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Income Tax Appellate Tribunal, MUMBAI BENCH “D”, MUMBAI
Before: SHRI D. KARUNAKARA RAO (AM) & SHRI RAM LAL NEGI (JM)
The present appeal filed by the assessee is directed against the order of CIT(A)-41, Mumbai dated 10.10.2011 which pertains to the assessment year 2008-09.
Brief facts of the case are that appellant firm is engaged in the business of diamond export and manufacturing of jewellery. The appellant filed its return of income for the assessment year 2008-09 declaring loss of Rs. 16,75,756/-.During assessment proceeding the AO disallowed deduction of Rs. 2,16,72,286/-, i.e.,gain on foreign exchange refund of customer’s advances, made under section 10AA of the Act, treating the same as income from other sources and assessed the income at 1,69,32,860/-
The assessee challenged the assessment order by filing appeal before the CIT(A) inter alia on the ground that the AO has wrongly disallowed the deduction under section 10AA of the Act on gain on Exchange difference on 2 M/s Diamonds ‘R’ US refund of customer advance received by the assessee during the relevant period. In the normal course of business, assessee receives advances from the customers abroad at the time of booking of order for supplying of jewellery.
The Ld. CIT(A) after hearing the assessee allowed other grounds of appeal, however, dismissed the aforesaid ground holding that “.... the AO has rightly treated the income of Rs. 2,16,72,278/-shown under the head ‘Exchange difference on refund of customer advance’ as income from the other sources and has rightly disallowed the exemption u/s 10AA of the I.T.Act.”
5. Aggrieved by the impugned order passed by the Ld. CIT(A), the appellant/assessee is in appeal before this tribunal. The assessee has challenged the impugned order on the following effective grounds:
1. On facts and in law, the learned ClT(A) had failed to appreciate that fluctuation in exchange difference was on account of the refund of customer advance in Asstt. Year 2008-09 is similar in nature as in Asstt. Years 2005- 06 & 2006-07. Under the facts and circumstances of the matter, he ought to have directed the Assessing Officer to tax the same as "Business Income".
2. On facts and in law, the learned ClT(A) had erred in not allowing the deduction u/s. 1OAA on gain of exchange difference on refund of customer advance of Rs.2,16,72,286/- u/s.10AA of the I.T. Act. Under the facts and circumstances of the matter, he ought to have allowed deduction u/s 10AA amounting to Rs.2,16,72,286/-.”
6. Before us the Ld. Counsel for the assessee submitted that the foreign buyers from whom the assessee had received advances against the supply of goods to them are regular foreign buyers of the assessee like one in the earlier years. The assessee had been supplying goods to them against such advances. The assessee firm followed method of accounting under which any difference arising on account of the foreign exchange rate fluctuation in respect of such advances from foreign buyers is shown in the profit and loss account. This method of accounting has been followed by the assessee regularly and consistently. In the Asst. Year 2006-07 and 2007-08 also exchange loss on customer advance claimed by the assessee amounting to 3 M/s Diamonds ‘R’ US Rs. 30,78,862/- and Rs. 64,41,673/- respectively were rejected by the AO on the ground that same does not form part of business activity. However, the CIT(A) set aside the assessment orders holding that the exchange loss is the part of business expenditure. The ITAT has dismissed the department’s appeal, against the order of CIT (A) for the Asst year 2007-08 ITA No.2090/M/2011, dated 2.1.2012. Further, ITAT allowed assessee’s claim for AY 2006-2007 vide its order ITA No. 5031/M/2009, dated 24.11.2010. So far as second ground is concern the Ld. Counsel argued that since the refund of customer advance in question comes within the preview of the business income as per the settled law, the assessee is eligible for exemption u/s 10AA of the Act.
7. On the other hand the Ld. DR having relied upon the finding of AO and Ld. CIT(A) submitted that there is no merit in the present appeal and the same may be dismissed.
We have heard the rival contentions and gone through the record made available before us in the light of contentions of the parties. The Co-ordinate bench of ITAT, Mumbai has decided the identical issue in favour of the assessee in assessee’s own case for the A.Y. 2006-07 holding as under: "7. Having given our careful consideration to the rival submissions and having perused he material on record, we are of the considered view that so far as the exchange loss on refund of advances received from the customers is concerned, the same indeed constitutes admissible deduction irrespective of whether or not he amounts so received were; diverted to use by partners. It is so for the elementary reason that the proximate cost of loss having been incurred is receipt of advances from the customers and refunding the same - an exercise which is clearly in the course of normal business operations. As the Id. counsel for the assessee very appropriately puts it, the deduction for exchange loss cannot 'be influenced by the usage of funds received in respect of which loss has been incurred because unlike in the case of interest on borrowings which requires related funds being used for the purposes of business, the exchange loss on refund of business advances has no such usage requirements. As long as the moneys are received in the course of business and as long as the moneys are refunded in the course of business, exchange loss on the same will constitute 'an admissible expenditure being incidental to the business operations. In, other words, it is a fact of receiving and refunding the advances which is required to be for the purpose of business rather than the use of funds so received and subsequently refunded. “for the purpose of business”. The requirement of sec. 37 thus ends with transactions for the purposes of business and it is not essential that the funds received during the course of such transactions must also be used for the purposes of business. It is important to bear in mind that the loss which is claimed as deduction is in the course of the business operations
4 M/s Diamonds ‘R’ US and is not in the nature of cost of funds and for this reason the use of fund is not really relevant for the purpose of deciding deductibility of such loss. In view of this discussion, we uphold the stand of the CIT(A) and decline to interfere in the matter.”
In the assessment year 2006-07, the assessee had received refunds of advances from the customers abroad. In that year there was loss and the tax liability of such loss was the issue before the Tribunal. Considering the trading nature of the said advances, which was done in the normal course of business activity, the Tribunal came to the conclusion that it was an admissible business loss. We find, ITAT allowed the similar claim of the assessee for AY 2007-08 and para 6 of the order of the ITAT for the AY 2007-2008 is relevant and the same is extracted as under:- “6. We see no reasons to take any other view f the matter than the view taken by the coordinate bench in assessee’s own case for immediately preceding year and which has only been followed by the CIT (A). In our considered view, therefore, CIT (A) was quite justified in following Tribunal’s order. We approve the action and decline to interfere in the matter.”
In the present case it happened to be a foreign exchange gain and the attempt of the Ld. CIT(A) in distinguishing the facts in the impugned order is not appreciated. Moreover, the revenue has not made out a case to demonstrate that the refunds in question had no connection with the trading activities. Therefore, in our considered view, the ratio laid down by the Tribunal in the assessee’s own case for the assessment year 2006-07 is applicable to the issue raised in ground No 1 of the of the assessee. Hence, applying the ratio laid down by the Tribunal in aforesaid case, we allow Ground No 1 of appeal of the assessee.
So far as Ground No 2 of the appeal is concerned, the co-ordinate bench of Mumbai Tribunal has decided the similar issue in favour of the assessee in M/s Jewel Art vs. ITO in for the A.Y. 2008-09. In the said case the assessee was an exporter of diamond jewellery and the earning of interest income the fixed deposits kept with the banks by way of margin money for the purpose of assessee’s business. The dispute arose as to whether the income earned by way of interest on FD kept as Margin Money constitutes a business receipts eligible for exemption u/s 5 M/s Diamonds ‘R’ US 10A of the Act. The ITAT relying on various decisions and judicial pronouncements decided the issue in favour of the assessee holding as under:- “6. Considering the above settled nature of the issue, we are of the opinion that the said interest receipts constitute business receipts and are eligible for deduction under section 10A of the Act. Accordingly, the grounds raised by the assessee are allowed.”
Relying on the aforesaid decision of the Tribunal, the Ld. Counsel for the assessee submitted that since the impugned gain has also been accrued from the normal business activities of the assessee and therefore, the same is eligible for exemption under section 10AA of the Act. We have already decided the first ground of appeal in favour of the assessee holding the gain of exchange difference on refund of customer advance of Rs.2,16,72,286/ as the business income of the assessee. Hence, considering the homology of the said gain with the interest receipts, we hold that assessee is eligible for exemption of Rs.2,16,72,286/-u/s.10AA of the Act. We, therefore, allow the second ground of the appeal of the assessee. Accordingly the impugned order passed by the Ld. CIT(A) is set aside.
In the result, appeal of the assessee for the A.Y. 2008-09 is allowed. Order pronounced in open court on 4th February, 2016