TaxTMI 
TaxTMI 
2018 (3) TMI 1638
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.... the facts and in the circumstances of the case, the Ld. CIT(A) erred in directing that the interest component for disallowance under limb (ii) of Rule 8D be taken at Rs. 51, 51, 4Q9/- instead of Rs. 8, 58, 89, 421/- by accepting the assessee's contention of proportionately allocating the interest expenditure to the earning of exempt income and earning of taxable income. (b) Whether on the facts and in the circumstances of the case, the Ld. CIT (A) erred in not following the Hon'ble ITAT Mumbai 'D' Bench finding in the case of HDFC Bank Ltd (2015) 155 ITD 765 that in the event of the assessee' s inability to exhibit the exact funding of the tax free investments acquired over the years, the disallowance has to be worked out u/s 14A (1) . read with Rule 8D. 2 (a) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) erred in directing that the loss of Rs . 26, 74, 50, 500/- on cancellation of forward contracts be treated as normal loss without treating it as speculative loss. (b) Whether On the facts and in the circumstances of the case, the Ld. CIT(A) erred in holding loss of Rs. 26, 74, 50, 5007- on cancellation of the forward contra....
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....as the appellant has not succeeded in identifying the own funds and the borrowed funds deployed for earning of exempt income and taxable income, he has proportionately worked out the interest attributable to the earning of exempt income and earning of taxable income. The working of the interest relating to earning of exempt income being very reasonable I hereby direct the AO to rework the disallowance u/s. 14A read with rule 8D by adopting interest component as Rs. 57, 57, 409 in place of Rs. 8, 58, 89, 421 adopted by him in his computation of limb (ii) of rule 8D (2). The argument of the AO that he followed the logic of the earlier years where the CIT (A) has confirmed the working of A component in limb (ii) of rule 8D (2) is not proper since as per the provisions of rule 8D the A component should be "the amount which is not directly attributable to any particular income or receipt". In the of the above discussion the ground is accordingly allowed. " 10. It was argued by learned DR that CIT(A) was not justified in accepting the assessee's contention that interest attributable to share capital activity was only Rs. 57, 57, 409/- instead of interest debited to P & L account amount....
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....laimed by the assessee. 14. By the impugned order, CIT(A) deleted the disallowance after observing as under:- 6.2. I have carefully considered the facts of the case and submissions of the Id. AR. I have also gone through the decisions relied on by the AO and the Id. AR. The AO has invoked the provisions of sec. 43(5) and held that the loss incurred without delivery or transfer of the commodity or script is speculative in nature. The Ld. AR on the other hand argued that the PCs are part of hedging to reduce the future losses in the business out of foreign exchange fluctuations and has been accounted as per AS-11. As per the existing catena of cases on the issue, forex loss on account of hedging is an allowable deduction so long as it is revenue in nature. Reliance is placed on the decision of Hon'ble Supreme Court in the case of Woodward Governor India Pvt. Ltd. 312 ITR 254 (2009). Further, when the appellant is following AS-11 and closing the PCs on maturity, the loss arisen thereof should be allowed during the year From the losses claimed during the year as per the details given at para 6 above, (SI. 3, 4, 5) the details of date of booking, date of closure and date of matur....
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....e future contracts are settled otherwise by then actual delivery cannot be bound to held that future contracts are not speculative contracts u/s. 43(5) of the Act. 7. We have considered rival contentions and found that assessee is engaged in export of diamonds. It entered into forward contract with the Banker, which minimised the risk / loss in the Forex market. Accordingly, assessee entered into forward exchange contract with its bankers. Due to various commercial considerations and exigencies and also change in the forex market, assessee had to cancel all forward contracts which were booked during the accounting year relevant to 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 ar....
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....nts, receivables and payables are in foreign currency which is inseparable and inextricably linked with the diamond business carried out by the assessee and, therefore, risk associated with the fluctuation of foreign currency also forms part and parcel of same business. To mitigate the foreign currency loss, RBI introduced the regulations so that exporters and importers can hedge the same through authorized dealers, mostly Banks. The assessee had entered into hedging transaction through banks and the amount for which the hedging transactions are entered are within the amount of the underlying transactions of imports and exports. There is no 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 ....
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....s been unable to substantiate the underlying exposure of derivative contracts to the tune of Rs. 8, 23, 26, 649/- and, therefore, it should be substantiated, the assessee before us, has contended that in any genuine hedging transaction where there is huge volume of purchase exposure and sales exposure, the hedging transaction keeps on fluctuating. The Ld. CIT(A) has upheld the disallowance keeping in mind the fact that in any particular month the hedging transactions were higher than foreign exchange exposure, the excess cannot be accepted as for the purpose of business transaction. We find that such an observation in general may not prevail in every 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 ....
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....red to hedge the foreign exchange loss by entering into forward contracts. Accordingly, it was contended that the same forms integral part of the export business. Accordingly, it was claimed that the loss of Rs. 7. 84 crores suffered on account of cancellation of foreign exchange forward contracts was allowable as business expenditure. However, the same was not acceptable to the assessing officer. The AO took the view that the assessee, being a dealer in diamonds, has entered into a separate business transaction of dealing in foreign currency and the same has been settled otherwise than by actual delivery. Accordingly the AO took the view that the forward contracts 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 Trib....
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.... reasoning is extracted as under (at the cost of repetition): "4. 6..................................... . This aspect has been dealt with in detail by the Hon"ble ITAT, Bangalore in the case of Shri K. Mohan Exports & Co in 126 ITD 0059 (Bang. ). Although the issue on hand was in a different context as to whether income from speculation profits can be said to be income "derived from exports" for the purpose of section 10B or not, ....... . " 5. 5. 4 On the other hand, we find that the issue in question is squarely covered in favour of the assessee from the following judgments of Hon"ble Bombay and Gujarat High Courts: (i) CIT Vs. Badridas Gauridu (P) Ltd - (2003) 261 ITR 256 (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 cancel....
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....ufactured 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 clause [(ac)] of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange; [or]] (e) an 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. Thi....
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....ness (hereinafter referred to as "speculation business") shall be deemed to be distinct and separate from any other business. 21. Explanation to section 28 uses the expression "speculative transactions carried on by an assessee are of such a nature as to constitute a business", and thus, considering the nature of these transactions, the impugned FCs cannot be deemed as the speculation business without going into the "nature of the transactions". For analyzing the nature, we need to examine why the FC transactions are entered, how these transactions are dealt with during their sustenance till they are cancelled by the assessee or terminated by the Banks and if they constitute hedging transactions etc. Basing on the "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 bus....
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....ntract clearly show that all the forward exchange contracts were in respect of each specific import order placed by the assessee. The purpose of these transactions was clearly to minimise assessee"s risk on account of fall in value of rupee, but the quantum of foreign exchange covered by these forward contracts was limited to the extent of assessee"s actual exposure in respect of import value commitments. That aspect is not disputed. On these facts, even though the transactions having been settled without delivery, the conditions of s. 43(5), describing speculative transactions, are clearly fulfilled, the requirement of Expln. 2 to s. 28 is not fulfilled inasmuch as it cannot be concluded that the transactions are such 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 m....
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....ases or imports.... . The assessee succeeds on this issue. In the result, the appeal is allowed 24. Although, the said decision was pronounced in the context of section 80HC of the Act, the ratio of the said decision is of paramount importance. B. Bombay High Court judgment in the case of CIT vs. Badridas Gauridu (P) Ltd. [2004] 134 Taxman 376 (Bom. ) 25. In this case, Honble High Court of Bombay answered the following question in favour of the assessee and the question reads that, - "Whether, where assessee, not being a dealer in foreign exchange but an exporter of cotton, had booked foreign exchange in forward market with bank in order to hedge against losses, to claim deduction in respect of loss suffered by it 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 O....
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....ness loss and relevant portion is extracted as under: "4...............He further held that losses incurred by theassessee during the year on account of change in value of currencies at the time of payment was allowed while finalising the assessment, that M to M losses were of notional losses and contingent in nature. Finally, loss on a/c. of outstanding forward contract as on 31. 03. 2008 were disallowed by him......... 33. Correlation of forward contracts vis-à-vis export invoices: Assessee filed a chart furnishing the export invoices raised in the year under consideration and related forward contracts booked and matured in the year under consideration. The details suggest that there is a broad connection is established and of course 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....
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.... each subdivision of loss is given as under: (a) Loss on Cancellation of Matured FCs amounting to Rs. 4, 14, 88, 805/- relates to the FCs cancelled or terminated on or after the due date. In other words, the FCs booked as integral part of the export invoices lived its booking period in full and they were either terminated by the Bank on or after due date of maturity date of the contract as the actual realization were not received in time. These are not premature cancellations by the assessee and therefore, in our considered view, the said loss of Rs. 4, 14, 88, 805/-, being related to the FCs which are integral or incidental to the exports of the diamonds, should be allowed as business loss in view of the binding High Court or Tribunal decisions/judgments in the 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 exchang....