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2016 (1) TMI 538 - AT - Income TaxTreatment of loss arisen on account of foreign exchange derivative contracts - Held that - Assessing Officer has to consider the foreign exchange derivative in proportion to export turnover as regular business transaction of the assessee. If the derivative transaction undertaken by the assessee is in excess of export turnover then that loss suffered in respect of that portion of excess transaction has to be considered as speculative loss only and that excess derivative transaction has no proximity with export turnover and the Assessing Officer is directed to compute accordingly. Further, the Assessing Officer has to see whether there is any premature cancellation of forward contract of foreign exchange and that transaction should be taken out for the purpose of considering the business loss and only the transactions which are completed to be considered for the purpose of determining the business loss from these foreign exchange forward contract. With this observation, we remand this issue to the file of the Assessing Officer for fresh consideration. This issue was considered by the Mumbai Tribunal while delivering the decision in the case of Araska Diamond P. Ltd, 2014 (10) TMI 776 - ITAT MUMBAI wherein the Tribunal came to the conclusion that the transactions, which were prematurely cancelled, cannot be considered as business transaction and it is to be considered as speculative transaction. - Decided in favour of revenue for statistical purposes.
Issues Involved:
1. Treatment of loss arising from foreign exchange derivative contracts. 2. Classification of such loss as speculative or business loss under the Income-tax Act. Issue-wise Detailed Analysis: 1. Treatment of Loss Arising from Foreign Exchange Derivative Contracts: The core issue in this appeal revolves around the treatment of a loss amounting to Rs. 2,56,46,747/- incurred by the assessee-company, which is engaged in the processing and export of marine products. The loss arose from foreign exchange forward contract transactions. The assessee treated this loss as part of its business loss and set it off against its business income. However, the Assessing Officer (AO) classified it as a speculative loss, citing Section 73 of the Income-tax Act, and disallowed the set-off against business income. 2. Classification of Such Loss as Speculative or Business Loss: The Commissioner of Income-tax (Appeals) [CIT(A)] relied on several tribunal decisions, including those of the Delhi Tribunal in Munjal Showa Ltd vs DCIT, Ahmedabad Tribunal in Essar Steel vs DCIT, Chennai Tribunal in DCIT vs Paterson Securities Pvt. Ltd, and M/s Cotton Blossom (India) Ltd vs ACIT. The CIT(A) concluded that the foreign exchange forward contracts were part of the regular business activities and not speculative transactions. This conclusion was based on proviso (c) to Section 43(5) of the Income-tax Act, which excludes such transactions from the definition of speculative transactions. Consequently, the CIT(A) directed the AO to treat the loss as a regular business loss. The Tribunal, in its analysis, referred to its own previous decision in M/s Majestic Exports vs The Joint CIT, where it was held that derivative transactions do not fall under Section 73. The Tribunal emphasized that according to Section 43(5), trading of shares with actual delivery and derivative transactions are non-speculative. This view was supported by the Special Bench of the Mumbai Tribunal in CIT v. Concord Commercial Pvt. Ltd., which held that the aggregate of business profit/loss should be worked out based on non-speculative profits before applying the Explanation to Section 73. Further, the Tribunal cited the Calcutta High Court's decision in M/s. Baljit Securities Pvt. Ltd., which clarified that losses from non-speculative transactions could be set off against income from speculative transactions. The Tribunal also referred to the Mumbai Bench's decision in Araska Diamond P. Ltd vs ACIT, which held that if foreign exchange contracts are not related to specific export or import transactions, they are speculative. The Tribunal concluded that the AO must consider foreign exchange derivatives in proportion to the export turnover as regular business transactions. Any derivative transactions exceeding the export turnover should be classified as speculative loss. Additionally, the AO must exclude prematurely canceled forward contracts from business loss calculations. Conclusion: The Tribunal remanded the issue to the AO for fresh consideration with specific instructions to: 1. Classify derivative transactions in proportion to the export turnover as regular business transactions. 2. Treat excess derivative transactions as speculative loss. 3. Exclude prematurely canceled forward contracts from business loss calculations. The Tribunal also noted that reliance on the Gujarat High Court's decision in CIT vs Friends and Friends Shipping P. Ltd was misplaced, as it did not support the assessee's position on premature cancellations. Final Judgment: The appeal of the Revenue was allowed for statistical purposes, and the case was remanded to the AO for fresh consideration based on the Tribunal's observations. (Order pronounced in the open court on 18.12.2015)
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