TaxTMI 
TaxTMI 
2017 (11) TMI 195
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....nts, filed the return of income on 24.09.2010 for the assessment year 2010-11 admitting loss of Rs. 1,35,26,139/-. During the assessment proceedings, the assessing officer found that the assessee had debited an amount of Rs. 12,26,79,604 as 'Derivative Loss' under the head 'Administrative Expenses' while an amount of Rs. 1,92,55,655/- was credited as 'Derivative Income' under the head 'Other Income' thus effectively claimed the net loss of Rs. 10,34,23,949/- from foreign exchange derivatives. The assessing officer has called for the details, but the assessee failed to furnish the details. Subsequently, the assessing officer called for information from the bank and obtained details for options and derivatives entered into by the assessee with ICICI Bank Ltd. The assessing officer found that the assessee has entered into contracts in respect of foreign exchange derivatives with ICICI Bank Ltd. quoting certain spot rate on a future date and cancelled the contract either before the fixed date or on the fixed date without taking possession of such foreign exchange (US dollars). Consequent on such cancellation the amount receivable /payable in Indian currency resu....
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....he carry forward of loss to be set off against the income from speculation in future years. 4. Aggrieved by the order of the assessing officer, the assessee went on appeal before the CIT(A) and the Ld. CIT(A) observed that the business activity of the assessee is not trading in Shares and Foreign exchange market. The assessee is an exporter of granite blocks. To carry out business transactions and to mitigate the loss on account of Foreign Exchange fluctuations, the assessee had entered into Forward Contracts (F.C) in the value of foreign currency. Therefore, Ld.CIT(A) allowed the expenditure as business expenditure u/s 37(1) of the I.T.Act and allowed the appeal of the assessee. While allowing the appeal of the assessee, Ld.CIT(A) also restricted the amount of loss claimed by assessee to Rs. 9,10,00,000/- instead of Rs. 10,24,23,949/- since the assessing officer has added the amount of Rs. 1,35,26,139/- twice. 4.1. The Ld.CIT(A) further held that by the letter of ICICI Bank dated 30/12/2009 the loss of Rs. 9,10,00,000/- was settled as against the original claim of Rs. 18,53,21,184/- by the bank, thus the loss was crysatlised in the F.Y.2009-10 relevant to the A.Y.2010-11 and the....
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....the ICICI Bank has filed the case against the assessee company in O.A.No.391 of 2009 before Debts Recovery Tribunal-III, Mumbai making the company as responsible for payment of the entire loss of Rs. 18,53,21,184/-. To bail out the company from Debts Recovery Tribunal-III, the assessee filed a counter in O.S. No.340/2008 before the Hon'ble Court of II Additional Chief Judge, City Civil Court, Hyderabad. The submissions were made in O.S.340 only to save the company from the Debts Recovery Tribunal. Ultimately, both the parties have reached, out of Court settlement on agreement between the assessee and the banker and there was no judgement delivered by the City Civil Court on the petition made by the assessee. Therefore, Ld.AR argued that averments made in O.A.No.340/2008 should not go against the assessee and the case be decided on facts.The Ld.AR further argued that the assessee is a granite exporter exporting the granite blocks to European countries, China and USA. The export turnover per annum is approximately 40.00 crores, i.e. 88% of the Company's revenue generated from the exports. Due to fluctuating exchange rate of USD during the year 2007, to insulate the revenue earnings, ....
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....to Rs. 9,10,00,000/- against outstanding amount Rs. 18,53,21,181/- in the year 2008-09. Since the loss is crystallized by mutual agreement, the assessee argued that it had saved Rs. 9,43,21,181/- and rightly claimed the loss in the year under consideration. Therefore, Ld.AR argued that there was no error in the claim made by the assessee. 8. We have heard rival submissions and perused the material placed on record. The assessee is an exporter of granite blocks to China, European Countries and USA and the approximate turnover of the assessee was 51 crores out of which 40.00 crores was export turnover which constitute 88% of total turnover. During the year 2008-09, the assessee had entered into derivative transactions by hedging cross currency and incurred the loss of Rs. 12,26,79,604/- and the profit of Rs. 1,92,55,655/-. In fact as per the master agreement the amount due and payable by the assessee inclusive of interest as on 30.12.2009 was Rs. 18,53,21,184/- including the principal amount of Rs. 14,72,91,184/-. The Bank has filed in OA No.391/2009 against the company before Debts Recovery Tribunal and the company has filed a suit in O.S.No.310/2008 before the II Additional Judge,....
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....bai while rendering the decision considered the decisions in the case of D.Kishore Kumar and Co. [2 SOT 769 (Mum)], Hon'ble Gujarat's High Court's decision in the case of Friends and Friends Shipping Pvt. Ltd and the decision relied upon by the Ld.AR. For ready reference, we extract the relevant paragraphs of the decision of Hon'ble ITAT Mumbai Bench in the case cited supra. [para 18-26). "18. The provisions of section 43(5) provides for definition of „speculation transactions‟. The said provisions read as under: ―43. (1)... (2).... (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 h....
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....iscipline‟ assumes importance and therefore, the "commodity" includes the ‗forward contract'. Thus, in principle, the forward contracts, being commodity, should fall in the definition of ‗speculation transaction' and the same is subjected to fulfillment of other conditions specified in sub-section (5) of section 43 of the Act. Having held so, we shall now examine if the impugned contracts/transactions constitute "hedging transactions" and covered by the exclusion provisions of clause (a) to the proviso to section 43(5) of the Act. The clause (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 ....
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....as not provided any reasons to reject the said arguments of Ld Counsel for the assessee. Therefore, in principle, we agree with the arguments of Ld Counsel for the assessee. Further, we also agree with the Ld Counsel's argument that the ‗fact of premature cancellation cannot alter the nature of the transaction'. Thus, Ld Counsel's comments on CIT(A) conclusions on treating or equating the FCs as ‗derivatives' of currency is also allowed considering the specific definition provided to derivatives in section 2(ac) of Securities Contract Regulation Act, 1956 and it is not the requirement of the law that the 1:1 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. H....
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....nstrued as transactions independent of assessee‟s business of importing rough diamonds and exporting cut and polished diamonds. There is one more aspect of the matter, and that is the reason as to why the forward contracts were cancelled midway and the profits were booked on the same instead of using these contracts to actually meet the foreign exchange requirements at the time of paying the import bills....... The due dates of payment at that point of time were only 16 days to 77 days away. The decision as to whether further hedging against the increase in foreign currency is warranted or not is essentially a commercial decision which 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....
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....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 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............." The Conclusion 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 not of speculation nature. 8.1. The Coordinate Bench, Visakhapatna....
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....tual delivery of goods manufactured by him or merchandise sold by him. A plain reading of sub-clause (a) of section 43(5) of the Act, makes it clear that any forward exchange contracts entered into in its business of import or export of goods to hedge the possible fluctuation in foreign currency, then such transactions are kept outside the purview of the definition of speculative transactions. Therefore, to see whether a particular transaction is a speculative transaction or a mere hedging transaction, there should be export or import of goods or merchandise at least to the extent of value of forward exchange contracts. 14. The treatment to be given to foreign currency items as per the amended AS - 11 of ICAI, notified by Central Government u/s. 211(3C) of Companies Act, does not make any distinction between items of capital nature and revenue nature. Both are required to be recognized in the Profit & Loss Account. In view of the aforesaid amendment, there exists a divergence of views on the treatment to be meted out in the books of account and in the Indian Tax Laws. Further, with an increased flow of inbound/outbound transactions and their complex dynamic structuring, the tax ....
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....loan had been obtained. The way in which the entries are made by an assessee in the books of account is not determinative of the question whether the assessee has earned any profit or suffered any loss. What is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. Therefore, once loss incurred on account of fluctuation in foreign currency, then the loss suffered shall be allowed as business loss, unless it is in the nature of speculation loss. 16. Having said that, let us come to the facts of the present case. In the present case on hand, the assessee is into the business of export of rice and other commodities. During the previous financial year, it has achieved export turnover of about Rs. 80 crores. The forward exchange contracts are entered in the previous financial year, which was not disputed by the A.O. Though there is no export turnover for the current financial year, this is because of a ban imposed by the Government of India, on export of rice and other commodities. As rightly pointed out by the Ld. A.R. for the assessee, the Government of India imposed ban on export of rice for a tempora....
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.... of entering into forward contracts with banks for the purpose of hedging loss in connection with its import/export business has to be regarded as business loss. The CIT (A) after considering the relevant explanations rightly deleted the additions made by the A.O. We do not see any reasons to interfere with the order of CIT (A). Hence, we inclined to uphold the CIT (A) order and reject the ground raised by the reven 8.2. In the assesse's case, the assessee is an exporter of granite and because of the assessee's business of export of granite, the assessee could enter into contract with the ICICI Bank for hedging the cross currency transactions to insulate the revenue and to mitigate the loss. The Reserve Bank of India vide circular 22/2007-08 dated 02.07.2007 permitted a person, resident of India to enter into foreign contract with an authorized dealer to hedge an export to exchange risk in respect of transactions for which sale and purchase of foreign exchange is permitted under the Act. It means, authorized dealer can hedge the business receivables so as to enable the parties to avoid exchange value differences. The authorized dealer i.e. bank can do this only for hedging not fo....