2014 (3) TMI 1179 - AT - Income Tax

Speculation loss while dealing in derivatives - Disallowance of exchange contract booked value as per the rate of exchange prevailing on the last date of the previous year - as per assessee assessee had booked option contract of exchange to optimize the liability in respect of foreign currency loan on working capital and hence the liability incurred on foreign exchange contract on account of exchange fluctuation is only in the revenue field and ought to have allowed as a revenue deduction - HELD THAT - In the cases relied on by the learned counsel, the facts are that the assesses had minimized the loss arising out of the fluctuation of Forex rate by cancelling the forward contract. Those forward contracts were entered into to protect the final outcome of its export proceeds from foreign exchange rate fluctuation. But in the present case, the Assessing Officer has clearly established that the assessee has carried out speculation business in the nature of trading in derivatives. The loss incurred by the assessee while dealing in derivatives is in the nature of speculation loss, as explained by the Assessing Officer. Therefore, we confirm the orders of the lower authorities on this point and reject the grounds raised by the assessee. Deduction provided under sec.80JJAA - HELD THAT - As pointed out by the Assessing Officer, number of workers did not reach the minimum requirement of 100 regular workmen. The regular workmen employed by the assessee during the relevant previous year was only 89. Therefore, the assessee-company is not entitled for deduction provided under sec.80JJAA. Accordingly, the order of the Commissioner of Income-tax(Appeals) on this point is reversed and the disallowance made by the Assessing Officer is upheld. - Decided against assessee.

Summary

Issues:
1. Disallowance of expenses on exchange contract booked value.
2. Treatment of foreign exchange derivatives contract loss as speculation loss.
3. Eligibility for deduction under sec.80JJAA based on the number of regular workmen employed.

Issue 1: Disallowance of expenses on exchange contract booked value
The assessee appealed the disallowance of &8377; 2,07,13,415 incurred on exchange contract booked value, arguing it should be allowed as a revenue deduction due to optimizing liability on foreign currency loan. The Assessing Officer treated it as a derivative loss, considering it a speculative transaction under sec.43(5) due to non-deliverable cross currency contract without underlying exposure to State Bank of India Treasury. The Commissioner of Income-tax(Appeals) upheld this position, leading to the disallowance.

Issue 2: Treatment of foreign exchange derivatives contract loss as speculation loss
The learned counsel cited judgments where losses from cancellation of forward contracts were allowed deductions, emphasizing minimizing Forex rate fluctuation losses. However, the Assessing Officer established the assessee's speculation business in derivatives, deeming the losses as speculation losses. The Tribunal confirmed this view, rejecting the grounds raised by the assessee.

Issue 3: Eligibility for deduction under sec.80JJAA based on the number of regular workmen employed
The Revenue contended that the assessee was not entitled to deduction under sec.80JJAA as they employed only 89 regular workmen instead of the required minimum of 100. The Tribunal reviewed the facts and upheld the disallowance, reversing the Commissioner of Income-tax(Appeals) decision. Consequently, the Revenue succeeded in its appeal, and the order disallowing the deduction was upheld.

In conclusion, the Tribunal dismissed the assessee's appeal and allowed the Revenue's appeal, confirming the disallowance of expenses on the exchange contract booked value and the denial of deduction under sec.80JJAA due to insufficient regular workmen employment. The judgment was pronounced on March 17, 2014, in Chennai.