TaxTMI 
TaxTMI 
2016 (8) TMI 1094
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....iness loss and (b) Rs. 833,76,649/- as speculation business loss". 3. The assessee is a Star Trading House engaged in the business of diamonds. The main activities of the assessee consists of purchase of rough and polished diamonds mainly through import from various countries, manufacturing of rough diamonds into polished diamonds and sell polished diamonds mainly by way of export to various countries. The brief facts qua the issue of disallowance under section 14A of Rs. 25,85,318/- as raised vide ground no.1 are that, the assessee has earned dividend income of Rs. 62,92,640/- which was claimed as exempt under section 10(34). The assessee had not attributed any expenses for the earning of such an exempt income and accordingly, no disallowance was offered in the computation. The AO observed that, assessee has common pool of funds and composite books of accounts from where it is not possible to exactly identify the expenses attributable to earning of this exempt income. In response to the show cause notice as to why the disallowance under section 14A should not be made as per Rule 8D, the assessee submitted that, all the loans taken were utilized for the business purpose and also ....
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....ssee could not substantiate its claim before the AO properly. 7. We have heard the rival submissions and also perused the relevant finding given in the impugned order and material placed on record. The disallowance under section 14A consists of disallowance of interest under Rule 8D(2)(ii) of Rs. 14,000,41/- and disallowance of indirect expenditure under Rule 8D(2)(iii) of Rs. 11,85,278/-, aggregating to Rs. 25,85,318/-. So far as the disallowance of interest is concerned, it has been submitted before us that the surplus and interest free funds available with the assessee far exceeded the investment made by the assessee. This contention of the assessee appears to be correct from the perusal of the Balance-sheet as on 31st March, 2008 from where it is evident that, the share capital and reserve & surplus itself was at Rs. 183,33,70,726/- whereas, the investment which has been made are at Rs. 48,29,02,642/-. Thus, it can be safely be presumed that investments have been made from surplus/interest free funds. This proposition has been upheld by the Hon'ble Bombay High Court in various other Courts several times including that of Reliance Utilities and HDFC Bank (supra), that when asse....
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.... What is required to be seen is, whether the income from the investment which "does not" or "shall not" form part of the income. The phrase "does not" conveys something done or to be done in present, that is, 'income during the year"; and "shall not" conveys something about in future, a strong assertion or intention, that is, 'not earned income in future'. Hence in our opinion, the phrase "shall not" covers a situation where income earned in future or whenever it is earned, then it shall not form part of the total income at any time. Thus, this contention of the assessee prima facie does not appears to be in correct interpretation or in line with the Rule 8D(2)(iii). Accordingly, we direct the AO to remove the strategic investments only from the working and from the balance, he should work out the disallowance as per Rule 8D (2)(iii). With this direction, ground No.1 is treated as partly allowed. 10. The brief facts qua the second ground are that, the assessee had debited a sum of Rs. 26,18,34,176/- on account of foreign exchange rate difference (net) under the head "raw materials consumed/trading goods utilized". The break-up of this head was given in Schedul-17 to the audited ac....
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....ard/hedging contract are not against specific import/export bills g. Currency is commodity in terms of section 43(5) of the Act and therefore, section 43(5) of the Act applies to the transactions entered into by the Appellant". 11. The Ld. CIT(A) after considering the observations and finding of the AO as well as submissions made by the assessee held that, loss of Rs. 8,33,76,649/- would be considered as speculation loss and loss of Rs. 40,89,46,448/- is to be considered as business loss. The sum and substance of assessee's submissions before CIT(A) are as under: a. Assessee is in the business of import and export Diamonds which transactions are executed in foreign currency. It also meets its working capital needs by way of borrowings in foreign currency. Thus, assessee is exposed to risks arising out of fluctuations in foreign currency exposure. In view of the regulatory guidelines and on the facts of the case he observed that the foreign currency forward/ option transactions entered into by the Assessee in order to mitigate the risks form an integral and inseparable part of its diamond business and is not a separate and distinct business by itself. b. Assessing Officer himsel....
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....t substantiate with respect to its underlying risk exposure and accordingly he held that loss of Rs. 8,33,76,649/- is to be considered as speculation loss and balance loss of Rs. 40,89,46,948/- is to be considered as business loss. 13. Before us, the Ld. Counsel, Shri Vijay Mehta submitted that assessee has entered into these transactions in order to hedge against the risk of currency fluctuation for its imports and exports. This issue had also come-up for consideration before the Tribunal in assessee's own case in the AYs 2001- 02 to 2004-05, wherein Tribunal has decided this issue in favour, which now has been affirmed by the Hon'ble Bombay High Court also vide order dated 17.01.2011, following the decision of Bombay High Court in the case of Badridas Gauridu, reported in 261 ITR 256. He further submitted that, transactions are carried out as per the Foreign Management Act, 1999 as well as circular issued by the RBI. So far as allegation of the AO that, break-up of option and contracts and position on date of contract and cancellation has not been provided, he submitted that it is not correct observation, because the complete details were furnished which is evident from para 1.7....
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....not only exposed to the risk of adverse price movements in the goods it deals in, but also wide fluctuations in foreign exchange rates in international markets having major impact on its revenue, receivables and payables. It is clearly evident that, due to large import and export of diamonds, which is the main business activity of the assessee, it is exposed to high risk of foreign exchange gain or loss which is arising only because of the said business only. In other words, all its receipts, payments, receivables and payables are in foreign currency which is inseparable and inextricably linked with the diamond business carried out by the assessee and, therefore, risk associated with the fluctuation of foreign currency also forms part and parcel of same business. To mitigate the foreign currency loss, RBI introduced the regulations so that exporters and importers can hedge the same through authorized dealers, mostly Banks. The assessee had entered into hedging transaction through banks and the amount for which the hedging transactions are entered are within the amount of the underlying transactions of imports and exports. There is no independent transaction of foreign exchange on s....
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....In the said case, the Hon'ble Tribunal after detailed discussion and relying upon various case laws, held that foreign exchange loss in the course of the business occurred due to hedging transactions through advance is nothing but business gain or loss. Accordingly, in view of the myriad precedence, we also hold that, here in this case the foreign exchange loss of Rs. 49,23,23,597/- is nothing but business loss which needs to be allowed. 16. So far as the CIT(A)'s contention that assessee has been unable to substantiate the underlying exposure of derivative contracts to the tune of Rs. 8,23,26,649/- and, therefore, it should be substantiated, the assessee before us, has contended that in any genuine hedging transaction where there is huge volume of purchase exposure and sales exposure, the hedging transaction keeps on fluctuating. The Ld. CIT(A) has upheld the disallowance keeping in mind the fact that in any particular month the hedging transactions were higher than foreign exchange exposure, the excess cannot be accepted as for the purpose of business transaction. We find that such an observation in general may not prevail in every case, because in normal business practice the h....