AI Drafter 
TaxTMI 
TaxTMI 
2018 (2) TMI 253
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....7 Date of Pronouncement 18.01.2018 2. Because while holding so, ld.CIT(A)has erred on fact in binding himself with the authoritative decisions referred and relied upon before him. 3. Because ld.CIT(A)has further erred in holding that transactions in currency derivatives were 'marked to market' transactions and liable to be treated as 'speculative transactions' ignoring that there were no derivative contracts outstanding as on 31.03.2013, which at any rate could be termed as 'notional loss'. 4. Because without prejudice to the aforesaid grounds, the order dated 28.10.2016 passed by the 'CIT' is wrong and illegal in so far as disallowance of Rs. 1,709,121 has been confirmed." 3. The facts of the case are that the assessee is a trader in non-ferrous metal scrap under the name and style of Kanishk Metalloys. During assessment year 2013-14, the assessee undertook trading in currency derivatives, and suffered loss of Rs. 1,709,121/- in such activities. The said loss of Rs. 1,709,121/- and activities relating thereto were duly disclosed in the e-return filed by the assessee, on being advised that that transaction in 'curren....
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....rivatives is not allowed to be set off against business income as the same has not been claimed by the assessee and also being speculative loss." 6. The ld. CIT(A), after considering the submissions of the assessee, decided the issue of loss not claimed in the return in favour of the assessee, but on merits, decided the issue of allowing loss against the assessee as per his findings recorded in para 8.2 and para 8.21 of the impugned order. The ld.CIT(A), besides, taking note of CBDT Instruction no. 3/2010 dated 23.03.2010, further observed that no loss had occurred to the assessee as the transactions in currency derivatives were 'marked to market' and the loss sustained was a 'notional loss'. 7. Challenging the impugned order, the ld. Counsel for the assessee has contended that the ld. CIT(A) has erred in holding the transactions in question as speculative transaction and not allowing the set-off thereof against other business income of the assessee; that while doing so, the ld. CIT(A) has failed to take into consideration the fact that all the transactions in currency derivatives made by the assessee were duly supported by the time and stamped contract notes ....
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.... Proviso (a) is relevant to those transactions which are related to 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 sold by him. The assessee has not explicitly pleaded in the present proceedings that he had entered into any contract of the nature^ specified in proviso (a) to section 43(5). He has also not furnished any evidence to substantiate this possibility. Further, it is observed that as against a turnover of Rs. 34.23 crores from the trading of nonferrous scrap the turnover of his foreign currency derivatives is Rs. 84.26 crores approximately for which he had entered into as many as 15,558 contracts during the period between 13.09.2012 and 31.03.2013. This relative mismatch between the volume of operations in the scrap and the foreign currency derivative trading businesses, points to the fact that the transactions in the latter were not carried out by the assessee in order to hedge the transactions of the scrap business. Hence, in view of the above f....
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.... A conjoint reading of the provisions of section 73(1), section 43(5) and explanation 2 to section 28 of the Act reveals that, out of all the transactions carried out by an assesses, some may be classified as "speculative transactions" in conformity with the provisions of section 43(5). Further, a direct implication of the provisions of Explanation 2 to section 28 is that out of such "speculative transactions" of the assessee, only those that are of such nature as to constitute a business, shall be further categorized as a "speculation business". The provisions of section 73(1), on their part, stipulate that for any loss to be eligible to be set-off against business income, will have to comply with two conditions-that it should be a "loss", and that it should be computed in respect of a "speculation business" carried on by the assessee. The factual matrix in the present case is that the assessee is a trader of non- ferrous metal scrap and during the year under consideration, he has shown loss of Rs. 17,09,120.61 on its foreign currency derivative transactions. This loss is reflected in the Statement of account for the period 01.04.2012 to 31.03.2013 issued by his broker, M....
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....ty, including stock and shares is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or script. However, there are five exceptions to this general rule provided by way of a proviso containing clauses (a) to (e), where the transaction, despite having been settled otherwise than by actual delivery, is not to be treated as a 'speculative transaction'. The assessee's contention is that his case falls under clause (d) of the proviso to section 43(5) of the IT Act. 13. Clause (d) of the proviso to section 43(5) provides that 'an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contract (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange shall not be deemed to be a speculative transaction. The explanation 1 to section 43(5) of the IT Act further defines certain words referred to in the said clause (d), as under:- (i) "eligible transaction" means any transaction,- (A) carried out electronically on screen-based system through a stock broker or sub-broker or through ... (B) which, is supported by a time stamped ....
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...., 2008 and came to the conclusion that (para 7.5, APB 276) derivatives include foreign currency and call option/put option, are transactions of derivative markets. Thus, as rightly submitted, the trading of currency derivatives made by the assessee is covered by the definition of 'derivatives' as contained in clause (d) of the proviso to section 43(5) of the IT Act. This position also stands accepted by the CBDT in its Instruction no. 3/2010 (APB 342 -343). Thus, the assessee fully complies with the conditions prescribed under clause (d) of Proviso to section 43(5) of the Act, read with the explanation thereto. 16. The ld. CIT(A) has taken due note of the contention of assessee that the transactions of currency derivatives were conducted through a recognised stock broker, on a rccognised Stock Exchange and they were duly supported by time stamped contract notes. He examined the provisions of section 43(5) of the IT Act and the proviso thereto and held that the case of the assessee could not be covered under clause (a) of the proviso to section 43(5) of the Act (i.e., the transactions could not be treated as hedging transactions), but to be considered under clause (d) of the prov....
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....loss of Rs. 1,184,370/- sustained during assessment year 2014-15, as there no contract outstanding as on 31.03.2014. It has been clarified that the assessee had traded in total seven series of contracts during the year (APB 238). Ledger accounts in respect of each series of contracts are placed at APB 239 to 245. All series of contracts except for USD (26.04.2013) (APB 240) had expired before the close of the financial year, on 31.03.2013 and thus, there was no occasion that contracts for those series of transactions could be outstanding as on 31.03.2013. 19. The logic of the Board in terming loss in respect of unexpired contracts (or, in other words, in respect of position held as at the close of accounting period) has not found favour with the Courts and even the loss on account of 'marked to market' in respect of such outstanding position could not be treated as notional loss, because same is based / on the time-tested and well accepted theory of valuing stock at lower of cost or market value. The Hon'ble Bombay High Court, by its order dated 15.10.2016, in ITA No. 896/2014, in 'CIT vs. Munjani Brothers' (copy placed on record), dismissed the revenue's appeal, whe....
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....(ii) Marked to market loss or an expected loss shall not be recognised unless the recognition of such loss is in accordance with the provisions of any other Income Computation and Disclosure Standard." 22. The Hon'ble Delhi High Court, by its recent decision in the case of 'The Chamber of Tax Consultants & Others vs. Union of India &, Others', reported as (2017) 87 taxmann.com 82 (Delhi), while holding certain 'ICDS' as ultra-virus, held that non-acceptance of the concept of prudence in ICDS I is per se contrary to the provisions of the Act and therefore, it cannot be countenanced. While holding so, the Hon'ble Delhi High Court in para 61 of its judgment held that:- "The Petitioners rightly point out that cases not governed by any specific ICDS are governed by ICDS-I, CBDT has in ICDSI notified that expected losses and marked-to-market losses are not be recoginized/allowed. It is rightly pointed out by the Petitioners that the concept of prudence is embedded in Section 37(1) of the Act which allows deduction in respect of expenses "laid out" or "expanded" for the purpose of business. The concept of prudence is inherent in this." 23. Thus, the instruction no. ....
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....n foreign currency. The assessee company has a turnover of Rs. 5.83 crores during the assessment year under consideration. We have observed that assessee company has entered into forward foreign exchange contracts and the contract worth USD 4 Million were outstanding as un-expired as on 31st March 2009 on which the assessee company has booked marked to market loss of Rs. 1,09,98,560/- on the date of Balance Sheet as at 31st March 2009 based on the movement of value of United States Dollar vis-a-vis in relation to Indian Rupees based on prevailing rate as on 31-03-2009. Before we proceed further, it would be relevant to analyse the provisions of Section 43(5) of the Act read with proviso (d) and explanation 1 to Section 43(5) of the Act which reads as under: 'Definitions of certain terms relevant to income from profits and gains of business or profession. 43. In sections 28 to 41 and in this section, unless the context otherwise requires- XX XX XX (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....
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....the relevant definitions as contained in the Securities Contract (Regulation) Act, 1956 as under: Section 2(ac) of the Securities Contract (Regulation) Act, 1956 reads as under: Section 2 in the Securities Contracts (Regulation) Act, 1956 2 Definitions. - In this Act, unless the context otherwise recjuires,- XX XX XX (ac) "derivative" includes- (A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (B) a contract which derives its value from the prices, or index of prices, of underlying securities; Section 2(h) of the Securities Contract (Regulation) Act, 1956 reads as under: Section 2 in The Securities Contracts (Regulation) Act, 1956 2 Definitions. - In this Act, unless the context otherwise requires,- (h) "securities" include- XX XX XX (ia) derivative; XX XX XX From the above, it is clear that speculative transaction is a transaction in which contract for purchase and sale of any commodity is settled otherwise than by actual delivery. It is not in....
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....quired. The proposed amendment therefore, seeks to provide that an eligible transaction carried out in respect of trading in derivatives in a recognized stock exchange shall not be deemed to be a speculative transaction. The proposed amendment also seeks to notify relevant rules etc. regarding conditions to be fulfilled by recognized exchanges in this regard. Further it is also proposed to amend sub-s. (4) of s.73 so as to reduce the period of carry forward of speculation losses from eight assessment years to four assessment years. These amendments will take effect from 1st April 2006 and will, accordingly, apply in relation to asst. ys 2006-07 and subsequent years." From the above it is evident that the eligible transactions in derivatives carried out through recognized stock exchanges are exempted from the purview of speculation transactions u/s 43(5) of the Act provided other conditions are satisfied because of recent and systemic and technological changes introduced by stock exchanges. We have observed that the assessee company has entered into derivative transactions in foreign currency through SEBI registered broker who is a member National....
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....ond the last date of accounting period, the loss is incurred to the assessee on account of evaluation of the contract on the last date of the accounting period i.e. before the date of maturity of the forward contract. The transaction in derivatives in foreign currency as entered into by the assessee company are similar to forward contract in foreign currency as discussed in the decision of Bank of Bahrain & Kuwait (supra). Respectfully following the decision of Tribunal, Special Bench, Mumbai in Bank of Bahrain & Kuwait (supra) we hold that the marked to market losses of Rs. 1,09,98,560/- determined by the assessee company due to the movement in the prevailing exchange rate of foreign currency i.e. United States Dollar vis-a-vis in relation to Indian Rupee as on the date of Balance Sheet viz 31st March 2009 is not a notional or contingent loss rather it is an ascertained liability which has crystallized whereby a pending obligation of derivative contract on the balance sheet date i.e 31st March 2009 is determinable with reasonable certainty and accuracy. The Accounting Standard-11 prescribed by ICAI also stipulate that in situation like this when the derivative transaction....
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....ability is said to have crystallized when a pending obligation on the balance sheet date is determinate with reasonable certainty. The considerations for accounting the income are entirely on different footing. 5. As per AS-11, when the transaction is not settled in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting period. 6. The contract for derivative in foreign currency have all the trappings of stock-in-trade. 7. In the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit and in case the derivative contract is squared off/settled in the succeeding year, the difference in loss/profit will be brought to tax in the succeeding assessment year and hence its allowability in the current year is tax neutral." 27. These discussions were relied on by the assessee before the Authorities below. 28. Thus, as rightly contended, not only were the losses incurred by the assessee entitled to be held as non-speculative, but also the whole of the loss sustained by him was entitled to be allowed to be set off with other income and no part of such loss c....