Income Tax Appellate Tribunal - Mumbai
Vishindas Holaram, Mumbai vs Department Of Income Tax on 7 July, 2011
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH 'K' MUMBAI
BEFORE J. SUDHAKAR REDDY (AM) AND
SMT. ASHA VIJAYARAGHAVAN (JM)
ITA No. 628/Mum/2007
Assessment year- 2003-04
The DCIT
Matru Mandir, 2nd floor,
R.No.206, Tardeo Road,
Mumbai-400 007
Vs.
M/s. Vishindas Holaram
102, Prasad Chambers,
Opera House,
Mumbai-400 004
(Appellant)
(Respondent)
Appellant by :
Ms. Kusum Ingale
Respondent by:
None
Date of Hearing :7.07.2011
Date of Pronouncement :
O R D E R
PER ASHA VIJAYARAGHAVAN (JM) This appeal preferred by the Revenue is directed against the order dated 13.11.2006 passed by the Ld. CIT(A)-XVII, Mumbai for the Assessment Year 2003-04.
2. None appeared on behalf of the assessee therefore we heard the Ld. Departmental Representative and dispose of this matter ex parte on merit.
3. The facts in brief are that the assessee is in the manufacturing exports of diamonds. As regards exchange gains the assessee has credited the net exchange difference of Rs.48,11,042/-. The said exchange difference is worked out as a continuous process from year to year and (I) providing for the closing bank rate on Sundry Debtors outstanding as on 1.4.2002 and further taking into consideration the actual realized value received as per the bank rate on the day of realization and the difference between the two is accounted for accordingly in keeping with the accounting norms and in conformity with accounting standards as provided under AS-11 issued by the institute of Chartered Accountants of India. There is no deviation from the practice followed in earlier years and therefore any other formula suggested other than the accounting method approved by the Institute will have to accommodate the adjustments of the previous year and so on every year including the adjustment of the next year which itself shall be tedious as well as not practical under the facts and circumstances of the case.
4. As regards Rough Rejection Diamonds, the assessee has exported rough rejection diamonds of Rs.2,53,83,784/- which have been considered for deduction u/s.80HHC relying on the decision of Premier Diamonds v/s. Asstt. Comm. of Income Tax (2001) 116 Taxman 273 (Mum) (Mag) (SMC)
5. As regards Exchange Difference Gain on Forward Contract Cancellation, the assessee has received forward contract cancellation difference of Rs.1,73,41,980/- which is included in the profit while calculating the deduction u/s.80HHC.
6. As regards export / total turnover, the export / total turnover is worked out differently and the same requires to be calculated in the light of provisions of the I.T. Act, 1961, as taken by the assessee.
7. As Regards Interest Income earned on Fixed Deposits with Banks, that the interest income earned by the assessee of the order of Rs.10,77,621/- from the Bank Fixed Deposits is already shown as income from other sources and offered for taxation as per the law.
8. With respect to Exchange rate difference of earlier years the AO has reduced the exchange difference gain of Rs.48,11,042/- from the export turnover for the purpose of computation of deduction u/s.80HHC by applying provisions of rule 115. The appellant has argued that the AO is not correct in reducing the exchange gain of Rs.48,11,042/- and has requested for allowing deduction u/s.80HHC on the exchange difference gain."
9. The Ld. CIT(A) relying on the decision of the ITAT in the case Kiran Exports in ITA No.2604/Mum/2005, 'E' Bench and also on the decision of the ITAT in the case M/s. M. B. Mehta & Co. in ITA No.460/Mum/04 by order dated 27.06.2006 directed the AO to allow the deduction u/s.80HHC for the A.Y. 2003-04. It is on the exchange difference gains relates during the year. Aggrieved the department has raised the first ground of appeal which is as follows :-
"1. That the learned CIT(A) has erred in law and on facts in directing the AO to include Rs.48,11,042/- being foreign exchange gain of earlier years as part of export turnover for the purpose of allowing deduction u/s.80HHC of the I.T. Act that the Hon'ble CIT(A) erred in not following ITAT's decision in the case of M/s. Kiran Exports for A.Y. 2002-03 in ITA No.2604/M/2005 dated 28.04.2006 wherein the Hon'ble ITAT has held at Page 7 as under:
"Hence, export sales proceeds received before the end of the previous year or within six months or extended period as the competent authority may allow will relate back and required to be included in "Export Turnover" in the year in which goods were exported. Similarly, in case if there is any exchange rate gain difference again, the same will also relate back and required to be included in the "export turnover" in the year in which goods were exported."
The decision of the Hon'ble CIT(A) which is inconsistent with decision of ITAT in the case of M/s. Kiran Exports cited supra.
Further, the Hon'ble Jurisdictional High Court in the case of Shah Brothers vs. CIT 259 ITR 741 (Bom) has similarly held as follows on page 743 (Para D).
"Now in the present case, the assesse effected export sales during the assessment year 1995-96. The assessee received incentives during the subsequent assessment year 1996-97. However, during the assessment year 1996-97, the assessee did not effect any export sales. Therefore, for the assessment year 1996-97, the assessee could not have claimed the deduction because, there were no export earnings during the year."
10. The Ld. Departmental Representative Ms. Kusum Ingale relied on the decision in the case of CIT Vs Shah Originals 327 ITR 19 wherein it has been held as follows:
"Allowing the appeal, that the proceeds of the EEFC account were to be utilized for bona fide payments by the account holder subject to the limits and the conditions prescribed. An assessee who was an exporter was not under an obligation of law to maintain the export proceeds in the EEFC account but this was a facility which was made available by the Reserve Bank. The transaction of export was complete in all respects upon the repatriation of the proceeds. It lies within the discretion of the exporter as to whether the export proceeds should be received in a rupee equivalent in entirety or whether a portion should be maintained in convertible foreign exchange in the EEFC account. The exchange fluctuation in the EEFC account arises after the completion of the export activity and does not bear a proximate and direct nexus with the export transaction so as to fall within the expression "derived" by the assessee in sub-section (1) of section 80HHC. Both the Assessing Officer and the Commissioner (Appeals) had noted that the exchange fluctuation arose subsequent to the transaction of export. In other words, the exchange fluctuation was not on account of a delayed realization of export proceeds. The deposit of the receipts in the EEFC account and the exchange fluctuation which had arisen therefrom could not be regarded as being part of the profits derived by the assessee from the export of goods or merchandise. The interest which had arisen as a result of the deposits maintained in the EEFC account could similarly not be regarded as representing the business income of the assessee. The business of the assessee consists of the manufacture and export of garments. The interest income which was generated from the deposits held in the EEFC account would not fall for classification as income under the head of business and profession but would fall for classification as income from other sources. The interest which accrued to the assessee on the deposits held in the EEFC account could not be treated as business income."
Respectfully following decision of the Jurisdictional High Court, we allow the revenue's appeal on this issue.
12. The second issue is with respect to interest income considered as income from other source amounting to Rs.10,77,671/-, the ground of appeal no. 2 is as under :-
"2. That the Learned CIT(A) has erred in law and on facts in directing the AO to treat the interest income received of Rs.10,77,621/- on FDR as a part of business ignoring the following Court decision including that the Apex Court holding that interest from FDR is assessable as 'income from other source'.
South India Shipping Corpn. Ltd. vs. CIT - 240 ITR 24 (Mad.) Tuticorin Alkali Chemicals and Fertilizers Ltd. vs. CIT (1997) 227 ITR 172 (SC) CIT vs. K.K. Doshi & Co. 245 ITR 849 (Bom.) M/s. Vintex Enginerring Export Pvt. Ltd. (A.Y. 1991-92) ITA No. 1640/M/98 dated 05.10.2000 (Mumbai Tribunal) ITO vs. M/s. Transpo International Works - ITA No.1170/M/2001 dated 26.09.2001 (Mumbai Tribunal) And also Hon'ble Supreme Court in the case of CIT vs. DR. V.P. Gopinath (248 ITR 449) wherein the Hon'ble Supreme Court observed that the limit on loan taken from the bank did not reduce the amount paid by way of interest on fixed deposits.
Further, the Hon'ble Punjab and Haryana High Court in the judgement dated 07.10.2003 in the case of Rani Paliwal vs. CIT 268 ITR 221 held that the amount of interest paid by the assessee could not be deducted from gross interest received by the assessee for the computation of 80HHC (purpose)."
13. The Ld. CIT(A) held as follows :-
"The Hon'ble Bombay High Court has held that interest on F.D. etc. could be regarded as income from business in the case of CIT vs. Indo Swiss Jewels Ltd. & Another reported in 284 ItR 389. The Hon'ble Madras High Court in the case of CIT vs. V. Chinnapandi (282 ITR 389) has held that the deduction of the gross interest is correct and no netting is permissible. Following the above two judgements the AO is directed to consider interest as business income following the Hon'ble Bombay High Court judgment and after that following the Hon'ble Madras High Court judgement, 90% of the gross interest is to be reduced as per Explanation (baa) to sec.80HHC. Also, in the case of Rani Paliwal vs. CIT reported in 268 ITR 220 the Hon'ble Punjab & Haryana High Court has confirmed the view of Hon'ble Madras High Court. Though the Hon'ble Mumbai Tribunal has held that where there is nexus between interest payments and interest receipts the netting is permissible, since 2 High Courts have held that no netting is permissible their decision is followed in giving this direction."
14. However, we find from the statement of facts filed before the Ld. CIT(A) that the interest income earned by the assessee amounting to Rs.10,77,621/- from the bank, fixed deposit has been already shown as "Income other sources" and offered for taxation as per law by the assessee. Under these circumstances, we confirm the order of the Ld. CIT(A). We hold that the interest income is to be considered as "Income from other sources" and further no netting is permissible, as there is no nexus between interest payments and interest receipts.
15. The ground of appeal No. 3 by the Revenue reads as under :-
"3. That the Learned CIT(A) has erred in law and on facts in directing the Assessing Officer to treat the income on account of cancellation of forward contract amounting to Rs.1,73,41,980/- as business income without appreciating the Provisions of Section 43(5) of the I.T. Act under which the said income was assessable as speculative income as held by the A.O. The decision relied upon the Learned CIT(A) in the case of Badridas Garidu (261 ITR 256) is not accepted by the Department and SLP is being filed."
16. The AO took out the gain arising out of the forward contract cancellation amounting to Rs.1,73,41,980/- from the profits of the business holding that the same was "speculative gain". The AO has further held that the appellant's case does not come under the exceptions provided under the provisions of (a),(b) & (c) of sec.43(5).
17. The assessee on the other hand has argued that sec.43(5) is not applicable to the facts of the case as according to the provisions of sec.43(5) only a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares (Emphasis supplied), is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scripts can be regarded as speculative transaction. Here, in this case the dollar is neither a commodity nor stock nor share and hence it does not come under any of the three definitions being commodity, stocks or shares and sec.43(5) is not at all applicable to the facts of the case, it was argued. It was argued that it is not an inclusive definition but an exhaustive definition since it starts with the words "speculative transaction" means' (Exphasis supplied).
18. It was further argued that the Hon'ble Bombay High Court in the case of CIT vs. Badridas Gauridu (P) Ltd. reported in 261 ITR 256 has held that forward contracts with banks in foreign exchange in the case of export of cotton is not speculative transaction and it was held that such a loss was deductible as business loss. In their case it was 'diamond' instead of 'cotton' but for the same the facts are exactly the same and hence the above income should have been treated as part of the business income/business loss and not as speculation income/speculation loss. It was also argued that in the case of D. Kishorekumar & Co. vs. DCIT, the Hon'ble ITAT 'H' Bench in ITA No.3883/Mum/97 for A.Y 1993-94 in its order dt. 31.3.05 has held that the income earned from cancellation of forward contract is part of the business income in the case of a diamond exporter. Accordingly, it was claimed that the AO was not correct in treating the same as speculative income.
19. The Ld. CIT(A) concluded that the Hon'ble Calcutta High Court in the case of CIT(C), Calcutta vs. Surajmal Nagarmal reported in 129 ITR 169 under similar circumstances, in the case of a jute importer and exporter has held that income earned /losses incurred in forward transaction is not speculation income / loss. Since all the conditions as prescribed by the Hon'ble Bombay High Court in the case of Badridas Garidu (261 ITR 256) are satisfied, the appellant's earning of income / incurring loss by cancellation of forward contract cannot be regarded as earning of 'speculation income'/incurring 'speculation loss'. In view of the above facts and since income was earned / losses were incurred on cancellation of the above contracts the income is not held to be speculative income/losses are not held to be 'speculative losses'. Also, in view of the above judgment of the Hon'ble Bombay High Court in the case of CIT vs. Badridas Gaurida (P) Ltd. reported in 261 ITR 256 as also in view of the Hon'ble ITAT judgement in the case of D. Kishorekumar & Co. in ITA No.3883/Mum/97 dt. 31.03.2003 it is held that the above income shall be regarded as part of the business income and deduction u/s.80HHC shall be re-computed accordingly. However, the exchange rate difference earned out of forward contract cancellation is to be regarded as part of total turnover but not as part of export turnover while working out deduction u/s.80HHC.
20. The Hon'ble Bombay High Court in the case of CIT vs. Badridas Gauridu (261 ITR 256) held as under :-
"Held, dismissing the appeal, that the assessee was not a dealer in foreign exchange. The assessee was an exporter of cotton. In order to hedge against losses, the assessee had booked the foreign exchange in the forward market with the bank. However, the export contracts entered into by the assessee for export of cotton in some cases failed. In the circumstances, the assessee was entitled to claim deduction in respect of Rs.13.50 lakhs as a business loss."
21. We find that in the appellant's case all the conditions as held in Badridas Gauridu are satisfied.
The appellant is not a dealer in foreign exchange.
The appellant is a diamond exporter.
The appellant is an export house.
Foreign exchange contracts booked were only incidental to the appellant's regular course of business.
Foreign exchange was booked against standing export orders/import liabilities.
Transactions were done with the permission of the RBI.
The contracts were booked in the forward market in order to 'hedge' against possible losses occurring in view of currency fluctuation.
The contracts were entered either to reduce the 'increase in cost of imports' or 'decrease in receipts of export proceeds' in view of fluctuation.
Each forward contract was either in respect of specific export order on hand or on respect of liabilities on account of imports.
The decision as to whether further hedging against the increase in foreign currency is warranted or not, is essentially commercial decision.
22. Therefore, the departmental ground is dismissed and the AO is directed to recompute the deduction u/s.80HHC by inter alia not excluding 90% profit related on cancelation of forward exchange contract. However while working out the deduction u/s.80HHC, the exchange rate difference earned out of forward contract cancellation is to be regarded as part of total turnover but not as part of export turnover while working out deduction u/s.80HHC.
23. The forth issue is with respect to export of rough rejection diamonds. Which reads as under :-
"4. That the Learned CIT(A) has erred in law and on facts in directing the AO to treat to exclude the re-export of rough diamonds amounting to Rs.2,53,83,784/- from the total turnover i.e. to maintain parity between numerator and denominator without appreciating the fact that the definition of the total turnover as per the Provisions of Sec.80HHC clearly includes the export sales of rough rejection diamond or any other sale receipt of the assessee."
24. The Ld. CIT(A) has relied on the decision in the case of M/s. Sheetal Manufacturing Co. vs. ITO for A.Y. 1998-99 in ITA NO.1143/Mum/02 of the 'A' Bench and held that deduction of the value of the export of rough rejected diamonds from the cost of purchase of rough diamond is held to be correct and the AO is directed to recompute the deduction accordingly. Apart from reducing the above sum from total export, turnover shall also be reduced from the total turnover.
25. We find the issue is covered by the decision of the Tribunal in the ase of M/s. Classic Diamonds (75 ITD 245). Therefore based on the Hon'ble Tribunal's judgement in the case of M/s. Classic Diamonds (75 ITD 245) and CBDT circular No.178, the A.O.'s action is justified to the extent that it cannot be regarded as part of the export turnover for the purposes of deduction u/s.80HHC as only the goods/merchandise which are covered as per 12th schedule can only be considered. Since rough rejection diamonds are not covered as per 12th schedule, A.O.'s order is correct to that extent. But in this case deduction of the export proceeds of the rough diamonds from the purchase cost can be accepted since out of total turnover of Rs.322.52 crores only Rs.2.53 crores worth of rough diamonds were rejected and exported back. This constitutes only 0.78% of the total turnover. The diamonds which are incapable of further processing are being sold by the assessee i.e. the same are being sold in unfinished from. Hence we are of the view that the same is to be reduced from the cost of purchases of rough diamonds. Accordingly we direct the AO to exclude the same from total turnover as well i.e. to maintain parity between numerator and denominator in view of the decision of the Jurisdictional High Court in the case of Kantilal Chotalal reported in 246 ITR 439.
Respectfully following the same, we dismiss this ground of Revenue.
26. In the result, the appeal filed by the Revenue is partly allowed.
Order pronounced on this 12th day of August, 2011 Sd/- Sd/-
( J. SUDHAKAR REDDY) (ASHA VIJAYARAGHAVAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated :12th August, 2011
RJ
Copy forwarded to :
The Appellant,
The Respondent,
The C.I.T.
CIT (A)
The DR, K - Bench, ITAT, Mumbai
//True Copy//
BY ORDER
ASSISTANT REGISTRAR
ITAT, Mumbai Benches, Mumbai
Date
Initials
Draft dictated on
02/08/2011
Draft placed before the author
03/08/2011
Draft proposed and placed before the second Member AM/JM
Draft discussed/approved by Second Member AM/JM
Approved Draft comes to the Sr. PS
Kept for pronouncement on.
File sent to the Bench Clerk
Date on which file goes to the Head Clerk
Date on which file goes to the AR
Date of dispatch
PAGE \* MERGEFORMAT 11
ITA No. 628/Mum/2007
M/s. Vishindas Holaram