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TMI Blog2005 (3) TMI 699X X X X Extracts X X X X X X X X Extracts X X X X ..... , this profit on cancellation of forward foreign exchange contracts effectively only reduces the costs of purchases in respect of those imports, and cannot be, by any logic, construed as transactions independent of assessee s business of importing rough diamonds and exporting cut and polished diamonds. The fact of premature cancellation, therefore, cannot alter the nature of transaction. Thus, we are of the considered view that the credit shown in the profit loss account as profit on cancellation of forward contracts is as integral part of the export business, as purchases or imports. As it effectively controls and reduces the cost of imports, and is integral part of the export business profits, and as, in our considered view, the exclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst CIT(A) s holding the 90% of the interest on fixed deposits is to be reduced for the purpose of computing section 80HHC deduction. 3. We will take up the second grievance first. As far as second grievance of the assessee is concerned, learned representatives have fairly agreed that this issue is now covered by the Special Bench decision of the Tribunal in the case of Lalsons Enterprises v. Dy. CIT [2004] 89 ITD 25 (Delhi). Learned Departmental Representative, however, dutifully relies upon the orders of the authorities below. The Special Bench decision being a binding judicial precedent for us, we respectfully follow the same, and, accordingly, we direct the Assessing Officer to recompute the deduction under section 80HHC in the light of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market price. On this cancellation of forward exchange contracts, or, put it differently, realization of difference between the contracted price of dollars vis-a-vis the prevailing market price of the foreign exchange, the assessee received a sum of Rs. 10,30,305. The assessee s claim was that this receipt of Rs. 10,30,305 was an integral part of its export business profits. The Assessing Officer, however, was of the view that 90% of the aforesaid receipt is liable to be excluded from the profits of the business under clause ( baa ) of Explanation to section 80HHC. The Assessing Officer also observed that "the criterion for reducing 90% of certain receipts in not whether the receipt is business or non business but whether the particular rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtmental Representative. We have also carefully perused the orders of the authorities below, as also the paper book filed before us, and duly considered factual matrix of the case as also the applicable legal position. 8. We must first of all address ourselves to the nature of these forward exchange contracts, and the question whether or not these transactions can be considered to be an integral part of the export business or whether or not these transactions are to be considered as a business by itself. As learned Departmental Representative has very rightly pointed out, in case we come to the conclusion that these forward exchange contracts, and their settlement without delivery, is a separate business by itself, the profits on these tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness by itself. In our understanding of the situation, these transactions are genuine business transaction to hedge against increased cost of purchases of rough diamond imports. It is a commonly accepted part of the financial management practices today that the risk element, due rise in value of foreign currency in respect of the import transactions entered, is minimised by entering into forward contracts for purchase of that currency. This is particularly necessary in a market in which the value of domestic currency is falling, which is evident from the fact that the assessee realized profits on cancellation of those contracts. These transactions are integral part of the export business and cannot be considered in isolation of the export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat all these contracts were cancelled on 13th April, 1992, when the prevailing market price was INR 100 = US$ 3.235, as against the forward contract rate of INR 100 = US $ 3,840 and the rates of INR 100 = US $ 3.68 to 3.7325 prevailing on the date of imports. The due dates of payment at that point of time were only 16 days to 77 days away, as evident from the chart showing the due dates-which was also contained in page 31 of the paper-book. The decision as to whether further hedging against the increase in foreign currency is warranted or not is essentially a commercial decision which depends on a number of factors, most important factor being the trend of currency markets at that point of time and businessman s perception about future tre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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