M/S ARISUDANA INDUSTRIES LTD,LUDHIANA vs. ASSISTANT COMMISSIONER OF INCOME TAX, LUDHIANA

आदेश/ORDER Per Sanjay Garg, Judicial Member :

The present appeal has been filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-2, Ludhiana [hereinafter referred to as ‘CIT(A)’], dated 4.12.2015 relating to assessment year 2012-13,

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passed u/s 250(6) of the Income Tax Act, 1961 (hereinafter

referred to as ‘the Act’).

appeal. Vide ground No.1, the assessee has agitated the

action of the CIT(A) in sustaining the disallowance of

Rs.1,86,089/- u/s 14A of the Act on account of expenditure

incurred for earning of tax exempt income.

submitted that the assessee during the year has earned tax

exempt dividend income of Rs.28,133/- only. That as per

the law laid down by the Hon'ble Delhi High Court in the

case of Cheminvest Ltd. Vs. CIT (2015) 378 ITR 33 (Del),

the total disallowance u/s 14A of the Act cannot exceed

the total tax e xempt income earned by the assessee. The

reliance in this respect has been placed on the decisions

of various High Courts including that of the Jurisdictional

High Court of Punjab and Haryana in the case of ‘CIT Vs.

Winsome Textiles’ (2009) 319 ITR 204 (P&H), and of the

Hon'ble Gujarat High Court in the case of ‘Corrtech Energy

P. Ltd. (2014) 45 Taxman.com 116’ and further of the Hon'ble

Allahabad High Court in the case of ‘CIT Vs. M/s Shivam

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Motors (P) Ltd’ (2014) 272 CTR (All) 277 and various other

case laws.

aforesaid decisions of the Hon'ble High Courts. The

Hon'ble different High Courts of the country have held

that the total disallowance u/s 14A of the Act cannot

exceed the total tax exempt income earned by the

assessee and if no tax exempt income is earned by the

assessee, no disallowance u/s 14A of the Act can be

made. In view of this, the disallowance on the issue is

restricted to the extent of the total tax exempt income

earned by the assessee which comes at Rs.28,133/-.

Ground of appeal No.1 is accordingly, partly allowed.

action of the lower authorities in making/confirming the

disallowance of Rs.83,90,686/- u/s 43(5) of the Act

holding the currency forward contracts as speculative

transactions. The Ld.Counsel for the asssessee has

explained before us that the assessee company is engaged

in the manufacturing of yarns and trading of knitted

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cloths & yarns. The yarns manufactured by the assessee

company are sold in the dome stic market as well as in the

international market. For the year under consideration,

the assessee company received export orders for around

US dollars 49,85,000/- for supply of yarns to different

buyers in different countries. To hedge the loss, if any,

against any foreign exchange fluctuations, the assessee

entered in the forex contract and, therefore, incurred

loss/expenditure of Rs.83,90,686/-. The Ld.Counsel for

the asssessee further submitted that hedging of the loss

cannot be said to be a speculative rather it was to secure

the expected profits. The hedging transaction against the

apprehended foreign exchange fluctuation losses is

permitted and cannot be said to be a speculative

transaction. The Ld.Counsel for the asssessee has also

invited our attention to the order dated 30.8.2017 of the

CIT(A) in the own case of the assessee for subsequent

assessme nt year i.e. 2013-14, wherein the Ld.CIT(A) has

accepted the contention raised by the assessee and has

held that the foreign exchange fluctuation profits earned

by the assessee of Rs.14,29,603/- through he dging

contracts to save the company from future losses, cannot

be said to be speculative gain. In view of this, we do not

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find any justification of the CIT(A) in holding the

transaction as speculative for the year under

consideration, whereas in the subsequent year, the gain

earned by the assessee on identical transaction has been

treated as gain earned in normal course of business and

not speculative. In view of this ground No.2 & 3 raised by

the assessee are accordingly, allowed.

disallowance of interest of Rs.10,86,012/- u/s 36(1)(iii) of

the Act in relation to running debit balance maintained

with Master Capital Services. The contention of the

Ld.Counsel for the asssessee in this respect is that the

running debit balance maintained by the assessee with

M/s Master Capital Services Pvt. Ltd. is margin money to

comply with legal and statutory requirements stipulated

by SEBI and is a business advance. That it cannot be said

to be an investment not related to business activity of the

assessee. It has been further submitted that even

otherwise, the own funds of the assessee for the year

under consideration were sufficient to meet the aforesaid

advance. The Ld.Counsel for the asssessee in this respect

has also invited our attention to the order of the CIT(A)

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dated 30.2.2017 passed for subsequent assessment year

2013-14, wherein on identical circumstances, the CIT(A)

considering the submissions of the assessee held that

since the assessee was having sufficient own interest free

funds to cover the interest free advances, hence, no

disallowance was attracted.

parties. Admittedly, the assessee was maintaining an

account with M/s Master Capital Services Pvt. Ltd. as the

assessee was obtaining their services for hedging losses

against foreign exchange fluctuation. The assessee had to

keep a margin money with M/s Master Capital Services

Pvt. Ltd. for the purpose of forward contracts entere d into

to hedge the losses against foreign exchange fluctuation

in respect of the amount receivable from exports. In

respect of this e ssentially was related to the business

activity of the assessee. Even otherwise, it has not been

rebutted or denied by the revenue authorities that the

assessee was having sufficient funds to meet the aforesaid

debit balance with M/s Master Capital Services Pvt. Ltd.

Hence, we do not find any justification on the part of the

lower authorities in making the aforesaid disallowance

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u/s 36(1)(iii) of the Act and the same is accordingly, ordered to be deleted.

Order pronounced in the Open Court on04.06.2019.

Sd/- Sd/- एन. के. सैनी संजय गग� (N.K. SAINI (SANJAY GARG ) उपा�य�/ Vice President �याय�क सद�य/ Judicial Member �दनांक /Dated: 4th June, 2019 *रती* आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to :

आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar