2015 (9) TMI 497 - AT - Income Tax

Forward contracts in respect of forex transactions entered into by the assessee with the banks - whether will not fall under the definition of speculative transaction and holding that assessee is entitled to claim such loss as business loss as held by CIT(A) - Held that - Forex transactions entered into by the assessee are not derivative transactions. However, it was held that transactions considered for determining the business loss from derivative transactions cannot be more than the total export turnover of the assessee for the assessment year under consideration and if derivative transactions are in excess of export turnover then the loss suffered in respect of portion of that excess transactions are to be considered as speculative loss only since the excess derivative transaction has no proximity with the export turnover. In this case also, it appears that forex transactions entered into by the assessee are more than the export turnover. Therefore, we direct the Assessing Officer to follow the decision of this Tribunal in the case of Majestic Exports (2015 (7) TMI 936 - ITAT CHENNAI ) and recompute the business loss in line with the order of the Tribunal, after calling for details from the assessee and giving opportunity of being heard - Decided partly in favour of revenue for statistical purposes.

Issues Involved:

1. Whether the forward contracts in respect of forex transactions entered into by the assessee with the banks fall under the definition of speculative transactions.
2. Whether the assessee is entitled to claim the loss incurred on such forward contracts as a business loss.

Issue-Wise Detailed Analysis:

1. Definition of Speculative Transactions:

The Revenue's appeal contends that the Commissioner of Income Tax (Appeals) erred in holding that forward contracts in respect of forex transactions entered into by the assessee with the banks do not fall under the definition of speculative transactions. The Assessing Officer had disallowed the claim of loss on account of forex loss hedging, considering it as a loss incurred in speculation business under section 73 of the Income Tax Act. The Assessing Officer observed that the assessee had canceled 96% of forward contracts and concluded that the loss of Rs. 46,82,32,979/- was speculative.

Upon appeal, the Commissioner of Income Tax (Appeals) considered the submissions of the assessee and the contentions of the Assessing Officer. The Commissioner followed various judicial precedents, including the decisions of the Calcutta High Court in CIT Vs. Soorajmull Nagarmull, the Bombay High Court in CIT Vs. Badridas Gauridu P.Ltd., and the co-ordinate Bench in the case of Cotton Blossoms, concluding that the forward contracts entered into by the assessee do not fall under the definition of speculative transactions. The Commissioner held that the assessee is entitled to claim the loss as a business loss.

2. Claiming Loss as Business Loss:

The Tribunal examined whether the loss incurred on forward contracts can be claimed as a business loss. The Tribunal noted that the assessee company was engaged in the business of manufacturing and export of hosiery garments and entered into forex derivative contracts, including structured contracts, to hedge against fluctuations in foreign currency. The assessee argued that trading in futures and options is no longer speculative transactions as per proviso (d) to Sec.43(5) inserted by the Finance Act, 2005.

The Tribunal considered various judicial precedents and submissions by the assessee, including the decisions in Munjal Showa Ltd. Vs. DCIT, CIT Vs. Badridas Gauridu (P) Ltd., and others, which supported the contention that derivatives and forward contracts for hedging purposes do not constitute speculative transactions. The Tribunal also referenced the Special Bench decision in Shri Capital Services Ltd Vs. ACIT, which held that foreign currency is neither a commodity nor shares under Sec. 43(5).

The Tribunal concluded that forex transactions entered into by the assessee are not speculative transactions. However, it was noted that if the derivative transactions are in excess of the export turnover, the loss suffered in respect of that excess portion should be considered as speculative loss, as it has no proximity with the export turnover. The Tribunal directed the Assessing Officer to recompute the business loss in line with this decision, after calling for details from the assessee and providing an opportunity for hearing.

Conclusion:

The Tribunal partly allowed the appeal for statistical purposes. It upheld the view that forward contracts for hedging purposes do not fall under speculative transactions and can be claimed as business loss, provided the transactions do not exceed the export turnover. If the transactions exceed the export turnover, the excess portion is to be treated as speculative loss. The Assessing Officer was directed to recompute the business loss accordingly.

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