DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE- 4(1)(1), BANGALORE vs. M/S. LIFESTYLE INTERNATIONAL PRIVATE LIMITED, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES “A” BENCH: BANGALORE BEFORE SMT BEENA PILLAI, JUDICIAL MEMBER AND SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER ITA No. 50/Bang/2020 Assessment Year : 2013-14 M/s. Lifestyle International Pvt. Ltd., 77, Town Centre, The Deputy Building No. 3, Commissioner of West Wing, Income Tax, Off HAL Airport Road, Circle – 4(1)(1), Yamlur, Vs. Bengaluru. Bengaluru – 560 037. PAN: AAACL2937J APPELLANT RESPONDENT & ITA No. 93/Bang/2020 Assessment Year : 2013-14 (By Revenue)

: Shri K.R. Vasudevan & Assessee by Shri Ankur Pai, Advocates : Shri Binod Kumar Singh, CIT Revenue by DR Date of Hearing : 23-08-2022 Date of Pronouncement : 18-11-2022

Page 2 of 31 ITA Nos. 50 & 93/Bang/2020 ORDER PER BEENA PILLAI Present cross appeals appeal has been filed by assessee as well as revenue against the order passed by Ld.CIT(A)-4, Bengaluru dated 04/11/2019 for Assessment Year 2013-14 on following grounds of appeal. Assessee’s appeal: “The grounds mentioned hereinafter are without prejudice to one another. 1. Computing profits earned from "slump sale" as business income instead of long-term capital gains on transfer of Splash division 1.1. The learned CIT(A) has erred in rejecting the business transfer of Splash division of the Appellant as slump sale and upholding the findings of learned AO without providing any basis. 1.2. The learned CIT(A) has erred in not appreciating the fact that the Appellant has furnished additional evidence under Rule 46A of the Income-tax Rules,1962 ["the Rules"]. Further, the Appellant has also furnished a copy of additional evidence before the learned AO at the time of issuance of remand report. 1.3. The learned CIT(A) and learned AO has erred in not considering the submissions/ documentary evidences furnished before them from time to time. 1.4. The learned CIT(A) has erred in accepting the treatment given by the learned AO that the transfer of Splash brand is a business income, when the division was in existence for more than 36 months and qualified as a long term capital asset. 1.5. The learned CIT(A) and learned AO has erred in concluding that the provision of section 50B of the Act are not applicable to the Appellant without providing any reasons as to why the transfer is not a slump sale. 1.6. The learned CIT(A) has failed to appreciate that transfer of Splash division is a slump sale as per provisions of section 2(42C) of the Act as the entire division including stores, computers, employees and stock-in-trade

Page 3 of 31 ITA Nos. 50 & 93/Bang/2020 was transferred on a going concern basis and not only "Splash" brand as alleged by the learned AO. 1.7. The learned CIT(A) has failed to appreciate that as per Business Transfer Agreement the Appellant has agreed to sell all the assets for a lump sum consideration without any values being assigned to individual assets and it was intended as slump sale as per the provision of section 50B of the Act. 1.8. The learned CIT(A) has erred in confirming the action of the learned AO, wherein the learned AO has considered book value of the division instead of net-worth of the division as per section 50B of the Act for the purpose of computing capital gains. 1.9. The learned CIT(A) upheld the order of the learned AO and has considered section 43(6)(c)(ii) of the Act instead of section 43(6)(c)(i)(c) of the Act, as specifically stated under section 50B of the Act for the purpose of computing WDV for slump sale. 1.10. The learned CIT(A) and the learned AO has erred in not relying on the net-worth certificate issued by Chartered Accountant in Form 3CEA. 1.11. The learned CIT(A) and the learned AO has erred in not appreciating the fact that the Act does not mandate for maintaining separate books of account for a division/ unit. 1.12. Notwithstanding and without prejudice to above, even if the transaction is to be considered as itemized sale, then the value of fixed assets transferred or sold should be reduced from the block of assets and only if the block ceases to exist, capital gains would arise. 2. Considering hedging losses as notional or speculative and disallowed under section 37 of the Act: 2.1. The learned CIT(A) has erred in confirming the disallowance of hedging losses without providing any basis for the same. 2.2. The learned CIT(A) upheld the order passed by the learned AO in disallowing hedging loss, by treating the same as speculative loss. 2.3. The learned CIT(A) and the learned AO failed to appreciate that the definition of a "speculative transaction" does not include a derivative transaction and hence Mark to Market ["MTM"] losses from derivative transactions is not a speculative loss. 2.4. The learned CIT(A) and the learned AO failed to appreciate the view of the Appellant that instruction no. 17/2008 dated 26 November 2008 and 03/2010 dated 23

Page 4 of 31 ITA Nos. 50 & 93/Bang/2020 March 2010 issued by the CBDT are not binding on the Appellant. 2.5. Notwithstanding and without prejudice to the above, the learned CIT(A) failed to appreciate that if such MTM losses be treated as speculative in nature, the same should be allowed to be carried forward and set off against the MTM gains, if any in the subsequent years The Appellant craves to leave/ to add to / to alter/ to amend/ to rescind/ to modify the grounds herein above or produce further documents, facts and evidence before or at the time of hearing this appeal.” Revenue’s appeal: “1. Whether the Ld. CIT(A) is right in deleting the disallowance of premium of Rs.2,61,37,084/- paid by the assessee towards forward cover and allowing the expenditure u/s 37 of the I.T Act, when the expenditure was disallowed by the AO by treating the same as speculative loss u/s.43(5) of the I.T Act. 2. Whether on the facts and circumstances of the case, Ld.CIT(A) was justified in allowing ESOP expenses to the assessee ignoring the fact that it is not a revenue expenditure actually incurred by the company, as per the provisions of the I.T Act. 3. Whether on the facts and circumstances of the case, Ld.CIT(A) was justified in following the decision of the Special Bench of the Bangalore Tribunal in the case of M/s.Biocon Ltd vs DCIT(2013) 25 ITR (T)602 which has not been accepted by the department and against which further appeal has been filed in Hon'ble High Court, which is pending. 4. Reliance is also placed on the decision of the Delhi Bench of the Tribunal in the Ranbaxy Laboratories Case where it has been held that ESOP expense is not allowable thereby disallowing the expenditure claimed by the assessee. 5. Further the SLP has been admitted in the Case of Lemon Tree Hotels (P) Ltd [2019] 104 taxmann.com 27 (SC) in favour of Revenue on the same issue of ESOP treatment and matter is pending for adjudication.

Page 5 of 31 ITA Nos. 50 & 93/Bang/2020 6. For these and other grounds that may be urged at the time of hearing, it is prayed that the order of the CIT (A) in so far as it relates to the above grounds may be reversed and that of the Assessing Officer may be restored. 7. The appellant craves leave to add, alter, amend and / or delete any of the grounds that may be urged.” 2. Brief facts of the case are as under: The Assessee is a private limited company engaged in the business of retail trade of apparels and accessories, toys, baby basics, footwear, leather products, furniture and household, and other accessories. It operates stores across India under the brand name "Lifestyle" and "Max". During the year, Splash, a division of the Assessee which was engaged in retailing of apparels to youth segment was moved to a separate legal entity i.e, Splash Fashions India Private Limited ("Splash India") w.e.f. 01.10.2012. This transfer the business of the assessee carried under “Splash” brand as a going concern was on 'slump sale' basis to Splash India. 2.1 Subsequent to the transfer of ‘Splash’ division on slump sale basis, the Assessee filed its return of income for the Assessment Year ("AY") AY 2013-14 on 30.11.2013, declaring a total income of Rs.597,189,260/- (including capital gains amounting to Rs.44,931,206/- arising on slump sale of Splash division). The return of income filed by the Assessee for AY 2013-14 was selected for scrutiny and notice under section 143(2) of the Income-tax Act ("the Act") was issued on the Assessee. 2.2 Statutory notices u/s. 143(2) along with 142(1) were issued to assessee in response to which representatives of assessee appeared

Page 6 of 31 ITA Nos. 50 & 93/Bang/2020 before the Ld.AO and filed various details, produced books of accounts. The Ld.AO observed that the assessee debited sum of Rs.2,61,37,084/- as premium on forward cover in its P&L account. Details were sought in respect of the same and assessee filed vide letter dated 11/01/2006 wherein it had submitted that the expenses were incurred towards hedging of foreign currency payables on merits of trade merchandise etc. Assessee submitted that to secure itself from uncertainties in the rate of foreign currencies, the assessee entered into forward contract with Indian Overseas Bank, and fixed the rate for foreign currency as on the date of the payment to the suppliers of merchandise. It was submitted that the assessee in this manner secures itself from any increase in the rates of foreign currency payables. The assessee also submitted that, for entering into such forward contract, the bank charges certain premium which is the expenses incurred by the assessee that was booked under the head “premia on forward cover”. Assessee filed various submissions which were considered by the Ld.AO. However, the Ld.AO treated the forward cover charged amortized during the year by the assessee as speculative loss u/s. 43(5) r.w.s. 73 of the Act. 2.3 The next issue considered by the Ld.AO was in respect of the expenditure incurred towards ESOP option exercised during the year amounting to Rs.18,44,375/-. It was submitted that, the assessee made claim of ESOP during the assessment proceeding which was denied by the Ld.AO. The assessee relied on the decision of Hon’ble Special Bench of this Tribunal in case of Biocon

Page 7 of 31 ITA Nos. 50 & 93/Bang/2020 Ltd. vs. DCIT reported in 35 taxmann.com 335. The Ld.AO, however, rejected the claim of assessee by submitting that, the assessee did not file revised return in respect of the claim, and therefore the assessing officer was precluded from considering the claim. The Ld.AO relied on the decision of Hon’ble Supreme Court in case of Goetz India Ltd reported in 284 ITR 323. 2.4 The next issue considered by the Ld.AO was in respect of the transfer agreement entered into with Splash Fashions India Pvt. Ltd. by the assessee wherein ‘splash’ brand was transferred. 2.4.1 The Ld.AO noted that the assessee transferred its assets amounting to Rs.22,35,71,677/-, based on the book values at the consideration of Rs.28,16,00,000/- and recorded a profit of Rs.5,80,28,323/-. The assessee also submitted that, the company expenses were allocated and the transfer was held to be a slump sale. The Ld.AO after considering various submissions by assessee observed as under: “6. Business Transfer …………..The argument of Sri Jagadish Solanki, the authorised representative is that as the accounting standards did not require the reporting of Splash as a separate segment it was reported under the Lifestyle segment but separate accounts and establishment as far as the brand was concerned were maintained. The company claims that the accounts and establishments were maintained separately but no conclusive evidences are furnished in this respect. The only evidence that could be furnished as to the identification of any assets of Splash brand is the details of fixed assets as per the inventory prepared by SS Industrial consultants. The value of the inventory at Rs 15.23 crores is based only on the adjustments made in the books of accounts as reported in the summary of the valuation report of the consultant. The company has admitted a profit on account of slump sale at

Page 8 of 31 ITA Nos. 50 & 93/Bang/2020 Rs 4,49,31,206. Further, WDV of the addition should be arrived at as determined under section 43(6)(c)(ii) while the accountant has determined the value u/s 43(6)(c)(i)(C). In view of the above arguments it is doubtful that the company has transferred the brand on a slump sale basis as what was transferred was only a brand and not an undertaking or division Hence, the transfer on account of sale of Splash brand is charged to capital gains under the normal provisions as transfer / sale of individual assets and not as a slump sale. The profit from the sale is therefore computed as under: (Rs.) (Rs.) Consideration received 28,16,00,000 1. Assets other than Less: depreciation assets 19,02,63,568 brought forward 2. Value of fixed assets as per books 3,70,06,707 of account 22,73,30,275 Less: Value of liabilities 22,35,71,676 37,58,599 Profit on sale of individual assets belongs to Splash 5,80,28,324 brand Hence the gains on transfer of Splash brand is adopted at Rs.5,80,28,324/- as against the claim of profit on slump sale of Rs.4,49,31,206.” 2.5 The next issue considered by the Ld.AO was in respect of the marked to market (MTM) losses claimed by the assessee amounting to Rs.17,63,532/- that was derived on fair value as on the balance sheet date, disallowed by the Ld.AO, holding it to be speculative loss in terms of Section 43(5) of the Act. 2.6 The Ld.AO also noted that, the assessee had belated remittances of EPF amounting to Rs.6,63,518/- which was disallowed by the Ld.AO. Thus the assessing officer made the following additions.

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Aggrieved by the order of Ld.AO, assessee preferred appeal before the Ld.CIT(A). 3. The Ld.CIT(A) after considering the detailed submissions of assessee allowed following issues. Ground Amount in Conclusion of Particulars No Rs. CIT(A) Disallowance of the premium on 2,61,37,084 Allowed in favour 1 forward cover under section 43(5) of Assessee read with section 73 of the Act Rejection of claim made by the Assessee during the course of Allowed in favour 2 18,44,375 assessment proceedings in respect of Assessee of ESOP expenses Short credit of brought forward Allowed in favour 3 losses of Assessee Allowed in favour 4 Arithmetical errors of Assessee Computation of interest under Allowed in favour 5 section 234B of Assessee

3.1 In respect of disallowance of hedging losses, the Ld.CIT(A) restricted the disallowance to the amount debited to the P&L account. In respect of the profits earned from slump sale, the addition was upheld.

Page 10 of 31 ITA Nos. 50 & 93/Bang/2020 Aggrieved by the order of Ld.CIT(A), both assessee as well as revenue are in appeal. We shall first take up the appeal filed by the assessee. 4. Ground no. 1 (1.1 to 1.12) has been raised by assessee in respect of the profits computed by the Ld.AO from the slump sale as business income, instead of long term capital gains. 4.1 The learned AR submitted that, the assessee entered into a business transfer agreement with Splash Fashions India Pvt. Ltd. on 29.12.2012 with effect from 01.10.2012 for sale of its "Splash" division, on a going concern and slump sale basis. He referred to the agreement placed at page 90-100 of the Paper book. It was submitted that, as part of the sale, the Assessee transferred employees, fixed assets, current and noncurrent assets, current and non-current liabilities involved in the business of Splash Division. 4.2 The Ld.AR further submitted that, in its return of income offered capital gains amounting to Rs.44,931,206/-, arising on slump sale of ‘Splash’ division as per section 50B of the Act, and the computation was determined to be as under: Particulars Amount in Rs. Book value of the Division 22,35,71,677 Net-worth of the Division as 23,66,68,794 per section 50B of the Act Consideration received from 28,16,00,000 Splash India Capital gains offered to tax in 4,49,31,206 the Return of income filed by the Assessee

Page 11 of 31 ITA Nos. 50 & 93/Bang/2020 4.3 The Ld.AR submitted that, the difference between the book value of the division and the net-worth of the division as per section 50B is due to the computation of the written down value ("WDV") of the assets. He submitted that, for the purposes of determining the book value, the WDV of the assets was calculated as per the provisions of section 43(6)(c)(ii) of the Act, while the WDV for the purposes of determining the net-worth, the provisions of section 43(6)(c)(i)(C) was applied. 4.4 He submitted that the Ld.AO in the assessment order held the transaction of sale of ‘Splash’ as itemized sale and not slump sale by stating that the transfer was only for brand and not an undertaking or division. The Ld.AO further held that the provisions of section 43(6)(c)(ii) were applicable for determining the WDV against section 43(6)(c)(i)(C) which has been applied by the assessee. 4.5 The Ld.AR submitted that, during the course of appeal before the Ld.CIT(A), the assessee filed additional evidence under Rule 46A which were admitted by the Ld.CIT(A). It was submitted that a remand report was called from the Ld.AO. In the remand report dated 03/11/2017, the Ld.AO held that no fresh evidence was submitted by the assessee and that the evidences submitted were already submitted in the course of assessment proceedings which were considered while passing the assessment order. 4.6 The Ld.AR submitted that assessee had submitted the following additional evidences and the observations of the Ld.AO in the remand report are incorrect.

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Page No of Annexure Particulars Paper book Karnataka VAT registration certificate for Splash, 697 to 699 brand before the business transfer Karnataka VAT registration for Splash brand after business 1 700 transfer Karnataka VAT returns filed by Splash Fashions India 701 to 736 Private Limited for FY 2013-14 Andhra Pradesh VAT registration certificate for Splash 737 brand before business transfer Andhra Pradesh VAT registration certificate 2 738 to 739 for Splash brand after business transfer Andhra Pradesh VAT returns filed by 740 to 751 Splash Fashions India Private Limited for FY 2013-14 Delhi VAT registration certificate for Splash brand before 752 business transfer Delhi VAT registration certificate for Splash brand after 3 753 business transfer Delhi VAT returns filed by Splash Fashions India Private 754 to 790 Limited for FY 2013-14 Copies of the Rental agreements for Splash stores in 791 to 824, Karnataka, Andhra Pradesh and Delhi continued 4 825 to 831 and in Splash Fashions India Private Limited after 832 to 881 transfer of business undertaking Form 16 of employees issued by the Assessee 882 to 893 before the business transfer 5 Form 16 of transferred employees issued by Splash 894 to 905 Fashions India Private Limited after the business transfer

4.7 The Ld.AR submitted that, ‘Splash’ India in its financials for the year ending 31.03.2013 declared the take over of the ‘Splash’ division from the Assessee on a slump sale basis. It was also submitted that the return of income filed by Splash India was assessed and accepted by its assessing officer therein it was accepted as a slump sale. It was thus submitted by the Ld.AR that the entire business of Splash India was transferred to the assessee as a going concern basis. In support of its contention, the Ld.AR

Page 13 of 31 ITA Nos. 50 & 93/Bang/2020 relied on the decision of Hon’ble Supreme Court in case of CIT vs. Equinox Solutions (P.) Ltd. reported in (2017) 80 taxmann.com 277. However, the Ld.CIT(A) without verifying the evidences filed by the assessee dismissed the ground. 4.8 On the other hand, the Ld.DR relied on the orders passed by authorities below. 4.9 We have perused the submissions advanced by both sides in the light of records placed before us. First of all it is to be seen what a "slump sale" is all about. Sec. 2(42C) of the IT Act, which is applicable from 1st April, 2000, defines "slump sale" to mean the transfer of one or more undertakings as a result of sale for a lump sum consideration, without values being assigned to the assets and liabilities of such a sale. In other words, if an undertaking is transferred as a going concern with all its assets and liabilities, without valuations having been assigned to individual assets, such a transaction is to be regarded as a "slump sale." 4.10 As per Explanation 1 to section 2(42C) of the Act, "undertaking" shall have the meaning assigned to it in Explanation 1 to Section 2(19AA) of the Act. Explanation 1 to section 2(19AA) of the Act says that, "undertaking" shall include any part of the undertaking or a unit or division of an undertaking or a business activity taken as a whole, but does not include individual assets or liabilities or any combination thereof not constituting as business activity. From this, it is clear where the assets and liabilities of an undertaking are sold as a group or lumped together, such a sale would qualify as a slump sale.

Page 14 of 31 ITA Nos. 50 & 93/Bang/2020 4.11 In the light of the above, we have carefully gone through the material on record, and we have carefully gone through the agreement entered into by the parties on 29/12/2012 w.e.f. 01/10/2012 which is scanned and reproduced as under:

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4.12 From the above agreement, Recital 2 clearly reveals that the assessee wishes to transfer, convey, assign as a going concern to

Page 19 of 31 ITA Nos. 50 & 93/Bang/2020 Splash Fashions India Pvt. Ltd., the business undertaking under the brand name “Splash” together with, its stores under the said brand undertaking along with its rights, property rights, easement rights. The details of which has been itemised in Annexure -1 to the agreement. We further noted that, in Article 1.1(a) of the agreement, the assets that are being transferred have been listed and in Article 1.1(b) the liabilities pertaining to splash division are also transferred. In Article (2), the consideration on such transfer has been valued at Rs.28,16,00,000/- as a full value consideration. We also note that in the auditors report following observations has been recorded in the “Notes to the financial statements”, for year ending 31/03/2013 that reads as under: “Splash Fashions India Private Limited ('the Company'), formerly known as Funcity Leisure India Private Limited was incorporated in as a Private Limited Company under the Companies Act, 1956. The Company in the current financial year has taken over the Splash division from Lifestyle International Private Limited on slump sale basis. The Company presently operates in retailing business through its stores across India under the name 'Splash'.” 4.13 As we compare the present facts, with the requirements u/s. 50B of the Act in the light of various clauses of the Business transfer agreement, we note that, as per Article (1) of the agreement, the assessee transferred the entire business under the brand name “Splash” to Splash Fashions India Pvt. Ltd., along with its employees, liabilities, and has also considered the same in the return of income filed by the transferor company as well as the transferee company. We note that the decision relied by the Ld.AR in case of Infineon Technologies India Pvt. Ltd. reported in (2020)

Page 20 of 31 ITA Nos. 50 & 93/Bang/2020 116 taxmann.com 580 has considered a similar situation wherein this Tribunal observed as under: “58. On reading of section 50 B it is abundantly clear that it is a code in itself for determining cost of acquisition and cost of improvement of undertaking but not for computation of capital gains in case of slump sale. The object of section 50 B is to determined the cost of acquisition and cost of improvement which is vital for computing capital gains under section 45 of the Act. Thus the full value of consideration in the slum sales needs to be determined by reducing the value of liabilities of an undertaking from their great value of all assets of the undertaking, provided that there is no itemised sale of assets and liabilities between the party and instead there is one jump sum value of undertaking. 59. The methodology for determining net worth has been given in Explanation 1 read with Explanation 2 of section 50 B. According to these provisions, aggregate value of total asset is reduced by value of liability of such undertaking. The aggregate value of asset and the value of liability as per Explanation 2, is the written down value of depreciable assets, book value of other assets and the book value of all the liabilities. Thus while computing capital gains from transfer of undertaking it has to be all the assets and all the liabilities.” 4.14 We note that, the assessee submitted the following details before the authorities below.

Paper book Particulars Amount in Rs. reference Book value of the Division 22,35,71,677 Page 316, 317 Net-worth of the Division as 23,66,68,794 Page 316, 319 per section 50B of the Act Consideration received from 28,16,00,000 Page 95 Splash India

Page 21 of 31 ITA Nos. 50 & 93/Bang/2020 4.15 We also note that the assessee obtained valuation from an independent merchant banker, who determined the fair market value at Rs.24,41,00,000/- as on 30/09/2012. We note that the value of consideration for transfer was determined at Rs.28,16,00,000/-. The book value of the division as on the transfer was Rs.22,35,71,677/-. There is a difference in the book value of the division and the net worth of the division due to the written down value as per the books of account that was computed at Rs.3,70,66,707/- which is tabulated at page 105 of the paper book. The net worth of the division was computed at Rs.23,66,68,794/- for the purposes of computing long term capital gains that includes fixed assets, other assets less liabilities. The entire computation of the net worth is placed at pages 316-319 of the paper book. 4.16 We also note that for the purposes of determining the book value, the WDV of the assets has been calculated as per the provisions of section 43(6)(c)(ii) of the Act and the WDV for the purpose of determining the net worth section 43(6)(c)(i)(C) has been applied. It is abundantly clear from the computation placed in the various pages of paper book referred to hereinabove that, assets were never independently purchased by the assessee. The intention to buy the splash brand was on a going concern basis. 4.17 In our opinion to conclude that a transaction is a slum sale or not is not only based on interpretation of terms and conditions of the entire agreement but it is also based on the manner in which the gains has been accounted by assessee in its books of accounts.

Page 22 of 31 ITA Nos. 50 & 93/Bang/2020 From the extracts of the accounts of assessee it is clear that it has not accounted for profits on itemised assets. In the instant case there is a sale of an entire undertaking as a going concern and assessing officer should have computed the capital gains under section 45 to 50 of Income tax Act. We note that there is no evidence with the Ld.AO that the items were sold independently. 4.18 We therefore direct Ld.AO to compute the quantum of capital gains in accordance with law as a slump sale. Ld.AO is directed to decide the cost of undertaking for purpose of computing capital gains that is arisen on transfer of asset as a going concern and is directed to value it as per section 55 of the act Ld.AO is also directed to grant indexation while computing capital gains. Ld.AO is also directed to decide the depreciation on block of assets and the capital gains has to be computed in accordance with section 45 to 50 of the Act. Accordingly, we allow this ground raised by assessee. Accordingly, these grounds raised by assessee stands allowed. 5. Ground no. 2 (2.1 to 2.5 ) is in respect of the disallowance of hedging losses u/s. 37 of the Act by holding it to be notional or speculative in nature. 5.1 The Ld.AR submitted that, the assessee had taken variable interest foreign currency loans (hereinafter referred to as "variable foreign loan") during the financial year 2011-12 in pursuance to an agreement entered with banks (page 303 to 314 of Paper book). Since, the assessee was exposed to the foreign currency fluctuation risks with respect to payment of interest as well as principal, it entered into cross currency interest rate swap agreement

Page 23 of 31 ITA Nos. 50 & 93/Bang/2020 ("derivative contract") with respective banks to effectively convert the said foreign loan into fixed interest Indian Rupee loan ("fixed Indian loan"). It is submitted that, the derivative contract mitigates foreign currency fluctuations risk and interest rate risk. The Ld. AR submitted that, the recognition and measurement for derivative contract was done as per Accounting Standard ("AS")-30, and thus, during the year under consideration, a portion of derivate contract qualifying for cash flow hedge towards interest rate risks and coupon currency risks were valued at fair value as on balance sheet date. The Ld. AR submitted that the aforesaid accounting treatment resulted in market-to-market ("MTM") losses on derivative contracts of Rs.18,63,532/-, out of which Rs.17,63,532/- was transferred to the "Hedging Fluctuation Reserve" (being balance sheet adjustment) and Rs.1,00,000/- was debited to profit and loss account. 5.2 The Ld. AR submitted that, the Ld AO disallowed Rs.18,63,532/- for the following reasons:  The Central Board of Direct Taxes ("CBDT") Instruction No.17/2008 dated 26.11.2008 provides that contingent and unascertained losses are not allowed.  Even if the expenses are considered to be realized losses, it is to be treated as speculation loss under section 43(5) of the Act owing to the fact that the loss was quantified in respect of outstanding balances on the basis of the prevailing rate which is speculative and notional in nature.

Page 24 of 31 ITA Nos. 50 & 93/Bang/2020  Further, MTM losses is not allowable based on the CBDT Instruction No. 03/2010 dated 23.03.2010. 5.3 The Ld.AR submitted that assessing officer following the CBDT Instruction No. 17/2008 dated 26/11/2008 and disallowed the MTM losses by holding it to be speculation u/s. 43(5) of the Act. He submitted that the Ld.CIT(A) relying on the CBDT Instruction No. 3/2010 accepted the contentions of the assessee partially by restricting the disallowance only to the amount debited to the P&L account. 5.4 The Ld.AR submits that, the foreign exchange losses arising on account of reinstatement of foreign currency assets and liabilities, was in accordance with the requirements of AS-30. It is submitted that, the financial statements of the assessee were accepted and certified by the statutory auditors. Further, the accounting policy was followed consistently by the Assessee for subsequent years to reflect true and fair view of profit and loss, and the state of affair of the business. 5.5 He also submitted that Coordinate Bench of this Tribunal in case of Quality Engineering & Software Technologies (P) Ltd. reported in (2015) 152 ITD 320 has held that provision for losses incurred on derivative contracts was an allowable expenditure. This Tribunal observed that, there was an existing contract with a binding obligation accrued against the assessee when it entered into forward contracts. This Tribunal held that, the forward contracts are in respect of consideration for exports proceeds, which are revenue items and there was an actual contract for sale of merchandise. The

Page 25 of 31 ITA Nos. 50 & 93/Bang/2020 Ld. AR thus submitted that, the transaction therefore did not qualify to be called as speculative transaction. 5.6 He also submitted that, this Tribunal rejected the revenue’s contention that, the transaction was speculative in nature in view of CBDT Instruction No. 3/2010. The Ld.AR placed reliance on following decisions in support.  Decision of Mumbai Tribunal in case of Deutsche Bank AG reported in (2003) 86 ITD 431  Decision of Mumbai Tribunal in case of ABN Ambro Securities India (P) Ltd. reported in (2011) 133 ITD 343 5.7 The Ld.AR further submitted that assessee’s own case for A.Ys. 2011-12 and 2012-13, Coordinate Bench of this Tribunal has considered this issue. 5.8 The Ld.DR on the contrary relied on the orders passed by authorities below. 5.9 We have perused the submissions advanced by both sides in the light of records placed before us. 5.9.1 We note that this is a recurring issue in case of assessee and assessee’s own case for A.Ys. 2009-10, 2011-12 and 2012-13, this Tribunal by way of a consolidated order has considered this issue by observing as under: “12.3 It is submitted that identical issue is decided by coordinate bench of this Tribunal in assessee’s own case for assessment year 2008-09 and 2010-11 by observing as under: “5.5 We have heard rival submissions and perused the material on record. The forward contracts were entered into mainly to hedge the import payments and working capital loans repayment which is in the ordinary course of trade or business of the assessee. The hedging contracts are in the nature of foreign exchange contract to purchase foreign exchange on a specified future date at a predetermined date. The bankers levied premium for entering into such forward contract. These are in the nature of actual charges levied by the bankers. It is

Page 26 of 31 ITA Nos. 50 & 93/Bang/2020 nothing but bank charges which is purely revenue in nature. The said expenditure is incurred to secure the assessee’s business from foreign exchange fluctuation risk. In case the assessee would not have taken the forward contract to cover itself from fluctuation risk, it can lead to making higher payment of imports and incurring huge losses, which could result in lesser profit. The Hon’ble Calcutta High Court in the case of CIT v. Britannia Industries Ltd. reported in [2015] 376 ITR 299 (Calcutta) had held that “consideration paid by the assessee to the authorized dealer of foreign exchange, which is the bank in this case, in order to obtain protection from fluctuation of foreign exchange rates is a revenue expenditure”. 5.6 As per section 43(5) of the I.T.Act, speculative transaction means a transaction in which the contract for purchase or sale of any commodity including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. The definition also provides for certain exceptions. A speculative transaction is characterized by four features, namely - (i) it is a contract for purchase or sale; (ii) The purchase or sale should be of a share, stock or commodity; (iii) There should be periodical or ultimate settlement of the contract; (iv) Settlement to be otherwise than by actual delivery or transfer. 5.7 In order to attract the definition of a speculative transaction, all the characteristics mentioned in the said definition is required to be satisfied. Definition of a speculative transaction vis-a-vis forward cover are as follows:- (i)A forex cover is a contract for purchase or sale and thus the first characteristic as per section 43(5) is satisfied. The third and fourth characteristic of periodic and ultimate settlement and settlement other than by actual delivery would be satisfied in a forex cover transaction. (ii) The second characteristic is that the purchase should be of a share, or stock or commodity. A forex cover is not a contract for the purchase of a share or a stock. In a forex cover, the purchase or sale is towards foreign currency. Therefore it has to be seen whether foreign currency can be equated with the term "commodity" such that its purchase or sale triggers the definition of a speculative transaction under the Act. 5.8 The term "commodity" has not been defined under the Income Tax Act Black’s Law Dictionary (8th Edition) defines the term

Page 27 of 31 ITA Nos. 50 & 93/Bang/2020 “commodity” as an article of trade or commerce; the term embraces only tangible goods, such as products or merchandise, as distinguished from services; an economic good, especially a raw material or an agricultural product. 5.9 The other definitions include: (i) Articles of commerce (ii) Anything movable which is bought and sold (iii) A raw material that can be sold (iv) An article of trade or commerce, especially an agricultural or mining product that can be processed and resold (v) Reasonably homogenous good or material bought and sold freely as an article of commerce. Commodities include agricultural products, fuels, metals, etc., and are traded in bulk on a commodity exchange or on spot market. 5.10 The Delhi Bench of ITAT in the case of Munjal Showa Ltd. v. DCIT, has held as under: "Foreign currency or any currency is neither commodity nor shares. The Sale of Goods Act specifically excludes cash from the definition of goods. Besides, no person other than authorised dealers and money changers are allowed in India to trade in foreign currency, much less speculate. S. 8 of the Foreign Exchange Regulations Act, 1973, provides that except with prior general or special permission of the RBI, no person other than an authorised dealer shall purchase, acquire, borrow or sell foreign currency. In fact, prior to the LERMS, residents in India were not even permitted to cancel forward contracts. The presumption of any speculative transaction is, therefore, directly rebutted in view of the legal impossibility and in view of the fact that foreign currency was neither commodity nor shares. " 5.11 Based on the above, foreign currency does not fall within the purview of the term "commodity" and hence this characteristic of a speculative transaction is not satisfied. Since, the definition of speculative transaction itself is not applicable to the assessee’s case as all the conditions were not satisfied, treating the transaction as speculative in nature is not sustainable in law. Therefore, we hold that the CIT(A) is correct in deleting the disallowance of premium on forward contract and no interference is called for. It is ordered accordingly.” 12.4 Admittedly, this is a recurring issue and facts have not been disputed by the revenue for year under consideration. Further nothing contradictory is placed on record by the revenue, to deviate form the above view. Respectfully following the same, we do not find any

Page 28 of 31 ITA Nos. 50 & 93/Bang/2020 infirmity in the view taken by the Ld.CIT(A), and the same is upheld.” 5.10 Nothing has been placed on record by the revenue contrary to the above view. Respectfully following the same, we hold that foreign currency does not fall within the purview of the term “commodity” and hence cannot be characterised as speculative transaction. As a requirement of the conditions specified u/s. 43(5) does not stands fulfilled, the addition made by the Ld.AO cannot be sustained. Accordingly, these grounds raised by assessee stands allowed. 6. The Ld.AR submitted that assessee has raised additional ground in respect of educational cess claimed as deduction. This issue is no longer resintegra. 6.1 We notice that identical issue has been dealt with by Coordinate Bench of this Tribunal in case of M/s. Infinera India Pvt. Ltd. in IT(TP)A No. 2589/Bang/2019 by order dated 23.02.2022 as under: 10.1 We notice that the Kolkata Bench of Tribunal in the case of Kanoria Chemicals & Industries Ltd Vs. Addl. CIT (ITA No.2184/Ko1/2018 dated 26.10.2021) has held that the education cess is an additional surcharge levied on income tax and hence it partakes the character of income tax. Accordingly it held that the education cess is not allowable as deduction. The Tribunal also noted the decision rendered by Hon'ble Bombay High Court in the case of Sesagoa Ltd. 117 Taxmann.com 96 and by Hon'ble Rajasthan High Court in the case of Chambal Fertilisers& Chemicals Ltd. Vs. JCIT (ITA No.52/2018 dated 31.7.2018), wherein it was held that the education cess is allowable as deduction. However, the Tribunal observed that the decision rendered by Hon'ble Supreme Court in the case of CIT Vs. K. Srinivasan (1972) 83 ITR 346 was not brought to the notice of the above said Hon'ble High Courts. Accordingly, the Tribunal has expressed the view that the decision rendered by Hon'ble Supreme Court in the case of K. Srinivasan (supra) shall prevail on this issue and accordingly held that the education cess is not allowable as deduction.

Page 29 of 31 ITA Nos. 50 & 93/Bang/2020 10.2 Following the above said decision of Kolkata bench of Tribunal in the case of Kanoria Chemicals & Industries Ltd (supra), we hold that payment of education cess including secondary and higher education cess is not allowable as deduction. Accordingly, we reject this ground of the assessee. Respectfully following the above we hold the payment of education cess as not available in the hands of the assessee. Accordingly, this additional ground is dismissed. Revenue’s appeal: 7. Ground no. 1 filed by the revenue is in respect of the premium paid on forward cover. 7.1 The Ld.AR submitted that assessee has imported certain trade merchandise from parties located outside India. Payments to such foreign vendors are required to be made in future on specified dates in foreign currency. He submitted that, the assessee in order to secure itself from adverse foreign exchange movements, i.e. making payments at higher rate than the rate at which expense was booked, has entered into currency hedging contracts with State Bank of India ("SBI") and/ or Indian Overseas Bank ("JOB") as per FEMA guidelines. 7.2 It was submitted that the hedging contracts are in the nature of forward exchange contracts, to purchase foreign currencies on a specified future date at a pre-determined rate. The banker levies premium for entering into such forward contracts (hereinafter referred to as "premium on forward cover") and these are in the nature of actual charges levied by the bank. 7.3 The assessee thus incurred expense of premium on forward cover amounting to Rs.26,137,084/- that was disallowed by the Ld.AO.

Page 30 of 31 ITA Nos. 50 & 93/Bang/2020 7.4 The Ld.CIT(A) allowed the claim of assessee by following the view adopted by the predecessor CIT(A) in assessee’s own case for A.Ys. 2009-10, 2010-11, 2011-12 and 2012-13. It was submitted that the Ld.CIT(A) therein had relied on the decision of Hon’ble Supreme Court in case of ACIT vs. Elecon Engineering Co. reported in (2010) 189 taxmann.com 83. 7.5 The Ld. DR relied on the orders passed by the Ld. AO. 7.6 We are of the view that as in the assessee’s appeal, we have held that foreign currency do not fall within the purview of the term “commodity”, and does not attract the definition of the speculative transaction. Any premium paid or incurred by assessee on such forward cover contracts cannot be held to be speculative transaction. We accordingly do not find any merit in this ground raised by revenue. Accordingly, Ground No. 1 raised by revenue stands dismissed. 8. Ground Nos. 2-5 raised by revenue is in respect of the relief claimed by assessee on ESOP of expenses that was granted by the Ld.CIT(A). Admittedly, on merits, esop of expenses are held neither to be notional nor capital in nature by the decision of Coordinate Special Bench in case of Biocon Ltd. vs. DCIT (supra). 8.1 We note that, the assessee had not made any claim in the original return of income filed however the same was made during the assessment proceedings which was denied by the Ld.AO. The Ld.CIT(A) following the ratio laid down by Hon’ble Supreme Court in case of Goetz India Ltd. (supra) directed the Ld.AO to grant the

Page 31 of 31 ITA Nos. 50 & 93/Bang/2020 claim. In our view, this approach adopted by Ld.CIT(A) cannot be found fault with and the same is upheld. Accordingly, ground nos. 2-5 raised by the revenue stands dismissed. Ground Nos. 6-7 are general in nature and do not require adjudication. Accordingly, the revenue’s appeal stands dismissed. In the result, the assessee’s appeal stands allowed and revenue’s appeal stands dismissed. Order pronounced in the open court on 18th November, 2022.

Sd/- Sd/- (LAXMI PRASAD SAHU) (BEENA PILLAI) Accountant Member Judicial Member Bangalore, Dated, the 18th November, 2022. /MS / Copy to: 1. Appellant 4. CIT(A) 2. Respondent 5. DR, ITAT, Bangalore 3. CIT 6. Guard file By order

Assistant Registrar, ITAT, Bangalore