TaxTMI 
TaxTMI 
2016 (2) TMI 502
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....ssessee had declared a loss of Rs. 7.84 crores on cancellation of foreign exchange forward contracts. It is pertinent to note that the assessee had revalued the outstanding receivables in foreign currency and declared a gain of Rs. 20.39 crores. The assessee had also declared a loss of Rs. 5.29 crores on revaluation of outstanding payable in foreign currency. The AO did not disturb both the items stated above. 3. The assessee submitted that it, being an exporter of diamonds, enters into sales transactions in US$ and hence it is required to hedge the foreign exchange loss by entering into forward contracts. Accordingly, it was contended that the same forms integral part of the export business. Accordingly, it was claimed that the loss of Rs. 7.84 crores suffered on account of cancellation of foreign exchange forward contracts was allowable as business expenditure. However, the same was not acceptable to the assessing officer. The AO took the view that the assessee, being a dealer in diamonds, has entered into a separate business transaction of dealing in foreign currency and the same has been settled otherwise than by actual delivery. Accordingly the AO took the view that the for....
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....ion under s. 10B." With due regards, we have perused the above findings and of the firm view that the issue itself was on different footing. To be precise, the issue before the earlier Bench was deduction u/s 10B and whether the profits from forward contracts can be said to be derived from the assessee's undertaking for the purpose of deduction u/s 10B of the Act whereas the issue on hand is entirely different. The above reasoning has been fairly conceded by the CIT(A) in her findings. For ready reference, the relevant portion of her reasoning is extracted as under (at the cost of repetition): "4.6......................................This aspect has been dealt with in detail by the Hon'ble ITAT, Bangalore in the case of Shri K.Mohan Exports & Co in 126 ITD 0059 (Bang.). Although the issue on hand was in a different context as to whether income from speculation profits can be said to be income 'derived from exports' for the purpose of section 10B or not,........" 5.5.4 On the other hand, we find that the issue in question is squarely covered in favour of the assessee from the following judgments of Hon'ble Bombay and Gujarat High Courts: (i) CIT ....
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.... (3)... (4).... (5) "speculative transaction" means a transaction in which a contract for the 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 or scrips: Provided that for the purposes of this clause- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; [or] [(d) an eligible transaction in respect of trading in derivatives referred to i....
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....ause (a) of the proviso to section 43(5) provides for exclusion of the 'hedging transaction' from the definition of the 'speculation transactions'. There are number of judgments in support of the assessee and relevant 'ratios' or conclusions are discussed in the succeeding paragraphs. 20. Before taking up these discussions, we shall now take up the provisions of the Explanation to section 28 of the Act, which also provide definition of 'Speculative Business'. The said explanation reads as under: Explanation 2.-Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as "speculation business") shall be deemed to be distinct and separate from any other business. 21. Explanation to section 28 uses the expression 'speculative transactions carried on by an assessee are of such a nature as to constitute a business', and thus, considering the nature of these transactions, the impugned FCs cannot be deemed as the speculation business without going into the "nature of the transactions". For analyzing the nature, we need to examine why the FC transactions are entered, how these transacti....
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....correlation between the FCs and the export invoices should exist and should be established by the assessee. So long as the total value of the FCs does not exceed, the claim of the assessee is sustainable as business loss. We have also analyzed the decisions relied on by Ld DR and find they are distinguishable. Now, we shall proceed to import some conclusions of the said decisions. Relevant judgmental laws - Conclusions & Held portions 23. Relevant extracts from the cited judgments are inserted in the succeeding paragraphs here as under: A. Held portion in the case of D. Kishorekumar 2 SOT 769 (Mum) "The details of forward exchange contract clearly show that all the forward exchange contracts were in respect of each specific import order placed by the assessee. The purpose of these transactions was clearly to minimise assessee's risk on account of fall in value of rupee, but the quantum of foreign exchange covered by these forward contracts was limited to the extent of assessee's actual exposure in respect of import value commitments. That aspect is not disputed. On these facts, even though the transactions having been settled without delivery, th....
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....depends on a number of factors, most important factor being the trend of currency markets at that point of time and businessman's perception about future trends of the currency market. For example, when a businessman perceives that the market value of foreign currency vis-a-vis the domestic currency will not go any higher or when the market starts the declining trend, he may see business expediency in cancellation of contract. The fact of premature cancellation, therefore, cannot alter the nature of transaction. For all these reasons, the credit shown in the P&L a/c as 'profit on cancellation of forward contracts' is as integral part of the export business, as purchases or imports..... The assessee succeeds on this issue. In the result, the appeal is allowed." 24. Although, the said decision was pronounced in the context of section 80HC of the Act, the ratio of the said decision is of paramount importance. B. Bombay High Court judgment in the case of CIT vs. Badridas Gauridu (P) Ltd. [2004] 134 Taxman 376 (Bom.) 25. In this case, Honble High Court of Bombay answered the following question in favour of the assessee and the question reads that,- "W....
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....on of this judgment as reported reads as under: Where in the normal course of business of import and export of jute, the assessee entered into foreign exchange contract to cover up the losses and differences in exchange valuation, the transaction is not a speculative transaction. 26. The above extracts unanimously support that the FCs entered by the assessee, an exporter and not the dealer in foreign exchange, with the Banks as incidental to the export business, are business transactions and loss or gains is notof speculation nature. The only relevant decision cited by Ld DR is the one delivered in the case of S.Vinodkumar Diamonds Pvt. Ltd, (supra) and in this case, AO allowed the relevant loss as business loss and relevant portion is extracted as under: "4...............He further held that losses incurred by the assessee during the year on account of change in value of currencies at the time of payment was allowed while finalising the assessment, that M to M losses were of notional losses and contingent in nature. Finally, loss on a/c. of outstanding forward contract as on 31.03.2008 were disallowed by him............" 33. Correlation of forwa....
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....of the year plus outstanding export receivable, the FCs can constitute 'hedging transaction'. Further also, the 'premature cancellation of FCs may not alter the above conclusions so long as the assessee has valid and acceptable explanation for such cancellations. It should not be the case, to start with, FC can be a 'hedging transaction' but the ending of such FC is 'speculation'. In the light of this synopsis of our views in the matter, we shall not deliberate on the impugned losses. 35. The subdivisions of the loss of Rs. 4,69,42,680/-: we have already tabulated above the three subdivisions of the impugned losses based on the timing of the cancellation of the FCs. Broadly the loss is divided into two types and the adjudication of the each subdivision of loss is given as under: (a) Loss on Cancellation of Matured FCs amounting to Rs. 4,14,88,805/- relates to the FCs cancelled or terminated on or after the due date. In other words, the FCs booked as integral part of the export invoices lived its booking period in full and they were either terminated by the Bank on or after due date of maturity date of the contract as the actual realization were not received in tim....