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TMI Blog2013 (11) TMI 408X X X X Extracts X X X X X X X X Extracts X X X X ..... diamonds and FC entered into only for diamonds would have been covered by the proviso (a) to the section 43(5)of the Act. As held by the Hon’ble High Court of Calcutta in the matter of Gourepore Co. Ltd.(1980 (11) TMI 23 - CALCUTTA High Court) onus was on the assessee to prove that the transactions in question were not of a speculative nature. We are of the opinion that the assessee has failed to discharge the onus cast upon him by the statute. - Decided against assessee. - ITA No.506/Mum/2013 - - - Dated:- 3-5-2013 - B R Mittal, and Rajendra, JJ. For the Appellant : Shri Madhur Agrawal For the Respondent : Shri Girija Dayal ORDER:- Per: Rajendra: The present appeal is directed against the order dt.04.10.2012 passed by the CIT(A)-9, Mumbai. Following Grounds of Appeal have been raised by the assessee-company: 1. i. The Learned Commissioner of Income Tax (Appeals) erred in confirming disallowance of proportionate interest expenditure of Rs.13,52,741/- by applying proviso to section 36(1)(iii) read with explanation 8 to section 43(1) of the Income Tax Act, 1961. ii. He erred in holding that interest bearing funds were utilized for purchasing the off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2.48 Crores on 31-03-2008, that possession of the premises had not been handed over to the assessee till the end of the AY. Vide order sheet entry dt.05-10-2011, he called for explanation from the assessee for proportionate disallowance of interest for advance given for office at BDB. After considering the reply filed by the assessee he held that the interest expenditure incurred by the assessee in respect of the above investment needed to be capitalised as per the proviso of Section 36(iii) of the Act, that no proof that non-interest bearing funds were diverted for the purpose of the above investment were filed by the assessee, that the said asset was not put to use during the year under consideration. Therefore, he disallowed an amount of Rs.13,52,741/- out of the interest expenditure claimed by the assessee. 3.1. Against the order of the AO assessee preferred an appeal before the First Appeal Authority (FAA). After considering the submissions of the assessee, FAA held that the appellant had invested a sum of Rs.2,48,41,894/- for buying an office premises at BDB that was not put to use, that the appellant had continued the payment in the current year, that it had paid Rs. 40,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee. It has been submitted disallowance should be restricted to the investment made during the year under consideration. In our opinion AO and FAA had rightly disallowed the interest payment. But, we are of the opinion that there is need for recalculating the exact amount of interest disallowance. Matter is restored back to the file of the AO to calculate interest for the investment made during the year only and not to consider full investment made till the last date of the year under consideration. Ground No.1 is partly decided in favour of the assessee. 4. Next Ground of appeal pertains to marked to market (M to M) losses amounting to Rs.4.02 Crores. During the assessment proceedings AO found that the appellant had claimed a loss of Rs.4,02,96,635/-on account of exchange rate fluctuation of outstanding debtors and creditors for sale and purchase of foreign currency considering the exchange rate as on 31.3.2008, that the assessee had cancelled forward contracts in US Dollars which were booked during accounting year relevant to assessment year 2008-09, that such cancellation resulted into net loss, that the appellant has entered into forward contracts in US dollars on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts in which there had not been any actual delivery. He referred to the cases of Sri Ranga Vilas Ginning Oil Mills(133ITR 85), Puttaiah Seshaiash and Company (146 ITR 168) to highlight the basic features of speculation business/speculation loss and considering the facts of the case he held that in the case under consideration contracts were in respect of foreign exchange, that foreign exchange could not termed goods manufactured by the assessee , that transaction of settlement of foreign exchange contract, settled without actual delivery, could not be considered as covered by proviso to section 43(5).He also made a reference to Explanation 2 to section 28 which stipulates that where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as speculation business) shall be deemed to be distinct and separate from any other business. After analysing the provisions of the said section he held that there were a number of transactions and forward contracts had been taken by the appellant and cancelled, that transaction were not an isolated transactions, that in view of Expln. 2 to s. 28, the profit from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uffered loss because of such forward contracts of foreign exchange (v) AO and the FAA disallowed the claim made by the assessee, as they were of the opinion that transactions entered in to by the assessee were of speculative nature. 5.2. Before proceeding further we would like to discuss the concept of forward contract (FC) briefly. It is said that a forward contract is an agreement between a buyer and seller getting the seller to deliver a specified asset of specified quality and quantity to the buyer on a specified date at a specified place and the buyer in turn is obligated to pay the seller a pre-negotiated price in exchange of the delivery. FC can be entered in to for exports also. In such transactions when the actual export is made, spot price may differ from the spot price on the date on which the appellant expected an export order. On the date or receipt of foreign exchange, if the spot price of rupee against foreign exchange increases/decreases then the assessee may make profits or suffer losses. As per the details available assessee had entered into such transaction during the year under consideration. It was claimed on behalf of the assessee that these transaction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntracts to purchase the same quantity before the Vaida day. The result of such dealings, when the sale and purchase are to and from the same person, has the effect of cancelling the contracts leaving only differences to be paid. The technique of hedge trading can be understood in simple terms. It is said that the hedge contract is so called because it enables the persons dealing with the actual commodity to hedge themselves, i.e., to insure themselves against adverse price fluctuations. A dealer or a merchant enters into a hedge contract when he sells or purchases a commodity in the forward market for delivery at a future date. His transaction in the forward market may correspond to a previous purchase or sale in the ready market or he may propose to cover it later by a corresponding transaction in the ready market, or he may offset it by a reverse transaction on the forward market itself. Hedging contracts need not succeed the contracts for sale and actual delivery of goods manufactured, but the latter may be subsequently entered into, provided they are within reasonable time. In order to be genuine and valid hedging contracts of sales, the total of such transactions should not ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dealt in Clause (a) of the proviso to section 43(5) of the Act. From the above discussion it can safely stated that the said clause applies, if following conditions are fulfilled: (1) There is a contract for actual delivery of goods manufactured by the assessee /a merchandise sold by it, (2) Assessee must be a subsequent transaction intend to guard against losses through future price fluctuations in respect of such contract, (3) Transaction in question must be a contract entered into in respect of raw materials or merchandise in the course of the assessee's manufacturing business and it should have been settled otherwise than by actual delivery of goods, (4) Hedging contracts may be both with regard to sales and purchases, (5) Hedging contracts need not succeed the contracts for sale and actual delivery of goods manufactured, but the latter may be subsequently entered into, provided they are within the reasonable time not exceeding generally the assessment year, (6) In order to be genuine and valid hedging contracts of sales, the total of such transactions should not exceed the total stocks of the raw materials or the merchandise on hand which would i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee entered in to forward purchases of standard jute goods and purchase back of forward contracts of sale. Assessee incurred loss in covering its forward contracts of sale. In the appeal filed by the assessee Hon ble Calcutta High Court, confirming the order of the ITAT, held that losses suffered by the assessee were result of the speculative transactions. In the case of Delhi Flour Mills Co.Ltd.(supra) Hon ble Delhi High Court held that forward transactions made by the assessee in respect of matra (a substitute of gram) could not be treated as hedging transactions and the loss sustained by the assessee in such transactions could not be set off against its profits in the business of manufacturing atta (wheat flour) and other wheat products. Hon ble Allahabad High Court, while deciding the appeal of M.P.Sugar Mills (P.) Ltd.(148 ITR 203) has held as under: Section 43(5)(a) of the Income-tax Act, 1961, which excludes hedging contracts from the definition of speculative transactions, contemplates contracts entered into by two classes of persons, namely, (1) persons who manufacture goods from raw materials; and (2) merchants. Whereas in the case of a manufacturer it is the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich no actual delivery of foreign exchange was made. On appreciation of the facts surrounding the transaction we have reached at the conclusion that transactions entered in to by the assessee were not hedging transaction, but same were speculative and thus the case of the assessee is not covered by proviso(a) of the section 43(5) of the Act. 5.5. Now we would like to discuss the cases relied upon by the AR. In the case of Ramchandra Shivnarain (supra) question decided by the Hon ble Court was about applicability of proviso to manufacturing business/ to a business of sale of goods. Hon ble court held that proviso was not confined to contracts in respect of raw materials entered into by persons in the course of their manufacturing business, that it applied equally to cases of persons carrying on manufacturing as well as persons carrying on business of selling goods, that there was no scope to confine it to manufacturers. Thus, facts of the matter of Ramchandra Shivnarain(supra) are not applicable to the case under consideration. In the instant case booking and cancellation of forward contracts of exchange were not in respect of specified export or import orders and all contracts ..... X X X X Extracts X X X X X X X X Extracts X X X X
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