Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI BENCHES “F”, MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI RAJESH KUMAR
PER RAJESH KUMAR, A.M:
These appeals filed by the assessee are directed against the order(s) of the Commissioner of Income Tax(Appeals)-48, Mumbai, dated 22-02-2018. ITA No.2576/Mum/2018:
In this appeal, the assessee has raised the following Grounds:
“Ground No.1 On the facts and circumstances of the case and in law, the learned Assessing Officer (AO) erred in carrying out adjustments to the : 2 : ITA Nos. 2576 & 2577/Mum/2018
returned income of the appellant, without appreciating the fact that such adjustments are not based on any incriminating material found during the course of search. The appellant prays that the order passed by the learned A.O. is bad in law as the juri iction u/s.153A is vitiated. “Ground No.2 On the facts and circumstances of the case and in law, the Hon'ble CIT(A) failed to appreciate that the Ld.AO had erroneously set off of brought forward losses and unabsorbed depreciation of earlier years amounting to Rs.53,56,717/- against the total income while computing deduction under Section 10A. “Ground No.3 On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the action of the Ld.AO of setting off loss of non-eligible Unit 1 of Rs.59,66,887/- against profit of eligible Unit 2 and then computing deduction under Section 10A of the Act”.
The issue raised by assessee in Ground No.1 is a juri ictional issue, challenging the order of CIT(A), upholding the order of the Assessing Officer (AO), confirming the additions to the income of assessee without being based on the incriminating material found during the course of search and therefore, the assessment framed u/s.143(3) r.w.s.153A of the Income Tax Act (Act) is bad in law.
The facts in brief are that – a search and seizure action u/s.132 of the Act was conducted by the DDIT(Inv.), Unit- IX(3), Mumbai in the case of the Mahendra Brothers Exports Pvt. Ltd., and its group concerns, directors and related persons on 08-08-2011. Accordingly, a notice u/s.153A was issued on 21-09-2012. The assessee filed return of income on 29-10-2012, declaring a total income of Rs.53,37,834/-. Thereafter, statutory notice was issued and duly served upon : 3 : ITA Nos. 2576 & 2577/Mum/2018
the assessee. The assessee is in the business of manufacturing and exporting of jewellery and during the year has shown total turnover of Rs.1,23,63,62,108/- and the profit Rs. Rs.4,19,91,433/-. The assessee has two units and out of the two units, one unit was eligible for deduction u/s.10A of the Act. The assessee claimed deduction u/s.10A of the Act at Rs.5,10,49,965/-. In this case, the original assessment was completed u/s.143(3) of the Act vide order dt.30-12-2008. Finally, after taking into consideration the submissions and replies of assessee, framed the assessment u/s.143(3) r.w.s.153A of the Act by setting -off the brought forward loss and depreciation of earlier years amounting to Rs.53,56,717/- against total income while computing deduction u/s.10A of the Act and also set-off loss of non- eligible unit of Unit No.1 of Rs.59,66,887/- against the profit of eligible Unit No.2 and then computed the deduction u/s.10A of the Act.
In the appellate proceedings, the Ld. CIT(A) dismissed the appeal of assessee on this juri ictional issue by holding that the assessment u/s.153A is mandatory and therefore rightly framed and thus justified the adjustments in the order framed u/s.143(3) r.w.s. 153A of the Act.
Ld.AR vehemently submitted before us that on the date of search i.e., on 08-08-2011, the assessment for the year under consideration has already attained finality and therefore has not abated. The assessment was framed in this case vide order u/s.143(3) of the Act, dt.30-12-2008 and thus the said assessment has attained finality on the date of search. Ld.AR
: 4 : ITA Nos. 2576 & 2577/Mum/2018
also submitted that any addition in the said order can only be made, based upon the incriminating material seized during the course of search and not otherwise as done by the AO. The d counsel of the assessee, therefore, submitted that the addition made by the AO in the assessment framed u/s.143(3) r.w.s.153A of the Act are without juri iction and has to be deleted. Ld.AR in defense of his argument, relied on the decision of CIT Vs. Continental Warehousing Corporation Ltd., [374 ITR 645] (Bom) and prayed for the Bench that the assessment framed by the AO may kindly be set aside as without juri iction.
Ld. DR on the other hand, relied on the orders of authorities below.
We have heard the rival contentions and perused the material on record as placed before us. We observe that in this case the assessment u/s.143(3) of the Act was framed vide order dt.30-12-2008, whereas search was conducted on 08- 08-2011. Thus, the assessment has attained finality on the date of search. In our opinion, AO can not disturb the completed and finalized assessment on the date of search which has attained finality. The AO has juri iction to disturb the assessment if the Department has seized some incriminating material qua the additions which are proposed to be made in the assessment framed u/s.143(3) r.w.s.153A of Act. However, in the present case, we find that there is no reference by the AO to any incriminating material found during search and therefore, we hold that the additions/adjustments/recomputations made by the AO in : 5 : ITA Nos. 2576 & 2577/Mum/2018
the assessment order are without juri iction and have to be deleted. The case of assessee is squarely covered by the decision of the Bombay High court in the case of CIT Vs. Continental Warehousing Corporation Ltd., (supra) wherein the Hon’ble court has held that in the case of unabated assessment, the additions can only be made if based upon the incriminating materials found during search and not otherwise. We, therefore, respectfully following the decision of the juri ictional High Court , set aside the order of CIT(A) and direct the AO to delete the adjustment or addition to that income.
In the result, this appeal of assessee is allowed.
ITA No.2577/Mum/2018:
In this appeal, the assessee has raised the following Grounds:
“Ground No.1
On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the disallowance made by the Ld.AO of Rs.1,35,97,584/- on account of loss on foreign currency forward contracts by treating the same as speculation loss instead of loss from business or profession. Ground No.2 On the facts and circumstances of the case and in law, the Hon'ble CIT(A) erred in confirming the action of the Ld.AO of ignoring the ‘Other income’ of Rs.70,72,017/- while computing deduction u/s.10A of the Act thereby ignoring the fact that the ‘Other Income’ of Rs.70,72,017 is inextricably linked with the business of the appellant and thus eligible for deduction u/s.10A of the Act”.
: 6 : ITA Nos. 2576 & 2577/Mum/2018
The first issue raised by the assessee in this appeal is against the upholding the order of AO by the ld. CIT(A), and thus confirming the loss on foreign currency forward contracts as speculation loss instead of business loss treated by the assessee. During the course of assessment proceedings, AO noticed that assessee has debited to the Profit & Loss A/c a sum of Rs.1,35,96,329/- on account of cancellation of forward contract under the head ‘Administrative and other expenses’. AO noted that such loss was on account of its forward contracts in foreign currency which were not deliverables at the first place. All the forward contracts were cancelled and no delivery was taken in any of the forward foreign exchange contracts. Therefore, by applying the provisions of Section 43(5), Section 73 along with Instruction No.3 of 2010, dt.23- 03-2010 issued by the CBDT, AO asked the assessee as to why this sum of Rs.1,35,97,584/- being loss on forward contracts should not be disallowed and added back to the total income of the assessee as the same was speculative which was replied by the assessee vide written submissions dt.21-02-2014 by submitting that the transactions of foreign exchange were in regular course of assessee’s business and the quantum of such forward transactions were within the import and export exposure on month to month basis. Ld.AR submitted that assessee was importing various raw-materials like polished diamonds, accessories, colour stones, precious metal etc., for manufacturing of jewellery items and these materials were either imported or procured from Domestic Tariff Area (DTA). Since the assessee was located in Seepz, these were generally payable in foreign currency. Similarly,
: 7 : ITA Nos. 2576 & 2577/Mum/2018
assessee exports finished goods i.e., finished jewellery that it manufactured to various out parties on credit. Credit term for the sales ranged between 90 days to 150 days as the customers were old ones. The ld counsel submitted that this was part and parcel of assessee’s business to receive foreign currency for exports and pay foreign currency for imports/DTA purchases. The assessee used to meet its working capital needs by way of foreign currency loans from bankers. Thus, assessee’s receipts and payments of foreign currency were integral and inseparable part of its business. Therefore, foreign currency transactions entered into by the assessee were not independent transactions and were incidental to the assessee’s jewellery business. The assessee has entered in to foreign currency transactions only for the purpose of meeting the requirements of exports of manufactured goods and import/DTA purchase of raw materials and for nothing else or for no other purposes. Therefore, assessee was exposed to adverse movements in foreign exchange rates which it received and used to pay as part of its business. Thus it is clearly evident that the assessee was exposed to risks of foreign exchange fluctuations in the ordinary course of its business exposed to the risks on account of fluctuation in foreign exchange rates in the international markets having a major impact on its revenue, receivables and payables arising out of its business. Further, these risks could have a severe impact on the assessee due to large volume of import and export transactions. The risk on account of foreign exchange rate fluctuation emanated directly from its business and formed an integral part and parcel of : 8 : ITA Nos. 2576 & 2577/Mum/2018
the business of assessee. For rate fluctuations in foreign exchange exposure, the assessee could mitigate, reduce or eliminate this risk by the mechanism approved and formalized by Reserve Bank of India by entering into foreign exchange forward contracts. Therefore, the ld counsel argued that the provisions of Section 43(5), 73 and Instruction No.3 of 2010, dt.23-03-2010 were not applicable to the assessee’s case. However, AO rejected the contentions of assessee and treated the loss as ‘speculative loss’ and did not allow the setting of the said loss against the income of the business and profession.
In the appellate proceedings, Ld. CIT(A) dismissed the appeal of assessee by observing and holding as under:
“1. Assessee has not been able to establish the linkage between the purchase and sale of diamonds/jewelry with the specific hedging contracts.
Merely because the exposure in the international market was of value higher than the amount of forward contracts, transactions of such forward contracts would not automatically become hedging. The advantage of hedging to assessee cannot be given purely on the basis of amount involved.
The language of clause 5 of proviso to section 43(5) is absolutely clear. The exception is available only to the contracts in the nature of guard against loss through future price fluctuations. This exemption is available only where such contracts are in the nature of guard and the onus is on the assessee to prove that such contracts in his case were held as a guard and assessee had not been able to prove is there was any hedging.
Assessee’s arguments are general is nature and onus has not been discharged with specific hedging linkages.
Reliance on facts of A.Y.2003-04: The issue of Hedging is one of facts there is no dispute in law. It has been elaborately brought out in Assessment order and in this appeal order above. That assessee has failed to establish specific linkage between forward contracts
: 9 : ITA Nos. 2576 & 2577/Mum/2018
with international purchase/sale and cancellations etc. of FC. Hence there cannot be any applicability of order for A.Y.2003-04. Since for A.Y.2003-04, the linkage of hedging was held to have been established, it does not mean that by virtue of that, such linkage is proven is A.Y.2009-10 also. The facts of A.Y.2009-10 need to verified separately for hedging purpose. Hence reliance on order for A.Y.2003-04 is not valid and is rejected.”
Ld.AR vehemently submitted to the Bench that the issue of loss on foreign exchange fluctuation on account of cancellation of forward contracts stood settled in a series of decisions of the Tribunal and Hon'ble Bombay High Court, stating that the loss resulting from cancellation of forward contracts in foreign exchange entered into for the purpose of hedging the risk on fluctuations in the foreign exchange was incurred in the normal business by the assessee and therefore constituted a business loss and may be allowed as such. In this regard, Ld. AR referred to the following decisions:
i. Assessee’s own case in ITA No.4341/Mum/2016, AY.2008-09, dt.02-07-2018; ii. Assessee’s own case in ITA Nos.8804/Mum/2004 and others , dt.30-10-2009, wherein it has been held that the loss resulting from cancellation of forward contract in foreign exchange was held to be a business loss. [161 ITD 772/72 taxmann.com 301 (Mumbai-Trib); iv. CIT Vs. D.Chetan and Co., [390 ITR 36] (Bom);
: 10 : ITA Nos. 2576 & 2577/Mum/2018
Ld.DR on the other hand, relied on the orders of authorities below and submitted that the said loss is a speculative loss as the contract was undertaken without any delivery and therefore rightly treated as speculative loss by applying the provisions of Section 43(5), 73 and Instruction No.3 of 2010, dt.23-03-2010. 14. We have heard the rival contentions, perused the materials on record. We observe that in this case assessee is in the business of manufacturing, import and export of jewellery items. For the purpose of import the assessee required to settle the imports in foreign exchange. Similarly finished goods are also exported to various clients where the credit period ranged between 90 to 150 days. Thus, the assessee requires foreign exchange for the purpose of making payment to creditors as well as receipt of payment from the sundry Debtors. It is a well known fact that there is a wide fluctuations in foreign currency. The assessee may have to suffer the loss due to fluctuation in the foreign exchange rates as the assessee has to meet the commitments of paying to creditors while the payments are also received from the foreign customers in foreign currency. In order to hedge the foreign currency fluctuation, assessee enters into foreign exchange forward contracts through banks as per RBI norms and thus these transactions are entered into in the ordinary course of business of the assessee and are integral and inseparable part of its business. In view of these facts and circumstances, we are not in agreement with the conclusion of the Ld.CIT(A) that the loss suffered due to cancellation of these forward contracts
: 11 : ITA Nos. 2576 & 2577/Mum/2018
in foreign exchange was a speculative loss. Moreover, the case of assessee is squarely covered by various decisions, referred above, wherein it was held that loss incurred due to cancellation of forward foreign currency contract in the ordinary course of business is a business loss and not a speculative loss.
The Co-ordinate Bench of this Tribunal in assessee’s own case in ITA Nos.8804/Mum/2004 and others , dt.30-10- 2009 held as under:
“31. After haring both the sides, we find that this issue stands covered in favour of the assessee by the decision of the co-ordinate Bench of the Tribunal, where one of us was a party. In the said decision the loss on account of cancellation of foreign exchange contract was held as business loss by the CIT(A) as against speculation loss as treated by the Assessing Officer. When the matter came up before the Tribunal, the Tribunal following the decision of the Hon'ble Kolkata High Court and Hon'ble Bombay High Court, cited above, dismissed the ground raised by the Revenue. Following the same logic as held by the decision of the co-ordinate Bench of the Tribunal, we hold that Rs.5,75,958/- on account of cancellation of foreign exchange contract in the course of business has to be treated as ‘income from business’ and consequently, the assessee is entitled to deduction under section 10A of the Act. In this view of the matter, the order of the CIT(A) is set aside and the ground raised by the assessee is allowed.”
ITA No.4341/Mum/2016, AY.2008-09, dt.02-07-2018:
“5. We have considered rival contentions and found that this issue is revolving around loss on foreign exchange forward contacts cancelled during the year, whether it is speculative in nature. Identical issue came up before ITAT in assessee's own case for A.Y. 2003-04 (ITA No. 69/Mum/2007) vide order dated 30.10.2009. The issue has been decided in favour of assessee as under:
"
The facts of the case in brief are that miscellaneous income of Rs.9,18,088/-contained an amount of Rs.5,75,958/- which was : 12 : ITA Nos. 2576 & 2577/Mum/2018
received on account of cancellation of foreign exchange contract. The Assessing Officer treated the same as 'income from other sources' and did not allow benefit of deduction under section WA of the l.T. Act. In appeal, the CIT(A) upheld the action of the Assessing Officer. Aggrieved with such order of the CIT(A), the assessee is in appeal before us.
The learned counsel for the assessee submitted that the assessee in order to hedge against any losses entered into these transactions and therefore, it cannot be treated as speculation transaction. Referring to the decision of the Tribunal in the case of ACIT Vs. Mahendra Brothers in ITA Nos. 1880/Mum/05 & 948/Mum/06 vide order dated 29.4.2009 for the assessment years 2001-02 & 2003-04 respectively, she submitted that the Tribunal in the said decision, following the decision of the Hon'ble High Court of Kolkata in the case of CIT Vs. Soorajmull Nagarmuli reported in 129 ITR 169 (Bom) and the decision of Hon'ble Bombay High Court in the case of CIT Vs. Badridas Gauridu (I) Ltd., 261 ITR 256 (Bom) had dismissed the appeals filed by the Revenue, where it was held by the CIT(A) that exchange loss on account of cancellation of forward contract amounts to business loss. She accordingly submitted that the issue stands covered in favour of the assessee by the decision of the co-ordinate Bench of the Tribunal.
The learned D.R., on the other hand, supported the order of the CIT(A).
After hearing both the sides, we find that this issue stands covered in favour of the assessee by the decision of the co-ordinate Bench of the Tribunal, where one of us was a party. In the said decision the loss on account of cancellation of foreign exchange contract was held as business loss by the CIT(A) as against speculation loss as treated by the Assessing Officer. When the matter came up before the Tribunal, the Tribunal following the decision of the Hon'ble Kolkata High Court and Hon'ble Bombay High Court, cited above, dismissed the ground raised by the Revenue. Following the same logic as held by the decision of the co-ordinate Bench of the Tribunal, we hold that Rs.5,75,958/- on account of cancellation of foreign exchange contract in the course of business has to be treated as 'income from business' and consequently, the assessee is entitled to deduction under section 10A of the Act. In this view of the matter, the order of the CIT(A) is set aside and tlie ground raised by the assessee is allowed
As the facts and circumstances during the year under consideration are same, respectfully following the decision of the Tribunal in assessee’s own case, wherein Tribunal have held that cancellation of foreign exchange contract is a : 13 : ITA Nos. 2576 & 2577/Mum/2018
business loss and not a speculation loss, we do not find any infirmity in the order of CIT(A) for allowing assessee’s claim of business loss”.
The case of the assessee is also covered by various other decisions referred to during the course of hearing. Even the Hon'ble Bombay High Court in the case of CIT Vs. D.Chetan and Co., [390 ITR 36] (Bom) has held that – Transaction entered into in the regular course of business of hedging of transaction to cover various foreign exchange fluctuations is a business loss and not a speculative loss.
Respectfully following the ratio laid down by the Hon’ble Bombay High Court and the earlier year decision in assessee’s own case, we hold that the loss incurred by assessee is a business loss and the AO is directed accordingly. This Ground of appeal raised by assessee is allowed.
The issue raised in Ground No.2 by the assessee is against the confirmation of order of AO by the CIT(A), wherein while computing deduction u/s.10A, the other income of Rs.70,72,017/-, which was inextricably linked with the business of assessee, was not taken into account.
1. The facts in brief are that during the course of assessment proceedings, the AO observed that assessee claimed deduction u/s.10A of the Act amounting to Rs.6,14,63,207/- in respect of Unit No.
The AO while passing assessment order, reduced the other income of Rs.70,72,017/- while computing deduction u/s.10A of the Act.
: 14 : ITA Nos. 2576 & 2577/Mum/2018
In the appellate proceedings, the CIT(A) dismissed the appeal on this ground, by holding that such income comprised of interest on Sale of Scrap Rs.1,000/-, Security Deposits of Rs.24,641/-, Sundry Expenses back written back of Rs.70,46,376/- which were in the nature of business, salary, travelling expenses, commission expenses, goods purchased, general expenses etc., claimed in earlier years i.e., AYs.2008- 09 and 2009-10. These were returned back during the year, hence brought to tax under the head ‘income from other sources’. According to the CIT(A), all the credit expenses were actually in the nature of expenses only and no way constitutes the income/receipt, which were eligible u/s.10A of the Act and therefore, the benefit of Section 10A cannot be granted qua this income.
Ld.AR submitted for the Bench that the total other income comprised of four items, the details thereof are given at para 8 of the appellate order. Out of four items, third item was of Rs.70,46,376/- representing the Sundry Expenses written-off, which were reduced from the profit in the earlier years and therefore should be allowed as part of the profits for the purpose of section 10A, whereas the Ld.AR did not press Item Nos. 1 & 2. 16. 4. Ld. DR, on the other hand, submitted for the Bench that the amount which is sought to be claimed a part of the profits for the purpose of Section 10A is only the expenses written-off in the books of account and in no way represented the profit from business and therefore was rightly denied while allowing deduction u/s 10A of the Act. The ld Dr therefore
: 15 : ITA Nos. 2576 & 2577/Mum/2018
requested that ground raised by the assessee in this regard is to be dismissed.
After considering the rival submissions and perusing the material on record, we find that the in the other income, there was an item of Rs.70,46,376/- on account of Sundry Expenses written-off back during the year which were claimed in the earlier year and thus, it was claimed as part of the profit and consequently, the claimed u/s.10A of the Act however the AO rejected the deduction u/s 10A in respect of the same. Now the only issue before us whether the expenses written back in the current year which were credited to the profit and loss account would be eligible for the deduction u/s 10A of the Act. Undisputable, during the year when these expenses were written back by crediting the same to the income of the account of the assessee and the profits were increased correspondingly. We find merits in the arguments of the ld AR that in earlier years these expenses were claimed in the profit and loss account and the deduction u/s 10A was allowed accordingly and now when these are reversed , the same should be treated as part of the profits for the purpose of deduction u/s 10A. After taking into accounts the totality of the scenario, we are of the view that the same forms part of profit for the purpose of Section 10A of the Act. Accordingly, we set aside the order of CIT(A) and direct the AO to allow the deduction u/s.10A of the Act. Hence, this ground raised by assessee is allowed.
In the result, this appeal of assessee is allowed.
: 16 : ITA Nos. 2576 & 2577/Mum/2018
To sum-up, both the appeals of assessee are allowed.
Order pronounced in the open court on 19.08.2019 (MAHAVIR SINGH) (RAJESH KUMAR) "याियक सद"य/JUDICIAL MEMBER लेखा सद"य/ACCOUNTANT MEMBER मुंबई/Mumbai; "दनांक/Dated : 19.08.2019 TNMM
आदेश क" "ितिलिप अ"ेिषत/Copy of the Order forwarded to : 1. अपीलाथ" / The Appellant
""यथ" / The Respondent 3. आयकर आयु"(अपील) / The CIT(A), Mumbai 4. आयकर आयु" / CIT, Mumbai 5. िवभागीय "ितिनिध, आयकर अपीलीय अिधकरण, मुंबई / DR, ITAT, Mumbai 6. गाड" फाईल / Guard file आदेशानुसार/ BY ORDER, स"यािपत "ित //// उप/सहायक पंजीकार (Dy./Asst.