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Income Tax Appellate Tribunal, KOLKATA BENCH “C” KOLKATA
Before: Shri S.S.Godara & Dr. A.L. Saini
आदेश /O R D E R PER S.S.Godara, Judicial Member:- This Revenue’s appeal for assessment year 2012-13 arises Commissioner of Income Tax (Appeals)-22, Kolkata’s order dated 30.11.2017 passed in case No. 36/CIT(A)-22/12-13/16-17/Kol, involving proceedings u/s 143(3) r.w.s.144(C) of the Income Tax Act, 1961; in short ‘the Act’. Heard both the parties. Case file perused.
The Revenue’s first and foremost substantive ground pleads that the CIT(A) has erred in law and on facts in deleting arm’s length price (ALP) adjustment of ₹49,99,58,855/- in respect of assessee’s corporate guarantee DCIT, Cir-8(1), Kol. vs. M/s Gujarat NRE Coke Ltd. Page 2 provided to its overseas associate enterprise (AE). Suffice to say, and without going much deeper in factual matrix of first issue, we find that CIT(A) has followed his detailed discussion in assessment years 2007-08, 2009-10 and 2010-11 in assessee’s case itself deleting identical “ALP” adjustment on the ground that a corporate guarantee does not amount to an international transaction in view of various judicial precedents i.e. Bharti Airtel Ltd. Vs. Addl. CIT (2014) 39 CCH 0445 (ITAT Delhi) M/s Videocon Industries Ltd. vs. ACIT (2015) 55 taxmann.com 263 (Mum), DCIT vs. Manalesia Ltd. and (2016) 157 ITD 132 (Ahd) Micro Ink Ltd. vs. Add. CIT have also taken note of corresponding amendment in sec. 92B by way of explanation vide Finance Act, 2012 w.r.e.f 01.04.2002. We thus affirm the CIT(A)’s findings going by the very analogy & reject the Revenue’s instant first substantive grievance.
Next comes the second issue of sec. 14A r.w.s. 8D disallowance of ₹2,08,89,076/- as well as consequential u/s 115JB computation. We notice herein as well hon'ble jurisdictional high court’s decision in CIT vs. Ashika Global Securities Ltd ITAT 100/2009 GA No.2122 of 2014 dated 11.06.2018 holds that the impugned disallowance does not apply in absence of any exempt income. The same takes care of both the foregoing limbs of the impugned disallowance since the latter aspect of MAT computation has no legs to stand. This tribunal’s decision in ACIT vs. Vincet Investments Ld. 82 taxmann.com (Delhi) (SB) has also settled the law that sec. 115JB MAT does not apply in case of sec. 14A disallowance. The Revenue fails in its second substantive grievance as well.
Lastly comes the third issue of disallowance of foreign exchange loss amounting to ₹74,39,71,483/-. The CIT(A)’s detailed discussion qua this last issue reads as under:- “4. I have carefully considered the action of the Ld.AO as well as the various submissions and arguments made by the appellant company. I have also carefully examined the Paper Book bearing reference to the various issues placed for DCIT, Cir-8(1), Kol. vs. M/s Gujarat NRE Coke Ltd. Page 3 attention by the Ld. A.R for the appellant in his submissions. From the factual matrix, it emerges that the Ld. A.O. observed that the assessee-company had booked foreign exchange loss of Rs.14,26,54,748/- on repayment of foreign currency loans and Rs.60,13,16,734/- under the head exception items, aggregating to Rs.74,39,71,483/-. When required to explain during the scrutiny proceedings, it was submitted by the appellant that the exceptional items were pertaining to unusual diminution in the value of rupee as against the US Dollar during the year, that the closing value of Packing Credit Facility (PCFC) and External Commercial Borrowings (ECB) had been restated at the rate prevailing as on the last of the A.Y. as per AS-11 and sec.43A does not permit the capitalization of this loss and that the net loss of Rs.51,77,406/- was on revenue account. Reliance was placed in the case of CIT vs. Woodward Governor India Pvt. Ltd. [312 ITR 254 (SC)]. The appellant has also submitted that further, on receipt of the draft order u/s.144C(1)/ 143(3) dated 31.03.2016, the assessee filed a petition u/s. 154 of the, Act dated. 08.04.2016 pointing out that notional capital loss of Rs.74,39,71,483/- on account of revaluation of outstanding foreign currency loans has been erroneously disallowed, inasmuch as loss on repayment/revaluation of foreign currency loans was to the tune of Rs.14,26,54,748, comprising of realized loss on repayment of foreign currency loans of Rs. 11,34,84,999/- and unrealized loss on revaluation of outstanding foreign currency loans as on 31.03.2012 of Rs.2,91,69,750/-, it was contended by the appellant that an erroneous figure by an excess of Rs.71,48,01,733/- [Rs.74,39,71,483 – Rs.2,91,69,750] has been considered in the draft order. However, as has been submitted by the appellant, while passing the final assessment order, the Ld. AO did not consider the said 154 petition, and alleged that the assessee could not substantiate the business expediency for loss of Rs.51,77,406/- on premature cancellation of Forward Exchange Contracts. The Learned. AO also did not accept the assessee’s explanation with respect to notional loss on closing value of PCFC & ECB. The Ld. AO has held that the foreign exchange fluctuation loss being a notional loss not incurred in the normal course of business was not on revenue account and hence not allowable u/s 37(1) of the Act. The Ld. AO thus disallowed foreign exchange fluctuation loss amounting to Rs.74,39,71,483/- u/s. 37(1) of the Act and added back the same to the assessee’s total income. On examination of the contentions made by the Ld. AR for the appellant, I find myself in agreement with the contentions of the appellant that the Learned. AO has made a mistake in considering the figure of PCFC and ECB revaluation loss to be Rs.74,39,71,483/- rather than Rs.29169.750/- as is obvious from the list of breakup of foreign loss as submitted by the appellant. It is also quite obvious that the Ld. AO has not said anything in the matter of foreix losses incurred by the assessee-appellant on account of import of cooking coal and export of metcoke, major components contributing to Forex loss / gain. As has been brought to notice in the succeeding year AY 2013-14, the Ld AO has allowed foreign exchange loss of Rs.45,11,62,855/- being the actual foreign exchange loss incurred on account of import of cooking coal and export of metcoke to be allowable u/s. 37(1) of the Income Tax act, 1961. In the matter of the Revaluation / cancellation of contracts after examination of the details submitted by the appellant, I find that the Ld AO has disallowed the loss on specious grounds that there was no binding urgency on the assessee to cancel the contracts prematurely. The Ld. AO has said that the business expediency was not emanating from such cancellation. However, I find that the matter has been explained by the appellant that it has entered into a number of forward contracts in foreign currency in the normal course of its business of import and export of goods to hedge against fluctuation in exchange rates, and that however, due to insufficient funds to pay to the Bank for import of goods as on the date of maturity of the contact, it had to cancel ta few contracts during the year. It was explained that due to cancellation of these contracts, the Bank debited/credited the account of the assessee with the exchange (loss)/gains. Therefore, I find myself DCIT, Cir-8(1), Kol. vs. M/s Gujarat NRE Coke Ltd. Page 4 in agreement with the appellant that the exchange loss on cancellation of foreign exchange contracts was actual loss suffered by the assessee. The matter has also been elucidated and substantiated by the as in the sample copy of the Bank Advice for cancellation of the contract and other supporting documents at page 1-3 of the paper book. I am inclined to accept the contention that these were real losses on account of cancellation of the contracts was debited to the account of the assessee, as such the same was a actual loss suffer by the assessee. The assessee is able to establish a proximate nexus of the losses with the business and the matte, in my considered view is covered by the view of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. Vs. CIT (2007) 288 ITR 1 (SC). The losses are, in my considered view to be examined from the point of view of the assessee, as it is seen that these are regular losses / gains coming to the assessee year on year as it ins in the business of import and export of items, and it is a regular importer of cooking coal and exporter of metcoke. Further courts have held that such losses are business losses when there is failure of an assessee to execute certain export contracts for which it has to incur losses, as it is quite a normal practice to hedge against losses by booking foreign exchange in the forward market with banks. I also find that the claim of the assessee that the loss of Rs.1,37,89,339/- on account of revaluation of forward contracts as at the end of the reporting period would be covered by the case of the Hon'ble Apex Court in CIT vs. Woodward Governor India (P) Ltd. (2009) 312 ITR 0254 (SC) wherein it was held that loss due to foreign exchange fluctuation in foreign currency transactions has to be considered on the last date of accounting year and it is deductible u/s 37(1) of the Act. The Hon'ble Court has clarified that the important point to be noted is that AS-11 stipulates effect of changes in exchange rate vis-a-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. "Any difference. loss or gain, arising on conversion of the said liability at the closing rate, should be recognized in the P&L account for the reporting period".
5. It is also observed that as has been brought top notice and relied upon by the appellant -company, the said matter is also covered in favor of the assessee by the order of the Hon'ble Jurisdictional ITAT-"C" - Bench in in the case of Neptune exports Ltd. In their order dated 29.03.2011, the Hon'ble ITAT, relying on the decision of the Hon'ble Apex court in CIT Vs Woodward Governor India Ltd. have observed as follows: "As regarding disallowance on account of foreign exchange fluctuation loss as well as profit on conversion of foreign currency keeping in view of the fact that the Hon'ble Apex Court cited supra has held that "loss suffered by the assessee in respect of the revenue liability on account of exchange difference as on the date of the balance sheet is an item of expenditure allowable u/s 37(1) in the year of accrual." Since the view taken by the Id. CIT(A) is in conformity with the decision of the Hon'ble Apex Court we find no infirmity in the orders of the Id. CIT(A) and we confirm the same and dismiss the appeal of the Revenue." In view of these rulings, I hold that the Ld AO was not justified in making the addition of Rs.51,77,406/- on account of cancellation and / or revaluation of contracts, and I find that the amount would be deductible u/s 37(1) of the Income Tax Act.
6. In the matter of the Repayment / revaluation of the foreign currency, PCFC loan, I find that the appellant has arrived at the impugned loss of Rs.2,91,69,750/- on the loan amounts outstanding in two banks, namely Standard Chartered Bank PCFC DCIT, Cir-8(1), Kol. vs. M/s Gujarat NRE Coke Ltd. Page 5 Account and Yes Bank PCFC Account. In appeal, it was submitted by the appellant- company that the Pre-shipment loan in foreign currency was taken by the assessee exclusively for his import/export business. To substantiate the issue, the appellant drew attention to the letter issued by the company to Yes Bank Limited at page 4, [of the Paper Book] wherein the assessee company has requested the Bank to grant PCFC loan against sale and purchase of low ash metallurgical coke. The assessee also enclosed sample advice copies of the payments credited to the account of the assessee issued by Standard Chartered Bank of India and Yes Bank Limited at page 5-9. of the PB. It was contended that said loss of Rs.2,91,69,750/- was computed taking into consideration the exchange rate of home currency vis-a-vis foreign currency as on the date of taking the loans and the last day of the reporting period. The said loss of Rs.10,61,88,940/- was. actual loss suffered by the assessee on account of fluctuation in the rate in foreign currency vis-a-vis the home currency. r also note that as has been brought to notice the Ld AO himself in A.Y 2013-14 has held in the assessment order that exchange loss of Rs,45,11,62,855/-, being actual foreign exchange loss incurred on account of import of coking coal and export of metcoke is allowable u/s 37(1) of the Act. Therefore, it is quite obvious that the Ld AO has in this year under appeal, taken a contradictory stand in disallowing the sum of Rs.10,61,88,940/- incurred on account of repayment of foreign currency loans taken for the purpose of import and export of goods. I also find strength in the contention of the appellant that the pre-shipment credit loan was availed by the assessee in the due course of its import of coking coal and other raw materials and subsequent export of met coke, and that the said loan was not taken to acquire any fixed capital asset. Therefore it would be a normal inference that the said pre- shipment credit loan was on account of trading business of the assessee and cannot be said to be a capital asset as opined by the Ld. AO. Having examined the request letter given by the assessee to the Banks, I agree with such contention that these are not loans given / taken on capital accounts. The matter is well covered by the case of CIT vs. Woodward Governor India (P) Ltd. (2009) 312 ITR 0254 (SC) wherein it was held that loss due to foreign exchange fluctuation in foreign currency transactions has to be considered on the last date of accounting year and it is deductible u/s 37(1) of the Act. It is also covered by the case of the jurisdictional ITAT in Neptune Exports Ltd, wherein the Hon'ble Bench followed the decision of the Hon'ble Apex Court in the case of CIT vs. Woodward Governor India (P) Ltd and held that, "As regarding disallowance on account of foreign exchange fluctuation loss as well as profit on conversion of foreign currency keeping in view of the fact that the Hon'ble Apex Court cited supra has held that "loss suffered by the assessee in respect of the revenue liability on account of exchange difference as on the date of the balance sheet is an item of expenditure allowable u/s 37(1) in the year of accrual," Since the view taken by the Id, CIT(A) is in conformity with the decision of the Hon'ble Apex Court we find no infirmity in the orders of the ld. CIT(A) and we confirm the same and dismiss the appeal of the Revenue." Having carefully examined the matter, I also find myself in agreement with the contention of the Ld. A.R for the appellant that, the Accounting Standard-II prescribed by ICAI also stipulates that in situation like this when the transaction in foreign currency has not been settled/squared during the accounting period, the effect of exchange rate difference on the un-expired foreign currency contracts as at the end of accounting period is to be accounted for in the books of accounts prepared for the afore-stated accounting period, Therefore, there is adequate merit in the argument that the ratio of the above discussed decisions are applicable to the facts emergent in the case of the appellant-company and it appears that the loss booked as at the end of the year is allowable loss u/s 37(1), of the Act. It is seen that the appellant has been able to submit the details relating to the profit/loss on foreign exchange transactions earned/incurred by the assessee-company in the preceding and succeeding years. From such details it is observed that in a succeeding year A.Y DCIT, Cir-8(1), Kol. vs. M/s Gujarat NRE Coke Ltd. Page 6 2013-14, the Ld AO has allowed Loss of Rs,45,11,62,855/- treating the same as actual loss suffered by the assessee., whereas a loss of Rs.14,98,89,621/- disallowed. In the A.Y 2011-12, as there is gain and the same was offered to tax by the appellant. Similar is the position in A.Y 2010-11. In the A.Y 2009-10, there was a loss of Rs.114,72,34,192/- and .such loss was allowed by the Id.AO. In the A.Y 2007- 08 and 2008-09 the appellant has offered gains which were accepted and charged to tax by the Ld. AO. In the given scenario that emerges for the different years, it is observed that the assessee reported gains in AY 2007-08, AY 2008-09, AY 2010-11 and AY 2011-12 and the same was duly offered to tax, and that these were not disputed by the Ld.AO. It is also noted, as pointed out by the appellant that in none of the years, except the current year under assessment, being AY 2012-13 and the immediately succeeding year, being AY 2013-14, the losses on account of foreign exchange transactions were disallowed by the Ld. AO. Therefore, it emerges that there is merit in the contention of the appellant that there have been contradictory stands taken by the Ld. AO on the same set of facts. It is observed that the Ld A.R has relied on the decision of the Hon'ble Apex Court in the case of Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SC) wherein it was held that strictly speaking, res judicata does not apply to income-tax proceedings, and though each assessment year being a unit, what was decided in one year might not apply in the following year and where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. I also find that for the facts of the case, the matter is covered in favour of the appellant in the judgment of the Hon'ble Apex Court in the case of CIT vs. Woodward Governor India (P) Ltd. ((2009) 312 ITR 0254 (Se) wherein it was held that, "There is no dispute that in the previous years whenever the dollar rate stood reduced, the Department had taxed the gains which accrued to the assessee on the basis of accrual and it is only in the year in question when the dollar rate stood increased, resulting in loss that the Department has disallowed the deduction/debit. This fact is important. It indicates the double standards adopted by the Department. "
Overall, in summary, from the factual and legal matrix that emerges, I hold that the Ld AO was incorrect in finding that the loss claimed by the assessee was notional loss or a capital loss. The action of the Ld.AO being, in disallowing the foreign exchange losses, in my considered observation unjustified, I find that the appellant- company is deserving of relief. The Ld. AO is directed accordingly, and these grounds of appeal 7 to 9 stands allowed.”
We have heard rival contentions. We find no merit in Revenue’s instant last grievance as well. We make it clear that there is no dispute on facts so far as all the corresponding items of the impugned foreign exchange loss are concerned. The Revenue’s twin arguments, inter alia, are that Assessing Officer had rightly declined the impugned foreign exchange loss on the ground that neither there was any business exigency involved in cancellation of the assessee’s forward contracts involving net loss of ₹51,77,406/- nor the sum of DCIT, Cir-8(1), Kol. vs. M/s Gujarat NRE Coke Ltd. Page 7 ₹74,39,71,483/- on account of revaluation; PCFC and ECB i.e. pre-shipment in foreign currency and external commercial borrowings; respectively could be taken as revenue items u/s 37(1) being notional capital loss(es). We see no reason to accept either of Revenue’s twin arguments. Hon'ble apex court’s decision in S.A Builders Ltd. vs. Commissioner of Income Tax (2007) 288 ITR 1 (SC) has settled the law that the department cannot claim itself to be put in arm cheker of the businessman or the board of directors to decide as to in what manner a particular business is to be run. We wish to clarify here in view of the facts of the case that apart from the questioning the business expediency element qua former sum of ₹51,77,406/-, the Revenue has nowhere disputed genuineness of the forward contracts cancellation. We notice that the taxpayer has also placed on record its bank advice regarding cancellation of forward contracts, accounting standards AS-11 prescribed by the ICAI stipulating that effect of exchange rate different in instances involving unsettled or unsecured transactions of foreign exchange during the relevant accounting period have to be recorded in the books. Case law i.e. DCIT vs. Bank of Bahrain and Kuwait (2010) 132 TTJ 050 (SB) and Woodword Governor (supra) also holds that such losses are allowable u/s 37(1) of the Act. We hold in this factual backdrop that the CIT(A) has rightly deleted the impugned former loss figure disallowance of ₹51,77,406/-.
Next comes the latter aspect of repayment / revaluation of foreign currency “PCFC” loan of ₹291,69,750/-. This latter aspect appears no more res integra between the parties since the assessee’s very head from assessment year(s) 2007-08 onwards stand assessed as business income during the course of assessments itself. There is no justification for adopting a different approvals in the impugned assessment year merely because the figures involved herein are in negative. We thus see no reason to express our agreement with Revenue inconsistent stands.