DIVGI WARNER PVT. LTD.,,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX,,

आदेश / ORDER

PER VIKAS AWASTHY, JM

This appeal by assessee is directed against the order of Commissioner of Income Tax (Appeals)-1, Pune dated 30.10.2015 for the assessment year 2010-11.

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company is engaged in manufacturing of transfer cases, automatic locking hubs

and transmission components used in automobile industry. The assessee filed

its return of income for the impugned assessment year on 14.10.2010 declaring

total income of Rs.13,21,10,603/-. The case of assessee was selected for

scrutiny. Accordingly, statutory notice u/s. 143(2) of the Income Tax Act, 1961

(hereinafter referred to as ‘the Act’) was issued to the assessee. During the

course of scrutiny assessment proceedings, the Assessing Officer noticed that

the assessee has claimed loss on foreign exchange fluctuation Rs.4,52,45,234/-

as revenue expenditure. The Assessing Officer held that the assessee has taken

forward cover against exports, hence, the transaction is not revenue in nature.

The Assessing Officer further observed that the transaction is not recurring in

nature; therefore, the expenditure is not for day to day running of the business.

r.w.s 144C(1) of the Act, the assessee filed appeal before the Commissioner of

Income Tax (Appeals). The Commissioner of Income Tax (Appeals) not only

upheld the action of Assessing Officer in adding back foreign exchange loss not

being on revenue account but went a step ahead in holding forward contract

taken by assessee as speculative in nature. Now, against the findings of

Commissioner of Income Tax (Appeals), the assessee is in second appeal before

the Tribunal.

assessee-company is engaged in business since 1996 and exports are a regular

feature of its business. The assessee had taken a forward cover from Caylon

Bank Ltd. against export sales to safeguard against the foreign currency

fluctuation. The ld. AR referred to agreement with Calyon Bank Ltd. dated

09.05.2006 at page 2 to 5 and master agreement dated 21.11.2007 entered into

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with Caylon Bank Ltd. at page 6 to 34 of the paper book. The ld. AR further

referred to contract confirmations at page 35 to 41 of the paper book. The ld. AR

pointed that as per agreement, the assessee had committed exports to the tune

of US $ 58,42,580 for the year with the bank. Due to recession in economy, the

exports of assessee-company reduced substantially, thus there was shortfall in

deposit of US $ 10,00,247 with the Bank. The difference between the open

market rate and deal rate was foreign currency fluctuation loss which was

recovered by bank from the assessee. The shortfall in deposit of US $ with the

bank as per commitment resulted in loss of Rs.4,52,45,234/- to the assessee.

The loss arising on account of payment made by assessee to the bank as per

agreement is wholly and exclusively in connection with the business of

assessee. The Assessing Officer has not disputed this fact. The ld. AR submitted

that the Hon'ble Bombay High Court in the case of CIT Vs. Badridas Gauridu

(P.) Ltd. reported as 261 ITR 256 has allowed the loss arising on account of

shortfall in exports against which the assessee had taken hedge from the bank,

as allowable business expenditure. The ld. AR to further buttress his

submissions, placed reliance of the following decisions:

vehemently defended the findings of Commissioner of Income Tax (Appeals) in

confirming addition and holding the same to be speculative transaction. The ld.

DR submitted that the transaction is speculative in nature as the assessee

without actual export of goods, has claimed the loss. The ld. DR in support of

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his submissions, placed reliance on the decision of Mumbai Bench of Tribunal

in the case of S. Vinodkumar Diamonds (P.) Ltd. Vs. Additional Commissioner of

Income Tax reported as 155 TTJ 280 (Mumbai-Trib).

and have perused the orders of Authorities below. We have also considered the

documents placed on record and the decisions referred during the course of

making submissions. The solitary issue raised in the appeal is; whether foreign

exchange fluctuation loss Rs.4,52,45,234/- arising on account of shortfall in

exports, is an allowable business loss or speculative loss?

locking hubs and transmission components used in automobile industry. The

assessee had taken forward cover from Caylon Bank Ltd. on export sales. As per

agreement, the assessee was required to export minimum specified quantity

every month and deliver committed amount of US $ every month to the bank at

the deal rate out of realization of its export sale proceeds. The contract also

provides that if the assessee-company is unable to honour its commitment due

to reduced exports, the bank would buy dollars from the open market. The

difference between the open market rate and the deal rate would be borne by

assessee-company.

It is an undisputed fact that in the assessment year under appeal, the

assessee could not meet export target. Thus, the assessee as per agreement

with the Bank had to compensate the bank by depositing US $ from the open

market. The loss suffered by the assessee on account of payment to the bank

difference between the open market rate and deal rate with the bank is business

loss suffered in normal course of business. The assessee had taken forward

contract from the bank to hedge against foreign currency fluctuations. As per

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agreement, in the event of any default, the assessee was liable to pay the

difference to the Bank.

(supra.) under similar set of facts allowed payment of charges to Bank as

business expenditure. In the said case, the assessee had entered into forward

contracts with the banks in respect of foreign exchange. The assessee could not

honour the terms and conditions of the contract, as a result, the assessee had

to pay charges to the bank and suffered loss. The assessee claimed the loss as

business loss. The Revenue disallowed the claim of assessee holding the loss as

speculative. The Tribunal reversed the findings of Revenue holding the contracts

were incidental to the assessee’s business of export of cotton, and held that it is

not a speculative transaction. In appeal by the Department, the Hon'ble

Bombay High Court upheld the findings of Tribunal by observing as under:

“3. The assessee was not a dealer in foreign exchange. The assessee was a cotton exporter. The assessee was an export house. Therefore, foreign exchange contracts were booked only as incidental to the assessee's regular course of business. The Tribunal has recorded a categorical finding to this effect in its order. The Assessing Officer has not considered these facts. Under section 43(5) of the Income-tax Act, "speculative transaction" has been defined to mean a transaction in which a contract for the purchase or sale of a commodity is settled otherwise than by the actual delivery or transfer of such commodity. However, as stated above, the assessee was not a dealer in foreign exchange. The assessee was an exporter of cotton. In order to hedge against losses, the assessee had booked foreign exchange in the forward market with the bank. However, the export contracts entered into by the assessee or export of cotton in some cases failed. In the circumstances, the assessee was entitled to claim deduction in respect of Rs.13.50 lakhs as a business loss. This matter is squarely covered by the judgment of the Calcutta High Court with which we agree, in the case of CIT Vs. Sooraj Mull Nagarmull [1981] 129 ITR 16.”

case of CIT Vs. D. Chetan & Co. (supra). The relevant extract of the order of

Hon'ble Jurisdictional High Court reads as under:

“7.The impugned order of the Tribunal has, while upholding the finding of the CIT (Appeals), independently come to the conclusion that the

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transaction entered into by the Respondent assessee is not in the nature of speculative activities. Further the hedging transactions were entered into so as to cover variation in foreign exchange rate which would impact its business of import and export of diamonds. These concurrent finding of facts are not shown to be perverse in any manner. In fact, the Assessing Officer also in the Assessment Order does not find that the transaction entered into by the Respondent assessee was speculative in nature. It further holds that at no point of time did Revenue challenge the assertion of the Respondent assessee that the activity of entering into forward contract was in the regular course of its business only to safeguard against the loss on account of foreign exchange variation. Even before the Tribunal, we find that there was no submission recorded on behalf of the Revenue that the Respondent assessee should be called upon to explain the nature of its transactions. Thus, the submission now being made is without any foundation as the stand of the assessee on facts was never disputed. So far as the reliance on Accounting Standard-11 is concerned, it would not by itself determine whether the activity was a part of the Respondent-assessee's regular business transaction or it was a speculative transaction. On present facts, it was never the Revenue's contention that the transaction was speculative but only disallowed on the ground that it was notional. Lastly, the reliance placed on the decision in S. Vinodkumar Diamonds (P.) Ltd. (supra) in the Revenue's favour would not by itself govern the issues arising herein. This is so as every decision is rendered in the context of the facts which arise before the authority for adjudication. Mere conclusion in favour of the Revenue in another case by itself would not entitle a party to have an identical relief in this case. In fact, if the Revenue was of the view that the facts in S. Vinodkumar (supra) are identical /similar to the present facts, then reliance would have been placed by the Revenue upon it at the hearing before the Tribunal. The impugned order does not indicate any such reliance. It appears that in S. Vinodkumar Diamonds (P.) Ltd. (supra), the Tribunal held the forward contract on facts before it to be speculative in nature in view of Section 43(5) of the Act. However, it appears that the decision of this court in CIT V. Badridas Gauridu (P.) Ltd.[2003] 261 ITR 256 [2004] 134 Taxman 376 ( Mum.) was not brought to the notice of the Tribunal when it rendered its decision in S. Vinodkumar Diamonds (P.) Ltd.(supra). In the above case, this court has held that forward contract in foreign exchange when incidental to carrying on business of cotton exporter and done to cover up losses on account of differences in foreign exchange valuations, would not be speculative activity but a business activity.”

The Co-ordinate Bench of Tribunal in the case of ACIT Vs. Finolex

Industries Ltd.(supra) deleted the addition where the assessee had suffered loss

on account of cancellation of foreign exchange contracts.

Diamonds (P.) Ltd. Vs. Addl. CIT (supra.). We observe that the Hon'ble High

Court in the case of CIT Vs. D. Chetan & Co. (supra) has considered the same

and distinguished. Thus, no reliance can be placed on said decision.

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Order pronounced on Wednesday, the 25th day of April, 2018.

Sd/- Sd/- (अ�नल चतुव�द� /ANIL CHATURVEDI) (�वकास अव�थी /Vikas Awasthy) लेखा सद�य/ACCOUNTANT MEMBER �या�यक सद�य/JUDICIAL MEMBER

पुणे / Pune; �दनांक / Dated : 25th April 2018 SB आदेश क� ��त�ल�प अ�े�षत / Copy of the Order forwarded to : अपीलाथ� / The Appellant. 1. ��यथ� / The Respondent. 2. 3. The CIT (Appeals)-1, Pune. 4. The Pr. CIT-1, Pune. 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, “बी” ब�च, पुणे / DR, ITAT, “B” Bench, Pune. गाड� फ़ाइल / Guard File. 6.

// True Copy // आदेशानुसार / BY ORDER,

�नजी स�चव / Private Secretary आयकर अपील�य अ�धकरण, पुणे / ITAT, Pune.