TaxTMI 
TaxTMI 
2016 (4) TMI 706
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....earned CI.T.(A) erred on facts in his observations in para 5.2.1 and 5.2.2 that a. Learned Assessing Officer has argued that the loss in question is a speculative loss because these transactions were settled otherwise than by delivery; b. The appellant had entered into several forward contracts all of which were cancelled during the year, and c. During the course of assessment as well as appellate proceedings, it was not disputed by the appellant that the loss shown was exclusively due to forward contract against which no delivery was made. 3. The learned CI.T.(A), inspite of driving home specifically in writing on the subject, erred in not following various judicial pronouncements squarely on the issue relied upon by the appellant including that of the Hon. Supreme Court in the case of Woodward Governor(312 ITR 254) and of jurisdictional Mumbai ITAT Special Bench in the case of Bank of Baharain & Kuwait (2010) 5 ITR (Trib) 301, subsequently followed on identical facts in the case of M/s. Bhavani Gems, wherein it has been held that loss incurred on foreign exchange fluctuation on revenue account on marked to market basis is not notional loss and ....
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.... appellant had claimed in its return of income for assessment year 2008-09, a loss of Rs. 2,13,43,725/- on account of exchange rate fluctuation of outstanding debtors and creditors for sale and purchase of foreign currency considering the exchange rate as on 31.3.2009. It is also not disputed that the appellant has cancelled forward contracts in US dollar which were booked during the during accounting year relevant to assessment year 2009-10 which resulted into net loss. The LAO has argued that the aforesaid loss is a speculative loss because these are the transactions which were settled by the appellant other than by actual delivery and hence as per provisions of Section 43(5) of the Act these are speculative loss. On the other hand the LAR has vehemently argued that in order to minimize risk / loss in the forex market, the appellant took forward exchange cover from its bankers. However due to various commercial consideration exigencies and / or changes in the forex market the appellant company had to cancel forward contracts which were booked during the accounting year relevant to assessment year 2009-10. 5.2.2 A perusal of the relevant details available before me indica....
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....s were cancelled. They were never settled by actual delivery nor by transfer of the commodity. 5.2.3. Sub-section 5 to section 43 of the Act, prescribes speculative transaction as a transaction in which a contract for the purpose of sale of any commodity including stock and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. It is clear that a transaction is speculative in case the contract is periodical or ultimately settled otherwise than by actual delivery or transfer of the commodity. In the instant case, it has been admitted that the loss debited on account of forward contract is in respect contracts in which there has been no actual delivery. 5.2.4 The Hon'ble Karnataka High Court in the case of V. N. Sarsety V/s CIT(1987) 163 fTR 727 (Kar) had an occasion to consider the meaning of the words "speculative transaction". In the case before the Hon'ble jurisdictional High Court, the issue was allowability of deduction of Rs. 35,150/- which was to be paid by the assessee on account of non~ delivery of certain quantity of cotton under the agreement dated 5th Feb. 1969. The Hon'ble....
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....hat the definition of speculative transaction as contained in the Act has restricted the meaning of the expression 'speculative transaction' and in a sense simplified it for the purposes of computation of income tax. When there is no delivery under a settlement contract, it is a speculative transaction. On the other hand, however, speculative the transaction might be, if there is delivery, it cannot be considered as a speculative transaction. Hence, the intention of the assessee that forward contract will be settled through actual delivery is not material and the only material thing is to see as to whether there has been actual delivery or not. 5.2.9 The Hon'ble Madras High Court in the case of Sri Ranga Vilas Ginning & Oil Mills Vs CIT (1982) 133 ITR 85 (Mad) had an occasion to consider the meaning of 'speculation business'. In the case before the Hon‟ble High Court, the assessee was dealing in the business of groundnut oil.. The assessee entered into forward contract for supply of groundnut 0il. Forward contract was settled not by actual delivery but by payment of difference. Such loss was held to be loss of speculation business. 5.2.10....
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....ilal (1981) 131 ITR 554 (MP) has held that even a single speculative transactions can constitute speculation business. 5.2.15 However, in the instant case, there are a number of transactions and forward contracts have been taken by the appellant and cancelled. Thus, it is not an isolated transaction. Hence, in view of Expl No.2 to s.28, the profit from the forward contract will have to be assessed as profit from speculation business. 5.2.16 The LAO has relied on the provision of sub-section 5 of Section of 43 the Act and the provision of Section 73 r.w. Instruction NO.3 of 2010 dated 23.3.2010 issued by the CBDT in order to come to a considered conclusion that the disputed loss on account of cancellation of forward exchange contract is not allowable business. The LAO has examined the claim of the appellant that the disputed booking and cancellation of foreign exchange contracts were in the nature of hedging against loss in import and export of cotton. The AO vide page Nos. 2 to 8 of the relevant assessment order have negated the claim of the appellant. The LAO has examined the claim of hedging of the appellant in the light of CBDT‟s circular No.23 o....
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....ccount. However, if such valuation results in profit the same is ignored and not credited to the Profit and Loss Account. 5.2.19 I have also perused the decision relied upon by the LAR. These case laws have been distinguished by the LAO during the assessment proceedings and have been discussed in the relevant assessment order. In the case of CIT vs Badridas Gauridu Pvt Ltd 261 ITR 256 (Bom),the contract was linked with the appellant's business and on account of forward forwarding booking contracts with the banks with respect of appellant‟s export orders. In the instant case it is the finding given by the LAO that booking and cancellation of forward contracts of exchange were not in respect of specified export or import orders. In the present case all contracts have been cancelled. Therefore the facts of the present case are clearly distinguishable from the facts mentioned in the case of CIT vs Badridas Gauridu Pvt Ltd(supra). The LAO has further distinguished the case of B Vijaykumar & Co. (ITN No.2510/Mum/2002) and facts of Kishorekumar & Co. vs DCIT in ITA No. 3883/Muml.97with the facts of the present case. As far as the LAR's reliance in the case of CIT vs....
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.... loss of Rs. 2,13,43,725/- disallowed by the LAO is confirmed. Therefore, ground of appeal no.1 and 2 are dismissed. " 5. The AR vehemently submitted before us that the case of the assessee was covered in its favor by decisions of the Hon‟ble Supreme court, High court and Tribunals which the AO and CIT(A) failed to appreciate. The effective sole ground as argued by the ld AR was against the disallowance of marked to market loss of Rs. 2,13,43,725/- which has accrued from the revaluation and re-statement of outstanding forward contract at the end of the year as per accounting standard -11 based foreign exchange on the closing date or reporting date. The ld counsel submitted that the outstanding export receivable at the close of the year were Rs. $ 1,01,18,500/- which were also re-stated at the close of the year and a gain of Rs. 4,48,05,788/- as recognized as income in the books of accounts. Likewise in order to cover the risk of the fluctuation in foreign currency rate, the assessee had entered into forward contract for sale at $83,45,000/- pending maturity at the year end on which the assessee revalued and re-stated at the current exchange rate prevailing at the end of th....
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....ll the business houses engaged in import/export and these days specially the exchange rate is highly volatile. The special bench decision in case of DCIT Vs Bank of Bahrain and Kuwait (2010)132 TTJ Mumbai (SB) 505 the special bench held that MTM losses in respect of forward foreign exchange contract debited to the profit and loss account are allowable and further held (i) a binding obligation is accrued against the assessee the moment it entered into forward foreign exchange contract(ii) consistent accounting method followed by the assessee to account for the forex gain and loss at the yearend based upon the current exchange rate cannot be disregarded(iii) the liability is said to have crystallized when a pending obligation on the date of balance sheet is determinable with reasonable certainty(iv) as per AS-11 when the transaction is not settled in the same accounting year as that in which it occurred , the exchange difference arises over more than one accounting period (v)in the ultimate analysis , there is no revenue effect and it is only timing of taxation of loss/profit. The Tribunal in the case of Venus Jewel (supra) has vide para 10 observed and held as under : "10. ....