DCIT, NEW DELHI vs. M/S. ORIENT CRAFT LTD., NEW DELHI

3. The above grounds of appeal are independent and without prejudice to one and another. Page 3 of 23. ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017 M/s Orient Cra� Ltd.

4. Your appellant craves, leave, to add, alter, amend, and / or forego any of the grounds of appeal at the time of hearing.

ITA No.- 3773/Del/2015(A.Y 2009-10) Revenue’s appeal “ 1. n the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 8,00,25,058/- made by the AO on account of disallowance of product development expenses which was treated as deferred revenue expenditure and in ignoring the fact that the benefit in terms of creating market and goodwill for the assessee in the international market is available to the assessee over a period of three years for expenditures made for the product development expenses..

2. On the facts in the circumstances of the case, the ld CIT(A) has erred in law and on the in deleting the disallowance of Rs. 2,99,31,782/- out of the total disallowance of Rs. 2,99,97,647/- made by AO u/s 14A r.w.s. 8D(2) (ii) by ignoring the mandatory provisions of sub-rule 8D r.w.s.14A of the Income tax Act, 1961.

3. On the facts and in the circumstances of the case, Id CIT(A) has erred in deleting the addition of Rs.66,41,71,241/- made by the AO where the loss on account of deficit on settlement of forward contracts(Net) was rightly taken as speculation loss under the provisions of section 43(5) of the Income tax Act, 1961 without appreciating the facts of the case.” ITA No.- 3774/Del/2015(A.Y. 2010-11) Revenue’s appeal “1. On the facts and in the circumstances of the case, the Ld CIT(A) has erred in deleting the addition of Rs. 7,53,40,902/- made by the AO on account of disallowance of product development expenses which was treated as deferred revenue expenditure and in ignoring the fact that the benefit in terms of creating market and goodwill for the assessee in the international market is available to the assessee over a period of three years for expenditures made for product development expenses..

2. On the facts and in the circumstances of the case, the Id CIT(A) has erred in law and on the facts in deleting the disallowance of Rs. 2,88,04,641/- out of the total disallowance of Rs. 2,88,70,506/- made by AO u/s 14A r.w.r. 8D(2)(ii) by ignoring the mandatory provisions of sub-rule 8D r.w.s.14A of the Income tax Act, 1961.

3. On the facts and in the circumstances of the case, Id CIT(A) has erred in deleting the addition of Rs.11,28,57,724/- made by the AO where the loss on account of deficit on settlement of forward contracts(Net) was rightly taken as speculation loss under the provisions of section 43(5) of the Income tax Act, 1961.

Page 4 of 23 ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017 M/s Orient Cra� Ltd.

4. The appellant craves to be allowed to add any fresh ground(s) of appeal and/or delete or amend any of the ground(s) of appeal.” ITA No.- 3202/Del/2017(A.Y. 2011-12) Revenue’s appeal “ (i) That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of product development expenses Rs. 8,27,46,723/- made by the AO by ignoring the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. Vs CIT 225 ITR 802 and the Department's appeal against the decision of ITAT in assessee's own case for A.Y.'s 07-08 & 08-09 are pending before the Hon'ble High Court. (ii) On the facts and circumstances of the case, the Ld. CIT(A) has erred in rejecting the mandatory procedure adopted by the AO in making the disallowance of expenses u/s 14A of the Income Tax Act, 1961, as no separate accounts for interest bearing funds and interest free funds and their utilisation is kept. As per instruction No. 5/2014 dated 11.02.2014, expenditure can be disallowed even when taxpayer in a particular year has not earned any exempt income. (iii) On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 11,62,27,976/- made by the AO on account of deficit on settlement of forward contracts (Net) which is a speculation loss under the provisions of section 43(5) of the Income Tax Act, 1961 without appreciating the facts of the case. (iv) That the appellant craves leave to add or amend any ground of appeal

before the appeal is heard or disposed off. ITA no.- 3203/Del/2017 (A.Y. 2012-13) Revenue’s appeal “ (1) That on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of product development expenses Rs. 10,82,51,151/- made by the AO by ignoring the decision of the Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. Vs CIT 225 ITR 802 and the Department's appeal against the decision of ITAT in assessee's own case for A.Y.'s 07-08 & 08-09 are pending before the Hon'ble High Court. (ii) On the facts and circumstances of the case, the Ld. CIT(A) has erred in rejecting the mandatory procedure adopted by the AO in making the disallowance of expenses u/s 14A of the Income Tax Act, 1961, as no separate accounts for interest bearing funds and interest free funds and their utilisation is kept. As per instruction No. 5/2014 dated 11.02.2014, expenditure can be disallowed even when taxpayer in a particular year has not earned any exempt income. Page 5 of 23. ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017 M/s Orient Cra� Ltd. (iii) On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 19,47,53,128/- made by the AO on account of deficit on settlement of forward contracts (Net) which is a speculation loss under the provisions of section 43(5) of the Income Tax Act, 1961 without appreciating the facts of the case. (iv) That the appellant craves leave to add or amend any ground of appeal before the appeal is heard or disposed off.

by the assessee is that the claim of expense u/s 10B has been wrongly disallowed. The Counsel for Page 6 of 23. ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017 M/s Orient Cra� Ltd. the assessee states that the assessee is a 100% export-oriented unit, and the income was shown as business income. Therefore, the same deserves to be upheld. The assessee has relied upon the order dated 06.10.2015 of the Hon’ble High Court of Delhi in the case of PCIT vs. Universal Precision Screws in ITA No. 392/2015.

7. Ground No. 3 for Assessment Year 2009–10 to AY 2012-13, relates to the disallowance on account of deficit on settlement of forward contracts.

Page 7 of 23 ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017 M/s Orient Cra� Ltd. The ld AR stated that the ITAT in assessee’s own case in AY 2013-14 in 5037/Del/2019 has decided the issue in favour of the assessee. He also relied on the decision of Delhi High Court in the cases PCIT vs Simon India Ltd. reported in 450 ITR 316 and Bechtel India Pvt. Ltd. vs ACIT in ITA No. 930/2017.

8. On various issues at dispute for various years, the Ld. DR filed written submissions, which are reproduced as under:

“ITA No.- 3625, 3626/Del/2015 (2009-10 and 2010-11)

“ In the above case, it is humbly submitted that the following submission may kindly be considered with regard to treating IPO expenses as capital expenditure and deduction u/s 10B disallowed for difference in foreign exchange and excess provision written back: 1. Treating IPO expenses as capital expenditure (disputed by Assessce): Following contentions of AO may kindly be considered with regard to treating IPO expenses of Rs. 1,68,30,430/- as capital expenditure:  The expenses incurred for bringing an IPO are the expenses which have been incurred for enhancement of capital.  Section 37 of the Act, under which the deduction has been claimed by the assessee, deals with the expenses which are recurring in nature and not being capital expenditure.  Assessee's claim that the IPO was subsequently withdrawn, thereby making the said expenditure as revenue in nature is not tenable. Above addition was confirmed by the Ld. CIT(A), relying on the decisions of Hon'ble Apex Court in the following cases:  M/s Punjab State Industrial Development Corporation Ltd. Vs CIT (1997) 225 ITR 792 It was held that the fee paid to the Registrar for expansion of the capital base of the company was directly related to the capital expenditure incurred by the company and although, incidentally that would certainly help in the business of Page 8 of 23 ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017 M/s Orient Cra� Ltd. the company and may also help in profit-making, it still retained the character of a capital expenditure since the expenditure was directly related to the expansion of the capital base of the company. Therefore, the amount paid to the ROC, as filing fee for enhancement of capital, was not a revenue expenditure.  Brooke Bond India Ltd. V CIT (1997) 225 ITR 798 It was held that though the increase in the capital results in expansion of the capital base of the company and incidentally that would help in the business of the company and may also help in the profit making, the expenses incurred in that connection still retains the character of a capital expenditure since the expenditure is directly related to the expansion of the capital base of the company. Hence, expenditure incurred by the assessee was capital expenditure. Revenue seeks its reliance on the decision of the Ld. CIT(A) and decisions quoted above. The argument taken by the assessee regarding subsequent withdrawal of the IPO does not alter the initial purpose of enhancing capital base which would have resulted in benefits of enduring nature to the assessee company. Further, following decisions may also kindly be considered in this regard: ➤ Vazir Sultan Tobacco Co. Ltd. Vs CIT (1988) 174 ITR 689 (Andhar Pradesh HC) Applying the principles enunciated by the Supreme Court in the case of Empire Jute Co. Ltd. v. CIT [1930] 124 ITR 1, in the instant case, the expenditure concerned was capital in nature, since it was laid out for adding to the capital structure of the assessee, besides acquiring an asset of enduring nature. The order of the Tribunal was, therefore, justified in rejecting the assessee's claim for deduction of the said expenditure. Above decision was affirmed by the Hon'ble Supreme Court in (1997) 93 Taxman 5. ➤ Bombay Burmah Trading Corporation Ltd. v. CIT and Vice Versa (1983) 145 ITR 793 (Bombay High Court) While dealing with the question whether the fees paid to the Registrar of companies for enhancement of capital could be described as revenue expenditure or capital expenditure, it was held that it was an expenditure incurred directly for the purposes of expansion of the capital asset and was, therefore, of capital nature. Above decision was affirmed by the Hon'ble Supreme Court in (1997) 93 Taxman 5.

2. Deduction u/s 10B disallowed for difference in foreign exchange and excess provision written back: Following contentions of AO may kindly be considered regarding disallowance of deduction made u/s 10B amounting to Rs. 1,99,23,462/-:  Sec 10B provides for deduction of profits and gains derived by a 100% export- oriented undertaking from the export of articles or things.  The word "derived from has been duly explained by the Apex Court in the case of Ms. Liberty India Vs CIT (2009) 225 CTR 233 (SC) & CIT Va Sterling Foods (1999)

Page 9 of 23 ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017 M/s Orient Cra� Ltd. 237 ITR 579 (SC). According to these decisions, there should be a direct nexus between the profits and gains and the industrial undertaking.  In view of above quoted judgements, immediate and proximate cause (i.e. first- degree nexus) is vital and fundamental to include any profit under the statutory expression "derived from which is eligible for deduction u/s 10B. Above addition was confirmed by the Ld. CIT(A) and reliance is sought upon the findings of the Ld. CIT(A) which are briefly stated as under: o Income in the nature of difference in foreign exchange and excess provision written back were not incomes derived from the business of export of articles. Therefore, the sane would not be considered as part of profits for claiming deduction u/s 10B. o In view of the decision of Apex Court in the case of Liberty India (supra) & Sterling Foods (supra), it was held by the Ld. CIT(A) that impugned incomes are not a first- degree source of receipt derived from the industrial undertaking Following decisions may kindly be considered in this regard:  K. Mohan & Co. (Exports), Mumbai Vs Department of Income Tax (Mumbai Tribunal)

Regarding allowability of deduction u/s 80HHC on gains on forward contract, it was held that the Hon'ble jurisdictional High Court in the case of CIT Vs Shah Originals (2010) 191 Taxman 81 (Bombay) has categorically held that gain on account of exchange rate fluctuation under EEFC account and interest thereon is a facility which is made available by RBI and further exchange fluctuation in such account arises after the completion of export activity and does not bear proximate and direct nexus with export transaction so as to fall within the expression "derived" by the assessee. Thus, the gain on account of exchange rate fluctuation as well as interest on such account cannot be treated as part of business income and hence is ineligible for inclusion in the profits of the business while calculating deduction u/s 80HHC. In view of this, gain on forward contract in the case under consideration was not allowed as deduction u/s 80HННС.  ACIT Ve K. Mohan & Co. (Exports) (P.) Ltd. (2010) 126 ITD 59 (Bangalore Tribunal) Assessee was engaged in business of manufacture and export of readymade garments. In order to avoid risk of loss due to foreign exchange fluctuation, it entered into forward contracts in respect of foreign exchange to be received as a result of export. During relevant assessment year, assessee claimed deduction under section 10B in respect of its entire income including profits derived from forward contracts. It was held that forward contracts being in the nature of speculation business, cannot be considered as business of undertaking for the purpose of computing deduction u/s 10B.

Page 10 of 23 ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017 M/s Orient Cra� Ltd.  Tocheunglee Stationery Mfg. Co. (P.) Ltd. v. ITO, Company Ward III(1), (2006) 5 SOT 428 (Chennai Tribunal) Whether for purpose of claiming deduction under section 10B, income should be derived from export business and form part of export turnover and assessce should show that profit was received from export for assessment year under consideration Held, yes Whether excess provision towards incentives and bonus for earlier years written back in books of account under section 41(1), refund of sales tax and resale value of special import licence, could be construed as income from export or as forming part of export turnover so as to be eligible for deduction under section 108 - Held, no ITA No.- 3202 & 3203/Del/2017 (2011-12 & 2012-13)

“ The assessee, Orient Craft Ltd., is a large exporter of garments. For AY 2011- 12, the Assessing Officer (AO) completed assessment under section 143(3) making, inter alia, three major additions: (i) treating a substantial part of "product development expenses" as deferred revenue expenditure and disallowing two-thirds in the year, (ii) disallowance under section 14A read with Rule 8D on investments yielding exempt income; and (iii) treating loss/deficit on cancellation/settlement of forward foreign exchange contracts as "speculation loss" under section 43(5), allowable only against speculative income. The AO also denied deduction under section 10B on certain "other income" (primarily exchange difference) on the ground that it was not "derived from" the eligible undertaking. In appeal, the CIT(A) substantially allowed the assessee's claims. The disallowance on product development was deleted treating the entire expenditure as revenue, following favourable orders in assessee's earlier years. The disallowance under section 14A was drastically scaled down, essentially accepting the assessee's plea of availability of own funds and limited administrative involvement. The forward contract loss was held to be a hedging loss incidental to export business and allowed as normal business loss. However, the CIT(A) sustained the AO's action in denying section 10B deduction on the "other income". The Revenue has appealed to the Tribunal against the relief granted by the CIT(A) on (i) product development expenses; (ii) section 14A disallowance, and (iii) treatment of forward contract loss as business loss.

Page 11 of 23 ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017 M/s Orient Cra� Ltd. The assessee, in its written and oral submissions, relies heavily on consistency with earlier years' relief, industry practice in garment sampling, jurisprudence on section 14A (especially disallowance not to exceed exempt income"), and case law treating forex forward losses of exporters as hedging and not speculative. The Revenue seeks restoration of the AO's order on all three issues and defends the denial of 108 deduction on "other income" on the strength of the "derived from" test laid down by the Supreme Court.

B. FINAL REVENUE ARGUMENTS ISSUE 1-PRODUCT DEVELOPMENT EXPENSES (GROUND NO. 1-REVENUE) 1.1 The AO has correctly appreciated the nature of "product development expenses as conferring an advantage of enduring character in the assessee's line of business. The factual finding is that these outlays on design studios, sampling, catalogues and buyer-specific development create and enhance market visibility, brand recall and buyer relationships over multiple seasons, not confined to a single previous year. The AO, therefore, allowed only one-third in the year and treated the balance as deferred, following the ratio of Madras Industrial Investment Corp. Lid v. CIT (1997) 225 ITR 802 (SC), where the Supreme Court expressly recognised that expenditure yielding benefit over a period can legitimately be amortised. 1.2 Section 37(1) permits deduction only of expenditure "laid out or expended wholly and exclusively for the purposes of business" in that year. Where the commercial reality shows that the benefit of the outlay spills over more than one year through enduring goodwill, jurisprudence (including Madras Industrial Investment and the enduring benefit test in Empire Jute Co. Ltd. v. CIT (1980) 124 ITR 1 (SC)) allows the Revenue to spread the deduction. The assessee's plea that there is "no concept of deferred revenue expenditure" is misconceived: what the Supreme Court disapproved is artificial re-labelling; it has, however, repeatedly permitted spreading where the nature of the benefit so warrants. 1.3 Reliance by the assessee and CIT(A) on earlier years' relief is misplaced. The principle of consistency cannot override the statute or bind the Department where the earlier view is demonstrably erroneous or the factual pattern has changed. The Supreme Court in Distributors (Baroda) Pvt. Ltd. v. Union of India (1985) 155 ITR 120 has made it clear that an incorrect view cannot be perpetuated on the ground of past practice. Moreover, the Revenue has already carried earlier years in reference/appeal; those orders are at best persuasive, not binding, and cannot disable a correct application of section 37(1) in this year. 1.4 The assessee's case law on routine advertisement/sales promotion being revenue is distinguishable on facts. Here, the AO has recorded that the product development function is a core, recurrent investment in design capability and Page 12 of 23 ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017 M/s Orient Cra� Ltd. buyer-facing sample development, with benefits extending to future orders and buyer retention. This is closer to capacity-building/market-creation than mere year-to-year sales push. On these facts, the AO's calibrated approach of allowing one-third and deferring two-thirds is reasonable, fact-based and ought to be restored. ISSUE 2 DISALLOWANCE UNDER SECTION 14A READ WITH RULE SD (GROUND NO. 2 - REVENUE) 2.1 The AO invoked Rule 8D only after recording dissatisfaction with the assessee's self-serving allocation of a token amount towards expenditure relatable to exempt income. The assessee has sizeable investments; it does not maintain separate accounts for interest-bearing and interest-free funds, nor for investment-management activity. In these circumstances, once the AO properly rejects the assessee's working, the machinery of Rule 8D is mandatory. This follows from Godrej & Boyce Mfg. Co. Ltd. V. DCIT (2010) 328 ITR 81 (Bom), subsequently endorsed in substance by the Supreme Court in Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640 (SC), which emphasizes that section 14A is to be applied on a realistic, not cosmetic, basis. 2.2 The CIT(A) has erred in virtually nullifying the disallowance by accepting an unverified theory of "own funds" and by mechanically limiting the figure to the assessee's token computation. Availability of some interest-free funds does not, by itself, establish that no part of borrowed funds or managerial/administrative infrastructure is deployed in acquiring and holding investments. The Supreme Court in Maxopp has squarely rejected the "dominant purpose" argument; if an expenditure has a live nexus with exempt income, it must be disallowed irrespective of the assessee's subjective intent. 2.3 The assessee's reliance on Joint Investments (P) Ltd. v. CIT (2015) 372 ITR 694 (Del) to contend that disallowance cannot exceed exempt income is also misplaced on facts. The AO's working under Rule 8D(2)(ii) and (iii) is based on objective formulae; no perversity is shown in the computation. Further, CBDT Circular No. 5/2014 makes it explicit that section 14A applies even in years of low or no exempt income, because the proximate expenditure is incurred for maintaining the investment portfolio as such. In any case, the relief granted by the CIT(A) has the effect of rewriting Rule 8D, which is impermissible in appellate jurisdiction. The full disallowance as per the AO's order deserves to be restored.

ISSUE 3-LOSS ON FORWARD FOREIGN EXCHANGE CONTRACTS (GROUND NO.3- REVENUE) 3.1 The AO has treated the net deficit on cancellation/settlement of forward contracts as speculative loss on the twin factual findings that (i) the contracts were settled otherwise than by delivery; and (ii) the assessee failed to establish

Page 13 of 23 ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017 M/s Orient Cra� Ltd. a one-to-one or even reasonably proximate nexus between specific export receivables and the contracts booked, in volume, timing and tenor. On these findings, the loss falls within section 43(5) and Explanation 2 to section 28, as part of a distinct speculative activity in foreign currency. 3.2 The assessee invokes decisions such as CIT v. BadridasGauridu (P) Ltd. (2004) 261 ITR 256 (Bom) and CIT v. SoorajmullNagarmull (1981) 129 ITR 169 (Cal) to contend that forward cover for exporters is hedging, not speculation. Those authorities, however, proceed on a clear foundational fact that the assessee had demonstrably booked forward contracts strictly to hedge identified export/import exposures, and that the volume and timing of such contracts were broadly commensurate with underlying assets/liabilities. In the present case, the AO has specifically recorded the absence of such correlation and the presence of repeated roll- overs/cancellations, for which no satisfactory commercial explanation or supporting documentation (purchase orders, shipment schedules, export receivables ledger vis-à-vis each contract) has been furnished.

3.3 Recent Tribunal jurisprudence (for example, DCIT v. Standard Match Industries (P) Ltd., 161 taxmann.com 459 (Chennai Trib.), where forward contract losses were held speculative due to failure to establish nexus with underlying business) reinforces the principle that the onus is on the assessee to prove genuine hedging. Mere status as an exporter, or generic RBI permission for forward contracts, does not automatically convert all currency contracts into hedges. Where, as here, the pattern indicates independent profit-seeking in forex movements and settlement is predominantly by cancellation/settlement with the bank rather than actual delivery linked to export bills, the AO is justified in characterizing the activity as speculative. 3.4 The CIT(A) has, with respect, applied the export-hedging decisions mechanically. without grappling with the AO's specific factual findings on mismatch and lack of documentation. On a proper appreciation of section 43(5), its provisos, and the burden of proof, the AO's treatment of the loss as speculation loss allowable only against speculative gains and not as ordinary business loss is legally correct and ought to be upheld. Overall, therefore, on each ground of appeal the order of the Assessing Officer is factually well-founded and legally supported, and deserves to be restored by the Tribunal.”

ITA No.- 3773, 3774/Del/2015, 3202, 3203/Del/2017 (2009-10, 2010-11, 2011-12, 2012-13)

Page 14 of 23 ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017 M/s Orient Cra� Ltd. In the above case, it is humbly submitted that the following decision may kindly be considered with regard to loss on account of deficit on settlement of forward contracts: 1. [2017] 82 taxmann.com 301 (Delhi - Trib.)- Bechtel India (P.) Ltd. vs. Assistant Commissioner of Income-tax, Circle-4(2)- Section 28(i), read with section 43(5) of the Income-tax Act, 1961 Business loss/deductions Allowable as (Forward exchange contracts) - Assessment year 2009-10- Whether where assessee, to avoid any unforeseen losses on account of downfall in foreign exchange rate, entered into forward contracts and sealed amount of foreign exchange rate, which would be receivable to it, assessee immuned itself from any fluctuation in foreign exchange rate Held, yes Whether in such circumstances, when it was certain that no additional liability would arise to assessee on maturity of contract, possibility of such liability on balance sheet date also could not arise Held, yes Whether, thus, where all forward contracts were settled by way of actual delivery through dollars received on export receivables and there was no extra outgo for settlement of forward contract other than already determined in contract, loss claimed by assessee on account of mark to market losses on account of fluctuation in foreign currency in respect of hedging forward contract was not allowable Held, yes [Para 4][In favour of revenue).

Page 15 of 23 ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017 M/s Orient Cra� Ltd. on the said aborted IPO. In such a factual matrix, we are in agreement with assessee that since the entire IPO was aborted, the expenses incurred did not result in creation of any asset and the assessee did not get any enduring benefit. We are of the considered view therefore, that the expenses made on raising the IPO is revenue expenditure and allowable u/s 37(1) of the Act. The decisions of M/s Punjab State Industrial Development Corporation Ltd. Vs CIT; Brooke Bond India Ltd. V CIT ; Vazir Sultan Tobacco Co. Ltd. Vs CIT and Bombay Burmah Trading Corporation Ltd. v. CIT (supra), relied upon by the Revenue, are all distinguishable in facts as in all these cases expenses incurred were for the purposes of expansion of the capital base and created asset of enduring nature whereas in the instant case no such asset was created. On the other hand, the assessee’s reliance on the decision of ITAT Mumbai Bench, in the case of Go Airlines (India) Ltd. vs. Deputy Commissioner of Income reported in [2021] 126 taxmann.com 152, is apt which had held as under:

18. We have considered rival submissions in the light of the decisions relied upon and perused the materials on record. The fact that the assessee has actually incurred the expenditure towards proposed issuance of IPO has not been doubted or disputed by the Assessing Officer. This is evident from the fact that the Assessing Officer has allowed amortization of a part of expenditure in terms of section 35D. The only reasoning of the AO while doing Page 16 of 23 ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017 M/s Orient Cra� Ltd. so is, since the expenditure is related to expanding the capital base, it is a capital expenditure. However, it is the contention of the assessee that ultimately, the decision to issue IPO was aborted. On a perusal of the balance- sheet of the assessee as at 31-3-2012, we do not find any asset of enduring nature created on account of issuance of IPO. Thus, in our view, this expenditure is akin to expenditure incurred towards aborted project, hence, qualify as revenue expenditure. Further, we find that in case of Nimbus Communications Ltd. (supra), the Hon'ble jurisdictional High Court has allowed expenditure on issuance of share as revenue expenditure. In the case of General Insurance Corporation (supra), the Hon'ble Apex Court has allowed assessee's claim of expenditure in connection with issuance of bonus shares as revenue expenditure. Similar view has been expressed in the other decisions cited before us. Therefore, keeping in view the ratio laid down in the judicial precedents referred to above, we allow assessee's claim by deleting the disallowance made by the Assessing Officer. This ground is allowed.

In view of the above, the ground of the assessee is allowed.

“6. It was held that the claim of the Revenue that the revenue expense should be deferred in the absence of a statutory provision or spread over some years cannot be accepted. In the case of Commissioner of Income Tax Vs. Casio India Ltd. (2011) 335 ITR Page 18 of 23 ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017 M/s Orient Cra� Ltd. 196 (Del.), reference was made to the decision in the case of Ci� Financial Consumer Fin. Ltd. (supra). It was held that the expenditure incurred on investment and sale promo�on was business expenditure under Sec�on 37(1) of the Act and the concept of deferred revenue expenditure should not be accepted at the behest of the Revenue.

Respectfully following the same, we hold that the CIT(A) has rightly deleted the said addition. The ground is dismissed.

Page 19 of 23 ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017 M/s Orient Cra� Ltd. disallowance. Following the ratio of the aforesaid decision, we hold that the disallowance under section 14A has to be limited only to the extent of the exempt income. The ground is dismissed.

13. We have seen the explana�on of the assessee as to the nature of impugned loss and its nexus with the business carried on by the assessee placed at paper book page 325 to 424. We have considered the reply of the assessee placed at page 358 to 362 of the paper book, details of profit/loss on account of currency fluctua�on at page 363 of the paper book, summary of all deriva�ve contract, foreign bill nego�ated along with the export sales placed at page 364 of the paper book, details of difference in exchange-deriva�ve contract and premium/discount on the contracts placed at page 365-376 of the paper book and copy of original and restructured agreements of deriva�ve contracts between the assessee and M/s Barclays Bank placed at page 381 to 415 of the paper book and se�lement advices for deriva�ve contracts with above said bank placed at page 416-424 of the paper book. It is seen that the deriva�ve contracts were entered by the assessee in the course of carrying on its business of exports of garments so that the risk of foreign exchange fluctua�on losses in respect of export & import transac�ons may be reduced. Also, there are interest liability on working capital foreign currency loans and repayment of such working capital loans. Thus, the loss incurred by the assessee company were in respect of the forward contracts entered into by the assessee company during the course of carrying on its business and thus these are the normal business losses of the assessee company. These were hedging against the exposure to foreign exchange risk present in Page 20 of 23 ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017 M/s Orient Cra� Ltd. the underlying business contracts. Learned first appellate authority also has discussed this issue at great length in its order of appeal and has held that such loss is in the nature of business loss and is not specula�on loss. He has relied upon the order passed by his predecessor in assessee's own case in earlier years viz. AY 2010-11 to 2012-13 and extensively extracted from such order of AY 2011- 12 passed by his predecessor. It has not been shown to us as to why such loss is not normal business loss in the facts and circumstances of the present case when assessee is exporter of ready-made garments and home furnishings, imports from outside India and has raised foreign currency loans and is exposed to foreign currency exchange fluctua�ons. Hedging contracts entered into are not considered specula�on and specific exclusion has been given under sec�on 43(5) of the Income Tax Act in this regard. Turnover the assessee is to the tune of Rs. 1157.57 crores which comprises mainly the exports turnover. We have seen the case laws relied upon by Learned counsel for the assessee- CIT vs. Soorajmull Nagarmull 129 ITR 169(Cal), CIT vs. Badridas Gauridu 261 ITR 256 (Bom), Friends and Friends Shipping P Ltd 217 Taxman 267 (Guj) in which it has been held that foreign exchange loss which is incidental to business of export/import is not specula�ve loss to which we too respec�ully rely upon. Therefore, it is held that the impugned loss which is the subject ma�er of the present appeal is integral to the main business of the assessee and has been incurred in respect of the contracts entered into to safeguard the foreign exchange proceeds on export or foreign exchange payments in respect of the imports and other payables from exchange fluctua�on loss and is thus not specula�ve loss but is normal business loss which is liable to be set off as per the provisions of the Income Tax Act In view of the aforesaid, we hold that the CIT(A) has rightly deleted the said addition. We are also fortified by the decision of the Delhi High Court in the case of PCIT vs. Simon India Ltd and Bechtel India Pvt. Ltd. vs. ACIT (supra). The ground is accordingly dismissed.

Page 21 of 23 ITA-3625-3526/Del/2015 ITA-3773-3774/Del/2015 ITA3202-3203/Del/2017 M/s Orient Cra� Ltd. No:- 3773/Del/2015; ITA No:- 3774/Del/2015; ITA No:- 3202/Del/2017; ITA No:- 3203/Del/2017 are dismissed. Order is pronounced in the Open Court on 20.03.2026.