Income Tax Appellate Tribunal - Delhi
Lal Mahal Ltd., New Delhi vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'G' DELHI
BEFORE SHRI C.L. SETHI AND SHRI K.G. BANSAL
I.T.A. No. 3804(Del)/2010
Assessment year: 2007-08
Shri Lal Mahal Ltd. (Formerly Joint Commissioner of
Known as Shiv Nath Rai Harnarayan Vs. Income-tax, Range-8,
(I) Ltd.) B-16, Bhagwan Dass Nagar, New Delhi.
New Delhi.
(Appellant) (Respondent)
Appellant by : Shri R.S. Singhvi, C.A.
Respondent by : Shri Gajanan Meena, CIT-DR
ORDER
PER K.G. BANSAL : AM The assessee has taken up seven substantive grounds in the appeal. Ground nos. 1, 3 and 4 are in respect of rejection of additional evidence by the ld. CIT(Appeals), disallowance of commission charges of Rs. 59,87,221/- and business promotion expenses of Rs. 11,18,756/-. These grounds read as under:-
"1(i) That on the facts and circumstances of the case, the CIT(A) was not justified in not accepting various additional evidence furnished in accordance with rule 46A of the Income-tax Rules.2 ITA No. 3804(Del)/2010
(ii) That finding and conclusion of the CIT(A) relating to issue of additional evidence is illegal, arbitrary, misconceived and without appreciating facts and circumstances of the case or application of mind.
3(i) That on the facts and circumstances of the case, the CIT(A) was not justified in confirming disallowance of commission charges to the extent of Rs. 59,87,221/-.
(ii) That the entire claim of commission is for the purpose of business and same is fully supported and established on the basis of evidence and explanation on record.
4(i) That on the facts and circumstances of the case, CIT(A) is not justified in confirming disallowance of business promotion expenses to the extent of Rs. 11,18,756/-
(ii) That the claim being for the genuine and bonafide needs of the business and claim is fully supported on the basis of details furnished before the lower authorities.
(iii) That the disallowance of the claim by the lower authorities is not sustainable on the facts and under the law."
1.1 The case of the ld. counsel before us is that the assessee had filed additional evidence for substantiating its claim for deduction of commission charges and business promotion expenses. These evidences were not taken on record by the ld. CIT(Appeals) on the ground that none of the conditions mentioned in Rule 46A of the Income-tax Rules, 1962, have been satisfied. Therefore, these grounds have been decided against the assessee without considering the additional evidence sought to be filed before him.
3 ITA No. 3804(Del)/20101.2 On perusal of the impugned order, it is seen that the commission expenditure of Rs. 82,11,000/- was claimed and the AO disallowed a sum of Rs. 59,87,221/- out of the expenditure. It was noted that six entries were made on 31.03.2007, being the last date of the previous year, which did not contain any narration about nature of payments and services received. The aggregate of these six entries comes to Rs. 8,82,894/-. Commission of Rs. 12,07,747/- was paid to M/s Kannu Exports, which is a proprietary concern of one director in the assessee-company. Except for stating that the amount was paid in US dollars no other particular or detail was furnished. Commission of Rs. 38,36,580/- was stated to have been paid to Shahid Ashraff and this amount was also stated to have been paid in US dollars. In absence of any details, the expenditure was disallowed. The ld. CIT(Appeals) mentioned that no material exists on record to substantiate the claim of deduction of Rs. 59,27,221/- under the provisions of section 37. He referred to the decision in the case of Schneider Electric India Ltd. Vs. CIT & Another, 304 ITR 360(Del); Swadeshi Cotton Mills Co. Ltd. Vs. CIT, (1967) 63 ITR 57 (SC) and Lachinarayan Madanlal Vs. CIT, (1972) 86 ITR 439 (SC). By relying on these decisions, the finding of the AO has been confirmed. 4 ITA No. 3804(Del)/2010 1.3 In respect of business promotion expenses, it is mentioned that the expenditure was in respect of purchase of gold coins for Rs. 4,01,475/- and other expenditure of Rs. 7,17,281/-, totaling to Rs. 11,18,756/-. The AO asked for the details, but no detail whatsoever was filed. Some copies have been filed now in the appellate proceedings as fresh evidence which has not been accepted. Thus, the expenditure was disallowed in absence of any details.
1.4 On perusal of the paper book filed before us, it is seen that party- wise details of the commission have been furnished in respect of each party and some details have been narrated. All these details are available in the paper book from page nos. 109 to 160. The details in regard to business promotion expenses have been placed in the paper book on page nos. 161 to 194. The expenses are in the nature of distribution of gold coins, cell-phone and rice.
1.5 The case of the ld. counsel before us is that the assessee had filed an application dated 11.5.2010 under Rule 46A for admission of this evidence. It was inter-alia contended that proper and reasonable 5 ITA No. 3804(Del)/2010 opportunity had not been provided by the AO. The evidence is in respect of payment of commission and business promotion expenditure, for which grounds had been taken up before the CIT(A). It was argued that it was a fit case for admission of additional evidence on both these grounds as bona-fide reason, being lack of proper opportunity, existed in the case. Therefore, it is argued that the evidences may be taken on record and the mater may be restored to the file of the AO to decide the grounds afresh after considering the additional evidences. The ld. counsel was questioned as to whether any affidavit was filed in support of the lack of proper opportunity. It appears that no affidavit was filed before the ld. CIT(Appeals). However, an affidavit, sworn on 14.3.2011 by Shri Prem Chand Garg, managing director of the assessee-company, has been filed before us now. The relevant paragraphs of the affidavit are reproduced below:-
3. "That hearing of the case of the assessee company for the Asstt.
Year 2007-2008 has been fixed regularly before the ld. JCIT, Range-8, New Delhi and various information and explanations were submitted with him through our counsel on different dates fixed from time to time and in more particularly on 15.09.2009, 22.09.2009, 9.1.2009, 16.11.2009 and 24.12.2009.
4. The ld. JCIT thereafter asked for production of books of account on 17.12.2009, which could not be produced due to the serious 6 ITA No. 3804(Del)/2010 illness of Mr. Harnarain Aggarwal, father and Chairman of the company.
5. That Mr. Harnarain Aggarwal was fallen ill seriously in the month of September, 2009 and was admitted to Ganga Ram Hospital where had got the open heard surgery and after heart operation, he could not recover well and again he was admitted to Maharaja Agarsain Hospital, Punjabi Bagh on 09.12.2009 and from where he was being discharged on 15.12.2009.
6. That on the date of hearing on 17.12.2009, I had to attend the hearing and therefore, the books of accounts of the company were placed in my car. All of sudden, my father was feeling very abnormal and I had to go to Hospital along with my father and thereafter I could reach the office of Ld. JCIT late at around 06.00 P.M. The ld. JCIT was busy in his official work and could not verify the books.
7. That my father could not still recovered from his ill health and he has been regularly admitted with various hospitals such as Maharaja Agarsain Hospital, Punjabi Bagh, B.L. Kapur Memorial Hospital, Karol Bagh and Medicity-Gurgaon. Recently he has been discharged from Medicity-Gurgaon on 10.03.2011."
1.6 In reply, the ld. DR submitted that the case of the assessee is that the books of account could not be produced before the AO due to the illness of the father of the managing director. The assessee has now filed an affidavit that his father was ill and was admitted to the hospital on 17.12.2009, when the books of account were required to be produced before the AO. He drew our attention towards page nos. 1 to 4 of the assessment order. It is inter-alia mentioned that a show cause notice u/s 142(1) dated 10.11.2009 was served on the assessee. The case was 7 ITA No. 3804(Del)/2010 heard from time to time. The assessee was requested to file evidence and details or services availed of, as the case may be, in respect of business promotion expenses and commission expenses. Five letters have been filed by the assessee between 15.09.2009 to 24.12.2009. Summons were also issued to produce books of account including the books relating to agricultural income. The assessee produced prints out of ledger and the xerox copies of certain bills in respect of agricultural income but the other books of account, bills, vouchers etc. relating to trading business and wind-mill power generation business were not produced. The case of the ld. DR is that sufficient opportunity had been granted but the assessee failed to file the requisite evidence. Therefore, the ld. CIT(Appeals) was right in not entertaining the additional evidence as none of the conditions mentioned in Rule 46A was satisfied. 1.7 We have considered the facts of the case and submissions made before us. The facts of the case are that the assessment proceedings were initiated on 04.04.2008 by issuing notice u/s 143(2). A show cause notice u/s 142(1) was issued on 10.11.2009 asking the assessee to file various details and to substantiate claims inter-alia in respect of payment of commission and sales promotion expenses. The assessee filed details 8 ITA No. 3804(Del)/2010 on five occasions including on 24.12.2009. However, all the books of account were not produced at any stage in the course of hearing. The ld. CIT(Appeals) also did not entertain the additional evidence on the ground that none of the conditions mentioned in Rule 46A has been satisfied. The case of the assessee before us is that Shri Harnarain Aggarwal, father of Shri Prem Chand Garg, the managing director, was ill and had been admitted to Ganga Ram Hospital in September, 2009, and then to Maharaja Agrasain Hospital on 9.12.2009. His condition deteriorated on 17.12.2009, due to which he had to rush to the hospital and, therefore, the books of account could not be produced on 17.12.2009. 1.8 Coming to the case law relied upon by the ld. DR, in the case of CIT Vs. Ram Kumar Choudhury, (2007) 288 ITR 179 (Gauhati), the question before the Hon'ble Court was-whether, on the facts and in the circumstances of the case, the order of Commissioner of Income-tax (Appeals), as upheld by the Tribunal, is legally tenable, the same being in violation of rule 46A of the Income-tax Rules, 1962? The case of the ld. counsel for the revenue was that the Tribunal misconstrued and misinterpreted the provision contained in rule 46A while dismissing the appeal preferred by the revenue, thereby confirming the order passed by 9 ITA No. 3804(Del)/2010 the CIT(Appeals). It was submitted that the zerox copies of sale bills and receipt of an amount of Rs. 6,38,000/- as sale proceeds of utensils remained unexplained. The evidence was allowed to be adduced by the CIT(Appeals), thereby deleting the addition. The Hon'ble Court mentioned that the evidence was filed by the assessee on its own and it was not called for by the ld. CIT(Appeals) in exercise of his appellate authority. Further, the record does not reveal that there was any such compliance required under sub-rules (1), (2) and (3) of Rule 46A. It was held that the appellate authority acted in violation of rule 46A by accepting zerox copy of sale-proceeds bill. The appellate authority is not permitted to act whimsically while exercising the jurisdiction under rule 46A. Therefore, the question was answered in favour of the revenue and against the assessee.
1.9 Having considered the facts of the case, it is clear that an application was moved before the ld. CIT(Appeals) for entertaining additional evidence which was rejected by him on the ground that none of the conditions mentioned in rule 46A has been satisfied. On the other hand, the affidavit of Shri Prem Chand Garg shows that he carried the books of account in his car for production before the AO on 17.12.2009 10 ITA No. 3804(Del)/2010 In the mean time, it was found that his father was feeling unwell and, therefore, he had to go to the hospital with his father. Consequently, he reached the office of the AO at about 6.00 P.M. when the AO was busy with some other official work and could not verify the books. According to us, this constitutes a ground which prevented the assessee from production of books of account before the AO within office hours, being one of the conditions mentioned in rule 46A. In the circumstances, the ld., CIT(Appeals) ought to have entertained the additional evidence so that the appeal could be decided on merits. The facts of this case are distinguishable from the facts of Ram Kumar Choudhury (supra), in as much as in this case ground for admission of additional evidence existed, as mentioned in rule 46A. Accordingly, the additional evidence is entertained. However, the evidence has not been examined by any of the lower authorities. Therefore, both these grounds are restored to the file of the AO for reconsidering the whole evidence for the purpose of fresh adjudication after giving the assessee a reasonable opportunity of being heard. Needless to say that the assessee shall produce the books of account before him at the very first hearing granted by him. 11 ITA No. 3804(Del)/2010 1.10 In the result, ground no. 1 is allowed and ground nos. 3 and 4 are treated as allowed for statistical purposes.
2. Ground no. 2 is that the ld. CIT(Appeals) was not justified in sustaining the disallowance of Rs. 39,19,676/- out of interest expenditure on the ground that the funds were not used for the purpose of business. 2.1 In the impugned order, the ld. CIT(Appeals) mentioned about the findings of the AO that the assessee-company made investment in Metafrique Ltd. of the Middle East, but failed to explain that the investment of Rs. 2,17,75,978/- was made out of surplus funds available with the assessee-company. No cash flow statement was filed to show that the investment was out of own funds and not the borrowed funds. It was also not shown that the investment will enhance the profits of the business of the assessee which is one of trading in food-grains. The assessee had borrowed funds of about Rs. 18.53 crore. Therefore, it was held that the sum of Rs. 2,17,75,978/- was diverted out of the borrowed funds. Interest on this amount was computed at Rs. 39,19,677/- @ 18% p.a. This amount was disallowed in computing the total income. The case of the assessee before the ld. CIT(Appeals) was that it is an equal 12 ITA No. 3804(Del)/2010 partner in joint venture with Metafrique Ltd., Nigeria, in which investment of Rs. 2,17,75,978/- was made. The assessee was in possession of own funds of about Rs. 46.65 crore. The investment represented only 4.75% of the funds owned by the assessee on which interest was not payable. Therefore, it was argued that no disallowance could have been made. Reliance was placed on the decision of Hon'ble Supreme Court in the case of S.A. Builders Vs. CIT, (2007) 288 ITR 1. The ld. CIT(Appeals) considered the facts of the case and submissions before him. The findings of the AO were also taken into account that funds were borrowed from the bank and contributed as share application money. The bankers were aware of the strategic benefits which the assessee- company shall reap in future and, therefore, they had no objection to such investment. In these circumstances, he came to the conclusion that the submissions regarding own funds available on the date of investment cannot be accepted in absence of cash flow statement and the decision in the case of S.A. builders Ltd.(supra) was not applicable on account of assessee's failure to establish that it had self-generated funds on the date on which the investment was made. Accordingly, the action of the AO was upheld.
13 ITA No. 3804(Del)/20102.2 Before us, the ld. counsel for the assessee made out a totally different case. It is submitted that the assessee became equal partner in joint venture with Metafrique Ltd. The joint venture agreement dated 29.11.2004 has been placed on record on page nos. 53 to 63 of the paper book. Page nos. 64 and 65 constitute a letter dated 03.05.2006 from State Bank of India regarding joint venture, in which it is mentioned that eight export bills totaling to US$ 478000 have been reckoned towards capital contribution for the joint venture by way of capitalization of export proceeds. The approval was given subject to six conditions mentioned in the letter. Page no. 67 shows total investment of Rs. 2,17,75,978/- made in the joint venture on five dates between 01.4.2006 and 27.07.2006. The case of the ld. counsel is that in financial years 2004-05 and 2005-06, the assessee purchased machinery and sold the same to the joint venture. In these transactions, profit of Rs. 26,64,093/- was earned. Rs. 12,70,194/- were declared as income for assessment year 2005-06 and Rs. 13,93,899/- for assessment year 2006-07. The investments in joint venture were sold in financial year 2008-09 for a total consideration of Rs. 3,59,42,445/- and thus profit of Rs. 1,39,72,491/- was earned. The company has not made any investment by way of cash or cheque in the joint venture. Therefore, there was no question of diversion of interest- 14 ITA No. 3804(Del)/2010 bearing borrowed funds. Further, the investment was made with a view to earn profit and, therefore, the decision in the case of S.A. Builders (supra) is applicable. Reliance was also placed on the decision reported in (2011) 51 DTR (Del) 98. It was submitted that the AO may verify these facts from the books of account. In the light of these facts, it was argued that no disallowance could have been made.
2.3 In reply, the ld. DR submitted that the case of the ld. counsel now is that machineries were purchased and sold to joint venture in lieu of which shares were allotted. The fact nevertheless stays that the investments were out of the borrowed funds. No fund flow statement has been filed to show that the purchase of machinery was out of own funds. Such a presumption cannot be drawn in absence of any evidence supporting the presumption. Therefore, the lower authorities rightly came to the conclusion that it was a case of diversion of borrowed funds for non- business purposes, especially when no nexus was shown with the business of trading in food-grains. It is further submitted that it is a totally new case made out now, which requires verification from the lower authorities.
15 ITA No. 3804(Del)/20102.4 The ld. DR sought to distinguish the facts of the case of S.A. Builders Ltd. (supra) by arguing that in absence of cash flow statement, it cannot be said that the investments were made out of own funds. Further, there is no nexus of the investment with the business of trading in food grains. Reliance has been placed on the decision in the case of CIT Vs. Abhishek Industries Ltd., (2006) 286 ITR 1 (P & H); Phaltan Sugar Works Ltd. Vs. CIT, (1994) 208 ITR 989 (Bom) and CIT Vs. Smt. Swapana Roy, (2011) 311 ITR 367 (All.).
2.5 We have considered the facts of the case and submissions made before us. The impugned order proceeded on the footing that cash investment has been made in Metafrique Ltd. The money so invested was borrowed from the bank, which had granted permission to do so subject to certain conditions. The investment had no nexus with the business of the assessee. Since no cash flow statement was filed to show the existence of own funds, the interest relatable to the borrowing from the bank and diverted towards investment in Metafrique Ltd. was disallowed. The case made out before us is completely different. It is submitted that the machineries were purchased in two years and sold to the aforesaid joint venture. Profits were earned in these transactions and 16 ITA No. 3804(Del)/2010 the money received as sale proceeds was converted into the investment. The investment was also sold in a subsequent year leading to profit. All these profits have been declared in respective years, i.e., assessment years 2004-05, 2005-06 and 2009-10. Thus, it was not a case of diversion of borrowed funds for non-business purposes. It has been contended that the AO may verify these facts in coming to appropriate conclusion in the matter. Further, from the findings recorded by the AO on page 4, paragraph V, which have not been disputed, it is seen that the books of account, vouchers etc. were not produced although computerized print outs and some zerox copies of bills in respect of agricultural income were produced. Therefore, it is clear that factual position now submitted by the ld. counsel had not been verified by any of the lower authorities. It could not have also been verified as the books were not produced and the case before them was totally different. In these circumstances, it will be in the interest of justice to restore the matter to the file of the AO to verify all the facts, as suggested even by the ld. counsel, and decide the issue as per law. It is ordered accordingly. 2.6 In the result, this ground is also treated as allowed for statistical purposes.
17 ITA No. 3804(Del)/2010
3. Ground no. 5 is to the effect that the ld. CIT(Appeals) was not justified in confirming the disallowance of Rs. 3,62,71,103/-, being swap charges. It is mentioned that the expenses are in the nature of financial expenses which are directly related to the business of the assessee. Therefore, the lower authorities were not justified in treating the same as speculation loss within the meaning of section 43(5) of the Act. 3.1 In the assessment order, it is mentioned that a sum of Rs. 3,62,71,103/- has been debited to P & L account as swap charges. It was submitted that the expenditure has been actually incurred and it represents the difference paid on closure of forward contracts undertaken to minimize the exchange fluctuation risk associated with realization of export proceeds. The AO considered the submissions. It is mentioned that the assessee is a trader in food-grains. Undisputedly, it entered into forward market contracts. Such contracts are speculative in nature. Therefore, any loss arising on account of speculative transactions cannot be allowed in computing the profits of business under the Act. It is immaterial as to whether such transactions are carried out directly 18 ITA No. 3804(Del)/2010 with the concerned parties or through the banking channels because the character of the transaction will remain the same.
3.2 Before the ld. CIT(Appeals) it was submitted that on procurement of orders from foreign buyers, the assessee immediately books foreign exchange in forward market with the bank. However, sometimes the foreign parties are not able to open the LC in time or reject the order, thereby resulting in the cancellation of booking of foreign exchange also. The expenditure incurred in booking the foreign exchange contract in such cases results in expenditure, which is debited in the books as "swap charges". The ld. CIT(Appeals) considered the facts of the case and submissions made before him. It is mentioned that the AO relied on the decision in the case of CIT Vs. Kurji Jinabhai Kotecha, (1977) 107 ITR 101 (SC) and CIT Vs. Shivlal Dhirajlal, (1992) 193 ITR 196. The assessee, on the other hand, placed reliance on the decision in the case of CIT Vs. Soorajmull, (1981) 22 CTR (Kol.) 8 and Voltas International Ltd. Vs. ACIT, (2009) 126 TTJ 702. He was of the view that the question whether the loss is speculative in nature or not is essentially a question of fact. The facts are that the assessee procures orders from foreign buyers and immediately books foreign exchange in 19 ITA No. 3804(Del)/2010 the forward market contract with the bank. When the foreign party fails to comply with the terms of LC or the order is rejected, it results into cancellation of booking of foreign exchange. This leads to expenditure or loss which is debited in the books as "swap charges". Section 43(5) defines "speculation transaction" to mean a transaction in which a contract for purchase or sale of a commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrip. The proviso to this provision carves out an exception that a contract in respect of raw- materials or merchandise entered into by a person in the course of manufacturing or trading business to guard against loss because of future price fluctuation in respect of his contract for actual delivery of goods manufactured by him or merchandize sold by him shall not be deemed to be a speculative transaction. On the basis of this provision, it is mentioned that there is a simple and objective test to determine whether the transaction is a speculative transaction or not and the test is whether the contract is periodically or ultimately settled otherwise than by actual delivery or transfer. If the goods are actually delivered or transferred, the contract would not be speculative in nature. Coming to the facts of the case, it is mentioned that the forward contracts of the 20 ITA No. 3804(Del)/2010 assessee in foreign exchange have attributes of a speculative transaction as they are settled otherwise than by delivery of foreign exchange, leading to expenditure of Rs. 3,62,71,103/-. Accordingly, the findings of the AO have been upheld.
3.3 Before us, the ld. counsel drew our attention towards the findings of the AO and the ld. CIT(Appeals). Therefore, our attention has been drawn towards page nos. 195 to 254 of the paper book. Page nos. 195 to 196 contain the details of contracts of sales with the foreign buyers and the booking of foreign exchange forward contract in terms of quantity, value, terms of export and payment, reason of cancellation, date of booking of forward contract with the bank and the period of booking, the amount, the date of cancellation and the swap charges paid or received. It may be worthwhile to narrate facts with respect to the first transaction mentioned on page no. 195. A contract was entered into on 18.6.2005 for export of white rice weighing 25000 for consideration of US$ 70,17,500 to MARGO of Medagaskar. The export was to be made within 45 days of LC credit. The contract was cancelled for non-receipt of LC credit. The assessee entered into five forward contracts in respect of this transaction with State Bank of Mysore on 22.7.2005 for a period up to 21 ITA No. 3804(Del)/2010 30.6.2006/28.7.2006 for an amount of US$ 60 lakhs. These contracts were cancelled on 14.7.2006/10.8.2006. All of them resulted in loss as per statements furnished by the bank in the period 18.7.2006 to 21.8.2008. Some contracts also show profits. However, the amounts involved in the sale proceeds and broken up forward contracts in foreign exchange are different, as can be seen from the example given earlier, where sale proceeds amount to US$ 70,17,500, but the forward contracts are only for US$ 60 lakh. The terms of contract were to expire in July, 2005, but forward contracts continued up to 14.7.2006 or 10.8.2006, as the case may be, i.e., much after cancellation of the contract. Overall, loss occurred in respect of such contracts. Page Nos. 198 to 254 contain other details about the contracts. Further, our attention has been drawn towards page no. 399, which is the schedule of sale expenses for the year ended on 31.3.2004. It shows debit of Rs. 14,95,64,923/-, under the head "Difference in exchange rate/re-booking and cancellation expenses". Similar expenditure for the year ended on 31.3.2003 amounted to Rs. 7,37,99,216/-. These expenses have been carried to the profit and loss account of those years under the head "sale expenses". The details have been shown in order to impress that similar expenses have been incurred in past and allowed in completing the assessments. It is 22 ITA No. 3804(Del)/2010 stressed that the loss or gain is only in respect of export transactions which have been cancelled. Therefore, it is agitated that the assessee is entitled to the deduction of the loss.
3.4 In reply, the ld. DR submitted that no case has been made out that the transactions were in the nature of hedging transaction undertaken to safeguard other investments made by the assessee. Otherwise, no necessity of entering into forward contracts has been proved by the assessee as arising out of business exigencies. This is the first year in which the AO has examined this issue and, therefore, acceptance of claims in earlier years cannot be taken as estoppel in this year. The transactions have been settled otherwise than by delivery or transfer of foreign exchange. The cases relied upon by assessee are distinguishable. The loss is speculative in nature and, therefore, it is in the nature of loss arising out of speculative transactions.
3.5 We have considered the facts of the case and submissions made before us. The facts are that the assessee is engaged in the business of trading in food grains including the export of food grains. The assessee habitually enters into contracts for export of food grains to various 23 ITA No. 3804(Del)/2010 countries. It is stated before us that as and when contract for export is undertaken, a forward contract of foreign exchange is booked with the bank. In respect of these forward contracts of foreign exchange, the assessee has incurred net loss of Rs. 3,62,71,103/-. The details of these contracts have been placed in the paper book on page nos. 195 to 254. From the details placed on page nos. 195 and 196, following features are seen:-
(i) the amount involved in booking of forward contract is not the same as the amount involved in the export contract;
(ii) the amount involved in forward contracts is in round sum;
(iii) the amount involved in forward contract is generally but in some cases it is higher than the amount involved in the export contract, as in the case of Adani Global Pte. Ltd., Singapore, where the export proceeds amount to US$ 38,77,500/-, while the amount involved in forward contract of foreign exchange is US$ 40 lakhs;
and 24 ITA No. 3804(Del)/2010
(iv) the forward contract is booked later than the export contract; the gap being of a month or more.
The lower authorities are of the view that the transactions of forward contract are speculative in nature, while it has been argued by the ld. counsel that the expenditure has been incurred in the course of business of export of food grains and, therefore, it is not hit by the provision contained in section 43(5) of the Act.
3.6 We may proceed with the cases relied upon by the rival parties. In the case of CIT Vs. Badridas Gauridu (P) Ltd., (2003) 261 ITR 256 (Bom.), the facts are that the assessee is an export house, exporting cotton. It had entered into forward contracts with the bank in respect of foreign exchange. Some of these contracts could not be honoured by the assessee for which it had to pay Rs. 13.50 lakh. This amount was debited to profit and loss account and it was claimed as business loss being the payment made on account of cancellation of forward booking of foreign exchange with the bank in respect of export orders. The AO disallowed the deduction on the ground that the assessee short-sold the foreign exchange and that the payments were not in the nature of damages but they were made to settle the transaction without delivery and, therefore, it 25 ITA No. 3804(Del)/2010 was a speculation loss, which could only be allowed to be carried forward. The CIT(Appeals) confirmed the order. The Tribunal took the view that the assessee is an exporter of cotton; that it had entered into transactions for export of cotton and it was entitled to book foreign exchange against export order; that the transaction was done with the permission of Reserve Bank of India; that the contracts were incidental to the business of export of cotton. Therefore, the transactions did not amount to speculative transactions. The Hon'ble High Court upheld the decision by making the following observations:-
"The assessee was not a dealer in foreign exchange. The assessee was a cotton exporter. The assessee was an export house. Therefore, foreign exchange contracts were booked only as incidental to the assessee's regular course of business. The Tribunal has recorded a categorical finding to this effect in its order. The Assessing Officer has not considered these facts. Under section 43(5) of the Income-tax Act, "speculative transaction" has been defined to mean a transaction in which a contract for the purchase or sale of a commodity is settled otherwise than by the actual delivery or transfer of such commodity. However, as stated above, 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 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. This matter is squarely covered by the judgment of the Calcutta High Court, with which we agree, in the case of CIT Vs. Soorajmull Nagarmull (1981) 129 ITR 169."26 ITA No. 3804(Del)/2010
3.7 In the case of CIT Vs. Soorajmull Nagarmull, (1981) 129 ITR 169, the facts are that the assessee incurred loss of Rs. 80,491/- and paid to Hindustan Mercantile Bank Ltd. in respect of foreign hundis. It was contended that such contracts were entered into for arranging foreign exchange for import of goods. Only a part (£ 55,000) of one of the contracts (for £ 1,00,000) was utilized by the assessee for importing goods. The balance of this contract and all other contracts were settled by the assessee otherwise than by actual delivery. The case of the assessee was that the amount consisted of two items, viz., Rs. 4,239/- as exchange difference and Rs. 76,252/- as interest charged by the bank for arranging foreign exchange. This contract was entered into in connection with import and export business. Foreign exchange of £ 55,000 was actually used. Therefore, the provision contained in section 24 is not application as the transactions were incurred in the course of business. The Hon'ble Court referred to the finding of the Tribunal and it was held that provision contained in section 24, Explanation-2, of the 1922 Act are not applicable. It can be seen that the facts of the case are distinguishable as out of £ 1,00,000, £ 55,000 were actually used in the business of import and export of goods.
27 ITA No. 3804(Del)/20103.8 In the case of Voltas International Ltd. Vs. ACIT, (2009) 126 TTJ (Mum.) 702, the facts are that the assessee entered into a contract on 8.8.1995 with a foreign bank, Legend Commodities, Switzerland, for supply of 25,000 MT of rice at a unit price of US$ 247. The overall purchase price amounted to 6.175 million US$. Before this agreement, the assessee had entered into another agreement with Western India Sugar & Chemical Industries, New Delhi, on 3.8.1995 for supply of rice. The assessee was to purchase rice from the Indian company which was sold to a foreign buyer. The foreign buyer paid the sale consideration through inland LC. The assessee's profit was estimated at US$ 30,000 @ US$ 1.20 per MT. The assessee also entered into a foreign forward contract with State Bank of India on 16.8.1995. According to this contract, the assessee agreed to sell the foreign exchange to be received on export at negotiated price of one US$ equal to Rs. 31.55 during the month of October and one US$ equal to Rs. 31.70 during 16.11.1995 to 15.12.1995. The Indian seller failed to honour the contract with the result that the export contract also failed. In the mean time, the forward contract matured which was rolled over at a higher rate necessitating payment of cancellation charges and interest on different rates to the bank. The total amount paid by the assessee to the bank was Rs. 28 ITA No. 3804(Del)/2010 2,13,31,571/- on account of cancellation charges and interest. The AO invoked the provisions contained in section 43(5). The case of the assessee was that this provision is not at all applicable in view of Board circular No. 23D dated 12.09.1960. The Tribunal referred to the decision in the case of Badridas Gauridu (P) Ltd. (supra) to the effect that the assessee was an exporter of cotton and in order to hedge against the losses, it booked foreign exchange in forward market with the bank. Since the cotton-contract failed, the assessee had to pay Rs. 13.50 lakhs to the bank, which had been held to be a business loss. Relying on this decision, it was held that the loss incurred by the assessee was not speculation loss.
3.9 Coming to the cases relied upon by the ld. DR, in the case of Kurji Jinabhai Kotecha (supra), the facts are that the assessee is carrying the business of running an oil mill and also the business of purchase and sale of groundnuts, groundnut seeds and oil; speculation business in groundnuts, groundnut oil and groundnut seeds; speculation business in cotton, erranda etc. In computing the income, the AO disallowed loss amounting to Rs. 73,348/- in forward contracts in groundnut oil, groundnuts and groundnut seeds. In doing so, it was held that the contract 29 ITA No. 3804(Del)/2010 were illegal and banned u/s 15(4) of the Forward Contracts (Regulation) Act, 1952. The AAC affirmed the decision of the AO. The Tribunal held that notwithstanding the illegality of the transaction, the loss can be set off and carried forward as per the provisions of the Act. Therefore, the loss was allowed to be set off against profits of other forward contracts to the extent available and the amount of Rs. 41,603/- was allowed to be carried forward. The Hon'ble Court held that the hedging loss, being in respect of the banned contract, cannot be set off against the profits of other business of the previous year. In regard to the question of carry forward, it was mentioned that the law will assume an illegal business to die out of existence with all its losses in the year under consideration itself.
3.10 In the case of M.R. Dhawan Vs. CIT, (1979) 119 ITR 412, the facts are that the assessee is a stock broker and member of Delhi and other stock exchanges. The question arose-whether, on the facts and in the circumstances of the case, the loss claimed by the assessee in the transactions entered in the "difference account" was rightly disallowed u/s 24(1) of the 1922 Act? The finding of the Court is that the basic question is a simple one and in view of the concurrent finding and, 30 ITA No. 3804(Del)/2010 indeed, admission that delivery on each of the settlement date was taken or given only in respect of a part of the purchases or sales settled on that date, it cannot be said that there was any delivery of shares except to that extent. This interpretation will not change because of the fact that the word "delivery" goes with the word "commodity" and the word "transfer" with the word "scrips".
3.11 In the case of Shivlal Dhirajlal (supra), the facts are that the firm of Tataram Ramjilal entered into a forward contract for purchase of 8000 tins of groundnut oil through the assessee-firm. The market price of groundnut oil was falling and, therefore, the assessee-firm tried to cover the transaction in order to reduce its losses. It drew hundis in favour of Tataram Ramjilal but the hundis were dishonoured. The assessee firm thereupon settled the transaction by selling 8000 tins of groundnut oil to avoid further losses. No delivery was given or taken. The assessee suffered loss of Rs. 27,035/- in the transaction. The Tribunal allowed the claim on the ground that it related to the business of the assessee firm. The Hon'ble Court mentioned that neither the AAC nor the Tribunal applied their minds to the question whether the loss arose from the same business, namely, illegal speculative business. It is mentioned that the 31 ITA No. 3804(Del)/2010 Tribunal was not right in holding that in order to claim the deduction in income-tax assessment of the assessee-firm, it was not concerned with the legality or illegality of the transactions and that the assessee was a commission agent and, as such, it was responsible for the obligation or debt of the constituents towards third party and was entitled to claim deduction of loss of Rs. 27,035/-. Coming to the issue whether the loss was speculation loss, it was mentioned that no evidence or material on record is there to point out to us which would indicate that the loss suffered in illegal speculative business could be set off against profits of the same speculative business. Such a question will arise only when the profit and loss arise from the same illegal business. The Tribunal was directed to dispose off the appeal accordingly.
3.12 Having considered the facts of the case, it is clear that the facts of the case are distinguishable from the facts of Kurji Jinabhai Kotecha, M.R. Dhawan and Shivlal Dhirajlal (supra) for the reason that the assessees in these cases had entered into speculation transactions in commodities in which they were dealing in the usual course of business. However, the assessee is a dealer in food grains, but it had entered into forward foreign exchange transactions. The facts of the case of 32 ITA No. 3804(Del)/2010 Soorajmull Nagarmull (supra) are also distinguishable, because in that case a part of the foreign exchange had been used in the course of business, thus, establishing that the transaction was inextricably linked with the business transaction. In the case of Voltas International Ltd. (supra), the transactions in commodities and forward transactions in foreign exchange were of the same amounts and both the transactions were undertaken concurrently. Therefore, there was a direct linkage between the two transactions. In the case of Badridas Gauridu (P) Ltd., the court relied on the findings of the Tribunal that foreign exchange was booked against export order and, therefore, held that the transaction was in the nature of hedging against losses which may arise on account of fluctuation in rate of foreign exchange. In view of these two decisions, it becomes clear that it has to be proved as a matter of fact that the transactions of forward contracts were undertaken wholly and exclusively for the purpose of business in order to safeguard possible loss arising to the assessee on account of fluctuation in rate of foreign exchange. In order to do so, there should be generally a reasonable equivalence between the period of subsistence of two contracts and the amounts involved in the two contracts. In any case, where the amount involved in forward contract is more than the amount involved in export contract, such an equivalence 33 ITA No. 3804(Del)/2010 cannot be said to exist. In paragaraph no. 3.5 (supra), we have listed four features seen in the two contracts when compared with each other. The issue regarding reasonable equivalence in these two contracts has not been examined by any of the authorities. The ld. counsel has also not referred to any evidence which shows that the bank had entered into the forward contact on the strength of the sale agreement. If an equivalence exists, then, it can be said that the transactions were hedging transactions to safeguard future losses arising on account of fluctuation in rate of foreign exchange, otherwise not. Further, it is seen that a substantial number of forward transactions have been undertaken which can be held to be constituting an independent business as understood under Explanation 2 of section 28. As the facts have not been examined in proper perspective, as mentioned above, by the lower authorities, we think it fit to restore this matter also to the file of the AO for proper appreciation of facts and application of appropriate cases as relied upon by the ld. counsel and which may come to his notice in the course of de- novo proceedings.
3.13 In the result, this ground is also treated as allowed for statistical purpose.
34 ITA No. 3804(Del)/2010
4. Ground no. 6 is that the ld. CIT(Appeals) erred in not accepting the claim that the assessee earned agricultural income of Rs. 55,73,159/-. It is mentioned that the claim is fully supported by details and evidence placed on record of the lower authorities.
4.1 The facts mentioned in the assessment order are that the assessee had shown net income of Rs. 55,73,159/- from agricultural operations. It was submitted that the promoters of the assessee company and their relatives had been dealing in food grains for last 100 years. The assessee purchased agricultural land near Chennai in this year. Although it was stated that the purchase deed is enclosed, it was not enclosed with the letter dated 24.12.2009 as a matter of fact. Further, it was submitted that the assessee had grown cereals and water melons with the help of villagers and staff stationed in Chennai. Therefore, it was agitated that the income was in the nature of agricultural income. The AO inter-alia mentioned that the assessee has not filed Khasra & Khatauni numbers and certificate from Patwari regarding carrying out agricultural operations on the land. It was further mentioned that the labour charges of Rs. 17,735/- debited in the books in respect of these operations were 35 ITA No. 3804(Del)/2010 rather too small to lead to net income of Rs. 55,73,159/-. The relevant portion in regard to the discussion on expenses, contained on page no. 35, in paragraph (v) are reproduced below:-
"As regards the defense of assessee company in respect of filing evidences in support of its agricultural operations, on scrutiny of the same, it is found that the assessee company has shown to have purchased fertilizer worth Rs. 1,20,000/-, purchase of seeds of Tarbooz/Watermelon worth Rs. 1,46,570/- and purchase of seeds of dal of Rs. 2,88,425/-. Besides it has shown purchase of Hero Honda Bike (Rs. 45,100/-) mobile expenses (Rs. 4,500/-), conveyance Rs. 6,743/-, diesel expenses Rs. 26,335/-, electricity expenses Rs. 3,374/-, labour charges Rs.17,735/-, printing and stationery Rs. 970/-, salary expense Rs. 62,985/-, Tractor repair and maintenance Rs. 7,051/-, traveling expenses- Rs. 7,283/-, vehicle repair and maintenance Rs. 2,178/-.
As per the P &L account filed by the assessee company the gross receipt from sales of dal is shown at Rs. 47,36,925/- and from Tarbooz Rs. 15,60,490/-. Thus, there is a total receipt of Rs. 62,97,415/- against which an amount of Rs. 7,24,256/- has been debited and finally posted and shown a net agricultural income of Rs. 55,73,159/-.
Here, it may be noted that even though the cultivation is a labour intensive enterprise and for the produce of agricultural product to the tune of Rs. 62,97,415/-. Thus, the above expense including labour expenses, are not sufficient even if it is assumed that the tractor might have been used for the tilling the land. What about labour expenses relating to sowing of seeds, cutting and reaping the produce. No expenses have been shown regarding irrigation of land."36 ITA No. 3804(Del)/2010
4.2 Before the ld. CIT(Appeals), it was submitted that sufficient details had been furnished regarding the names of the farmer and the share of the assessee. However, the assessee had not been able to file any evidence by way of affidavit from the farmers to establish this averment. The assessee used to share the expenses with the farmers in the ratio of 80:20. That is how the income was earned. The ld. CIT(Appeals) referred to the findings of the AO that evidence in regard to actual carrying on agricultural operations has not been filed. He relied on number of cases including the case of CIT Vs. Raja Binoy Kumar Sahas Roy, (1957) 32 ITR 466(SC), to the effect that the assessee has not only to show that it owns agricultural land but also show that actual agricultural operations were carried out. Since no evidence regarding the actual activity was there on the record, he confirmed the findings of the AO. 4.3 Before us, the ld. counsel referred to the findings of the AO and the ld. CIT(Appeals). Our attention has been drawn to page no. 269 of the paper book, which contains profit and loss account in respect of agricultural operations at Chennai. It shows sales of cereals at Rs. 47,36,925/- and water-melons at Rs. 15,16,490/-. The expenses in respect of seeds, diesel, fertilizers and tractor repairs and maintenance have been 37 ITA No. 3804(Del)/2010 debited in the manufacturing account, leaving gross profit of Rs. 57,09,014/-. After deducting various expenses, which have also been mentioned by the AO, the net profit has been worked out at Rs. 55,73,159/-. Further, our attention has been drawn towards the assessment order in the case of the assessee for assessment year 2008-09. It is mentioned that the assessee was not able to furnish requisite details in assessment year 2007-08. However, the assessee has filed details of agricultural income and affidavits of agriculturists in that year. The matter was referred to the DDIT (Investigation), Unit-III(2), Chennai, who submitted report dated 27.12.2010 for assessment year 2008-09. It is reported that the assessee raised black gram (two crops) and watermelon (one crop). The details of the crops have also been mentioned. After considering the whole evidence, it was held that the claim of the assessee to the extent of agricultural income of about Rs. 84.24 lakh cannot be accepted, therefore, the income from agricultural operations was estimated at Rs. 42,12,893/-. The case of the ld. counsel is that the lower authorities ignored all the evidences which were placed on record of this year. In the immediately succeeding year, the claim of the assessee was partly accepted. Accordingly, it is agitated that there is no reason not to accept the claim in this year also.
38 ITA No. 3804(Del)/20104.4 In reply, the ld. DR submitted that the assessee has not placed on record any evidence regarding actual agricultural operations. No affidavit has been filed from the farmers. Even Khasra and Girdawari numbers have not been filed. The certificate from Patwari regarding actual conduct of agricultural operation has also not been filed. The labour expenses of Rs. 17,000/- only do not justify huge net income of Rs. 55,73,159/-. It was also stressed that the claim of the assessee was not accepted in full even in immediately succeeding year. Therefore, it was urged that the orders of the lower authorities may be confirmed. 4.5 We have considered the facts of the case and submissions made before us. We find that there is no certificate from Patwari regarding actual agricultural operations being carried out by the assessee in this year. There is no evidence from farmers in the form of affidavit that they carried out agricultural operations and shared expenses and receipts with the assessee. Nonetheless, the accounts do show purchase of seeds. No finding has been given as to what happened to the seeds. The evidence placed on record by the assessee is also incomplete as mentioned above. In such a situation, it will be in the fitness of things if enquiries 39 ITA No. 3804(Del)/2010 are got conducted at Chennai for this year, as done in assessment year 2008-09, to ascertain the nature and extent of agricultural income, if any, accruing from actual agricultural operations. Thereafter, the AO may determine the income as warranted by the facts and law. Needless to say that the assessee may be given opportunity of being heard on the evidence received, if any, from Chennai.
4.6 Thus, this ground is also treated as allowed for statistical purposes.
5. Ground no. 7 is regarding disallowance of claim of depreciation to the extent of Rs. 8,69,21,154/-. In this connection, it is mentioned in the assessment order that the assessee diversified its business in the field of generation of wind energy. It was required to file evidence regarding installation of wind mills and other equipments on which depreciation was claimed. It was submitted that the assessee has installed wind power towers and used the same for generation of electricity. In this connection, following evidences were filed:-
(i) certificate of commission on 26.3.2007 at 301, Village Abdasha, District Kutch by Gujarat Energy Development Agency;40 ITA No. 3804(Del)/2010
(ii) xerox copies of invoice for the month of March, 2007 raised in favour of Gujarat Urja Vikash Nigam Ltd.; and
(iii) ledger account of power wind with copies of concerned invoices.
5.1 After examining the details, it was mentioned that the Gujarat Energy Development Agency issued the commissioning certificate on 16.4.2007 after the close of the previous year. The assessee has filed invoice dated 15.04.2007 on its own letter-pad claiming that two wind power towers generated 1191 KW of electricity, valued at Rs. 4,013/-. There is no confirmation from the Gujarat State Electricity Board regarding the purchase of any power. Machinery and plant were purchased from Suzlon Infrastructure Ltd. and their invoices have been filed. On these facts, it has been concluded that the generation of power had not started on or before 31.03.2007. Therefore, the claim of depreciation was disallowed.
41 ITA No. 3804(Del)/20105.2 The matter was agitated in appeal. It was submitted that although the assessee had installed the towers on 26.03.2007, the certificate was issued by Gujarat Energy Development Agency on 16.4.2007. However, since the machinery etc. was installed on 26.03.2007, it was ready for use on that date. Therefore, the assessee is entitled to the deduction of depreciation. The ld. CIT(Appeals) considered the facts of the case and submissions made before him. He referred to the decision in the case of CIT Vs. Maps Tours & Travels, (2003) 260 ITR 655, in which it has been held that although cars have been purchased on the last date of the accounting year, these had not been registered for running on the road. There is no evidence about the user of the cars before the end of the previous year in the relevant previous year. Therefore, the Tribunal erred in giving a finding that the assessee was entitled to deduction of depreciation. Further, he referred to the decision in the case of Dinesh Kumar Gulab Chand Aggarwal Vs. CIT, (2004) 267 ITR 768 (Bom.), in which it is held that the expression "used" in section 32 means actually used and not merely ready to use. We may add here that SLP against this decision has been dismissed by the Hon'ble Court as reported in (2004) 266 ITR 106 (St.).
42 ITA No. 3804(Del)/20105.3 Before us, the ld. counsel referred to the evidence in the paper book. Page no. 361 is the ledger account showing sale of Rs. 3,852/- on 31.03.2007, which is supported by invoice no. 1/2006-07 dated 15.4.2007 raised on the stationery of the assessee. It has not been acknowledged by the buyer. Page No. 363 is certificate of commissioning issued by Gujarat Energy Development Agency on 16.4.2007 to the effect that 3 MW capacity wind mill farm has been commissioned by the assessee on 26.03.2007, whose details are furnished in the certificate itself. Page no. 364 is the undated schedule from Gujarat Energy Development Agency showing installed capacity at 3 MW. There are other certificates from the same agency dated 15.04.2008 and 09.04.2008 regarding further commissioning of wind farm capacity. The case of the ld. counsel is that either the depreciation may be allowed to the assessee, but in case any further enquiry is required, the mater may be referred to the AO for verification.
5.4 In reply, the ld. DR submitted that there is no evidence of production of electricity in this year. Commissioning certificate has been issued after the close of the previous year, which does not establish 43 ITA No. 3804(Del)/2010 that the plant and machinery was ready for generation of electricity before 31.03.2007.
5.5 We have considered the facts of the case and submissions made before us. We find that credit of a small sum by way of sale in the books of account, without any acknowledgement from the buyer, does not lead to an inference that the assessee had produced and sold electricity in this year. Further, the certificate does not explicitly show that the machines have been installed and were ready for production of electricity in this year. Nevertheless, the assessee has shown minor sale in its books of account on 26.3.2007. The ld. counsel submitted that there could be production of electricity on other dates up to 31.03.2007. In these circumstances, we tend to agree with the ld. counsel that the matter may be restored to the file of the AO for further verification and de- novo adjudication as per law. Both the parties shall be at liberty to bring any further evidence on record.
5.6 Thus, this ground is also treated as allowed for statistical purposes.
44 ITA No. 3804(Del)/2010
6. In the result, the appeal is treated as partly allowed for statistical purposes.
This order was pronounced in the open court on 29 April, 2011.
Sd/- sd/- ( C.L. Sethi) (K.G.Bansal) Judicial Member Accountant Member Dated: 29th April, 2011. SP Satia Copy of the order forwarded to:
Shri Lal Mahal Ltd., B-16, Bhagwan Das Nagar, New Delhi. JCIT, Range-8, New Delhi.
CIT(A) CIT The DR, ITAT, New Delhi. Assistant Registrar.