DCIT, CIR-12(1), KOLKATA, KOLKATA vs. M/S. HINDUSTAN GUM & CHEMICALS LTD., KOLKATA

आदेश /O R D E R PER S.S.Godara, Judicial Member:- This Revenue’s appeal for assessment year 2012-13 arises against the Commissioner of Income Tax (Appeals)-4, Kolkata’s order dated 17.02.2017, in case No.243/CIT(A)-4/Cir-12(1)/Kol/16-17, reversing Assessing Officer’s action inter alia disallowing / adding market to market loss and additional depreciation claim of ₹449.18 lakh and ₹55,13,634/-; respectively involving proceedings u/s 143(3) of the Income Tax Act; in short ‘the Act’. Heard both the parties reiterating their respective stands. Case file perused.

ITA No.891/Kol/2017 A.Y. 2012-13 DCIT Cir-12(1) Kol. Vs. M/s Hindustan Gum & Chemicals Ltd. Page 2 2. We come to Revenue’s former substantive grievance seeking to revive the Assessing Officer’s action disallowing assessee’s market-to-market loss claimed of ₹449.18 lakh treating the same to be notional and a contingent liability. Both the parties takes us to the CIT(A)’s detailed discussion qua the instant issue reading as under:- “4. Ground No. 1 & 2 This ground is directed against the action of the AO of disallowing market-to-market loss on restatement of foreign exchange contracts of ₹449.18 lacs. In the P&L A/c the appellant had debited net loss of ₹1028.52 lacs by way of loss on foreign currency transaction and translation under the head ‘Other Expenses”. Before the AO, the appellant had furnished the break-up of such net loss of foreign currency transaction and translation. The AO noted that the said loss included market-to-market loss of ₹44918 lacs in relation to derivative contracts at the year-end which has been claimed as business expenditure by the appellant. The AO required the appellant to explain as to why such loss should not be disallowed. In response the appellant furnished an explanation explaining the nature of derivative contracts and the manner in which the MTM loss was booked to show that the loss was real & ascertained. The AO however did not agree with the explanation of the appellant. Referring to the CBDT Instruction No 3/2010 dated 23.03.2010, the AO held that such MTM loss was notional & contingent in nature and therefore disallowed it and added it back to total income. 4.1 During the appellate stage, the AR of the appellant discussed the issue and also made detailed submissions on this issue which are as follows:- “Ground No.2 is against the Assessing Officer's action of not allowing deduction for “market to market’ loss amounting to Rs.449.18 lacs. In the impugned order the AO has alleged that the market to market loss debited by the appellant is notional in nature and that in view of the CBDT Instruction No. 3 of 2010, the said loss is contingent in nature and therefore not allowable as deduction from the profits of the business. The AO therefore disallowed the said sum of Rs.449.18 lacs while assessing the taxable income. In this regard the appellant submits that it is engaged in the manufacture and trading of Gaur products. Major revenue of the appellant is derived from exports. During the relevant financial year the company’s export earning in convertible foreign exchange amounted to Rs.258,599.24 lacs. It will thus be appreciated that the appellant had substantial exposure to international trade which was conducted in foreign currency terms. As such the appellant was highly exposed to the risks arising from exchange rate fluctuations. In the circumstances to hedge against exchange fluctuation risks in relation to its

ITA No.891/Kol/2017 A.Y. 2012-13 DCIT Cir-12(1) Kol. Vs. M/s Hindustan Gum & Chemicals Ltd. Page 3 international trading operations, the appellant had entered into foreign exchange denominated forward contracts with bank. The ICAI has recommended the Accounting Standard for accounting of derivative and/or forward contracts in terms of which the persons entering into foreign exchange forward contracts to hedge their exchange fluctuation risk are required to state the outstanding positions at the exchange rates prevailing on the Balance Sheet date and make provision for anticipated losses arising on account of foreign exchange fluctuation. The ICAI relying on the principle of prudence has recommended that the entities and enterprises who follow mercantile system of accounting should evaluate derivatives contract on the basis of exchange rate prevailing on the Balance Sheet date. On the restatement of outstanding derivative or forward s the enterprise should account for income or losses arising from restatement of outstanding foreign currency contract. The said method recommended by ICAI has been consistently followed by the assessee in the past and accordingly the income or loss arising from restatement of outstanding foreign exchange denominated /. Forward contracts were offered as income or claimed as loss in the earlier years. The method followed by the assessee is in conformity with accounting standard and guidance note issued by ICAI and the same has consistently been followed by the appellant in the past as well in the subsequent year. It is pertinent to state that the foreign exchange forward contracts were entered into by the appellant with reference to underlying which were export orders to be executed by the appellant in the ordinary course of its export business. In the circumstances’ the loss which accrued or arose on account of restatement foreign exchange forward contracts was a loss incurred in the ordinary course of assessee’s business. The issue as to whether the loss arising on account of restatement of liabilities arising from exchange rate variation is a contingent loss or ascertained was considered by the Hon'ble Apex Court in its judgment in the case of Woodward Governor of India Ltd vs. CIT (312 ITR 254) as also in the case of CIT Vs. ONGC Ltd in these 2 decisions the Supreme Court categorically held that the loss debited in the P & L account by an assessee on account of restatement of liabilities pursuant to exchange rate variation is defined or ascertained loss and not contingent loss and hence allowable is incurred in relation to trading liability. Following the judgments of the Supreme Court, the Delhi Bench of ITAT in the case of Bechtel India Pvt. Ltd. vs. Addl. CIT (33 txman.com 213) held that exchange fluctuation loss in relation to contractual liabilities was not notional loss and had to be allowed in computing Profits & Gain of business. It is also relevant to submit that the appellant made similar claims in the earlier years as well which was disallowed by the AO but on appeal your predecessors in the appellate orders passed for AYs 2008-09, 2009-10 & 2010-11 deleted the same. Copies of the relevant appellate orders are enclosed. Since the factual matrix of the assessee’2012-13 it is prayed that disallowance of Rs.449.18 lacs be directed to be deleted.’

ITA No.891/Kol/2017 A.Y. 2012-13 DCIT Cir-12(1) Kol. Vs. M/s Hindustan Gum & Chemicals Ltd. Page 4 4.2 I have carefully considered the submissions of the AR and have perused the details of such loss. This issue with regard to allowability of market-to- market loss arising out of restatement of foreign exchange liabilities has been decided by the Apex Court in the case of CUIT vs. Woodward Governor India (P) Ltd (312 ITR 154) and ONGC vs. CUIT (322 ITR 180). In these decisions the Apex Court has held that the loss incurred on restatement of foreign currency liabilities in conformity with exchange rate prevailing on the balance sheet date is not a contingent liability but defined and ascertained liability and therefore the loss incurred on restatement is liable to be allowed in the case of an assessee who follow the mercantile system of account. Further such loss allowable if the underlying asset or underlying liability is incurred on trading account. In the appellant’s case, it had entered into foreign exchange forward contracts for hedging exchange fluctuation risks in respect of export orders. As such the underlying transaction in relation to forward contract entered into by the assessee was trading transaction and therefore any loss connected with such trading transaction was in the revenue field and therefore to be allowed in view of the ratio laid down by the Supreme Court in the case of CIT vs. Woodward Governor India (P) Ltd up and ONG vs. CIT (supra). In fact this view finds support in the appellate order assed by my predecessor for AYs 2008-09, 2009-10 & 2010-11 respectively. Following these appellate orders, the AO is directed to allow the deduction for market-to-market loss of ₹449.18 lacs. [Ground No 1 is therefore allowed].” It is apparent at the outset that CIT(A) has followed his order in assessee’s case itself for AYs 2008-09 to 2010-11 deciding the very issue is its favour. We sought to know with the final status thereof. Both parties are very fair in pointing out that various co-ordinate benches decisions have already upheld the CIT(A)’s similar action in the said preceding assessment years. Their respective orders dated 08.03.2017, 25.10.2017 and 14.02.2018 form part of case record(s) before us. Learned Departmental Representative is very fair in not indicating any distinction on facts or law therein. We therefore conclude that the CIT(A) has rightly deleted the impugned market-to-market loss disallowance of ₹449.18 lakhs. The Revenue’s former substantive ground fails.

ITA No.891/Kol/2017 A.Y. 2012-13 DCIT Cir-12(1) Kol. Vs. M/s Hindustan Gum & Chemicals Ltd. Page 5 2015. We notice in this backdrop that CIT(A);’s findings under challenge decide the instant issue in assessee’s favour as under:- “6. Ground No.4 During FY 2010-11 relevant to AY 2011-12 the appellant had purchased new pant & machinery for its manufacturing business and certain plant & machinery were put to use for less than 180 days. Accordingly in terms of second proviso to Section 32(1), the appellant claimed additional depreciation only to the extent of 50% of the additional depreciation otherwise allowable under Section 32(1)(iia) of the Act. In the relevant FY 2011-12 the appellant had claimed the balance 50% of the additional depreciation on the new plant & machinery installed in earlier FY 2010-11 which were put to use for less than 180 days in that year, amounting to ₹55,13,634/-. The AO required the appellant to explain as to why such remaining 50% of the additional depreciation should be allowed. In response the appellant filed an explanation along with copies of the appellate orders of CIT(A)’s of earlier years wherein identical claims were allowed. Apart from the foregoing the appellant also placed reliance on the decisions of coordinate Benches of Tribunal. The AO however did not agree with the contention of the appellant. According to Assessing Officer the foremost condition to claim additional depreciation was that the plant & machinery should be new and since the plant & machinery in question had been put to use in earlier year, the appellant could not avail the benefit of additional depreciation u/s. 32(1)(iia) of the Act. the AO further referring to second proviso to Section 32(1)(iia) held that it only restricts the claim of additional depreciation to 50% in respect of new assets put to use for less than 180 days and the is no such provision allowing the assessee to claim remaining 50% in the succeeding year. For these reasons, the AO held that the claim of additional depreciation made by the appellant to the extent of ₹55,13,634/- was unjustified and hence disallowed the impugned sum and added it back to the total income. 6.1 In the course of appellate proceedings, the AR of the appellant furnished detailed submissions in support of the claim of additional depreciation. The AR also filed copies of the appellate orders passed by the Hon'ble ITAT, Kolkata in appellant’s own case for AY 2007-08 & my predecessors for AYs 2008-09 to 2010-11 wherein on identical facts, the remaining claim of 50% of additional depreciation on the new asset put to use for less than 180 days was allowed in the succeeding year. The relevant extracts of the submissions are as follows:- ‘Ground No. 4 is against Assessing Officer's decision of not allowing 50% of additional depreciation of Rs.55,13,634/- with reference to cost of plant and machinery which was put to use for period less than 180 days in the immediate preceding assessment year. During the FY 2010-11 relevant to AY 2011-12 the assessee had purchase and installed new plant & machinery and put to use for period less than 80 days during the relevant year. In terms of Sec 32(1)(iia) of the IT Act the assessee was entitled for additional depreciation @ 20% of the actual cost. In view of second proviso to Sec 32(1) the said additional depreciation was however restricted to 50% of the deduction amount allowable @ 20%. Accordingly in respect of actual cost of machinery installed but put to use for period less than 180 days the additional

ITA No.891/Kol/2017 A.Y. 2012-13 DCIT Cir-12(1) Kol. Vs. M/s Hindustan Gum & Chemicals Ltd. Page 6 depreciation was allowed at the reduced rate of 10% in the computation of income for AY 2011-12. While filing the return of income the AY 2012-13 the assessee claimed the deduction for remaining 10% of the additional depreciation for which deduction was not allowed in the earlier year. It was at the appellant contention that the deduction u/s. 32(1)(iia) was allowable @ 20% and there was no disenabling provision in the Act to deny the benefit of the entire deduction if in the initial year the deduction was restricted to 50% of the amount normally permissible u/s. 32(1)(iia). The AO however disallowed the assessee’s claim observing that the provision of clause (iia) was in the nature of incentive or exemption provision which needed to be strictly construed. The deduction was permissible only if the eligibility for the benefit was established strictly in conformity with the condition prescribed in the relevant provision of the Act. The AO further noted that even though on the same issue the appellant’s claim was allowed by CIT(A) the Revenue had filed appeal before the ITAT and as such the matter was sub judice. Following his predecessor’s orders for earlier year therefore the AO disallowed the assessee’s claim for 10% of the additional depreciation claimed in relation to actual cost of the assets which were put to use for less than 180 days in AY 2011-12. In this regard the appellant submit that the initial depreciation under clause (iia) is allowed as an “incentive” to encourage investments in new plant & machinery. The condition precedent for allowing such deduction is acquisition and installation of new plant & machinery in the manufacturing business. Once the conditions prescribed in clause (iia) are fulfilled the assessee becomes eligible to claim additional depreciation @ 20%. There is nothing in the language employed in clause (iia) which suggests that such deduction is required to be allowed only in the year in which the machinery is installed and first put to use. The language of clause (iia) shows that the deduction to be allowed @ 20% of the actual cost of new plant & machinery and the first year of allowability of deduction is the year in which the machinery is installed and put to use. If in view of the second proviso to Sec 32(1) the deduction under clause (iia) is not fully allowed in the year of installation and then there is no bar in the Act which provide that the deduction cannot be allowed for the remaining 50% in the subsequent year. The appellant submits that the interpretation of clause (iia) as made by the appellant was accepted by your predecessor while deciding the appeals for the AYs 2008-09 & 2009-10. Copies of the appellate orders are enclosed for your ready reference and record. It is further material to submit that the view expressed by the CIT(A) is supported by the decision of the ITAT Delhi in the case of DCIT vs. Cosmos Films Ltd (24 Taxman.com 189) Your attention is also invited to the “proviso” which was inserted after the second proviso to Sec 32(1) by the Finance Act 2015 which reads as follows:- ‘ Provided also that where an asset referred to in clause (iia) or the first proviso to clause (iia), as the case may be, is acquired by the assessee during the previous year and is put to use for

ITA No.891/Kol/2017 A.Y. 2012-13 DCIT Cir-12(1) Kol. Vs. M/s Hindustan Gum & Chemicals Ltd. Page 7 the purposes of business for a period of less than one hundred and eighty days in that previous year, and the deduction under this sub section in respect of such asset is restricted to fifty percent of the amount calculated at the percentage prescribed for an asset under clause (iia) or that previous year, then, the deduction for the balance fifty percent of the amount calculated at the percentage prescribed for such asset under clause (ii) shall be allowed under this sub-section in the immediately succeeding previous year in respect of such asset.’ The appellant submits that the “proviso” inserted by the Finance Act 2015 is clarificatory in nature inasmuch as it merely removed an apparent ambiguity or absurdity crept into the Act. Since the amendment made by the Finance Act merely cured the lacuna, existing in the law and which was leading to absurdity, the said amendment being curative and retrospective in operation. The appellant therefore submits that the AO be directed to allow the deduction for Rs.55,13,564/- being 10% of the additional depreciation in respect of machinery installed in AY 2011-12 but put to use for period less than 180 days in that year. It is also relevant to submit that the appellant made identical claims in the earlier years as well which was disallowed by the AO but on appeal your predecessors in the appellate orders passed for AYs 2007-08 to 2010-11 deleted the same. Furthermore the Hon'ble ITAT, Kolkata in the ITA No.1364/Kol/2013 dated 08.07.2016 has upheld the order of the CIT(Appeals) for AY 2007-08. Copies of the relevant appellate orders are enclosed. Since the factual martix of the assessee’s case is identical in AY 2012-13 it is prayed that the AO be directed to allow the deduction of additional depreciation for Rs.55,13,564/-.’ 6.2 I have carefully considered the AR’s submissions and perused the applicability of legal provisions. I find that the issue at hand involved in this ground is covered in assessee’s favour by the appellate order of the hon'ble ITAT, Kolkata in appellant’s own case for AY 2007-08 and also the appellate orders passed by my predecessors for AYs 2008-09 & 2009-10. Apart from the foregoing, impugned order further note that the interpretation of Section 32(1)(iia) by the judicial authorities has also been accepted by the Legislature when proviso was inserted in Section 32(1) after second proviso by the Finance Act, 2015. The amendment was carried out with a view to set at rest the ambiguity prevailing because of the lack of clarity in the second proviso about allowability of additional depreciation @ 20% because of the restriction put in place by the second proviso to Section 32(1). In order to remove the ambiguity, the proviso further inserted by the Finance Act, 2015 and thereby clarity was brought about the Legislature. The Constitution Bench of the Hon'ble Supreme Court in the case of Vatika Township Ltd vs. CIT (367 ITR 466) has held that where an amendment is carried out in the Act which is curative in nature and removes the ambiguity I the existing provision or an amendment which is intended to remove unintended hardships should be considered retrospective in operation. Applying the ratio laid down in the said judgment of the Apex Court therefore, I find that the proviso inserted by the

ITA No.891/Kol/2017 A.Y. 2012-13 DCIT Cir-12(1) Kol. Vs. M/s Hindustan Gum & Chemicals Ltd. Page 8 Act, 2015 being curative in nature was retrospective in operation since it merely removes the unintended hardship. Moreover the said amendment is in consonance with the judicial interpretation placed on the provisions of Section 432(1)(iia) of the Act and therefore I direct he AO to allow the appellant benefit of additional depreciation of ₹55,13,634/- in relation to actual cost of plant and machineries installed in AY 2011-12 but put to use for period less than 180 days ‘Ground No. 4 is therefore allowed].” It is therefore clear that the CIT(A) has followed his order(s) in preceding assessment years qua instant issue as well. We notice that the above co- ordinate bench(s) have rejected Revenue’s similar substantive ground thereby upholding CIT(A)’s identical findings. We do not see any reason to adopt a different approach in the impugned assessment year in absence of any distinction in facts or law. 3. This Revenue’s appeal is dismissed. Order pronounced in the open court 31/05/2018 Sd/- Sd/- (लेखा सद%य) (�या'यक सद%य) (Dr. A.L. Saini) (S.S.Godara) (Accountant Member) (Judicial Member) Kolkata, *Dkp, Sr.P.S (दनांकः- 31/05/2018 कोलकाता । आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant-DCIT, Circlee-12(1), P-7, Chowirnghee Sq. Aayakar Bhawan, 7th Floor Kolkata-69 2. ��यथ�/Respondent-M/s Hindustan Gum & Chemicals Ltd., 9/1, R.N. Mukherjee, Road Birla Building BBD Bag, Kolkata-01 3. संबं3धत आयकर आयु4त / Concerned CIT Kolkata 4. आयकर आयु4त- अपील / CIT (A) Kolkata 5. 7वभागीय �'त'न3ध, आयकर अपील�य अ3धकरण, कोलकाता / DR, ITAT, Kolkata 6. गाड< फाइल / Guard file. By order/आदेश से, /True Copy/ Sr. Private Secretary, Head of Office/DDO आयकर अपील�य अ3धकरण, कोलकाता ।