THIAGARAJAR MILLS (P) LIMITED,MADURAI vs. JCT, MADURAI

आयकर अपीलीय अिधकरण, ‘डी ’ �ायपीठ, चे�ई IN THE INCOME-TAX APPELLATE TRIBUNAL ‘D’ BENCH, CHENNAI �ी धु�ु� आर.एल रे�ी, �ाियक सद� एवं �ी एस जयरामन, लेखा सद� के सम� Before Shri Duvvuru RL Reddy, Judicial Member & Shri S. Jayaraman, Accountant Member आयकर अपील सं./I.T.A.Nos.1202, 1203 & 1204/Chny/2015 िनधा�रण वष�/Assessment Years: 2009-10, 2010-11 & 2011-12 M/s. Thiagarajar Mills (P) Ltd., Joint Commissioner of GST Road, Kappalur Vs. Income Tax, Madurai – 625 008. Range – I, Madurai [PAN: AAACT 4304R] (अपीलाथ� /Appellant) (��थ�/Respondent) अपीलाथ� की ओर से / Appellant by : Shri R. Srinivasan, Advocate ��थ� की ओर से/Respondent by : Shri M. Srinivasa Rao, CIT सुनवाई की तारीख/ Date of hearing : 24.10.2019 घोषणा की तारीख /Date of Pronouncement : 29.11.2019 आदेश /O R D E R PER DUVVURU RL REDDY, JUDICIAL MEMBER: These three appeals filed by the same assessee are directed against separate orders of the ld. Commissioner of Income Tax (Appeals)-I, Chennai all dated 20.03.2015 relevant to the assessment years 2009-10, 2010-11 & 2011-12. Since common issues have been raised in these appeals, heard together and are being disposed of by this common order for the sake of brevity.

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dismissed the ground of assuming jurisdiction of the Joint Commissioner of Income Tax in completing the assessment while the case as examined and scrutinized by the Deputy Commissioner of Income Tax.

2.1 Brief facts leading to the technical ground are that the assessee filed its return of income for the assessment year 2009-10 admitting NIL income under normal provisions. The return of income was processed under section 143(1) of the Income Tax Act, 1961 [“Act” in short]. However, the assessment was taken up for scrutiny by the DCIT and all details called for were furnished and discussed. However, under concurrent jurisdiction, the JCIT completed the assessment under section 143(3) of the Act on 27.12.2011.

2.2 It was the submission of the ld. Counsel that the second officer never intimated about his jurisdiction or intention to pass the order. It is well settled rule of law that the person who heard must decide. If not, an opportunity should be given by the new incumbent, the proviso to section 129 of the Act does not arise unless the second officer intimates his intention to pass orders as has been held in DCIT v Ramesh Chand Jain [109 TT] 561 (Agra)]. By relying upon various case law, the ld. Counsel has argued that the case was examined by one officer (DCIT) and the other officer (JCIT) though said to have concurrent jurisdiction did not hear the case by giving intimation of his intention to pass the assessment order. Concurrent

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jurisdiction does not give jurisdiction to one officer to hear and another to pass the order and thus, prayed for quashing the assessment.

2.3 On the other hand, the ld. DR has submitted that even though the DCIT initiated scrutiny by issuing notice under section 143(2) of the Act, intimating assumption of concurrent jurisdiction, the JCIT, vide his letter dated 15.09.2011 called for various details, which were filed by the AR of the assessee and discussed the issues. The objections raised by the AR of the assessee were considered by the Assessing Officer [JCIT] and thereafter, the assessment under section 143(3) of the Act was completed and in support of his above submissions, the ld. DR filed entire copies of the order sheet running page 2 to 6. The ld. DR further submitted that the entire case was heard by the Assessing Officer [JCIT] with the AR of the assessee and thereafter the assessment order was passed.

2.4 Per contra, by filing copies of the letter of the JCIT dated 15.09.2011 and assessee’s replies vide letter dated 03.10.2011, 04.10.2011, 29.10.2011, 03.11.2011, 07.12.2011, 08.12.2011, 16.12.2011, 17.12.2011 and 21.12.2011, the ld. Counsel for the assessee vehemently argued that the replies to the queries were addressed to the DCIT and discussed the case with him and not with the JCIT. It was further submission that the case of the assessee was completely heard by the DCIT, whereas, the

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assessment order passed by the JCIT is without jurisdiction and prayed for quashing the same.

2.4 We have heard both the sides, perused the materials available on record and gone through the orders of authorities below including case law filed by the assessee. We have also perused the copies of the order sheet running page 2 to 6, which reveals that even though the DCIT issued notice under section 143(2) of the Act, after assuming concurrent jurisdiction, the JCIT proceeded further by calling various other details vide his letter dated 15.09.2011, wherein, upon referring to the notice issued under section 143(2) of the Act, the JCIT has clearly intimated in the above referred letter to the assessee of holding concurrent jurisdiction over this case.

2.5 The jurisdiction of Assessing Officers has been defined under section 124 of the Act, which reads as under :- Jurisdiction of Assessing Officers. 124(1) Where by virtue of any direction or order issued under sub- section (1) or sub-section (2) of section 120, the Assessing Officer has been vested with jurisdiction over any area, within the limits of such area, he shall have jurisdiction – (a) in respect of any person carrying on a business or profession, if the place at which he carries on his business or profession is situate within the area, or where his business or profession is carried on in more places than one, if the principal place of his business or profession is situate within the area, and (b) in respect of any other person residing within the area. 2. ............

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3 No person shall be entitled to call in question the jurisdiction of an Assessing Officer - (a) where he has made a return [under sub-section (1) of section 115WD or] under sub- section (1) of section 139, after the expiry of one month from the date on which he was served with a notice under sub-section (1) of section 142 or [sub-section (2) of section 115WE or] sub-section (2) of section 143 or after the completion of the assessment, whichever is earlier; (b) where he has made no such return, after the expiry of the time allowed by the notice under [sub-section (2) of section 115WD or sub- section (1) of section 142 or under sub-section (1) of section 115 WH or under section 148 for the making of the return or by the notice under the first proviso to section 115WF or under the first proviso to section 144] to show cause why the assessment should not be completed to the best of the judgment of the Assessing Officer, whichever is earlier. It is pertinent to note that w.e.f. 1.6.2016 the Finance Act, 2016 is inserted the following sub-clause (4) ……….. (5) ………..” A perusal of sub-section (3)(b) of section 124 of the Act shows that the jurisdiction of an Assessing Officer cannot be called in question by an assessee after the expiry of one month from the date of which he was served with a notice under sub-section (1) of section 142 of the Act or after completion of assessment, which was to be earlier. It is further evident that sub-section (4) of section 124 of the Act has been made subject to the provisions of sub-section (3) in case an assessee has questioned the jurisdiction of an Assessing Officer. It is only in those jurisdictions that the Assessing Officer is to refer the matter for determination to the Director General or the Chief Commissioner or the Commissioner as per the provisions of section 124(2) of the Act. It is, thus, evident that before the

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expiry of the period of one month from the date of service of notice under sub-section (1) of section 142 of the Act, no right to question the jurisdiction of an Assessing Officer would survive.

2.6 In the present case, the assessee has not challenged the assumption of concurrent jurisdiction by the JCIT within the time stipulated in the statute and reproduced hereinabove. The case law filed by the assessee has no application to the facts of the present case because none of the case deals with filing of objection over questioning the jurisdiction of the Assessing Officer after lapse of the time stipulated in the statute as well as completion of assessment, despite intimation of assumption of jurisdiction was communicated to the assessee. Thus, in the absence of any objection filed by the assessee during the course of assessment proceedings or within the time stipulated under section 124(3) of the Act, the technical ground raised by the assessee stands dismissed.

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3.1 The assessee claimed derivative loss amounting to ₹.10,82,82,270/-. When the assesse was asked as to how this derivative loss having nexus with the business carried out and to be allowed as business loss, it was the submission before the Assessing Officer that it was primarily undertaken to hedge loss in export sale realization and therefore has a first degree nexus with our business and relied on the decisions in the case of CIT v. Badridas Gauridu (P) Ltd. 261 ITR 256 (Bom) and CIT v. Soorajmull Nagarmull 129 ITR 169 (Cal). When the Assessing Officer proposed to treat the loss as loss from speculation, the AR of the assessee has submitted that the transaction does not fall within the scope of section 43(5) of the Act. Forward contracts are utilized by delivery/settlement. Actual transaction is being recorded in the books, where, there was no element of profit/loss. The assessee has not submitted proper evidences to prove that the loss claimed by them is not speculative in nature. Any loss in speculative transactions can be set off only against profits from speculative transaction as per section 73 of the Act. The assessee has claimed notional loss of ₹.18,82,82,270/- being the (Market to Market) loss on account of forward contracts/derivative transaction outstanding on the close of the assessment year. Therefore, the Assessing Officer was of the opinion that this loss is a notional loss and also contingent in nature. Hence, treating the amount of ₹.10,82,82,270/- relating to loss on forex derivative transaction as speculative transaction, the Assessing Officer

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disallowed the claim and added to the business income of the assessee. The assessee carried the matter in appeal before the ld. CIT(A). After elaborately discussing relevant provisions, analyzing derivative contracts and discussing the case law, the ld. CIT(A) has held that the resultant loss represents as speculative loss and upheld the addition.

3.2 On being aggrieved, the assessee is in appeal before the Tribunal. The ld. Counsel for the assessee has submitted that the assessee has carried out foreign currency transactions from business activity of the company. It was further submission that the derivative contracts entered into by the assessee have a direct underlying currency exposure on account of export proceeds receivable by the assessee and are connected to the business and therefore, the loss on derivatives is a business loss. It was further submission that the cross currency option contract was a decision purely to hedge the currency exposure of the assessee and therefore, the loss thereon is not speculative and it is outside the purview of section 43(5) of the Act. It was further submission that the section 43(5) of the Act defines speculative transactions only with respect to contracts arising out of purchase and sale of commodity, stock and shares that are periodically or ultimately settled otherwise than by actual delivery or transfer of such commodity or strips. Foreign currency can neither be called as commodity or stocks and shares. It was further submission that the ld. CIT(A) failed to

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note that the decision in the case of CIT v. Friends and Friends Shipping (P) Ltd. 35 taxmann.com 553 (Guj) clearly holds that forward contracts are for the purpose of hedging against any loss arising due to fluctuation in foreign currency and therefore cannot be considered as speculative in nature. It was further submission that the ‘currency’ is not ‘commodity’ and therefore, the decisions relating to other than currency are not applicable and consequently, the ld. CIT(A) erroneously arrived at a conclusion that the derivative transactions undertaken by the assessee have no relations whatsoever with the assessee’s export business either as underlying or a hedge and prayed for deleting the addition.

3.3 On the other hand, by strongly supported the orders of authorities below, the ld. DR has submitted that the foreign currency derivate contracts are speculative in nature and therefore, loss arising out of the same has to be treated as speculative loss as defined under section 43(5) of the Act. It was further submission that the foreign currency derivate contracts transacted by the assessee constitutes a separate business activity of the assessee and therefore set off loss arising out of foreign currency derivate contracts of the assessee, which is speculative in nature, is permissible only against profits & gains arising out of speculative business of the assessee. It was further submission that the value of the total derivative contracts is about 5 times the export turnover. It was further submission that when there

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is specific provision in the Act in respect of speculative transactions, those provisions has to be applied while computing speculative income/loss of the assessee. It was further submission that since the assessee’s case does not fall within the provisions of section 43(5) (a) to (d) of the Act in order to exclude the foreign exchange derivative transactions made by the assessee outside the scope of speculative transactions, the ld. DR pleaded that the order of the Revenue may be sustained.

3.4 We have heard both the sides, perused the materials available on record and gone through the orders of authorities below including case law filed before the Tribunal. The point at issue to be adjudicated is whether the loss incurred by the assessee is a normal business loss or speculative loss. In this case before us, the main business of the assessee is manufacture of cotton yarn and its export. Being an exporter of cotton yarn and in order to prevent loss in sale proceeds, the assessee purchased foreign exchange and settled them as and when necessary as a normal commercial practice followed generally. It was the submission of the assessee that these transactions are primarily undertaken to hedge the loss in export sale realization and therefore has a first degree nexus with the business.

3.5 In this case, the assessee had entered into “Forward Contract” (derivative) with the bank in order to hedge its foreign exchange risk. What had happened was that due to adverse foreign exchange movement, the

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bank has debited the loss to the assessee’s account. Thus, the loss debited by the bank in the assessee’s account has crystallized and is a realistic loss suffered by the assessee. In these circumstances, the issue under consideration before us is that, whether loss on account forex derivatives are to be considered as a business loss or speculative loss. Only money changers and banks are allowed to trade in foreign currency and the assessee is neither a money changer nor a bank. On perusal of the appellate order, the assessee has submitted the details of the forward contracts entered into and the ld. CIT(A) at page 9 & 10 tabulated the same reveals that the assessee has utilized the services of Standard Chartered Bank, ABN Amro Bank, State Bank of India & IDBI Bank Ltd. in order to iron out the loss arising out of foreign currency fluctuation risk by entering into forex derivative contract.

3.6 Based on the statement of bank wise deals executed by the assessee, the ld. CIT(A) has observed that the total export turnover of the assessee during the year was 13.9 million USD amounting to ₹.63 crores. There are 213 export invoices and almost all of them are in USD. The total imports of the assessee during the year were 7.4 million USD amounting to ₹.32.65 crores through 23 import invoices and most of them are in USD. The assessee entered into forward contracts for the following currency pairs CHF-USD, EUR-USD, GBP-USD, INR-USD, JPY-USD, USD-EUR & USD

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GBP, even though all most all the exports and imports are in USD. The assessee has taken its hedging position in accordance with the guidelines of RBI and the same is not disputed. The claim of the assessee was that the underlying exposure both in respect of Euro and USD is more than adequate to cover the hedging positions taken in respect of cross currency derivative contracts entered into by the assessee. However, the ld. CIT(A) has observed that the assessee’s decision to enter into separate cross currency derivative transactions were a separate activity to obtain speculative profit based on the currency movements during a particular period and held that the derivative transactions undertaken by the assessee have no relations whatsoever with the assessee’s export business either as underlying or a hedge. Thus, the ld. CIT(A) has held that the derivative transaction entered into by the assessee are short time speculative transactions independent of the hedge or underlying on the regular export business of the assessee representing as speculative loss. However, the ld. Counsel for the assessee has vehemently argued that the assessee’s export turnover during the year was amounting to ₹.63 crores and there are 213 export invoices and almost all of them are in USD. Therefore, the ld. Counsel has submitted that the ld. CIT(A) has erroneously held that the derivative transactions undertaken by the assessee have no relations whatsoever with the assessee’s export business either as underlying or a hedge.

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3.7 On perusal of the appellate order, we find that the factual position emerged out of bank wise statement of deals executed by the assessee submitted before the ld. CIT(A) indicates that the total export turnover of the assessee during the year was 13.9 million USD amounting to ₹.63 crores and there are 213 export invoices and almost all of them are in USD. The total imports of the assessee during the year were 7.4 million USD amounting to ₹.32.65 crores through 23 import invoices and most of them are in USD. On verification of the statement of bank wise deals executed for the year, the ld. CIT(A) has observed that all the derivative contracts executed were cancelled before the due date and even a single contract was honoured. The number of contracts was around 298 in number which was very high. The approximate value of these derivative contracts for the year comes to ₹. 305 crores which is about 5 times the export turnover along and about 3.5 times the export and import turnover. Thus, the abnormally high figures indicate that the assessee was trading much more than genuine requirement for hedging. Accordingly, we direct the Assessing Officer to restrict the actual loss in lieu of actual export after verification of contract notes, etc. and the assessee is also directed to cooperate with the Department by producing all particulars. Thus, the ground raised by the assessee is allowed for statistical purposes for all the assessment year under appeal.

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4.1 In the assessment year 2010-11, the assessee has earned dividend income of ₹.5,35,600/-. When the Assessing Officer proposed for disallowance under section 14A r.w. Rule 8D, the assessee has furnishing working under Rule 8D required by the Assessing Officer. However, the Assessing Officer determined the expenditure component under section 14A r.w. Rule 8D and disallowed ₹.78,623/- for the assessment year 2010-11.

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4.2 Similarly, in the assessment year 2011-12, the assessee has earned dividend income of ₹.28,23,669/-. When show-caused, the assessee’s AR has submitted that the dividend warrants issued by the investee companies are encashable at par and therefore the assessee has not incurred any amount charged towards service charges/financial expenses by banks for realizing the above dividend amount and thus requested not to make addition towards earning of the dividend income, besides disallowing ₹.50,428/- under section 14A of the Act by the assessee in the memo of total income. However, the Assessing Officer determined the expenditure component under section 14A r.w. Rule 8D at ₹.62,000/- and disallowed the difference amount of ₹.11,572/- [₹.62,000 – ₹.50,428] for the assessment year 2011-12.

4.3 Against the disallowances under section 14A r.w. Rule 8D, the assessee carried the matter in appeal for the assessment years 2009-10, 2010-11 and 2011-12. After considering the submissions of the assessee, the ld. CIT(A) upheld the addition made by the Assessing Officer for all the assessment years under appeal.

4.4 On being aggrieved, the assessee is in appeal before the Tribunal. The ld. Counsel for the assessee has submitted that the authorities below have failed to record the satisfaction that how the method adopted by the assessee is not correct and consequently the entire exercise is void and

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prayed for deleting the addition. On the other hand, the ld. DR supported the orders of authorities below.

4.5 We have heard the rival contentions gone through the orders of authorities below including case law relied on. On perusal of the materials available on record, we find that the assessee has specifically raised a ground before the ld. CIT(A) that without recording satisfaction on the expenses admitted/disallowance made in the memo of income by the assessee, the disallowance made by the Assessing Officer under section 14A r.w. Rule 8D is unwarranted. However, on perusal of the appellate order, the ld. CIT(A) has not adjudicated the specific ground raised by the assessee. Rule 8D cannot be invoked and applied unless the Assessing Officer records his dissatisfaction regarding correctness of the claim made by the assessee in relation to expenditure incurred to earn exempt income. This is mandatory and pre-condition imposed by sub-section (2) to section 14A of the Act. Rule 8D is in the nature of best judgment determination i.e. determination in default and on rejection of the explanation of the assessee in relation to expenditure incurred to earn exempt income. Rule 8D is not applicable by default but only if and when the Assessing Officer records his satisfaction and rejects the explanation of the assessee regarding the disallowance of expenditure. In the present case the assessment order precedes on a wrong assumption that Rule 8D would apply to all cases and

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is mandatory. Even though the Assessing Officer excluded the expenditure/ disallowance made by the assessee while determining the disallowance, the Assessing Officer has not recorded his satisfaction and since the ld. CIT(A) has not adjudicated the specific ground, we remit the matter back to the file of the ld. CIT(A) to decide the issue afresh in accordance with law after affording an opportunity of being heard to both parties. Thus, the ground raised by the assessee is allowed for statistical purposes.

Sd/- Sd/- (S JAYARAMAN) (DUVVURU RL REDDY) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, the 29.11.2019 Vm/- आदेश की �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant, 2.��थ�/ Respondent, 3. आयकर आयु� (अपील)/CIT(A), 4. आयकर आयु�/CIT, 5. िवभागीय �ितिनिध/DR & 6. गाड� फाईल/GF.