2014 (10) TMI 776 - AT - Income Tax

Foreign currency forward contract treated as speculation loss Held that - The assessee is dealing in diamonds, it had entered in to 24 forward contracts, that total forward contract cancelled were of ₹ 28 Crores, that the total sales during the year amounted to ₹ 27.78 Crores - the amount involved in the forward contract (FC) is more than 100% of the turnover of the assessee, that FC were not relatable to specific bills, that the assessee had not related any single bill to any of the contract and had not provided any purchase order during the assessment or appellate proceedings - the definition of speculative transaction in section 43(5) of the Act, gives a simple test for deciding, for the purpose of Act, as to what a speculative transaction means - The true test is delivery of commodities/goods as per the contract, including a FC Profit/loss in respect of unperformed contracts is considered speculation profit or loss - CIT(A) was rightly of the view that the disputed transactions were speculative and not hedging transaction, that the assessee could not relate any single bill to any of the contract and it had not provided detail of any purchase order relatable to specific transaction, during the assessment or appellate proceedings - Thus, the transactions undertaken by it have to be taken as transactions relatable to Foreign Exchange - the order of the FAA does not suffer from any legal or factual infirmity Decded against assessee.

Issues Involved:
1. Disallowance of loss on account of cancellation of foreign currency forward contracts as speculation loss.
2. Determination of whether forward contracts are relatable to specific export bills.
3. Classification of foreign currency as a "commodity".
4. Reliance on precedents such as CIT vs. Badridas Gauridu (P.) Ltd. and DCIT v. Intergold (I) Limited.

Detailed Analysis:

1. Disallowance of Loss on Account of Cancellation of Foreign Currency Forward Contracts as Speculation Loss:
The assessee-company challenged the disallowance of Rs. 2,98,48,551/- as speculation loss. The AO observed that the loss incurred from currency derivatives due to forward contracts had to be treated as forex derivative loss. The AO emphasized that such losses must be proven as hedging transactions rather than speculative ones. The AO cited sections 43(5), 28(2), 72, and 73 of the Act, concluding that the transactions were speculative since they did not meet the conditions of proviso (d) to section 43(5). The FAA upheld this view, noting that none of the forward contracts were settled by actual delivery, thus classifying them as speculative transactions under section 43(5).

2. Determination of Whether Forward Contracts Are Relatable to Specific Export Bills:
The AO found that the forward contracts were not linked to specific export bills of the assessee. The FAA supported this finding, stating that the assessee failed to provide any purchase orders or relate any single bill to the contracts. The FAA distinguished this case from Badridas Gauridu Pvt. Ltd., where the forward contracts were linked to specific export orders. Thus, the FAA concluded that the transactions were not part of the normal business activity and were speculative in nature.

3. Classification of Foreign Currency as a "Commodity":
The FAA discussed the definition of "commodity" under section 43(5) and concluded that foreign currency falls within this definition. The FAA explained that speculative transactions include those settled otherwise than by actual delivery, which encompasses forward contracts in foreign currencies. The FAA noted that derivatives could be used for hedging against business risks, but only exchange-traded derivatives are excluded from speculative transactions under clause (d) of section 43(5).

4. Reliance on Precedents Such as CIT vs. Badridas Gauridu (P.) Ltd. and DCIT v. Intergold (I) Limited:
The assessee cited various precedents to support its claim. However, the FAA distinguished these cases, noting that in Badridas Gauridu, the contracts were linked to specific export orders, unlike in the present case. The FAA also referred to other cases such as Shree Capital Services Ltd. and Bengal & Assam Co. Ltd., which supported the view that the transactions were speculative. The FAA emphasized that the burden of proof was on the assessee to show that the transactions were hedging transactions, which the assessee failed to do.

Conclusion:
The tribunal upheld the order of the FAA, confirming that the transactions were speculative in nature and not hedging transactions. The appeal filed by the assessee was dismissed, and the disallowance of the loss on account of cancellation of foreign currency forward contracts was confirmed. The tribunal's decision emphasized the importance of proving the linkage of forward contracts to specific export bills and the classification of foreign currency as a commodity under section 43(5).

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