TaxTMI 
TaxTMI 
2004 (5) TMI 62
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.... arrive in market once a year in second quarter of the year for very limited period. * The sale of "green coffee" to 'processors' in India or to parties outside India shall take place throughout the year and the sale price of "green coffee" is largely determined by the then prevailing price in the international market. * The applicant to carry on its business of sale of green coffee throughout the year will have to stock huge inventory of green coffee for most part of the year though it will have to buy its entire requirement during the short period of its availability in second quarter of the year * Since the sale price of "green coffee" is linked to its price in the international market, the applicant will be exposed to risk of price fluctuations between the time of purchase of "green coffee" and its subsequent sale during the year. 3. It is stated that the applicant to safeguard itself against price fluctuations in respect of stock of "green coffee" will have to enter into hedging transactions on the International Commodity Exchange (hereinafter referred to as ICE in short) in which it would initially sell the "green coffee" (not necessarily of the same variety as held in st....
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....f exception created by this clause is that hedging in respect of merchandise should be intended to guard against price fluctuations in respect of contract of sale of actual delivery of merchandise. The counsel claimed that there is no warrant to read proviso (a) to section 43(5) so as to justify an inference that legislature intended to exclude from speculative transactions only the contract of sale of merchandise entered into by a person in the course of his merchandising business to guard against loss through price fluctuations. In the commercial world, in order to effectively hedge against adverse price fluctuations of merchandise, a merchant has necessarily to enter into forward transaction of both sale and purchase because without these contracts for sale and purchase constituting hedging transactions, there would be no effective insurance against the risk of loss in the price fluctuations of merchandise sold. 7. The counsel explained that his understanding of the scope of hedging transactions is in conformity with the opinion expressed by Central Board of Revenue (now Central Board of Direct Taxes) in Circular No.23D dated September 12, 1960 rendered in the context of parima....
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.... sale for actual delivery, the transactions could not be treated as hedging transactions. Same view was taken by the Calcutta High Court also in the case of Becker Gray & Co. v. CIT (1983) 139 ITR 203. Further, in para 4 of Annexure-II, the applicant has mentioned that hedging transaction would be in the form of a sale. The Madras High Court in CIT v. S.K. AR. K. AR. Somasunderam Chettiar & Co. (1975) 101 ITR 832 has held that only contracts of purchases could be covered under hedging transactions. This decision was later on affirmed by the Supreme Court also (1992) 194 ITR 1 (SC). 10. In relation to question No.4, the Director has commented that the hedging transaction can be in connected commodity also (and not necessarily in the same commodity) so long it is a genuine hedging transaction (Board's decision on point (ii) in Circular No.23D of 12.9.60). However, as far as quantity is concerned, the Andhra Pradesh High Court held in the case of M.G. Bros. v. CIT (1985) 154 ITR 695 that it was not a hedging contract because there was no evidence that the assessee had adequate stock of raw materials to the extent of the forward transaction. 11. In his rejoinder, the counsel stated t....
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.... it is stated that the view of the Central Board of Direct Taxes in Circular No.23 dated 12.9.60 was overlooked. Thus, the aforesaid view is against the benevolent circular, which is binding on the authorities. Reference in this regard is made to the decision of UCO Bank vs. CIT 237 ITR 889 (SC), wherein, the Hon'ble Apex-Court did not follow its earlier decision in the case of State Bank of Travancore vs. CIT 158 ITR 102 because in the earlier case benevolent circular was not pointed out to the court. Therefore, the decision of Supreme Court in Somasundaram Chettiar & Co. (supra) is to be examined/understood with reference to the ratio laid down by Supreme Court in UCO Bank's case (supra). 13. The counsel pointed out that without prejudice, the facts of Somasundaram Chettiar & Co.'s case (supra) were peculiar. In the aforesaid case assessee had initially entered into contracts for purchase of certain goods from the mills. He then entered into a contract of sale of the same goods to a party. Later, he entered into a contract to repurchase the same goods from the same party. Subsequently, he took delivery of the goods from the mills and sold them to other parties. So far as contrac....
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....es. 17. Before we deal with the merits of the arguments put forth by the learned counsel of the applicant and the departmental representative, it would be appropriate to extract the relevant provisions of the Act and the relevant paragraphs of the Board's Circular. 18. Section 43(5) and proviso (a) thereto reads as under:- "(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 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;" 19. The preamble and point Nos.1 & 2 of the Board's Circular No.23 D of 12.9.1960 are extracted below:- "A number of representations and suggestions have been received by the Board from associations and Chambers of Commerce regarding the manner in which the prov....
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....ions though the transactions may not be incidentally the same commodity. Thus, hedging transactions in one type of cotton against another type of cotton, one variety of oil seed against another, one type of grain against another, should not be treated as speculative transactions provided the other conditions of Explanation 2 to section 24 are satisfied. The condition mentioned in the last two sentences of the decision on point 1 above will apply here also." 20. We do not agree with the contention of the departmental representative that since the Supreme Court's judgment in the case of Somasundarm Chettiar & Co. does not refer to the Board Circular, it is not applicable to this case. The Circular did not apply to the facts of that case. Even if it had been referred to before the Court, it would not have made any difference. 21. Now the scope of the provisions of the Act and the Circular of the Board have to be examined in the light of material placed before us. Before the issue of Circular of the Board, the Income-tax authorities gave a restrictive meaning to the hedging transactions. The said view was also confirmed by various High Courts including Madras High Court and Allahabad....
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.... and the genuine businessmen have been put to considerable hardship. We certainly appreciate, as we have done earlier, the principle under-lying the proviso, but we equally disapprove of its wrong application for denying genuine hedging losses. We feel that the solution to the various problems which have been brought to our notice in relation to this subject can be found by expanding Explanation 2 to section 24(1) so as to classify and exclude such transactions which should not come under the mischief of this section. The assessing officer should first examine whether a hedging transaction is genuine or not. If it is a genuine one, and it is by way of future sale of a commodity against stock of the same commodity, the loss arising out of this transaction should be excluded from the purview of speculation…………. * The hardship caused by a too literal interpretation of Explanation 2 to section 24(1) of the Income-tax Act was illustrated to us by a case where a dealer having ready cloth business entered into a contract for the purchase of 1000 bales of cloth from a mill on a forward delivery basis. Ultimately, it was found that the mill could supply only 980 bales, the remainin....