TaxTMI 
TaxTMI 
2025 (5) TMI 495
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....ore, both the appeals were heard together and are being disposed of by way of this common consolidated order. For the sake of convenience, we shall be dealing with the facts in the case of the appeal of the assessee pertaining to the Asst. Year 2014-15 in ITA No. 362/Ahd/2020 and our decisions rendered therein will apply pari passu to the other appeal of the assessee as well. ITA No. 362/ Ahd/2020 Asst.Year 2014-15 3. The ld.counsel for the assessee pointed out that error noted by the ld.Pr.CIT in the assessment order was with respect to the allowance of loss incurred by the assessee on foreign currency derivative transactions ("FCDT" for amounting short) to Rs. 1,50,12,699/- which the ld.Pr.CIT found to be "marked to market" loss ("M2M" for short) and noting the same to be notional loss, contingent in nature and not allowable in terms of the CBDT Instruction No.3/2010 dated 23.03.2010 ("Board Instruction" for short), he found, the AO to have allowed this claim erroneously without examining the issue and conducting due enquiries with regard to the same. 4. The assessee when confronted with the same by the Ld.PCIT in the proceedings conducted under section 263 of the Act....
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....assessee by the AO, without confronting the same to the assessee during revisionary proceedings, thus holding the assessment order passed to be erroneous in gross violation of the principles of natural justice. 6. The ld.DR strongly supported the order of the ld.Pr.CIT, and made contentions at length on the issue of "FCDT" entered into by the assessee being not allowable in terms of provisions of law, referring to various judicial decisions in this regard. 7. We have heard contentions of both the parties carefully, and have gone through the order of the ld.Pr.CIT and various documents referred to before us by both the parties, as also, judicial decisions referred to during course of hearing before us. We shall now proceed to adjudicate the present appeals. 8. It is to be kept in mind that the appeal arises from the order of the ld.Pr.CIT in exercise of his revisionary powers,passed u/s 263 of the Act, holding the assessment order erroneous causing prejudice to the Revenue. And our scope of adjudication is therefore, confined to deciding, whether the ld.Pr.CIT has rightly found so, in accordance with law. The Ld.PCIT has held the assessment order erroneous on account of the....
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....rty in terms of US Dollars. Therefore, the above mentioned loss of Rs. 136.40 lakhs (Rs. 82.91 lakhs + Rs. 53.49 lakhs) was mark to market loss giving effect of changes in foreign exchange rate as on 31.03.2015. However, such MTM loss of Rs. 136.40 lakhs is not an allowable in view of CBDT's Instruction No. 3/2010 dated 23.03.2010 which states that MTM loss is a notional loss and contingent in nature and therefore the same is not an allowable expense while computing the total income. 10. The ld.counsel for the assessee pointed out that with respect to both these types of "FCDT" a different explanation was furnished to the ld.Pr. CIT on account of the different nature of the loss, and it was also pointed out to him that in terms of position of law as laid down by courts in various decisions, both losses were allowable. 11. He stated that it was pointed out to the Ld.PCIT that the foreign currency derivative loss was on account of forward contracts and was not an "M2M" loss, but in fact it was an actual loss incurred by the assessee on settlement of the transactions, and therefore not covered by the CBDT instruction and thus allowable as per law. That the loss on exchang....
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....tuation loss incurred by the assessee is attached herewith as Annexure-31A * In terms of the provisions of the Companies Act, 2013, the assessee is mandatorily required to follow the accounting standards issued by the Institute of Chartered Accountants of India ("ICAI"). * The reporting currency of the assessee is Indian Rupee hence, all the transactions entered into by it during the course of its business are recorded in Indian Rupees. * In respect of the accounting of the transactions entered into Foreign Currency, the assessee follows the following accounting treatment as prescribed under Accounting Standard - 11 "The Effects of Changes in Foreign Exchange Rates" issued by ICAI: * The transactions in foreign currencies on revenue accounts are stated at the rates of exchange prevailing on the dates of transactions. * The net gain or loss on account of exchange differences either on settlement or on translation is recognised in the statement of Profit and Loss. The foreign currency assets and liabilities including forward contracts are restated at the prevailing exchange rates at the year end. The premium in respect of forward contracts....
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..... 53.49 lakhs being year-end outstanding balance in the account of Novex Trading as per AS-11 & no forward contract Rs. 82.91 lakhs being Currency Derivative Transactions in the nature of Forward Exchange Contracts Settled loss Rs. 84,46,566 Unsettled marked to market profit Rs. 1,55,360 14. He also drew our attention to PB Page No. 14, pointing out to the ld.Pr.CIT that Instruction NO. 3 of 2010 did not apply to the impugned transaction, and that loss had been booked in accordance with AS- 11, as under: c) Since this particular loss is pertained to revenue transaction relating to import of goods, the Instruction No. 03/2010 dated 23.03.2010 is not at all applicable as it is related to 'Tax Implications Of Forward Foreign Exchange Contracts, only. d) The said loss has been accounted following the accounting treatment as prescribed under Accounting Standard -11 "The effects of Changes in Foreign Exchange Rates" issued by the Institute of Chartered Accountants of India. e) Thus, the assessee has rightly and consistently recorded the effect of exchange rate differences and as a result has claimed such loss arising due to changes in ....
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....ed a "recognised stock exchange" under Section 2(39) of the Companies Act, 1956 by Ministry of Corporate Affairs, Gout, of India, on December 21, 2012. (Copy of the said notification is attached for your immediate reference marked as an Annexure-32A). It is also notified by the Central Government as a recognised association for the purposes of clause (e) of the proviso to clause (5) of the said section 43 of the Income- tax Act, 1961 (43 of 1961) read with sub-rule (4) of rule 6DDD of the Income-tax Rules, 1962. Copy of the said notification is attached for your immediate reference marked as an Annexure-32B. Shareholders of the Exchange include India's top public sector banks, private sector banks and domestic financial institutions who, together hold over 88% stake in the Exchange. MSEI is subjected to CAG Audit and has an independent professional management. In line with global best practices and regulatory requirements, clearing and settlement is conducted through a separate clearing corporation, MCX-SX Clearing Corporation Ltd. (MCX-SX CCL). All the Foreign Currency derivative transaction carried out by a broker of MCX Stock Exchange Ltd. electronically an....
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....ble transaction" means any transaction,- (A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye- laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and (B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act; (ii) "recognised stock exchange" means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified!9 by ....
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....CLARIFICATION REGARDING ALLOWING LOSSES ON ACCOUNT OF FOREX DERIVATIVES INSTRUCTION NO. 03/2010, DATED 23-3-2010 Foreign Exchange derivative transactions entered into by the corporate sector in India have witnessed a substantial growth in recent years. This combined with extreme volatility in the foreign exchange market in the last financial year is reported to have resulted in substantial losses to an assessee on account of trading in forex derivatives. A large number of assessees are said to be reporting such losses on 'marked to market' basis either suo motu or in compliance of the Accounting Standard or advisory circular issued by the Institute of Chartered Accountants. The issue whether such losses on account of forex derivatives can be allowed against the taxable income of an assessee has been considered by the Board. In this connection, I am directed to say that the Assessing Officers may follow the guidelines given below:- 'Marked to Market Losses' 2. "Marked to Market" is in substance a methodology of assigning value to a position held in a financial instrument based on its market price on the closing day of the accounting or reporting reco....
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.... be one that fulfils the conditions laid down in Explanation to section 43(5)(d). Any loss in a speculative transaction can be set off only against profit from speculative transactions. As the revenue implications of such transaction are large, the Assessing Officers need to examine the statements of accounts and the notes to accounts with a view to find out any reference to any loss on account of forex-derivatives. In some cases, these losses may be camouflaged under the 'financial charges', 'foreign exchange loss' or some similar head which may make it difficult to detect them. In such cases, the Assessing Officers should make a specific query asking the assessee to give a break up of any 'Marked to Market' loss on a forex-derivatives included in the Profit and Loss Account and examine whether such transactions are 'eligible transaction' in terms of section 43(5)(d). An adjustment to the taxable income may therefore be made, if necessary, keeping in view the provisions of law referred to above." 3.1 In the said instruction, the term "Marked to Market" has been used and therefore, I have tried to understand this term by visiting the rele....
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....ther than book value. ii) This is done most often in futures accounts to ensure that margin requirements are being met. If the current market value causes the margin account to fall below its required level, the trader will be faced with a margin call. iii) An exchange marks traders' accounts to their market values daily by settling the gains and losses that result due to changes in the value of the security. iv) There are two counterparties on either side of a futures contract - a long trader and a short trader. v). The trader who holds the long position in the futures contract is usually bullish, while the trader shorting the contract is considered bearish. If at the end of the day, the futures contract entered into goes down in value, the long account will be debited and the short account credited to reflect the change in value of the derivative. Conversely, an increase in value results in a credit to the account holding the long position and a debit to the short futures account. vi) For example, to hedge against falling commodity prices, a wheat farmer takes a short position in 10 wheat futures contracts on November 21, 2017. Sin....
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....8 included in the total debits of Rs. 5,37,46,88.68 as against the total credits of Rs. 3,42,32,243.64. The closing balance of Rs. 1,94,84,145.04/- has been transferred to the profit & loss account under the title "Net loss on foreign currency transactions and translation" grouped under the head "other expenses". 3.3 The assessee has filed the copy of account on currency derivative transactions. These transactions are carried out through Kalyanbhai Mayabhai Stock Brokers Pvt. Ltd. During the course of assessment proceedings, the assessee has furnished its explanation as under :- * It had incurred loss of Rs. 1,54,19,300.68/- on currency derivative transactions carried out during the year under consideration and claimed the same as business expenditure. * During the year under assessment, it had made forward contracts of foreign currency derivative through MCX Stock Exchange Ltd in order to hedge its open exposure in respect of transactions entered into for import of raw material during normal course of business. * The transactions were carried out through recognized stock exchange as per the provisions of section 4 of the Securities Contracts(Reg....
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...."Gain/loss on currency derivative transactions" on 22.05.2014. 3.6 Now, the issue to be considered is as to whether the transactions so entered are speculative transactions or normal business transactions as per the definition provided u/s 43(5) of the Act. The entire text of section 43(5) of the Act is, therefore, reproduced to examine the facts of the assessee's case in the light of said provisions together with the explanations provided below section 43(5) of the Act as under :- "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) 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; or (b) a contract in respect of stocks and shares entered in....
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.... (i) "commodity derivative" shall have the meaning as assigned to it in Chapter VII of the Finance Act, 2013; 3.7 Since the assessee has claimed to have entered into trading in derivatives referred to in clause (ac) of section 2 of Securities Contracts (Regulation), 1956, the provisions of this section are also reproduced as under :- "[(ac)] "derivative" includes- (A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (B) a contract which derives its value from the prices, or index of prices, of underlying securities;]" 3.8 Further, the International Accounting Standard (IAS) 39, defines "derivatives" as follows :- "A derivative is a financial instrument: (a) whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar variable (sometimes called the 'underlying'); (b) that requires no initial net investment or little initial net investment relative to ....
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....e losses there from have to be adjusted against the profits on speculative transactions. 3.10 Without prejudice to the above, even if it is assumed that the above transactions were not falling in the definition of "speculative transactions" as per the exception clauses (d) & (e) of section 43(5) of the Act, the explanation below section 73 of the Act would be applicable. This is so because it is not the company whose gross total income consisted mainly of income which is chargeable under the heads :- * "Interest on securities", * "Income from house property", * "Capital gains" * "Income from other sources"], or a company [the principal business of which is the business of trading in shares or banking]or the granting of loans and advances). 3.11 To understand this more clearly, the explanation below section 43(5) of the Act is reproduced as under :- "Explanation .- Where any part of the business of a company [other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sou....
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....sued by the ICAI being revenue in nature was allowable. He pointed out that the ld.Pr.CIT distinguished the said decision, noting that in the facts of the present case before the Hon'ble Apex Court the assessee had debited difference between the rate of foreign currency as prevailing as on the date of obtaining the foreign loan and the rate of foreign currency as at the close of the year; that in the case of the assessee, however, trading of foreign currency on day-to-day basis had been made without taking any delivery. He pointed out that the ld.Pr.CIT had proceeded on incorrect assumption of the facts that the impugned transactions were also with regard to the forward contract of the foreign currency, though, it was clearly pointed out to him that the loss booked were on account of difference in exchange rate of creditors balance as on the date of entering the transaction and that prevailing as at the end of the year, and was identical to the facts in the case considered by the Hon'ble Apex Court. He pointed out therefore that the ld.Pr.CIT had wrongly appreciated again the facts of the present case for holding the decision of the Hon'ble Apex Court, not applicable in....
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....claim to be wrongly allowed by the AO, completely misappreciating the facts of the present case and noting it to be on account of loss on forward contract of "FCDT". Noting this incorrect fact, he has held the transaction to be speculative in terms of section 43(5) of the Act, and noting this incorrect fact alone, he has distinguished the decision, the assessee had cited as applicable in the facts of the case. Therefore, we agree with the ld.counsel for the assessee that the finding of the error by the ld.Pr.CIT on account of incorrect allowance of claim of loss on account of foreign exchange difference in relation to outstanding creditors of Rs. 53.49 lakhs was an incorrect finding of the error based on incorrect appreciation of the facts, and therefore, the same is held to be not sustainable. 24. As for the other component of the loss, admittedly, the same was on account of forward contract of "FCDT" but the assessee had pointed out that the loss was a settled loss and not an M2M loss. The ld.Pr.CIT, we find, still goes on to record an incorrect finding that the loss was an unsettled M2M loss and hence not allowable in terms of CBDT Instruction No. 3 of 2010 (supra). On the se....
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....nfronted to the assessee during the revisionary proceedings. Therefore, holding the assessment order erroneous on account of the applicability of a provision, which was never confronted to the assessee is, we agree with the ld.counsel for the assessee, in gross violation of principles of natural justice. Besides, we have gone through the order of the ld.Pr.CIT and we find that there is no clarity in the order of the ld.Pr.CIT as to how the Explanation to section 73 would disentitle the assessee to set off any loss on transactions on trading in foreign currency. The relevant finding of the ld.Pr.CIT are at para 3.10 to 3.12 of his order as under: "3.10 Without prejudice to the above, even if it is assumed that the above transactions were not falling in the definition of speculative transactions" as per the exception clauses (d) & (e) of section 43(5) of the Act, the explanation below section 73 the Act would be applicable. This is so because it is not the company whose gross total income consisted mainly of income which is chargeable under the heads :- * "Interest on securities", * "Income from house property", * "Capital gains" * "Income....
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....s and gains, if any, of any speculation business carried on by him assessable for that assessment year; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on. (3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business. (4) No loss shall be carried forward under this section for more than four assessment years immediately succeeding the assessment year for which the loss was first computed. Explanation .- Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources", or a company the principal business of which is the business of trading in shares or banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shal....
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....2013 Client # WRO-MAN STAPPDAGS PVT LTD. [10]] S-2, MALIDHAR COPYFLEX, S.M.ROAD, I.V.3 3/6/75 ANEXADAD. 330015 Sold For You- Bought For Yar Sold For Credit You- Rate Sell Qty Contract Description Closing Pr Bry Qty Bought Rito For Yar Ichit 56.7925 3841 F USDINR 2606 56.9775 710585.00 251250.00 F USDDR 2907 57.2575 1500 57.0700 03/96 56.9900 4 F USDINR .2907 57.25/5 990.00 56.9875 . 50 F LSDDR 2907 57.25/3 12500.00 05/06 56.9875 294 F USDEUR 2907 57.2575 61000.00 /05/06 56.9875 202 F USDIHR 2907 57.287 50500.00 126260.00 500 Series Total 1500 03/06 57.6250 100 F USDINR 2609 57-7600 13300.00 00/06 57.7250 100 F USDINX 250? 57.7800 3500.00 200 Series Total 17000.00 MIX, Prados Total 601325.00 OTHER OFREES 000:45 SEBI TO CHARGES -20.06 /03/06 SERVICE TAX 613.19 580.47 Sold For Credit You- Rate Bry Qty Bought Rito For Yar 603399.37 Due to us -Margin Details- çin as per Exchnąa: 25,21,065.00 Dr Dạy Pr "va Margin -: 0.00 CF Addi Cional Margin : 0.00 C it Margin Collected: ....