Karnataka High Court
M/S Shankara Infrastructure vs Asst Commissioner Of on 28 June, 2021
Bench: Alok Aradhe, Hemant Chandangoudar
1
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 28TH DAY OF JUNE 2021
PRESENT
THE HON'BLE MR. JUSTICE ALOK ARADHE
AND
THE HON'BLE MR.JUSTICE HEMANT CHANDANGOUDAR
I.T.A. NO.89 OF 2015
BETWEEN:
M/S. SHANKARA INFRASTRUCTURE
MATERIALS LTD.
(FORMERLY SHANKARA PIPES INDIA LTD.,)
G-2, FARAH WINSFORD
NO.133, INFANTRY ROAD
BANGALORE-560001.
... APPELLANT
(BY SRI. A. SHANKAR, SR. COUNSEL FOR
SRI. M. THIRUMALESH, ADV.,)
AND:
ASST. COMMISSIONER OF
INCOME TAX, CIRCLE 12(3)
4TH FLOOR, RASHTROTHANA BHAVAN
NRUPATHUNGA ROAD
BANGALORE-560001.
... RESPONDENT
(BY SRI. K.V. ARAVIND, ADV.,)
---
THIS I.T.A. IS FILED UNDER SECTION 260-A OF
I.T.ACT, 1961 ARISING OUT OF ORDER DATED 17.10.2014
PASSED IN ITA NO.85/BANG/2013, AND ORDER OF
COMMISSIONER OF INCOME TAX (APPEALS)-III, BANGALORE
2
DATED 31.10.2012 IN APPEAL NO.188/C-12(3)/CIT(A)-
III/BANG/10-11 FOR THE ASSESSMENT YEAR 2008-09.
I. FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW
STATED ABOVE.
II. ALLOW THE APPEAL AND SET ASIDE THE ORDER OF
THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE
BEARING ITA NO.85/BANG/2013 DATED 17.10.2014 AND
ORDER OF COMMISSIONER OF INCOME TAX, (APPEALS)-III,
BANGALORE.
THIS I.T.A. COMING ON FOR ADMISSION, THIS DAY,
ALOK ARADHE J., DELIVERED THE FOLLOWING:
JUDGMENT
This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as 'the Act', for short) has been filed by the assessee against the order dated 17.10.2014 passed by the Income Tax Appellate Tribunal, Bangalore. The subject matter of the appeal pertains to the Assessment year 2008-2009. The appeal was admitted by a Bench of this Court vide order dated 21.08.2015 on the following substantial question of law:
"Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the foreign currency transactions entered into by the assessee are speculative in nature and that the FCNR loss of 3 Rs.1,79,99,380/- are notional in character and the loss is liable to be disallowed?"
3. Facts leading to filing of this appeal briefly stated are that the assessee is a company engaged in the business of trading in steel tubes, pipes, PVC, etc. The assessee filed the return of income for the Assessment Year 2008-09 on 23.09.2008 and declared the total income of Rs.24,27,56,572/-. The assessee thereafter filed a revised return on 23.02.2010 and declared a total income of Rs.22,47,57,192/-. The return of income filed by the assessee was selected for scrutiny and a notice under Section 143(2) of the Act dated 13.08.2009 was issued to the assessee. During the course of the assessment proceeding, the Assessing Officer made a query about the provision of loss of Rs.1,79,99,380/- on account of foreign exchange fluctuation impacting the working capital loan borrowed with foreign exchange swap option. The assessee thereupon submitted an explanation to the Assessing Officer that revised return of income was filed to claim foreign exchange fluctuation loss and the amount debited to profit and loss 4 account was Rs.68,81,094/- after setting off funeral expenses fluctuation bill of Rs.1,11,18,287/-.
4. The Assessing Officer, by an order dated 18.12.2010 passed under Section 143(3) of the Act, held that the loss in question is a notional loss and being speculative in nature cannot be claimed as revenue expenditure under Section 37 of the Act. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals), who by an order dated 31.10.2012, dismissed the appeal. The assessee approached the Income Tax Appellate Tribunal by filing an appeal. The Tribunal by an order dated 17.10.2014, held that transaction in question was a speculative transaction and dismissed the appeal preferred by the assessee. In the aforesaid factual background, this appeal has been filed.
5. Learned Senior counsel for the assessee submitted that the transaction in question is not speculative in nature as the transaction was entered into with the intention of reducing interest caused due to higher domestic interest rates and the risk of exchange fluctuation part and parcel of 5 the transaction. It is further submitted that loss incurred is not a notional loss as the same is based on foreign currency rates as on 31.03.2008 and the assessee as on 31.03.2008, was liable to pay a sum of Rs.1,79,99,380/-. Alternatively, it is submitted that addition, if any, can be made to the extent of Rs.68,81,094/- as the same is the net loss which has been debited to profit and loss account and claimed in computation of income. It is contended that revenue has disallowed the loss of Rs.1,79,99,380/- and taxed the gain of Rs.1,11,18,287/- which is not in accordance with law. It is also submitted that the finding recorded by the Tribunal that liability of the assessee is neither ascertained nor crystalised is factually incorrect. In support of aforesaid submission, reliance has been placed on the decisions of the Supreme Court in 'CIT Vs. BADRIDAS GAURIDU P. LTD.' (2003) 261 ITR 256 (BOM.), 'CIT Vs. SOORAJMULL NAGARMULL' (1981) 129 ITR 169 (CAL.), 'CIT Vs. D CHETAN & CO.' (2016) 75 TAXMANN.COM 300 (BOM.), 'CIT Vs. QUEST GLOBAL ENGINEERING SERVICES PVT. LTD.' IN ITA NO.133 OF 2015 DATED 15.02.2021, 'OIL & NATURAL GAS CORPN. LTD. Vs. CIT' (2010) 322 ITR 6 180 (SC), 'CIT Vs. WOODWARD GOVERNOR INDIA P. LTD.' (2009) 312 ITR 254 (SC), 'CIT Vs,. WIPRO FINANCE LTD.' (2013) 351 ITR 153 (KAR.), 'CALCUTTA CO. LTD. Vs. CIT' (1959) 37 ITR 1 (SC), 'NATIONAL RAYON CORPN. LTD. Vs. CIT' (1997) 227 ITR 764 (Sc), 'KESORAM INDUSTRIES & COTTON MILLS LTD. Vs. CWT' (1966) 59 ITR 767 (SC), 'BHARATH EARTH MOVERS Vs. CIT' (2000) 245 ITR 428 (SC) AND 'CIT Vs. MPHASIS LTD.' ITA NO.62/2018 DATED 24.02.2021, KARNATAKA.
6. On the other hand, learned counsel for the revenue has submitted that the assessee has not sustained a loss in the course of the business and is therefore, not eligible to claim deduction under Section 37(1) of the Act. It is further submitted that actual liability has not accrued to the assessee but has accrued by book adjustment and therefore, the same has been treated as notional loss. It is also submitted that since the assessee is not carrying on speculative business, therefore, the speculative loss does not accrue to the assessee. It is pointed out that in the cases 7 relief upon by the learned Senior counsel for the assessee, the loss was directly linked to the business of the assessee and in the instant case, the loss sustained has not been incurred in the course of business of the assessee. It is also submitted that the decision rendered by the Supreme Court in the case of WOODWARD GOVERNOR INDIA (P.) LTD., supra does not apply to the fact situation of the case. It is also urged that Section 43A of the Act which was incorporated in the Act w.e.f. 01.04.2003 applies to the fact situation of the case. Lastly, it is urged that finding of fact has been recorded on this aspect by all the authorities under the Act and therefore, no substantial question of law arises for consideration in this appeal.
7. We have considered the submissions made on both sides and have perused the record. The only issue which arises for consideration in this appeal whether loss of Rs.1,79,99,380/- incurred by the assessee as on 31.03.2008 being marked to market loss is speculative and notional in nature and is therefore liable to be disallowed. The issue involved in this appeal is squarely covered in decision of 8 Bombay and Calcutta High Court in 'CIT Vs. BADRIDAS GAURIDU P. LTD.' and 'CIT Vs. SOORAJMULL NAGARMULL'. In BADRIDAS GAURIDU, wherein it has been 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 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 9 business loss. This matter is squarely covered by the judgment of the Calcutta High Court, with which we agree, in the case of CIT v. Soorajmull Nagarmull [1981] 129 ITR 169".
8. Now, we may advert to the facts of the case in hand. The assessee had obtained a working capital loan from City Bank and had entered into a foreign currency swap option. The working capital loan outstanding as on the date of entering into foreign currency swap option was Rs.10,00,00,000/- and the loan liability based on the rates prevailing as on 31.03.2008 comes to Rs.11,79,99,380/-. Thus, the difference of Rs.1,79,99,380/- is on account of foreign exchange fluctuation loss which is a revenue expenditure. The assessee, in the subsequent financial year i.e. 2008-09 has made a payment of Rs.2,17,91,846/- as against aforesaid liability of Rs.1,79,99,380/- which is evident from the copy of the ledger book. Thus, the aforesaid liability was crystalised and ascertained. The assessee had entered into a binding obligation when it entered into a foreign currency contract and the contract was entered into to protect the assessee from foreign exchange 10 fluctuation. The working capital loan was used for the purpose of business and therefore, the same could not have been considered either as notional or speculative transaction. It is pertinent to note that if the assessee has to repay the loan and square off the contract on 31.03.2008, the assessee in addition to prepayment charges, has to make a payment of Rs.11,79,99,380/-. Therefore, the finding recorded by the Tribunal that the decision of the Supreme Court in WOODWARD GOVERNOR INDIA P. LTD. do not apply to the fact situation of the case, cannot be sustained in the eye of law. The working capital loan was used by the assessee for the purpose of business and therefore, the assessee had incurred the loss in the course of business and is entitled to claim deduction under Section 37(1) of the Act.
9. For the aforementioned reasons, the substantial question of law is answered in favour of the assessee and against the revenue.
In the result, order dated 17.10.2014 passed by the Tribunal and the order dated 31.10.2012 passed by the 11 Commissioner of Income Tax (Appeals) for the Assessment Year 2008-09 are set aside.
In the result, the appeal is allowed.
Sd/-
JUDGE Sd/-
JUDGE RV