DCIT, CIRCLE - 3, KOLKATA, KOLKATA vs. M/S. R. PIYARELALL IMPORT & EXPORT LTD., KOLKATA

First we shall take up the Revenue’s appeal and the Revenue raised the following grounds: “1. In the facts and circumstances of the case, the order of the CIT(A) is erroneous due to treating of the speculative loss of Rs.1,77,91,478/- as ‘business loss’, ignoring the fact that in course of assessment

The brief facts of the case are that the assessee is a company engaged in the business of import of foodgrains i.e rice, wheat, pulses etc... The return of income was filed on 30-11-2006 disclosing the total income of Rs.1,06,67,427/-. The assessment was completed under section 143(3) of the Act and the AO determined income at Rs.2,89,72,142/- for the year under consideration.

During the assessment proceedings, the AO found that the assessee had debited an amount of Rs. 1,77,91,478/- on account of loss from derivative transaction. The assessee submitted that it was a business loss, that in order to safe guard its business that it may face losses due to price fluctuations in future, the said transactions were carried out only on the items which dealt by it in the ordinary course of business. The AO observed the assessee also involved into another commodity transaction which s not in any way associated with its real business. The AO was of the view that the said separate transaction was not connected with the actual business activity and the proviso to sec. 43(5) of the Act is not applicable as it was a deliberate attempt by the assessee to show as a speculation loss under the garb of business loss without

As aggrieved above the assessee contended that it entered into different contracts to supply its goods in future for a price on the date of contract or to pay the difference by way of withdrawl of delivery of goods through registered broker i.e., national commodity and derivative exchange limited. The CIT-A found that the assessee was unable to supply its goods due to heavy rise in prices of commodities and to oblige its forward contracts the assessee had to pay damages for the breach of contarct and further opined that it is actual loss incurred by the assessee during its ordinary course of business and observation of which reproduced as under : I have gone through the assessment order and the arguments both written and verbal. However I find that the AO in course of assessment proceedings failed to apply his mind properly to the facts and circumstances with nature thereof the case and also failed to appreciate the relative documents furnished. Moreover it is crystal clear from the paper and the records filed that the appellant company entered into derivative transaction in order to guard against business loss in its huge holding of stocks through price fluctuations and in terms of the provision of sec43(5)(b) of the income tax it should not be deemed to be a speculative transaction. Considering the facts and circumstances of the case it is concluded that the claim of business loss amounting to Rs.1,77,91,478/- should be allowed. The AO is directed to give effect accordingly.

Before us regarding ground no.1 the learned DR submits that it is a case of difference of opinion between AO and CIT-A. Ground no.1 involves a point of speculative loss in nature as per AO in his order at page no.2. CIT-A by relying on some papers as discussed in its order at pg.15 were not available with AO. The learned DR also pointed out that the certificate issued therein which is placed at pg no.87 of the paper book is in general nature and a paper appears to be web generated

In reply the learned AR submits that all the details regarding the claim were produced before the AO and CIT-A which are at pg.no 48 to 60 in the paper book and no additional documents what so ever filed before the CIT-A. The AO having examined all the details found the assessee has involved separately commodity transaction having no connection with its actual business and proviso to sec43(5) of the Act is not applicable which is incorrect and based on presumption and relied on order of CIT-A.

Heard both sides and perused with all the relevant material available on the record. The question to be decided in this issue is as to whether the loss claimed by the assessee falls for consideration u/s 43(5)(b) of the Act or not. In this regard we may refer to the proviso (b) sub sec (5) of sec 43 of the Act.

A plain reading of sub sec (5) speaks that any stocks and shares settled without actual delivery or transfer of such commodity or scrips as the case may be under contract is a speculative transaction and proviso (b) to sub sec (5) of sec 43 of the Act, the benefit is provided to the dealer or the investor as the case may be to protect his business from any loss in future due to price fluctuations can be settled otherwise that by the actual delivery or transfer or scrips. In the present case the assessee involved in the export business having established in 1981 entered into contracts to supply its key products but however due to high rise in fluctuation of prices of its key products the assessee could not deliver its products to its purchaser under contract thereby it settled by way of paying damages to its purchasers. To support its case, the assessee filed statement of commodity of future transaction and physical stock placed at pg nos.48 to60 in paper book. During the course of the arguments the learned AR pointed that this documents detailing the physical stock were submitted before the AO and the CIT-A having examined the same gave relief to the assessee. The learned AR also pointed at page no.46 of paper book to show that the assessee incurred loss due to price fluctuation of item chana where it purchased for Rs. 1,672,500 /- on 7-2- 2006 and it sold the same item at price Rs.1,699,490/- on 9-2-2006. Thereby it shows to establish a loss of Rs.2,06,990/-. However, as rightly pointed out by the ld. D.R., it appears that the relevant details filed by the assessee and relied upon by the ld. CIT(A) were not available before the AO as there is no mention of the same in the assessment order. The onus to establish that his case is covered by the proviso to section 43(5) is on the assessee and he has to discharge the same by establishing the co-relation between the transactions in question and his regular business transactions so as to prove that the same are entered into to guard against loss in his holdings of 5

In view of the discussion and finding thereon in ground no-1, in our opinion, the adjudication of Ground no-2 is not necessary, therefore the same is dismissed.

Ground no-3 involving Rs.1,40,000/- as disallowed by the AO being 40% of Rs.7,10,738/- as claimed by the assessee towards computer maintenance. The assessee contended that it incurred said expenses for the purpose of business. The assessee also relied on the case laws in Southern Roadways Ltd reported in 288 ITR 15 (Mad) and Janakiram Mills Ltd reported in 275 ITR 403, But, however, the AO found that the case laws referred above are very old and the ratio therein can not be applied in the present case, but, relying on current guideline disallowed 40% and added to the income of the assessee. Before CIT-A, the AR contended that the assessee incurred said expenses for upgradation of software for improvement and to enable existing system to run efficiently and to keep peace with the latest technology and relied on case law in IBM India Ltd vs CIT reported in 105 ITD 1 (Bang) passed by the Tribunal of Bangalore Benches. After considering the submissions of the assessee, CIT-A deleted the addition made on account of disallowance at 40% against the claim of the assessee.

Heard both sides and perused with all the relevant material available on the record. We find that the assessee debited Rs.7,10,738/- to profit and loss a/c towards

The Bangalore 'B’ bench of Tribunal in the case of IBM INDIA LTD. vs. COMMISSIONER OF INCOME TAX reported in (2007) 105 ITD 0001, wherein the facts in the said decision are that the assessee therein acquired certain application software for a sum of Rs. 33,14,298 and claimed the same as revenue expenditure. The AO held that since these result in enduring benefit to the assessee, it is a capital expenditure and not revenue expenditure. CIT(A) held that in absence of any material to decide the lifespan of said software and also held that the depreciation on non- tangible asset is allowable under s. 32(1)(ii) implying that software which is an intangible asset can also be a capital asset and the same amounts to capital expenditure and not revenue expenditure. The Tribunal examined is as to whether the treatment of purchase of software amounting to Rs. 33,14,298 is a capital expenditure or a revenue expenditure and held as follows: 3.5 We have carefully considered the relevant facts, arguments advanced and the decisions cited. For determining the nature as to whether the expenses are capital or revenue, the same can be with regard to facts of each case, as no one test or principle or criteria is paramount or conclusive or of universal application. When expenditure is made not only once and for all but also with a view to bringing into existence an asset or an advantage for the enduring benefit, the same can be properly classified as capital expenditure. At the same time, even though the expenses are once and for all and may give an advantage for enduring benefit but is not with a view to bringing into existence any asset, the same cannot be always classified as capital expenditure. The test to be applied is, is it a part of company’s working expenses or is it expenditure laid out as a part of process of profit earning. Is it on the capital layout or is it an expenditure necessary for acquisition of property or of rights of a permanent character, possession of which is condition on carrying on a trade at all. Hon’ble Supreme Court in the case of Alembic Chemical Co. (supra) held that the concept of payment made ‘once and for all’ and of ‘enduring benefit’ must respond to the changing economic realities of the business. It is also observed that "once for all" payment 7

In the present case the assessee claimed Rs.7,10,738/- towards computer maintenance and contended that it incurred said expenses for the purpose of business for improvement and to enable existing system to run efficiently and to keep pace with the latest technology and the AO was of the view that the case laws relied on by the assessee in the case of CIT vs Southern Roadways Ltd reported in 288 ITR 15 (Mad) and CIT vs. Janakiram Mills Ltd (2005) 196 CTR (Mad) 551 : (2005) 275 ITR 403 (Mad) are very old and cannot be relied. Let us examine the case law in CIT vs Southern Roadways Ltd where question before the Hon’ble Court was that whether, on the facts and circumstances of the case, the Tribunal was right in holding that the expenditure incurred on the upgradation of software is revenue expenditure? The Hon’ble Court held that in view of the ratio laid down in CIT vs. Janakiram Mills Ltd (2005) 275 ITR (Mad), we hold that the expenditure on replacement of machinery is revenue expenditure and therefore, the Tribunal was right in allowing the claim of the

Heard both parties. It is noticed from the orders of both the lower authorities that the assessee could not produce the said certificates before the AO nor before the CIT-A in full and considering the submissions of the both the representatives, in the interest of justice, we remand the issue in C.O. to the file of AO with a direction to verify the certificate and to pass order in accordance with law. The assessee is at liberty to file all relevant details and documents that may be relied to claim the exemption U/s 80G of the Act. Accordingly, the sole issue raised by the assessee in its Cross Objection is allowed for statistical purposes.

In the result, the appeal filed by the Revenue is allowed partly for statistical purposes and the Cross Objection filed by the assessee is also allowed for statistical purposes. Order Pronounced in the Open Court on 27.05.2016