DCIT vs. M/S INDUS GARMENTS INDIA P. LTD.,,

IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH : BANGALORE

BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI NARENDRA KUMAR CHOUDHARY, JUDICIAL MEMBER

ITA No.209/Bang/2013 Assessment year : 2009-10

The Deputy Commissioner of Vs. M/s. Indus Garments India P. Ltd., No.117/A, 5th Main, Income Tax, Industrial Suburb, 2nd Stage, Circle 11(4), Bangalore. Yeshwantpur, Bangalore – 560 022. PAN: AABCI 2620Q APPELLANT RESPONDENT

Appellant by : Shri S. Praveen, Addl. CIT(DR) Respondent by : Ms. Sheetal, Advocate

Date of hearing : 10.03.2016 Date of Pronouncement : 16.03.2016

O R D E R Per B. Ramakotaiah, Accountant Member

This is a revenue’s appeal against the order dated 9.11.2012 of the CIT(Appeals)-I, Bangalore on the issue of claim of loss on account of fluctuation in foreign exchange.

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noticed that assessee has claimed foreign exchange loss of

Rs.2,32,20,805 in the profit & loss account in Schedule-X and after issuing

show cause notice to the assessee, disallowed the same stating that loss

incurred by the assessee was speculative loss within the meaning of

section 43(5). The AO also relied on the Board Circular No.3/2010 dated

22.3.2010 to hold that the transactions entered by the assessee are

speculative transactions, accordingly the loss cannot be allowed. He

added the same as business profit and did not even quantify the loss to be

carried forward as even speculative loss.

submissions (which are extracted in para 3.1 of the impugned order) to

submit that assessee has received about Rs.84.38 crores of foreign

exchange during the F.Y. 2007-08 and consequently entered into a master

agreement with Standard Chartered Bank in Dec. 2007 covering its export

risks for the subsequent period. Consequent to this agreement, from

January 2008 onwards various foreign currency options were entered into

and the rate was fixed in the forward rate of converting USD into INR at

Rs.40.53. It was informed that this agreement was entered into only to

protect and ensure that assessee earns Indian Rupees at a specified rate

for every Dollar of export earnings. It was submitted that the transactions

were business transactions and is very well covered by Explanation to

section 43(5). It was further submitted that in the impugned year, assessee

had earned foreign currency of Rs.72.14 crores in both USD and Euros and

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these transactions were entered into in the business interest. Assessee also relied on various case laws and justified the loss to an extent of Rs.2,32,20,805.

“3.5 I have carefully considered the appellant’s submissions and the reasons given by the AO in the assessment order. The amount of Rs.2,32,20,805/- claimed as exchange loss was disallowed by the AO on the ground that it was a speculative loss. The AO relied on the provisions section 43(5) of the Act in this regard apart from the following judicial decisions: i) Munjal Shows Ltd- v. DCIT (94 TTJ 227)(ITAT, Mumbai) (94 TTJ 227)(ITAT, Mumbai) ii) Shree Capital Services Ltd. v. ACIT (111 ITD 498) (Sp1. Bench of ITAT, Kolkata) 3.6 The appellant being an exporter entered into derivative transactions with Standard Chartered Bank to cover the possible foreign exchange fluctuation loss. Though the AO relied on the provisions of section 43(5) of the Act, he had overlooked the Explanation clause (d) of the proviso to sub-section (5) which of section 43, reads as under: “(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 scrips: Provided that for the purposes of this clause ……. [(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;] shall not be deemed to be a speculative transaction;

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Explanation--For the purposes of this clause, the expressions -- (i) ‘eligible transaction’ means any transaction - (A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 04 1992) in accordance with the provisions of the Securities contracts (Regulation) act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) an the rules, regulations or bye-laws made or directions issued Under those Acts or by banks or mutual funds on a recognized stock exchange, ……” 3.7. From the above, it is clear that speculative transaction does not include trading in derivatives if carried out electronically on screen-based system through a stock-broker or sub-broker or such other intermediary registered u/s 12 of the SEBI Act 1992. In the instant case, the derivative transactions are carried out by the appellant through the Standard Chartered Bank, which is an approved intermediary for carrying out the derivative transactions. The said Explanation was inserted by the Finance Act 2005 with effect from 1/4/2006. The decisions relied on by the AO are relating to the period prior to the introduction of the amendment and distinguish even or fact. Therefore, the loss suffered by the appellant on account of derivative transactions carried out by them cannot be categorized as speculative transaction in view of the said Explanation, which is applicable to the period under consideration. Hence, the AO is directed to allow the said loss as an allowable business loss.”

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as seen from Schedule 10 to Profit & Loss Account, the assessee had

indeed earned a profit in earlier year to an extent of Rs.56,17,976 which

was treated as business income. In view of that also, the stand taken by

the AO cannot be justified. Therefore, we do not find any merits in the

contentions raised by the revenue. Various case law on the issue also

support the assessee’s contentions which need not be reiterated here.

Suffice to say that foreign exchange transactions with various

intermediaries approved by RBI cannot be treated as speculative

transactions.

5.1 However, there are no details on record as to how the losses of

Rs.2,32,20,805 have been suffered by the assessee. The details are not

placed on record for verification of quantity of loss suffered. Therefore,

while accepting in principle that the loss is to be allowed as a business

loss, the AO is directed to examine the loss vis-à-vis transactions entered

into by the assessee and quantify the loss. It is also noticed that assessee

has filed the return admitting net loss of Rs.33,57,230 after setting off

income from other sources. However, in the amount to be carried forward,

the assessee has quantified the same at Rs.99,10,746 consisting of

business loss of Rs.24,55,202 and depreciation of Rs.74,55,544. We find

that the AO has not quantified the losses/ depreciation to be carried

forward. While giving effect to this order, AO is directed to examine the

loss suffered in the foreign exchange transactions and then directed to

quantify the losses to be carried forward along with any unabsorbed

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depreciation which is to be carried forward to next year, based on the record. With these directions, the revenue’s appeal is treated as dismissed.

Pronounced in the open court on this 16th day of March, 2016.

Sd/- Sd/- ( NARENDRA KUMAR CHOUDHURY ) ( B. RAMAKOTAIAH ) Judicial Member Accountant Member

Bangalore, Dated, the 16th March, 2016.

/D S/

Copy to:

By order

Assistant Registrar, ITAT, Bangalore.