TaxTMI 
TaxTMI 
2018 (5) TMI 142
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....be set off against speculative loss of Rs. 1,03,93,854/- arisen 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 tran....
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.... to be speculative transactions as they fall under clause (a) and (b) of section 43(5) of the Act. In view of the Assessing 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. Assessin....
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....est on gold loan taken from the MMTC until the price of gold is fixed. In the second scheme, gold is purchased from the MMTC on an outright 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 ....
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.... rates of pure gold and foreign currency has been either paid or realized and debit and credit has been accounted for under the head "loss on 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 speci....
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.... covered under sub-section (d) of section 43(5) of the Act i.e. the transactions carried out on the recognized stock exchange, have been excluded from the 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 contr....
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....nsidered view that the appellant's case does not fall within proviso (a) to (d) of the section 43(5). 5.1 As regards the case law relied upon by the Ld. AR, it may be mentioned 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. [20....
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....lied on the order of the lower authorities to justify that the transaction in question are speculative transaction only. 4.9 We have heard the rival submission and perused the relevant material 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 ex....
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....itions 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- (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 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 forwa....
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....to be seen from the contract agreements and underlying assets. In the case of the assessee for claiming benefit of clause (a) of Section 43(5) of the Act, its forward contract transactions should have been corroborated one by one, with the purchases of gold and supply of jewellery manufactured. Before the Assessing 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 h....
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.... that the Assessing Officer has erred in holding the gains arisen from Forward contracts in respect of 'Foreign Currency1 as business income though he has placed reliance on the decision in the case of K Mohan & Company (Export) (P) Ltd. (2010) 130 TTJ 719. However, the nature of Forward contracts in respect of 'Foreign Currency' 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.....
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....not, for the purpose of the business. The expression "for the purpose of business" occurring in section 36(l)(iii) specifies that deduction under this section is admissible only when capital is borrowed directly "for the purpose of business". In this case, the assessee has not claimed that the interest free advance has been given for commercial expediency. 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 i....