The Hon'ble Dr.justice Vineet Kothari v. The Assistant Commissioner Of Income Tax

THE HON'BLE DR.JUSTICE VINEET KOTHARI M/s.Capricorn Food Products India Ltd.,New No.AH-11/Old No.AH-216, 2nd Street, 8th Main Road,Shanthi Colony, Anna Nagar,Chennai 600 040. PAN: AABCC 1550 BAppellant vs The Assistant Commissioner of Income Tax Company Circle-I(3), Chennai. Respondent Prayer : Tax Case Appeal filed under Section 260-A of the Income Tax Act, 1961 against the order of the Income TaxAppellate Tribunal, ‘B’ Bench, Chennai dated 27.5.2016 inI.T.A.No.2179/Mds/2015, preferred against the order of thecommissioner of Income Tax(Appeals)-I, Chennai, dated03.08.2015, made in I.T.A No.346/2011-12/AI (New No.I.T.A.48/CTI(A)-1/2011-12), against the order of the Assistant Commissionerof Income Tax, Company Circle -I(3), Chennai-34, dated15.12.2011 made in PAN No. for the Assessment Year2009-10. The Court was held by Video Conference, as per theResolution of the Full Court dated 3 July 2020, by Judges attheir respective residences and the counsel, staff of the Courtappearing from their respective residences. https://hcservices.ecourts.gov.in/hcservices/ 2. The present Appeal has been filed by the AssesseeM/s.Capricorn Food Products India Limited raising the followingpurported substantial questions of law calling in question thecorrectness of the order passed by the Income Tax AppellateTribunal,'B'Bench,Chennai,dated27.5.2016inI.T.A.No.2179/Mds/2015, for the Assessment Year 2008-2009:- "(i) Whether the order of the Tribunal issustainable in law as it suffers from seriousinconsistencies and illegalities? (ii) Whether the Tribunal is right in law insummarily disposing of the appeal without advertingto the detailed submissions made, facts and figuresplaced before it without applying its mind in ajudicious manner? (iii) Whether the Tribunal is right in law in givingcertain directions to the Assessing Officer whilesetting aside the assessment without noticing thefact that the loss claimed in respect of the case ofAishwaria & Co is from derivative trading whereasthe loss in the present case is on account ofhedging of foreign currency receivable from exports?(iv) Whether on the facts and in the circumstancesof the case the Income Tax Appellate Tribunal isright in law in directing the Assessing Officer thatonly the transactions which are completed are to beconsidered for the purpose of determining thebusiness loss from these foreign exchange forwardcontract?" 3. The operative part of the Order of the learned Tribunalclearly shows that the matter has only been remanded to theAssessing Authority with similar directions given by theTribunal in its earlier decision in the case of Aishwarya &Company Private Limited in I.T.A.No.860/Mds/2014, as given inpara 8 of its order. 4. The said para 8 including the extract from the order ofthe Tribunal in Aishwarya & Company Private Limited is quotedbelow for ready reference:- "8. We have heard both the parties and perusedthe material on record. In our opinion, the issuein dispute was considered by this Tribunal in thecase of M/s.Aishwarya & Co. P. Ltd., in ITANo.860/Mds/2014 vide order dated 29.05.2015 whereinthe followed the decision of Calcutta High Court inthe case of M/s.Baljit Securities Pvt. Ltd. (88CCH 313) and held as under: "Clause (d) of Section 43(5) becameeffective with effect from 1st April, 2006. https://hcservices.ecourts.gov.in/hcservices/ Therefore, prior to 1st April, 2006 anyransaction in which a contract for thepurchase or sale of any commodity includingstocks and shares was periodically orultimately settled otherwise than by theactual delivery or transfer of the commodityor scrip was a speculative transaction. Sub-section 1 of Section 73 provides as follows: "Clause (d) of Section 43(5) becameeffective with effect from 1st April, 2006. https://hcservices.ecourts.gov.in/hcservices/ Therefore, prior to 1st April, 2006 anyransaction in which a contract for thepurchase or sale of any commodity includingstocks and shares was periodically orultimately settled otherwise than by theactual delivery or transfer of the commodityor scrip was a speculative transaction. Sub-section 1 of Section 73 provides as follows: '(1) Any loss, computed in respect ofa speculation business carried on by theassessee, shall not be set off exceptagainst profits and gains, if any, ofanother speculation business.' The resultant effect was that any lossarising out of speculative transaction couldonly have been set off against profitsarising out of speculative transaction. Inthe present case, the assessee, as alreadyindicated, has been dealing in shares wheredelivery was in fact taken and also inshares where delivery was not ultimatelytaken. In other words, the assessee has beendealing in actual selling and buying ofshares as also dealing in shares only forthe purpose of settling the transactionotherwise than by actual delivery. Thequestion arise whether the losses arisingout of the dealings and transaction in whichthe assessee did not ultimately takedelivery of the shares or give delivery ofthe shares could be set off against theincome arising out of the dealings andtransactions in actual buying and selling ofshares. An answer to this question is to befound in the explanation appended to Section73 which reads as follows: 'Explanation: where any part ofthe business of a company otherthan a company whose gross totalincome consists mainly of incomewhich is chargeable under theheads "interest on securities", ora company the principal businessof which is the business ofbanking or the granting of loansand advances) consists in thepurchase and sale of shares ofother companies, such companyshall, for the purposes of this section, be deemed to be carryingon a speculation business to theextent to which the businessconsists of the purchase. In orderto resolve the issue before us,the section has to be read in themanner as follows: "Explanation : Where any part ofthe business of a company (…… ……………..) consist in the purchase andsale of shares of other companies,such company shall, for thepurposes of this section, bedeemed to be carrying on aspeculation business to the extentto which the business consists ofthe purchase and sale of suchshares. It would, thus, appear that where anassessee, being the company, besidesdealing in other things also deals inpurchase and sale of shares of othercompanies, the assessee shall be deemed tobe carrying on a speculation business. Theassessee, in the present case, principallyis a share broker, as already indicated. Theassessee is also in the business of buyingand selling of shares for self where actualdelivery is taken and given and also inbuying and selling of shares where actualdelivery was not intended to be taken orgiven. Therefore, the entire transactioncarried out by the assessee, indicatedabove, was within the umbrella ofspeculative transaction. There was, as such,no bar in setting off the loss arising outof derivatives from the income arising outof buying and selling of shares. This iswhat the learned Tribunal has done. 9. From the above decision of the CalcuttaHigh Court in the case of Baljit SecuritiesPvt. Ltd. cited supra, the issue standscovered in favour of the assessee. However,we make it clear that total transactionconsidered for determining this business 9. From the above decision of the CalcuttaHigh Court in the case of Baljit SecuritiesPvt. Ltd. cited supra, the issue standscovered in favour of the assessee. However,we make it clear that total transactionconsidered for determining this business loss from derivative transactions cannot bemore than the total export turnover of theassessee for the assessment year underconsideration and if the derivativetransaction is in excess of export turnover,then that loss suffered in respect of thatportion of excess transactions to beconsidered as speculative loss only as thatexcess derivative transaction has noproximity with export turnover and theAssessing Officer is directed to computeaccordingly. This ground is allowed asindicated above. 5. Further, the Mumbai Bench of ITAT in thecase of Araska Diamond P. Ltd vs ACIT, 152ITD 203, has held as under: "Total sales during the year amounted to27.78 crores, that The AO and the FAA hadheld such transaction were speculative innature and had disallowed the claim made bythe assessee, that the assessee was of theopinion that transactions entered into by itwere not speculative transactions. ITATfound that the amount involved in theforward contract(FC) was more than 100% ofthe turnover of the assessee, that FC werenot relatable to specific bills, that theassessee had not related any single bill toany of the contract and had not provided anypurchase order during the assessment orappellate proceedings. ITAT found that inthe case under consideration assessee wasnot dealing in Foreign Exchange, thereforetransactions entered into by it in ForeignExchange cannot be held to be hedgingtransactions. As the assessee was dealing indiamonds and FC entered into only fordiamonds would have been covered by theproviso (a) to the section 43(5)of the Act.As held by the Hon'ble High Court ofCalcutta in the matter of Gourepore Co. Ltd,onus was on the assessee to prove that thetransactions in question were not of aspeculative nature. ITAT was of the opinionthat it had failed to discharge the onuscast upon him by the statute. It was also not able to contradict the finding of factthat booking and cancellation of FC offoreign exchange were not in respect ofspecified export or import. Besides, findingof fact given by the Revenue Authoritiesremained un-contravened that loss inquestion shown by it pertained to those FCtransactions, against which no actualdelivery of foreign exchange was made. Onappreciation of the facts surrounding thetransaction ITAT had reached at theconclusion that transactions entered in toby the assessee were speculative in natureand the case of the assesseeis not coveredby proviso(a) of the section 43(S) of theAct. Disputed transactions were speculativeand not hedging transaction, that theassessee could not relate any single bill toany of the contract and it had not provideddetail of any purchase order relatable tospecific transaction, during the assessmentor appellate proceedings. Thus, thetransactions undertaken by it have to betaken as transactions relatable to ForeignExchange. ITAT was of the opinion that theorder of the FAA does not suffer from anylegal or factual infirmity. Therefore,consideringthepeculiarfactsandcircumstances of the case, ITAT confirmedhis order FAA and decide effective groundagainst the assessee." 6. In view of the above orders of theTribunal, we are of the opinion that theAssessing Officer has to consider theforeign exchange derivative in proportion toexport turnover as regular businesstransaction of the assessee. If thederivative transaction undertaken by theassessee is in excess of export turnoverthen that loss suffered in respect of thatportion of excess transaction has to beconsidered as speculative loss only and thatexcess derivative transaction has noproximity with export turnover and theAssessing Officer is directed to computeaccordingly. Further, the Assessing Officerhas to see whether there is any prematurecancellation of forward contract of foreignexchange and that transaction should betaken out for the purpose of considering the business loss and only the transactionswhich are completed to be considered for thepurpose of determining the business lossfrom these foreign exchange forwardcontract. With this observation, we remandthis issue to the file of the AssessingOfficer for fresh consideration. 7. Before us, the ld. Representative reliedon the judgment of Gujarat High Court in CITvs Friends and Friends Shipping P. Ltd,[2013J 217 Taxman 267, for the propositionthat if the assessee failed to take deliverywithin the period indicated in contract andthe assessee had given instructions to bankfor cancellation of contract on payment ofagreed charges to the bank thesetransactions cannot be considered asspeculative transaction. However, there isno finding in this judgment towards thiseffect and the reliance placed by theassessee is misplaced. More so, this issuewas considered by the Mumbai Tribunal whiledelivering the decision in the case ofAraska Diamond P. Ltd, 152 lTD 203, andafter following the judgments of CalcuttaHigh Court in the case of Bengal & Assam Co.Ltd vs CIT 227 CTR 399, and Bombay HighCourt judgment in the case of CIT vsBadridas Gauridu P. Ltd 261 ITR 256, theTribunal came to the conclusion that thetransactions,whichwereprematurelycancelled, cannot be considered as businesstransaction and it is to be considered asspeculative transaction. In view of theabove, we are inclined to remit the issueback to the file of the Assessing Officerfor fresh consideration." In view of this, we are remitting the issue indispute to the file of AO on similar direction.Hence, the appeal of assessee is partly allowed forstatistical purposes. 9. In the result, both the appeals of theRevenue and the assessee are partly allowed forstatistical purposes. In view of this, we are remitting the issue indispute to the file of AO on similar direction.Hence, the appeal of assessee is partly allowed forstatistical purposes. 9. In the result, both the appeals of theRevenue and the assessee are partly allowed forstatistical purposes. 5. Mr.G.Baskar, learned counsel for the Appellant/Assesseesubmitted that while remanding the case to the AssessingAuthority, the Tribunal has given certain directions and its https://hcservices.ecourts.gov.in/hcservices/ views about the Exchange Fluctuations to be treated asspeculative loss or business loss and therefore, it is not anopen remand which is likely to prejudice the case of theAssessee while the Assessing Authority passes a fresh order uponsuch remand. 6. The learned Senior Standing Counsel Mr.T.Ravikumarappearing for the Respondent/Revenue has not seriously objectedto the Assessing Authority passing fresh orders in accordancewith law. 7. Therefore, we do not find any substantial question oflaw to be arising in the present case at this stage, requiringour consideration or pronouncement on the merits of the case,since the matter has only been remanded to the AssessingAuthority. 8. However, we make it clear that the objections of theAssessee shall be kept open and the Assessee will be free torely upon the relevant materials including the later case laws,if any, delivered on this issue in various High Courts. 9. The Assessing Authority may proceed to pass freshorders, uninfluenced by any observations made by the Tribunal inthe above quoted portion of its previous order as well as thepresent order of the learned Tribunal. 10. With these observations, the Appeal is disposed ofwithout answering the questions of law at our end. No order asto costs. Sd/- Assistant Registrar //True Copy// Sub Assistant Registrar Ssk/kpl To1.The Income Tax Appellate Tribunal,B Bench, Chennai. 2.The Commissioner of Income Tax(appeals)-I,Chennai. 3.The Assistant Commissioner of Income Tax +1 cc to M/s.G.Baskar, Advocate Sr.No. 25117 +1 cc to M/s.T.Ravikumar, Advocate Sr.No. 25119 T.C.A.No.818/2016 SSV(CO)RMP(02/11/2020)