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Income Tax Appellate Tribunal, ‘A’ BENCH, BENGALURU
Before: SHRI CHANDRA POOJARI & SHRI PAVAN KUMAR GADALE
The assessee has filed the appeal against the order of the Commissioner of Income-tax, Bengaluru-1, Bengaluru, passed u/s 263 of the Income-tax Act,1961 ['the Act'] dated 12/03/2014 for the assessment year 2009-10.
The assessee raised the following grounds of appeal:
1. “The order passed by the learned C.I.T. u/s 263 of the Act, in so far as it is against the appellant, is opposed to law, equity, weight of evidence, probabilities, facts and circumstances of the case.
Page 2 of 10 2. The learned C.I.T. failed to appreciate that there was no error much less an error prejudicial to the interest of the revenue in the order passed by the learned Assessing Officer warranting revision u/s.263 of the Act and consequently, the order passed by the C.I.T. is opposed to law and facts of the appellant's case and requires to be cancelled.
3. The learned C.I.T. failed to appreciate that there was no requirement to set-aside the issue relating to the loss sustained by the appellant for fresh consideration as the learned A.O. had examined the issue in course of assessment proceedings and therefore the provisions of section 263 of the Act were inapplicable to the facts of the appellant's case.
4. The learned C.I.T. failed to appreciate that the loss sustained by the appellant on hedging of foreign currency exchange loss cannot be considered as a speculative loss as the same was incurred in normal course of business of exports carried on by the appellant and as such, there was no requirement to consider the same as a speculation loss under the facts and in the circumstances of the appellant's case and thus, there was no error prejudicial to the interest of revenue for invoking the provisions of sec. 263 of the Act. 5. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fee as part of the costs.”
Brief facts of the case are that the assessee is in the business of manufacture of garments and filed the Return of income on 28/09/2009 with ‘nil’ income. The Return of income was processed u/s 143(1) of the Act. Subsequently, the case was selected for scrutiny and notices u/s 143(2) and 142(1) of the Act were issued. The learned AR appeared from to time and the case was discussed. The AO, on perusal of the financial statements and Balance-sheet found that the assessee has made investments
Page 3 of 10 and earned dividend income and the AO applied the provisions of section 14A of the Act and worked out the disallowance of Rs.14,09,724/- and assessed loss to the extent of Rs.16,04,00,292/- and passed order u/s 143(3) of the Act dated 22/12/2011.
Meanwhile, the CIT having jurisdiction, on perusal of records found the assessment order passed u/s 143(3) and is erroneous and prejudicial to the interests of the revenue. The CIT found that the assessee has claimed expenditure in the P&L Account of Rs.2,02,41,206/- under the head ‘loss on forward contracts’. The CIT is of the opinion that loss is in the nature of speculation and cannot be set off against regular income as the loss has to be added to the income. Since the AO has not dealt on this issue and examined in the assessment proceedings, the CIT issued notice and the assessee filed written submissions on27/11/2013 and 28/11/2013. The CIT, at page 2 of the order, dealt on the submissions of the assessee, where the assessee was relying on the judicial decisions. The ld. CIT after considering the submissions that ‘loss under forward contracts’ cannot be considered as speculation loss. Whereas on perusal of assessment records, the CIT found that the AO has not examined the nature of loss, whether it is speculation or non-speculation. The CIT relied on the Hon’ble Apex Court decision in the case of Malabar
Page 4 of 10 Industrial Co. vs. CIT (243 ITR 83) and the CIT referred to the decision of the co-ordinate bench of the Tribunal in assessee’s own case for assessment year 2005-06 where income from forward contracts has been treated as speculative in nature for the purpose of allowing deduction u/s 10B. Therefore, the CIT is of the opinion that ‘loss from forward contracts’ has to be considered as speculation in nature and the assessee having accepted the decision of the Tribunal, has not contested in the higher forums. The ld.CIT, with these observations of the opinion that the order passed u/s 143(3) dated 22/12/2011 is erroneous and prejudicial to the interests of revenue and set aside the assessment, to the file of the AO to examine the nature of loss on forward contracts as speculation and redo the assessment and also the assessee should be provided adequate opportunity and passed order u/s 263 of the Act dated 12/03/2014.
Aggrieved by the order, the assessee filed an appeal before the Tribunal. Before us, the learned AR argued that the CIT, after considering the submissions of the assessee at page 3 has emphasized on the facts that the decision of the Tribunal for assessment year 2005-06 was in respect of claim of 10B deduction whereas the income from forward contracts was considered as speculation. But in the present case, the assessee has debited to the P&L Account, loss on forward contracts and not Page 5 of 10 for the purpose of claiming deduction u/s 10B of the Act. The learned AR referred to letter filed before the AO dated 25/11/2011 with Note on loss on forward contract, which is placed at page 4 of the paper book. Whereas the AO, in the assessment proceedings, has called for details which are filed in paper book at pages 4 and the AO has examined the fact on issues. The learned AR relied on the following decisions:
MOIL Ltd. Vs. CIT (81 taxmann.com 420(Bom); 2. CIT vs. Nirav Modi (71 taxmann.com 272(Bom); 3. Spectra Shares & Scrips (P) Ltd. Vs. CIT(219 Taxman 61(AP); 4. CIT vs. Badridas Gauridu (P) Ltd. (134 Taxman 376)(Bom); 5. CIT vs. Friends and Friends Shipping (P) Ltd. (35 taxmann.com 553(Guj); 6. K.Mohan & Co. (Exports) Pvt. Ltd. Vs. ACIT, in 1266/Bang/2010 & 1057/Bang/ 2012 (ITAT, Bang.) 7. ACIT vs. K.Mohan & Co. (Exports) Pvt. Ltd. Vs. ACIT, in ITA No.113/Bang/2019 (ITAT, Bang) and 8. Hanuman Weaving Factory vs. ACIT in ITA No.112/Bang/2012 & 1320/Bang/2012(ITAT, Bang.)
Further learned AR submitted copy of the assessment orders for the earlier years and consequential order passed u/s 143(3) r.w.s 263 of the Act which is placed at page 45 of the paper book and supported with judicial decisions in the case of Majestic Exports vs. JCIT (62 taxmann.com 307)(Chennai-Trib). The ld. AR mentioned that the assessee in the present case is in the business of manufacture of cotton textiles and forward contracts was in respect of same goods and not any other goods and prayed for allowing the appeal.
Page 6 of 10 6. Contra, learned DR supported the order of the CIT and referred that the CIT has correctly considered this fact and the AO has not verified the loss on forward contract and emphasized on para. 21 of the order of the Tribunal in the assessee’s own case for assessment year 2005-06 in dated 07/08/2009, which reads as under:
“21. It is true that section 10B(1) says that a deduction of such profit and gains as are derived by 100% export oriented undertaking is to be allowed as deduction. For the purposes of sub-section (1), the quantum of deduction is to be computed as per section 108(4). The deduction permissible is in the same proportion to the profit of the business of the undertaking as it bears to the export turnover to the total turnover. The words uses are "profit of the business of the undertaking". The business of the undertaking is to manufacture and export readymade garments. We had already held that profit from forward contract is profit to be assessed under the head 'speculation business' and speculation business is not the business of the undertaking. Hence for the purpose of computing deduction u/s 10B, speculation business cannot be considered as the business of the undertaking. We have also considered the decision of the jurisdictional Bench on which the learned AR has placed reliance. The facts in that case are different, as in that case, the issue was in respect of interest and not profit from other business. Hence, the ratio of law as laid down by the jurisdictional Bench in the case of Motorola India (supra) is not applicable.”
And prayed that the appeal of the assessee be dismissed.
We heard the rival submissions and perused material on record. The sole crux of the disputed issue is with respect to order passed u/s 143(3) is erroneous and prejudicial to the interests of Page 7 of 10 revenue. The learned AR emphasized that in the scrutiny proceedings, AO has called for information on various dates and the assessee filed letter with Note on loss on forward contracts dated 25/11/2011 and second letter on the said date was filed on this disputed issue. The learned AR ‘s contention that the Tribunal, in the assessee’s case for the assessment year 2005-06 which was referred by the CIT in para.4.4 of the revision order, was in respect of forward contract treated as speculative transaction for the purpose of claiming deduction u/s 10B of the Act as such speculation nature of transaction are not eligible for deduction u/s 10B. In the present case, the assessee has claimed the loss on forward contract in P&L account. Therefore, the decision of the Tribunal in particular to forward contract was treated as speculative in nature for the purpose of benefit u/s10B of the Act Where as in the case on hand, the assessee has claimed the loss on forward contracts in P&L Account and not with respect to claim u/s 10B. When a query was raised whether the consequential order passed as per the direction of the CIT, the learned AR filed copy of the assessment order passed u/s 143(3) r.w.s. 263 of the Act dated 16/10/2014 where the AO, has followed the directions and made addition.
Now, the question that arises before us is that the order u/ s 263 satisfies the twin conditions of being erroneous and prejudicial to the interests of revenue. The learned AR filed
Page 8 of 10 assessment orders u/s 143(3) for assessment years 2005-06, 2007-08 and 2008-09 where there was no addition to this effect and similar loss on forward contracts was claimed in the present assessment year. We found the assessee has entered into forward contracts in respect of products dealt by it and not any other exported goods and the loss on such transactions has to be allowed as business loss. The learned AR relied on the decision of the Tribunal in the case of Majestic Exports (supra) where these facts have been considered by the Tribunal at para.8.1 which read as under:
8.1 Now, this view has been taken by Co-Ordinate, Chennai in the case Aishwarya & Co. (P.) Ltd. [IT Appeal No. 860 (Mad.) of 2014, dated 29-5-2015], wherein they followed the judgment of the Calcutta High Court in the case of Dy. CIT v. Baljit Securities (P.) Ltd. [2015] 68 SOT 82 (URO)/55 taxmann.com 191 wherein held as under:— '(1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.' The resultant effect was that any loss arising out of speculative transaction could only have been set off against profits arising out of speculative transaction. In the present case, the assessee, as already indicated, has been dealing in shares where delivery was in fact taken and also in shares where delivery was not ultimately taken. In other words, the assessee has been dealing in actual selling and buying of shares as also dealing in shares only for the purpose of settling the transaction otherwise than by actual delivery. The question arise whether the losses arising out of the dealings and transaction in which the assessee did not ultimately take delivery of the shares or give delivery of the shares could be set off against the income arising out of the dealings and transactions in actual buying and selling of shares. An answer to this question is to be found in the explanation appended to Section 73 which reads as follows: 'Explanation: where any part of the business of a company other than a company whose gross total income consists mainly of income which is chargeable under the heads interest on securities", or a Page 9 of 10 company the principal business of which is the business of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase. In order to resolve the issue before us, the section has to be read in the manner as follows: "Explanation : Where any part of the business of a company (. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ) consist in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares." It would, thus, appear that where an assessee, being the company, besides dealing in other things also deals in purchase and sale of shares of other companies, the assessee shall be deemed to be carrying on a speculation business. The assessee, in the present case, principally is a share broker, as already indicated. The assessee is also in the business of buying and selling of shares for self where actual delivery is taken and given and also in buying and selling of shares where actual delivery was not intended to be taken or given. Therefore, the entire transaction carried out by the assessee, indicated above, was within the umbrella of speculative transaction. There was, as such, no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares. This is what the learned Tribunal has done.
9. From the above decision of the Calcutta High Court in the case of Baljit Securities (P.) Ltd. (supra), the issue stands covered in favour of the assessee. However, we make it clear that total transaction considered for determining this business loss from derivative transactions cannot be more than the total export turnover of the assessee for the assessment year under consideration and if the derivative transaction is in excess of export turnover, then that loss suffered in respect of that portion of excess transactions to be considered as speculative loss only as that excess derivative transaction has no proximity with export turnover and the Assessing Officer is directed to compute accordingly. This ground is allowed as indicated above.”
We found the decision of the Tribunal, where facts are similar to the present case but needs verification of assessee’s case in particular to the claim of loss made by the assessee and such forward contracts loss cannot be more than export total turnover of the assessee and there is no finding on this disputed
Page 10 of 10 issue by the AO nor the assessee could substantiate or explain before lower authorities. We are of the substantive opinion that matter requires verification and for limited purpose, Remit the disputed issue to the file of the AO to apply ratio of that decision and allow the ground of appeal of the assessee for statistical purposes.
In the result, the appeal of the assessee is allowed for statistical purposes.
Order pronounced in the open court on 31st January, 2019.