Income Tax Appellate Tribunal - Bangalore
Hanuman Weaving Factory, Bangalore vs Assessee on 1 August, 2013
ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore
IN THE INCOME TAX APPELLATE TRIBUNAL
Bangalore 'B' Benches, Bangalore
Before Shri Shri George George K. Judicial Member
And Shri Jason P. Boaz, Accountant Member
ITA No.1112 /Bang/2012
(Assessment year: 2009-10)
Asstt. Commissioner of Income Vs. M/s.Hanuman Weaving
Tax, Circle-3(1) Factory
Bangalore No.05, Hanuman Buildings,
Tank Bund Road, Bangalore
PAN: AABFH 7295 M
(Appellant) (Respondent)
ITA No.1320 /Bang/2012
(Assessment year: 2009-10)
M/s.Hanuman Weaving Vs. Asstt. Commissioner of
Factory Income Tax, Circle-3(1)
No.05, Hanuman Buildings, Bangalore
Tank Bund Road, Bangalore
PAN: AABFH 7295 M
(Appellant) (Respondent)
Department by: Shri A.K.Ganesh Rao, DR
Assessee by: Shri K.S. Jain, CA
Date of Hearing: 01/08/2013
Date of Pronouncement: 23/08/2013
ORDER
Per George George K. J.M. These two appeals - one by the Revenue and another by the assessee firm - are directed against the order of the CIT (A)-II, Bangalore, dated 6.7.2012. The relevant assessment year is 2009-10.
Page 1 of 20ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore I. ITA No.1112/B/12 - By the Revenue:
2. The Revenue has, in its Memorandum of appeal, raised three grounds. However, all the grounds are confined to the solitary issue, namely:
"Whether the claim of expenditure of Rs.32,17,578/- incurred for relaying of the floor with marble is capital or revenue?"
II. ITA No.1320/B/12 - By the assessee:
3. The assessee has raised seventeen grounds in an illustrative manner. However, during the course of hearing, the learned A.R. has pressed for adjudication of the ground No.4 only which states as under:
"that the authorities below have erred in disallowing the expenditure on cancellation of forward contract amounting to Rs.65,17,187/- by wrongly treating it as 'speculation loss."
3.1. As the issues raised in these appeals are inter-linked and pertaining to the same assessee, for the sake of convenience, they are heard, considered together and disposed of in this consolidated order.
3.2. We shall first take up the issue raised by the Revenue for consideration as under:
Page 2 of 20ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore I. ITA No.1112/B/12 - By the Revenue:
4. Briefly stated, the facts of the issue are as below:
4.1. The assessee firm is an exporter of silk fabrics involving the process of reeling, twisting, dyeing, weaving, printing, embroidery work etc. During the year under dispute, the assessee had furnished its return of income, admitting an income of Rs.2,24,34,844/- which was, initially, processed u/s 143(1) of the Act.
Subsequently, the case was subjected to scrutiny u/s 143(3) of the Act. During the course of assessment proceedings, the AO noticed that the assessee had incurred an expenditure of Rs.35,75,087/- towards cost of marbles for replacement of flooring in its building. Being queried as to why the same should not be treated as a capital expenditure, it was contended by the assessee that the value of building will not be enhanced due to relaying of floors as it was intended for protecting the silk fabrics while spreading. Thus, it was contented that the expenditure incurred was revenue in nature .
4.2. The AO held, by rejecting the assessee's contention that the replacement of red-oxide flooring which was twenty five years' old with marbles gives arise to an enduring benefit and, thus, the expenditure incurred was capital in nature. Accordingly, a sum of Rs.32,17,578/-, after allowing depreciation at 10%, was added to the income of the assessee.
Page 3 of 20ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore 4.3. Aggrieved, the assessee took up the issue, among others, before the CIT (A) for relief. After taking into account the submission made by the assessee, the CIT (A) was of the view that the expenditure on replacing the flooring was in the nature of revenue and, thus, allowable deduction. The relevant portion of her reasoning is extracted as under:
"3.3........................................In my view, the expenditure incurred by the appellant on relaying of the flooring fits into 'repair and maintenance' and is allowable as a revenue expenditure. Courts have been holding that such expenditure is to be treated as revenue expenditure and not capital expenditure as no new asset is brought into existence and it is in the nature of repair etc. I derive support from the decision of the Hon'ble High Court of Delhi in the case of Delhi Press Samachar Patra (P) Ltd reported in 322 ITR 590 (Del) where, after considering the decision of the Hon'ble Supreme Court in CIT v. Saravana Spinning Mills Ltd reported in 293 ITR 201. It was held that such expenditure on repairs, reinforcement, replacement of dilapidated beams, pillars, walls etc., of existing press building was not capital expenditure but only revenue expenditure as the assessee did not bring into existence any new asset over and above existing building. Expenditure on replacing the flooring in the present case would also be in the nature of revenue expenditure and allowable........."
4.4. Aggrieved, the Revenue has come up before us with the present appeal. During the course of hearing, it was submitted that the CIT (A) had failed to refer to the amended provisions to s. 30(a)(i)&(ii) by way of insertion of Explanation below this section by the Finance Act 2003 w.e.f. 1.4.2004 which reads ''For the removal of doubts, it is hereby declared that the amount paid on account of the cost of repair referred to in sub-clause (i) and the Page 4 of 20 ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore amount paid on account of current repairs to in sub-section (ii) of clause (a) shall not include any expenditure in the nature of capital expenditure. It was, therefore, pleaded that the action of the AO requires to be restored. To strengthen its stand, the revenue had placed reliance on the following case laws:
(i) Ballimal Naval Kishore v. CIT (1997) 224 ITR 414;
(ii) Punjab State Industrial Dev. Corporation Ltd v. CIT 225 ITR 792;
(iii) CIT v. Madras Auto Services (P) Ltd 233 ITR 468 4.5. On the other hand, the learned AR supported the findings of the CIT (A) on the issue. It was, further, submitted that the stand of the CIT (A) was based on the judgments of the Hon'ble Delhi High Court (supra) and also the Hon'ble Supreme Court in the case of CIT v. Saravana Spinning Mills Limited (supra) and, hence, the same requires to be sustained.
4.6. We have carefully considered the submissions of both the parties and also perused the relevant materials on case record. The red-oxide flooring of more than twenty five years' old was replaced by marbles for smooth and un-hindering functioning of the assessee's business. As rightly pointed out by the CIT (A), the assessee had, in fact, not brought into existence any new asset over and above the existing building, but, effected repairs only in the floor by replacing it with marbles which falls within the scope of 'repairs and maintenance' of the existing building. This view has Page 5 of 20 ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore been held by the Hon'ble Delhi High Court reported in 322 ITR 590 (Del) (supra) and also the Hon'ble Supreme Court (supra).
4.6.1. We have, with due regards, perused the ruling of the Hon'ble Supreme Court in the case of Ballimal Naval Kishore and Another v. CIT reported in (1997) 224 ITR 414 (SC) as relied on by the revenue. In the said case, the Hon'ble Supreme Court, while analysing the provisions of s. 10(2)(v) of the IT Act, 1922, had referred to the ruling of the Bombay High Court in the case of New Shorrock Spinning and Manufacturing Co. Limited reported in (1956) 30 ITR 338(Bom) wherein Mr. Justice Chagla C.J., speaking for the Division Bench, observed that the expression 'current repairs' means expenditure on buildings, machinery, plant or furniture which is not for the purpose of renewal or restoration, but, which is only for the ;purpose of preserving or maintaining an already existing asset and which does not bring a new asset into existence or does not give to the assessee a new or different advantage. The learned Chief Justice observed that they are such repairs as are attended to as and when need arises and that the question when a building, machinery etc., requires repairs and when the need arises must be decided not by any academic or theoretical test but by the test of commercial expediency. The learned Chief Justice observed:
"The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as expenditure for repairs what is really done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of repairs because it is only Page 6 of 20 ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore by reason of this definition of repairs that the expenditure is revenue expenditure.
If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which is Legislature has permitted under section 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure"
Accepting the ratio laid down by the Hon'ble Bombay High Court (supra), the Hon'ble Supreme Court observed that in our opinion the test involved by Chagla C.J., in New Shorrock Spinning and Manufacturing Co. Ltd's case (1956) 30 ITR 338 (Bom), is the most appropriate one having regard to the context in which the said expression occurs. It has been followed by a majority of the High Court in India. We respectfully accept and adopt the test.
Applying the aforesaid test, if we look at the facts of this case, it will be evident that what the assessee did was not mere repairs but a total renovation of the theatre. New machinery, new furniture, new sanitary fittings and new electrical wiring were installed besides extensively repairing the structure of the building. By no stretch of imagination, can it be said that the said repairs qualify as 'current repairs within the meaning of section 10(2)(v). It was a case of total renovation and has rightly been held by the High Court to be capital in nature...."
4.6.2. We have carefully perused the ruling of the Hon'ble Supreme Court (supra). In that case, the assessee did not make mere Page 7 of 20 ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore repair but a total renovation of the theatre, new machinery, new furniture etc., were installed besides extensively repairing the structure of the building. It was, therefore, ruled that it cannot be said that the said repairs qualify as 'current repairs' within the meaning of s. 10(2)(v) whereas in the present case, the assessee had only replaced the red-oxide flooring with marbles in order to facilitate smooth running of its business. We are, therefore, of the view that the case law relied on by the revenue cannot come to its rescue as the present case is clearly distinguishable.
4.6.3. Considering the above mentioned facts into account and also in conformity with judicial views (supra), we are of the firm view that the expenditure incurred to the tune of Rs.32,17,578/- [after allowing depreciation at 10% by the AO] cannot be categorized as capital in nature. In substance, the Revenue's appeal is dismissed.
5. We shall now proceed to deal with the issue raised by the assessee in the following paragraphs:
II. ITA No.1320/B/12 - By the assessee:
Addition of Rs.65,17,189/- by treating as 'speculative loss':
5.1. During the course of assessment proceedings, the AO noticed that the assessee had debited in its accounts a sum of Rs.1,56,03,464/- as difference in foreign exchange. Being queried, the assessee had furnished a lengthy submission by justifying its Page 8 of 20 ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore action as recorded in the assessment order under dispute. However, the AO noted that the difference in foreign exchange arises for the assessee as exporter of silk fabrics and cloth at the time of realisation of export proceeds received in foreign currency. That the assessee receives export proceeds as per invoices, but, at the time of realising the same, what the assessee gets is on the basis of prevalent market rate of the foreign currency i.e., if the rate is higher, the benefit is credited to P & L account or, if the rate is lower, the loss is debited.
The AO had, further, noted that the assessee had debited to the P & L account a sum of Rs.96.86 lakhs due to the fluctuation in foreign currency out of the total amount of Rs.1.56 crores. The difference of Rs.65,17,187/-between the two was found to have been debited to P & L account as loss arising from the cancellation of forward contract in foreign exchange. The AO also found that the assessee had entered into forward contract agreement with the State Bank of India for delivering a fixed amount of foreign exchange in a month at a fixed rate. Cancellation of the forward contract results in recovery of the difference between contracted rate and the rate at which the contract is cancelled known in the international business parlance as 'swap charges'. The ledger account of the assessee also reveals that the assessee had paid such swap charges amounting to Rs.65.17 lakhs due either to difference in foreign currency on forward contract or cancellation of forward contract on fifteen occasions between 15.5.2008 and 31.3.2009. The AO had further noticed that the assessee's case was one of forward contracts relating to transaction in financial asset coming within the concept of speculative transactions and not coming with the exception Page 9 of 20 ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore contemplated in the proviso (a) to s. 43(5) of the Act. The AO also noticed a clause in the assessee's contact with the Bank relates to 'cancellation' which reads as under:
"Cancellation - The contracted buying / selling rate will be set off against the Bank's ready T.T. selling / buying rate on the date of cancellation and difference will be recovered from, or paid to, you as the case may be."
5.2 On the basis of the said clause, the AO came to the conclusion that 'the contract has been ultimately settled otherwise than by the actual delivery or transfer of the commodity i.e., foreign exchange.' Placing reliance on a few case laws, the AO held that the assessee was not entitled to claim expenditure amounting to Rs.65.17 lakhs due to foreign exchange loss and, accordingly, brought the same to tax.
5.3. Aggrieved, the assessee had filed appeal before the CIT (A). The CIT (A), however, after due consideration of the assessee's plea, had confirmed the AO's action. The relevant portions of her reasoning are extracted as under;
"4.4............The fact is that the appellant has entered into a number of transactions with the State Bank of India for trading in US dollars at a particular rate which have been settled without delivery. In addition, other contracts for US dollars and Great Britain pound sterling have been settled with delivery. The issue is only with regard to the contracts settled without delivery. Section 43(5) of the I.T Act which deals with the definition of 'speculative transaction' clearly covers such transactions within its ambit. These are also not excluded from such definition by the proviso to section 43(5) of the Act. As Page 10 of 20 ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore such, the transactions in question are clearly 'speculative transactions' under the I.T. Act. However, it still remains to be seen, whether or not these 'speculative transactions' constitute a 'speculation business' to which Explanation 2 to section 28 applies.
4.5. It is seen that the appellant has traded in foreign exchange derivate with bank and volume of such trade is based on the average receipt of the past 3 years' as stated by the appellant. It is not the case of the appellant that each export order is directly protected against foreign exchange risk. Instead, the appellant has entered into a series of 'speculative transactions' every month, keeping in view his expected foreign exchange availability on the strength of export orders in his regular business of export. These transactions are, therefore, in the nature of a parallel business over and above the regular business, the connection with the regular business being only incidental and not direct. The transactions in foreign exchange market are with a profit intent separate from his regular business and not merely to exclusively protect risks in foreign exchange fluctuation as claimed by the appellant.
4.6. On such facts and circumstances of the case, the speculative transactions entered into by the appellant clearly constitute a 'speculation business' to which Explanation 2 to section 28 and also section 73 of the I.T. Act apply. This aspect has been dealt with in detail by the Hon'ble ITAT, Bangalore in the case of Shri K.Mohan Exports & Co in 126 ITD 0059 (Bang) ........................."
5.3.1. Though the CIT (A) had fairly conceded that the issue on hand was in a different context as to whether income from speculation profits can be said to be income 'derived from exports' for the purpose of section 10B or not, she, however, observed that the decision of the Hon'ble Calcutta High Court in the case of CIT v. Sooraj Mull Nagarmull (129 ITR 169) which has been relied on by Page 11 of 20 ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore the High Court of Bombay in its decision in the case of CIT v. Badridas Gauridas (P) Ltd (261 ITR 256) cited by the assessee has been discussed in detail and distinguished by the jurisdictional Tribunal in the case of K. Mohan Exports & Co. (supra). After extensively extracting the findings of the earlier Bench in the case of K.Mohan Exports & Co (supra), the CIT (A) had observed that -
"4.6.(sic) 4.7. In the present case also, a series of speculative transactions have been undertaken on the basis of export turnover of earlier 3 years and these would clearly constitute a 'speculation business.' In such a case, this loss cannot be wholly or exclusively from the regular business of the appellant but arising out of the separate 'speculation business' engaged in by the appellant. The same has rightly been disallowed by the assessing officer."
5.4. Aggrieved, the assessee has come before us with the present appeal. During the course of hearing, the arguments put-forth by the learned AR are summarized as under:
- that the assessee is not a dealer in foreign exchange, but, had entered into forward contract transactions with SBI with the object of protecting the export proceeds against the foreign exchange fluctuations in the market. Hence, the concept of delivery and non-delivery is of no consequence and is irrelevant in the context of the assessee. The assessee who is primarily a dealer in silk, the transactions of forward contract was not done in isolation but was done with the object of protecting the business interest of trading in silk, and, hence, the provisions of s. 43(5) of the Act are not attracted;
- that the transactions are not speculative in nature, but, entered into with the object of protecting business profits and business interest would not bring to the fore any speculative business. As a consequence, explanation to s. 28 is not attracted in the assessee's case;Page 12 of 20
ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore
- that it is not correct to say that the assessee has traded in foreign exchange derivatives with bank. It is a fact that all such transactions have been entered into based on the average business receipts of the past three years. This in itself is an indication that transactions of forward contracts have not been done in isolation and, therefore, cannot be considered as speculative transactions;
- that differing with the suggestion of the CIT (A) that each export order should have been protected against foreign exchange risk which would have brought the transactions outside the scope of speculative transactions etc., it was claimed that it would make no difference whether each export order is directly protected or the portion is through a series of transactions. As long as the transactions of forward contract are hinged on real business transactions and are not done in isolation and, the assessee has no exclusive business interest in such forward contract transactions, it cannot be classified either as speculative transactions or business;
- contradicting with the CIT (A) presumption that the assessee carried on parallel business over and above the regular business, it was claimed that the transactions of forward contract were in relation to the average foreign exchange business receipt of the earlier three years, and that it was not done in isolation, but, was connected with receipt of business proceeds from foreign buyers/customers. The cancellation of forward contract was contingent upon the business receipts in foreign currency and, therefore, was not in isolation and not a parallel business as alleged by the CIT (A);
- relies on the ruling of the Hon'ble Madras High Court ion the case of Sri Rangavilas Ginning & Oil Mills v. CIT (1982) 133 ITR 85 (Mad)'
- distinguishing the case of K. Mohan & Co, (Export) Pvt. Ltd (supra) relied on by the authorities below, it was submitted that since the assessee is not seeking any benefits u/s 10B, the findings of the Hon'ble earlier Bench is not applicable and inconsequential to the facts and circumstances of the assessee's case;Page 13 of 20
ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore
- Relies on the following case laws:
(i) CIT v. Badridas Gauridu (P) Ltd (2003) 261 ITR 0256 (Bom);
(ii) CIT v. Soorajmul Nagarmull (1981) 129 ITR 169 (Cal); &
(iii) CIT v. Panchamahjal Steel Ltd (2013) 33 Taxmann.com 10 (Guj)
- that if there were a single transaction, it can be a speculative business as it was done in isolation, however, the assessee's case, it is not a speculation loss, but, a business loss as the motive of entering into forward contract was with the object of mitigating the business risk associated with the silk trade in which it was primarily interested;
- that the forward contract of foreign currency is not doubt a loss and not expenditure. However, loss will be allowable u/s 28 as it satisfies certain conditions as contemplated in that section. If this is examined closely, the following principles emerge from the action of the assessee, namely:
(a) the assessee is an exporter of silk fabrics and, therefore, amounts receivable from the customers are obviously denominated in foreign currency;
(b) the assessee had entered into forward contracts of foreign currency to mitigate risk in fluctuations;
(c) there were some parts of the contracts that were executed by inflow of export proceeds and there were others that had to be cancelled on account of lower receipts than were anticipated; this obviously is the outcome of the business dynamics and, therefore, has to be treated as part of the business process;
(d) loss on account of forward contracts springs directly from and incidental to the carrying on the business of export of silk fabric by the assessee;
(e) the loss is not incurred on a capital account or fixed assets so as to make it capital loss; & Page 14 of 20 ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore
(f) there exists a direct and proximate nexus between its export business and the loss on account of forward contract.
5.4.1. In conclusion, it was submitted that the loss incurred on cancellation of forward contract of foreign currency amounting to Rs.65.17 lakhs is a business loss and not speculative loss and, therefore, the same requires to the allowed for set off.
5.4.2. On the other hand, the learned DR supported the action of the authorities below on the issue. It was, further, submitted that the issue has since been discussed by the first appellate authority elaborately and arrived at a right conclusion that the loss incurred by the assessee cannot be wholly or exclusively termed from its regular business, but, arising out of the separate 'speculative business and, therefore, the stand of the CIT(A) deserves to be sustained.
5.5. We have carefully examined the rival submissions and also perused the relevant materials on record. Briefly, the assessee had debited to its P& L account a sum of Rs.90,86,277/- due to the fluctuation in forex out of the total amount of Rs.1.56 crores and the difference thereof, amounting to Rs.65.17 lakhs was claimed as loss arising from the cancellation of forward contract in forex. The AO, however, for the reasons recorded in his order under dispute and also relying on certain case laws, held that the assessee was not entitled to claim the said expenditure due to forex loss and, accordingly, brought to tax. The CIT (A), relying on the findings of Page 15 of 20 ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore the earlier Bench of this Tribunal in the case of K Mohan Exports & Co. (supra) came to the conclusion that a series of speculative transactions have been undertaken.
5.5.1. The assessee had entered into a Forward/Exchange Contract agreement with none other than a leading nationalized Bank, namely, the State Bank of India. The agreement clearly stipulates that the forward contract is for export proceeds. The assessee, admittedly, is not a dealer in foreign exchange. It is an admitted position that the transactions of forward contract were in relation to the average foreign exchange business receipts of the 3 years. It was not done in isolation, but, was connected with receipts of business proceeds from foreign buyers/customers. This clearly indicates that transaction of forward contracts with SBI is with the sole object of protecting the export proceeds against foreign exchange fluctuation in the market. Such contracts were directly from and incidental to the assessee's business of export of silk fabrics and, therefore, do not represent speculative transaction. Hence, the concept of delivery and non-delivery is of no consequence and is irrelevant in context of facts of this case. The learned AR has furnished details of forward contracts entered into on various dates. We notice that delivered percentage of US dollar is 73.59% and the shortfall in delivery is 26.41%. We notice shortfall in delivery is towards the close of accounting year on account of non-receipt export proceeds from foreign buyers/customers.
Page 16 of 20ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore 5.5.2. The CIT (A) had stated that each export order should have been protected against foreign exchange risk which would have brought the transaction outside the scope of speculative transactions. According to us, it would make no difference whether each export order is directly protected or the protection is through a series of transactions. As long as the transactions of forward contracts are concerned, we find that they are directly linked with the assessee's business of export of silk fabrics and, as such, it cannot by any stretch of imagination be classified as 'speculative business'.
5.5.3. The AO and the CIT (A) have placed strong reliance in the case of K. Mohan Exports (supra) to come to a conclusion that the assessee's claim of business expenditure debited to forex loss in forward contract cannot be an allowable deduction.
In K.Mohan Exports case, it was concluded by the Hon'ble earlier Bench that -
"Assessee-exporter having entered into forward contracts in respect of foreign exchange receivable as a result of export in respect of the export turnover and settled the same without actual delivery, the profit from such forward contracts is assessable as profit from speculation business in view of Expln. 2 to s. 28 r/w s. 43(5), and speculation business not being the business of assessee's undertaking, profit from forward contracts could not be included in the profits of the business of the undertaking for the purposes of computing deduction under s. 10B".Page 17 of 20
ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore With due regards, we have perused the above findings and of the firm view that the issue itself was on the different footing. To be precise, the issue before the earlier Bench was deduction u/s 10B and whether the profits from forward contracts can be said to be derived from the assessee's undertaking for the purpose of deduction u/s 10B of the Act whereas the issue on hand is entirely different. The above reasoning has been fairly conceded by the CIT (A) in her findings. For ready reference, the relevant portion of her reasoning is extracted as under (at the cost of repetition):
4.6. .......................................This aspect has been dealt with in detail by the Hon'ble ITAT, Bangalore in the case of Shri K.Mohan Exports & Co in 126 ITD 0059 (Bang). Although the issue on hand was in a different context as to whether income from speculation profits can be said to be income 'derived from exports' for the purpose of section 10B or not, ........................."
5.5.4. On the other hand, we find that the issue in question is squarely covered in favour of the assessee from the following judgments of Hon'ble Bombay and Gujarat High Courts:
(i) CIT v. Badridas Gauridu (P) Ltd - (2003) 261 ITR 256 (Bom):
The assessee had entered into forward contracts with the Banks in respect of foreign exchange. Some of these contracts could not be honoured by the assessee for which it had to pay some amount which was debited to the P & L account. The assessee claimed the same as business loss being payment on account of cancellation of forward booking of forex with the banks in respect of Page 18 of 20 ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore exports orders. Finally, when the issue came up for consideration the Hon'ble Bombay High Court held as under:
"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 AO has not considered these facts. Under s. 43(5) of the 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) 22 CTR (Cal) 8 : (1981) 129 ITR 169 (Cal).
(ii The Hon'ble Gujarat High Court has, in the case of CIT - III v. Panchmahal Steel Ltd reported in (2013) 33 taxmann.com 10 (Guj) on a similar issue, held as under:
"................Admittedly, the assessee is a not a dealer in foreign exchange. For the purpose of hedging the loss due to fluctuation in foreign exchange while implementing the export contracts, the assessee had entered into forward contract with banks. In some cases, the export could not be executed and the assessee had to pay certain charges to the bank and thereby incurred certain expenses. These expenses, the assessee claimed by way of expenditure towards business. We do not find that the transaction can Page 19 of 20 ITA Nos.1112 and 1320 of 2012 Hanuman Weaving Factory Bangalore be stated to be in speculation as to cover under sub-section (5) of section 43 of the Act."
5.5.5. Taking into account the above facts into consideration and also in conformity with the ruling of various judiciaries (supra), we are of the considered view that the CIT (A) was not justified in sustaining the order of the AO on the issue. In substance, the issue goes in favour of the assessee.
6. In the result: (i) the Revenue's appeal is dismissed; &
(ii) the assessee's appeal is allowed.
Order pronounced at the end of the hearing on 23rd August, 2013.
Sd/- Sd/-
(Jason P. Boaz) (George George K)
Accountant Member Judicial Member
Bangalore, dated 23rd August, 2013.
Vnodan/sps
Copy to:
1. The Appellant
2. The Respondent
3. The concerned CIT(A)
4. The concerned CIT
5. The DR, ITAT, Bangalore
By Order
Assistant Registrar
Income Tax Appellate Tribunal,
Bangalore Benches, Bangalore
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