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CIT vs. M/s. D. Chetan & Co (Bombay High Court)
October, 15th 2016

37(1)/43(5): Loss suffered in foreign exchange transactions entered into for hedging business transactions cannot be disallowed as being “notional” or “speculative” in nature. S. Vinodkumar Diamonds is not good law as it lost sight of Badridas Gauridas 261 ITR 256 (Bom)

The Assessee is engaged in the business of import and export of diamonds. During the assessment proceedings, the Officer found that Respondent assessee explained that the amount of Rs.78.10 lakhs claimed as loss was on account of having entered into hedging transactions to safeguard variation in exchange rates affecting its transactions of import and export by entering into forward contracts. The Assessing Officer by order of Assessment dated 27 December 2011 disallowed the claim on the ground that it is a notional loss of a contingent liability debited to Profit and Loss Account. Resultantly, the same was added to the assessee’s total income. Being aggrieved, the assessee carried the issue in appeal to the Commissioner of Income Tax (CIT (Appeals)). The CIT (Appeals) allowed the assessee’s appeal inter alia relying upon the decisions of Tribunal in Bhavani Gems vs. ACIT (ITA No.2855/Mum/2010 dt.30.3.2011) and the Special Bench decision in the case of DCIT vs. Bank of Bahrain and Kuwait ((2010) 132 TTJ (Mumbai) (SB) 505). The CIT (Appeals) on facts found that the transaction of forward contract was entered into during the course of its business. It held it was not speculative in nature nor was it the case of the Assessing Officer that it was so. Thus the loss incurred as forward contract was allowed as a business loss. Being aggrieved, the Revenue preferred an appeal to the Tribunal. The Tribunal upheld the finding of the CIT (Appeals) that the loss incurred by the Respondent Assessee was a revenue loss and not connected with any speculation activities. The Tribunal found that the transaction of forward contract had been entered into for the purpose of hedging in the course of its normal business activities of import and export of diamonds. On appeal by the department to the High Court HELD dismissing the appeal:

(i) The Tribunal has, while upholding the finding of the CIT (Appeals), independently come to the conclusion that the transaction entered into by the assessee is not in the nature of speculative activities. Further the hedging transactions were entered into so as to cover variation in foreign exchange rate which would impact its business of import and export of diamonds. These concurrent finding of facts are not shown to be perverse in any manner. In fact, the Assessing Officer also in the Assessment Order does not find that the transaction entered into by the assessee was speculative in nature. It further holds that at no point of time did Revenue challenge the assertion of the assessee that the activity of entering into forward contract was in the regular course of its business only to safeguard against the loss on account of foreign exchange variation. Even before the Tribunal, we find that there was no submission recorded on behalf of the Revenue that the assessee should be called upon to explain the nature of its transactions. Thus, the submission now being made is without any foundation as the stand of the assessee on facts was never disputed.

(ii) So far as the reliance on Accounting Standard 11 is concerned, it would not by itself determine whether the activity was a part of the assessee’s regular business transaction or it was a speculative transaction. On present facts, it was never the Revenue’s contention that the transaction was speculative but only disallowed on the ground that it was notional.

(iii) The reliance placed on the decision in S. Vinodkumar Diamonds Pvt. Ltd. vs. Addl.CIT ITA 506/MUM/2013 rendered on 3 May 2013 in the Revenue’s favour would not by itself govern the issues arising herein. This is so as every decision is rendered in the context of the facts which arise before the authority for adjudication. Mere conclusion in favour of the Revenue in another case by itself would not entitle a party to have an identical relief in this case. In fact, if the Revenue was of the view that the facts in S. Vinodkumar are identical / similar to the present facts, then reliance would have been placed by the Revenue upon it at the hearing before the Tribunal. The impugned order does not indicate any such reliance. It appears that in S. Vinodkumar, the Tribunal held the forward contract on facts before it to be speculative in nature in view of Section 43(5) of the Act. However, it appears that the decision of this court in CIT vs. Badridas Gauridas (P) Ltd. (134) Taxman Pg. 376 was not brought to the notice of the Tribunal when it rendered its decision in S. Vinodkumar (supra). In the above case, this court has held that forward contract in foreign exchange when incidental to carrying on business of cotton exporter and done to cover up losses on account of differences in foreign exchange valuations, would not be speculative activity but a business activity.

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