TaxTMI 
TaxTMI 
2015 (8) TMI 366
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....d the appeal aggrieved by the order of the Ld. CIT (A) in ITA No.207/11-12 dated 12.06.2013. Since the issues in these appeals are common in nature, they are clubbed heard together and disposed of by this common order for the sake of convenience. 2. The concised grounds raised in all the appeals are listed below for adjudication. 2.A Assessee's Appeal : M/s.SCM Garments (P) Ltd. (A.Ys. 2009-10 & 2010-11)in ITA Nos.1645/13 & 2275/Mds/14:- Common ground in both the above appeals "The Revenue has erred in treating the loss incurred by the assessee on account of forex derivative contracts as speculative loss and thereby not allowing the assessee to set off the losses against its business income." 2.B Revenue's appeal : M/s.SCM Garments (P) Ltd. (A.Y.2010-11) in ITA No.2313/Mds. /14:- "The Ld. CIT (A) has erred in holding that the assessee is entitled for deduction U/s. 80-IA of the Act". At the outset before us, both the parties fairly conceded that this issue is squarely covered by the Jurisdictional High Court in the case of Velayudhaswamy Spinning Mills (P) Ltd Vs. ACIT in 231 CTR 368(Mad.) in assessee's favour. Therefore, respectively following the decision of Jurisdictiona....
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.... the Reserve Bank of India (RBI). Hence, it is not a transaction as stipulated U/s. 43(5) (a) & (d) of the Act. Before the Ld. Assessing Officer, the assessee has advanced the following submissions in support of its stand:- (i) The assessee is an exporter and most of its receivables are in foreign currency. (ii) In order to cover up the foreign currency exposures due to the normal business activity of the assessee, they had to enter into forward options contract which are mostly settled by delivery of currency. (iii) The profit or loss on account of forex derivative contract in the case of the assessee is incidental to the normal business of the assessee having a direct nexus. (iv) In order to hedge the currency risk the assessee on the basis of realistic calculation and also on the basis of advice of the bankers has entered into such transaction. (v) This loss on account of forex derivative contract was incurred by the assessee despite scientific analysis and expert advice due to global economic meltdown which had occurred during the second half of 2008. (vi) Foreign exchange is not a commodity but it is currency. Therefore, Section 43(5) of the Act will not be applied in th....
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....ulation business loss is not correct. When there is a specific provision in the Act, income has to be computed accordingly. c) The transactions transacted by the assessee is in the nature of derivatives referred to in sub-section (d) of section 43(5) of the Act and the conditions stipulated in Explanation to the said sub-section for treating it as a non-speculation transaction are not met. 4.3. On appeal to CIT (A), the Ld. CIT (A) after examining the issue made the following observations:- i) Forex derivatives are commodities as understood in business parlance. In arriving at such conclusion the Ld. CIT (A) relied in dictionary meaning of the word 'Commodity' and the decision of the Special Bench of the Calcutta Tribunal in the case Capital Services Ltd. Vs. ACIT (2009) 121 ITD 498 (Kol.)(SB), CIT Vs. Bharat R. Ruia (HUF) in 337 ITR 452. ii) Until liberalization of Indian economy in 1991, foreign exchange was treated as scarce commodity and was not available for trade or purchase by the individuals. Only during mid 2000 the RBI allowed trading in foreign exchange. iii) Since trading in foreign exchange was not permissible earlier, the Income Tax Act, which was passed by the P....
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....hich the bankers of the assessee advised the assessee to exercise sophisticated hedging tools such as 'options and swaps' in order to contain the risk of foreign currency exposures. (iv) Thus the assessee has acted only on the advice of its bankers in order to reduce the risk due to foreign currency exposures and there was no intention to indulge in any speculative activities. (v) Unfortunately, due to global economic meltdown the advice of the bankers went haywire which resulted in huge loss to the assessee during the course of its ordinary business. (vi) Section 43(5) of the Act defines speculative transactions only with respect to contracts arising out of purchase and sale of commodity, stock and shares that are periodically or ultimately settled otherwise than by actual delivery or transfer of such commodity or strips. Foreign currency can neither be called as commodity or stocks and shares. Reliance was placed on the decision of the Mumbai Tribunal in the case of Munjal Showa Ltd vs. DCIT reported in 94 TTJ (Del) 227. (vii) The forex derivative transactions entered by the assessee though nationalized banks are regulated and permitted by Reserve Bank of India keeping in vie....
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....herefore pleaded by the Ld. D.R that the order of the Revenue may be sustained. 7. We have heard the rival submissions and carefully perused the material on record and case laws relied by both the parties. In this case before us, one of the major business activities of the assessee is export of business garments as it appears from the financial statements submitted by the assessee. Therefore, it is obvious that the assessee would be having huge sundry debtors resulting from export of garments which are receivable in the foreign currency. These sundry debtors are exposed to currency fluctuation risk. One of the methods to protect loss against foreign currency fluctuation is by way of 'hedging'. Hedging transactions are entered in order to protect against the loss due to compensatory price movement. It protects an asset or liability against fluctuation in foreign exchange rate. One of the tools for hedging the forex risk is by way of foreign currency derivatives. Section 45 of the Reserve Bank India Act, 1949 defines derivative as a financial instrument whose value depends on the value of the underlying exposures. In the case before us, the underlying exposure is the foreign currenc....
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....reign currency is neither commodity nor shares as defined U/s. 43(5) of the Act. (vii) The Instructions issued by CBDT Instruction No.03/2010 dated 23.03.2010 has recognized the loss out of forex derivatives on actual settlement/conclusion of contracts as allowable business loss, however they have directed the Revenue to examine whether the transactions would fall U/s. 43(5)(d) of the Act, and if so to treat the same as non-speculative transaction. By the above directions, it appears that though the CBDT has recognized the loss arising out of forex derivatives on actual settlement of the contracts, directed the Revenue to treat the same as speculative transaction when they are transacted through nationalized banks and as not speculative, when these transactions are transacted through recognized stock exchange. (viii) It is pertinent to note here that the bankers act as an advisory agent to the assessee in order to protect them from foreign exchange exposure by using their expertise and these services cannot be obtained by the assessee in the stock exchange where their scope of service is very limited. (ix) In the present case the assessee has taken a hedging position to the exte....
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....No.240 of 2008A. Nos.1926, 1927, 2446 and 2447 of 2008 in S.S No.240 of 2008 vide order dated 14.10.2008 reported in 8 MLJ 261 has held that derivative transactions ceased to be speculative transactions or wages because pricing of the deal follows a scientific pattern on the basis of financial mathematics. Just as actuaries scientifically determined the value of insurance risk and the premium payable, Financial Mathematician/Portfolio Managers evaluate the price of these derivatives. (Para 81 of the Order) 8. Further, it is pertinent to note that the foreign currency is neither commodity nor stock or shares. "Foreign currency" is nothing but currency printed in a different country. It is money of a country other than one's own. "Currency" is a generally accepted form of money including coins and paper notes which is issued by a government and circulated within an economy. It is a medium based on the value of an underlying commodity. It is used as medium of exchange for goods and services. The currency value of one country with another country fluctuates according to the economic factors prevalent in those countries. Therefore holding foreign currency is placing reliance on the ec....
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....ract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act; (ii) "recognised stock exchange" means a recognised stock exchange as referred to in clause (f) of section 238 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified 39 by the Central Government for this purpose;] It is pertinent to note that banks have option to trade in foreign currency derivatives either through recognized stock exchange or through RBI. When the banks facilitates its clients to deal in foreign exchange derivatives through RBI, more stringent regulations are complied and therefore these transactions cannot be denied the benefits provided under the Act when traded through recognized stock exchange. 9. Now the question is whether to treat the foreign currency derivatives as commodities, or stocks and shares. If it is treated as commodities, Section 43(5)(a) of the Act comes to the rescue of the assessee because in the pre....
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....f CIT Vs. Sooraj Mull Nagarmull, reported in (1981) 129 ITR 169(Cal.) wherein it was held that the assessee used to carry on export and import of jute business. In the course of normal business it used to enter into foreign exchange contracts in order to cover up loss and difference in foreign exchange valuation. The assessee utilized part of the amount of the foreign exchange covered. This finding of fact has not been challenged, If in the course of normal carrying on of business certain loss or obligation or interest arise these must be deferrable to the carrying on of the business and these must be incidental to the carrying on of the business. Undoubtedly, the contract for foreign exchange as such can be treated as a contract for commodity. But the question here essentially is that the assessee was carrying on business of export and import of jute goods. In order to carry out these transactions, the assessee had to enter into foreign exchange contract in order to cover up these transactions. In those foreign exchange contracts, if any loss occurred then such loss was a loss referable to and related to the business carried on and arising out of the business of the assessee. Here....
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.... revenue account transaction should be allowed as deductable expenditure. 11. Thus to sum up in the present case before us, the assessee is an exporter of garments who has entered into forex derivative transactions through its bankers with a view to effectively hedge its foreign currency risk. Therefore, these forex derivative transactions have a close proximity or rather incidental to the export business of the assessee, which cannot be considered as speculative. Moreover in the case of the assessee foreign currency contracts cannot be treated as wagering contracts for the reasons discussed herein above. Section-43(5) of the Act is applicable to transactions in commodity or stocks and shares. If currency is treated as commodity, then according to Section 43(5) (a) of the Act, such transaction shall not be deemed to be speculative transaction. Further currency cannot be treated as stock or shares because inherently they have different characteristic. Further, in the case of the assessees, the foreign exchange exposure for the "relevant period" specified by "R.B.I" regulations is quiet substantial in order to justify the forex derivative transactions made by the assessee through Go....