ACIT, CENTRAL CIRCLE - 3(1), KOLKATA, KOLKATA vs. M/S. SPECIALTY RESTAURANTS LTD.,, KOLKATA

We notice at the outset that this Revenue’s appeal suffers from 10 days delay in filing this appeal. The Assessing Officer has filed his condonation petition dated 05.06.2017 attributing the above delay to compilation of necessary papers for the ACIT, CC-3(1), Kol. Vs. M/s Specialty Restaurants Ltd. Page 2 purpose of filing the instant appeal. The assessee is very fair in not disputing correctness thereof. We accordingly condone the impugned delay of 10 days in filing of the instant appeal. The case is now taken up for adjudication on merits.

The Revenue’s first substantive ground challenging correctness the CIT(A)’s appellate order reversing assessment findings disallowing assessee’s Employees’ Contribution to Provident Fund paid beyond due date prescribed in the respective statute. Learned Departmental Representative fails to rebut the clinching findings in the CIT(A)’s order that assessee had paid the contribution in issue well before the due date of filing return u/s 139(1) of the Act. Hon'ble jurisdictional high court’s decision in ACIT vs. M/s Vijjay Shree Ltd of 2011 held that the impugned disallowance in case of employee’s contribution deposited before the due date of filing of return u/s 139(1) of the Act is not sustainable. The CIT(A) has already followed the same in his finding under challenge. We thus decline Revenue’s instant first substantive ground.

The Revenue’s second substantive ground pleads that the CIT(A) has erred in law as well as on facts in deleting the disallowance of foreign exchange loss of ₹57,03,854/- thereby treating the same as business loss allowable u/s 37 of the Act. The assessee had debited the total sum of ₹58,10,210/- in its profit and loss account to have been arisen on hedging foreign currency non-resident loan (FCNR). This sum included losses of restatement of receivable on debtors of ₹1,06,356/-. There is further in dispute about the State Bank of India having sanctioned a term loan of ₹22.50 crores to this taxpayer for the purpose of meeting its working capital requirements. The Assessing Officer’s assessment dated 28.03.2014 held the impugned sum to be representing losses incurred on foreign exchange fluctuation to principal amount and therefore, it was held capital expenditure only.

The CIT(A) accepts assessee’s arguments against the impugned disallowance as follows:- “VI. Ground 3: Expenditure on account of foreign exchange loss of Rs.57,03,853/- ACIT, CC-3(1), Kol. Vs. M/s Specialty Restaurants Ltd. Page 3 Submission of the assessee. ‘During the year, the appellant debited an amount of Rs.58,10,210/- to the Profit and Loss A/c on account of Foreign Exchange Loss. During the course of assessment proceedings, the appellant was asked to explain why this deduction should not be disallowed as it is in the nature of loss incurred of foreign exchange fluctuation related to the principal amount of loan taken and therefore, it was in the nature of capital expenditure. In response to the said query, the appellant submitted that the said loss is on account of hedging in the foreign currency non-resident loan (FCNR), which was inclusive of loss on restatement of receivables on debtors of Rs.1,06,356/-. In this respect, it was also submitted that Ste Bank of India had sanctioned a term loan of Rs.22.50 cores to the appellant for meeting its working capital requirement vide its sanction letter dated 15-09-2008. A copy of the sanction letter is enclosed at Page 40-51 of the Paper Book. The details of loan given and amount converted into Foreign Currency Loan is give below: Sr No. Particulars Remarks 1 Sanctioned amount of Rupee Term 22.50 cr Loan 2 Schedule of Repayment The Term loan is repayable in 14 quarterly instalments commencing from the quarter ending December 2009 3 Converted amount of Rupee Term Rs.15 crores for one year. Loan into FCNR(B) 4 Purpose of conversion To save on interest cost for a period of one year on the term loan by availment of FCNR loan 5 Cost element of FCNR loan LIBOR plus hedging cost The foreign exchange loss/gain accounted during the year pertained to the interest cost and hedging risks associated with the foreign currency loan. Further, it was also submitted that the entire FCNR(B) loan was excluding of loss on restatement of receivables on debtors of Rs.1,06,356/-, so incurred by the assessee are relatable to the principal amount of loan taken and therefore, are I the nature of capital expenditure and hence not an allowable deduction. To rebut the contention of the learned AO, it is humbly submitted that the term loan sanctioned by the SBI was for the purpose of meeting working capital requirements and not to purchase any capital asset. The same is evident from the sanction letter dated 15-09-2008, relevant page 43 of the Paper Book. The Rupee Term Loan was converted into FCNR(B) Loan to save on the interest cost since the interest is directly linked to LIBOR. Due to a fall in the value of the Indian Rupee vis-à-vis the US Dollar, it suffered foreign exchange losses on loans repayable in foreign currency. As such, the allegation of the Learned AO that the foreign exchange loss is capital in nature is baseless. The hedging loss is revenue in nature and hence deductible u/s. 37(1) of the Act. To buttress the contention of the appellant, reliance is placed on the judgment of the Apex Court in the case of Sutlej Cotton Mills Ltd vs. CIT (116 ITR 001), wherein it was held that, “The law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be a trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as a part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature.”

ACIT, CC-3(1), Kol. Vs. M/s Specialty Restaurants Ltd. Page 4 Here, undisputedly, the FCNR loan was a part of the circulating capital for meeting the day to day working capital requirements of the business and hence any profit/loss arising from such hedging in foreign currency will be revenue profit/loss. Here, it is also relevant to mention that in the immediately preceding year FY 2009-10, there was foreign exchange gain of Rs.13,30,647/- which was assessed to tax as revenue profit. Hence, treating the loss as a capital loss in the current year is deviation from the policy followed in the earlier year by the Department, taking into consideration that there was no change in the facts of the case. This clearly tantamount to double standards adopted by the Department. The said income of Rs.1323,30,647/- was included in ‘Schedule 14-Other Income’ of audited accounts of FY 2009-10 and was offered for taxation. The audited accounts for FY 2009-10 is enclosed at Page 52-60 of the Paper Book. A copy of the assessment order of AY 2010-11 is also enclosed at Page 61-66. In the year, when there were profits on account of hedging in foreign currency, the said activity was treated as a revenue profit and Foreign Exchange Gain was assessed to tax and in the immediately next year, since the appellant suffered Foreign Exchange Loss, the Learned AO disallowed the same on the alleged ground that the aid loss is a capital expenditure. There being no change in the facts of the case, the learned AO ought not to disturb the procedure followed in the preceding years as held by the Apex Court in the case of RadhasoamiSatsang v. CIT (1992) 193 ITR 321, wherein it was held that, “Strictly speaking, res judicata does not apply to income-tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following year; where a fundamental aspect permeating through the different assessment years has been found as a fact one way or a the other and parties have allowed that position to be sustained by not challenging the order, it would not be t all appropriate to allow the position to be changed in a subsequent year.” In this regard, reliance in also placed on the judgment of the Apex Court in the case of CIT vs. Woodward Governor India Pvt Ltd (312 ITR 254) 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.tis fact is important. It indicates the double standards adopted by the Department.” Further reliance is placed on the recent judgment in the case of Cooper Corporation Pvt Ltd vs. DCIT (TA No.866/PN/2014) wherein the Tribunal affirmed the taxpayer’s argument that the impugned fluctuation loss had direct nexus with the saving in interest costs without bringing any new capital set into existence, and the conversion of rupee term loans into foreign currency loans had served as a hedging mechanism against revenue receipts from exports, and portrayed commercial expediency. The Tribunal placed reliance in the Hon'ble Supreme Court's ruling in the case of Woodward Governor India (P) Limited and held that the loss arising on foreign exchange fluctuation has been rightly accounted as revenue expense in the profit and loss statement in accordance with AS-11. Accordingly, the Tribunal held that the taxpayer’s claim that the foreign exchange fluctuation loss was a revenue loss was justified.” In the light of the above, the hedging loss, so incurred by the appellant, having been incurred in the normal course of business is allowable u/s 37 of the Act and in view of the same it is humbly urged before your goodself to direct the learned AO to delete the disallowance of Rs.57,03,854/-. Decision: On this issue it is submitted that the foreign exchange gain of Rs.1330647/- for Ayr. 201-11 was offered by the assessee for taxation. The assessee has been following the same method of accounting as in the earlier year as far a foreign exchange gain/loss is ACIT, CC-3(1), Kol. Vs. M/s Specialty Restaurants Ltd. Page 5 concerned. In this regard reliance has been placed on the decision of Apex Court in RadhasoamiSatsang v. CIT, (1992) 193 ITR 321, wherein it was held that: “Strictly speaking, res judicata does not apply to income-tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following year; where a fundamental aspect permeating though the different assessment year 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.” It is seen that no reasons have been give in by the AO in the assessment order for deviating from the accounting policy in the earlier years. Strictly speaking res-judicata is not applicable in Income-tax matters however there should b significant change in facts which should be brought on record by the AO. No such change in facts has been discussed by the AO in the assessment order. Further, the AO cannot take diametrically opposite stand in two assessment years. In this case Foreign Exchange Gain has been treated as revenue in nature in A.Yrs. 2010-11 and the foreign exchange loss has been treated Capital in nature in the impugned assessment year. This is not correct and the AO is required to follow uniform accounting policy. Sr No. Particulars Remarks 1 Sanctioned amount of Rupee Term 22.50 cr Loan 2 Schedule of Repayment The Term loan is repayable in 14 quarterly instalments commencing from the quarter ending December 2009 3 Converted amount of Rupee Term Rs.15 crores for one year. Loan into FCNR(B) 4 Purpose of conversion To save on interest cost for a period of one year on the term loan by availment of FCNR loan 5 Cost element of FCNR loan LIBOR plus hedging cost The entire FCNR loan was squared off during the year by way of adjustment in Rupee term loan. The assessee has also placed reliance on the decision of the Apex Court in the case of CIT vs. Woodward Governor India Pvt Ltd (312 ITR 254) 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.tis fact is important. It indicates the double standards adopted by the Department.” Respectfully following the decision of the Apex Court in RadhasoamiSatsang (supra) and Woodward Governor India Pvt Ltd (Supra) the loss incurred by the assessee on account of foreign exchange is to be treated as business loss u/s. 37.”

We have given our thoughtful consideration to rival contentions against and in support of CIT(A)’s action holding the assessee’s foreign exchange loss in issue to be business loss u/s.37 allowable as revenue expenditure. Learned Departmental ACIT, CC-3(1), Kol. Vs. M/s Specialty Restaurants Ltd. Page 6 Representative fails to dispute the basic fact first of all that this question of foreign exchange gain / loss is very much a recurring one in assessee’s case throughout. Taking for instance the immediate preceding assessment year 2010-11. The assessee’s foreign exchange gain of ₹13,30,647/- in said preceding assessment year qua the very loans hedging stood assessed under revenue head. The Revnue’s endeavour in the impugned assessment year is to adopt an inconsistency position which is not correct in the eyes of law as per hon'ble apex court’s decision in RadhasoamiSatdsang vs. CIT (1992) 193 ITR 321 (SC).

It further transpires that the assessee had converted it rupee term loan into FCNR loan in order to save the interest cost being linked to LIBOR. The impugned loan was part of circulating capital. The loss in issue therefore arises from foreign currency hedging only forming part of revenue head in profit and loss account which is not disputed at Revenue’s behest.

Hon'ble apex court’s decision in Sutlej Cotton Mills Ltd vs. CIT (116 ITR 001) made it clear long back that such gain / loss falls under trading head of foreign currency in question held in revenue account or a trading asset or part of circulating capital. Their lordship latter decision in CIT vs. Woodward Governor India Pvt Ltd 312 ITR 254 (SC) also discarded Revenue’s inconsistent stands in adopting a different approach qua the very issue in preceding and succeeding assessment years. We take into account all these facts as well as settled legal position to conclude that the CIT(A) has rightly treated assessee’s foreign currency accordingly loss to be revenue expenditure is allowable sec. 37 of the Act.