THE DCIT, CIRCLE 2(1), RAJKOT-GUJARAT vs. SMT MEENABEN H LAKHANI, RAJKOT-GUJARAT

Grounds of appeal raised by the Revenue are as under:

Ground No. 1 relates to addition of Rs. 1,47,94,267/- made on account of export sale commission under Section 40(a)(ia) of the Act as no TDS was made.

The assessee engaged in the business of Trading of Agricultural Products and exporting the same, following mercantile system of accounting filed its return of income at Rs. 2,25,31,360/- on 26.11.2014. The assessee claimed export sales brokerage amounting to Rs. 1,47,94,267/- details whereof were duly submitted by the Ld. AO wherefrom it appears that all these payments were made to the foreign entities as commission basis for procuring business to various foreign entities to whom these ITA Nos.229-234/Rjt/2017 DCIT vs. Smt. Meenaben H. Lakhani & Others Asst.Year – 2014-15, 2011-12 transactions have been entered into and sales whereof have been crystallized. No TDS have been made while making such payment to the foreign agents and finally the said Export Sales Brokerage (Commission) of Rs. 1,47,94,267/- wad disallowed under Section 40(a)(ia) of the Act and added to the total income of the assessee by the Ld. AO which was, in turn, deleted by the Ld. CIT(A). Hence, the instant appeal before us.

We have heard the respective parties and also perused the relevant materials available on record.

The case of the assessee is this that disallowance under Section 40(a)(ia) r.w.s. 194H would come into play only when the payers has not deducted the tax at source on the sum paid and credited in the account of the recipient. The taxability under the Act shall be governed only if the payee has permanent establishment in India. The specific case made out by the appellant that such commission has been made to the foreign parties for rendering services abroad in the nature of soliciting customers for its export business activities. Such agents have provided services for outside India and never came to India at the relevant previous year. Further that the commission was paid by the appellant since was not chargeable to tax in India, the appellant was not liable to deduct tax at source and, therefore the disallowance made is totally unjustified and rightly deleted by the Ld. CIT(A) as of the case made out by the appellant before us. On this aspect the appellant relied upon the judgment passed by the Coordinate Bench in ITA No. 508/Ahd/2016 in the matter of DCIT vs. Elitecore

On other hand, the Revenue’s case is this that in view of the Explanation 2 of Section 195(1) inserted vide Finance Act 2012 clarifies liability of deduction of tax ITA Nos.229-234/Rjt/2017 DCIT vs. Smt. Meenaben H. Lakhani & Others Asst.Year – 2014-15, 2011-12 mandatory extended to all persons, resident or non-resident. Since the assessee made payments for commission and has claimed deduction, the assessee was required to deduct tax at source on the amount of the said payment. However, since the assessee has failed to deduct at source on the commission payments as required under Section 194H the expenses in quashing are not allowable as business expenditure in view of the provision of Section 40(a)(ia) of the Act as the observation made by the Ld. AO while disallowing the claim.

Upon careful consideration of the order passed by both the authorities below and upon considering the submission made by the Ld. Counsel appearing for the assessee as also the submission made by the appellant before the authorities below we observe that the disallowance under Section 40(a)(ia) r.w.s. 194H can only take place when the payer has not deducted tax at source on the sum paid and/or credited in the account of her resident but in the instant case the Ld. AO himself has accepted that the impugned payment has been made to the non-resident agents by referring the provision of Section 195(1) of the Act. Even if, the assessee is liable to deduct tax at source on the commission paid that is to be deducted under Section 195(1) of the Act and not under Section 195H of the Act.

In fact, the question of deduction of tax will arise only if the element of income in the sum paid/credited is chargeable under the provisions of the Act. Thus, the first condition is that there must be an element of income/profits chargeable under the Act. Further that if the receipt in the hands of the payee non-resident entity is chargeable under the Act then and only then tax to be deducted. Whereas in the case of resident the element income/profit is already embodied in the payment and as such the prayer is bound to deduct the tax at source. In the present case the appellant has paid sales commission to overseas parties. Section 195 provides that unless the income is liable ITA Nos.229-234/Rjt/2017 DCIT vs. Smt. Meenaben H. Lakhani & Others Asst.Year – 2014-15, 2011-12

We find that while allowing the claim of the assessee the Ld. CIT(A) applied his mind and dealt with the statutory provision relating to this claim in the following manner:- “In the present case, the appellant had paid sales commission to overseas parties. Provisions of Section 195 of the Act clearly provides that, unless the income is liable to be taxed in India, there is no obligation to withhold tax. Further, the basic conditions under provisions of section 9 of the Act with respect to accruing or arising in India namely connection with the property in India and control and management vested in Indja^re-R0t satisfied in the present case. The commission was remitted directly to the agent abroad. Such non-resident agent was not liable to tax in India on these commission payments. Section 195 of the Act has to be read along with the charging sections 4, 5, and 9 of the Act, One should not read section 195 of the Act to mean that the moment there is a remittance, the obligation to deduct tax automatically arises. Section 195 of the Act clearly provides that unless the income is chargeable to tax in India, there is no obligation to withhold tax. In order to determine whether the income could be deemed to accrue or arise in India, section 9 of the Act is the basis. The non-resident agent of Indian exporter operates in his own country and no part of his income arises in India and commission is usually remitted directly to him. Therefore, the same is not received by him or on his behalf in India. If the contentions of the AO are to be taken as correct, that any person making payment to a non-resident is necessarily required to deduct tax, then the tax department would be entitled to appropriate the monies deposited by the payer even if sum paid is not chargeable to tax because, there is no provision in the Act by which a payer can obtain refund. Section 237 read with Section 199 of the Act implies that only the recipient of the sum i.e. the payee would seek a refund. Therefore also, no tax is deductible under section 195 of the Act on commission payments and consequently the expenditure on export commission payable to a non-resident for services rendered outside India becomes allowable expenditure-and the same is outside the purview of section 40(a)(ia) of the”

We have further considered the judgment passed by the Coordinate Bench in the matter of DCIT vs. Elitecore Technologies Pvt. Ltd. where it has been held that as commission income has no impact of taxability in the hands of commission agent as because admittedly no business operations were carried out in India the assessee has ITA Nos.229-234/Rjt/2017 DCIT vs. Smt. Meenaben H. Lakhani & Others Asst.Year – 2014-15, 2011-12 no obligation to deduct tax at source for such commission payment made to the non- resident agent. This particular judgment has also been considered by the Ld. CIT(A) alongwith the judgment passed by the Rajkot Bench in the matter of ACIT vs. Rimtex Industries in ITA No. 315/Rjt/2013. The judgment passed by the Hon’ble Apex Court in the matter of Ishikawajima Harima Heavy Industries Ltd., reported in (2008) 288 ITR 408 (SC) has also been considered in terms of which the twin test of rendering services by the non-resident in India and used in India has been held to be satisfied. Furthermore, the judgment passed in the matter of DCIT vs. M/s. DML Exim Pvt. Ltd. in ITA No. 27/Rjt/2016 has also been considered by the Ld. CIT(A). The order passed by the Coordinate Bench in the appeal preferred by the Revenue has been duly considered by us where the similar issue has been found to be decided in favour of the assessee. Thus, taking in to consideration the entire aspect of the matter we find that the services rendered by the payee in the case in hand is admitted outside India and cannot even be deemed to be rendered in India and thus the provision of Section 40(a)(ia) cannot be invoked as the payment not taxable in India. Thus, the deletion of addition made under Section 40(a)(ia) of the Act by the Ld. CIT(A) is found to be justified, without any ambiguity so as to warrant interference. Hence, this ground of appeal filed by the Revenue is disallowed.

Ground No. 2 relates to addition on account of disallowance of foreign exchange rate difference of Rs. 2,09,49,337/-.

Upon verification of the profit and loss account it is found that the assessee has debited exchange rate difference expenses at Rs. 2,09,49,337/-. While replying the issue the assessee by and under a letter dated 25.11.2016 submitted the following: “1) During the year under consideration there is loss of Rs. 2,09,49,337/- in foreign exchange rate difference. We are exporter, and to avoid any future loss/gain we are selling (Hedging) dollars to our bank Oriental Bank of Commerce, and later on as and when we export ITA Nos.229-234/Rjt/2017 DCIT vs. Smt. Meenaben H. Lakhani & Others Asst.Year – 2014-15, 2011-12

However, such explanation given by the assessee was not found acceptable. The dollar booking made in advance and not set off against dollar remittances arising from export cannot be hedging transaction. As there is booking in excess of the actual remittances accepted to be received and the same has been termed as speculative in nature. ITA Nos.229-234/Rjt/2017 DCIT vs. Smt. Meenaben H. Lakhani & Others Asst.Year – 2014-15, 2011-12

However, the Ld. DR has failed to controvert such submission made by the Ld. AO.

We have heard the respective parties, and also perused the relevant materials available on record.

We have further considered the judgment passed by the Coordinate Bench in the matter of DCIT vs. M/s. DML Exim Pvt. Ltd. in ITA No. 27/Rjt/2016. While deciding the issue in favour of the assessee the Coordinate Bench has been pleased to observe as follows: “During the course of assessment proceeding from the final accounts it was gathered that under the head administration / general expenses, the assessee has claimed other general administrative expenses at Rs. 1,21,09,315/-, the details whereof were also furnished before the authorities below. From the details it was further found that the general administrative expenses included the fluctuation in foreign currency at Rs. 46,28,828/- The assessee explained his claim before the AO which was accepted by the Ld. AO to the extent that the dollar bookings made in advance and set off against dollar remittances as hedging transaction. However, dollar bookings not set off against dollar remittances arising from exports has not been accepted to be framed as hedging by the Ld. AO as there is booking in excess of the actual remittance accepted to be receipt, which according to the Ld. AO falls under the scope and purview of speculation. He, therefore, added Rs. 46,28,828/- in respect of the claim of fluctuation in foreign exchange considering the same as speculation with a rider that assessee can set off his speculation loss against the speculation income as provided by the Act. In appeal the Ld. CIT(A) deleted such addition relying upon the judgment passed by the Juri ictional High Court in the case of CIT vs. Panchmahal Steel Ltd. Hence, the instant appeal before us.

At the time of hearing of the instant appeal the Ld. DR relied upon the order passed by the Ld. AO.

On the other hand, the Ld. Counsel appearing for the assessee submitted before us that the issue is squarely covered by the judgment passed by the Hon’ble Juri ictional High Court in ITA Nos.229-234/Rjt/2017 DCIT vs. Smt. Meenaben H. Lakhani & Others Asst.Year – 2014-15, 2011-12

We have heard the respective parties, we have also perused the relevant materials available on record including the orders passed by the authorities below. It appears that the assessee made the following submission before the Ld. AO:- “Normally when we confirm any export sale contract, to prevent any future loss due to change in exchange rates we book (hedge) dollars from our Banker Oriental Bank of Commerce where we have document discounting limits. Latter on we submit the documents for collection/discount against this dollar booking contracts. Firstly we only sales the dollars and never purchase dollars. After dollar booking we give sales documents for collection/discount. Before the expiry of the contract if we cannot submit the documents then the unutilized part of contract is settled by the bank. Thus the forward contracts done by us are only one sided and only for the purpose of hedging and not the purpose of doing any speculative gain or loss. Thus if we book dollar for latter period then we get more rate i.e. we get premium as per RBI & Banking premium rules. Similarly if we give the documents against future period of booking then the bank get back the premium of the same and this charges they debit to our account under the head of Forward Contract early delivery charges. Thus the forward contract early delivery charges paid by us are just return back of excess premium which we get at the time of booking of dollar. This amount is not at all speculative but it is routine practice and part and partial of the banking and export business transactions.” Though in spite of the same the AO termed the dollar bookings, which was not set off against the dollar remittance, as speculation and not hedging since there is booking in excess of the actual remittance accepted to be received. However, as we find from the records while allowing the claim of the assessee the Ld. CIT(A) observed as follows:- “7.2 I have perused the assessment order and the written submission filed by the ld. AR. The AO vide para 7 of the assessment order had held that the fluctuation in foreign currency arose on account of the dollar bookings by way of advance contracts entered into by assessee with the banks against which the realization of dollar at the time of export is adjusted and the extent of the unutilized dollar booked in advance by the assessee with the bank which remained outstanding at the end of the month, was closed by the bank by crediting/debiting the assessee’s account to the extent of the unused dollar left behind out of the dollar booking for want of export realization, is speculative I nature. According to the AO,this settlement is done on a month to month basis by the ban and there is no squaring up of transactions by way of actual realization of dollar. On the other hand, the ld. AR submitted that, in the appellant’s export business, there is always a risk of fluctuating foreign currency at the time of realization of sale proceeds. Therefore in order to hedge against the loss, the appellant enters into forward contracts with its bank and tries to minimize the risk on account of fluctuation in foreign exchange against the future export sales realization. It is also seen that, forward contracts are extensively ITA Nos.229-234/Rjt/2017 DCIT vs. Smt. Meenaben H. Lakhani & Others Asst.Year – 2014-15, 2011-12

The third ground is usual in nature and no order need be passed. ITA Nos.229-234/Rjt/2017 DCIT vs. Smt. Meenaben H. Lakhani & Others Asst.Year – 2014-15, 2011-12 ITA No. 231/Rjt/2017 (A.Y. 2011-12):-

Grounds of appeal are raised by the Revenue are as under:

Ground No.1 has already been decided by us in ITA No. 229/Rjt/2017 for A.Y. 2014-15 in Ground No. 1 therein. In the absence of any changed circumstances the same shall apply mutatis mutandis.

Ground No.2 relates to disallowance to the tune of Rs. 28,45,800/- on account of bad debts written off during the year.

The brief facts leading to the case is this that at the appellant paid the impugned amount as tender deposit for supply of sesame seeds to one Korea Agro Fisheries Trade Corporation which became non refundable as the appellant were constraint to back out from the execution of the agreement by allowing the said corporation to forfeit the impugned deposit for the particular reason that had the delivery been expected it would have caused heavy loss due to market situation. Since the assessee has not credited this amount as income in the relevant assessment year being in the nature of deposit, write off bad debt has not been found to be allowable under the provision of Section 36(2)(i) of the Act by the Ld. AO. However, the same was reversed by the First Appellate Authority in the appeal preferred by the appellant. Hence, the instant appeal before us. ITA Nos.229-234/Rjt/2017 DCIT vs. Smt. Meenaben H. Lakhani & Others Asst.Year – 2014-15, 2011-12

We have heard the respective parties, and also perused the relevant materials available on record.

It is a fact that this loss was booked in the accounts as business loss under the head ‘bad debts’ but is has submitted by the appellant that it is not bad debt instead it is purely a business loss which is allowable under the Act. Thus, such loss is not hit by sub-Section 2 of Section 36. Forfeiture of advance is a business loss and has direct nexus with the operation of the business it is incidental to business carried on. Further that, it was incurred in the character of the trade and during the ordinary course of business.

Now, in the first place, the Privy Council was not considering the case of a trading loss. The Privy Council was considering a specific allowance claimed under the provisions of section 10 (2) of the Income-tax Act, and even in deciding that the Privy Council felt difficulty, and were not made in the process of earning profits. They did not arise out of any transactions in the conduct of their business. That the assessees had to make those payments no doubt affected the eliminated yield in money to them for their business but the is not the statutory criterion. The obligation to make these payments was undertaken by the assessees in consideration of their acquisition of the right and opportunity to earn profits, that is, of the right of conduct the business, and not for the purpose of producing profits in the conduct of the business. Now, this according to Mr. Joshi is the criterion and the ratio. Assuming that is the criterion and the ratio, surely that is not applicable to the facts before us. How can it possible be said in this case that this deposit was made by the assessee in order to acquire the right to conduct the business and not for the purpose of producing profits in the conduct of the business ? The business was already being carried on by the assessee. This was a transaction in that business. It is in order to put through that transaction that the deposit was necessary.

The second case referred to by Mr. Joshi is Commissioner of Income-tax v. Motiram Nandram. In that case the assessees were carrying on business of cloth, yarn and money-lending and they wanted to start a new business and for that purpose they deposited with an oil company Rs. 50,000. In consideration of that the assessees were appointed organizing agents of the oil company for five years for a particular area. They were to recommend the selling agents and the sales were to be conducted by these selling agents, but the assesses were to receive certain commission on all goods sold by the selling agents within the area and also on all sales effected in the area by the company. The deposit was to yield interest at 7 per cent. Part of the deposit was repaid and then the company went into liquidation, and the assessees claimed the part of the deposit which was lost to them and that claim was rejected by the Privy Council. Now, in the first place, the Privy Council took the view that the deposit was made by the assessees for the purpose of being permitted to engage in a business and that must be considered to be a purpose of securing an enduring benefit of a capital nature. Therefore, on the facts of that case where the assessees were launching upon a new business and they could only start this business by making this deposit, the Privy Council observed that by making the deposit they were getting a capital asset of an enduring nature, the capital asset being the business. Mr. Joshi says that in this case ITA Nos.229-234/Rjt/2017 DCIT vs. Smt. Meenaben H. Lakhani & Others Asst.Year – 2014-15, 2011-12 also by making the deposit the assessee is obtaining a business. But that is not correct. It is true that under the Income-tax law even a single venture may be business, but his is not a case of a single venture. As we have pointed out before, it is in the course of the business which the assessee had been carrying on that it entered into this particular transaction. So this is neither a case of acquiring a new business, nor acquiring a joint nature. Further, at page 138 Sir George Rankin, who delivered the judgment of the Privy Council, points out that the deposit of Rs. 50,000 may be looked upon as a temporary investment because it yielded interest while it remained with the oil company. That feature is also absent in the case before us. Nobody can suggest that the deposit was made by the assessee as a temporary investment with the railway company. It was expressly made as an earnest; as security for carrying out the particular contract. Their Lordships also say that a deposit must be considered in relation to the Particular business, and when we look upon his deposit and the relation it has to the business of the assessee, it is clear that the deposit was made not for the purpose of acquiring any capital asset of an enduring nature or acquiring a new business, but it was made solely for the purpose of earning profits in the course of the business. The Privy Council also points out that the question that should be posed is - "what is the object of the expenditure ?" - and they proceed to answer that question by saying - "it must be answered from the stand-point of the assessee at the time the deposit was made." From the point of view of the assessee in this case there cannot be the slightest doubt that the deposit was looked upon as a business expenditure and if the deposit was forfeited it was a business loss.

The result is that we must answer the question submitted to us in the affirmative. The Commissioner to pay the costs.

Question answered in the affirmative.”

The third ground of appeal is usual in nature and no order need be passed.

Grounds of appeal are raised by the Revenue are as under:

Ground No. 1 relates to addition of Rs. 67,34,611/- made on account of contract cancellation charges. ITA Nos.229-234/Rjt/2017 DCIT vs. Smt. Meenaben H. Lakhani & Others Asst.Year – 2014-15, 2011-12

The assessee claimed expenses by way of contract cancellation charges to the tune of Rs. 67,34,611/-. The assessee is engaged in the business of export and trading of agricultural products. Both the buyer and the sellers used to enter into contract to deliver and accept the goods within a prescribed period of time and at certain rate too. In the event, the goods are not delivered within the prescribed time and on the mutually agreed rate the difference between the old purchase order amount and contract settlement amount is the contract cancellation charges. It is a general trade of business that delivery of some of the contracts is not done and settled as the case made out by the assessee.

We have heard the respective parties, and also perused the relevant materials available on record.

We have further considered the judgment passed by the Hon’ble Rajasthan High Court in the case of CIT vs. Sohanlal Kunwar & Sons where it has been held that payment made for non-fulfillment of contract was wholly and exclusively for the purpose of business and was in the interest of business and for commercial exigencies. Thus, the compensation paid for breach of contract without undertaking any business activity was a business loss and, therefore, allowable. We have further considered the ITA Nos.229-234/Rjt/2017 DCIT vs. Smt. Meenaben H. Lakhani & Others Asst.Year – 2014-15, 2011-12 judgment passed by the Hon’ble Gujarat High Court in the case of CIT vs. Panachand Khemchand and also the judgment passed by the Hon’ble Apex Court in the matter of CIT vs. Shantilal Pvt. Ltd. which are also in the same line.

In fact what is really settled by the award of such damages and their acceptance by the aggrieved party is the dispute between the parties. Section 43(5) speaks of a settlement of contract, and, consequently, when there is a breach of contract resulting in dispute between parties and culminating in award of damages as compensation by an arbitration award, the transaction cannot be treated as ‘speculative transaction’ within the meaning of Section 43(5). Therefore, the loss incurred was not a loss incurred in a speculative transaction. We find that Ld. CIT(A) upon due application of mind considering the entire aspect of the matter and the judgment passed by different judicial forum has deleted the addition holding the same as business loss and not a loss of speculative nature which in our considered opinion is just and proper so as to warrant interference. Thus, this ground of appeal preferred by Revenue is devoid of any merit and hence dismissed.

Ground No.2 has already been decided by us in ITA No. 229/Rjt/2017 for A.Y. 2014-15 in Ground No. 1 therein. In the absence of any changed circumstances the same shall apply mutatis mutandis.

Ground No.3 has already been decided by us in ITA No. 229/Rjt/2017 for A.Y. 2014-15 in Ground No. 2 therein. In the absence of any changed circumstances the same shall apply mutatis mutandis.

The fourth ground of appeal is usual in nature and no order need be passed. ITA Nos.229-234/Rjt/2017 DCIT vs. Smt. Meenaben H. Lakhani & Others Asst.Year – 2014-15, 2011-12

Grounds of appeal are raised by the Revenue are as under:

Ground No.1 has already been decided by us in ITA No. 230/Rjt/2017 for A.Y. 2014-15 in Ground No. 1 therein. In the absence of any changed circumstances the same shall apply mutatis mutandis.

Ground No.2 has already been decided by us in ITA No. 229/Rjt/2017 for A.Y. 2014-15 in Ground No. 1 therein. In the absence of any changed circumstances the same shall apply mutatis mutandis.

Ground No.3 has already been decided by us in ITA No. 229/Rjt/2017 for A.Y. 2014-15 in Ground No. 2 therein. In the absence of any changed circumstances the same shall apply mutatis mutandis.

The fourth ground of appeal is usual in nature and no order need be passed. ITA Nos.229-234/Rjt/2017 DCIT vs. Smt. Meenaben H. Lakhani & Others Asst.Year – 2014-15, 2011-12

Grounds of appeal are raised by the Revenue are as under:

Ground No.1 has already been decided by us in ITA No. 230/Rjt/2017 for A.Y. 2014-15 in Ground No. 1 therein. In the absence of any changed circumstances the same shall apply mutatis mutandis.

Ground No.2 has already been decided by us in ITA No. 229/Rjt/2017 for A.Y. 2014-15 in Ground No. 1 therein. In the absence of any changed circumstances the same shall apply mutatis mutandis.

Ground No.3 has already been decided by us in ITA No. 229/Rjt/2017 for A.Y. 2014-15 in Ground No. 2 therein. In the absence of any changed circumstances the same shall apply mutatis mutandis.

The fourth ground of appeal is usual in nature and no order need be passed. ITA Nos.229-234/Rjt/2017 DCIT vs. Smt. Meenaben H. Lakhani & Others Asst.Year – 2014-15, 2011-12

Grounds of appeal are raised by the Revenue are as under:

Ground No.1 has already been decided by us in ITA No. 229/Rjt/2017 for A.Y. 2014-15 in Ground No. 1 therein. In the absence of any changed circumstances the same shall apply mutatis mutandis.

Ground No.2 has already been decided by us in ITA No. 229/Rjt/2017 for A.Y. 2014-15 in Ground No. 2 therein. In the absence of any changed circumstances the same shall apply mutatis mutandis.

The third ground of appeal is usual in nature and no order need be passed.

In the combined result, the appeals preferred by the Revenue in ITA Nos. 229- 234/R/2017 are dismissed.

""यथ" / The Respondent. 3. संबं"धत आयकर आयु"त / Concerned CIT 4. आयकर आयु"त(अपील) / The CIT(A).

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