability to ICICI Bank which was to fall due for repayment in about eight months. It was further stated that as per Accounting Standard 11 "The Effects of Changes in Foreign Exchange Rates" issued by ICAI, appellant has provided marked-to-market loss in books of account. It was also stated that even though actual marked-to-market loss was of Rs. 7.39 crore but actual loss suffered by appellant was Rs. 6.55 crore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore decisions of Ahmedabad ITAT in the case of Heavy Metal and Tubes Ltd. in ITA No. 1951/Ahd/2011 dated 30/06/2014(supra) and Adani Enterprise Ltd. in ITA No.1545/Ahd/2014 pronounced on 30/01/2015(supra) in support of its argument that such loss is not speculative loss as observed by Assessing Officer. On careful consideration of entire facts, it is observed that the two issues emerging out of above discussion are that whether conversion of USD into Swiss Franc resulting into loss is speculation loss or business loss and whether M2M loss provided by appellant on above derivative contract is contingent loss or actual business loss. So far as first issue is concerned, it is observed that appellant has imported material in USD and in terms of RBI guidelines; it converted its liability of USD into Swiss Franc. It is not the case that appellant has not at all incurred any liability and entered into transaction of buying USD and selling Swiss Franc dependency or vice a versa hence conversion of foreign currency liability in another foreign currency liability is hedging transaction not covered by speculative transactions as defined in section 43(5) of the Act. It is pertinent to note ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... well as submissions of the appellant. The appellant company is engaged in the manufacturing of Tubes & Pipes. It purchases the required raw materials mainly from import source. During the previous year relevant to assessment year under consideration, approx. 90% of the value of materials consumed is from import purchase. There are export sales also. Thus, it appears that the appellant company requires dealing in foreign exchange in normal course of business and to safeguard the future losses against foreign exchange rate fluctuation it enters in to hedging transaction. It has availed the fund based and nonfund based financial facilities from its bankers in the form of Letter of Credit, Buyer's Credit, Cash Credit Limits in foreign currency for purchase of raw materials & payment to overseas suppliers, against stock of raw materials & collection of book debts. It is submitted that since the appellant company uses the fund and non-fund based facilities in foreign currency, the bankers have advised the company to cover up the foreign exchange payment liabilities against the risk of fluctuation in rate of foreign exchange. There is always an inherent risk of fluctuation in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tled forward contracts have to be accounted in the books. As such there is no difference between the loss on account of evaluation of unsettled outstanding foreign exchange forward contracts and loss on account of settled foreign exchange forward contracts during the year. Loss, under both the situations, i.e. settled and unsettled forward contracts in foreign exchange, is revenue loss incurred in the normal course of business to hedge the risk of fluctuations in foreign exchange rates. Further, it is also submitted that as per the Accounting Standard-11 (AS-11) issued by the ICAI and RBI's guidelines, the companies are required to revalue un-matured contracts as per rates of exchange notified by Foreign Exchange Dealer's Association of India (FEDAI). 8.3 During the previous year relevant to assessment year under consideration, there were 2 unsettled forward contracts aggregating to US $ 76.00 lacs as on the last date of Balance Sheet i.e. 31-03- 2008 to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period. The loss is incurred by the appellant company on account of evaluation of these unsettled outstanding forw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r, this treatment is as per principles of accounting which required the current assets to be marked to the market rate. 8.6 The ratio laid down in the decision of Income-tax Appellate Tribunal, Mumbai Bench-"C" Special Bench, Mumbai in the case of DCIT vs. M/s. Bank of Bahrain & Kuwait (ITA No.4404 & 1883/Mum72004) is squarely applicable to the appellant company. 8.7 The loss incurred by the appellant company on account of evaluation of contract on the last day of accounting year i.e. before the date of maturity of forward contract be allowed as business loss for the following reasons I.......................... 8.8 Considering all the above facts together, I am inclined to agree with the contention of the appellant company that the loss incurred by the appellant company on account of foreign exchange hedging transactions in forward contracts which is backed by the trading liability of the appellant company on account of import purchases, is a business revenue loss and not speculative loss as held by the A.O. The case of the appellant company squarely falls under proviso (a) to Sec. 43(5) of the Act and accordingly, the transactions entered into by the appellant company in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... particular case, cover an amount which is re-ally a "loss" even though the said amount has not gone out from the pocket of the assesses-Word "paid" in s. 43(2) means actually paid or incurred according to the method of accounting on the basis of which profits or gains are computed under s. 28/29-Sec.37(1) has to be read with ss, 28, 29 and 145(1)- There is no finding of iti X X X X Extracts X X X X X X X X Extracts X X X X ..... vt. Ltd. (127 ITD 386) has held as under: It shows that set off of loss of derivative trading against the profit of share trading business is permissible. 4.12 ........... Thus, it emerged from above legal discussion that once transactions in currencies cannot attract the very definition of expression "speculative transaction" contained in clause [5] of Section 43, there is no room for suggesting that the exception contained in clause (d) of Proviso thereto does not apply to transactions by way of currency swap in foreign currency. In the result, loss on account of such contracts, entered into for the purpose of hedging, is deductible as business expenditure. According to us, Assessing Officer has adopted legally tenable view in its facts and circumstances though not discussed specifically. 4.19 Regarding merit of the claim, we find that currency swap loss of Rs. 6.04 Crores was directly covered in favour of assessee by the decision of the jurisdictional High court in the case of CIT v. Friends and Friends Shipping Pvt, Ltd [supra], wherein assessee had entered into forward _contracts with banks to hedge against any loss arising to fluctuation in foreign currency. In some c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Id. Commissioner of Income Tax and the submissions of Id. Representatives of the parties. We have also carefully considered the cases cited before us (supra). It is relevant to state that in the case of Woodward Governor India (P.) Ltd. (supra), the Hon'ble Apex Court observed and held that the . assessee debited to its profit and loss account certain unrealized loss due to foreign exchange fluctuation in foreign currency transactions towards revenue items as on the last day of the accounting year. The A.O. held that the liability as on the last date of the previous year was not an ascertained but a contingent liability. Resultantly, the same was added back to the total income. The C1T(A) echoed the assessment order. However, the Tribunal held that the claim of the assessee for deduction of unrealized loss due to foreign exchange fluctuation as on the last date of the previous year was deductible. The said order of the Tribunal was upheld by the Hon'ble High Court. On further appeal by the department, the Hon'ble Supreme Court held that the loss suffered by the assessee is on revenue account towards foreign exchange difference as on the date of balance sheet and is an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of ONGC Ltd (supra).? The.assessee- a public sector undertaking was engaged in the capital intensive/exploration and production of petroleum products for which it had to heavily depend on foreign loans- to cover its expenses, both capital and revenue and for payment to non-resident contractors, in foreign currency for various services rendered. The assessee made three types of foreign exchange borrowings i.e.(i) on revenue account; (ii) on capital account, and (iii) for general purposes. Some of the loans became repayable in the relevant accounting year and the date of payment of some loans fell after the end of the relevant accounting year. The assessee revalued its foreign exchange loans, in foreign exchange on revenue account, on capital account and for general purposes outstanding as, on 31-3-1991, and claimed the differences IT.A. No.7223/Mum/2011 6be.tw,eerv their respective amounts in Indian currency as on 3f-3-1990 and 31-3-1991 as revenue loss under section 37(1) in respect of loans used in revenue account. The assessee also treated the similar difference in foreign .exchange as an, increased, liability u/s 43A. The AO allowed the deduction claimed u/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w taken by AO, nor the action of AO is prejudicial to the interest of revenue. Hence, the order of Commissioner of Income Tax u/s 263 of the Act .to hold that the action of AO is erroneous to the extent the loss considered as ITA. No.7223/Mum/2011 7allowable on account of derivative contracts outstanding as on the date of balance sheet i.e. 31.3.2008 is neither justified nor in accordance with law.. Hence, we quash the said order of Id. Commissioner of Income Tax by allowing the grounds of appeal taken by the assessee." Hon'ble Hyderabad ITAT in the case of VST Industries Ltd. Vs. Additional CIT ,TA No: 647/HYD/2012) vide its order dated 23rd August, 2013 has held as under: "10. The Hon'ble Gujarat High Court in case of Friends and Friends Shipping Pvt. Ltd. (Tax Appeal No. 251 of 2010 dated 23-08-2011) (supra) after following the decisions of the Hon'ble Bombay High Court in case CIT Vs. Badridas Gaurida (P) Ltd. (261 ITR 256) and the decision of Hon'ble Calcutta High Court in case of CIT vs. Soorajmull Nagarmull (129 ITR 169) held that when the assessee is not dealer in foreign exchange and for the purpose of hedging the loss due to fluctuation in foreign ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dabad in the case of ACIT vs. Heavy Metal & Tubes Ltd. vide ITA No. 1951/Ahd/2011 and CO. No. 232/Ahd/2011 order dated 30-06-2014 and decision of Hon'ble Mumbai High Court in the case of CIT-16 Vs. D. Chetan & Co. (2016) 75 taxman.com 33 (Bombay) dated 1st October, 2016 5. We have heard the rival contentions and perused the material on record carefully. The assessing officer has disallowed the claim of deduction for loss arising from foreign exchange fluctuation in respect of a hedging contract to cover foreign exchange credit provided by ICIC Bank for payment for the purpose of imported raw material upon accounting of the outstanding hedging contract on market to marked basis at the end of the year. There was an outstanding liability in foreign currency towards import either to the suppliers or to the bank. The buyer's credit liability was due in May, 2008 and it was an option contract. In order to hedge against the foreign currency liability the assessee entered a foreign option contract with ICIC Bank in July, 2007. Due to sudden and unexpected fall in the value of USD Vs. Swiss currency in the math of March 2008, the assessee has incurred foreign exchange loss of Rs. 6,55,53,33 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated to have issued a certificate dated 12.02.2015 claiming realization of Rs. 123,71,57,417/- which could be realized to the tune of Rs. 111,72,18,0927- as on 31.03.2011. Its SBI contract enabled it to book losses against the above unrealized bills. Lower authorities as well as learned Departmental Representative do not rebut this factual position. The assessee claims to have been inter alia recording its sales to overseas clients on the day of transaction in its books in Indian currency at the rate prevailing on the very day, it would lodge conversion claim upon payment of its consideration money by said customers, this currency settlement took time after lodgment to be realized resulting in fluctuation loss as is the case herein. We notice in this backdrop that hon'ble jurisdictional high court's decision in CIT v. Friends & Friends Shipping (P.) Ltd. [2013] 35 taxmann.com 553/217 Taxman 267 (Guj.) holds losses arising from similar foreign exchange contracts to be business losses than speculative ones. Their lordships conclude that such exchange transactions are hedging transactions instead of being speculative transactions in nature. Next comes hon'ble Bombay high ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e normal income. On query, the assessee explained that the profit being short term capital gain having same tax rate therefore it was not separately shown under the head capital gain. On verification of the sale deeds the assessing officer noticed that in some cases the value of sale consideration received was less than the fair market value. Consequently, after invoking the provision of section 50C of the act, the assessing officer has added an amount of Rs. 15 lacs to the total income of the assessee after estimating the total market value at the rate of Rs. 20 lacs per acre. 8. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee. The relevant part of the decision of ld. CIT(A) is as under:- "Decision: 9.3 I have carefully considered the Assessment Order and the submission filed by the Appellant. The Assessing Officer has observed that appellant has sold land of 6 acres and 5 guntas situated at survey no 53 &54 .Manasapalli Village, Mandal for consideration of Rs. 1,07,50,000 whereas JANTRI Value for such land reveals that market value is Rs. 1,22,50,000 hence differential amount of Rs. 15,00,000 was added to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of computing income from capital gain. The appellant has relied upon decision of Hon'ble Punjab & Haryana High court in the case of CIT V/s Chandni Gucchar wherein Assessing Officer has made addition for unexplained investments at the time of purchase by relying on JANTRI rate of purchase of land. However, in the present case, Assessing Officer has made addition invoking revisions of section 50C for sale value of land and it is settled legal law that such provisions do not apply in the hands of purchasers hence ratio of said decision is not applicable in present case. Even decision of Jurisdictional Ahmedabad ITAT relied upon by appellant was for the case of purchase of asset hence even ratio of said decision is not applicable in present case. Considering the facts discussed herein above, addition made by Assessing Officer is upheld and this ground of appeal is dismissed." 9. During the course of appellate proceedings before us, the ld. counsel has placed reliance on the decision of Chandra Narain Chaudhary 38 taxman.com 275 (All). The ld. counsel has submitted that no evidence had been brought to show that any amount in excess and declared consideration was received by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argued that it has purchased application software and such technology is rapidly changes hence such software are not for enduing benefit and allowable as revenue expenditure. The appellant relied upon decision of CIT V/s Asahi India Safety Glass Limited (supra). On careful consideration of entire facts, it is held that appellant is entitled to depreciation @ 60% on computer and computer software from A.Y. 2003-2004. The depreciation chart as provided in Income Tax Rules does not make any distinction between application software or other software and clearly depicts that assessee is entitled to depreciation @ 60%. Even the decision of CIT V/s Asahi India Safety . Glass Limited relied upon by appellant pertains to assessment year prior to A.Y. '2003-2004 and same is not applicable in year under consideration. Considering these facts, Assessing Officer was justified in holding that software expenditure cannot be allowed as revenue expenditure and appellant is entitled to depreciation @ 60% on such expenditure. However, as appellant is granted depreciation on Software expenditure of Rs. 19,04,502, closing block of " Software" in the case of appellant is increased by addition o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... V Health Food Pvt. Ltd. for sale of RBD palm oil on various dates and various quantities. However afterwards the assessee company could not take delivery of contracted quantity of RBD palm oil within the stipulated time schedule and requested for settlement. The assessee has further submitted that it has paid settlement charges below the price prevailing in the market hence it cannot be said to have been unjustifiable. The assessee has submitted copies of credit notes along with daily rates published by the solvent extractor association of India. The assessing officer has not accepted the submission of the assessee. He was of the view that the contract in first place were entered at exaggerated rate and the rate of settlement will always be less than the average market price. He has stated that the said transactions within the group was a mere artificial or employed so as to reduce the tax liability of the assessee company. Therefore, Sauda settlement charges of Rs. 2,14,40,000/- was disallowed and added to the total income of the assessee. 16. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee. The relevant part of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greed upon settlement price which is lower than contract price but higher than price as per SEA which clearly suggest that appellant has settled the contract for minimizing the losses incurred in contract executed with above party. During the course of assessment proceedings, appellant has submitted Price as per SEA on settlement date and no adverse inference is drawn by Assessing Officer which clearly support the contention of appellant that settlement was agreed upon to reduce the losses incurred to execution of purchase contract. For better appreciation of facts and from tabular chart reproduced in assessment order, it is observed that appellant has made purchase contract of Rs. 43,500 PMT and on the date of settlement, rate as per SEA was Rs. 40,000 but appellant has agreed upto to settle the transaction at Rs. 42,000 PMT which means that appellant has incurred loss of Rs. 1500 PMT as against actual loss of Rs. 3000 PMT. Even in balance transactions, appellant has agreed upon settlement rate as discussed herein above. It is further observed that while making addition, Assessing Officer has observed that on 09.06.2009, market price was Rs. 40000 PMT whereas on 05.06.2009, cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s having tax arbitrage- (i)lf one of the related companies is a loss making company and the other is a profit making company and profit is shifted to the loss making concern; and (ii)lf there are different rates for two related units [on account of different status, areabased incentives, nature of activity, etc.] and if profit is diverted towards the unit on the lower side of the tax arbitrage. For example, sale of goods or services from non-SEZ area, [taxable division] to SEZ unit [non-taxable unit] at a price below the market price so that taxable division will have less taxable profit and non-taxable division will have a higher profit exemption. [Para 4] The ratio of above decision squarely applies to present case as KTV Health Food Pvt. Ltd. has already paid maximum marginal tax on income disclosed in year under consideration hence question of making disallowance of loss on the ground that transaction is with related party covered u/s 40A(2)(b) does not arise. It is pertinent to note that during the year under consideration, appellant has earned net Sauda settlement income of Rs. 1,11,24,002 and same is disclosed in Schedule 14 " Sales and other operational income(net)" w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at High Court. Considering the same, we do not find any merit in the appeal of the revenue, therefore, the same is also dismissed. Cross Objection No. 211/Ahd/2015 filed by the assessee 21. Ground No. 1 of the cross objection is not pressed, therefore, the same is dismissed as not pressed. 22. Ground No. 2 of the cross objection is against the decision of ld. CIT(A) in upholding disallowance of Rs. 13 lacs claimed as bad debts written off on the ground that amount in question had been taken into income under the head capital gains in earlier assessment years. During the course of assessment, the assessing officer noticed that assessee has claimed bad debt advance written off to the amount of Rs. 51,603,770/-. On verification, the assessing officer has observed that assessee has written off provision for advances of Rs. 88,17,112/- and advance to creditors amounting to Rs. 5,09,331/-. The assessing officer has further observed that this amount was in nature of advance written off which was not offered to tax in earlier year. Therefore condition as laid down in section 36(2) of the act were unfulfilled. Therefore, amount of Rs. 93,26,443/- was disallowed and added to the total i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... " Capital gains" which means that loss arising on account of nonrecovery of sale proceeds would be capital loss for appellant and not business loss as claimed by appellant, thus, addition of Rs. 13,00,000 made by Assessing Officer is upheld." 24. During the course of appellate proceedings before us, the ld. counsel has contended that ld. CIT(A) is not justified in restricting the addition to the extent of Rs. 13 lacs on the ground that loss was of the nature of capital loss. It is further contended that if the loss is of the nature of capital loss then the same should have been allowed as capital loss. The ld. counsel has placed reliance on the decision of Co-ordinate Bench in the case of Sagar Drugs & Pharmaceutical Pvt. Ltd. Vs. Joint CIT vide ITA No. 345/Ahd/2016 order dated 18-01-2016. On the other hand, ld. departmental representative has supported the order of ld. CIT(A). 25. We have heard both the sides and perused the material on record. We have gone through the decision of the Co-ordinate bench as cited above in the case of the Sagar Drugs and Pharmaceutical Pvt. Ltd. supra. The relevant part of the decision of Co-ordinate Bench is reproduced as under:- "8. It is only ..... X X X X Extracts X X X X X X X X Extracts X X X X
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