TaxTMI 
TaxTMI 
TaxTMI 
2017 (5) TMI 972
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.... - 9 has erred in not allowing allocation of interest paid amounting to Rs. 84,68,707/- for IPO funding, a related shares allotted in such IPOs. 3. Facts in brief are that assessee is engaged in the business of manufacturing and export of diamonds. During the course of scrutiny assessment, AO disallowed assessee's claim of deduction on account of expenditure incurred for earning exempt income amounting to Rs. 39,82,046/-. The AO observed that the disallowance offered by the assessee was not as per Rule 8D, accordingly, he re-worked out the disallowance @Rs39,82,046/-. By the impugned order, the CIT(A) confirmed the disallowance. 4. Learned AR appearing on behalf of the assessee contended that assessee own funds were sufficient to cover the value of the investment, therefore, no disallowance was warranted in respect of interest expenditure. He further argued that disallowance u/s.14A should be restricted to the amount of exempt income earned by the assessee during the year. For this proposition, he relied on the following judicial pronouncements. 1. Cheminvest Ltd., 378 ITR 33 2. Joint Investments v. CIT (372 ITR 694 (Del) 3. Indus Valley Investments v DCIT being ITA No.37....
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.... the A.Y.2008-09 under consideration. Such cancellation of forward contracts in US dollars resulted into net loss. In terms of nature of business, assessee imports rough diamonds mainly from Diamond Trading Company (DTC). Assessee exports finished diamonds to various parties on credit. Credit term for the sales ranges between 90 to 150 days. Most of the customers have long term relationship with the assessee. As assessee imports rough diamonds and export finished diamonds, it receives and pay foreign currency. These foreign currency transactions are incidental to the assessee's diamond business. Thus, foreign currency transactions were entered by the assessee for the purpose of meeting the requirement and for nothing else or for no other purpose. Thus, assessee's business and sources of borrowings are effectively in foreign currency and thus the assessee is exposed to adverse movements in foreign exchange which it receives and pays as part of its business. All these transactions entered by the assessee are incidental to its business activity of import and export and to protect against adverse movements in foreign exchange in a highly volatile global market. Thus, foreign exchange f....
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....o independent transaction of foreign exchange on standalone basis. The details of transaction on which the assessee has made profit and loss on various foreign exchange contracts has already been discussed in the impugned orders along with the copy of the contract entered with the banks. Thus, such a loss cannot be in any manner equated with hedging of foreign currency alone, but ceases to fall within the realm of 'speculation' albeit it is inextricable linked with the business of the assessee. This matter had already been decided by the Tribunal in the assessee's own case in the earlier years which has been upheld by the Hon'ble Bombay High Court following the ratio and principle laid down in the case of Badridas Gauridu (supra). We find that this issue is no longer res integra, because in various decisions as relied upon by Ld. Counsel before us, it has been consistently held that, if the assessee is not dealing in foreign exchange per se but has hedged against the foreign exchange loss in the forward market with the bank, then any loss or gain thereto is to be treated as business loss or business gain only. The Hon'ble Bombay High Court in the case of Badridas Gauridu (supra), h....
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....very case, because in normal business practice the hedging is often done based on actual estimated exposure looking to the past transactions undertaken and based on that, hedging is done in respect of transaction yet to be done in the near future. Bill to bill or one to one basis exposure of hedging cannot be done in a continuum business and nothing has been brought on record that RBI puts such kind of condition or bar for hedging of foreign currency based on actual bill to bill exposure. Hedging contracts need not succeed the contract for sale and actual goods manufactured but may get settled within a reasonable time. Quantity and timing may not be relevant for a short period in a continuous transaction as long as transaction construed is based on genuine hedging and finally it coincides with the actual exposure undertaken. It is only at the year end that one can still reconcile the hedging transactions with the actual exposure or delivery and come to a conclusion whether hedging contract exceeded the actual exposure or not but certainly not on week to week or month to month basis. Thus, the disallowance of loss sustained by the Ld. CIT(A) of Rs. 8,23,26,649/- cannot be upheld sim....
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....ts have not been entered into 'diamonds' and hence the forward contracts entered into 'foreign currency' cannot be linked with the business of diamonds. He further took the view that the 'derivatives' is also a commodity. Accordingly, the AO took the view that the activity of the assessee in entering into forward contract in foreign currency is a speculative transaction and hence the loss suffered by the assessee is a speculative loss. In this regard, the AO took support from the decision rendered by Bangalore bench of Tribunal in the case of ACIT Vs. K.Mohan & Co. (Exports) P Ltd reported in 126 ITD 59. The Ld CIT(A) confirmed the order of the AO by following the decision rendered in the case of M/s S.Vinodkumar Diamonds P Ltd (ITA No.506/M/2013). 4. We heard the parties and perused the record. The decision rendered by the Bangalore bench of Tribunal in the case of K. Mohan & Co. (Exports) P Ltd (supra) was considered by another bench of Bangalore Tribunal in the case of ACIT Vs. M/s Hanuman Weaving Factory in its order dated 28.10.2013 passed in ITA No.1112/Bang/2012. The issue before the Tribunal in the case of M/s Hanuman Weaving factory (supra) was identical to the one cont....
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....6 (Bom):...... (ii) CIT-III Vs. Panchmahal Steel Ltd (2013) 33 taxmann.com 10 (Guj)' Thus, the Bangalore bench of Tribunal has taken the view that the decision rendered by the co-ordinate bench in the case of K. Mohan & Co. (Exports) (supra) shall not be applicable to the facts considered by it. Accordingly, by following the two decision of Hon'ble Bombay and Gujarat High Courts (referred supra), the Bangalore bench concluded in the case of Hanuman Weaving Factory (supra) the loss on cancellation of foreign exchange forward contract is allowable as deduction. 5. The Ld A.R brought to our notice the decision dated 11.10.2013 rendered by the co-ordinate bench of Mumbai Tribunal in the case of London Star Diamond Company (I) P Ltd Vs. DCIT (ITA No.6169/Mum/2012), wherein also the Tribunal considered the issue relating to the disallowance of loss arising on cancellation of foreign exchange forward contracts. It is pertinent to note that the co-ordinate bench also considered the decision rendered by another co-ordinate bench in the case of S.Vinod Kumar Diamonds Pvt Ltd (supra), on which the Ld CIT(A) had placed reliance. The Tribunal examined following two questions in the ....
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....n eligible transaction in respect of trading in commodity derivatives carried out in a recognised association, shall not be deemed to be a speculative transaction..........' 19. The above provision provides that a transaction in which a contract in respect of trading of 'any commodity' including stocks and shares is settled otherwise than by the actual delivery or transfer of commodity / scrips. Here the meaning of expression "any commodity" is a matter of debate. This definition provides for exclusion of certain specified contracts discussed in clause (a) to (e) of the proviso to section 43(5) of the Act. Clause (a) of the proviso deals with the hedging contracts entered into in the course of manufacturing and merchandizing of the business to guard against the losses through future price fluctuations in respect of contracts for actual deliver. Clause (b) deals with the contracts entered into by dealer or investor in respect of Stock Exchange and Clause (d) deals with an eligible transaction in respect of trading derivatives carried out in a recognized Stock Exchange. Clause (e) deals with eligible transactions in respect of the trading in commodity derivatives carried out in....
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.... 'nature, certain speculation transactions shall constitute as speculation business and such speculation business shall be deemed to be distinguished and separate from any other business. Further, the provision of section 73 relating to "loss in speculation business' is another relevant provision in this regard. Thus, the Explanation 2 to section 73 also deals with deemed speculation business where there is some trading activity of shares by the assessee being other business activity. Now, we shall take up relevant judgments on the subject raised before us. 22. Relevant judgmental laws: In this regard, relevant decisions include the decision in the case of D Kishore kumar and Co supra, binding judgment of the Bombay High Court in the case of CIT vs. Badridas Gauridu Pvt Ltd (supra), judgment in the case of Sooraj Muill Magarmull 129 ITR 169 (para 3) from Calcutta High Court. The judgments from the High Court of Ahmedabad in the cases of Friends and Friends Shipping Pvt. Ltd (supra) and in the case of Panchamahal Steel Ltd (supra) are also relevant. These decisions / judgments are unanimously relevant for the proposition that the FC transactions, when entered into with the banks ....
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....a nature' as to constitute a business by itself. These transactions are genuine business transaction to hedge against increased cost of purchases of rough diamond imports. It is a commonly accepted part of the financial management practices today that the risk element, due rise in value of foreign currency in respect of the import transactions entered, is minimised by entering into forward contracts for purchase of that currency. This is particularly necessary in a market in which the value of domestic currency is falling, which is evident from the fact that the assessee realized profits on cancellation of those contracts. These transactions are integral part of the export business and cannot be considered in isolation of the export business in the course of which the transactions have been entered into. As a matter of fact, this profit on cancellation of forward contracts is generally revenue neutral because the question of profit on cancellation of forward contracts can only arise in a situation when the value of foreign currency is increasing vis-avis domestic currency, and when the foreign exchange value is so increasing the ultimate payment made in foreign exchange by the a....
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.... as a business loss'- Held yes. 25.1. Relevant finding is discussed in para 3 of the judgment and the same reads as follows:- '3. The assessee was not a dealer in foreign exchange. The assessee was a cotton exporter. The assessee was an export house. Therefore, foreign exchange contracts were booked only as incidental to the assessee's regular course of business. The Tribunal has recorded a categorical finding to this effect in its order. The Assessing Officer has not considered these facts. Under section 43(5) of the Income Tax Act, 'speculative transaction' has been defined to mean a transaction in which a contract for the purchase or sale of commodity is settled otherwise than by the actual delivery or transfer of such commodity. However, as stated above, the assessee was not a dealer in foreign exchange. The assessee was an exporter of cotton. In order to hedge against losses, the assessee had booked foreign exchange in the forward market with the bank. However, the export contracts entered into by the assessee for export of cotton in some cases failed. In the circumstances, the assessee was entitled to claim deduction in respect of Rs. 13.50 lakhs as a business loss. This m....
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....urse it is not up to the extent of rupee. It is the case of the Revenue that the correlation should be precise to the last rupee of the invoice amount. The said argument was made out by the assessee relying on the judgment of the Gujarat High Court in the case of Friends and Friends Shipping Pvt. Ltd (supra) and Panchamahal Steel Ltd (supra). Considering the above stated scope of the relevant provisions on one side and the precedents on the other, now we shall take up the core issue of adjudication of the grounds raised in the appeal and the fate of the impugned losses of Rs. 4,69,42,680/-. Relevant portion from the judgment of the Gujarat High Court in the case of Friends and Friends Shipping Pvt. Ltd (supra) is as follows: 'It is true that the CIT (A) has made some observations which would prima facie suggest that there was no direct co-relation between the exchange document and the precise contract. However, such observations cannot be seen in isolation................ .............We find that the decisions of the Bombay High Court and the Calcutta High Court noted above would cover the situation. 34. From the above analysis and summary of judgments, it is safely concl....
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.... case of D Kishore kumar and Co (supra), Badridas Gauridu Pvt Ltd (supra), Sooraj Muill Magarmull, (supra) etc. Thus, loss arising from cancellation of the matured contracts is allowed in favour of the assessee. Thus, this part of the ground of the assessee is allowed. 6. Accordingly, the Tribunal came to the conclusion that the Forward contracts entered into with the banks for hedging the losses due to foreign exchange fluctuations on the export proceeds are to be considered integral or incidental to the export activity of the assessee. It was further held that there is no requirement of law that there should be 1:1 correlation between the Forward Contracts and Export invoices and so long as the total value of forward contracts does not exceed, the claim of the assessee is sustainable as business loss. Accordingly, it was held that the forward contracts 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 not of speculation nature. It was further specifically held that the loss arising on cancellation of matured forward contracts was allowable as deduction....