Income Tax Appellate Tribunal - Ahmedabad
Tower Overseas Ltd.,, Ahmedabad vs Assessee on 7 July, 2016
आयकर अपील
य अ धकरण, अहमदाबाद यायपीठ 'ए', अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL
" A " BENCH, AHMEDABAD
सव ी आर.पी.तोलानी, या यक सद य एवं अ नल चतव
ु द , लेखा सद य के सम!।
BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER
And SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER
1. आयकर अपील सं./I.T.A.No.1396/Ahd/2012
2. आयकर अपील सं./I.T.A. No.1678/Ahd/2012
( नधा रण वष / Assessment Year : 2009-10)
1. Tower Overseas Ltd. बनाम/ 1. The ACIT
7, Gadhavi Society Vs. Circle-8
Nr. Ishita Tower Ahmedabad
Navrangura,Ahmedabad
2. The ACIT(OSD) 2. Tower Overseas
Circle-8, Ahmedabad Ltd., Ahmedabad
थायी ले खा सं . /जीआइआर सं . / PAN/GIR No. : AABCT 6695 C
(अपीलाथ' /Appellant) .. (()यथ' / Respondent)
Assessee by : Shri Samir S. Jani, AR
Revenue by : Shri K. Madhusudan, Sr.DR
ु वाई क+ तार ख /
सन Date of Hearing 6/06/2016
घोषणा क+ तार ख /Date of Pronounce ment 07/07/2016
आदे श / O R D E R
PER SHRI ANIL CHATURVEDI, ACCOUNTANT MEMBER :
These cross-appeals by the Assessee and Revenue are directed against the order of the Commissioner of Income Tax(Appeals)-XIV, ITA No.1396/Ahd/2012 (By Assessee) and ITA No.1678/Ahd/2012 (By Revenue) Tower Overseas Ltd. vs. ACIT Asst.Year - 2009-10 -2- Ahmedabad dated 25/05/2012 passed for Assessment Year (AY) 2009-
10.
2. The relevant facts as culled out from the materials on record are as under:-
2.1. Assessee is a company stated to be engaged in the business of trading of coated cotton fabrics, foam Board, Nylon and flex Banner.
Assessee initially filed its return of income on 30/09/2009. Subsequently it revised its return of income on 04/05/2010. The case was selected for scrutiny and thereafter assessment was framed u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") vide order dated 15/12/2011 and the total loss was determined at Rs.2,14,88,054/-. Aggrieved by the order of the Assessing Officer (AO), assessee carried the matter before the ld.CIT(A), who vide order dated 25/05/2012 (in Appeal No.CIT(A) XIV/ACIT.Cir.8/156/2011-12) granted partial relief to the assessee. Aggrieved by the order of ld.CIT(A), Assessee and Revenue are now in cross-appeals before us.
3. Grounds raised by the assessee in ITA No.1396/Ahd/2012are as under:-
1. The learned CIT(A) has erred in law and on facts in partly confirming the assessment order passed by the Assessing Officer u/s.143(3) of the Act.ITA No.1396/Ahd/2012 (By Assessee)
and ITA No.1678/Ahd/2012 (By Revenue) Tower Overseas Ltd. vs. ACIT Asst.Year - 2009-10 -3-
2. The learned CIT(A) has erred in holding the loss on account of transactions carried out through Karvy Stock Broking Ltd. as Speculative Loss in spite of the plea of the appellant that the same is hedging loss. The same is prayed for treatment as business loss.
3. The learned CIT(A) has erred in law and on facts in upholding order of the Assessing Officer only on the erroneous basis that the expenditure incurred for raising the capital by payment to ROC is Capital in nature and also ignoring the judicial precedent cited by the appellant. The same is prayed for allowance.
4. The learned CIT(A) has erred in not adjudicating the Ground No.3 of alternate prayer for allowance ROC fees paid under section 35D. The same is prayed to your honor.
5. The appellant humbly requests that cost be awarded in this appeal on account of arbitrary manner in which the order is passed by the department.
3.1. On the other hand, the grounds raised by the Revenue in ITA No.1678/Ahd/2012 are as under:-
1) The Ld.Commissioner of Income-tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in partly deleting the disallowance made by speculation loss u/s.43(5) of the Act.
2) The Ld.Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad has erred in law and on facts in deleting the disallowance made u/s.36(1)(viii) of the Act.
3) On the facts and in the circumstances of the case, the Ld.Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad ought to have upheld the order of the Assessing Officer.ITA No.1396/Ahd/2012 (By Assessee)
and ITA No.1678/Ahd/2012 (By Revenue) Tower Overseas Ltd. vs. ACIT Asst.Year - 2009-10 -4-
3. It is therefore, prayed that the order of the Ld.Commissioner of Income-Tax (Appeals)-XIV, Ahmedabad may be set-aside and that of the order of the Assessing Officer be restored.
4. We first take up the Revenue's appeal in ITA No.1678Ahd/2012. 4.1. First ground is with respect to deleting the disallowance of speculation loss u/s.43(5) of the Act.
4.2. Before us, at the outset, ld.Sr.DR submitted that Ground No.1 raised by the Revenue and ground No.2 raised by the Assessee are inter- connected and therefore it can be considered together.
4.3. During the course of assessment proceedings and on perusing the Profit &Loss Account, AO noticed that assessee has debited Rs.39,33,576/- in the P&L Account under the head "loss on forward cover transactions". Assessee was asked to show-cause as to why the loss in forex derivative not be treated as speculative loss u/s.43(5) of the Act to which the assessee inter-alia submitted that the loss is a usual phenomena in the import export business and is different from mark to margin loss and is fully allowable. AO did not accept the assessee's contention. He after considering the CBDT Instruction No.3 of 2010 dated 23/03/2010, was of the view that the transaction of forex derivative has not been carried out on a recognized exchange and it does not fulfill the condition laid down in section 43(5) of the Act and therefore it is in the nature of speculative transaction and any loss from speculative ITA No.1396/Ahd/2012 (By Assessee) and ITA No.1678/Ahd/2012 (By Revenue) Tower Overseas Ltd. vs. ACIT Asst.Year - 2009-10 -5- transaction can be set off against profit only from speculative business. He after considering the facts that the transaction of forex derivatives were carried with the bank and not recognized exchange, disallowed Rs.39,33,576/-. Aggrieved by the order of AO, assessee carried the matter before the ld.CIT(A), who after considering the submissions of the assessee, granted partial relief to the assessee by holding as under:-
"3.3. Decision :
I have carefully considered the assessment order and the submission filed by the appellant. The A.O. has disallowed the loss of Rs.39,33,576/- under the head loss on forward cover transaction by treating it as speculative transaction. The appellant has submitted that it was doing business of importing goods from foreign countries and it has imported goods of more than Rs.50 crores during the year, the payment for which has to be made after 5-6 months at the prevailing market rates of the currency. The rate of foreign exchange vary from time to time and, therefore, to hedge against the possible loss due to volatility of market fluctuation, the importers enter into contract with authorized bankers to purchase the foreign currency at the prevailing market rate at the time of entering the import contract. The appellant has, further, given certain instances wherein it has been demonstrated by him that the appellant has incurred a loss of Rs.23,60,000/- on account of such type of transaction. The transaction was for Rs.4 lac US $ with HDFC Bank. In this case, the letter of credit through which the import is done was opened in the month of June and July and the payment due date was in the month of February and March. To safeguard against the future risk the appellant had hedged Rs. 4 lac US $ with HDFC Bank on 27/08/2008 after the opening of LC. Since the appellant expected the dollar to rise up to 52, he decided to cancel the contract incurring the loss of Rs.23.6 lacs. The appellant has further given details of total transactions of such hedging contract and it has ITA No.1396/Ahd/2012 (By Assessee) and ITA No.1678/Ahd/2012 (By Revenue) Tower Overseas Ltd. vs. ACIT Asst.Year - 2009-10 -6- been submitted that in some transaction there is a loss but in some cases, the appellant has earned profit also. However, there is overall loss in the account. The appellant has further submitted that the advice to enter into hedging transaction was given by the HDFC Bank as letter of credit was opened with it and it was a general trade practice. Later on the foreign exchange transaction, were also done through Karvy Stock Broking Ltd. The appellant has further relied on the decision of Gujarat High Court in the case of M/s. Friends and Friends Shipping Pvt. Ltd. in Tax Appeal No. 251 of 2010 dated 23/08/2011.
After considering the factual position, the submission of the appellant and the finding of the A. O., I am of the opinion that the claim of the appellant is partly correct. It is noted from the ledger account of the foreign exchange profit / loss incurred by the appellant that the transactions which have been done through HDFC Bank are very few and are not frequently done. However, the transactions done through Karvy Stock Broking Ltd. are frequently done and are done on regular basis. It is noted that there was only one transaction of loss on 29/11/2008. The next transaction was on 31/12/2008 and after that the appellant has started making transactions through Karvy Stock Broking' Ltd. and there are many transactions in the month of January, February and March which show that the transactions are not in the nature of hedging transaction but are in the nature of speculative transaction. It is also noted that the transactions are in trading of Currency Futures. The law laid down by the Honourable Gujarat High Court in the case mentioned by the appellant is also similar. The Honourable Court has held that the onus is on the appellant to prove that the transaction was not speculative but hedging. The transaction that are done through HDFC Bank are clearly linked with the business of the appellant and can be considered as hedging transactions. Hedging in foreign exchange is a normal practice for the persons engaged in import of export. Whereas the transactions done through Karvy Stock Broking Ltd. are not in the nature of hedging transactions but are in the nature of speculative transactions as these are for trading in Currency Futures. The A. O. is, therefore, directed to treat the loss incurred through the transaction done through HDFC Bank as non-ITA No.1396/Ahd/2012 (By Assessee)
and ITA No.1678/Ahd/2012 (By Revenue) Tower Overseas Ltd. vs. ACIT Asst.Year - 2009-10 -7- speculative and business loss. The transactions carried out through Karvy Stock Broking Ltd. should accordingly be treated as speculative in nature and the loss is accordingly directed to be disallowed. Therefore, the loss to that extent will be allowed as business loss and the balance is directed to be treated as speculative loss which can be carried forward for the next A.Y. and onwards. The A.O. is directed to work out the exact figures accordingly. The ground of appeal is accordingly partly allowed."
4.3. Aggrieved by the order of ld.CIT(A), Assessee and Revenue are now in appeal before us.
4.4. Before us, ld.Sr.DR supported the order of AO. Ld.AR, on the other hand, reiterated the submissions made before the ld.CIT(A) and AO and submitted that the ld.CIT(A) has erred in considering the loss incurred from the transactions done through Karvy Stock Broking Ltd. as speculative transactions.
5. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the ld.CIT(A) while deciding the issue has noted that the assessee had done transactions through HDFC Bank and Karvy Stock Broking Ltd., the transactions done through HDFC Bank were very few, whereas the transactions done through Karvy Stock Broking Ltd. were frequent and the number of transactions done with Karvy Stock Broking Ltd. indicated that they were not in the nature of hedging transactions but were in the nature of speculative transactions and for arriving at aforesaid ITA No.1396/Ahd/2012 (By Assessee) and ITA No.1678/Ahd/2012 (By Revenue) Tower Overseas Ltd. vs. ACIT Asst.Year - 2009-10 -8- conclusion, he also relied on the decision of Hon'ble Gujarat High Court in the case of M/s.Friends and Friends Shipping Pvt.Ltd. in Tax Appeal No.251 of 2010 dated 23/08/2011. He therefore concluded that the transactions done through HDFC Bank were linked with the business of the assessee and therefore could be considered as hedging transactions, whereas the transactions through Karvy Stock Broking Ltd. were in the nature of speculative transactions. He accordingly directed the loss incurred on the transactions through HDFC Bank be allowed and the loss incurred on the transactions with Karvy Stock Broking Ltd. be considered in speculative in nature. Before us, Assessee and Revenue have not placed any material on record to controvert the findings of ld.CIT(A). In view of the aforesaid facts, we see no reason to interfere with the order of ld.CIT(A) and thus this ground of Revenue and Assessee is dismissed.
6. Second ground of Revenue is with respect to deleting the addition made u/s.36(1)(vii) of the Act.
6.1. AO noticed that assessee had claimed interest expense of Rs.3,99,02,123/-. He also noticed that assessee has given interest-free loans of Rs.18,84,892/- to the Director of the Company. AO therefore concluded that assessee had diverted the interest-bearing funds for the purpose of non-business use and therefore to the extent of interest paid ITA No.1396/Ahd/2012 (By Assessee) and ITA No.1678/Ahd/2012 (By Revenue) Tower Overseas Ltd. vs. ACIT Asst.Year - 2009-10 -9- on the amount advanced to Director cannot be allowed as deduction. He thereafter worked out the interest disallowance @ 11.5% and disallowed Rs.2,16,762/- Aggrieved by the order of the Assessing Officer (AO), assessee carried the matter before the ld.CIT(A), who after considering the submission of the assessee, deleted the addition by observing as under:-
"5.3. Decision:
I have carefully considered the assessment order and the submission filed by the appellant. The appellant has submitted that the transaction with Shri Ambani are current account type transaction with the company. There was an opening credit balance of Rs.66,59,425/- in the account for which Mr.Ambani did not charge any interest from the company. Similarly, the appellant company has also not charged the interest. It has further been submitted by the appellant that the company is having its own capital of Rs.2.5 crores and another Rs.4 crores of share application money which are interest free. In addition to these funds, the reserves and surplus of Rs.93,45,302/- were also there in the beginning of the year and, therefore, it had sufficient interest free funds to give the interest free loan to the director.
I am inclined to accept the submission given by the appellant. The appellant had sufficient interest free funds and the decision of Reliance Utilities and Power Limited (2009) 313 ITR 340 (Bom) is squarely applicable on these facts. Further, it is also noted that the Director is also not charging any interest from the company for giving the loan and accordingly the A.O. was not justified in making the disallowance u/s.36(1)(iii) of the Act. The addition is therefore, directed to be deleted and the ground of appeal is accordingly allowed."ITA No.1396/Ahd/2012 (By Assessee)
and ITA No.1678/Ahd/2012 (By Revenue) Tower Overseas Ltd. vs. ACIT Asst.Year - 2009-10
- 10 -
6.2. Before us, ld.Sr.DR supported the order of AO. On the other hand, ld.AR reiterated the submissions made before the AO and ld.CIT(A) and thus supported the order of ld.CIT(A).
7. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the ld.CIT(A) while deciding the issue in favour of assessee has noted that the transactions with the Directors were of current account type and there was opening credit balance in the account for which the Directors did not charge any interest from the assessee and assessee has also not charged the interest. He has further given finding that the interest-free funds in the form of Share Capital were far in excess of the amount advanced to the Director and in view the decision of Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd. reported in (2009) 313 ITR 340 (Bom), no disallowance u/s.36(1)(iii) of the Act was called for. Before us, Revenue has not placed any material on record to controvert the findings of ld.CIT(A) nor has placed any binding decision in its support. In view of the aforesaid facts, we see no reason to interfere with the order of ld.CIT(A) and thus this ground of Revenue is dismissed.
8. In the result, Revenue's appeal in ITA No.1678/Ahd/2012 for AY 2009-10 is dismissed.
ITA No.1396/Ahd/2012 (By Assessee)and ITA No.1678/Ahd/2012 (By Revenue) Tower Overseas Ltd. vs. ACIT Asst.Year - 2009-10
- 11 -
9. Now we take up the Assessee's appeal in ITA No.1396/Ahd/2012 for AY 2009-10.
9.1. Before us, ld.AR submitted that Ground Nos.1 & 5 are general in nature and therefore not pressed. In view of ld.AR's submission, these grounds are dismissed.
9.2. As Ground No.2 raised by the assessee being inter-connected with Ground No.1 raised by Revenue, we hereinabove, while deciding the ground of Revenue have dismissed the Ground of Assessee and Revenue.
10. Ground Nos.3 & 4 are not pressed by the ld.AR and therefore the same are dismissed as not pressed.
11. In the result, the appeal of the Assessee is dismissed.
12. In the combined result, Revenue's appeal and Assessee's appeal are dismissed.
This Order pronounced in Open Court on 07/07/2016
Sd/- Sd/-
आर.पी.तोलानी अ नल चतव
ु द
( या यक सद य) (लेखा सद य)
( R.P. TOLANI ) ( ANIL CHATURVEDI )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 07/ 07 /2016
ट .सी.नायर, व. न.स./T.C. NAIR, Sr. PS
ITA No.1396/Ahd/2012 (By Assessee)
and ITA No.1678/Ahd/2012 (By Revenue)
Tower Overseas Ltd. vs. ACIT
Asst.Year - 2009-10
- 12 -
आदे श क ! त#ल$प अ%े$षत/Copy of the Order forwarded to :
1. अपीलाथ' / The Appellant
2. ()यथ' / The Respondent.
3. संबं4धत आयकर आयु6त / Concerned CIT
4. आयकर आयु6त(अपील) / The CIT(A)-XIV, Ahmedabad
5. 7वभागीय ( त न4ध, आयकर अपील य अ4धकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड फाईल / Guard file.
आदे शानुसार/ BY ORDER, स)या7पत ( त //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील य अ धकरण, अहमदाबाद / ITAT, Ahmedabad
1. Date of dictation .. 17.6.16 (dictation-pad 11- pages attached at the end of this appeal-file)
2. Date on which the typed draft is placed before the Dictating Member ...4.7.16
3. Other Member...
4. Date on which the approved draft comes to the Sr.P.S./P.S.................
5. Date on which the fair order is placed before the Dictating Member for pronouncement......
6. Date on which the fair order comes back to the Sr.P.S./P.S.......7.7.16 late evening
7. Date on which the file goes to the Bench Clerk.....................8.7.16
8. Date on which the file goes to the Head Clerk..........................................
9. The date on which the file goes to the Assistant Registrar for signature on the order..........................
10. Date of Despatch of the Order..................