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2026 Supreme(Online)(ITAT) 6623
INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH)
Satbeer Singh Godara, Judicial Member, Naveen Chandra, Accountant Member
Orient Craft Limited – Appellant
Versus
DCIT – Respondent
ITA No. 3625/Del/2015|ITA No. 3626/Del/2015|ITA No. 3773/Del/2015|ITA No. 3774/Del/2015|ITA No. 3202/Del/2017|ITA No. 3203/Del/2017
For the Appellants/Petitioners: Salil Aggarwal, Madhur Aggarwal
For the Respondents: Monika Singh
Expenses for aborted projects are revenue in nature where no enduring asset is created. Losses from hedging foreign exchange in export-import business are ordinary business losses. Deductions for export units include income inextricably linked to business operations, and Section 14A disallowance cannot exceed the actual exempt income earned.
Headnote:(A) Income Tax Act, 1961 - Section 37(1) - Aborted public issue expenses - Whether capital or revenue expenditure - Expenses incurred for an aborted public issue do not result in the creation of any asset or enduring benefit, and thus qualify as revenue expenditure allowable under Section 37(1). (Para 10)
(B) Income Tax Act, 1961 - Section 10B - Deduction on 100% export-oriented unit - Whether income from foreign exchange difference and excess provision write-back is 'derived from' industrial undertaking - Gains from foreign exchange fluctuations and reversal of excess provisions, being inextricably linked to business transactions of an export-oriented unit, satisfy the nexus test for 'derived from' and qualify for deduction. (Para 11)
(C) Income Tax Act, 1961 - Section 37(1) - Product development expenses - Claim of deferred revenue expenditure - Recurring expenditure on product design and sampling does not warrant deferment as deferred revenue expenditure in the absence of a statutory provision; must be allowed in the year of incurrence. (Para 12)
(D) Income Tax Act, 1961 - Section 14A read with Rule 8D - Disallowance of expenditure - Limitation on disallowance - Disallowance under Section 14A cannot exceed the amount of exempt income earned during the relevant year. (Para 13) (E) Income Tax Act, 1961 - Section 43(5) - Speculation loss versus business loss - Loss on forward contracts - Forward contracts entered into for hedging against foreign exchange volatility in connection with export and import business are not 'speculation losses' but are incidental business losses and allowable. (Para 14)
Facts of the case:
The assessee, an exporter, incurred various expenditures categorized by the tax authorities as either capital in nature (aborted public issue costs, deferred product development costs) or non-business/speculative (forward contract losses). The authorities also denied certain deductions related to unit-specific income and investment-related expenses under specific sections of the Act.
Findings of Court:
The Tribunal found that expenses for aborted projects do not create enduring assets; therefore, they are revenue in nature. Losses from forward foreign exchange contracts linked to export business act as hedging and are regular business losses, not speculative. Furthermore, product development costs recurring in nature are fully deductible in the year incurred, and tax exempt income cannot be 'swallowed' by excessive disallowance of expenditure under Section 14A.
Issues: Whether aborted public issue expenses, product development costs, forward exchange contract losses, and foreign exchange gains qualify as revenue expenditure, deductible expenses, business losses, and eligible unit-income respectively, and the extent of disallowance under Section 14A.
Ratio Decidendi: Expenditures lacking the creation of an enduring asset are revenue in nature; hedging losses incidental to export business are normal business losses; deductions linked to export unit operations meet the 'derived from' test; and Section 14A disallowance is capped by the limit of exempt income.
Result: Appeals of the assessee allowed; appeals of the revenue dismissed.
| Table of Content |
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| 1. expenditure on an aborted ipo project is deductible as revenue expenditure under section 37(1) as no enduring capital asset is created. (Para 1 , 1 , 2 , 3 , 10) |
| 2. income resulting from foreign exchange differences and written-back provisions by a 100% eou possesses a first-degree nexus with business activities, qualifying for section 10b deduction. (Para 4 , 11) |
| 3. product development expenses are revenue outlays, and deferring these as 'deferred revenue expenditure' without specific statutory provisions is impermissible. (Para 5 , 12) |
| 4. disallowance under section 14a read with rule 8d cannot exceed the total quantum of exempt income earned by the assessee. (Para 6 , 13) |
| 5. losses from forward foreign exchange contracts entered to hedge export/import risks incidental to business are normal business losses, not speculative losses under section 43(5). (Para 7 , 8 , 14) |
1. These six cross appeals are filed by the Assessee (ITA Nos.- 3626/Del/2015, 3625/Del/2015) and the Revenue (3773/Del/2015, 3774/Del/2015, 3202/Del/2017, 3203/Del/2017) against the different orders dated 09.03.2015, 10.03.2015 and 27.02.2017 respectively of the Ld. Commissioner of Income Tax (Appeals)-7, [hereinafter referred to as the Ld. CIT(A)] pertaining to Assessment Years (A.Y.) 2009-10, 2010-11 and 2011-12 and 2012-13 respectively. Since common issues are involved in these appeals, the same is being disposed of by way of this common order for the sake of convenient and brevity. The grounds in all the six appeals are reproduced as under:
ITA No.- 3625/Del/2015(A.Y. 2009-10) Assessee’s appeal
1. That the orders passed by lower authorities are bad in law and against the facts & circumstances of the case.
2 That both CIT(A) & AO have erred in law and on facts in treating, IPO expenses amounting to Rs. 1,68,30,430/- as capital expenditure arbitrarily and without any justification.It is contended that the ratio of the judgements in case of 225 ITR 792 and 225 ITR 798 are not applicable to the appellant's case.
3 The above grounds of appeal are independent and without prejudice to one and another.
ITA No.- 3626/Del/2015(A.Y. 2010-11) Assessee’s appeal
1 That the orders passed by lower authorities are bad in law and against the facts & circumstances of the case.
2 That both CIT(A) & AO have erred in law and on facts in not allowing deduction u/s 10B amounting to Rs. 1,99,23,462/- abitrarily and without any justification on the assumptions that it is not derived from industrial undertaking.
It is contended that the difference in foreign exchange is a first degree source of receipt being derived from the industrial undertaking.
3 The above grounds of appeal are independent and without prejudice to one and another.
4 Your appellant craves, leave, to add, alter, amend, and / or forego any of the grounds of appeal at the time of hearing.
ITA No.- 3773/Del/2015(A.Y 2009-10) Revenue’s appeal
“ 1. n the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the addition of Rs. 8,00,25,058/- made by the AO on account of disallowance of product development expenses which was treated as deferred revenue expenditure and in ignoring the fact that the benefit in terms of creating market and goodwill for the assessee in the international market is available to the assessee over a period of three years for expenditures made for the product development expenses..
2. On the facts in the circumstances of the case, the ld CIT(A) has erred in law and on the in deleting the disallowance of Rs. 2,99,31,782/- out of the total disallowance of Rs. 2,99,97,647/- made by AO u/s 14A r.w.s. 8D(2) (ii) by ignoring the mandatory provisions of sub-rule 8D r.w.s.14A of the Income tax Act, 1961.
3. On the facts and in the circumstances of the case, Id CIT(A) has erred in deleting the addition of Rs.66,41,71,241/- made by the AO where the loss on account of deficit on settlement of forward contracts(Net) was rightly taken as speculation loss under the prov
