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TMI Blog2007 (11) TMI 437X X X X Extracts X X X X X X X X Extracts X X X X ..... ice. According to the Assessing Officer, in the trading account for assessment year 2001-02, corresponding to financial year 2000-01, the assessee has shown opening stock of Rs. 31,65,332, purchases of Rs. 1,72,06,932, sales of Rs. 15,47,054 and closing stock of Rs. 2,94,666 resulting in gross loss of Rs. 57,61,174. In the detail of purchases, the assessee has shown hedging expenses of Rs. 66,28,762.50. On being asked to explain the nature of expenses, the assessee has submitted that Pepper hedging expenses claimed by the assessee related to the procurement of exportable quality of pepper for the purpose of export from Indian Pepper Spice Trade Association (IPSTA), controlled and monitored by Forward Market Commission and the daily difference in the market prices of the quantity booked had to be reimbursed to IPSTA for the safety of the trade. It was further stated that hedging was done to avoid default by the local sellers in case the market rose and if the seller was unable to deliver the pepper, organization could procure the pepper from the market and deliver the goods to the buyer who was in need at the time of delivery. It was further stated that the assessee was mainly doing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intention of taking delivery and not speculation. However, the reply of the assessee did not find favour with the Assessing Officer. Thus he treated the hedging expenses of Rs. 66,28,672 as the speculative in nature and accordingly disallowed the same. 6. Being aggrieved the assessee preferred appeal before the Ld. CIT(A) and submitted as under : "( i )The market of the commodities, your appellant deals in, is a highly volatile market. Foreign buyers normally place orders in advance for a delivery to be made on future dates. In export obligations, since the timely delivery always remains an essence, it is always prudent to enter into future transactions with some reliable party who can deliver the goods at a pre-determined rates. ( ii )IPSTA is a Government organization and it ensures that its members comply with the contracts in hand. Thus dealing with any non-member of IPSTA is always a risky proposal. So also your appellant is the member of IPSTA. Further a dealer, who has some confirmed future contract in hand for supply of the commodity, is always in a better position to negotiate with the foreign buyers. Here comes the requirement of hedging transactions. The hedging ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he subject. ( vii )The Assessing Officer further wrongly observed that the assessee did not produce the books of account. Had it been the case the assessment would have been completed under section 144 instead of section 143(3). The assessee has maintained its books of account in normal course of its business and has produced the same during the assessment proceedings. The same can still be produced as and when required. ( viii )The case laws cited by the Assessing Officer are not applicable in the given facts and circumstances as none of the case deliberates on the transactions defined under section 43(5)( c ) of the Income-tax Act, 1961. Section 43(5) ( a ) ( b ) contemplate to exclude from the definition of speculative transactions those cases where a normal businessman is forced to undertake hedging to cover possible business losses. These two clauses cannot be invoked in a case covered under section 43(5)( c ). Section 43(5)( c ) specifically covers members of a forward market who are bound to undertake jobbing and arbitrage in the normal course of their business. All the case laws cited by the Assessing Officer invariably cover clauses ( a ) and ( b ) and not clause ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uard against loss through future price fluctuations. Thus unless the assessee showed that there was some existing contract in respect of which he was likely to suffer a loss because of future price fluctuations and that it was to safeguard such loss that he entered into forward contract of sale, the assessee could not claim the benefit of a hedging contract. Hedges in respect of stock and shares : clause ( b ) : This clause refers to hedges in respect of stocks and shares by a dealer or inventor therein. So the appellant is not covered by this clause. Hedging in nature of jobbing or arbitrage : clause ( c ) : This clause excepts hedges in the nature of jobbing or an arbitrage entered into by a member of a forward market or stock exchange to guard against loss which may arise in the ordinary course of his business as such member. A jobber sells or buys on his own account and takes advantage of every turn of the price. Jobbing takes place between one member and another on the same stock exchange, whereas arbitrage is done between different exchanges, may be Indian or foreign. The jobber takes advantage of the hourly fluctuations in prices in the same exchange whereas the ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of transaction which have been done by the assessee and loss incurred establish that the transactions were in the nature of jobbing and loss was incurred in the course of business by a member of forward commodity market. The Assessing Officer had directly made inquiry from IPSTA and in reply it was categorically accepted that assessee had entered into transaction with it. The transactions so entered were for safeguarding its interest against the future price fluctuation. In the facts and circumstances of the case we are of the view that the case of the assessee squarely falls within the purview of clause ( c ) of proviso to section 43(5). Hence the loss incurred by the assessee cannot be said to be speculative loss. In the result ground Nos. 1 and 2 of assessee s appeal is allowed. 10. The third ground of appeal states that having regard to the facts and circumstances of the case, Ld. CIT(A) ought to have admitted the additional ground before him and adjudicated on its admission and its merit. With regarding to allowability of deduction under section 80HHC is concerned, there is no dispute to the well-settled legal proposition that the same is to be allowed on the profit fina ..... X X X X Extracts X X X X X X X X Extracts X X X X
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