TaxTMI 
TaxTMI 
2018 (11) TMI 1104
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....mmissioner of Income-tax Appeals - 9 ["CIT(A)"] has erred in law and facts in confirming the change of income head of compensation income received from renting of property along with facilities from "Income from Other Sources" to "Income from House property" without appreciating the fact that the appellant has entered into a valid and enforceable agreement for providing business service center against which such compensation was received. 2.0 Ground - 2 2.1 On the facts and in circumstances of the case, the learned CIT(A) has erred in law and facts in confirming the disallowance of Rs. 688,272/- under section 14A of the Income Tax Act, 1961 ('the Act'), by applying Rule 8D of the Income tax Rules, 1962 ('the Rules). 3.0 Ground - 3 3.1 On the facts and in circumstances of the case, the learned CIT(A) has erred in law and facts in treating the loss on premature cancellation of forward exchange contracts of Rs. 35,595,000/- as speculation loss without appreciating the fact that forward contracts are in the nature of hedging transactions and integral /incidental to the import / export activity and premature cancellation was on account of mitigating the market risk a....
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....is also explained that such advance was repaid by adjustment against export of diamonds made subsequently. No disallowance was made by the Assessing Officer on account of interest expenditure, however, he computed a disallowance of Rs. 21,47,174/- by applying Rule 8D(2)(iii) of the Rules on account of administrative expenditure incurred for earning of such income, but since the assessee-company was assessed for the period 05.12.2008 to 31.03.2009, he determined the disallowance on a proportionate basis, at Rs. 6,88,272/-. The CIT(A) has also affirmed the said decision. 6. At the time of hearing, the learned representative for the assessee categorically made an assertion that so far as the assessment of the assessee-company is concerned, such dividend income has not been assessed as such inasmuch as the same was relatable to the period assessed in the hands of the erstwhile assessee-firm, i.e. till 05.12.2008 and, therefore, on that basis, assessee had asserted that since it has not earned any exempt income, the question of disallowing any expenditure u/s 14A of the Act would not arise. In this context, he has also referred to the decision of the Hon'ble Delhi High Court in the....
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....ining the reasons for cancelling the forward contracts prematurely, assessee also referred to various decisions, inter-alia, including the decision of the Mumbai Bench of the Tribunal in the case of London Star Diamond Co. (I) Pvt. Ltd. dated 11.10.2013 in ITA No. 6169/Mum/2012 to contend that such loss incurred on premature cancellation of forward contracts was a 'business loss'. The CIT(A) has considered the submissions put forth by the assessee and has ultimately upheld the action of the Assessing Officer in treating the same as a 'speculation loss'. However, in coming to such a decision, the CIT(A) has made the following discussion which would bring out the precise reason for his disagreement with the assessee though, in principle, he has accepted the proposition canvassed by the assessee based on the decision of the Mumbai Bench of the Tribunal in the case of London Star Diamond Co. (I) Pvt. Ltd. (supra) :- "5.4 ........................it is noted that similar issue was before the Hon'ble Mumbai ITAT in the case of M/s. London Star Diamond Company (India) Pvt. Ltd. in ITA No. 6169/M/2012, where in order dated 11/10/2013, after considering various decisions of higher Cour....
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....s. 11. The learned representative for the assessee vehemently pointed out that the CIT(A) has erred in not appreciating the reasons canvassed by the assessee for premature cancellation of the forward contracts in two cases, which clearly establish that it was a business decision taken by the assessee to cancel them. In this connection, our attention has been invited to para 4.1 of the order of the CIT(A), wherein the reasons for premature cancellation canvassed by the assessee have been reproduced verbatim. On the strength of such reasons, the learned representative pointed out that looking at the prospects of business declining in future, assessee took steps to prematurely cancel the forward contracts inasmuch non-cancellation would have resulted in over-hedging of the expected imports and resulted in avoidable loss if the foreign currency had moved adversely. Nevertheless, the learned representative also referred to the decision of the Tribunal in the case of DCIT vs Mahendra Brothers Exports (P.) Ltd., [2016] 161 ITD 772 as well as in the case of D. Kishorekumar & Co. vs DCIT, [2005] 2 SOT 769 (Mum.) to support assessee's treatment of such loss as a 'business loss' and not as a....
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.... non-acceptance of assessee's explanation as convincing with respect to premature cancellation of forward contracts, the hedging undertaken by taking foreign exchange forward contracts is otherwise an activity in the course of business. This position is, in-principle, fortified by the various decisions of the Tribunal relied before us, viz. Mahendra Brothers Exports (P.) Ltd. (supra) as well as D. Kishorekumar & Co. (supra). 14. Now, we may examine the efficacy of the reasons which have been explained by the assessee for premature cancellation of the two forward contracts. Before the CIT(A), assessee explained that earlier the business was carried under the name and style of 'Blue Star" as a partnership firm, which got converted into the assessee-company w.e.f. 05.12.2008. The two forward contracts in question were entered into during the existence of the erstwhile firm on 20.11.2008 and were cancelled on 10.12.2008. Assessee explained that the two forward contracts were entered to hedge imports of diamonds considering the future volume of exports estimated on the basis of the past performance. It was explained that during the period April, 2008 to November, 2008, the average volu....
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.... context. So, however, what is of essence is that as per our co-ordinate Bench, the decision as to whether hedging against cost incurred in foreign currency is warranted or not is essentially a commercial decision, which has to be left to the perception of the businessman. Our co-ordinate Bench explained that in certain situations, a businessman may perceive market trends in such a way that business expediency may justify cancellation of a contract also. The Bench thereafter explained that the fact of premature cancellation itself cannot alter the nature of the transaction. In the present case too, the entire conspectus of facts and circumstances show that merely because assessee took a decision to prematurely cancel the forward contracts cannot be a ground to say that it is a 'speculation loss' and not a 'business loss', when otherwise entering of forward contracts in order to hedge against foreign exchange fluctuations with respect to import and export is accepted to be an activity carried out in the course of business. In fact, in the present case, assessee has sufficiently demonstrated that the action of premature cancellation of forward contracts was to contain avoidable futur....