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IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 25TH DAY OF MAY, 2021
PRESENT
THE HON'BLE MR. JUSTICE SATISH CHANDRA SHARMA
AND
THE HON'BLE MR. JUSTICE NATARAJ RANGASWAMY
ITA NO.352/2018 C/W ITA NO.350/2018, ITA NO.351/2018
BETWEEN
THE PR.COMMISSIONER OF INCOME TAX
CIT (A), CENTRAL CIRCLE,
C.R.BUILDING,
QUEEN’S ROAD
BENGALURU 560 001.
THE ASST.COMMISSIONER OF INCOME TAX
CENTRAL CIRCLE,
C.R.BUILDING,
QUEEN’S ROAD
BENGALURU 560 001.
... APPELLANTS
COMMON (BY SRI K V ARAVIND, ADVOCATE)
AND:
M/S DELHI INTERNATIONAL AIRPORT PVT.LTD., SKIP HOUSE, 25/1, MUSEUM ROAD, BENGALURU 560 025, PAN AACCD 3570F
... RESPONDENT
COMMON (BY SRI BALARAM RAO, ADVOCATE)
ITA NO.352/2018 IS FILED UNDER SECTION 260A OF THE INCOME TAX ACT PRAYING TO FORMULATE THE SUBSTANTIAL
QUESTIONS OF LAW STATED ABOVE, ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU IN ITA NO.594/BANG/2017 DATED 13.10.2017 (VIDE ANNEXURE-C) CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASST.COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 2(2), BENGALURU.
ITA NO.350/2018 IS FILED UNDER SECTION 260A OF THE INCOME TAX ACT PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE, ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU IN ITA NO.592/BANG/2017 DATED 13.10.2017 CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASST.COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 2(2), BENGALURU.
ITA NO.351/2018 IS FILED UNDER SECTION 260A OF THE INCOME TAX ACT PRAYING TO FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE, ALLOW THE APPEAL AND SET ASIDE THE ORDERS PASSED BY THE INCOME TAX APPELLATE TRIBUNAL, BENGALURU IN ITA NO.593/BANG/2017 DATED 13.10.2017 CONFIRMING THE ORDER OF THE APPELLATE COMMISSIONER AND CONFIRM THE ORDER PASSED BY THE ASST.COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 2(2), BENGALURU.
THESE ITAs COMING ON FOR FINAL HEARING THIS DAY, SATISH CHANDRA SHARMA J., DELIVERED THE FOLLOWING:
JUDGMENT
Regard being had to the similitude in the controversy involved in all the three cases, they are heard analogously together and a common judgment is being passed.
The facts of ITA.No.352/2018 are narrated as under:
The present appeal is arising out of the order dated 13.10.2017 passed by the Income Tax Appellate Tribunal in ITA
No.594/Bang/2017 (The Assistant Commissioner of Income Tax, Central Circle 2(2), Bengaluru vs. M/s Delhi International Airport Pvt.Ltd.,).
This Court while admitting the appeal has framed the following substantial question of law;
“Whether on the facts and in the circumstances of the case and in law, the Tribunal is right in remanding back the issue to assessing authority with a direction to allow the relief as the assessee do not have exempt income and as such no disallowance can be made under Section 14A read with Rule 8D of the Act contrary to provisions of Section 14A and Rule 8D and Circular No.5/2014 dated 11.2.2014 which has clarified that Rule 8D read with Section 14A provides for disallowance of the expenditure even when the tax payer in a particular year has not earned any exempt income?”
Sri Balaram Rao, learned counsel for the assessee has stated that in ITA No.133/2015 the same question of law has been answered in favour of the assessee and against the revenue.
Sri K.V.Aravind, learned counsel for the revenue has not disputed the aforesaid judgment.
The order dated 15.2.2021 passed in ITA No.133/2015, in paragraphs 11 to 14 reads as under; “11. We have considered the submissions made on both sides and have perused the record. Substantial questions of law No.1 and 3 are interlinked, therefore, we proceed to deal
with the same together. Before proceeding further it is apposite to take note of the relevant statutory provisions which are reproduced below for the facility of reference:
"Section 14A: Expenditure incurred in relation to income not includible in total income.—For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.".
(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act.
Explanation 2 to Section 28 - Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as" speculation business") shall be deemed to be distinct and separate from any other business.
Section 43(5): "speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts:
Provided that for the purposes of this clause — (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or
(b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or
(c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; [or]
(d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; [or]
(e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognised association, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013),
shall not be deemed to be a speculative transaction.
Section 43AA: 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.
(2) For the purposes of sub-section (1), gain or loss arising on account of the effects of change in foreign exchange rates shall be in respect of all foreign currency transactions, including those relating to –
(i) monetary items and non-monetary items.
(ii) translation of financial statements of foreign operations; (iii) forward exchange contracts;
(iv) foreign currency translation reserved.
After having noticed the relevant statutory provisions, we may advert to the facts of the case in hand. The assessee
has entered into forward contract with the bank to buy or sell foreign exchange at an agreed price at a specified future date in order to hedge against possible future financial loss due to fluctuation in the rate of foreign currency. The Tribunal, inter alia, has held that foreign exchange forward contract means an agreement to exchange different currencies at a forward rate. It has further been held that the aforesaid contract created a continuing binding obligation on the date of contract against the assessee to fulfill the same on the date of maturity and it is in the nature of a hedging contract because it is a contract entered into against possible future financial losses. The assessee would come to know of the actual profit/loss only on the date of maturity only unless there is any premature cancellation of the contract. Thereafter, the Tribunal has noted the well settled principles regarding the accounting principles and in Paragraph 4.5.5 has held that the contention of the assessee that, forward contract was to be revalued in accordance with Accounting standards 11 and therefore, the assessee had no option but to determine the profits / loss with regard to unmatured foreign exchange forward contracts in accordance with currency rates as on the date of the valuation i.e., 31st March has not been disputed by the revenue. Thereafter, in Paragraph 4.5.8, the Tribunal has held that it is not in dispute that the forward contracts have been entered into by the assessee in order to protect its interest against fluctuation in foreign currency, in respect of consideration for export proceeds which is a revenue item and has concluded as follows:
(i) A binding obligation accrued against the assessee when it entered into foreign exchange forward contracts;
(ii) The forward contracts are in respect of consideration for export proceeds, which are revenue items;
(iii) The liability is determinable with reasonable certainty when an obligation is pending on the balance sheet date and such a liability cannot be said to be a contingent liability.
(iv) The accounting treatment is as per Accounting Standards and the ICAI Guidelines.
(v) The principles enunciated by the Hon'ble Apex Court in the case of Woodward Governor India Pvt. Ltd. (supra) are applicable to the facts of the case on hand.
It is pertinent to mention here that the revenue has not questioned / doubted the genuineness and reasonableness of the transaction. Similarly, the revenue has not disputed the fact that the estimation was made on reasonable basis and not on adhoc basis which is evident from Paragraph 6.1 of the order of Commissioner of Income Tax (Appeals). The loss which is claimed by the assessee, is claimed as deductible business expenditure and therefore, provision for loss has to be allowed at the close of the year in accordance with Paragraphs 3 to 39 of the Accounting Standard 11, which deals with foreign exchange contract. It is not disputed by the revenue that forward contracts were entered to protect the assessee from foreign exchange fluctuation in respect of consideration for export proceeds. The tribunal, therefore, rightly relied on the decision in WOODWARD GOVERNOR INDIA supra while allowing the market to market loss as relating to forward exchange contract as deduction. It is pertinent to mention here that Instruction No.3 of 2010 was issued on 23.03.2010 and same is not applicable for the Assessment Years 2008-09 and 2009-10 in view of well settled legal position that a circular which is beneficial in nature applies retrospectively but a circular which is oppressive has to be applied prospectively (SEE: CCE VS. MYSORE ELECTRICAL INDUSTRIES LTD (2006) 12 SCC 448). It is pertinent to note that the aforesaid has not been given effect o by several high courts namely in MUNJAL SHOVA LTD VS DCIT (2016) 382 ITR 555 (DELHI) and in CIT VS. VINERGY INTERNATIONAL PVT LTD ITA NO.376/2014 (BOMBAY HIGH COURT). The loss sustained by the assessee due to fluctuation in foreign exchange while implementing export contract is incidental to assessee's course of business, therefore, such a loss is not a speculative loss but a business loss. The aforesaid findings have not been demonstrated to be perverse. For the aforementioned reasons, the substantial questions of law No.1 and 3 are answered against the revenue and in favour of the assessee.
Now we may advert to the second substantial question of law. It is pertinent to note that for Assessment Year 2009-10 the assessee has not earned dividend income. The aforesaid fact has not been disputed by the revenue. It is also relevant to mention that Circular No.5/2014 dated 11.02.2014 is not
applicable in the instant case as the instant case pertains to Assessment Year 2009-10. The aforesaid Circular has no retrospective operation. It is noteworthy that aforesaid Circular was not even relied by the parties. This court in COMMISSIONER OF INCOME TAX VS. KINGFISHER INVESTMENT INDIA LTD. vide judgment dated 29.09.2020 inter alia held that disallowance under Section 14A read with Rule 8D has to be made even when taxpayer in a particular year has not earned any exempt income. This court relied on the decision of the Supreme Court in MAXOPP INVESTMENT LTD supra which was reproduced in Paragraph 5 of the decision and reliance was also placed on Circular dated 11.02.2014 issued by Central Board of Direct Taxes (CBDT). However, the aforesaid decision was subsequently considered by this court in judgment dated 16.01.2021 passed in I.T.A.No.271/2017 (PRINCIPAL COMMISSIONER OF INCOME TAX VS. NOVEL SOFTWARE DEVELOPMENT) in which it was held that decision of this court in KINGFISHER FINVEST LTD. was distinguishable as the basis of the aforesaid decision of this court was the decision of the Supreme Court in MAXOPP INVESTMENTS LTD. supra and it was held that the aforesaid decision does not deal with applicability of Section 14A of the Act. However, eventually this court agreed with the view taken by High Court of Madras in CIT VS. CHETTINAD LOGISTICS P LTD., (2017) 80 TAXMANN.COM 221 (MAD.) AND KEM INVEST LTD. VS. CIT, (2015) 16 TAXMANN.COM 118 (DELHI) and held that since no exempt income has accrued to the assessee therefore, the provisions of Section 14A of the Act do not apply to the fact situation of the case. Therefore, it has become necessary for us to clarify the view taken in the two decisions viz., KINGFISHER FINVEST INDIA LTD. AND M/S NOVEL SOFTWARE INDIA (P) LTD. supra. At this stage, we may refer to Paragraph 40 of the decision of the Supreme Court in MAXOPP supra, the relevant extract of which reads as under:
It is to be kept in mind that in those cases where shares are held as 'stock-in-trade', it becomes a business activity of the assessee to the deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is therefore, different from the
case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even that the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in-trade, this may not be necessarily a situation. The main purpose is to liquidate those shares whenever the share price goes upon order to earn profits. In the result, the appeals filed by the revenue challenging the judgment of the Punjab and Haryana High Court in State Bank of Patiala also fail, though law in this respect has been clarified hereinabove.
From perusal of the relevant extract of the Supreme Court, it is evident that the decision in MAXOPP INVESTMENT LTD. supra deals with applicability of Section 14A of the Act. Therefore, the observations made with regard to applicability of Section 14A in M/S NOVEL SOFTWARE INDIA (P) LTD. are factually incorrect and we hasten to clarify the same. However, from relevant extract of Paragraph 40, it is evident that only expenses proportionate to earning of exempt income could be disallowed under Section 14A of the Act and the decision of MAXOPP INVESTMENT LTD is an authority for the aforesaid proposition that the provision is relatable to earning of actual income. The object of Section 14A is to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The High Court of Madras has relied on the decision of the Supreme Court in COMMISSIONER OF INCOME TAX VS. WALFORT SHARE AND STOCK BROKERS (2010) 326 ITR 1 wherein it has been held that Section 14A is relatable to income of actual income or not notional or anticipated income. Therefore, the conclusion arrived at by us in M/S NOVEL SOFTWARE INDIA (P) LTD. is affirmed but for different reasons. It is also clarified by us that while recording the conclusion in KINGFISHER FINVEST LTD. that disallowance under Section 14A has to be made even taxpayer has not earned
any exempt income, this court has misread the ratio of the decision of the Supreme Court in MAXOPP INVESTMENT LTD supra and therefore, the aforesaid view being contrary to the law laid down by the Supreme Court is not a binding precedent.
In view of preceding analysis, the second substantial question of law is also answered against the revenue and in favour of the assessee. In the result, we don to find any merit in this appeal, the same fails and is hereby dismissed.”
In light of the aforesaid judgment passed in ITA No.133/2015, the question of law is answered in favour of the assessee and against the revenue. Resultantly, the appeal stands dismissed.
In light of the aforesaid order, ITA Nos.350 and 351 of 2018 stand dismissed.
Sd/- JUDGE
Sd/- JUDGE