2015 (9) TMI 494 - AT - Income Tax

Disallowance of loss incurred by the assessee on forward contracts and other derivative contracts as speculation loss - Held that - Both trading of shares and derivative transactions are not coming under the purview of Section 43(5) of the Act which provides definition of speculative transaction exclusively for purposes of section 28 to 41 of the Act. Again, the fact that both delivery based transaction in shares and derivative transactions are non-speculative as far as section 43(5) is concerned goes to confirm that both will have same treatment as regards application of the Explanation to Section 73 is concerned, which creates a deeming fiction. Now, before application of the said Explanation, aggregation of the business profit/loss is to be worked out irrespective of the fact, whether it is from share delivery transaction or derivative transaction. One has to see whether the assessee entered into these derivative within the period stipulated for payment of export proceeds or within the time period allowed for payment of interest to the concerned bank. Further, it is to be seen whether the volume / quantum of derivative transaction entered by the assessee is more than the total export turnover and payment of interest to bank and volume of transaction cannot be more than these two components. Accordingly, we are directing the Assessing Officer to keep these facts in mind and decide the issue in the light of the Tribunal order in the case of M/s. Majestic Exports (2015 (7) TMI 936 - ITAT CHENNAI ). With these observations, we are remitting back this issue back to the file of the Assessing Officer for fresh consideration. - Decided partly in favour of assessee for statistical purposes.

Issues Involved:
1. Disallowance of loss on forward contracts and other derivative contracts as speculation loss.

Issue-wise Detailed Analysis:

1. Disallowance of Loss on Forward Contracts and Other Derivative Contracts as Speculation Loss:

The primary grievance of the assessee revolves around the disallowance of a loss amounting to Rs. 90,08,639/- incurred on forward contracts and other derivative contracts, which was treated as speculation loss by the Assessing Officer (AO). The assessee argued that these contracts were entered to hedge currency risks associated with its export receivables and foreign currency loans, and thus, the loss should be considered as a business expenditure.

Facts of the Case:
The assessee had substantial export turnover and receivables, and to manage exchange fluctuation risks, it entered into forward and derivative contracts with ICICI Bank. The contracts were intended to hedge against currency risks related to the business of producing and selling auto castings. However, the AO disallowed the loss, categorizing it as speculative.

Commissioner of Income Tax (Appeals) Observations:
The Commissioner of Income Tax (Appeals) upheld the AO's decision, noting that the contracts were speculative in nature. The contracts were settled by paying the loss in Indian Rupees rather than actual delivery of foreign currency, indicating speculative transactions. The Commissioner cited Section 43(5) of the Income Tax Act, which defines speculative transactions, and referenced the Special Bench of Calcutta Tribunal in the case of Shree Capital Services Ltd vs. ACIT, which clarified that derivatives are commodities for the purpose of Section 43(5)(d). The Commissioner concluded that the transactions were speculative and not linked to the export receivables, thus confirming the AO's order.

Tribunal's Analysis:
The Tribunal referenced a similar issue in the case of M/s. Majestic Exports, where it was held that derivative transactions related to export business should be considered business transactions. The Tribunal emphasized that both delivery-based transactions and derivative transactions are non-speculative as per Section 43(5) and should be aggregated before applying the Explanation to Section 73, which creates a deeming fiction for speculative business.

Calcutta High Court's View:
The Tribunal also referred to the Calcutta High Court's decision in M/s. Baljit Securities Pvt. Ltd., which held that losses from derivative transactions could be set off against income from actual buying and selling of shares, indicating that such transactions fall within the umbrella of speculative transactions.

Conclusion:
The Tribunal agreed with the previous order that the volume of derivative transactions should not exceed the total export turnover and payment of interest to the bank. The issue was remitted back to the AO for fresh consideration, directing the AO to ensure that the derivative transactions are within the stipulated period for payment of export proceeds or interest to the bank and that the volume of transactions does not exceed the export turnover and interest payment.

Order:
The appeal was partly allowed for statistical purposes, and the issue was remitted back to the AO for fresh consideration, keeping in mind the Tribunal's observations and the need to align derivative transactions with export turnover and interest payments. The order was pronounced on 28.08.2015 at Chennai.

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