SUBROS LIMITED,DELHI vs. JCIT RANGE 24 NEW DELHI, DELHI

At the time of hearing, ld. AR for the assessee brought to our h\notice grounds of appeal

With regard to ground no.1, ld. AR for the assessee submitted that the issue involved is disallowance of employees contribution towards PF and ESI and he submitted that the issue under consideration is against the assessee on the basis of decision of Hon’ble Supreme Court in the case of Checkmate Services Pvt. Ltd. (2022) 143 taxmann.com 178. Accordingly, we dismiss the above ground of appeal

On the other hand, ld. DR for the Revenue relied on the orders of the lower authorities.

Considered the rival submissions and material placed on record. We observed that assessee is having exposure of foreign exchange and in order to mitigate the same, assessee has booked forward contracts against the foreign currency fluctuations. Similar issue was considered by Hon’ble Delhi High Court in the case of PCIT vs. Simon India Ltd. (supra) wherein Assessing Officer has considered the loss on forward contract as speculative loss and similar issue was considered by the Hon’ble Court and held as under :- “24. It is material to note that the only specific ground, stated by the Revenue in its appeal in respect of the deletion of loss on Forward Contracts, reads as under: "(C) Because the losses on account of foreign exchange fluctuations on forward contracts are not allowable under section 37(1) of the Income-tax Act and covered as hedging transactions under section 43(5)(a) of the Act or should be disallowed as speculation losses under section 43(5) of the Act in view of the CBDT Instruction No. 3/2010 dated 23-3-2010."

Thus, according to the Revenue, the learned CIT(A) and the learned Tribunal had erred in finding that the loss on account of Forward Contracts is allowable under section 37(1) of the Act and is covered as a hedging transaction under section 43(5)(a) of the Act. The Revenue contends that the said loss is required to be disallowed as a speculative loss in terms of the CBDT Instruction no. 3/2010.

The Revenue’s contention is unmerited. There is no dispute that the Forward Contracts were entered into by the assessee to hedge against foreign exchange fluctuations resulting from inflows/outflows in respect of the underlying contracts for provisions of consultancy and project management. Concededly, the assessee is not dealing in foreign exchange. Clearly, the said transactions were to hedge against the risk of foreign exchange fluctuations and thus, fall within the exceptions of proviso (a) to section 43(5) of the Act. The Forward Contracts were to guard against any loss on account of future exchange fluctuations in respect of inflows and outflows relating to contracts for execution of the works entered into by the assessee.” 12. And further the decision in Bechtel India Pvt. Ltd. (supra), the ld. CIT(A) has relied on the decision of ITAT Bench and the same was considered by Hon’ble Delhi High Court and decided the issue in favour of the assessee and held as under :- “ Having heard learned counsels for parties, we find that the principal question which stands raised appears to be conclusively settled in light of the following binding conclusions rendered by a coordinate Bench of this Court in Pr. Commissioner of Income Tax vs Simon India Ltd. [2022 SCC Online Del 4284]. We deem it apposite to extract the following passages from that decision: "25. Thus, according to the Revenue, the learned CIT(A) and the learned Tribunal had erred in finding that the loss on account of Forward Contracts is allowable under Section 37(1) of the Act and is covered as a hedging transaction under Section 43(5)(a) of the Act. The Revenue contends that the said loss is required to be disallowed as a speculative loss in terms of the CBDT Instruction no.3/2010. 26. The Revenue's contention is unmerited. There is no dispute that the Forward Contracts were entered into by the Assessee to hedge against foreign exchange fluctuations resulting from inflows/outflows in respect of the underlying contracts for provisions of consultancy and project management. Concededly, the Assessee is not dealing in foreign exchange, Clearly, the said transactions were to hedge against the risk of foreign exchange fluctuations and thus, fall within the exceptions of proviso (a) to Section 43(5) of the Act. The Forward Contracts were to guard against any loss on account of future exchange fluctuations in respect of inflows and outflows relating to contracts for execution of the works entered into by the Assessee.

It is material to note that there is no allegation that the Assessee has not been following the system of accounting consistently. In CIT v. Woodword Governor India Pvt. Ltd. (supra), the Supreme Court had 2022/DHC/005364 Page 11 of 15 referred to AS-11. In terms of AS- 11, the exchange difference arising on foreign currency transactions are necessary to be recognized as income or expense in the period in which they arise, except in cases of exchange differences arising on repayment of liabilities for acquiring fixed assets.

In the present case, the Assessee had stated that it was reinstating its debtors and creditors in connection with execution of contracts entered into with foreign entities on the basis of the value of the foreign exchange. Thus, clearly the loss on account of Forward Contracts would require to be recognized as well.

It is also relevant to refer to the findings of the learned CIT(A) in this regard. Paragraph no.13 of the appellate order reads as under: "13. It may be noted that the valuation-loss is reflected on the debit side of the P&L account whereas the corresponding valuation Gains resulting on the valuation of the debtors is reflected on the credit side included as part of sales / exchange Gains and in respect of imports as reduction in the import price on the debit of the Profit & Loss account. In other words, the entire transaction of either realization of debtors in foreign exchange / payment for imports in foreign exchange which are designated in foreign currency and the entering into Forward cover contract are integral part of the same transaction i.e. two sides of the same coin. By considering both sides of the P&L the correct net profit is worked out. Therefore, in order to ascertain the correct taxable profits of the appellant the loss has to be allowed as a business loss because it is due to the business exigency the forward contracts are entered into to 2022/DHC/005364 Page 12 of 15 protect against any loss that might result due to foreign exchange Currency fluctuation foreign currency fluctuation.

Undisputedly, the Forward Contracts, in the present case, are hedging transactions, The Assessee has reinstated its debits and credits from the underlying transactions on the value of the foreign exchange on the due date. The corresponding losses/gains under the Forward Contracts, thus, were also required to be accounted for to arrive at the real profits, It would be anomalous if, on the one hand, debtors and creditors, in respect of current assets, are stated at the current value of foreign exchange and the corresponding loss on the hedging transaction is not accounted for. In essence, the Assessee has stated his income by taking into account the foreign exchange value as it stands on the due date. It is well settled that the CBDT Instructions and circulars which are contrary to law are not binding."

We additionally take note of the legislative amendments which have been introduced pursuant to the view which was expressed by the Supreme Court in Commissioner of Income Tax vs Woodward Governor India Private Limited [(2009) 13 SCC1] and which has led to the introduction of Section 43AA of the Income Tax Act, 1961l ["Act"] with effect from 01 April 2017 and which reads as follows: “Taxation of foreign exchange fluctuation. 43AA.(1) Subject to the provisions of section-43A, any gain or loss arising on account of any change in foreign exchange rates shall be treated as income or loss, as the case may be, and such gain or loss shall be computed in accordance with the income computation and disclosure standards notified under Sub-section (2) of section-145.

It is thus manifest that Forward Exchange Contracts were clearly not covered within the ambit of the provisions concerned prior to 01 April 2017.

In view of the aforesaid, we answer the questions posited in favour of the appellant. The order of the ITAT dated 29 May 2017 shall consequently stand set aside. The appellant is held entitled to consequential relief.”

Respectfully following the above decisions, we are inclined to allow grounds no.2, 2.1 & 2.2 raised by the assessee.

Ground No.3 is general in nature and does not require any adjudication.

Accordingly, the appeal filed by the assessee being for AY 2015-16 is partly allowed. 16. With regard to appeal filed by the assessee for AY 2016-17 being AY 2015-16. Since the facts in AY 2015-16 are exactly similar, our above findings in AY 2015-16 are applicable mutatis mutandis in AY 2016-17. Accordingly, the appeal being for AY 2016-17 filed by the assessee is also partly allowed. 17. With regard to AY 2017-18, the first ground of appeal

On the other hand, ld. DR for the Revenue brought to our notice para 6.7 of the assessment order and submitted that the Assessing Officer has given clear-cut findings. Therefore, he relied on the findings of the Assessing Officer and submitted that even the assessee has not submitted invoices or bills in support of the sales. In this regard, he relied on the decision of ITAT, Hyderabad Bench in the case of Vaishnavi Bullion Private Ltd. vs. ACIT & Ors. order dated 28.11.2022.

Considered the rival submissions and material placed on record. We observed from the record that the assessee has deposited SBN during demonetization period and the source for the above was from their cash sales and scrap sales. Assessing Officer observed that assessee has deposited Rs.21,00,000/- during the demonetization period and the source is claimed to be from scrap sales. On an enquiry, assessee has submitted the party-wise details of such scrap sales and also submitted confirmations from these parties. Assessing Officer observed certain discrepancies on the date of deposit regarding of cash sales from two parties i.e. Rajesh Enterprises and Hindustan Metal and he disbelieved the submissions of the assessee and proceeded to make additions. We observed from the record that assessee has submitted the party-wise details and date-wise scrap sales before the Assessing Officer and the Assessing Officer merely observed the information submitted by the assessee and proceeded to make the addition without cross-verifying from the other parties. It is against the standard conventions and in similar cases, the Hon’ble Delhi High Court in the case of CIT vs. Genesis (supra) held as under :- “5. The Tribunal has noted that insofar as M/s. Rajesh Traers is concerned, it had given the names and addresses of the parties whom it had introduced to the assessee as result of which the assessee had made sales to these parties to the extent of Rs.50,62,849/-. M/s. Rajesh Traders confirmed the receipt of commission and gave details of services rendered by it as per its letter dated 11.10.2003 in response to summons issued by the Assessing Officer under section 131 of the Income-tax Act. M/s. Rajesh Traders also appears to have been given a copy of the accounts of the assessee as maintained in its books of account.

Insofar as M/s. Jagish Rai Rai Bhagwan is concerned, the assessee furnished a copy of the accounts of this party containing the details of commission paid. The assessee also disclosed the names of the parties from whom business had been procured by the assessee through the said commission agent. M/s. Jagdish Rai Jai Bhagwan also confirmed the receipt of commission.

Despite all this material, it appears that the Assessing Officer required the presence of the commission agents for cross-examination. The assessee has pointed out that M/s. Rajesh Traders has sent the information and as regards M/s. Jagdish Rai Jai Bhagwan, there are some differences that the assessee had with that party and, therefore, it was not in a position to produce the said party.

However, the Assessing Officer did not take any coercive measures to enforce attendance of any of the parties except issuing summons under section 131 of the Income-tax Act in response to which necessary information was filed.

The Tribunal took a view that the fact that the assessee was not in a position to produce the two commission agents is not its fault and the Assessing Officer could have exercised powers available to him to summon and cross-examine these two parties, if, for some reason, he did not accept the statement furnished by these two parties. The Assessing Officer could also have made independent enquiries from the customers of the assessee. However, none of this was done.

Therefore, we are of the opinion that the Tribunal has not committed any error in the view that it has taken. The assessee produced all the material that it could possibly produce and if the Assessing Officer was not inclined to believe the material produced, he could have used the coercive powers available to him, which he failed to exercise.”

Further, Hon’ble Delhi High Court in the case of Jhaveri Bihari Services vs. ACIT (supra) held as under :-

From the above decisions, we observed that Hon’ble High Court held that the Assessing Officer could have further enquired with the parties and not resorted to reject the documents and information submitted by the assessee in order to claim that the source of the cash deposits were from the parties brought on record by them. Even, in the present case, assessee has submitted the source of cash deposits from the sale of scrap sales and also filed the details of the parties along with confirmations. Assessing Officer rejected the same without making further enquiries. Therefore, we are inclined to follow the decision of Hon’ble Delhi High Court and decide the issue in favour of the assessee.

Coming to the submissions of the ld. DR for the Revenue and ld. DR relied on the decision of ITAT, Hyderabad Bench in the case of Vaishnavi Bullion Private Limited (supra), we observed that the decision relied by the ld. DR is distinguishable to the facts of the present case. In the abovesaid decision, the assessee made out two versions of sources for the credits recorded in their books of account i.e. one is received from 2153 persons and the other as received from single person. The Bench observed that assessee failed miserably whether the same belonging to either said 2153 persons or one person with cogent evidence. The facts in the present case are different than the assessee as the assessee has precisely explained the source of cash and also filed the confirmations. Therefore, the above case is distinguishable to the facts of the present case. Accordingly, grounds no.2, 2.1 & 2.2 raised by the assessee are allowed.

Ground No.3 is general in nature, hence does not require any adjudication.

Accordingly, the appeal filed by the assessee being for AY 2017-18 is allowed.

With regard to appeal filed by the assessee for AY 2020-21 being ITA No.3579/Del/2023, at the time of hearing, ld. AR submitted that ground no.1 & sub-grounds are relating to the issue of Marked to Market. The issue is already considered by us in AY 2015-16 and similar issue is already decided in favour of the assessee. Since the facts in AY 2015-16 are exactly similar, our above findings in AY 2015-16 are applicable mutatis mutandis in AY 2020-21. Accordingly, ground nos.1 & sub- grounds taken in ITA No. 3579/Del/2024 for AY 2020-21 are allowed.

With regard to grounds no.2, 2.1 & 2.2, ld. AR submitted that the assessee has claimed deduction u/s 35(2AB) of the Act. However, the same was rejected by the Assessing Officer and the same amount i.e.

On the other hand, ld. DR for the Revenue has no specific objections on remitting the issue back to the file of Assessing Officer.

Considered the rival submissions and material place don record. We observed that the assessee has claimed the deduction u/s 35(2AB) of the Act first time before the Assessing Officer since the assessee has received the DSIR approval after filing the return of income. This being a deduction which is lawfully available to the assessee, we are inclined to remit this issue back to the file of Assessing Officer to verify the same and allow as per law. Accordingly, this ground is allowed for statistical purposes 32. With regard to ground no.3 & 4, at the time of hearing, ld. AR for the assessee submitted that assessee does not prefer to press these grounds. Accordingly, these grounds are dismissed. 33. Ground No.5 is general in nature, hence the same does not require separate adjudication. 34. In the result, the appeal being is partly allowed for statistical purposes. 35. To sum up : ITA Nos.3576 & 3577/Del/2023 for AYs 2015-16 & 2016- 17 respectively are partly allowed, ITA No.3578/Del/2023 for AY 2017- 18 is allowed and the appeal being ITA No.3579/Del/2023 is partly allowed for statistical purposes. Order pronounced in the open court on this 9th day of October 2024.