LOKSONS PVT.LTD., BOMBAY. vs. ASSTT.COMMISSIONER OF I.T.CIRCLE 5(4), BOMBAY.

:1: bgp bgp bgp

IN IN IN THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORDINARY ORDINARY ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION

INCOME INCOME INCOME TAX REFERENCE 10 OF 1995 TAX REFERENCE 10 OF 1995 TAX REFERENCE 10 OF 1995

M/s.Loksons Pvt.Ltd.,

2nd Floor, Ramchandra Bldg,

200, L.T.Marg, Bombay-2.

..Applicant

Vs.

Assistant Commissioner of Income Tax,

Circle 5(4), Bombay.

..Respondent

Mr.P.J.Pardiwala i/b. Kanga & Co.for the Applicant.

Mr.Vimal Gupta with Mr.P.S.Sahadevan for the

Respondent.

CORAM CORAM CORAM :- DR.S.RADHAKRISHNAN & :- DR.S.RADHAKRISHNAN & :- DR.S.RADHAKRISHNAN &

A.V.NIRGUDE, A.V.NIRGUDE, A.V.NIRGUDE, JJ. JJ. JJ.

DATE DATE DATE : 15TH JULY, 2008 : 15TH JULY, 2008 : 15TH JULY, 2008

JUDGMENT JUDGMENT JUDGMENT (PER : DR.S.RADHAKRISHNAN,J.) (PER : DR.S.RADHAKRISHNAN,J.) (PER : DR.S.RADHAKRISHNAN,J.)

By this Reference, the Income Tax Appellate

Tribunal, Bombay has referred the following

substantial question of law:

Whether on the facts and circumstances of the

case, the Tribunal was justified in upholding the

disallowance

the claim of the

assessee

for

deduction

account

exchange

loss

Rs.65,54,930/-

incurred on remittance of advance

received for supply of goods holding that the sum

was

paid

by the assessee was not on account

commercial expediency and was not incurred wholly

and exclusively for the purpose of business?

The above question of law pertains to

A.Y.1989-90.

The brief facts are, that the

Assessee

is a Private Limited Company carrying on a business of

trading

and

also

export

goods

and

for

the

A.Y.1989-90, the Assessee had filed a return of income

showing

net

loss

of Rs.56,03,630/-.

However,

the

Assessing

Officer

had

determined

the

net

taxable CNR No : HCBM020003961995 Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:51:06

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income

the

Assessee at Rs.8,06,729/-

and

while

passing

the

aforesaid

assessment

order

dated

28/02/1992, the Assessing officer had disallowed a sum

Rs.65,54,930/-

being the amount of loss

occurred

due

fluctuation

of foreign exchange

rate

while

remitting back the advance received for supply of

goods by the Assessee.

It appears that the Assessee had entered into

two

contracts

with

M/s.Globe Trading

Agency

Ltd.,

Dubai

in July,1979 for the supply/export of 7000

Kg.

copper/silver

wire

containing 47% silver

for

total

value

Rs.66,10,000/-.

the

aforesaid

contracts,

the Assessee had to effect shipment latest

September,1979.

pursuance

the

said

contracts,

the

Assessee

had

received

sum

32,09,895

UAE Dirhams as an advance for the supply of

the

aforesaid goods.

Unfortunately, before the goods

could

shipped by the Assessee, the Government

India

had

issued

a Notification

dated

03/08/1979,

whereby

total ban was imposed on export of

silver

from

India.

In view thereof, the Assessee could

not

export

the

aforesaid copper/silver wire, as per

the

contracts.

The Assessee had approached this Court by

filing

Writ Petition and initially

ad-interim

relief

was obtained whereby, the Assessee was allowed

export 50% of the contracted goods.

However,

the

said

ad-interim relief was set aside by the

Division

Bench

of this Court and subsequently an Appeal

seems Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:51:06

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to have been preferred to the Hon’ble Supreme Court of

India,

but

the record does not indicate as

what

transpired

thereafter.

However, the Assessee

could

not

dispatch the aforesaid 7000 Kg.

of copper/silver

wire,

contracted

M/s.Globe

Trading

Agency

Ltd.,Dubai,

view of ban imposed by Government

India.

Ultimately,

the purchaser had cancelled

the

contracts

his letter dated 29/09/1985 and by

the

said

letter the said purchaser had demanded back

the

aforesaid 32,09,895 UAE Dirhams which was paid towards under the said contracts.

The

Assessee

thereafter

had

approached the Reserve Bank of

India

for refunding the said amount of 32,09,895 UAE Dirhams

and

the

Reserve

Bank

India

granted

three

permissions

dated

01/11/1988

the

Assessee

for

sending the aforesaid 32,09,895 UAE Dirhams, the said

three permission Numbers are:

Sr.No. Sr.No. Sr.No. Permit No. Permit No. Permit No.

UAE UAE UAE Dirhams Dirhams Dirhams

Date Date Date

24,35,750 01/11/88

4,84,700 01/11/88

2,89,445 01/11/88

----------

32,09,895

----------

Accordingly, after obtaining

the said

permission,

the Assessee had forwarded 32,09,895

UAE Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:51:06

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Dirhams to M/s.Globe Trading Agency Ltd., Dubai during

the A.Y.1989-90.

The value of UAE Dirhams had gone up

substantially

during the aforesaid lapse of 10

years

since

the amount was received in July/August,1979 and

came

to be refunded only in the

Assessment

Year

1989-90.

result

fluctuation

foreign

exchange

rates, to constitute the said 32,09,895

UAE

Dirhams,

the

Assessee

had

pay

excess

Rs.65,54,930/-

during the A.Y.1989-90 over and

above

the rate which was prevailing in July/August,1979 when

the amount was received by the Assessee.

The Assessee had claimed the aforesaid excess

amount

terms

rupees

paid

the

foreign

purchaser,

way

of loss, as the

said

additional

amount was paid to the Purchaser, in view of

fluctuation in foreign exchange rates.

Mr.Pardiwala, the learned Counsel appearing

for the Assessee pointed out that what was refunded in

the Assessment Year 1989-90 pursuant to the permission

granted

by the Reserve Bank of India was exactly

the

same

32,09,895

UAE Dirhams and the Assessee

had

control over the fluctuating foreign exchange rate and

view

of the lapse of almost 10 years

the

excess

amount

of Rs.65,54,930/- was paid.

Mr.Pardiwala,

this behalf refers to one of the terms of contract, on

which

the

Tribunal had also relied upon.

The

said

term

reads

"alteration in rates

freight

or Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:51:06

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insurance

shall be on buyers account".

The

Tribunal

has interpreted the word appearing in the said term of

contract

"rates"

mean

fluctuation

foreign

exchange

rates.

However, Mr.Pardiwala

pointed

out

that

here the "rates" would mean rates of silver

and

not

rates

of foreign exchange".

Mr.Pardiwala

also

contended

that

the

Assessee had returned

only

the

exact

UAE

Dirhams which he had received in the

year

1979,

i.e.

after a lapse of almost 10 years,

since

all

the

efforts

of the Assessee came

nought

Mr.Pardiwala

contended

that

the

aforesaid

interpretation by the Income Tax Appellate Tribunal is

totally erroneous.

The rates here should only be with

regard

the price of silver.

To put it

other

words,

in the event by the time the silver were to be

dispatched

the

rates had gone up, it will be on

the

buyers

account

and

it had nothing to

with

the

foreign

exchange.

Mr.Pardiwala also contended

that

the

Tribunal had erroneously concluded that the price

was

settled

Indian currency @ Rs.950/-

per

kg.

F.O.B.

and

that the payment has to be made only

terms

Indian

Rupee.

Mr.Pardiwala

strongly

contended

that

Indian

Exporter

could

receive

payment

from a foreign party directly in Indian rupee

and

that

be so it would be a

serious

violation

under

the

then

provisions

Foreign

Exchange

Regulation

Act.

Mr.Pardiwala

contended

that

payment

by a foreign party to an Indian party, a bank

will

always accept foreign currency and the same bank Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:51:06

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will

convert the same in Indian rupee and pay to

the

Indian

party.

Accordingly,

when

the

amount

32,09,895

UAE

Dirhams were received

from

M/s.Globe

Trading Ltd., Dubai, the Assessee’s bank had converted

into

Indian rupee.

Similarly, the

Assessee

had

refunded the said 32,09,895 UAE Dirhams.

The Assessee

had

spend

that much of Indian

rupee

obtain

32,09,895

UAE Dirhams and to pay the purchaser by way

refund.

Mr.Pardiwala

pointed out that

this

obviously

was

loss

due to

fluctuating

rate

foreign exchange and the Appellant had no control over

the same.

Mr.Pardiwala contended that with regard to the

second aspect that the Tribunal had disagreed that the

Appellant/Assessee

had

to refund the amount

due

"commercial

expediency".

The

learned

Counsel

submitted

that if the party dealing with the

foreign

entity

obtains

advance for supply of certain

goods,

such

party is bound to refund the same and if

the

Indian

entity were not to refund the same, the entire

credibility of the Indian entity will be lost.

Hence,

to maintain the commercial expediency the Assessee had

to refund atleast the amount received from the foreign

purchaser.

Mr.Pardiwala pointed out that in fact the

foreign

party

had

demanded

further

amount

17,77,656

UAE

Dirhams in addition to

32,09,895

UAE

Dirhams

towards

damages.

In fact, the Assessee

had

not

forwarded

any

amount towards

damages

but

had Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:51:06

:7:

forwarded

the

only

amount

which

had

received

towards for

the

supply/export

the

copper/silver

wire.

Mr.Pardiwala strongly

contended

that

the Petitioner’s act of refund of the

aforesaid

purchase

price back to the foreign party was a

"fair

trade practice" and it was a clear case of "commercial

expediency".

Under

the

aforesaid

facts

and

circumstances

the case, Mr.Pardiwala pointed

out

that

the aforesaid question referred to by the Income

Tax

Appellate Tribunal ought to be answered in favour

of the Assessee and against the Revenue, in the sense,

the

said amount of Rs.65,54,930 ought to have allowed

a loss during the A.Y.1989-90 and the order of the

Income

Tax

Appellate

Tribunal,

Mumbai

disallowing

deduction on account of exchange loss of

Rs.65,54,930/- ought to be set aside.

Mr.Vimal Gupta, the learned Counsel appearing

on behalf of the Revenue could not controvert that the

Assessee

could

not

dispatch/export

the

silver

M/s.Globe

Trading

Agency Ltd., Dubai because of

the

ban

imposed by the Government of India on

03/08/1979

from exporting silver from India.

Mr.Gupta also could

not

controvert that in reality, what is refunded

was

exactly

32,09,895

UAE

Dirhams.

However,

Mr.Gupta

sought

justify

the

order

the

Income

Tax

Appellate

Tribunal

contending in view of

the

above

mentioned

term of contract i.e.

"alteration in rates

freight or insurance shall be on buyers’ account". Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:51:06

:8:

the

sense, here the "rates" would mean rate

with

regard

to foreign exchange.

Mr.Gupta also sought

contend

that

there

commercial

expediency

involved

refunding

the amount

received

the

foreign

party and in fact the Assessee need not

have

returned the aforesaid amount and incurred the said

foreign exchange loss.

After hearing both the parties, we find that

there

are

two issues in the aforesaid

questions

law.

The

first

being,

whether

the

amount

Rs.65,54,930/-

can

claimed by

the

Assessee

account of foreign exchange loss by way of loss in the

Income Tax return for the A.Y.1989-90?

With regard to

the

said question, the record is very clear that when

the

amount

was received in the year 1979 by

way from

the

foreign party, the

value

UAE

Dirhams

terms of rupee was less compared to

when

the same amount of 32,09,985 UAE Dirhams were refunded

M/s.Globe Trading Agency Ltd., Dubai after a lapse

almost

years.

To put in

other

words,

the

Assessee

had

received

32,09,895 UAE Dirhams from

the said foreign company and

the

very

same

amount i.e.

32,09,895 UAE Dirhams were refunded

back by the Assessee to the said company after a lapse

almost 10 years, over which he had no control

and

fact

there

no dispute from

the

Income

Tax

Department

that

the

Assessee could not

export

the

goods

because

the

Notification

issued

the Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:51:06

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Government

India

imposing ban on the

export

silver

from

India.

There is no

dispute

that

the

Assessee

had

made all attempts even

approaching

this

Court

and

seeking

permission

export.

Ultimately,

on complete failure to export the

goods,

the

year

1985

and

after

obtaining

necessary

permission

from

the

Reserve

Bank

India,

the

Assessee

had

dispatched

the entire

amount

the

foreign

company.

The interpretation sought to be put

the

Income Tax Appellate Tribunal with regard

"alteration

in rates or freight or insurance shall be

buyers

account"

is that it

deals

with

foreign

exchange

rate.

"Rates", obviously here

would

mean

rates

silver otherwise rates in foreign

exchange

makes

sense in the said clause because the

price

was agreed as per the Indian rupee at Rs.950/- per Kg.

Therefore,

what is contemplated here, is the rate

silver

and

by the time supply was to be made to

the

buyer

and in the event of any fluctuating in the rate

silver, the buyer will bear the additional burden.

Under

the

aforesaid facts and circumstances

the

case, we are clearly of the view that the Assessee had

control

over the excess payment that ought to

made

to the foreign company due to the fluctuation in

the

rate

of foreign exchange.

Second aspect in

the

above

is,

that whether the aforesaid payment can

said

be for commercial expediency?

Obviously

good

businessman will have to maintain certain amount

credibility

and

specially in a

foreign

market. Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:51:06

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There is no dispute that the Assessee had received the

aforesaid

32,09,895 UAE Dirhams by way of advance and

the

Assessee can not turn around and say that he will

not

refund

pay

back the

same

the

foreign

company.

This

also

would

come

under

"commercial

expediency".

Had the Assessee not been refunded

the

entire

amount

received by him as an advance

towards

the

contracts, the entire credibility of the Assessee

would have gone in the foreign market, and the said

refund was obviously for commercial expediency.

10.

Under the aforesaid facts and circumstances of

the

case, in both the aspects, we find the

arguments

of the Assessee to be sound for the aforesaid reasons.

Hence,

answer

the aforesaid question of

law

favour

the Assessee and against the

Revenue

and

hold

that

the disallowance of claim of Assessee

for

deduction

account

exchange

loss

Rs.65,54,930/-

incurred

remittance received

for supply of goods and the same paid by the

Assessee

ought

to be allowed and also it was due

commercial

expediency wholly and exclusively for

the

purpose

business.

Accordingly, the Reference

answered

favour of the Assessee and

against

the

Revenue. The Reference stands disposed of

accordingly.

(A.V.NIRGUDE,J.) (A.V.NIRGUDE,J.) (A.V.NIRGUDE,J.)

(DR.S.RADHAKRISHNAN,J.) (DR.S.RADHAKRISHNAN,J.) (DR.S.RADHAKRISHNAN,J.) Uploaded on - 21/08/2020 Downloaded on - 28/10/2026 05:51:06 Powered by TCPDF (www.tcpdf.org)