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Income Tax Appellate Tribunal, KOLKATA BENCH “B” KOLKATA
Before: Shri N.V.Vasudevan & Shri Waseem Ahmed
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
This appeal by the Revenue is directed against the order of Commissioner of Income Tax (Appeals)-4, Kolkata dated 30.12.2009. Assessment was framed by ITO Ward-10(2), Kolkata u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) vide his order dated 30.12.2009 for assessment year 2007-08. Grounds raised by Revenue per its appeal reproduced below:- “1. That the Ld. CIT(A) has erred in law as well as on fact by allowing foreign exchange fluctuation loss as business loss whereas AO treated the same as speculation loss.
2. That the Ld. CIT(A) has erred in law as well as on fact as Section 10B clearly says that profit of the 100% export oriented unit shall be allowed to be deducted from the total income of the assessee.
A.Y. 2007-08 CIT, Cir-10(1) Kol. Vs. M/s Arena Machieries Ltd. Page 2 3. That the appellant craves for leave to add, delete or modify any of the grounds of appeal before or at the time of hearing.”
Shri Saurabh Kumar, Ld. Departmental Representative represented on behalf of Revenue and Shri S.K. Agarwal, Ld. Authorized Representative appeared on behalf of assessee.
First issue raised by Revenue in this appeal is that Ld. CIT(A) erred in deleting the addition made by the Assessing Officer for ₹1,04,82,800/- on account of foreign exchange fluctuation.
Briefly stated facts are that assessee is a limited company and engaged in tools manufacturing, export of machineries and trading in textiles. The assessee during the year under consideration has claimed a loss of ₹1,04,82,800/- on account of foreign exchange fluctuation. However, AO treated the same as speculation loss in accordance with the explanation to Section 73 of the Act. Thus, the AO added the impugned loss to the total income of assessee on the ground that it cannot be set off from the non- speculation business. Therefore, the AO allowed the speculation loss to be carried forward and added the speculation loss to the total income of assessee.
Aggrieved, assessee preferred an appeal before Ld. CIT(A). The assessee before Ld. CIT(A) submitted that it received a contract for the export of machineries. Accordingly, it has taken a forward contract against the export of machineries but the export contract was not executed. Therefore the forward contract was cancelled. As a result of cancellation of forward contract assessee has incurred loss of ₹1,04,82,800/- only. Ld. CIT(A) after considering the submission of assessee has deleted the addition made by the AO by observing as under:- “6.2.1 First point is that the forex loss was in connection with export, i.e., the affairs of the EPOOU Unit. Therefore the Loss should have been booked in the P & L A/c of the EOU Unit, and not in the consolidated P & L A/c. The AO in the assessment order at para 4(d) has pointed out this aspect. I concur with the AO. 6.2.2 Now as to the treatment theeof, the forward contract was connected with export order. thus, as pointed out by the ld. AR, this A.Y. 2007-08 CIT, Cir-10(1) Kol. Vs. M/s Arena Machieries Ltd. Page 3 instance is covered by exception in clause (a) to section 43(5) which reads: (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) … …
6.2.3 Thus, I hold that the loss is a business loss; however, being connected to the exports it therefore must firstly be accounted for in the P & L a/c of the EOU Unit, and then merged in the consolidated P & L a/c.”
The Revenue, being aggrieved, is in appeal before us.
Before us Ld. DR for the Revenue heavily relied on the order of AO. On the other hand, Ld. AR for the assessee filed paper book which is running pages 1 to 100 and drew our attention on the export order received by assessee which is placed on pages 19 to 64 of the paper book. He further submitted that assessee has taken a forward contract from UCO Bank for ₹ 50 lakh US$ to hedge the export order. The copy of the said forward contract is enclosed on page 55 of the paper book. However, subsequently, forward contract was cancelled due to the cancellation of export order. Thus the assessee has incurred a loss of ₹1,04,82,800/- on account of cancellation of said forward contract. The copy issued by UCO Bank for the cancellation of said forward contract is placed on page 66 of the paper book. He relied on the order of Ld. CIT(A).
We have heard the rival contentions of both the parties and perused the material available on record. The facts of the case are not in dispute therefore we are not inclined to repeat the same for the sake of brevity. In the instant case, assessee took a forward contract against the export of goods as evident from the copy of the contract which is placed on pages 19 to 64 of the paper book. The relevant extract of the contract copy is reproduced below:- “The Director Arena Machineries Limited 103D/1 Block “F”, New Alipore Kolkata, India A.Y. 2007-08 CIT, Cir-10(1) Kol. Vs. M/s Arena Machieries Ltd. Page 4 Pin 700053 Dated 28th April 2005 SUB ; SUPPLY OF PILFER PROOF CLOSURE MANUFACTURING LINE Dear, Sir, Please refer to the discussion the undersigned have been having with you regarding the scope of supply of complete line of pilfer proof closure. We are pleased to inform you that we have decided to purchase the same from your end. Please supply the complete line of equipments for production of caps of following sizes: • 28 x 15 mm • 30 x 44 mm • 30 x 60 mm • Complete line for side printing (metal cap decorative line) for the cap size 30 x 44 mm and 30 x 60 mm The price agreed upto is US$ 6,500,000 on CIF Almaty, Kazakhstan basis. The price also includes supervision of installation, erection, commissioning and training of personnel. Please find herewith enclosed the list of all the equipments for individual lines to be provided to us. Please also intimate us the delivery schedule etc. Thanking you For TOO Armanov”
After gone through the copy of said contract there remains no doubt that the assessee has received a contract from CIF Almaty, Kazakhstan for the export of goods. Accordingly, forward contract was taken by assessee against the export order from the UCO Bank. However, the forward contract was subsequently cancelled as evident from the letter written by UCO Bank. The relevant extract of the letter is reproduced below:- “To M/s Arena Machineries Limited, 103D/1, Block – F, New Alipore, Kolkata – 700 053. Dear Sirs, Sub : Cancellation of forward contract No.MFP/050407/ 2005 of our International Banking Br., Kolkata At your request, we requested our International Banking Branch to book forward contract against payment of your import bill. Our International Banking Branch vide their letter No IBB/Ex./2006 dtd. 11th August, 2006, has advised us that they have debited our a/c. for Rs.1,04,82,800/- being the charges for cancellation of forward contract No.MFP/050407/2005 booked n the name of our company. As per terms of contract, the cancellation charge is payable by you. As such, we would request you to remit the fund immediately for our outstanding entry without further loss of time. If we do not receive any response from your end within seven days from the date of receipt of this letter, we shall be constrained to debit you’re a/c. without showing any reason whatsoever.” A.Y. 2007-08 CIT, Cir-10(1) Kol. Vs. M/s Arena Machieries Ltd. Page 5 In view of above, it can be concluded that impugned loss was incurred by assessee in relation to its business activity to safeguard the loss and thus it cannot be held speculation loss. In holding so, we find guidance and support from the judgment of Hon'ble Delhi High Court in the case CIT vs Woodward Governor India Private Limited [2007] 294 ITR 451 (Del) where it was held that:- “We affirm the decision of the Income-tax Appellate Tribunal in Oil and natural Gas Corporation Ltd. V. Deputy CIT (Asstt.) [2003] 261 ITR (AT) 1 (Delhi) which rightly follows the settled position as explained in the judgment of the Hon'ble Supreme Court which we have referred to. We, therefore, reject the submission of the Appellant in these appeals that the increase in liability on account of the fluctuation in the rate of foreign exchange remaining on the last day of the financial year is notional or contingent and, therefore, cannot be allowed as a deduction.”
Besides the above, we also find that a contract which is taken against the raw materials/ merchandise cannot be held as speculative transactions in accordance with the provision of clause (a) of Section 43(5) of the Act which is reads as under:- “Definitions of certain terms relevant to income from profits and gains of business or profession.
In sections 28 to 41 and in this section, unless the context otherwise requires- (1) … … (2) … … (3) … … (4) … … (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: (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” A plain reading of the said section makes it clear that the impugned loss cannot be regarded as speculation. Ld. DR has not brought anything contrary to the decision of Ld. CIT(A). In this view of the matter, we do not find any infirmity in the order of Ld. CIT(A). We hold accordingly. This ground of Revenue’s appeal is dismissed.