Income Tax Appellate Tribunal - Ahmedabad
Adani Enterprises Ltd., Ahmedabad vs Assessee on 30 January, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "A" BENCH AHMEDABAD
आयकर अपीलीय अिधकरण, ए'
अिधकरण अहमदाबाद यायपीठ 'ए
BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL
MEMBER,
AND SHRI N. S. SAINI, ACCOUNTANT MEMBER.
ITA.No.1545/Ahd/2014
(Assessment Year:2008-09)
Adani Enterprises Ltd.
Adani House,
Nr. Mithakhali Six Roads,
Navrangpura, Ahmedabad Appellant
Vs.
Addl. CIT
Range-1, 3 rd Floor,
Pratyakshkar Bhavan,
Ambawadi, Ahmedabad Respondent
PAN: AABCA2804L
अपीलाथ क ओर से /By Appellant : Shri S. N. Soparkar,
A.R.
ू यथ क ओर से/By Respondent : Shri Subhash Bains,
CIT D.R.
सुनवाई क तार"ख/Date of Hearing : 07.01.2015
घोषणा क तार"ख/Date of
Pronouncement :30.01.2015
I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09
(Adani E nte rprise s Ltd. vs. ACIT) Page 2
ORDER
PER SHAILENDRA KUMAR YADAV, J.M:
This appeal has been filed by the assessee against the order u/s.263 of the Income Tax Act, 1961 of Commissioner of Income Tax, Ahmadabad-1, dated 28.03.2014 for A.Y. 2008-09 on the following grounds:
"1. On the facts and in the circumstances of the case, the learned CIT erred in assuming his jurisdiction u/s.263 of the I.T. Act, whereas the mandatory conditions for assuming such jurisdiction are totally absent, with the result that the impugned order passed u/s. 263 is bad in law.
2. On the facts and in the circumstances of the case, the learned CIT erred in arriving at a conclusion without any basis whatsoever to the effect that the assessment order passed by the Assessing Officer was erroneous as well as a prejudicial to the interest of the revenue.
3. On the facts and in the circumstances of the case, the learned CIT erred in cancelling the assessment order passed by the Assessing Officer on 24th February, 2012 u/s.143(3) of the I.T. Act and directing the Assessing Officer to make a fresh assessment."
2. CIT called for and examined the assessment proceedings for A.Y. 2008-09 in assessee's case and observed that assessment order passed u/s. 143(3) r.w.s. 144C of the Act on 24.02.2012 by Additional CIT determining total income at Rs.1,36,99,26,007/- was erroneous in so far as it was prejudicial to the interest of Revenue on following grounds:
I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 3 "The assessee had charged the P&L account with Rs.6,04,00,000/- which is currency Swap Loss on account of hedging of Rupee loan with Dollar loan through OTC contracts with Banks. Thus, the loss incurred on such hedging activity was speculative in nature [not excluded as per clause (d) to section 43(5) and was not allowable against income from non-speculative business."
Accordingly, a notice dated 10.03.2014 was issued and whereby assessee was asked to explain as to why appropriate order u/s. 263(1) of the Act should not be passed. In response to same, Learned Authorized Representative for the assessee made submissions and having heard the same, CIT observed that assessee is a Public Limited Company engaged in export/import and domestic trading of various commodities. The return of income was filed on 30.09.2008 and 28.05.2009 declaring total income of Rs.44.30 crores. Same was revised on 28.04.2009 whereby total income was enhanced to rs.117.58 crores. Assessment order u/s. 143(3) r.w.s. 144C was passed on 24.02.2012 whereby total income was assessed at Rs.136.99 crores after making several additions/disallowances. The major additions includes Transfer Pricing addition (Rs.10.91 crores), Prior period expenses (Rs.45.09 lacs), Bad Debts (Rs.1.64 crores), Disallowance u/s. 14A (Rs.3.97 crores) and Deduction u/s.80IA (Rs.1.23 crores).
2.1 Subsequently, on examination of case records, CIT observed that assessee had claimed currency swap loss of I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 4 Rs.6.04 crores under the head 'Financial expenses' in the profit and loss account. Since, this loss was related to hedging of Rupee loan with Dollar loan, the said transaction was not eligible transaction and hence the loss incurred was required to be treated as speculative loss u/s.43(5). Such speculative loss could not be adjusted against normal business income as per the provisions of Section 73(1) of the Act. In response to the notice, the broadly stand of assessee was as under:
"(i) It is contended that during assessment proceeding the issue of Currency Swap Loss was thoroughly examined by the AO and detailed submissions were filed on the same.
Therefore, the assessment order cannot be regarded as erroneous and prejudicial to the interest of revenue u/s.263. The assessee has relied on the Supreme Court decision in the case of Malabar Industrial Co. Ltd. (243 ITR
83) and other judgments based on the same lines i.e. when the AO has adopted one view with which the CIT does not agree, then such order cannot be treated as erroneous and prejudicial to the interest of revenue.
(ii) The Swap contract transactions are in the nature of hedging transactions to hedge against currency fluctuations and to reduce cost of borrowings by swapping currencies. The same was entered into by the assessee as per RBI guidelines on Risk Management and Inter-Bank dealings. The AO had accepted that the Currency Swap Loss is wholly in consonance with the statutory provisions of section 43(5) of the Act.
(iii) Section 43(5) is only applicable to contract for purchase or sale of a commodity and hence the provisions of section 43(5) cannot be applied to currency and accordingly, hedging transaction cannot be regarded as speculative transaction.
(iv) The ITAT Chennai Bench in the case of Patersons Securities Pvt. Ltd. (127 ITD 386) has held that derivatives are not a contract for purchase or sale of any physical commodity and therefore cannot be treated as speculative I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 5 transaction u/s 43(5). In the case of Friends & Friends Shipping Pvt. Ltd., the Gujarat High Court has held that loss incurred due to fluctuation in foreign exchange while implementing the export contracts which could not be executed is to be treated as business expenses. Hence, exception to clause (d) will apply to Currency Swap Loss and the said loss is deductible as business expenditure."
2.2 With regard to enquiry conducted by Assessing Officer, CIT observed that no such inquiries have been conducted by Assessing Officer. Assessing Officer has simply accepted the claims of assessee and failed to make any enquiry which was called in the circumstances of the case. At the same time CIT observed that analysing the claim of assessee in detail, elaboration has been done in assessment order but the chain of events should show that there was application of mind. Assessing Officer did not apply his mind while allowing he claim. Assessing Officer is not supposed to take a view without making proper enquiries and without proper examination of the claim made by the assessee. It is his duty to ascertain the truth of facts stated in return when circumstances of case are such as to provoke an inquiry. It is incumbent on the Assessing Officer to make further inquiry to further investigate the facts stated in the return. The word "erroneous" in Section 263 includes failure to make such inquiry. The order becomes erroneous because such an inquiry has not been made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct. CIT observed that revisional power conferred on the Commissioner u/s.263 is of wide amplitude. Any order passed by Assessing Officer without I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 6 inquiry and investigation is erroneous and prejudicial to the inquiry.
2.3 Regarding applicability of provisions of Section 43(5), CIT observed that provision of Section 43(5) applied to the facts of the present case. After detailed discussion, CIT held that transaction in question is speculative transaction within the broad meaning of Section 43(5) and resultant loss cannot be set off against profits and gains of non speculative business as per the provisions of Section 73(1) of the Act. Assessing Officer has not analyzed the submissions made by assessee. Assessing Officer has not examined the speculative nature of currency swap transactions entered into by assessee due to which speculative loss of Rs.6.04 crore has been unduly allowed against normal business of assessee. As a result thereof, there was substantial loss of revenue to the exchequer since assessee's claim of speculative loss against non speculative profit has been allowed without proper analysis of facts and applicable provisions of law. Accordingly, CIT held that assessment order for A.Y. 08-09 passed u/s. 143(3) r.w.s. 144C dated 24.02.2012 was erroneous and prejudicial to the interest of Revenue. Hence, Assessing Officer was directed to pass a fresh assessment order after allowing opportunity to assessee as per law.
3. Same has been opposed before us. Learned Authorized Representative has raised various contentions. Learned Authorized Representative submitted that CIT erred in I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 7 assuming his jurisdiction u/s.263 of the Act, whereas mandatory conditions for assuming such jurisdiction was totally absent, with the result that impugned order passed u/s. 263 is bad in law. On the facts and circumstances of the case, CIT erred in arriving at a conclusion without any basis whatsoever to the effect that the assessment order passed by Assessing Officer was erroneous as well as prejudicial to the interest of Revenue. Learned Authorized Representative mainly relied on the statement of facts-cum-synopsis filed before CIT running into 49 pages, wherein various contentions have been raised on issue at hand which will be dealt by us at appropriate place in this order. Learned Authorized Representative took us to the various factual and legal submissions filed before Assessing Officer to impress upon us that order of the Assessing Officer is neither erroneous so as to be prejudicial to the interest of revenue so as to invoke provisions of Section 263. Accordingly, same should be set aside. On other hand, learned Departmental Representative made detailed factual and legal submissions to support the facts that order of CIT passed u/s. 263 is valid one, which will be dealt in detail in this order. Accordingly, learned Departmental Representative submitted that order of CIT should be upheLearned In sum and substance, Learned Departmental Representative supported the order of CIT passed u/s. 263 on facts and law.
4. After going through rival submissions and material on record, we find that order of Assessing Officer has been I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 8 reversed under the provision of Section 263 of the Act. For the sake of convenience we reproduce Section 263, which reads as under:
"The Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Income Tax Officer is erroneous in so far as it is prejudicial to the interest of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment."
4.1 The power of suo motu revision u/s. 263(1) is in the nature of supervisory jurisdiction and the same can be exercised if circumstances specified there under exist. There are two situations must exist so as to enable Commissioner to exercise power of revision u/s.263, namely
(i) the order is erroneous
(ii) by virtue of being erroneous prejudice has been caused to the interests of Revenue.
4.2 The stand of learned Authorized Representative has been that once inquiry has been conducted by Assessing Officer on the issue involved then order passed by Assessing Officer is not erroneous. For this proposition, Learned Authorized Representative relied on the decision of Hon'ble Gujarat High Court in case of Commissioner of Income tax-I vs. Amit Corpn. [2012] 21 taxmann.com 64 (Guj.), which deals the issue of erroneous of the order and regarding issue of prejudicial to interest of revenue. Learned Authorized Representative relied I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 9 on the decision of Hon'ble Gujarat High Court in case of CIT vs. Friends and Friends shipping (P.) Ltd. [2013] 35 taxmann.com 553 (Gujarat). Learned Authorized Representative also relied on various legal proposition to support his stand that order of Assessing Officer is neither erroneous nor prejudicial to the interest of revenue which will be dealt by us while deciding this issue in later para of this order.
4.3 On the point of inquiry, Learned Authorized Representative submitted that Assessing Officer has issued noticed dated 23.08.2001 u/s.142(1) as compiled on page 1 to 5 of the paper book filed on behalf of assessee and certified to be filed before Assessing Officer, which reads as under:
"You are requested to furnish the following information/details. This letter is part of the Notice U/s.142(1) of the I.T. Act, and to be treated as such.
1. Please give year wise details of 'import entitlement licenses' of all types due to the company and state as to which of these were accounted and offered to tax in earlier years.
2. You have claimed Rs.18,11,52,776 as deduction under 80IA of the Act for the year. In this regard please give following information.
a) Which undertaking/enterprise is claiming the deduction, its location and address, what is the 'eligible business' of undertaking, give a detailed note.
b) Give the copy of agreement the enterprise entered with the authorities referred in s. 80IA(4)(b)
c) Give infrastructure facility developed and investment made details over the years, which is the initial year of claim and give year wise deduction claimed and status in assessments?
I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 10
d) Please demonstrate that the undertaking satisfies all other conditions of section 80IA
e) Please produce the audited accounts of the undertaking and the P&L and Balance sheet with enclosures and give working of the deduction.
f) What are the transactions of the said undertaking with the sister concerns/associate concerns and give details of quantity and value of these transactions.
3. You have made investments of Rs.1494.77 crores and earned Rs.1431639 as dividend, further Rs. 177,27,82,245 is earned as share of profit from Adani Exports which is exempt from tax. However no expenditure relevant to the income has been disallowed by you. Please explain as to why Rule 8D should not be applied to disallow the expenditure under section 14A.
4. The company during the year has received DFCE licenses worth Rs.211.61 crores for import of materials without paying duties. This benefit has accrued during the year with certainty. Explain as to why the amount of Rs. 211.61 crores should not be added to income for the year.
5. Penalty paid as per 3CD report is Rs. 16217975, where as Rs.10550490 only has been disallowed in computation. Explain as to why the remaining amount Rs.5667485 should not be disallowed and added to income. Also explain further as to why Rs.703750 the 'other penalty' paid should not be disallowed and added to income.
6. You have charged to P & L account Rs.17.27 crores under 'provision for doubtful debts/write off. However only Rs. 22799885 has been disallowed in computation. (Provision for doubtful debts as per schedule-8 is Rs. 3.61 cr.) Please show cause as to why the remaining amount of Rs. 15 crores should not be disallowed and added to income.
7. Please give breakup of the provision for doubtful debts and write off debts along with note as to how these debts have become bad. Please state whether these debts have I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 11 been actually written off in the books, if so give proof of write off with certification. Further please demonstrate with evidence that these debts were offered to tax in earlier years and satisfy the conditions of section 36(2).
8. Please show cause as to why provision for doubtful debts should hot be added to the book profit for the purpose of 115JB working.
9. Dividend from M/s Adani Global Ltd Rs.4559363 has not been offered to tax. Explain as to how the dividend received from non-resident company is exempt from tax in India.
10.Company received Rs.141.61 crores on redemption of investments which include Rs. 710445 towards exchange rate difference (gain). Please explain as to why this amount should not be added to income. If it has already been accounted, please give details.
11.You have disallowed only Rs.16855490 out of total prior period expenses of Rs.2,19,15,076. Explain as to why the remaining amount of Rs.5353722 should not be disallowed and added to income as this expenditure also does not relate to the present year.
12.What is Currency Swap. You have charged Rs.6.04 crores of Currency Swap losses to P & L account. Please explain as to why the amount should not be disallowed and added to income.
13.Please see annexure XI to 3CD report. Following amount covered by section are unpaid Bonus unpaid Rs. 382978 Interest on buyers credit Rs.349685 Interest on LC Rs.209599 Please explain as to why these amounts should not be disallowed and added to income under section 43B of the Act.
I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 12
14.What is 'Target Plus Scheme'. Please give details of achievements made by the company under the scheme and year wise benefit due to the company under the Scheme. Please furnish ledger accounts of the same since 2004.
15.It is seen that you have charged Rs.1.96 crores to P & L account in respect of derivative contracts. Please give the nature of expenditure along with the relevant account. Also show cause as to why the amount should not be disallowed and added to income.
16.It is seen that company owns office premises by virtue of investment in shares. Shares are distinct assets and depreciation is not provided on these assets by the IT Act. Please give the depreciation claimed on these shares in the accounts and explain as to why the depreciation should not be disallowed and added to income.
17.Company has incurred Rs.236124 towards club expenses give details. Please explain as to how these expenses can be considered for wholly and exclusively for business purposes.
18.Company has taken huge term loans and foreign currency loan and paying interest. However at the same time company has extended interest free loans to other companies like Adani Habitat Ltd (Rs.147.35 crores) Adani Mining Ltd (1.81 cr), Miraj Impex Ltd. (Rs. 10.58 cr). Please explain as to why proportionate interest paid should not be disallowed under section 36(1)(iii) of the Act.
19.It is seen from the records that the company owned a unit in new SEZ at Sachin Surat doing manufacturing and export of Gold articles like bangles, chains and medallions and deduction u/s 10AA was claimed in earlier years. This year, there is no such claim. Please give details and explain the position of the SEZ unit and disposal of its assets and relevant entries in books.
20.Profit of Rs.886391123 is shown twice from the same firm 'Adani Exports' having PAN: AAMFA8563G. in the I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 13 computation of income statement. Explain the double entry. Give P & L account and Balance Sheet, Audit Reports of Adani Exports along with schedules and annexures.
21.Verification of reports shows that the company has made sales of Rs. 2,164.45 crores to Adani Exports. Please give nature of sales to Adani Exports. Please give details of purchases made by the company corresponding to the said sales, quantity wise and in value wise. Also give incidental expenses relevant to the purchases.
22.Company has received Rs.116.52 crore as interest from the loans advanced to Adani Infrastructure and Developers Pvt Ltd but no interest was received from Vyom Trade Link Pvt Ltd and Adani Retail Ltd.
Please give rate of interest charged from Adani Infrastructure and Developers Pvt Ltd. Also give account statements of Adani Infrastructure and Developers pvt Ltd and Vyom Trade Link Pvt Ltd in your books.
23.Please give details foreign exchange received and foreign exchange paid and gross foreign exchange gain/loss.
Please give exchange rate fluctuation which is adjusted against any assets during the year. Also give details of exchange rate fluctuation charged to P & L account.
Please give details of interest paid outside India on any LC/loan and tax deducted thereon as per section 195 of the Act.
24.Please give details of shareholdings of directors having more than 10% voting rights and give their ledger account for the year.
25.Please give details of term loans and working capital loans (7166.36 cr) taken like bank (branch, loan account number, address) nature of loan, copy of the loan sanction letter and the details of the securities offered to the bank for availing the loan/credit. Also give copies of I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 14 statements of assets filed to these banks as on 31.03.2009 in respect of these loans. Please give date of payment of interest for verification of compliance to s. 43B provisions.
26.During the year there are substantial additions to fixed assets. Please produce the vouchers to substantiate the acquisition of assets and also give Notes supporting the use of the same during the year with evidence. Please state whether any additional depreciation has been claimed for the year, If so give details.
Please state whether any 'land lease or access rights' are obtained by you and give details of lease rent written off for the year.
27.Please state whether all over heads and tax, duty cess etc. included in Turnover and Inventories (Rs.914.89 cr) in compliance to provisions section 145A. If not, give details of taxes liable to be included in Turnover and inventories.
28.Please furnish breakup of the receivables/ Sundry debtors (Rs.1141,47 cr) in descending order along with address, PAN for first 25 parties along with ledger accounts.
29.Please give breakup of loans and advances (Note 11) in descending order along with address, PAN and ledger a/c for first 25 parties.
30.Please furnish breakup of the Sundry Creditors and other liabilities in descending order along with address, PAN for first 25 parties along with ledger accounts.
31.Please give nature of Capital Work-in-Progress (Rs. 17.15 cr) and Opening capital Work-in-Progress (Rs.3.26 cr) along with breakup and detailed working of the same. Please give details of pre operative expenses or cost of borrowings added to Capital work in Progress. I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 15
32.What is profit on sale/relinquishment of Development Rights (Rs. 35.12 cr). Please give a note along with relevant documents and ledger account.
33.Please give detailed breakup of following
a) other operating income (Rs. 192.32 cr)
b) business support services
34.Please give note on assets sold. Also give details of grass loss /profit on sale of assets.
35.Please give details of - loss of stock/ Impairment of assets/ obsolescence of spares/ diminution of value of investments accounted in the books or charged to P & L account along with basis of accounting.
36.There are substantial payments to related parties, please give details and justify the payments in comparison to market rates.
37.Please clarify whether all the disallowances quantified by the auditor in various columns of form 3CD and Annexures A to G of form 3CD of Audit Report have been disallowed by you in computation. If not please give details and reasons.
38.Please give details of premium paid, losses on settlements, and provision for losses for cash flow hedges in respect of derivative contracts which have been charged to P & L account, prefer notes A(t)]
39.Please give details of all brought forward losses available for set off as per your claim made in the returns and as per assessments completed by the department in the relevant years.
40.Please give following on a CD or DVD.
a) all ledger accounts of income and expenditure in excel format
b) all quarterly returns in forms 26Q and 27Q (and form 27A for each quarterly return in hard copy)"
I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 16 Learned Authorized Representative before us drew specific attention to the page no.2 of said compilation, wherein Assessing Officer vide query no.12 made certain enquiry touching issue at hand, which reads as under:
"12. What is Currency Swap. You have charged Rs.6.04 crores of Currency Swap losses to P&L account. Please explain as to why the amount should not be disallowed and added to income."
4.4 Above referred show cause notice and queries raised by Assessing Officer, was replied by assessee vide its letter dated 29.11.2011 along with its Annexure 1, which has been compiled at page nos. 21 to 35 of paper book filed before us again certified to be filed before concern Assessing Officer and reads as under:
"In connection with the above assessment proceedings, we are pleased to submit the remaining details point-wise as per notice u/s 142(1) of the IT Act in addition to our earlier submission dated 1st October, 2011 herein under:
(12) Your good self has sought explanation regarding currency loss of Rs 6.04 Crores. In this regard we submit that the assesses company is a "Five Star Export House" and exports various types of commodities.
Further, we submit that the assessee company has borrowed money for the purpose of its business i.e. global trading of various commodities. As per the terms entered into with banks for foreign currency working capital loan, the banks sanctioned foreign currency with a condition that the assessee company would enter into a currency swap arrangement for the said foreign currency Loan. Accordingly, the assessee company has entered into currency swap transaction in respect of outstanding foreign currency loans as per the prevalent RBI Guidelines.
I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 17 Further, the copy of ledger account of currency swap loss of RS 6.04 Crores and sample copies of some of the swap contracts entered into with Bank Viz Barclays Banks Plc is enclosed for your good self's perusal. (Annexure-1) On perusal of the same it is evident that the assessee company has entered into currency swap transactions in respect of foreign currency loans i.e. US$ loans which are converted into Japanese Yen (JPY).
In this context, the worth noting part of RBI guideline which is usually referred to in a Swap contract with an Authorized Dealer (usually "Bank") is reproduced herein under:
"that as on date and as on the date of the maturity of the transaction, the counterparty has and shall have the underlying exposure for which the transaction has been entered into as a hedge and as on date there is no other hedge already in place for the said exposure---"
The above clause in swap contracts amply clarifies the fact that the swap contract in foreign currency can be entered into only in case the enterprise is having underlying as foreign currency denominated loans both at the time of entering into transaction as well as at the time of maturity of transaction. (Emphasis provided) To summarise, the company has entered into swap contracts for the underlying being foreign currency denominated loans taken for the purpose of global trading business of the assessee company as is evident on perusal of sample copies of contracts with banks and notes forming part of Schedule - Secured loans being part of the Balance sheet. Since, the assessee company has entered into currency swap contracts for working capital loans which is pre-requisite for the dynamic business of export and import of commodities, the loss of Rs 6.04 Crores being incurred in respect of circulating/working capital is an allowable expense u/s 37 of the IT Act as is held in I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 18 various judicial pronouncements. The assessee company places reliance on the landmark decision in this context of the Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd Vs C1T reported in 116 ITR 1 (SC).The relevant part of head note of the said decision reads as under:
"Whether where profit or loss arises to an assessee on account of appreciation or depreciation in value of foreign currency held by him, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if foreign currency is held by assessee on revenue account or as a trading asset or as part of circulating capital embarked in business - Held, yes - Whether, however, if foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature - Held, yes "
(15) Your good self has sought an explanation regarding allowability of Loss of Rs 1.96 Crores on derivatives contracts. We are submitting herewith the break up of the said loss of Rs 1.96 Crores and copies of the relevant ledger accounts. (Annexure-2) On perusal of the same, your good self would find that the said loss consists of Rs 0.73 Crores in respect forex derivative contracts and Rs 1.23 Crores in respect of commodity derivative contracts. In so far as loss on forex derivatives contracts is concerned, we submit that the said loss is in the nature of mark to market loss in respect of forward contracts entered into by the assessee company in respect of trade obligations and accordingly, the said loss being in the nature of trading expenditure is allowable u/s 37 of the IT Act as it is incurred during the course of carrying on of the business and particularly in view of the decision of the Hon'ble Supreme Court in the case of CIT Vs Woodward Governor India (P) Ltd reported in 312 ITR 254 (SC).TK head note of the said decision is reproduced herein under for ready reference:
"Section 37(1), read with section 145, of the Income- tax Act, 1961 - Business expenditure - Allowability of - I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 19 Assessment year 1998-99 - Whether expression 'expenditure' as used in section 37 may, in circumstances of a particular case, cover an amount which is really a 'loss', even though said amount has not gone out from pocket of assessee - Held, yes - Whether loss suffered by assessee on account of foreign exchange difference as on date of balance sheet is an item of expenditure under section 37(1) - Held, yes - Whether accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till Assessing Officer comes to conclusion for reasons to be given that said system does not reflect true and correct profits - Held, yes - Whether an enterprise has to report outstanding liability relating to import of raw material using closing rate of foreign exchange and any difference, loss or gain, arising on conversion of said liability at closing rate should be recognized in profit and loss account for reporting period -Held, yes"
Further, the loss of Rs 1.23 Crores is incurred in, respect of hedging transactions in commodity derivatives entered into on commodity exchanges. On perusal of details submitted to your good self and Annexure XVII of the Tax Audit Report, it is evident that the assessee company deals in various agro products viz pulses, rice, sugar, soyabean oil etc and to hedge against the fluctuation in the price of agro products, the assessee company entered into commodity derivatives transactions in the year under consideration. Since, the loss of Rs 1.23 Crores is incurred on derivative contracts to hedge against the fluctuation in the price of agro products which is traded by the assessee company, the said hedging loss being realized trading expenditure is allowable u/s 37 of the IT Act in view of various judicial pronouncements.
(17) The assessee company has incurred Rs 2,36,124 towards club expenses. The ledger account along with vouchers and invoices are submitted herewith. (Armexure-3) On perusal of the same, it is clear that I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 20 the said expenses are incurred for the residential accommodation and food & beverages for the vendors and employees of the company. Your good self would appreciate that the said expenses are necessary to effectively run the business of the company and the expense incurred is miniscule as compared to the revenue of the assessee being listed company. Since the club expense has been incurred for the residential accommodation and food & beverages of vendors and employees, the same is actually and wholly incurred for the business of the assessee company and the same is allowable u/s 37 of the IT Act. Moreover, the said club expense incurred should be allowed u/s 37 of the IT Act as wholly and exclusively incurred for the business of the assessee company as it is akin to incurring expenses for residential accommodation in a hotel or guest house and for food & beverages in any other restaurant or in the assessee's own office premise for the vendors and employees of the company which is otherwise allowable u/s 37 of the IT Act.
(23) The details of net foreign exchange fluctuation loss of Rs 12,74,96,613 as disclosed in Schedule 18-Finance charges of Audited Financial Statement along with ledger accounts is submitted herewith. Further, the detailed explanation regarding various types of working/circulating loans/credit facilities on account of which the said forex loss (net) is incurred is also submitted herewith (Annexure-4). Further, the assessee company has been consistently entering into the various types of foreign currency working/circulating loans/credit facilities and it has offered for tax the gain arising on such transactions as well as it has been allowed said loss 3 expense in the year in which it is incurred on year on year basis.
In so far as adjustment of forex fluctuation to asset is concerned, we submit that no amount has been adjusted against the value of asset in view of the fact that there is no outstanding foreign currency loan taken for the purpose of acquisition of capital asset. Accordingly, the question of adjusting the value of I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 21 forex fluctuation in the value of assets in terms of Sec 43A of the IT Act does not arise.
The details of interest paid outside India on LC and Loan to various banks along with nature of loan/credit facility is submitted herewith. (Annexure-5) The e-TDS returns evidencing TDS deducted u/s 195 of the IT Act on said loan/credit facility is already submitted vide point no 40 of our earlier submission.
(25) In continuation of details submitted in respect of interest on term loans, we submit herewith the various dates of payment of interest on buyers's credit and local LC. We may submit that the assessee company has already disallowed, the said interest expense as disclosed in Annexure XI of the tax audit report, in the return of income. (Annexure-6) (26) The block of asset wise vouchers and invoices evidencing addition/acquisition to fixed assets are submitted herewith for your good selfs verification (Annexure-7) On perusal of the said details, it is evident that the major addition is in the block of vehicles, computers, furniture fixtures etc which is put to use as soon as they are acquired as is evident on perusal of the details submitted herewith. Further, the assessee company submits that it is having an in house internal audit department and external auditors who do statutory audit as well as tax audit and therefore, the date of put to use have been verified by all of them. Further, we confirm that the assesses company has not claimed additional depreciation on the plant & machinery.
In so far as details of lease rent is concerned, we submit that Rs 1.56 Crores (Net) is charged off to profit & loss account as lease rent in respect of leasing arrangements entered into by the assessee company. The copy of the ledger account of lease rent is submitted herewith. (Annexure-8) Moreover, we submit that there is no lease of land arrangement entered into by the assessee company.
I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 22 (27) Your good self has sought an explanation regarding compliance with the provisions of Section 145A of the IT Act in respect of inventories. In this regard, we submit that the assessee company is engaged in the business of global trading of various commodities and is not a manufacturer. Accordingly, the assessee company submits that taxes, duty, cess paid to bring goods to the place of its location and condition are included in the value of purchases, sales and inventories. No CENVAT credit in respect of the same has been claimed or received by the assessee company as is evident on perusal of Clause No 12B and 22 (a) of the Tax Audit Report. Accordingly, we submit that the assessee company has duly complied with the provisions of Section 145A of the IT Act.
(35) The assessee company submits that it has not charged to profit & loss account any loss on account of impairment of assets, obsolescence of spares or diminution in the value of investments. Though the assessee company has incurred loss of Rs 20,98,259 on account of loss of goods due to accident, the same has been compensated by the insurance company. The Ledger accounts of Loss of goods due to accident and transit loss recovery are submitted herewith. (Annexure-9) (36) Your good self has sought the details of payment made to related parties and its justification with market rates. On perusal of Annexure IX of the Tax Audit & report, it is evident that the assessee company has mainly entered into substantial transactions with Mundra Port & Special Economic Zone Ltd (MPSEZ), Adani Wilmar Ltd (AWL) and Aditya Corpex Pvt Ltd. In so far as transactions with Mundra Port & Special Economic Zone Ltd are concerned, we submit that the assessee company has paid services charges for port handling services provided to the assessee company. We are submitting herewith the invoices raised by MPSEZ on the asssessee company along with invoice raised by MPSEZL on Hindustan Zinc Ltd and PEC Ltd I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 23 as comparables. Further, the assessee company has entered into transactions for purchase of ground nut oil and purchase of soyabean meal. We are submitting herewith invoice raised by AWL on the assessee company along with ledger account of vendor of AWL who has raised invoice on AWL evidencing back to back purchase price for the said prices. Further, the assessee company has purchased cut & polished diamonds from Aditya Corpex Pvt Ltd. Please find attached herewith the invoice raised by Aditya Corpex Pvt Ltd on the assessee company and invoice raised on Anand Trade Movers (Guj) Pvt Ltd by Aditya Corpex Pvt Ltd as a comparable transaction. (Annexure-10) On perusal of above transactions coupled with party wise comparables provided by us, it is evident that the assessee has entered into transactions with its related parties at prevalent market price.
(38) The details of loss in respect of cash flow hedges in respect of derivative contracts as referred to in Note no A(t) are already submitted vide point 23 herein above and hence, the same is not submitted again.
(39) On perusal of details of brought forward loss as shown in Annexure XV of the Tax Audit Report and claimed in return of income, it is evident that the said brought forward losses are short term and long term capital losses of A.Y.2002-03, 2003-04,2004-05 and 2005-06 which are allowed as such in the assessment orders of the said years. Further, in respect of long term capital loss of A.Y.2006-07 and 2007-08 are concerned, we are submitting that the said loses have been allowed to us. We are submitting herewith the copies of assessment order of A.Y.2006-07 and 2007-08 for your good selves ready reference. (Annexure-11)"
4.5 It shows that detailed enquiry has been done by Assessing Officer including issue of currency swap loss of Rs.6.04 crore and same has been replied in detail along with other details also mentioned above. Even CIT has raised the issue u/s.263 I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 24 regarding said loss of Rs.6.04 crore on account currency swap loss, which CIT has reproduced on page 1 of his order which is as under:
"The assessee had charged the P&L account with Rs.6,04,00,000/- which is Currency Swap Loss on account of hedging of Rupee loan with Dollar loan through OTC contracts with Banks. Thus, the loss incurred on such hedging activity was speculative in nature [not excluded as per clause (d) to section 43(5) and was not allowable against income from non-speculative business."
4.6 CIT has started the enquiry on the issue at hand which has its genesis from order of concern Assessing Officer. In such situation, it is not proper on part of CIT to observe that Assessing Officer has made no enquiry, so his order is erroneous. CIT has issued show cause notice dated 10.03.2014 u/s. 263 of the Act to the assessee inter alia stated as to why order passed by concern Assessing Officer u/s.143(3) r.w.s. 144C of the Act on 24.02.2012 as discussed above determining total income at Rs.1,36,99,26,007/- was erroneous in so far it was prejudicial to the interests of revenue on above mentioned ground. Assessee categorically replied the said show cause notice vide its reply dated 14.03.2014. The substance of the said reply of assessee has also been incorporated by assessee in statement of facts-cum-synopsis filed before us running into page nos. 4 to 33 which will be dealt in detail by us in coming para. According to learned Authorized Representative CIT while passing the order has not properly appreciated the facts and law and concluded that no such inquiry has been conducted by Assessing Officer. I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 25 According to him Assessing Officer simply accepted the claim of assessee and failed to make any inquiry. So far as the inquiry on the issue involved made by Assessing Officer is concerned, Assessing Officer made enquiries vide its letter dated 23.08.2001 u/s.142(1) as discussed above. Assessee has replied the same in detail vide its reply dated 29/11/2011 as discussed above. So it is not appropriate to allege that Assessing Officer has made no enquiry or insufficient enquiry. We find that Hon'ble Gujarat High Court in case of Commissioner of Income tax-I vs. Amit Corpn. (2012) 21 Taxman.com 64 (Guj.) has held that Assessing Officer while framing assessment order is supposed to call all record of the assessee and having perusing the same order is passed then assessment order could not be revised in exercise of revisional power u/s.263. Even in case before us, we find that notice dated 23.08.2011 issued by the Assessing Officer u/s. 142(1), wherein Assessing Officer has almost raised 40 issues and on each of the issue, assessee has replied the same in detail to concerned Assessing Officer as discussed above. Having considered the same, Assessing Officer reached to certain conclusion. In such situation, it cannot be alleged that Assessing Officer has not applied his mind on the issue at hand, before reaching to certain conclusion. It was explained before Assessing Officer that assessee company borrowed money for the purpose of its business i.e. global trading of various commodities. As per terms entered into with banks for foreign currency working capital loan, banks sanctioned I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 26 foreign currency with a condition that assessee company would enter into a currency swap arrangement for the said foreign currency Loan. Accordingly, assessee company had entered into currency swap transaction in respect of outstanding foreign currency loans as per the prevalent RBI Guidelines. The copy of ledger account of currency swap loss of Rs. 6.04 Crores and sample copies of some of the swap contracts entered into with Bank Viz Barclays Banks Plc were filed before Assessing Officer. It is not in dispute that assessee company has entered into currency swap transactions in respect of foreign currency loans i.e. US$ loans which was converted into Japanese Yen (JPY). Specific guidelines which is usually referred to in a Swap contract with an Authorized Dealer (usually "Bank") is reproduced herein under:
"that as on date and as on the date of the maturity of the transaction, the counterparty has and shall have the underlying exposure for which the transaction has been entered into as a hedge and as on date there is no other hedge already in place for the said exposure---"
Above clause in swap contracts amply clarifies the fact that the swap contract in foreign currency can be entered into only in case the enterprise is having underlying as foreign currency denominated loans both at the time of entering into transaction as well as at the time of maturity of transaction. Thus, assessee company has entered into swap contracts for the underlying being foreign currency denominated loans taken for the purpose of global trading business of assessee company. Since, assessee company had entered into currency swap I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 27 contracts for working capital loans which is pre-requisite for dynamic business of export and import of commodities, loss of Rs 6.04 Crores being incurred in respect of circulating/working capital was an allowable expense u/s. 37 of the Act as held in various judicial pronouncements. Hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd Vs C1T reported in (1979) 116 ITR 1 (SC).The relevant part of head note of the said decision reads as under:
"Whether where profit or loss arises to an assessee on account of appreciation or depreciation in value of foreign currency held by him, on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if foreign currency is held by assessee on revenue account or as a trading asset or as part of circulating capital embarked in business - Held, yes - Whether, however, if foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature - Held, yes "
4.7 As stated above, complete details and break-up of aforesaid Currency Swap Loss alongwith a sample contract with Barclays Capital formed part of Annexure-I to the aforesaid letter dated 29th November, 2011. The Assessing Officer considered all the relevant issues during course of assessment proceedings and various replies and explanations filed on behalf of assessee-company and having duly considered vis-a-vis the documentary evidences and the audited accounts. Thereafter the assessment order was passed wherein total income was determined by Assessing Officer at Rs.136,99,26,00/- as against returned income (as per revised return) of Rs.117,58,16,576/-. Assessing Officer made several I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 28 additions and disallowances. He after proper application of mind accepted the assessee's claim regarding currency swap loss of Rs.6,04,00,000/- and no disallowance on this issue was made. It is correct that there is no discussion on this issue in assessment order but all the accompanying facts and circumstances establish beyond any doubt that this issue was specifically and thoroughly examined by Assessing Officer and he arrived at legally correct view that currency swap loss was in the nature of a legitimate allowable business expenditure.
4.8 As mentioned above, in the written submissions dated 29th November, 2011, assessee company had invited the attention of Assessing Officer to the guidelines issued by the Reserve Bank of India regarding entering into Swap Contract and the relevant portion of the Reserve Bank of India guidelines was also reproduced in aforesaid submissions. Reserve Bank of India vide its letter dated 2nd July, 2007 issued Master Circular on Risk Management and Inter-bank Dealings. For ready reference the relevant text of this letter reads as under:
"Master Circular on Risk Management and Inter-Bank Dealings Rupee Accounts of Non-Resident Banks, Inter- Bank Dealings, Foreign Exchange Derivative Contracts, etc. are governed by the provisions in Notification No. FEMA 1/2000-RB, Regulation 4(2) of Notification No. FEMA 3/RB-2000 and Notification No. FEMA 25/RB-2000 dated May 3, 2000 and subsequent amendments thereto.
I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 29
2. This Master Circular consolidates the existing instructions on the subject of "Risk Management and Inter-Bank Dealings" at one place. The list of underlying circulars/notifications is set out in Appendix.
3. This Master Circular is issued with a sunset clause of one year. This circular will stand withdrawn on July 1, 2008 and would be replaced by an updated Master Circular on the subject."
4.9 The view adopted by Assessing Officer while allowing assessee currency swap loss was wholly in consonance with the statutory provisions of section 43(5) of Income Tax Act, which is reproduced below for ready reference:
"[5] "speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips:
Provided that for the purposes of this clause--
(a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or
(b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or
(c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 30 guard against loss which may arise in the ordinary course of his business as such member; o]
(d) an eligible transaction in respect of trading in derivatives referred to in clause 35[(ac)] of section 236 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange;] shall not be deemed to be a speculative transaction.
Explanation.--For the purposes of this clause, the expressions--
(i) "eligible transaction" means any transaction,--
(A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act. 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and (B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A] and permanent account number allotted under this Act;
(ii) "recognised stock exchange" means a recognised stock exchange as referred to in clause (f) of section 238 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified39 by the Central Government for this purpose;"
I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 31 4.10 Aforesaid section applies only to such transactions in which a contract for purchase or sale of a commodity, including stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of commodity or scrips. The word "commodity", by no stretch of imagination, can cover currency which is only a medium of exchange with which goods and services can be bought and soLearned The Legislature, while enacting aforesaid provision, thought it necessary to expressly include stocks and shares as being covered under "commodity", which means that but for such expressed inclusion, the word "commodity" would not have covered even stocks and shares. Obviously, currencies cannot be covered by the word "commodity". In such situation, provision of section 43(5) cannot be applied to currencies. Without prejudice to above, by virtue of the Proviso to section 43(5), hedging transaction cannot be regarded as speculative transactions. Aforesaid proviso does not contain anything to provide for an exception on account of hedging contracts in respect of currencies whereas it specially covers raw material, merchandise, stock and shares. It shows that legislature was clear in its mind that since the word "commodity" itself cannot take in any currency as such, there can be no question for providing an exception in that regard in the proviso.
4.11 We find that ITAT Chennai Bench in case of DCIT vs. Patersons Securities Pvt, Ltd. (127 ITD 386) has held as under:
I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 32 "3. We have heard the rival submissions, the available material on record and have also carefully treated through the relevant provisions of the Act and related precedents thereof. Before we venture to decide the controversial issue, we have to understand as to what exactly derivative means and what is exact meaning of transaction in respect of trading in derivative insofar as income-tax is concerned. After clearly understanding the actual legal meaning of the derivative trading vis-a-vis the speculative transaction, we cannot resist ourselves to arrive at the same conclusion on which the Learned CIT(A) has actually arrived. A derivative is a financial instrument, the price of which has a strong correlation with an underlying commodity, currency, economic variable or financial instrument. The different types of derivatives are "future contracts, forward, swaps and options". They are traded on derivatives markets or over the counter (OTC). The market traded derivatives are standard but the OTC trades can be customized with regard to maturity, quantity, or pricing structure for a particular client. The disclosure of derivatives in financial statements is required by "Financial Reporting Standard-13". A speculative transaction as per section 43(5) means a transaction in which the contract for the purchase or sale of any commodity, including stocks and shares, is periodically or & ultimately settled otherwise than by actual delivery or transfer of commodity or scrip. A derivative can also be traded on the value of the underlying shares but are not a trade in any actual stock. It does not have a physical existence. Derivatives are not a contract for purchase or sale of any physical commodity as such. So, these are not speculative transactions in the strict sense of terms of section 43(5). For the definition of derivatives section 2(ac) of the Securities Contract (Regulation) Act, 1956 can be consulted. It derives its value from the prices or index of prices, of the underlying securities.
4. The Mumbai Bench of the ITAT in I.T.A. No. 3182/Mum./2004 has held that trading in derivatives I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 33 cannot be considered as a speculative transaction.
Therefore, set-off of loss of derivative trading against the profits of the share trading business is permissible. Hence, we confirm the impugned finding of the Id. CIT(A) and dismiss the sole ground of this appeal.
5. In the result, the appeal of the Revenue stands dismissed."
It shows that set off of loss of derivative trading against the profit of share trading business is permissible.
4.12 We also find that Hon'ble Jurisdictional Gujarat High Court in case of CIT v. Friends and Friends Shipping Pvt. Ltd. rendered on 23.8.2011 in Tax Appeal No. 251 of 2010 held as under:
"Having thus heard the learned advocates for the parties and having perused the documents on record, we find that the issue is covered by the decisions of the Bombay High Court in the case of Badridas Gaurida (P) Ltd. and the Calcutta High Court in the case of Soorajmull Nagarmull (supra).
In the decision of the Bombay High Court, the assessee was in the business of export of cotton. The assessee had entered into forward contract with banks in respect of foreign exchange. Some of these contracts could not be honoured for which the assessee had to pay Rs.13.50 lacs which was debited to the profit and loss account. The assessee claimed the sum as business loss. Revenue was of the opinion that the loss was speculative in nature. Bombay High Court following the decision of the Calcutta High Court in the case of Soorajmull Nagarmull [supra) held that the expenditure would not be covered under section 43 [5) of the Act as speculative transaction. It was observed as under:
I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 34 "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 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 C1T v. Soorajmull Nagurmull (1981) 129 ITR169."
Before the Calcutta High Court, the assessee was a firm engaged in the business of import and export of jute. In course of business, the assessee would enter into forward contract in foreign exchange in order to cover the loss which may arise due to difference in foreign exchange valuation. In one such contract, the assessee had to pay to the Bank difference of Rs.80,491/- which was claimed by the assessee as revenue expenditure. The Assessing Officer disallowed the claim. The High court held that the assessee was not a dealer in foreign exchange and the foreign exchanges were only incidental to the assessee's regular course of business and the loss was thus not a speculative loss but incidental to the assessee's business and allowable as such. Facts in the present case are very similar. Admittedly, the assessee is not a dealer in for3eign exchange. For the purpose of hedging the loss due to fluctuation in foreign exchange while implementing the I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 35 export contracts, the assessee had entered into forward contract with the 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 be stated to be in speculation as to cover under subsection (5) of section 43 of the Act."
Thus, it emerged from above legal discussion that once transactions in currencies cannot attract the very definition of expression "speculative transaction" contained in clause [5] of Section 43, there is no room for suggesting that the exception contained in clause (d) of Proviso thereto does not apply to transactions by way of currency swap in foreign currency. In the result, loss on account of such contracts, entered into for the purpose of hedging, is deductible as business expenditure. According to us, Assessing Officer has adopted legally tenable view in its facts and circumstances though not discussed specifically.
4.13 The normal practice with department is that assessment order contains detailed discussion only on such issues which are decided against assessee and issue which are decided in assessee's favour do not contain any much discussion or any discussion in the assessment order. In such situation, it is not appropriate for Commissioner to invoke his jurisdiction u/s. 263 of the Income Tax Act, with a view to reverse the completed assessment order on alleged ground that such assessment was erroneous and prejudicial to the interest of revenue. To sum up, we find that assessment order was passed after thorough I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 36 scrutiny and after due application of mind on relevant issues on the point. Claim of currency swap loss of Rs.6,04,00,000/- was specifically inquired into during the course of the assessment proceedings and Assessing Officer raised all relevant queries on this issue. Assessee filed detailed replies on this issue accompanied by all documentary evidences in support of its claim. Assessing Officer after due application of mind concluded that the currency swap loss was allowable having regard to the provisions of section 43(5) of the Act.
4.14 Even if it is assumed that two different possible views could have been taken on this issue, the fact remains that the Assessing Officer has adopted a legally tenable and possible view after taking into considering the facts and circumstances as discussed above. Such view adopted by Assessing Officer cannot be said to be a legally unsustainable view.
4.15 It is established legal position that every loss of revenue cannot be treated as prejudicial to the interest of revenue and when Assessing Officer adopted one of the courses permissible in law which results into loss of revenue, or where two views are possible and Assessing Officer has taken one view with which CIT does not agree, it cannot be treated as an erroneous order so as to be prejudicial to the interest of revenue, even if there is no specific discussion in this assessment order on this issue. The facts and circumstances as on record suggests that I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 37 there was due application of mind on the part of Assessing Officer with regard to the issue at hand.
4.16 We find that Hon'ble Gujarat High Court decision in the case of CIT v. Arvind Jewelers 259 ITR 502 has held as under:
"The provisions of section 263 of the income-tax Act. 1961, cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer. It is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. The phrase "prejudicial to the interests of the Revenue" has to be read in conjunction with an erroneous order passed by the Assessing Officer and every loss of as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the Revenue. When an Assessing Officer adopts one of the courses permissible in law and it has resulted in loss of revenue, or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the Revenue unless the view taken by the Income-tax Officer is unsustainable in law.
The assessee-firm had filed its return of income disclosing a net loss of Rs. 2,777 in the business of purchase and sale of ornaments and jewellery. The Income-tax Officer issued notices under sections 143 (2) and 142(1) of the Income-tax Act along with the requirement letter. After considering the material produced by the assessee and the explanation offered, the Income-tax Officer framed the assessment determining the total income at Rs. 32,900. The Commissioner of Income-tax held that the order was erroneous and prejudicial to the interests of the Revenue, in so far as the Income-tax Officer had not carried out any investigation either while adding certain amounts in the total income or while accepting the assessee's explanations on the various points. The I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 38 Tribunal set aside the order of the Commissioner of Income-tax. On a reference:
Held, that the finding of fact by the Tribunal was that the assessee had produced relevant material and offered explanations in pursuance of the notices issued under section 142(1) as well as section 143(2) of the Act and after considering the material and explanations, the Income-tax Officer had come to a definite conclusion. Since the material was there on record and the said material was considered by the Income-tax Officer and a particular view was taken, the mere fact that different view can be taken should not be the basis for an action under section 263. The order of revision was u justified."
It shows that even if two possible views are possible on merits, and Assessing Officer has adopted one view after appreciation of facts, his order cannot be said to be erroneous so as to be prejudicial to the interests of Revenue to invoke provision of Section 263. We also find that Hon'ble Supreme Court in case of Malabar Industrial Company Ltd, v. CIT (2000) 243 ITR 83 (SC) and again Hon'ble Supreme Court decision in case of CIT v. G. M. Mittal Stainless Steel P. Ltd. (2003) 263 ITR 255 (SC) has taken similar view. We also find that Hon'ble Allahabad High Court in case of CIT vs. Mahendrakumar Bansal 297 ITR 99, has held that merely because the Income Tax Officer had not written a lengthy order, it would not establish without bringing on record specific instances that the assessment order passed u/s. 143(3) is erroneous and prejudicial to the interests of Revenue. Hon'ble Bombay High Court decision in case of CIT vs. Gabrial [India] Ltd. 203 ITR 188 has held that if Assessing Officer has raised queries and the assessee has filed I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 39 written submissions/explanation, merely because there is no discussion in the Assessing Officer's order on the relevant issue, it cannot be said that such order becomes erroneous. Similar view has been taken by Hon'ble Delhi High Court in case of CIT vs. Hindustan Coco Cola Beverages P. Ltd. 331 ITR 192 (Del.). We also find that Hon'ble Delhi High Court in case of CIT vs. Anil Kumar Sharma, 335 ITR 83 (Del.) has held as under:
"There is a distinction between "lack of inquiry" and Inadequate inquiry". If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Income-tax Act, 1961, merely because he has a different opinion in the matter:
Held, dismissing the appeal, that the present case would not be one of "lack of inquiry" even if the inquiry: was termed inadequate. The Tribunal found that complete details were filed before the Assessing Officer and that he applied his mind to the relevant material and facts, although such application of mind was not discernible from the assessment order. The Tribunal held that the Commissioner in proceedings under section 263 also had all these details and material available before him, but had not been able to point out defects conclusively in the material, for arriving at a conclusion that particular income had escaped assessment on account of non application of mind by the Assessing Officer. The Tribunal was right and the order of revision was not valid."
In above case, the Hon'ble Delhi High Court has relied on its earlier decision in case of CIT vs. Sunbeam Auto Ltd., 332 ITR 167 has observed as under:
I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 40 ". . . . As noted above, the submission of learned counsel for the Revenue was that while passing the assessment order, the Assessing Officer did not consider this aspect specifically whether the expenditure in question was revenue or capital expenditure. This argument predicates on the assessment order, which apparently does not give any reasons while allowing the entire expenditure as revenue expenditure. However, that by itself would not be indicative of the fact that the Assessing Officer had not applied his mind on the issue. There are judgments galore laying down the principle that the Assessing Officer in the assessing order is not required to give detailed reason in respect of each and every item of deduction, etc. Therefore, one has to see from the record as to whether there was application of mind before allowing the expenditure in question as revenue expenditure. Learned counsel for the assessee is right in his submission that one has to keep in mind the distinction between 'lack of inquiry' and 'inadequate inquiry'. If there was any inquiry, even inadequate that would not by itself give occasion to the Commissioner to pass orders under section 263 of the Act, merely because he has different opinion in the matter."
4.17 Applying ratio of CIT vs. Sunbeam Auto Limited (2011) 332 ITR 167 (Del), Pune 'A' Bench has decided similar issue in favour of assessee in Smt. Shakuntala S. Sanghavi vs. ACIT, Jalgaon in ITA No. 956/PN/2013 by observing as under:
"6. After going through the rival submissions and material on record, we find that the assessee was a partner in erstwhile firm M/s. Deepak Foods which was engaged in the business of producing Tutifruti. M/s. Deepak Foods used to sell the product under the brand name Nilons. The assessee retired as a partner in M/s. Deepak Foods on 17.03.2008. At the time of retirement, the assessee received total amount of Rs.21,66,52,000/-. In the return filed by the assessee for A.Y. 2008 - 09, the assessee did not offer any amount to tax which was received by her at the time of retirement from the partnership firm. The copy of the return of income filed by the assessee has been enclosed by I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 41 assessee on pages 5-22 of its Paper Book. However, the assessee had given a note to this return wherein the fact of goodwill received was mentioned.
6.1 As stated above, the concerned CIT has passed the order u/s 263 inter alia held that the assessment order passed was erroneous as well as prejudicial to the interest of the revenue. Firstly, the CIT has stated that there was no proper enquiry and the Assessing Officer has not conducted necessary enquiry and applied mind regarding the amount received by the assessee. He has simply accepted the return filed by the assessing without verifying the facts of the case. CIT further stated that the amount received by the assessee at the time of retirement over and above the capital account balance was taxable as long term capital gain in the hands of the assessee. The CIT in para 13 of his order has stated that the assessee is liable to pay capital gain on the amount received by her.
6.2 According to the concerned CIT, the contention of the assessee that the amount received by her is towards her share in the assets of the firm including the goodwill was not found correct. The CIT has mentioned that firstly the entire transaction has been routed in a manner to avoid tax. It was pointed out that M/s. Lesma Ltd., a company incorporated in Cyprus invested Rs.67.09 Crs. in a company called Sanghavi Foods Pvt. Ltd. The share capital of Sanghavi Foods Pvt. Ltd. was increased from Rs.1.33 Crs. to Rs.2.66 Crs. and the shares were issued at a premium of Rs.67.09 Crs. Later on, Sanghavi Foods Pvt. Ltd. invested Rs.52.42 Crs. in M/s. Deepak Foods and out of the said amount Rs.21.52 Crs. was withdrawn by the assessee which is subject matter of tax as dealt by the concerned CIT above.
6.3 The CIT has stated that the amount of goodwill has been decided on an arbitrary basis without recognizing the principles of natural justice. He has referred to the profit earned by M/s. Deepak Foods and has stated that it was impossible to determine the goodwill at such a huge figure. According to him, the entire transaction has been routed I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 42 under the garb of goodwill and therefore, he has stated that the amount received of Rs.21.52 Crs. should be taxed on a protective basis under the head income from other sources. As stated above, the CIT has given the following directions.
a. Firstly, he has stated that the goodwill should be computed as per the super profit method and the amount received by the assessee in excess of the goodwill amount should be taxed as long term capital gain.
b. Alternately, he has stated that the amount of Rs.21.52 Crs. should be taxed as income from other sources.
6.4 The stand of the assessee has been that the order passed by the CIT u/s 263 is not justified. The CIT has harped on the issue that the Assessing Officer has not applied his mind to the issue of receipt of amount of Rs.21.52 Crs. at the time of retirement and hence, the assessment order passed is erroneous so as to be prejudicial to the interest of the revenue. The CIT has not merely set aside the order of the Assessing Officer but has given specific directions to tax the amount received of Rs.21.52 Crs. as an income of the assessee. In the return of income, the assessee had clarified that she had retired from the firm M/s. Deepak Foods and had received an amount as goodwill which was claimed exempt from tax. Thus, the fact that the assessee had received as goodwill was mentioned by the assessee in her return itself.
6.5 With regard to the issue whether the amount received is taxable as long term capital gains. We find that ITAT, Pune in the case of Rajnish Bhandari [ITA No. 469/PN/11] has held that the amount received over and above the capital account balance at the time of retirement is not taxable. While arriving at above decision, ITAT had relied upon another decision of ITAT, Pune in the case of Riyaz Shaikh [ITA No.352/PN/06]. The relevant portion of the Rajnish Bhandari is as under:
I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 43 "2. The issue raised by the Revenue in this appeal is as to whether the amount of Rs 54,59,083/- received by the assessee on retirement from the partnership firm is liable to be taxed as long term capital gain arising on transfer of partnership rights. The facts, in brief, are that the assessee, a partner in various partnership firms , retired from the partnership firm M/s Raviraj Associates w.e.f. 31.3.2007, relevant to the assessment year 2007-08, vide deed of retirement of the same date. He was a partner to the extent of 37.5% of the shares and was paid Rs 54,59,0837- over and above the balance in his capital account. The assessee claimed this amount as capital receipts not liable to tax. The Assessing Officer, however, taxed the said amount as long term capital gain. The Assessing Officer derived support from a decision of the Pune Bench of the Tribunal in the case of Shevantibhai C. Mehta v. ITO 83 TTJ 542 (Pune). The assessee took up the matter in appeal before the Commissioner of Income-tax (Appeals).
3. Before the Commissioner of Income-tax (Appeals), assessee relied on a subsequent decision of our co- ordinate Bench in the case of Mr Riyaz A Shaikh v. ITO vide ITA No 352/PN/06 dated 29.10.2010, wherein the Tribunal held that amounts received by the partner on his retirement are exempt from capital gains tax. The Commissioner of Income-tax (Appeals) has since deleted the impugned addition and against this decision, the Revenue is in appeal before us.
4. The learned departmental Representative supported the order of the Assessing Officer.
According to the learned Departmental
Representative, the additional consideration
received by the assessee was on account of relinquishment of his pre existing rights in the partnership firm, and therefore, the same was in the nature of capital gain liable to tax as per the provisions of sections 45 read with section 2 (47) ft) & (ii) of the Act.
I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 44
5. On the other hand, the learned Counsel for the respondent- assessee defended the order of the Commissioner of Income-tax (Appeals) and filed a copy of the order of our co-ordinate Bench in the case of Mr Riyaz A Shaikh (supra) in support of the stand of the assessee.
6. We have carefully considered the rival contentions. We find that the Commissioner of Income-tax (Appeals) has decided the issue in favour of the assessee by following the order of our co-ordinate Bench in the case of Mr Riyaz A Shaikh (supra), wherein on identical issue, the Tribunal has held as under:
We have carefully considered the rival submissions and perused the orders of the authorities below. As noted earlier, the short point involved in this appeal relates to taxability of amount received by the assessee on retirement from partnership firm. The Hon 'ble Supreme court in the case of Mohanbhai Pamabhai (supra) following its judgment in the case of Sunil Siddharthbhai v. CIT156ITR 509 (SC) held that when a partner retired from the firm and received his share of an amount calculated on the value of the net partnership assets including goodwill of the firm, there is no transfer of interest of the partner in the goodwill, and no part of the amount received is assessable as capital gain under section 45 of the Act. The judgment of the Humble Gujarat High Court in the case of Mohanbhai Pamabhai (supra) reported as 91 ITR 393 (Guj) was affirmed. Subsequently, in the case of CIT v R Lingmallu Raghukumar, 247 ITR 801 (SC), the Supreme Court held, while affirming the principle laid down in the case of Mohanbhai Pamabhai (supra) that when a partner retires from the partnership firm and the amount of his share in net partnership assets after deduction of liabilities is determined, there is no element of transfer of interest in the partnership assets by the retired partner to the continuing partners and I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 45 the amount received by the retiring partner is not 'capital gain' under section 45 of the Act. Further, the learned counsel for the appellant has correctly pointed out that the decision of the Hon'ble Bombay High Court in Tribhuvandas G Patil (supra) followed in the case of NA Mody (supra) has been reversed by the Hon 'ble Supreme court in the case of Tribhuvandas G Patel reported in 236 ITR 515 (SC) on this aspect of the matter. In fact, the Hon'ble Bombay High Court in a recent decision in the case of Prashant S Joshi (supra) has noted the aforesaid legal position. In this circumstances the reliance placed by the authorities below on the judgment of the Hon 'ble Bombay High Court in the case of Prashant S Joshi (supra) has also noted the omission of section 47(ii) of the Act and insertion of section 45(4) of the Act with effect from 1.4.1988. Considering the entirety of the legal position, it has been affirmed by the Hon'ble High Court that amounts received by the partner on his retirement, are exempt from capital gains tax.
In this view of the matter, we find it appropriate to allow the claim of the assessee and accordingly the order of the CIT(A) is set aside. The AO is directed to delete the impugned addition. Thus, in Ground Nos 2 & 3, assessee succeeds as above."
Therefore, we do not find any error in the order of the Commissioner of Income-tax (Appeals) and accordingly, affirm his order. The revenue fails on this Ground of appeal."
Nothing contrary was brought to our knowledge on behalf of revenue with regard to above legal preposition. The assessee further clarified that the decision of ITAT, Pune in the case of Riyaz Shaikh has been confirmed by Hon'ble Jurisdictional of Bombay High Court, inter alia held that the amount received at the time of retirement is exempt from tax. The relevant operative para of the said order is as under:
I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 46 "2. We find that by the impugned order, the Tribunal while holding that amounts received by a partner on his retirement from partnership firm are exempt from capital gains tax relied upon the decision of this Court in the matter of Prashant S. Joshi V/s. Income Tax Officer & Anr. reported in [2010] 324 ITR 154 (Bom).
Counsel for the revenue is unable to point out as to how the decision in the matter of Prashant S. Joshi (supra) inter alia holding that no capital gains are payable by an erstwhile partner on amounts received on retirement would not be applicable to the present case. The only submission on behalf of the revenue is that there was an earlier decision of this Court in the matter of N.A. Mody V/s. CIT reported in [1986] 162 ITR 420 and it has not been considered in the decision rendered in the matter of Prashant S. Johsi (supra).
3. In the impugned order, the Tribunal does refer to the decision of this Court in the matter of N.A. Mody (supra) and states that it follows the decision of this Court in the matter of CIT V/s. Tribhuvandas G. Patel reported in 115 ITR 95 and the same has been reversed by the Apex Court in Tribhuvandas G. Patel V/s. CIT reported in 263 ITR 515. This Court in the matter of Prashant S. Joshi (supra) has also referred to the decision of Tribuvandas G. Patel (supra) rendered by this Court and its reversal by the Apex Court. Moreover, the decision of this Court in the case of Prashant S. Joshi (supra) placed reliance upon the decision of the Supreme Court in the case of CIT V/s. R. Lingamallu Rajkumar reported in [2001] 247 ITR 801, wherein it has been held that amounts received on retirement by a partner is not subject to capital gains tax. In the above circumstances, we see no reason to entertain the proposed question of law'' Again, nothing contrary was brought to our knowledge on behalf of revenue with regard to development on the issue. We find that the claim made by the assessee is correct. The CIT has relied upon the decision in the case of Shevantibhai C. Mehta (supra) which was considered in the case of Rajnish I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 47 Bhandari (supra) inter alia held that the amount received on retirement from partnership is not taxable. Secondly, the Hon'ble Bombay High Court in the case of Riyaz Shaikh (supra) has also affirmed that the amount received by a partner at the time of retirement is not taxable. Thus, considering the recent decisions of Jurisdictional Bombay High Court and ITAT, Pune as discussed above, the order of Assessing Officer cannot be said to be erroneous as to be prejudicial to the interest of revenue to invoke the provisions of section 263 of Act.
6.7 Regarding the contention of CIT that the entire transaction was an arranged transaction. According to him, the amount received by the assessee as goodwill was not correct since the goodwill of M/s. Deepak Foods was much less. The copy of the balance sheet of Deepak Foods for F.Y. 2007-08 has been placed on pages 123 to 129 of the Paper Book filed by assessee reveals that the total revenue was Rs. 9.19 Crs. and the net profit was Rs.85.49 lakhs. The concerned CIT in his order has considered the turnover and profit of M/s. Deepak Foods for the earlier years and has held that the goodwill should be computed as per the super profit method. According to the CIT, the goodwill as per the super profit method would be worked out at a much lower figure. In this regard, we find that the CIT has not appreciated the fact that Lesma Ltd. had acquired Rs.1.33 Crs. share capital in M/s. Sanghavi Foods Pvt. Ltd. at a premium of Rs.67.09 Crs and the Sanghavi Foods is a related concern. Now, for F.Y. 2007-08, the turnover of Sanghavi Foods was Rs. 6.02 crs and it had incurred a loss of Rs. 55 lacs. Thus, going by the logic of the CIT, there was no reason as to why Lesma Ltd. paid Rs. 67.04 Crs. for acquisition of shares of Sanghavi Foods when its goodwill as per the super profit method worked out to much lower a figure. This demonstrates that in the commercial world, the sale and purchase transactions are not entered into as per the book results but they are entered into considering the future potential of a business which a purchaser anticipates. In its facts and circumstances, M/s. Deepak Foods had a much stronger financial potential as compared to M/s. Sanghavi Foods. The CIT has not appreciated that I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 48 M/s. Deepak Foods had a brand name and its product was having good market at the relevant point of time. Thus, the amount invested in M/s. Deepak Foods and M/s. Sanghavi Foods is on account of the brand name 'Nilons', dealer network, customer loyalty, etc. The CIT has not adopted practical approach while determining goodwill. He failed to appreciate the other factors like brand name and customer base, which play a very vital role in determining the quantum of goodwill. Considering these factors, the amount received is reasonable. The CIT has not properly appreciated the under current factors in its commercial background, which is not justified. In view of above legal discussion, the amount received by assessee is exempt from tax.
6.8 The CIT on an alternate basis held that the amount of Rs. 21.52 Crs. is taxable as income from other sources, simply in case the amount received on retirement is not taxable as capital gain. The amount received could not be taxed as income from other sources, simply because a receipt is not a capital gain chargeable to tax u/s.45. One should not jump to the conclusion that the receipt in question is not a capital receipt at all. There can be capital receipts which are not chargeable to tax u/s.45 of Act. Merely because the receipt in question is not taxable as a capital gain it could not be concluded that the impugned receipt is a revenue receipt chargeable to tax as income from other sources. This view is fortified by the decisions Mumbai Bench in the case of Niyati B Yodh [4 SOT 941 (Mum)], wherein, the payment received by legal heir of tenant under a tripartite agreement between such legal heirs, landlord and purchaser for handing over peaceful possession to the purchaser being capital receipt could not be brought to tax as income from other sources. The similar view has been expressed in the case of CIT Vs. Smt. T.P. Sidhwa (1982) 133 ITR 840 (Bom), wherein it was held that the income from house property earned by one who was not owner was held not assessable under the head income from other sources. The mere fact that rent received in the absence of ownership could not be brought to charge u/s.9 would not enable the revenue to bring it under the residuary head i.e. "income from other sources."
I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 49 6.9 Regarding the allegation of CIT that the assessee has resorted to tax planning. As per the above discussion, the retirement of partner does not amount to a transfer for the purposes of capital gains. The court has held that if transactions are arranged as per law, simply because they lead to tax reduction, it does not mean that these transactions are to be rejected as tax planning measures. The Hon'ble Supreme Court in the case of Walfort Shares and Securities [326 ITR 1] has held that in case, the assessee company purchased the shares cum dividend, received the dividend thereafter, which was tax free and later on, sold the shares ex dividend and claimed the capital loss. It was held that assuming that the assessee made the use of provision of Section 10(33), such use could not be said to be abuse of law. Even assuming that the transaction was pre planned, there was nothing to impeach the genuineness of the transaction and hence, the loss was allowed. We also find that the Hon'ble Supreme Court in the case of Porrits and Spencer (2010) 329 ITR 222 (P & H) has held that once the transaction is genuine, merely because it is entered into with a motive to avoid tax, it would not become a colourable device and the loss is allowable.
6.10 We further find that the CIT has given his finding that the Assessing Officer did not conduct necessary enquiry and applied his mind regarding the amount received by the assessee. In this regard, we find that the Hon'ble Delhi High Court in the case of CIT Vs. Sunbeam Auto Ltd. (2011) 332 ITR 167 (Del) held that the provisions of section 263 should not be invoked for inadequate enquiries but it may be invoked in the case of absence of enquiry. It is not case of CIT that enquiry has not been conducted but only allegation is that the Assessing Officer did not conduct necessary enquiry. Necessary enquiry, adequate enquiry or insufficient enquiry is subjective outlook. It varies person to person. So, CIT cannot thrust his subjective outlook upon the Assessing Officer who in fact has made certain enquiries with regard to issue at hand at the relevant point of time. In view of above legal and factual discussion, the order of CIT u/s.263 is not justified and the same is quashed." I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 50 Even in case before us it is not the case of no enquiry by Assessing Officer. Even then CIT has taken adverse view. According to CIT, view adopted by Assessing Officer does not suit to him CIT which is not justified. We also find that Hon'ble Gujarat High Court CIT vs. R.K. Construction Co. 313 ITR 65 (Guj.) has held as under:
"Held, dismissing the appeal, that since all the necessary details were furnished to the Assessing Officer, there was no reason for the Commissioner to invoke the revisional jurisdiction under section 263 of the Act. The Assessing Officer had taken a particular view on the basis of the evidence produced before him. On the basis of the evidence before the Assessing Officer and materials which were collected by the Commissioner in revisional proceedings, the Commissioner had taken a different view. However, in the revisional proceedings under section 263. it was not open for the Commissioner to take such a different view. There was nothing on record to suggest that the view taken by the Assessing Officer was unsustainable in law."
Hon'ble Delhi High Court in case of CIT vs. DLF Ltd., 350 ITR 555 (Del.). held that It is not mere prejudicial to the Revenue or a mere erroneous view which can be revised, under section 263 of Income-tax Act. There should be added element of "unsustainability" in the order of Assessing Officer, which clothes the Commissioner with jurisdiction to issue notice, and proceed to make appropriate orders under provision of Section
263. Hon'ble Supreme Court in case of CIT vs. Greenworld Corporation, 314 ITR 81 (SC) observed that scope of provisions of section 263 of the Act is no longer res integra. The power to exercise suo motu power of revision in terms of section 263(1) is in the nature of supervisory jurisdiction and same can be I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 51 exercised only if the circumstances specified therein, viz., (1) the order is erroneous ; (2) by virtue of the order being erroneous prejudice has been caused to the interest of the Revenue, exist. Hon'ble Supreme Court in case of Malabar Industrial Co. Ltd. v. CIT (supra) has held that phrase prejudicial to the interests of the Revenue has to be read in conjunction with an erroneous order passed by Assessing Officer. Every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interests of the Revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of Revenue unless the view taken by Income-tax Officer is unsustainable in law. Neither it is necessary nor it is possible to discuss in the assessment order, the issues which are accepted after satisfying himself regarding the facts and law involved therein. Assessing Officer has to discuss in the body of assessment order, only those issues which are not accepted by him and for which he seeks to make an addition to total income. We find that order of Assessing Officer shows that he has raised specific query and assessee has given specific reply on facts and law on the issue of currency swap loss of Rs. 6.04 Crores, as mentioned earlier.
I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 52 4.18 We find that Ahmedabad 'A' Bench in ITA No. 1096/A/2011 and 910/A/2014 dt. 17-10-2014 in case of Cadilla Health Care Ltd., Ahmedabad v. CIT, Ahmedabad-1 held as under:
"Considering the aforesaid facts it is seen that for A.Y. 2006- 07 and A.Y. 2008-09, AO had had made full inquiries by raising the queries with respect to the issue under consideration and the same were also replied by the assessee and on receipt of the replies accepted the claim of the assessee. We further find that H'ble Apex Court in the case of CIT vs. Max India Ltd. (2007) 295 ITR 282 (SC) has held that where two views are possible and the ITO has taken one view with which the CIT does not agree, it cannot be treated as an erroneous order prejudicial to the interest of Revenue, unless the view taken by the ITO is unsustainable in law. It is a generally noticed that during the course of assessment proceedings, the AO examines numerous issues and generally, the issues which are accepted do not find mention in the assessment order and only such points are taken note of on which the assessee's explanations are rejected and additions/disallowances are made. In such a situation, we are of the view that provisions of s. 263 cannot be resorted to and for which we draw support by the decision of H'ble Bombay*High Court in the case of Gabriel India Ltd (supra). We also draw support from the decision of H'ble Delhi High Court in the case of CIT vs. Honda Sial Power 333 ITR 547 (Del), where it has been held that when a regular assessment is made u/s 143(3) a presumption can be raised that the order has been passed upon on application of mind. Before us, Revenue has not brought any material on record to demonstrate that the view taken by the AO was an impermissible view and was contrary to law or was upon erroneous application of legal principles necessitating the exercising of Revisionary powers u/s 263. Further, the cases laws relied upon by the Revenue are distinguishable on facts and therefore cannot be applied to the facts of the present case. In the view of the aforesaid facts, we are of the view that in the present case for AY 2006-07 and for AY 2008-09, CIT was not justified in resorting to the revisionary powers u/s 263 of the Act. We I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 53 therefore set aside the orders of CIT for AY 2006-07 and AY 2008-09, setting aside the assessment order passed u/s 143(3) of the Act. Thus the ground of Assessee are allowed in both the years."
4.19 Regarding merit of the claim, we find that currency swap loss of Rs. 6.04 Crores was directly covered in favour of assessee by the decision of the jurisdictional High court in the case of CIT v. Friends and Friends Shipping Pvt. Ltd [supra], wherein assessee had entered into forward contracts with banks to hedge against any loss arising to fluctuation in foreign currency. In some cases, export could not be executed and assessee had to pay certain charges to banks. Assessee treated said charges as business loss and claimed deduction. However, Assessing Officer disallowed said loss holding it to be speculative in nature. Matter travelled up to Hon'ble High Court, wherein it was held that foreign exchange contracts as incidental to assessee's export business and incurred loss in said contracts, said loss was not in nature of speculative loss but same was allowed as business loss. Thus, matter was decided in favour of assessee. In such situation, order passed by Assessing Officer cannot be said to be erroneous so as to be prejudicial to the interest of revenue. In response to query raised by Bench whether currency loss of Rs. 6.04 Crores consists of all the losses or any profit earned in this currency swap agreements. The Learned Authorized Representative drew our attention to pages 29 and 30 of the compilation where ledger account of currency swap was compiled. He also pointed out that in certain currency swap transactions, profit is also I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 54 earned and hence, sum of Rs. 6.04 Crores is net figure of loss. Thus case on merit also tilt in favour of assessee.
4.20 Coming to the argument of Learned Departmental Representative who has relied on following decisions:
i. CIT vs. Infosys Technologies Ltd. 17 taxmann.com 203 (Kar.), wherein Assessing Officer allowed claim without any discussion, order was held to be both erroneous and prejudicial as quasi judicial authority is required to give reasons for any allowance. The appeal before us is being decided at the strength of decision of Jurisdictional High Court as discussed.
ii. CIT v. Jawahar Bhattacharjee 24 Taxmann.com 215 (Gau.), wherein assessment order passed on wrong assumption of facts, on incorrect application of law, without due application of mind are not beyond the scope of Section 263. In case before us there is no wrong assumption by Assessing Officer and case has been decided in its facts and circumstances.
4.21 Learned Departmental Representative also relied on following case to support the order of CIT(A).
i. CIT v. Usha International Ltd. 348ITR 485 [Del.] ii. Bharat Overseas Bank Ltd. vs. CIT 152 TTJ 546 (Chennai) iii. Malabar Industries Ltd. vs. CIT 243 ITR 23 (SC). iv. Asman Invesmtent Ltd. v DCIT ITA No. 1262/A/2011, ITAT Ahmedabad I.T.A. No. 1545/Ahd/2014 A.Y. 2008-09 (Adani E nte rprise s Ltd. vs. ACIT) Page 55
4. There is no dispute to the proposition that Assessing Officer's order can be revised in case of assessee made no inquiry in the assessment order. But in case before us enquiry has been done. So it can not be said that Assessing Officer has passed order without any enquiry or application of mind. So, the cases relied by learned Departmental Representative does not help the Revenue. In view of above discussion, CIT was not justified in setting aside the order of Assessing Officer by invoking provision of 263 of Act because Assessing officer has decided the issue after making enquires as discussed above. Moreover, on merit also case tilt in favour of assessee. So order of CIT u/s. 263 is quashed.
5. In the result, appeal filed by the assessee is allowed.
Pronounced in the open Court on this the 30th day of January, 2015.
Sd/- Sd/-
(N. S. SAINI) (SHAILENDRA KUMAR YADAV)
ACCOUNTANT MEMBER JUDICIAL MEMBER
True Copy
S.K.SINHA
आदे श क ूितिल(प अमे(षत / Copy of Order Forwarded to:-
1. राजःव / Revenue
2. आवेदक / Assessee
3. संबंिधत आयकर आयु1 / Concerned CIT
4. आयकर आयु1- अपील / CIT (A)
5. (वभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड: फाइल / Guard file.
By order/आदे श से, उप/सहायक पंजीकार आयकर अपीलीय अिधकरण, अहमदाबाद ।