1. This appeal is filed by the assessee against the order of the Commissioner of Income Tax (Appeals)-II, Coimbatore dated 04.01.2013 for the assessment year 2007-08.
2. The appeal filed by the assessee is barred by 60 days. The assessee filed an affidavit explaining reasons for delay in filing of appeal stating that he met with an accident, seriously injured and hospitalized for more than three months and could not hand over the Commissioner of Income Tax (Appeals) order to A.R. for filing appeal time. Thus prays for condonation of delay. We have perused the reasons and are satisfied that there is a reasonable cause for the delay in filing of the appeal. In the interest of justice, we condone the delay of 60 days in filing of the appeal. The petition for condonation of delay is thus, allowed and the appeal is admitted.
3. Counsel for the assessee submits that both the issues in this appeal are decided by the co-ordinate Bench of this Tribunal in assessee's own case for the immediately preceding assessment year and he places a copy of the order of this Tribunal in ITA No. 2032/Mds/2012 dated 21.02.2013. Counsel submits that ground No. 2 raised against the order of the Commissioner of Income Tax (Appeals) in confirming the disallowance of foreign currency derivative loss by treating it as speculation loss and holding that it cannot be allowed to set off against income of regular business of the assessee is decided in favour of the assessee by the co-ordinate Bench of this Tribunal in ITA No. 2032/Mds/2012. With regard to ground No. 4 i.e. denying deduction under section 80IB of the Act on duty draw back, he submits that the issue has been decided against the assessee by the co-ordinate Bench in the aforesaid order.
4. Departmental Representative supports the orders of the lower authorities.
5. Heard both sides. Perused orders of lower authorities and the decision relied on. On a perusal of the decision of coordinate Bench of this Tribunal in ITA No. 2032/Mds/2012 dated 21.02.2013 we find that both the issues in the appeal of the assessee are squarely covered by this decision. In respect of disallowance of foreign currency derivative loss by treating it as speculation loss and not allowing set off against regular business, the Tribunal held as under:--
"9. We have heard both sides. Perused the materials on record and the orders of authorities below. The assessee is an exporter of hosiery garments. There is no dispute that the assessee is not a dealer in foreign exchange. The assessee's forex transactions are regulated by RBI. The assessee is carrying on the forex transactions only in the course of its business and not as a separate business as observed by the Assessing Officer because the assessee is not a dealer in foreign exchange. The Hon'ble Bombay High Court in the case of CIT v. Badridas Gauridu (P) Ltd. (supra) held that an assessee who is an exporter of cotton engaged in forward contracts with banks in foreign exchange is not a speculative transaction. It was held that loss deductible is business loss. While holding so, the Hon'ble Bombay High Court held as under:--
"The assessee-company carried on business as export house. The assessee-company is an exporter of cotton. On 30th Dec., 1992, the assessee filed its return of income showing an income of Rs. 1,13,100. The assessee had entered into forward contracts with the banks in respect of foreign exchange. Some of these contracts could not be honoured by the assessee for which it had to pay Rs. 13.50 lakhs, which was debited to the P&L a/c. The assessee claimed the same as business loss being payment made on account of cancellation of forward booking of foreign exchange with the banks in respect of export orders. The AO disallowed the deduction on the ground that the assessee had short sold the foreign exchange and that the payments made were not in the nature of damages, but they were made to settle the transaction without delivery and, therefore, the said amount of Rs. 13.50 lakhs was a speculation loss, which can only be allowed to be carried forward and set off against speculation profits. Being aggrieved, the assessee carried the matter in appeal to the CIT(A). The first appellate authority confirmed the assessment order. Being aggrieved, the assessee carried the matter in appeal to the Tribunal, which took the view that the assessee was an exporter of cotton; that the assessee was an export house; that it had entered into transactions for export of cotton; that the assessee was entitled to book foreign exchange against export orders received by it; that the transaction was done with the permission of the Reserve Bank of India; that such contracts were incidental to the assessee's business of export of cotton; and, therefore, they did not represent speculative transactions. Accordingly, the Tribunal allowed the appeal. Being aggrieved, the Department has come by way of appeal to this Court.
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 s. 43(5) of the IT Act, "speculative transaction" has been defined to mean a transaction in which a contract for the purchase or sale of a 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 CIT v. Soorajmull Nagarmull : (1981) 22 CTR (Cal) 8: (1981) 129 ITR 169.
In the circumstances, there is no merit in the appeal. The appeal fails and the same is dismissed with no order as to cost."
The Hon'ble Calcutta High Court in the case of CIT v. Soorajmull Nagarmull (supra) has also taken similar view. The Delhi Bench of the Tribunal in the case of Munjal Showa Ltd. v. DCIT (supra) held that foreign currency or any currency is neither commodity nor shares. It was also held that in view of the provisions of FERA, it is legally impossible to enter into a speculative transaction in respect of foreign currency and such a forward contract is excluded from the ambit of speculative transaction by proviso (c) to Sec. 43(5) of the I.T. Act. Relevant paras are extracted below:--
"31. Foreign currency or any currency is neither commodity nor shares. The Sale of Goods Act, specifically excludes cash from the definition of goods. Besides, no person other than authorized dealers and money changers are allowed in India to trade in foreign currency, much less speculate. Sec. 8 of the Foreign Exchange Regulations Act, 1973, provides that except with prior general or special permission of the RBI, no person other than an authorized dealer shall purchase, acquire, borrow or sell foreign exchange.
32. In fact, prior to the LERMS, residents in India were not even permitted to cancel forward contracts. The presumption of any speculative transaction is, therefore, directly rebutted in view of the legal impossibility and in view of the fact that foreign currency was neither commodity nor shares.
33. The definition of "speculative transaction", will not apply to a situation where the purpose of entering a forward contract was to hedge/safeguard against any loss on account of repayment of principal amount of the loan: cancellation of the contract was identical to that object and consequently any loss/gain arising from such cancellation is directly related to repayment of the loan.
34. Further, attention is also drawn to proviso (c) to s. 43(5) of the Act, which excludes 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, etc. to guard against loss which may arise in the ordinary course of his business to such member from the definition of speculative transaction.
Respectfully following the above decisions, we hold that Forex contracts entered into by the assessee will not fall under the definition of "speculative transaction". The grounds taken by the assessee on this issue are allowed."
6. Respectfully following the said decision, we allow this ground of appeal of the assessee.
7. In respect of denying duty draw back while computing deduction under section 80IB of the Act, the Tribunal in ITA No. 2032/Mds/2012 dated 21.02.2013 held as under:--
"10. The next issue in the grounds of appeal is that the Commissioner of Income Tax (Appeals) erred in confirming the exclusion of duty draw back from eligible profits while computing deduction under sec. 80IB of the I.T. Act.
11. The Assessing Officer, while completing assessment restricted the relief under sec. 80IB of the Act by excluding duty draw back from the profits derived from industrial undertaking. The assessee claimed deduction under sec. 80IB of the Act including the duty draw back amount as profit derived from industrial undertaking. On appeal, the Commissioner of Income Tax (Appeals) following the decision of Hon'ble Supreme Court in the case of Liberty India v. CIT (317 ITR 218) up held the action of the Assessing Officer in excluding duty draw back for the purpose of computing relief under sec. 80IB of the Act. The Commissioner of Income Tax (Appeals) held as under:
"7.1 The assessee had claimed deduction u/s. 80IB wherein they had included Duty Draw back amount as profits derived from industrial undertaking. The Assessing Officer has denied this benefit on the basis that duty draw back amount cannot be included in the eligible profit for claiming deduction u/s. 80IB. This issue is squarely covered in favour of the revenue by the decision of Hon'ble Apex Court in the case of Liberty India v. CIT reported in : 183 Taxman 349 (2009) (SC),wherein it is held as under:--
'DEBP is an incentive. It is given under Duty Exemption Remission Scheme. Essentially, it is an export incentive. No doubt, the object behind DEBP is to neutralize the incidence of customs duty payment on the import content of export product. This neutralization is provided for by credit to customs duty against export project. Under DEPB, an exporter may apply for credit as percentage of FOB value of exports made in freely convertible currency. Credit is available only against the export project at rates specified by DGFT for import of raw materials, components, etc. DEPB credit under the scheme has to be calculated by taking into account the deemed import content of the export product as per basic customs duty and special additional duty payable on such deemed imports. Therefore, DEPB/Duty Draw back remissions are incentives which flow from the schemes framed by the Central Government or from section 75 of the Customs Act, 1962. Hence, incentive profits are n
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ot profits derived from the eligible business under section 80-IB. They belong to the category of ancillary profits of such undertakings...." Conclusion The duty draw back receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purpose of section 80-I/80-IA/80-IB. [Para 24]." 7.2 Respectfully following the above decision, this ground of appeal is dismissed and addition made by the Assessing Officer is upheld." On going through the order of Commissioner of Income Tax (Appeals) we do not find any infirmity or good reason to interfere with the order of Commissioner of Income Tax (Appeals) since the Commissioner of Income Tax (Appeals) has only followed the decision of Hon'ble Supreme Court in concluding that duty drawback is not profits derived from industrial undertaking for the purpose of computing relief under sec. 80IB of the Act. The grounds raised by the assessee on this issue are rejected." 8. Respectfully following the said decision, we reject the grounds raised by the assessee on this issue. 9. In the result, appeal of the assessee is partly allowed. Order pronounced in the open court on Friday, the 30th day of January, 2015 at Chennai.