:1: bgp bgp bgp IN IN IN THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORDINARY ORDINARY ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION INCOME INCOME INCOME TAX REFERENCE 10 OF 1995 TAX REFERENCE 10 OF 1995 TAX REFERENCE 10 OF 1995 M/s.Loksons Pvt.Ltd., 2nd Floor, Ramchandra Bldg, 200, L.T.Marg, Bombay-2. ..Applicant Vs. Assistant Commissioner of Income Tax, Circle 5(4), Bombay. ..Respondent Mr.P.J.Pardiwala i/b. Kanga & Co.for the Applicant. Mr.Vimal Gupta with Mr.P.S.Sahadevan for the Respondent. CORAM CORAM CORAM :- DR.S.RADHAKRISHNAN & :- DR.S.RADHAKRISHNAN & :- DR.S.RADHAKRISHNAN & A.V.NIRGUDE, A.V.NIRGUDE, A.V.NIRGUDE, JJ. JJ. JJ. DATE DATE DATE : 15TH JULY, 2008 : 15TH JULY, 2008 : 15TH JULY, 2008 JUDGMENT JUDGMENT JUDGMENT (PER : DR.S.RADHAKRISHNAN,J.) (PER : DR.S.RADHAKRISHNAN,J.) (PER : DR.S.RADHAKRISHNAN,J.) 1. By this Reference, the Income Tax Appellate Tribunal, Bombay has referred the following substantial question of law: . Whether on the facts and circumstances of the case, the Tribunal was justified in upholding the disallowance of the claim of the assessee for deduction on account of exchange loss of Rs.65,54,930/- incurred on remittance of advance received for supply of goods holding that the sum was paid by the assessee was not on account of commercial expediency and was not incurred wholly and exclusively for the purpose of business? 2. The above question of law pertains to A.Y.1989-90. The brief facts are, that the Assessee is a Private Limited Company carrying on a business of trading and also export of goods and for the A.Y.1989-90, the Assessee had filed a return of income showing net loss of Rs.56,03,630/-. However, the Assessing Officer had determined the net taxable :2: income of the Assessee at Rs.8,06,729/- and while passing the aforesaid assessment order dated 28/02/1992, the Assessing officer had disallowed a sum of Rs.65,54,930/- being the amount of loss occurred due to fluctuation of foreign exchange rate while remitting back the advance received for supply of goods by the Assessee. 3. It appears that the Assessee had entered into two contracts with M/s.Globe Trading Agency Ltd., Dubai in July,1979 for the supply/export of 7000 Kg. of copper/silver wire containing 47% silver for a total value of Rs.66,10,000/-. By the aforesaid contracts, the Assessee had to effect shipment latest by September,1979. In pursuance of the said contracts, the Assessee had received a sum of 32,09,895 UAE Dirhams as an advance for the supply of the aforesaid goods. Unfortunately, before the goods could be shipped by the Assessee, the Government of India had issued a Notification dated 03/08/1979, whereby a total ban was imposed on export of silver from India. In view thereof, the Assessee could not export the aforesaid copper/silver wire, as per the contracts. The Assessee had approached this Court by filing a Writ Petition and initially an ad-interim relief was obtained whereby, the Assessee was allowed to export 50% of the contracted goods. However, the said ad-interim relief was set aside by the Division Bench of this Court and subsequently an Appeal seems :3: to have been preferred to the Hon’ble Supreme Court of India, but the record does not indicate as to what transpired thereafter. However, the Assessee could not dispatch the aforesaid 7000 Kg. of copper/silver wire, as contracted to M/s.Globe Trading Agency Ltd.,Dubai, in view of ban imposed by Government of India. Ultimately, the purchaser had cancelled the contracts by his letter dated 29/09/1985 and by the said letter the said purchaser had demanded back the aforesaid 32,09,895 UAE Dirhams which was paid towards an advance under the said contracts. The Assessee thereafter had approached the Reserve Bank of India for refunding the said amount of 32,09,895 UAE Dirhams and the Reserve Bank of India granted three permissions dated 01/11/1988 to the Assessee for sending the aforesaid 32,09,895 UAE Dirhams, the said three permission Numbers are: Sr.No. Sr.No. Sr.No. Permit No. Permit No. Permit No. UAE UAE UAE Dirhams Dirhams Dirhams Date Date Date 1. DC BYX (iii)/39/L-60/88-89 24,35,750 01/11/88 2. DC BYX (iii)/40/L-60/88-89 4,84,700 01/11/88 1. DC BYX (iii)/41/L-60/88-89 2,89,445 01/11/88 ---------- 32,09,895 ---------- 4. Accordingly, after obtaining the said permission, the Assessee had forwarded 32,09,895 UAE :4: Dirhams to M/s.Globe Trading Agency Ltd., Dubai during the A.Y.1989-90. The value of UAE Dirhams had gone up substantially during the aforesaid lapse of 10 years since the amount was received in July/August,1979 and it came to be refunded only in the Assessment Year 1989-90. As a result of fluctuation in foreign exchange rates, to constitute the said 32,09,895 UAE Dirhams, the Assessee had to pay in excess of Rs.65,54,930/- during the A.Y.1989-90 over and above the rate which was prevailing in July/August,1979 when the amount was received by the Assessee. 5. The Assessee had claimed the aforesaid excess amount in terms of rupees paid to the foreign purchaser, by way of loss, as the said additional amount was paid to the Purchaser, in view of fluctuation in foreign exchange rates. 6. Mr.Pardiwala, the learned Counsel appearing for the Assessee pointed out that what was refunded in the Assessment Year 1989-90 pursuant to the permission granted by the Reserve Bank of India was exactly the same 32,09,895 UAE Dirhams and the Assessee had no control over the fluctuating foreign exchange rate and in view of the lapse of almost 10 years the excess amount of Rs.65,54,930/- was paid. Mr.Pardiwala, in this behalf refers to one of the terms of contract, on which the Tribunal had also relied upon. The said term reads as "alteration in rates or freight or :5: insurance shall be on buyers account". The Tribunal has interpreted the word appearing in the said term of contract "rates" to mean fluctuation in foreign exchange rates. However, Mr.Pardiwala pointed out that here the "rates" would mean rates of silver and not rates of foreign exchange". Mr.Pardiwala also contended that the Assessee had returned only the exact UAE Dirhams which he had received in the year 1979, i.e. after a lapse of almost 10 years, since all the efforts of the Assessee came to a nought Mr.Pardiwala contended that the aforesaid interpretation by the Income Tax Appellate Tribunal is totally erroneous. The rates here should only be with regard to the price of silver. To put it in other words, in the event by the time the silver were to be dispatched the rates had gone up, it will be on the buyers account and it had nothing to do with the foreign exchange. Mr.Pardiwala also contended that the Tribunal had erroneously concluded that the price was settled at Indian currency @ Rs.950/- per kg. F.O.B. and that the payment has to be made only in terms of Indian Rupee. Mr.Pardiwala strongly contended that no Indian Exporter could receive payment from a foreign party directly in Indian rupee and if that be so it would be a serious violation under the then provisions of Foreign Exchange Regulation Act. Mr.Pardiwala contended that in payment by a foreign party to an Indian party, a bank will always accept foreign currency and the same bank :6: will convert the same in Indian rupee and pay to the Indian party. Accordingly, when the amount of 32,09,895 UAE Dirhams were received from M/s.Globe Trading Ltd., Dubai, the Assessee’s bank had converted it into Indian rupee. Similarly, the Assessee had refunded the said 32,09,895 UAE Dirhams. The Assessee had to spend that much of Indian rupee to obtain 32,09,895 UAE Dirhams and to pay the purchaser by way of refund. Mr.Pardiwala pointed out that this is obviously was a loss due to fluctuating rate in foreign exchange and the Appellant had no control over the same. 7. Mr.Pardiwala contended that with regard to the second aspect that the Tribunal had disagreed that the Appellant/Assessee had to refund the amount due to "commercial expediency". The learned Counsel submitted that if the party dealing with the foreign entity obtains advance for supply of certain goods, such a party is bound to refund the same and if the Indian entity were not to refund the same, the entire credibility of the Indian entity will be lost. Hence, to maintain the commercial expediency the Assessee had to refund atleast the amount received from the foreign purchaser. Mr.Pardiwala pointed out that in fact the foreign party had demanded a further amount of 17,77,656 UAE Dirhams in addition to 32,09,895 UAE Dirhams towards damages. In fact, the Assessee had not forwarded any amount towards damages but had :7: forwarded the only amount which it had received towards advance for the supply/export of the copper/silver wire. Mr.Pardiwala strongly contended that the Petitioner’s act of refund of the aforesaid purchase price back to the foreign party was a "fair trade practice" and it was a clear case of "commercial expediency". Under the aforesaid facts and circumstances of the case, Mr.Pardiwala pointed out that the aforesaid question referred to by the Income Tax Appellate Tribunal ought to be answered in favour of the Assessee and against the Revenue, in the sense, the said amount of Rs.65,54,930 ought to have allowed as a loss during the A.Y.1989-90 and the order of the Income Tax Appellate Tribunal, Mumbai disallowing deduction on account of exchange loss of Rs.65,54,930/- ought to be set aside. 8. Mr.Vimal Gupta, the learned Counsel appearing on behalf of the Revenue could not controvert that the Assessee could not dispatch/export the silver to M/s.Globe Trading Agency Ltd., Dubai because of the ban imposed by the Government of India on 03/08/1979 from exporting silver from India. Mr.Gupta also could not controvert that in reality, what is refunded was exactly 32,09,895 UAE Dirhams. However, Mr.Gupta sought to justify the order of the Income Tax Appellate Tribunal contending in view of the above mentioned term of contract i.e. "alteration in rates or freight or insurance shall be on buyers’ account". :8: In the sense, here the "rates" would mean rate with regard to foreign exchange. Mr.Gupta also sought to contend that there is no commercial expediency involved in refunding the amount received to the foreign party and in fact the Assessee need not have returned the aforesaid amount and incurred the said foreign exchange loss. 9. After hearing both the parties, we find that there are two issues in the aforesaid questions of law. The first being, whether the amount of Rs.65,54,930/- can be claimed by the Assessee on account of foreign exchange loss by way of loss in the Income Tax return for the A.Y.1989-90? With regard to the said question, the record is very clear that when the amount was received in the year 1979 by way of advance from the foreign party, the value of UAE Dirhams in terms of rupee was less compared to when the same amount of 32,09,985 UAE Dirhams were refunded to M/s.Globe Trading Agency Ltd., Dubai after a lapse of almost 10 years. To put in other words, the Assessee had received 32,09,895 UAE Dirhams as an advance from the said foreign company and the very same amount i.e. 32,09,895 UAE Dirhams were refunded back by the Assessee to the said company after a lapse of almost 10 years, over which he had no control and in fact there is no dispute from the Income Tax Department that the Assessee could not export the goods because of the Notification issued by the :9: Government of India imposing ban on the export of silver from India. There is no dispute that the Assessee had made all attempts even by approaching this Court and seeking permission to export. Ultimately, on complete failure to export the goods, in the year 1985 and after obtaining necessary permission from the Reserve Bank of India, the Assessee had dispatched the entire amount to the foreign company. The interpretation sought to be put by the Income Tax Appellate Tribunal with regard to "alteration in rates or freight or insurance shall be on buyers account" is that it deals with foreign exchange rate. "Rates", obviously here would mean rates of silver otherwise rates in foreign exchange makes no sense in the said clause because the price was agreed as per the Indian rupee at Rs.950/- per Kg. Therefore, what is contemplated here, is the rate of silver and by the time supply was to be made to the buyer and in the event of any fluctuating in the rate of silver, the buyer will bear the additional burden. Under the aforesaid facts and circumstances of the case, we are clearly of the view that the Assessee had no control over the excess payment that ought to be made to the foreign company due to the fluctuation in the rate of foreign exchange. Second aspect in the above is, that whether the aforesaid payment can be said to be for commercial expediency? Obviously a good businessman will have to maintain certain amount of credibility and specially in a foreign market. :10: There is no dispute that the Assessee had received the aforesaid 32,09,895 UAE Dirhams by way of advance and the Assessee can not turn around and say that he will not refund or pay back the same to the foreign company. This also would come under "commercial expediency". Had the Assessee not been refunded the entire amount received by him as an advance towards the contracts, the entire credibility of the Assessee would have gone in the foreign market, and the said refund was obviously for commercial expediency. 10. Under the aforesaid facts and circumstances of the case, in both the aspects, we find the arguments of the Assessee to be sound for the aforesaid reasons. Hence, we answer the aforesaid question of law in favour of the Assessee and against the Revenue and hold that the disallowance of claim of Assessee for deduction on account of exchange loss of Rs.65,54,930/- incurred on remittance of advance received for supply of goods and the same paid by the Assessee ought to be allowed and also it was due to commercial expediency wholly and exclusively for the purpose of business. Accordingly, the Reference is answered in favour of the Assessee and against the Revenue. The Reference stands disposed of accordingly. (A.V.NIRGUDE,J.) (A.V.NIRGUDE,J.) (A.V.NIRGUDE,J.) (DR.S.RADHAKRISHNAN,J.) (DR.S.RADHAKRISHNAN,J.) (DR.S.RADHAKRISHNAN,J.)