Gujarat High Court
Commissioner vs Mitsu
TAXAP/658/2009 11/ 12 ORDER IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL No. 658 of 2009 ========================================================= COMMISSIONER OF INCOME TAX - Appellant(s) Versus MITSU LIMITED - Opponent(s) ========================================================= Appearance : MR M.R.BHATT, SENIOR ADVOCATE WITH MRS MAUNA M BHATT for Appellant(s) : 1, None for Opponent(s) : 1, ========================================================= CORAM : HONOURABLE MR.JUSTICE D.A.MEHTA and HONOURABLE MS.JUSTICE H.N.DEVANI Date : 29/06/2010 ORAL ORDER
(Per : HONOURABLE MS.JUSTICE H.N.DEVANI)
1. In this Appeal under section 260A of the Income Tax Act, 1961 (the Act) appellant revenue has proposed the following questions :
[A] Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the CIT(A) deleting the disallowance made by the Assessing Officer u/s. 43B, in respect of belated payment of PF & ESIC ?
[B] Whether on the facts of the case and in law, the Appellate Tribunal was justified in granting relief u/s. 80HHC of the Act to assessee on the issue of gain on forward currency contract without appreciating the fact that the gain on exchange difference is nothing but speculation profit and not related to the business of the assessee ?
[C] Whether on the facts of the case and in law, the Appellate Tribunal was in justified in directing the Assessing Officer not to exclude this income from the profits eligible for deduction U/s. 80HHC without appreciating the fact that when the assessee enters into a forward contract, as in this case, the assessee stands to benefit by the fluctuations in foreign exchange irrespective of the fact whether the trade agreement exists or not ?
[D] Whether on the facts of the case and in law, the Appellate Tribunal was justified in granting relief to assessee without appreciating the fact that the provisions/liability written off and shown as income of the year was not earned during the year and was duly considered while working out the deduction U/s.80HHC in the relevant A.Y. in which such expenditure/creditors existed ?
[E] Whether on the facts and circumstances of the case and in law, the Appellate Tribunal was right in directing not to exclude the income of Rs.3,63,345/- earned from sale of scrap from the profits eligible for deduction U/s. 80HHC, though same have no direct or immediate nexus with the manufacturing activity of the assessee as per ratio laid down by the Hon'ble Apex Court in the cases CIT Vs. Sterling Foods (1999) 237 ITR 579 and Pandian Chemicals Vs. CIT (2003) 262 ITR 278(SC)?
[F] Whether on the facts and circumstances of the case and in law, the Appellate Tribunal was right in dismissing the appeal of the Department without considering the ratio laid down by the Hon'ble M.P. High Court in the case of D.P. Agrawal Vs. CIT 272 ITR 118 [MP] wherein it has been held that scrap income will not be eligible for deduction U/s. 80IB of the Act ?
[G] Whether on the facts and circumstances of the case and in law, the Tribunal was right in holding that the excise duty and sales will not be included in the total turnover while calculating the deduction U/s. 80HHC of the Act ?
[H] Whether on the facts and circumstances of the case and in law, the Tribunal was right in relying on the decisions of the Hon'ble Apex Court in the case of CIT Vs. Sudarshan Chemicals [2000] 245 ITR 769, CIT, Coimbatore Vs. Lakshmi Machines Works, 290 ITR 667 & CIT Vs. Catapharma [India] P. Ltd. [2007] 292 ITR 641 [SC] without considering the fact that such decisions were pertaining to the assessment years prior to A.Y. 1999-00 and with effect from 01.04.99 [A.Y.1999-00], provisions of section 145A of the Act have been inserted as per which valuation of purchase and sale has to be made after adding tax, duty, cess or fee etc ?
The assessment year is 2004-2005 and the corresponding accounting period is the year ending on 31.03.2004. The assessing officer framed assessment under section 143(3) of the Act, interalia disallowing deduction in respect of belated payment of PF and ESIC, disallowing deduction under section 80HHC in respect of gain on forward currency contract and from sale of scrap and included excise duty and sales tax in the total turnover for the purpose of deduction under section 80HHC.
The assessee carried the matter in appeal before Commissioner (Appeals) and partly succeeded. Both revenue as well as the assessee preferred appeals before the Tribunal and the assessee succeeded qua the aforesaid issues.
Heard the learned Senior Advocate for the appellant revenue.
In so far as proposed question [A] is concerned, the impugned order clearly indicates that the Tribunal has merely followed the decisions of the jurisdictional High Court as well as the Supreme Court. In the circumstances, the issue is merely an academic one.
Insofar as proposed questions [B] and [C] are concerned, the learned Senior Advocate has assailed the impugned order contending that the gain on forward currency contract being other income was excluded from the profits eligible for deduction under section 80HHC, since there is no mention of such receipt in the Explanation (baa) to Section 80HHC and the same was not directly derived from the manufacturing activity of the assessee. That the said income was not related to export business and was required to be excluded in view of the specific mention of the word 'charges' in sub clause (baa). That the exchange difference is received on account of difference in the exchange rate not only on the export but also on the import, as it pertains to the manufacturing business. It was contended that gain on cancellation of forward currency contract is also a kind of speculation profit.
In the impugned order the Tribunal has recorded thus:
First of all it is noticed that in the case of foreign exchange realization, no incentive has been granted by any policy of the Government of India. The currency between two countries being different, the government of the respective countries manage payments on country to country basis. Reserve Bank is the administrative authority and FEMA is the administrative law. The Indian exporters may export goods or import goods for a price which may be designated in Indian Rupees or in Foreign Currency. Depending upon the demand-supply position on a global basis; the value of the currency fluctuates on different dates. The Indian party has to calculate their earnings or payments in Indian currency. In order to remove the uncertainty in earning the RBI permitted hedging of future realization or payments. FEMA and related RBI regulations are only mechanisms to facilitate risk management of foreign exchange realization or payments. This is to facilitate foreign trade by managing the risk of increase or decrease in the value of real/payments and not for earning any income. The entire mechanism is not a permissible mode of earning income due to ups and downs in currency valuation, but is to manage and control the erosion in value on account of difference in export realization or import payments. FEMA of 1999 do not permit speculation in foreign exchange. The underlying transaction is the receivable/payable generated on account of export or import transaction. The amount receivable is for sale or purchase of goods. Even if the amount is given by the bank, as an agent, it is ultimately a permitted transaction to maximize the value of sale of goods as against a possible currency deterioration, or to bring certainty to transactions. Without sale of goods an exporter cannot hedge or claim to have currency exposure. The bank as only medium, is an administrative authority to facilitate the mechanism .
The Tribunal found that in the present case, the assessee company was a manufacturer exporter and had participated in the administrative mechanism provided by the Government of India through FEMA of 1999 in order to realize the amount due on sale of goods and was entitled to deduction under section 80HHC. Thus, the Tribunal after appreciating the evidence on record and the submissions advanced on behalf of the respective parties, has given sufficient, cogent and convincing reasons for holding that the the transaction in question was not a speculative transaction and that the foreign exchange contract was entered into by the assessee only with a view to realize the amount due on sale of goods. In the circumstances, no infirmity is found in the reasoning adopted by the Tribunal in holding that the gain on forward currency contract is related to the business of the assessee. In the circumstances, no question of law can be stated to arise qua the said ground.
In relation to proposed question [D] , the Assessing Officer disallowed deduction under section 80HHC in respect of recovery of bad debts, excess provisions written back, etc. On behalf of the assessee it has been claimed that recovery of bad debts and sundry balances written back are directly relatable to the business profit of the assessee. Commissioner (Appeals) found that writing back of provisions/liability for expenses payable was merely a reversal of liabilities created in the previous year as a result of which manufacturing profit of the previous year got reduced. Accordingly, it should also be treated as part of manufacturing profits eligible for deduction under section 80HHC. The Tribunal upon appreciating the evidence on record has concurred with the findings recorded by Commissioner (Appeals). Thus, in light of the concurrent findings of fact recorded by Commissioner (Appeals) and the Tribunal, no question of law can be stated to arise, as proposed or otherwise, in relation to the said ground.
As regards proposed questions [E] and [F], considering the smallness of the amount involved, the challenge in relation to the said grounds is not entertained, leaving it open to the revenue to agitate the same in an appropriate case.
In so far as proposed questions [G] and [H] are concerned, Admit. The following substantial question of law arises for determination :
Whether the Appellate Tribunal is right in law and on facts in directing the Assessing Officer to exclude the excise duty and sales tax for computing the deduction u/s. 80HHC of the Act, despite insertion of section 145A of the Act ?
Sd/-
Sd/-
(D.A.
Mehta, J.) (H.N. Devani, J.)
M.M.BHATT