TaxTMI 
TaxTMI 
2024 (5) TMI 342
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....nature but treating the same as business loss." 4. That the grounds of appeal are without prejudice to each other. 5. That the appellant craves leave to add, alter, amend or forego any ground(s) of appeal raised above at the time of the hearing." 3. Brief facts of the case are that, the assessee filed return declaring current year loss of Rs. 59,76,849/-, the assessee also declared book profit u/s 115JB of the Income Tax Act, 1961 ('Act' for short) at Rs. 1,72,65,860/- and the tax has been paid on book profits. The assessment order came to be passed by assessing the income of the assessee at Rs. 4,32,53,750/- by making addition on account of difference in foreign exchange (M2M) of Rs. 55,62,952/-, on account of loss on forward contracts being speculative in nature of Rs. 4,18,22,913/- and addition on account of loss on forward premium account being speculative in nature at Rs. 18,44,736/-. Aggrieved by the assessment order dated 25/03/2013, the assessee preferred an Appeal before the CIT(A), the Ld. CIT(A) vide order dated 26/08/2016, deleted the addition made by the A.O. As against the order of the Ld. CIT(A) the Department of Revenue has preferred the present Appeal on the g....
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....ugh the contract was suppose to be completed at a later date. It is further argued that this loss has been crystallized on the date of balance sheet, as the appellant is following the mercantile system of accounting. It is stated that there was no existing relationship between aforesaid derivative contracts and actual export transactions and accordingly, gain/loss on such options was required to be and was recognized in the profit and loss account of the year under consideration. It is also demonstrated by the appellant that it is consistently following the same method of accounting in different assessment years, and the profits earned in some of the years have been offered for taxation. 8.1 The AO considered this loss as not crystallized due to the fact that the value of foreign currency is subject to change on the date of completion of such contracts in future, and hence it is a contingent and un-crystallized loss. Thus, the same was not allowed. 8.2 The appellant has relied upon various decisions wherein the same issue was discussed and decided. It has been stated that in the case of CIT vs. Woodward Governor India P. Ltd. 312 ITR 254, the Hon'ble Supreme Court has elabo....
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....se of Woodward Governor India P. Ltd. (supra) It has been held by the Hon'ble ITAT that:- Coming to the corporate additions i.e. disallowance of loss, it clearly emerges from the record that the assessee in respect of foreign exchange realization follows mercantile system of accounting and not cash system of accounting. The loss has been incurred for hedging of foreign currency fluctuation involved in sales invoices on the basis of forward contracts, which is a business decision to safeguard its interest, The loss has been incurred on the basis of scientific method in the ordinary course of business. The loss being based on a scientific method, on the basis of contractual liability with banks and on mercantile system has to be allowed to the assessee following Hon'ble Supreme Court judgment in the case of Woodward Governor India (P.) Ltd. (supra). Our view is further fortified by the fact that DRP in its own order in subsequent year has itself held that the issue about the loss on mercantile system is pending dispute in A.Y. 2008- 09. Therefore, the allowability of the loss on actual payment in A.Y. 2009-10 has been made subject to the allowability of the loss for AY. 200....
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....e Hon'ble Bombay High Court held that loss arising in the process of conversion of foreign currency is a trading loss. It was the case of the assessee before the authorities that the assessee booked forward contracts to hedge against the foreign currency fluctuation risk to business transaction viz export orders undertaken by the assessee and hence the taking of the aforesaid hedge cover was incidental to the business. The forward contracts were related to the exports proceeds expected to be received in the course of the business and not for acquisition for any capital asset and hence the loss is arising on revenue account, thus the same is allowable. The contracts entered by the assessee are binding and enforceable in law and hence the loss incurred on the date of balance sheet, due to the adverse exchange fluctuations would be allowable under the mercantile system of accounting entered that the same had not been actually paid, thus the same cannot be termed as notional loss in view of the decisions of the Hon'ble Supreme Court in the case of Woodward Governor (supra). The Co-ordinate Bench of the Tribunal by relying on the Judgment of the Hon'ble Supreme Court in the case....
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....g on the findings and the conclusion of the Ld. CIT(A) submitted that the Ground No. 2 of the Revenue is devoid of merit, accordingly sought for dismissal of the same. 12. We have heard both the parties and perused the material available on record. The assessee has declared loss of Rs. 4,18,22,913/- on account of loss on forward contracts during the year under consideration. As per the assessee, the losses suffered by the assessee are normal business losses and therefore deductable, the A.O. did not accepted the contention of the assessee and made the addition on the ground that since the transaction entered into Forex Directive by the assessee Company do not fall in the exclusionary clauses of Section 43(5) of the Act. The Forex Directive loss declared by the assessee Company clearly falls within the definition of speculative transaction defined u/s 43(5) of the act and the speculative losses can only be set off against the speculative profits, the loss of Rs. 4,18,20,913/- debited to the profit and loss account on account of forward contract in foreign currency has been disallowed and added to the total income of the assessee Company. The said disallowance has been deleted by th....
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....lly the decision of Hon'ble ITAT Delhi in the case of Munjal Showa Ltd. vs. DCIT 94 TTJ 227 wherein it is held that the foreign currency cannot be regarding as commodity for the purpose of the said section and accordingly derivate/forward contract in respect of same cannot also be considered as commodity for the purpose of said section. 9.3 It is also stated that the derivate contracts were genuine hedging contracts and were not entered into with the intention of speculation or deal in the same. It is mentioned that the RBI does not allow a resident person to enter into such derivative contracts, unless the same is to hedge the foreign currency fluctuations, arising in the normal course of business. If contracts are not for such purpose, the same are liable to be cancelled by RBI/banks, authorized dealers. It is stated that the losses has been incurred in the normal course of business transaction, for the purpose of hedging the foreign currency fluctuation risk. In some of the cases premature cancellation of contract has been done with a view to cut further losses that would have arisen, if the contract were to run their full course. 9.4 Therefore, it is contended that neit....
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....ss the Ground No. 2 of the Revenue. 14. Ground No. 3 is regarding deleting the addition of Rs. 18,44,736/-. The Ld. Departmental Representative vehemently submitted that the Ld. CIT(A) committed error in deleting the above addition being speculative in nature but erroneously treated the same as business loss which requires interference at the hands of the Tribunal and by relying on the findings of the A.O., the Ld. Departmental Representative sought for allowing the Ground No. 3 of the Revenue. 15. Per contra, the Assessee's Representative relying on the order of the CIT(A) submitted that the losses incurred on cancellation of forward contract was treated as business loss, therefore, the Ld. CIT(A) rightly held that the expenditure claimed under the forward premium account is also treated as business expenditure which requires no interference at the hands of the Tribunal. 16. We have heard both the parties and perused the material available on record. During the previous year the assessee claimed deduction of Rs. 18,44,736/- under the forward premium account which represents the amortized loss, computed as the difference between the forward rate and the spot rate at the date....