TaxTMI 
TaxTMI 
2022 (2) TMI 527
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....lls or receivables of the assessee cannot be linked to the derivative transactions? 4. The Id. CIT(A) failed to appreciate the assessee by entering into a currency derivative transaction the assessee is clearly taking a speculative bet on the movement of Japanese Yen with US Dollars during a fixed period which are in the nature of a wager contract and hence the loss on the same is not an allowable business expenditure? 5. The Id. CIT(A) failed to appreciate the forex derivative transactions undertaken by the assessee are not settled by actual delivery of foreign exchange but only the difference between the agreed price on the maturity date that is credited or debited to the account of the assessee and hence would fall within speculative transaction? 6. The Id. CIT(A) failed to appreciate neither the bank nor the assessee has analyzed or stated any specific underlying exposure or balance sheet exposure of the assessee in the derivative transaction? 7. The Id. CIT(A) failed to appreciate a Forex derivative transaction, if it is a hedge should reduce the risk and loss to the assessee but the perusal of the contract notes and corresponding huge loss ....
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.... 2,10,82,712/-. For the year 2007, the assessee had entered into sale agreements with two or three of Japanese Companies to supply different quantities of monument granite blocks through their Chinese Intermediaries during the ensuing three-year period. The Chinese would be making the payment in USD with a future possibility of the direct payment by the Japanese customers. The assessee had entered into hedging contract with State Bank of India to hedge the foreign currency risk to minimize the loss for USD at Japanese end. The assessee has accounted profit or loss arising on account of fluctuation in foreign currency as income or expenses, as the case may be, in the relevant AYs. During the year under consideration, the assessee has claimed foreign exchange fluctuation loss amounting to Rs. 5,45,96,356/-. During the course of assessment proceedings, the AO on the basis of details filed by the assessee and also an analysis of provisions of Sec.43(5) of the Income Tax Act, 1961 opined that loss incurred by the assessee on account of fluctuation in foreign currency, is in the nature of speculative transaction and consequent loss is to be treated as speculative loss. The AO discussed t....
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....ade by the AO. The relevant findings of the Ld.CIT(A) are as under: 5. Let us now come to the facts of the present case. The appellant is into the business of export of monument granite block to the Japanese market through Chinese intermediaries. 5.1 In the year 2007, Kunnam Granite Works entered in to sale agreements with two or three of Japanese Companies to supply around 6 to 8 different qualities of Monument granite blocks to them through their Chinese intermediaries during the ensuing 3 year period. The supplies are in the form of granite Blocks which will be shipped to Chinese Intermediaries and the Chinese, after completing the monument making process, will supply to the end user of Japanese buyers. This arrangement was suggested by the Japanese Customers in view of the inexpensive cost of labour in China. The Chinese would be making the payments in US $ with a future possibility of the direct payment by Japanese customers in Japanese Yen depending on the Currency fluctuation. As estimated, these shipments would run into several crores in the coming years and since the orders were assured, Kunnam Granite Works in consultation with State Bank of India took s....
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....action entered into by the assessee with State Bank of India, is not in the ordinary course of business of the assessee, who is an export of granites and the export bills are receivables of the assessee, cannot be linked to the derivative transactions. The Ld.DR, further, submitted that the Ld.CIT(A) failed to appreciate the fact that Forex derivative transactions undertaken by the assessee, are not settled in light of delivery of foreign exchange, but only the difference between the agreed price on the maturity date i.e. credited or debited to the accounts of the assessee and hence, would fall within speculative transaction. 7. The Ld.AR for the assessee, on the other hand, supported the order of the Ld.CIT(A) and submitted that the assessee had entered into forward contract with State Bank of India to hedge possible fluctuation in foreign currency on account of export receivables, which is evident from the fact that the assessee is in the business of export of granite blocks to Japan and further the export sales of the assessee for the year under consideration is more than Rs. 50 Crs. whereas, the derivative contracts entered into by the assessee is only Rs. 5 lakhs USD per mo....
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.... nature of speculative transaction, which does not come under proviso (d) to Sec.43(5) of the Act. 9. We have gone through the reasons given by the AO to treat Forex loss incurred by the assessee on account of derivative transactions as speculative transactions in light of various arguments advanced by the Ld.AR for the assessee and we ourselves do not subscribe to the reasons given by the AO for the simple reason that the assessee being an export of goods to Japan Company had entered into hedging transactions with State Bank of India by entering into Forex derivatives to minimize possible loss in fluctuation in USD, because the Japanese Companies agreed to make the payments through their Chinese Intermediaries by USD. Further, during the year under consideration, the assessee achieved an export turnover of Rs. 50.53 Crs. which is much more than the amount of derivative contracts entered into by the assessee with State Bank of India. We further noted that when the assessee enters into a hedging transaction to minimize the possible loss from fluctuation in foreign currency, then profit or loss arises on account of appreciation or depreciation in the value of foreign currency held....