Income Tax Appellate Tribunal - Chennai
Acit, Chennai vs M/S. Celebrity Fashions Ltd., Chennai on 26 May, 2017
आयकर अपील य अ धकरण, 'बी' यायपीठ, चे नई।
IN THE INCOME TAX APPELLATE TRIBUNAL
'B' BENCH: CHENNAI
ी एन.आर.एस. गणेशन, या यक सद य एवं
ी "ड.एस. सु दर %संह, लेखा सद य के सम*
BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND
SHRI D.S.SUNDER SINGH, ACCOUNTANT MEMBER
आयकर अपील सं./ITA No.2516/Mds/2016
नधा+रण वष+ /Assessment Year: 2011-12
The Asst. Commissioner of Income Vs. M/s.Celebrity Fashions Ltd.,
Tax, Corporate Circle-1(2), SDV, IV and C2, 3rd Main
Chennai-600 034. Road, MEPZ/SEZ, Tambaram,
Chennai-600 045.
[PAN: AAACC 3696 D]
(अपीलाथ./Appellant) (/0यथ./Respondent)
अपीलाथ. क1 ओर से/ Appellant by : Mr.Supriyo Pal, JCIT
/0यथ. क1 ओर से /Respondent by : Mr.Anil Nair, CA
सुनवाई क1 तार ख/Date of Hearing : 14.03.2017
घोषणा क1 तार ख /Date of Pronouncement : 26.05.2017
आदे श / O R D E R
PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:
This is an appeal filed by the Revenue against the Order dated 16.06.2016 of Commissioner of Income Tax (Appeals)-1, Chennai, in ITA No.119/14-15 (New No.ITA165/CIT(A)-1/2014-15) for the AY 2011-12 and raised the following grounds:
ITA No.2516/Mds/2016:- 2 -:
1. The order of the, learned CIT(A) is contrary to law and facts and circumstances of the case.
2. The Ld CIT(A) erred in deleting the disallowance made u/s.14A, without appreciating the fact that earning of exempt income is not the criteria for 14A disallowance, and once exempt income bearing investments are made by the assessee, disallowance u/s.14A becomes mandatory in such cases.
3. The Ld.CIT(A) erred in deleting the 14A disallowance, without appreciating the fact that the 14A disallowance was calculated as per specific formula as detailed under Rule 8D of the IT Rules, and further the deletion goes against the Board's circular No. 5/2014 dated 11.2.2014.
4. The Ld.CIT(A) erred in allowing the exchange fluctuation loss without appreciating the fact that the loss was incurred due to cancellation of forward contracts, and is not derived from the business of the assessee, and the tractions that have ended up in losses have been ultimately settled otherwise than by actual delivery of foreign exchange, and therefore falls under the ambit of speculation loses only.
5. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.
2.0 Ground Nos.1 & 5 are general in nature which do not require specific adjudication.
3.0 Ground Nos.2 & 3 are related to the disallowance made u/s.14A r.w.r.8D of the Income Tax Rules.
The AO disallowed a sum of Rs.17,76,044/- u/s.14A by applying Rule 8D of Income Tax Rules. The assessee went on appeal before the Commissioner of Income Tax(Appeals) (in short 'Ld.CIT(A)') and the Ld.CIT(A) allowed the assessee's appeal holding that the assessee has not earned any exempted income and hence, no disallowance is called for u/s.14A r.w.r.8D. We extract the relevant para graphs of the CIT(A) in Para No.6 as under:
6. I have carefully perused the facts in issue, submissions made by the appellant and material on record. The appellant has pleaded that it has not earned any dividend income during the period under consideration and as a result of which following the ratio in Cheminvest Ltd v. CIT 378 ITR 33, no disallowance is called for in its case. In this context it would serve useful purpose to refer to the decision of the Hon'ble Delhi High Court in the case of Cheminvest Ltd v. CIT 378 ITR 33 order dated 2.9.2015 in ITA No.749/2014 wherein it has been held that disallowance u/s 14A envisages that there should be a actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income.ITA No.2516/Mds/2016
:- 3 -:
Similarly in the case of ACIT v. M. Baskaran in ITA No. 1717/Mds/2013 order dt. 31st of July, 2014 the facts related to the assessee which had not received any exempt income. The ITAT held therein that disallowance u/s.14A could not be sustained in such circumstances. In other words, s.14A will not apply if no exempt income is received or receivable during the relevant previous year. Since the appellant of its own admission had not earned any dividend income during the year ended 31.3.2011, the AO is directed to delete the addition to the tune of Rs.17,76,044/- made u/s.14A read with Rule 8D. This ground of appeal is allowed.
4.0 We heard both the parties and perused the material placed before us.
The assessee stated before the Assessing Officer (in short 'AO') as well as the Ld.CIT(A) that it had not earned the dividend income during the previous year relevant to the AY 2011-12. This fact has not been controverted by the Learned Departmental Representative (is short 'Ld.DR'). Now the issue is settled by the Hon'ble jurisdictional High Court in the case of Redington (India) Ltd. v. ACIT that where there is no exempted income in the relevant year, there cannot be disallowance of expenditure u/s.14A in relation to exempted income. We re-produce here under the relevant paragraphs of the Hon'ble Jurisdictional High Court order in Redington (India) Ltd.v.Additional Commissioner of Income-tax, Co. Range-V, Chennai, [2017] 77 taxmann.com 257 (Madras) as under:
15. The exemption extended to dividend income would relate only to the previous year when the income was earned and none other and consequently the expenditure incurred in connection therewith should also be dealt with in the same previous year. Thus, by application of the matching concept, in a year where there is no exempt income, there cannot be a disallowance of expenditure in relation to such assumed income. Madras Industrial Investment Corpn. Ltd. v. CIT [1997] 225 ITR 802/91 Taxman 340 (SC). The language of s.14A (1) should be read in that context and such that it advances the scheme of the Act rather than distort it.
16. In conclusion, we are of the view that the provisions of s. 14A read with Rule 8D of the Rules cannot be made applicable in a vacuum i.e. in the absence of exempt income. The questions of law are answered in favour of the assessee and against the department and the appeal allowed. No costs.ITA No.2516/Mds/2016
:- 4 -:
Respectfully following the decision of Hon'ble jurisdictional High Court, we uphold the order of the Ld.CIT(A) and dismiss the grounds of the appeal raised by the Revenue.
5.0 Ground No.4 is related to the addition of Rs.3,31,01,102/- relating to foreign exchange loss:
The AO found during the course of assessment proceedings that the assessee has debited a sum of Rs.3,31,01,102/- towards foreign exchange fluctuation loss. The AO disallowed the foreign exchange loss arising on account of forward contracts as speculation loss.
5.1 Aggrieved by the order of the AO, the assessee went on appeal before the Ld.CIT(A) and the Ld.CIT(A) allowed the assessee's appeal.
The relevant paragraphs of the Ld.CIT(A)'s order is extracted for the sake of convenience and clarity as under:
Issue No.3: Disallowance of exchange fluctuation loss -- Rs.3,31,01,102/-
15. The AO observed that the appellant has debited a total sum of Rs.3,31,01,102/- out of which a sum of Rs.11,46,668/- was considered as swap loss and Rs.3,27,14,848/- is towards exchange fluctuation. Since the loss is on account of cancellation of forward contracts and those contracts have not been settled by way of foreign exchange remittance by the debtors of the appellant company, the AO questioned that why the loss should not be considered as speculative loss u/s.43(5). The appellant relied on the decisions of Hon'ble Supreme Court in the case of CIT v. Woodward Governor India P Ltd (312 ITR 254) and M/s.Oil & Natural Gas Corpn. Ltd v. CIT (322 ITR 180). The AO held that the loss so arrived by cancellation of forward contracts is not derived from the business of the assessee and is also not attributable to the business affairs of the assessee and since the transactions which have ended up in such losses, have been ultimately settled otherwise than by the actual delivery of foreign exchange, Sec.43(5)v(a) comes into play and the corresponding losses are to be treated as losses from speculation business. The AO distinguished the decisions relied on by the appellant.
16. I have carefully perused the facts in issue, submissions of the appellant and material on record. It is noted that a similar issue in appellant's own case for A.Y. 2009-10 was allowed by CIT(A)-III, Chennai vide order in ITA No.682/11-12/A-III dated 27.2.2013 and was affirmed by the ITAT, Chennai vide its order in ITA No.1250/Mds/2013 dated 27.8.2013.
Further on identical grounds in appellant's own case for AY 2010-11, following the above orders, CIT(A)-1, Chennai, vide order in ITA No.60/13-14 dt. 22.5.2015 decided the issue ITA No.2516/Mds/2016 :- 5 -:
in favour of the appellant. Respectfully following the same, the plea made by the appellant needs to be upheld. Accordingly, this ground of appeal is allowed.
5.2 During the appeal hearing, Learned Authorized Representative (in short 'Ld.AR') brought to our notice that the Hon'ble ITAT 'B' Bench in ITA Nos.1249 & 1250 dismissed the Revenue appeal on the similar issue. The Ld.DR could not controvert the submissions made by the Ld.AR with other rulings/ orders of higher authority. For the sake of convenience and clarity, we reproduce the relevant paragraphs of the Hon'ble ITAT Order in the assessee's own case:
24. We have heard both sides, perused the materials available on record and have also gone through the orders of authorities below. The assessee is in the business of export of garments and all such realizations are in foreign exchange. It is an admitted fact that the assessee has to import raw materials and also export the garments. In both the aspects, foreign currency is only involved. In the assessment order, the Assessing Officer has observed that the exchange loss is bifurcated into two values being foreign exchange fluctuation loss on account of export proceeds realization of Rs.13,80,61,721/- and swap loss of Rs.18,01,04,908/- on account of cancellation of postponement of forward contracts.
The Assessing Officer has not given any reason for disallowance of Rs.18,01,04,908/-. This swap loss of Rs.18,01,04,908/- on account of cancellation of postponement of forward contract in connection with the business of the assessee only. The Assessing Officer has not given justifiable reason except stating that it is speculation loss. The Ld.CIT(Appeals), by following Special Bench of ITAT, Mumbai in the case of DCIT v. Bank of Bahrain & Kuwait (supra) allowed the claim of the assessee. In similar circumstances, in the case of CIT v. Panchmahal Steel Ltd.(supra), the Hon'ble Gujarat High Court by relying on the decision of the Hon'ble Bombay High Court in the case of CIT v. Badridas Gaurida (P) Ltd. 261 ITR 256 and the decision of the Hon'ble Calcutta High Court in the case of CIT v. Soorajmull Nagarmull 129 ITR 169 has held as under:
"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:
"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 state 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 ITA No.2516/Mds/2016 :- 6 -:
assessee was entitled to claim deduction in respect of Rs.13.50 lakhs as a business loss. This matter is squarely covered by the judgment of the Calcutta High Court, with which we agree, in the case of CIT v.Soorajmull Nagurmull (1981) 129 ITR 169."
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 foreign exchange. For the purpose of hedging the loss due to fluctuation in foreign exchange while implementing the export contracts, the assessee had entered into forward contract with 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 sub-section (5) of section 43 of the Act.
It is true that the CIT(Appeals) has made some observations which would prima facie suggest that there was no direct co-relation between the exchange document and the precise export contract. However, such observations cannot be seen in isolation. CIT(Appeals) himself has noted that the assessee had entered into seven separate contracts with the bankers. In the case of M.G.Brothers (supra), the Andhra Pradesh High Court was concerned with a case where the assessee was carrying on business of groundnut oil and the assessee entered into forward transactions in neem oil and cotton seed oil. In that view of the matter, the Court held that it was not a hedging transaction since there was no evidence that the assessee had adequate stock of raw materials to the extent of hedging transactions. In the case of Joseph John (supra), the Apex Court observed that the burden of proof is upon the assessee to show that the transaction is not speculative transaction but a hedging transaction and further that the finding of the Tribunal that the transaction carried out by the assessee is speculative in nature and not hedging transactions is essentially a finding on a question of fact. The above noted decisions do not directly touch the controversy arising in the present appeal. We find that the decisions of the Bombay High Court and the Calcutta High Court noted above would cover the situation.
Tax appeal is therefore dismissed."
25. In the present case, we find that the assessee has incurred loss relating to its business only and in view of the decision of the Hon'ble Gujarat High Court in the case of CIT v. Panchmahal Steel Ltd. (supra), this ground of appeal raised by the Revenue is dismissed.
Since facts of the assessee's case are the same. Respectfully following the decision of the Hon'ble ITAT in the assessee's own case, the appeal of the revenue on this ground is dismissed.
ITA No.2516/Mds/2016:- 7 -:
In the result, the appeal of the revenue is dismissed.
Order pronounced in the Open Court on 26th May, 2017, at Chennai.
Sd/- Sd/-
(एन.आर.एस. गणेशन) ("ड.एस. सु दर %संह)
(N.R.S. GANESAN) (D.S.SUNDER SINGH)
या यक सद य/JUDICIAL MEMBER लेखा सद य/ACCOUNTANT MEMBER
चे नई/Chennai,
6दनांक/Dated: 26th May, 2017.
TLN
आदे श क1 / त%ल7प अ8े7षत/Copy to:
1. अपीलाथ./Appellant 4. आयकर आयु9त/CIT
2. /0यथ./Respondent 5. 7वभागीय / त न ध/DR
3. आयकर आयु9त (अपील)/CIT(A) 6. गाड+ फाईल/GF