TaxTMI 
TaxTMI 
2018 (5) TMI 142
X X X X Extracts X X X X
X X X X Extracts X X X X
....isen from Gold Desk deal transactions completely ignoring the fact that the assessee himself in previous year had treated the same as business income/profit while dealing with transactions of the same nature with same party. 3. La. CIT (A) agreed with the A.O. that the loss from Gold desk deal transactions is speculative but erroneously Ld. CIT(A), suo-moto took the stand that gain of Rs. 99,22,176/- from foreign currency forward contracts is speculative without being claimed by assessee for it, even during entire assessment proceedings. The assessee this year is trying to claim the same to be speculative profit from Foreign currency forward contract, in contradiction to transaction of same nature, with same party, which in the previous year he himself had treated it as Business profit. Even the assessee in the year under reference, while filing the return of income on 15.10.2010, had treated it to be business profit. 4. Ld. CIT(A) erred in ignoring the fact that transaction was not listed/traded on a recognized stock exchange, as also, CIT(A) has further erred in ignoring the fact that neither do the transactions fall under the condition laid down u/s 43(5)(d) of the Income Ta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng Officer, the assessee didn't furnish any evidence in support of claim of transaction covered under proviso (a) to Section 43(5) of the Act. He further observed that these transactions are derivative transactions and in absence of trading on the recognized Stock Exchange, the assessee cannot be allowed the benefit of subsection (d) of section 43(5) of the Act. The Ld. Assessing Officer also noted that in preceding assessment year similar loss of Rs. 29,56,985/-on gold desk deal was treated by the assessee as speculative and added to the income. In view of the observations, the Ld. Assessing Officer disallowed the loss claimed on gold desk deal of Rs. 1,03,93,854/-. The Assessing Officer also made disallowance of Rs. 78 400/-out of the interest paid by the assessee towards borrowed funds in view of interest- free advances to partners of the firm. The assessment under section 143(3) of the Act was completed on 07/03/2013. Against the additions/disallowance made, the assessee filed appeal before the Ld. CIT(A). The Ld. CIT(A) upheld the finding of the Ld. Assessing Officer as regard to the loss from Gold desk deal holding the same as loss on speculative transactions. The Ld. CIT(A) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....utright basis. In this, the price of gold is fixed and an upfront payment for the same has to be made to the MMTC within two working days. This pure gold is used for manufacturing and exporting the jewellery. Since, there is time gap between the purchase of pure gold and the export of jewellery; therefore, normally there is fluctuation in the gold price during that period. The purchases from the MMTC are without payment of any custom duty; therefore, the appellant remains under legal obligation to export equivalent quantity of gold jewellery in due course of time as per the EXIM policy. 2.1 In a situation when the assessee buys and fixes the gold price at the instance of the foreign buyer, then in that case there is no fluctuation in gold price during the period of the purchase of pure gold and the export of jewellery as the gold has been purchased for the buyer and is exported to him at the price he has fixed at the time of purchase of pure gold. However, in the second situation, which is relevant for deciding this appeal, when the appellant bought pure gold/raw material for manufacturing of jewellery but the foreign buyer has not bought pure gold at that point of time though he....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... gold desk". The assessee has also rolled over few transactions for further period on maturity of the contract. The assessee has treated gain or loss in difference in rate of pure gold and foreign currency as business gain/loss. According to the assessee, these transactions are hedging transactions undertaken to cover the risk of underlying stock and have been excluded from the definition of the speculative transaction under subsection (a) and (b) of section 43(5) of the Act. According to the Assessing Officer, the assessee had not provided any documentary evidence including contract notes etc to support that each transaction was in respect of underlying asset. The relevant finding of the Assessing Officer is reproduced as under: "3.9 In the present case the assessee has failed to prove that the derivative transactions carried out were for hedging. In support of its claim the assessee could not furnish any evidence to prove how the derivative transactions were hedging/risk management transactions. The assessee did not submit any specific underlying i.e. the particulars assets/liability/transactions which were hedged. The underlying / basis for the transactions were stated to be p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he definition of speculative of transactions. 4.5 The Assessing Officer also observed that in the immediately preceding assessment year, the similar kind of loss on gold desk deal of Rs. 29,56,985/- was treated by the assessee as speculative loss and suo motu added back to the income. 4.6 As against the above finding of the Assessing Officer, the Ld. CIT(A) held that the subsection (a) to (d) of section 43(5) are not attracted at all in the case of the assessee. The relevant finding of the Ld. CIT(A) is reproduced as under: "5. I have carefully considered the submission of the appellant and perused the record. The proviso marked as (a) to 43(5) is in respect of manufacturer, which at most may be attracted here. The proviso marked as (b) to (d) of section 43(5) are in respect of dealer, investor, member of Forward Market of Stock exchange and derivative trading; thus, these are not attracted here as the appellant does not fall under these category. The proviso marked as (a) to 43(5) reads as under: (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 pr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ioned that the case law relied upon by the appellant is distinguishable on facts and do not apply to the appellant's case. The question is one of applicability of the principles to the facts in a given case. It has been a well-settled view that the ratio of any decision must be understood in the background of that case. What is of essence in a decision is its ratio and not every observation found therein nor what legally follows from the various observations made in it. It is not a profitable task to extract a suitable sentence here and there from a judgement and to build upon it (vide Ambica Quarry Works v. State of Gujarat, AIR 1987 Supreme Court 1073). In my considered view, the principles enunciated in the case relied upon by the Ld. AR do not render any help to the appellant in the facts and circumstances of the present case because the appellant's case is held to be distinguishable on facts. 5.2 I have scanned a decision in the case of London Star Diamond Company (I) P. Ltd. [2013] 38 taxmann.com 338 (Mumbai-Trib.); wherein the Hon'ble has held that Forward contracts entered into with banks for hedging foreign exchange loss on outstanding receivables in foreign ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....on record. The facts in respect of the transaction brought on record by the Ld. CIT(A) have not been disputed by the Ld. counsel of the assessee. The assessee is contesting that forward contract transaction of Gold are hedging transactions, whereas according to the Assessing Officer, no supporting documents have been filed. The hedging transactions can be illustrated as under. "For example, imagine an exporter has got an export order of jewellery, say 1000 grams on 01/04/2008, which has to be supplied within 3 months, say by 30/6/2008. The price of pure gold per 10 gms as on 01/04/2008 is say Rs. 30,000/-. The exporter purchases the gold and start manufacturing of the jewellery. The exporter apprehends that the prices of gold may go up or may go down as on the date of jewellery finally exported to the buyer i.e. 30/06/2008. In case, the price of gold goes up, the exporter get more value of the jewellery due to rise in the price of the gold, however, if the price, goes down the exporter will get less value of the jewellery as compared to the value on the date of purchase. In order to eliminate the risk of loss on sale of jewellery, if any due to fall in price of gold on the date o....
X X X X Extracts X X X X
X X X X Extracts X X X X
......... (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 him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; [or] (d) an eligible transaction in respect of trading in derivatives referred to in clau....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Officer, the assessee failed to correlate these forward contract transactions of gold and corresponding purchases and export of jewellery. Even such details have not been filed either before the Ld. CIT(A) or before us. Thus, on this ground, the assessee cannot be allowed the benefit of proviso (a) to section 43(5) of the Act in absence of any documentary evidences to support its contention of fulfilling conditions of proviso (a) to section 43(5) of the Act. 4.9.8 Further, the Ld. CIT(A) has distinguished the facts of the case with the facts of the case of London Star Diamond company. In the said case forward contracts were entered into with banks for hedging foreign exchange loss on outstanding receivables in foreign currency. In the said case there was one to one correlation between the forward contracts and the export invoices but in the instant case the assessee has failed to correlate underlying asset with the forward contracts entered into by the assesse. We agree with the finding of the Ld. CIT(A) that the facts of the case of London Star Diamond company are distinguishable from the facts of the assessee and accordingly ratio of the said decision is not applicable over the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y' as mentioned above is speculation. Thus, both types of transactions; Forward contracts in respect of 'pure gold' and Forward contracts in respect of 'Foreign Currency' being similar has to be treated on the same footings. Thus, it is hereby held that the profit of Rs. 99,22,176/- derived on account of Forward contracts in respect of 'Foreign Currency' as mentioned above is speculative profit/gains and not the business income as held by the AO. Accordingly, it is held that the profit of Rs. 99,22,176/- derived on account of Forward contracts in respect of 'Foreign Currency' being speculative profit has to be set off of against the loss of Rs. 1,03,93,854/- debited in gold desk account. Consequentially, the addition of Rs. 1,03,93,854/- is restricted to Rs. 4,71,678/-. The AO shall give consequential relief." 5.4 On perusal of the above finding, we note that the Ld. CIT(A) has decided the issue in view of the facts noted in the case of forward contract transactions of the gold and no documentary evidence in support have been referred in his findings on the issue in dispute. 5.5 In view of the aforesaid facts, we feel it appropriate to restore ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 4.3 In this regard, reliance is placed on the judgment of Hon'ble Supreme Court in the case of M/s S.A. Builders Ltd. In that case the Hon'ble High Court confirmed the disallowance of notional interest made by the AO u/s 36(l)(iii) of the IT Act, 1961 on account of interest free advance given by the assessee out of borrowed funds. However, on appeal, the Hon'ble Supreme Court restored the matter to the ITAT to decide the factual issue as to whether the interest free loan was given to the sister concern as a measure of commercial expediency, and if it was, it should have been allowed. Accordingly, the Hon'ble Supreme Court has held that the interest on such amount can only be allowed if the interest free loan has been advanced for commercial expediency. However, in the present case, the assessee has not claimed that the interest free advance was given to the partner for commercial expediency. 4.4 Thus, in view of the explicit provisions of the Act and the explanation by Hon'ble Supreme Court in the case law cited above, notional interests on the sum expended by the assessee to partners needs to be disallowed in proportionate. In view of the above the notional interest @ 10% on a....