Latest Expert Exchange Queries
sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
 
 
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Service Tax | Sales Tax | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Indirect Tax | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing
 
 
 
 
Popular Search: list of goods taxed at 4% :: cpt :: TAX RATES - GOODS TAXABLE @ 4% :: ARTICLES ON INPUT TAX CREDIT IN VAT :: articles on VAT and GST in India :: ACCOUNTING STANDARDS :: form 3cd :: Central Excise rule to resale the machines to a new company :: due date for vat payment :: ICAI offer Get Windows 7,Office 2010 in Rs.799 Taxes :: empanelment :: ACCOUNTING STANDARD :: TDS :: VAT RATES :: VAT Audit
 
 
From the Courts »
  Vatsala Shenoy vs. JCIT (Supreme Court)
  Vatsala Shenoy vs. JCIT (Supreme Court)
 M.K.Overseas Pvt. Ltd. Vs. Pr.Commissioner Of Income Tax-06
 Arshia Ahmed Qureshi Vs. Pr. Commissioner Of Income Tax-21
 CHAUDHARY SKIN TRADING COMPANY Vs. PR. COMMISSIONER OF INCOME TAX-21
  Sushila Devi vs. CIT (Delhi High Court)
  Vatsala Shenoy vs. JCIT (Supreme Court)
 Deputy Director Of Income Tax Vs. Virage Logic International
 Commissioner Of Income Tax-3 International Taxation Vs. Virage Logic International India
 Pr. Commissioner Of Income Tax-06 Vs. Moderate Leasing And Capital Services Pvt. Ltd.
 ITO vs. Vikram A. Pradhan (ITAT Mumbai)

Arun Sehgal, S/o Late Shri K.K. Sehgal, 10, North Avenue Road, West Punjabi Bagh, New Delhi. Vs. ACIT, Circle 25(1), New Delhi.
January, 22nd 2016
                  ,   "" 
      IN THE INCOME TAX APPELLATE TRIBUNAL "H" BENCH, MUMBAI

       BEFORE S/SHRI B.R.BASKARAN, AM AND AMARJIT SINGH, JM

                   ./I.T.A. N.2300/Mum/2015
                (   / Assessment Year:2009-10)
 M/s Hiraco India Pvt.Ltd,       / Dy.Commissioner of Income
 GW 2050,                        Vs. Tax-5(1),
 Bharat Diamond Bourse,              Aayakar Bhavan,
 Bandra Kurla Complex,               M K Road,
 Babdra (E),                         Mumbai-400020.
 Mumbai-400051
      ( /Appellant)               ..     ( / Respondent)


        ./   ./PAN. :AACCHO427M

           / Assessee by                 Shri Vijay Mehta
           /Revenue by                   Shri Vijay Soni


           / Date of Hearing                 : 6.1.2016
           /Date of Pronouncement: 20.1. 2016

                               / O R D E R
Per B R Baskaran, AM:

      The assessee has filed this appeal challenging the order dated
15.04.2013 passed by Ld CIT(A)-10, Mumbai and it relates to the
assessment year 2009-10. The assessee is aggrieved by the decision of Ld
CIT(A) in confirming the disallowance of claim of Rs.7.84 crores relating to
the loss suffered in cancellation of foreign currency forward contracts by
treating the same as speculation loss.

2.    The facts necessary for the disposal of the above said issue are set
out in brief.   The assessee is engaged in the business of importer,
manufacturer and exporter of diamonds. It is also engaged in generation
and distribution of power by windmill. The AO noticed that the assessee
                                     2
                                                       I T A N o . 2 3 0 0 / Mu m / 2 0 1 5


has entered into forward contracts in foreign exchange to hedge against
foreign currency fluctuation risks. The assessee had declared a loss of
Rs.7.84 crores on cancellation of foreign exchange forward contracts. It is
pertinent to note that the assessee had revalued the outstanding
receivables in foreign currency and declared a gain of Rs.20.39 crores.
The assessee had also declared a loss of Rs.5.29 crores on revaluation of
outstanding payable in foreign currency. The AO did not disturb both the
items stated above.

3.    The assessee submitted that it, being an exporter of diamonds,
enters into sales transactions in US$ and hence it is required to hedge the
foreign exchange loss by entering into forward contracts. Accordingly, it
was contended that the same forms integral part of the export business.
Accordingly, it was claimed that the loss of Rs.7.84 crores suffered on
account of cancellation of foreign exchange forward contracts was
allowable as business expenditure.        However, the same was not
acceptable to the assessing officer.     The AO took the view that the
assessee, being a dealer in diamonds, has entered into a separate
business transaction of dealing in foreign currency and the same has been
settled otherwise than by actual delivery.   Accordingly the AO took the
view that the forward contracts have not been entered into diamonds` and
hence the forward contracts entered into foreign currency cannot be
linked with the business of diamonds. He further took the view that the
derivatives is also a commodity. Accordingly, the AO took the view that
the activity of the assessee in entering into forward contract in foreign
currency is a speculative transaction and hence the loss suffered by the
assessee is a speculative loss. In this regard, the AO took support from
the decision rendered by Bangalore bench of Tribunal in the case of ACIT
Vs. K.Mohan & Co. (Exports) P Ltd reported in 126 ITD 59. The Ld CIT(A)
                                     3
                                                       I T A N o . 2 3 0 0 / Mu m / 2 0 1 5


confirmed the order of the AO by following the decision rendered in the
case of M/s S.Vinodkumar Diamonds P Ltd (ITA No.506/M/2013).

4.    We heard the parties and perused the record.                The decision
rendered by the Bangalore bench of Tribunal in the case of K. Mohan &
Co. (Exports) P Ltd (supra) was considered by another bench of Bangalore
Tribunal in the case of ACIT Vs. M/s Hanuman Weaving Factory in its order
dated 28.10.2013 passed in ITA No.1112/Bang/2012.          The issue before
the Tribunal in the case of M/s Hanuman Weaving factory (supra) was
identical to the one contested before us, viz., whether the expenditure
incurred on cancellation of forward contract was a speculation loss or not.
The above said assessee was exporter of silk fabrics and it has claimed the
loss arising on cancellation of forward contract in foreign currency as
deduction.    The AO rejected the claim by holding the same was
speculative loss and the same was confirmed by Ld CIT(A). The Tribunal
proceeded to adjudicate the issue by duly considering the decision
rendered in the case of K. Mohan & Co. (Exports) P Ltd, and held as
under:-
      In K. Mohan Exports case, it was concluded by the Hon`ble earlier
      Bench that-
             Assessee-exporter having entered into forward contracts in
             respect of foreign exchange receivable as a result of export in
             respect of the export turnover and settled the same without
             actual delivery, the profit from such forward contract is
             assessable as profit from speculation business in view of
             Expln. 2 to s. 28 r/w s. 43(5), and speculation business not
             being the business of assessee`s undertaking, profit from
             forward contracts could not be included in the profits of the
             business of the undertaking for the purposes of computing
             deduction under s. 10B.

      With due regards, we have perused the above findings and of the
      firm view that the issue itself was on different footing.                To be
                                         4
                                                               I T A N o . 2 3 0 0 / Mu m / 2 0 1 5


      precise, the issue before the earlier Bench was deduction u/s 10B
      and whether the profits from forward contracts can be said to be
      derived from the assessee`s undertaking for the purpose of
      deduction u/s 10B of the Act whereas the issue on hand is entirely
      different.   The above reasoning has been fairly conceded by the
      CIT(A) in her findings. For ready reference, the relevant portion of
      her reasoning is extracted as under (at the cost of repetition):
            4.6......................................This aspect has been dealt with in
            detail by the Hon`ble ITAT, Bangalore in the case of Shri
            K.Mohan Exports & Co in 126 ITD 0059 (Bang.). Although the
            issue on hand was in a different context as to whether income
            from speculation profits can be said to be income derived
            from exports` for the purpose of section 10B or not,........

      5.5.4     On the other hand, we find that the issue in question is
      squarely covered in favour of the assessee from the following
      judgments of Hon`ble Bombay and Gujarat High Courts:

      (i) CIT Vs. Badridas Gauridu (P) Ltd ­ (2003) 261 ITR 256
      (Bom):......

      (ii) CIT-III Vs. Panchmahal Steel Ltd (2013) 33 taxmann.com 10
      (Guj)

Thus, the Bangalore bench of Tribunal has taken the view that the
decision rendered by the co-ordinate bench in the case of K. Mohan & Co.
(Exports) (supra) shall not be applicable to the facts considered by it.
Accordingly, by following the two decision of Hon`ble Bombay and Gujarat
High Courts (referred supra), the Bangalore bench concluded in the case
of Hanuman Weaving Factory (supra) the loss on cancellation of foreign
exchange forward contract is allowable as deduction.

5.    The Ld A.R brought to our notice the decision dated 11.10.2013
rendered by the co-ordinate bench of Mumbai Tribunal in the case of
London    Star     Diamond     Company        (I)   P    Ltd      Vs.       DCIT           (ITA
                                     5
                                                        I T A N o . 2 3 0 0 / Mu m / 2 0 1 5


No.6169/Mum/2012), wherein also the Tribunal considered the issue
relating to the disallowance of loss arising on cancellation of foreign
exchange forward contracts. It is pertinent to note that the co-ordinate
bench also considered the decision rendered by another co-ordinate bench
in the case of S.Vinod Kumar Diamonds Pvt Ltd (supra), on which the Ld
CIT(A) had placed reliance.       The Tribunal examined following two
questions in the case of London Star Diamond Company (I) P Ltd (supra):-


      (i) if the Forward Contracts entered into with the Bank constitutes
      the integral or incidental to the activity of export of the diamonds by
      the assessee, who is not the dealer in foreign exchange.

      (ii) if the AO was justified in not setting off against the profits on
      actual realization or revaluation as speculative profits.





The co-ordinate bench also examined the provisions of sec. 43(5), which
defines the expression Speculative transactions and finally decided the
issue in favour of the assessee. The relevant discussions made by the
Tribunal are extracted below, for the sake of convenience:-


      17. Before declaring the decisions of the Tribunal on the issues
      raised before us, we find it relevant to scan the relevant provisions
      ie section 43(5) of the Act, Explanation to section 28 etc.

      Definitions of the speculation transaction on speculation
      business:

      18. The provisions of section 43(5) provides for definition of
      ,,speculation transactions. The said provisions read as under:

      43. (1)...
      (2)....
      (3)...
      (4)....
      (5) "speculative transaction" means a transaction in which a
      contract for the purchase or sale of any commodity, including stocks
                               6
                                                  I T A N o . 2 3 0 0 / Mu m / 2 0 1 5


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 into by
      a dealer or investor therein to guard against loss in his
      holdings of stocks and shares through price fluctuations; or

      (c) a contract entered into by a member of a forward market
      or a stock exchange in the course of any transaction in the
      nature of jobbing or arbitrage to guard against loss which may
      arise in the ordinary course of his business as such member;
      [or]

      [(d) an eligible transaction in respect of trading in derivatives
      referred to in clause [(ac)] of section 2 of the Securities
      Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a
      recognized stock exchange; [or]]

      (e) an eligible transaction in respect of trading in commodity
      derivatives carried out in a recognised association, shall not
      be deemed to be a speculative transaction..........

19. The above provision provides that a transaction in which a
contract in respect of trading of any commodity including stocks
and shares is settled otherwise than by the actual delivery or
transfer of commodity / scrips. Here the meaning of expression
"any commodity" is a matter of debate. This definition provides
for exclusion of certain specified contracts discussed in clause (a) to
(e) of the proviso to section 43(5) of the Act. Clause (a) of the
proviso deals with the hedging contracts entered into in the course
of manufacturing and merchandizing of the business to guard
against the losses through future price fluctuations in respect of
contracts for actual deliver. Clause (b) deals with the contracts
entered into by dealer or investor in respect of Stock Exchange and
Clause (d) deals with an eligible transaction in respect of trading
                               7
                                                  I T A N o . 2 3 0 0 / Mu m / 2 0 1 5


derivatives carried out in a recognized Stock Exchange. Clause (e)
deals with eligible transactions in respect of the trading in
commodity derivatives carried out in a recognized association. These
five types of contracts / eligible transactions shall not be deemed as
speculative transactions. Although there is decision of the Tribunal
where it is held that the FCs are not commodities, considering the
judgment of Honble High court of Calcutta in the case of Sooraj
Muill Magarmull supra, which was followed by the judgment of
jurisdictional High Court in the case of Badridas Gauridu Pvt Ltd
(supra), needs to be followed by us. The principle of "judicial
discipline assumes importance and therefore, the commodity
includes the forward contract`. Thus, in principle, the forward
contracts, being commodity, should fall in the definition of
speculation transaction` and the same is subjected to fulfillment of
other conditions specified in sub-section (5) of section 43 of the Act.
Having held so, we shall now examine if the impugned
contracts/transactions constitute "hedging transactions and
covered by the exclusion provisions of clause (a) to the proviso to
section 43(5) of the Act. The clause (a) of the proviso to section
43(5) provides for exclusion of the hedging transaction from the
definition of the speculation transactions`. There are number of
judgments in support of the assessee and relevant ,,ratios or
conclusions are discussed in the succeeding paragraphs. 20. Before
taking up these discussions, we shall now take up the provisions of
the Explanation to section 28 of the Act, which also provide
definition of Speculative Business. The said explanation reads as
under:

      Explanation 2.--Where speculative transactions carried on
      by an assessee are of such a nature as to constitute a
      business, the business (hereinafter referred to as speculation
      business) shall be deemed to be distinct and separate from
      any other business.

 21. Explanation to section 28 uses the expression speculative
transactions carried on by an assessee are of such a nature as to
constitute a business, and thus, considering the nature of these
transactions, the impugned FCs cannot be deemed as the
speculation business without going into the "nature of the
transactions. For analyzing the nature, we need to examine why
the FC transactions are entered, how these transactions are dealt
with during their sustenance till they are cancelled by the assessee
or terminated by the Banks and if they constitute hedging
                               8
                                                 I T A N o . 2 3 0 0 / Mu m / 2 0 1 5


transactions etc. Basing on the nature, certain speculation
transactions shall constitute as speculation business and such
speculation business shall be deemed to be distinguished and
separate from any other business. Further, the provision of section
73 relating to "loss in speculation business is another relevant
provision in this regard. Thus, the Explanation 2 to section 73 also
deals with deemed speculation business where there is some trading
activity of shares by the assessee being other business activity.
Now, we shall take up relevant judgments on the subject raised
before us.

22. Relevant judgmental laws: In this regard, relevant decisions
include the decision in the case of D Kishore kumar and Co
supra, binding judgment of the Bombay High Court in the case of
CIT vs. Badridas Gauridu Pvt Ltd (supra), judgment in the case
of Sooraj Muill Magarmull 129 ITR 169 (para 3) from Calcutta
High Court. The judgments from the High Court of Ahmedabad in
the cases of Friends and Friends Shipping Pvt. Ltd (supra) and
in the case of Panchamahal Steel Ltd (supra) are also relevant.
These decisions / judgments are unanimously relevant for the
proposition that the FC transactions, when entered into with the
banks for hedging the losses due to foreign exchange fluctuations
on the export proceeds, are to be considered integral or
incidental to the export activity of the assessee. Therefore, the
losses or gains constitute the business loss or gains and not the
speculation activities. In the preceding paragraphs of the order, in
the portions assigned to the ARs arguments, we have analyzed
these issues and the DR has not provided any reasons to reject the
said arguments of Ld Counsel for the assessee. Therefore, in
principle, we agree with the arguments of Ld Counsel for the
assessee. Further, we also agree with the Ld Counsels argument
that the fact of premature cancellation cannot alter the nature of
the transaction. Thus, Ld Counsels comments on CIT(A)
conclusions on treating or equating the FCs as derivatives` of
currency is also allowed considering the specific definition provided
to derivatives in section 2(ac) of Securities Contract Regulation Act,
1956 and it is not the requirement of the law that the 1:1 correlation
between the FCs and the export invoices should exist and should be
established by the assessee. So long as the total value of the FCs
does not exceed, the claim of the assessee is sustainable as
business loss. We have also analyzed the decisions relied on by Ld
DR and find they are distinguishable. Now, we shall proceed to
import some conclusions of the said decisions.
                                9
                                                   I T A N o . 2 3 0 0 / Mu m / 2 0 1 5


Relevant judgmental laws ­ Conclusions & Held portions

23. Relevant extracts from the cited judgments are inserted in the
succeeding paragraphs here as under:

A. Held portion in the case of D. Kishorekumar 2 SOT 769 (Mum)

The details of forward exchange contract clearly show that all the
forward exchange contracts were in respect of each specific import
order placed by the assessee. The purpose of these transactions
was clearly to minimise assessee`s risk on account of fall in value of
rupee, but the quantum of foreign exchange covered by these
forward contracts was limited to the extent of assessee`s actual
exposure in respect of import value commitments. That aspect is not
disputed. On these facts, even though the transactions having been
settled without delivery, the conditions of s. 43(5), describing
speculative transactions, are clearly fulfilled, the requirement of
Expln. 2 to s. 28 is not fulfilled inasmuch as it cannot be concluded
that the transactions are such a nature as to constitute a business
by itself. These transactions are genuine business transaction to
hedge against increased cost of purchases of rough diamond
imports. It is a commonly accepted part of the financial
management practices today that the risk element, due rise in value
of foreign currency in respect of the import transactions entered, is
minimised by entering into forward contracts for purchase of that
currency. This is particularly necessary in a market in which the
value of domestic currency is falling, which is evident from the fact
that the assessee realized profits on cancellation of those contracts.
These transactions are integral part of the export business
and cannot be considered in isolation of the export business
in the course of which the transactions have been entered
into. As a matter of fact, this profit on cancellation of forward
contracts is generally revenue neutral because the question of profit
on cancellation of forward contracts can only arise in a situation
when the value of foreign currency is increasing vis-avis domestic
currency, and when the foreign exchange value is so increasing the
ultimate payment made in foreign exchange by the assessee also
increases. ...... Since it is an undisputed position that the imports, in
connection with which the assessee had entered into forward
contracts, actually took place, this profit on cancellation of forward
foreign exchange contracts effectively only reduces the costs of
purchases in respect of those imports, and cannot be, by any logic,
construed as transactions independent of assessee`s business of
                              10
                                                I T A N o . 2 3 0 0 / Mu m / 2 0 1 5


importing rough diamonds and exporting cut and polished
diamonds. There is one more aspect of the matter, and that is the
reason as to why the forward contracts were cancelled
midway and the profits were booked on the same instead of using
these contracts to actually meet the foreign exchange requirements
at the time of paying the import bills....... The due dates of
payment at that point of time were only 16 days to 77 days
away. The decision as to whether further hedging against the
increase in foreign currency is warranted or not is essentially a
commercial decision which depends on a number of factors, most
important factor being the trend of currency markets at that point of
time and businessmans perception about future trends of the
currency market. For example, when a businessman perceives that
the market value of foreign currency vis-a-vis the domestic currency
will not go any higher or when the market starts the declining trend,
he may see business expediency in cancellation of contract.
The fact of premature cancellation, therefore, cannot alter
the nature of transaction. For all these reasons, the credit
shown in the P&L a/c as ,,profit on cancellation of forward
contracts is as integral part of the export business, as
purchases or imports..... The assessee succeeds on this issue. In
the result, the appeal is allowed.

24. Although, the said decision was pronounced in the context of
section 80HC of the Act, the ratio of the said decision is of
paramount importance.

      B. Bombay High Court judgment in the case of CIT vs.
         Badridas Gauridu (P) Ltd. [2004] 134 Taxman 376 (Bom.)

25. In this case, Honble High Court of Bombay answered the
following question in favour of the assessee and the question reads
that,-

      Whether, where assessee, not being a dealer in foreign
      exchange but an exporter of cotton, had booked foreign
      exchange in forward market with bank in order to hedge
      against losses, to claim deduction in respect of loss suffered
      by it as a business loss- Held yes.

25.1. Relevant finding is discussed in para 3 of the judgment and
the same reads as follows:-
                        11
                                           I T A N o . 2 3 0 0 / Mu m / 2 0 1 5


3. The assessee was not a dealer in foreign exchange. The
assessee was a cotton exporter. The assessee was an export
house. Therefore, foreign exchange contracts were booked
only as incidental to the assessee`s regular course of business.
The Tribunal has recorded a categorical finding to this effect
in its order. The Assessing Officer has not considered these
facts. Under section 43(5) of the Income Tax Act, speculative
transaction has been defined to mean a transaction in which
a contract for the purchase or sale of commodity is settled
otherwise than by the actual delivery or transfer of such
commodity. However, as stated above, the assessee was not
a dealer in foreign exchange. The assessee was an exporter of
cotton. In order to hedge against losses, the assessee had
booked foreign exchange in the forward market with the
bank. However, the export contracts entered into by the
assessee for export of cotton in some cases failed. In the
circumstances, the assessee was entitled to claim deduction in
respect of Rs. 13.50 lakhs as a business loss. This matter is
squarely covered by the judgment of the Calcutta High Court
in the case of CIT vs. Sooraj Mull Nagarmull (1981) 129 ITR
169.

Judgment of Calcutta High Court in the case of CIT vs.
Sooraj Mull Nagarmull [1981] 129 ITR 169 (Cal.)

Held: The assessee used to carry on export and import of
jute business. In the course of normal business it used to
enter into foreign exchange contracts in order to cover up loss
and difference in foreign exchange valuation. The assessee
utilized part of the amount of the foreign exchange covered.
This finding of fact has not been challenged. If in the course
of normal carrying on of business certain loss or obligation or
interest arise these must be deferrable to the carrying on the
business and these must be incidental to the carrying on
of the business. Undoubtedly, the contract for foreign
exchange as such can be treated as a contract for
commodity.............

The Conclusion of this judgment as reported reads as
under:

Where in the normal course of business of import and export
of jute, the assessee entered into foreign exchange contract
                               12
                                                  I T A N o . 2 3 0 0 / Mu m / 2 0 1 5


      to cover up the losses and differences in exchange valuation,
      the transaction is not a speculative transaction.

26. The above extracts unanimously support that the FCs entered by
the assessee, an exporter and not the dealer in foreign exchange,
with the Banks as incidental to the export business, are business
transactions and loss or gains is notof speculation nature. The only
relevant decision cited by Ld DR is the one delivered in the case of
S.Vinodkumar Diamonds Pvt. Ltd, (supra) and in this case, AO
allowed the relevant loss as business loss and relevant portion is
extracted as under:




      4...............He further held that losses incurred by the
      assessee during the year on account of change in
      value of currencies at the time of payment was
      allowed while finalising the assessment, that M to M losses
      were of notional losses and contingent in nature. Finally,
      loss on a/c. of outstanding forward contract as on
      31.03.2008 were disallowed by him............


33. Correlation of forward contracts vis-à-vis export
invoices: Assessee filed a chart furnishing the export invoices
raised in the year under consideration and related forward contracts
booked and matured in the year under consideration. The details
suggest that there is a broad connection is established and of course
it is not up to the extent of rupee. It is the case of the Revenue that
the correlation should be precise to the last rupee of the invoice
amount. The said argument was made out by the assessee relying
on the judgment of the Gujarat High Court in the case of Friends
and Friends Shipping Pvt. Ltd (supra) and Panchamahal Steel Ltd
(supra). Considering the above stated scope of the relevant
provisions on one side and the precedents on the other, now we
shall take up the core issue of adjudication of the grounds raised in
the appeal and the fate of the impugned losses of Rs.
4,69,42,680/-. Relevant portion from the judgment of the Gujarat
High Court in the case of Friends and Friends Shipping Pvt. Ltd
(supra) is as follows:

             It is true that the CIT (A) has made some
            observations which would prima facie suggest that
            there was no direct co-relation between the exchange
            document and the precise contract. However, such
            observations cannot be seen in isolation................
                               13
                                                  I T A N o . 2 3 0 0 / Mu m / 2 0 1 5




            .............We find that the decisions of the Bombay High
            Court and the Calcutta High Court noted above would
            cover the situation.

34. From the above analysis and summary of judgments, it is safely
concluded that the impugned FCs are "commodities. However,
considering the fact that these FCs are integral part or incidental
to the core business of export of diamonds or the outstanding
receivables of export proceeds, in principle, the impugned FCs
constitute hedging transaction and not the "speculative
contracts. As such, the banks do not entertain FCs of speculative
nature with the customers like the assessee, the exporter. As such,
the extension of FCs, in case of non-receipt of export proceeds on
the due dates, is not allowed without cancelling the existing FCs.
However, the onus is on the assessee to explain satisfactorily why
the assessee resorted to premature cancellation of some FCs.
Further, it is not the requirement that there must be 1:1 precise
correlation between FC and the corresponding export invoice. So
long as the total FCs does not exceed the exports of the year plus
outstanding export receivable, the FCs can constitute hedging
transaction. Further also, the premature cancellation of FCs may
not alter the above conclusions so long as the assessee has valid
and acceptable explanation for such cancellations. It should not be
the case, to start with, FC can be a hedging transaction` but the
ending of such FC is speculation`. In the light of this synopsis of our
views in the matter, we shall not deliberate on the impugned losses.

35. The subdivisions of the loss of Rs. 4,69,42,680/-: we have
already tabulated above the three subdivisions of the impugned
losses based on the timing of the cancellation of the FCs. Broadly
the loss is divided into two types and the adjudication of the each
subdivision of loss is given as under:

      (a) Loss on Cancellation of Matured FCs amounting to Rs
      4,14,88,805/- relates to the FCs cancelled or terminated on or
      after the due date. In other words, the FCs booked as integral
      part of the export invoices lived its booking period in full and
      they were either terminated by the Bank on or after due date
      of maturity date of the contract as the actual realization were
      not received in time. These are not premature cancellations by
      the assessee and therefore, in our considered view, the said
      loss of Rs 4,14,88,805/-, being related to the FCs which are
                                     14
                                                         I T A N o . 2 3 0 0 / Mu m / 2 0 1 5


             integral or incidental to the exports of the diamonds, should
             be allowed as business loss in view of the binding High Court
             or Tribunal decisions/judgments in the case of D Kishore
             kumar and Co (supra), Badridas Gauridu Pvt Ltd (supra),
             Sooraj Muill Magarmull, (supra) etc. Thus, loss arising from
             cancellation of the matured contracts is allowed in favour of
             the assessee. Thus, this part of the ground of the assessee is
             allowed.


6.   Accordingly, the Tribunal came to the conclusion that the Forward
contracts entered into with the banks for hedging the losses due to foreign
exchange fluctuations on the export proceeds are to be considered integral
or incidental to the export activity of the assessee. It was further held that
there is no requirement of law that there should be 1:1 correlation
between the Forward Contracts and Export invoices and so long as the
total value of forward contracts does not exceed, the claim of the assessee
is sustainable as business loss. Accordingly, it was held that the forward
contracts entered by the assessee, an exporter and not the dealer in
foreign exchange, with the Banks as incidental to the export business, are
business transactions and loss or gains is not of speculation nature. It was
further specifically held that the loss arising on cancellation of matured
forward contracts was allowable as deduction and for arriving at this
decision, the Tribunal has placed reliance on the following case laws:-
      (a)    CIT Vs. Badridas Gauridu Pvt Ltd (261 ITR 256)(Bom)
      (b)    CIT Vs. SoorajMull Magarmull (129 ITR 169)(Cal)

7.   The Ld A.R submitted that the Gujarat High Court has taken identical
view in the case of CIT Vs. Friends and Friends Shipping Pvt Ltd (217
Taxman 267) and also in the case of CIT Vs. Panchmahal Steel ltd (215
Taxman 140). The Chennai bench of Tribunal has also expressed identical
view in the case of SCM Garments (P) Ltd Vs. DCIT (2015)(69 SOT 397) by
following the decision rendered by the Hon`ble Calcutta High Court in the
                                       15
                                                          I T A N o . 2 3 0 0 / Mu m / 2 0 1 5


case of Soorajmull Nagarmull (supra).       Thus, we notice that the claim of
the assessee is admissible in view of the availability of vast decisions on
this issue.

8.          In view of the foregoing, we are unable to agree with the view
taken by the tax authorities on this issue. Accordingly, we set aside the
order of Ld CIT(A) on this issue and direct the AO to allow the claim of
Rs.7.84 crores relating to loss arising on cancellation of foreign exchange
forward contracts.

9.     In the result, the appeal filed by the assessee is allowed.

        Pronounced accordingly on 20th Jan, 2016.
                                    20th Jan, 2016    

            Sd                                            sd

      (AMARJIT SINGH)                                ( B.R. BASKARAN)
     JUDICIAL MEMBER                                 ACCOUNTANT MEMBER

 Mumbai:20th Jan, 2016.

.../ SRL , Sr. PS

    /Copy of the Order forwarded to :
1.  / The Appellant
2.     / The Respondent.
3.      () / The CIT(A)- concerned
4.      / CIT concerned
5.     ,   ,  /
      DR, ITAT, Mumbai concerned
6.      / Guard file.

                                                             / BY ORDER,

True copy
                                                       (Asstt. Registrar)
                                              ,  /ITAT, Mumbai

 
 
Home | About Us | Terms and Conditions | Contact Us
Copyright 2016 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Binarysoft Technologies - Sitemap

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions