TaxTMI 
TaxTMI 
2015 (4) TMI 1049
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....arments, filed its return of income for the assessment year 2008-09 on 30.9.2008 admitting Nil income under the normal computat ion, and Rs. 7,90,33,870/- crores U/s.115JB of the Act. Initially the return was process U/s. 143(1) of the Act and subsequently the case was taken for scrutiny and assessment was completed U/s. 143(3) of the Act on 28.12.2010 wherein the Ld. Assessing Officer made addition of Rs. 5,44,50,660/- being loss on derivatives disallowed to be set off against the business income, holding it to be speculative loss. 3.1. During the course of assessment proceedings, the Ld. Assessing Officer observed that apart from manufacturing and export of hosiery garments to various countries, the assessee had also entered into forex derivative contracts with Axis Bank, Yes Bank & IDBI Bank. The Forex Derivative Contracts were in the nature of options and swap contract. The assessee had contended before the Ld. Assessing Officer that these transactions are hedging transactions for minimization of risk relating to foreign currency fluctuat ions, which arises from the export business of the assessee. However, the Ld. Assessing Officer treated the same as 'Speculative transacti....
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.... "6.12 the claim of the assessee's derivative transactions are having an underlying hedge against export bills of the assessee , is akin to saying that an exporter visiting Hong Kong and having a loss from his gambling in a Casino in Macau is to be treated as a business loss. The exporter may have receivables in Hong Kong dollars. However his gambling in Macau casino, if resulted in a loss is a separate speculative activity even though the loss in gambling is paid in Hong Kong dollars. Similar is the situation here with the assessee. The assessee's export bills in the last 4 years have permitted him to enter into derivative transactions with the bank. However, the assessee's decision to enter into separate cross currency derivative transactions were a separate activity to obtain speculative profit based on the currency movements i.e. US Dollar Vs. Euro during a particular period. In other words US Dollar and Euro were mere dices on the gambling table. The movement of Euro Vs. US Dollar went against assessee's call on them. This resulted in a huge speculation loss. Therefore, the derivative transactions undertaken by the assessee have no relations whatsoever with the assessee's expo....
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....e fol lowed in the instant case also since the issue in both the case is similar and identical. The relevant port ion of the order dated 27.02.2015 of that case is ext racted herein below wherein the issue is elaborately discussed:- "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 deriva....
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....luctuation risk by entering into forex derivative contract. (vi) The Special Bench of the ITAT, Kolkata Bench in the case of Shri Capital services Ltd Vs. ACIT in 121 ITD 498(Kol.)(SB) has held that foreign 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 ....
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....currency exposure arising out of import and export trade. (xiv) The Hon'ble jurisdictional Madras High Court in the case M/s.Rajashree sugars and chemicals Ltd Vs. Axis Bank Ltd., in O.A Nos.251 & 252 of 2008 in C.S.No.240 of 2008 O.A. Nos.526 & 527 of 2008 in C.S 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 a....
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....racts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or byelaws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and (B) which is supported by a time stamped contract 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....
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....for export of cotton in some cases failed. In the circumstances, the assessee was entitled to claim deduction in respect to 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 Ld. CIT Vs. Soorajmull Nagarmull (1981) 22 CTR (Cal.) 8: (1981) 129 ITR 169 (Cal.). B. In the case of 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 carry....
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.... assessee is identified, if some incidental activities or transactions or dealing in foreign exchange is undertaken but that is also related to some extent to main business activity, then, it could not be said that assessee is in speculative business. G. In the case of CIT Vs. Climate System Pvt. Ltd., reported in 2014 (8) TMI 901 - Delhi High Court wherein it was held that exchange fluctuation arising on the 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 ....