TaxTMI 
TaxTMI 
2014 (10) TMI 776
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.... Bench: 5 Kapadia, J Devadhar and DCIT v. Intergold (I) Limited (2010) 1 ITR 2571 27 50T 239 (ITAT-MUM) which are on identical facts of the assessee 5. The assessee craves Your Honour leave to add, alter or amend or delete any of the above grounds. 2. Assessee-company,engaged in the business of trading of cut and polished diamonds, filed its return of income on 26.09.2009 declaring loss at Rs. 2,19,91,359/-. Assessing officer (AO) finalised the assessment u/s.143(3) of the Act, on 29.12.2011,determining the total income of Rs. 78,57,190/-. Effective ground of appeal is about disallowance of loss of Rs. 2,98,48,551/- on account of cancellation of foreign currency forward contract During the assessment proceedings, the AO found that the assessee had debited loss on account of exchange rate fluctuation amounting to Rs. 2.98 Crores. He directed the assessee to furnish details on account of exchange rate difference and of forward contracts After considering the explanation filed by the assessee, the AO observed that any loss incurred by an assessee on entering into currency derivatives,due to forward contract of foreign exchange (FE) rate, had to be taken as forex derivative lo....
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....iness activity in currency forwards. The AO further referred to the instruction no.3 of 2010 issued by the CBDT. Defining the term hedging transaction, the AO held that the contracts in not in respect of material or merchandise to which the assessee generally dealt with, that same were the currency contracts and were purely speculative in nature. He AO also referred to proviso -D to section 43(5) of the Act that was inserted w.e.f. 01.04.2000. He held that the proviso excluded certain derivative transaction,that the proviso strengthened the view that the transaction in the derivative were basically speculative in nature,that only certain transaction were treated as non-speculative, that section 43(5) of the Act was amended w.e.f. AY 2006-07, that the proviso D of the section provided that such transaction had to be carried out through a recognised stock-exchange if same were to be treated as non-speculative transaction. Finally,he held that transactions of forex derivative undertaken by the assessee for the year under consideration did not satisfy any of the conditions given in proviso (d) to section 43(5) of the Act, that forex derivative transaction were speculative in nature,....
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....ssets such as shares, bonds, foreign currencies, that even after insertion of clause (d), all transactions in derivatives are not taken outside the purview of Section 43(5) of the Act, that it was only those derivative transactions which were covered under clause (d) that were outside the purview of Section 43(5) and rest of the transactions in derivatives were covered u/s.43(5) of the Act. The FAA relied upon the decision of the Hon'ble Bombay High Court delivered in the case of Bharat R Ruia (HUF) and held that only exchange traded derivatives are covered under clause (d), that the derivatives under dispute were not eligible transactions in respect of trading in derivatives, that the assessee had cancelled all relevant forward contracts in US Dollars which were booked during accounting year relevant to assessment year 2009-10 which resulted into net loss, that in respect of export of diamonds, the assessee had entered into forward contract in respect of foreign exchange to be received as a result of export, that it had undertaken the transactions to avoid the risk of loss due to foreign exchange fluctuation, that the assessee at the time of agreeing to export took into con....
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..../131/2013). and the judgments of Hon'ble High Courts of Bombay and Gujarat in the cases of Badridas Gauridu (261 ITR 256), Panchmahal Steel Ltd. (Tax Appeal 131 of 2013) and Friends and Friends Shipping Pvt. Ltd. (Tax Appeal 251 of 2010). Departmental Representative (DR)argued that the assessee had not matched the transaction with the export bills, that facts of the cases relied upon by the assessee were distinguishable from the facts of the present case. 5. We have heard the rival submissions and perused the material before us Undisputed facts of the case are that the assessee is dealing in diamonds, it had entered in to 24 forward contracts, that total forward contract cancelled were of Rs. 28 Crores (approximately), that the total sales during the year amounted to Rs. 27.78 Crores, that the AO and the FAA had held such transaction were speculative in nature and had disallowed the claim made by the assessee,that the assessee was of the opinion that transactions entered into by it were not speculative transactions. We find that the amount involved in the forward contract (FC) is more than 100% of the turnover of the assessee, that FC were not relatable to specific bills, th....
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....rofit or loss.In short, in order that a transaction may fall within the scope of the expression 'speculative transaction', it must be a transaction in which a contract for purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity/scrips. Here,it would be useful to appreciate as to how hedge transactions are commercially understood before determining the true scope,width and nature of proviso(a) to Sec. 43(5) of the Act Hedge contracts are those contracts which hedge against prejudicial price fluctuations.The technique of hedge trading can be understood in simple terms.It is said that the hedge contract is so called because it enables the persons dealing with the actual commodity to hedge themselves, i.e., to insure themselves against adverse price fluctuations. A dealer or a merchant enters into a hedge contract when he sells or purchases a commodity in the forward market for delivery at a future date.His transaction in the forward market may correspond to a previous purchase or sale in the ready market or he may propose to cover it later by a corresponding tran....
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....tured goods or merchandise, a manufacturer or merchant has necessarily to enter into forward transactions of sale and purchase both, and without these contracts of sale and purchase constituting hedge transactions, there would be no effective insurance against the risk of loss in the price fluctuations of the commodity, manufactured or the merchandise sold. Hedging contracts are dealt in Clause (a) of the proviso to section 43(5) of the Act. From the above discussion it can safely stated that the said clause applies, if following conditions are fulfilled: i) there is a contract for actual delivery of goods manufactured by the assessee /a merchandise sold by it, ii) assessee must be a subsequent transaction intend to guard against losses through future price fluctuations in respect of such contract, iii) transaction in question must be a contract entered into in respect of raw materials or merchandise in the course of the assessee's manufacturing business and it should have been settled otherwise than by actual delivery of goods, iv) hedging contracts may be both with regard to sales and purchases, v) hedging contracts need not succeed the contracts for sale an....
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....om could not be set off against the assessee's income from the business in the manufacture and sale of groundnut oil." Similarly, in the case of Nuddea Mills Co.Ltd (supra)the assessee was a manufacturer of jute goods and it has entered into forward contracts of sale of standard jute goods. In view of overseas offer, it decided to manufacture special quality jute goods. Assessee entered in to forward purchases of standard jute goods and purchase back of forward contracts of sale.It incurred loss in covering its forward contracts of sale.In the appeal filed by the assessee,Hon'ble Calcutta High Court, confirming the order of the ITAT, held that losses suffered by the assessee were result of the speculative transactions.In the case of Delhi Flour Mills Co.Ltd.(supra) Hon'ble Delhi High Court held that forward transactions made by the assessee in respect of matar (a substitute of gram) could not be treated as hedging transactions and the loss sustained by the assessee in such transactions could not be set off against its profits in the business of manufacturing atta (wheat flour) and other wheat products.Hon'ble Allahabad High Court, while deciding the appeal of M.P....
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....t has failed to discharge the onus cast upon him by the statute. It was also not able to contradict the finding of fact that booking and cancellation of FC of foreign exchange were not in respect of specified export or import. Besides, finding of fact given by the Revenue Authorities remained un-contravened that loss in question, shown by it pertained to those FC transctions,against which no actual delivery of foreign exchange was made. On appreciation of the facts surrounding the transaction we have reached at the conclusion that transactions entered in to by the assessee were speculative in nature and the case of the assessee is not covered by proviso(a) of the section 43(5) of the Act. 5.5. Now we would like to discuss the cases relied upon by the AR. In the case of Intergold (I) Ltd. (supra) the matter related to sections 10A and 80HHC of the Act. In the matter of Bombay Diamond Co. Ltd. (supra), the FAA had held that loss arising out of forex contract was business loss and the Tribunal had endorsed the view of the FAA. Thus, the case was limited to the facts of that case. In the case of Friends and Friends Shipping Pvt. Ltd. the Hon'ble Gujarat High Court had specifi....