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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 ..... year as compared to the preceding year. iv. Without prejudice to above, He erred in confirming the calculation of proportionate disallowance of interest of Rs.13,52,741/- wherein the entire investment in the property (Rs.2,48,41,884/-) is considered instead of investment made during the year (Rs.40,01,199/-). 2. i. The Learned Commissioner of Income Tax (Appeal) grossly erred on facts in confirming disallowance of mark to market loss of Rs.4,02,96,635/- on account of outstanding forward contracts. ii. He erred in applying instruction No. 3/2010 dated 23.3.10 with respect to notional loss on speculative transactions and forex derivatives without appreciating that the appellant had a binding obligation under such forward contracts and the liability at year end is determinable with reasonable certainty. iii. He failed to appreciate that the recognition of gain/loss on outstanding forward contracts at year end on mark to market basis is regularly followed by the appellant and accepted in the past. iv. He erred in treating the loss on mark to market forward contracts as disallowable whereas profits on s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellant had never put the said BDB office to use during the FY. 2007-08, that interest from 01-04-2008 to 26-08-2008 even after capitalisation would form a part of cost of impugned property for calculation of actual cost, that the appellant had failed to furnish the fund flow statement, or the periodical profit and loss account in support of its proposition that interest free funds were given out of appellant's own funds and out of internal accruals, that the AO had not to prove the nexus between the interest bearing funds raised by the appellant and interest free funds advanced by the appellant, that the burden lied on the appellant to prove that the amount advanced to the concerns came out of appellant's own funds. 3.2. Before us, Authorised Representative (AR) submitted that assessee had adequate interest free funds during the year under consideration, that proviso to section 36(1) (vii) read with expl.8 to section 43(1) of the Act was not applicable to the facts of the case, that during the year, investment amounting to Rs. 40.01 lakhs was made, that even if disallowance had to made it should have been restricted to the investment made in the year. Departmental Represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the disputed loss on account of cancellation of forward exchange contract was not allowable business loss. AO also examined the claim of hedging, made by the assessee, in the light of CBDT's circular No.23 of 1960 dated 12.09.1960 wherein hedging transaction were defined. He held that as per the answer to point No.3 of the said Circular of the CBDT, only in the cases of bona fide ready delivery contract; having been settled by actual delivery the transactions; were not required to be treated as speculative transactions. As per the AO in the case under consideration all transaction were settled without actual delivery. He further held that losses incurred by the assessee during the year on account of change in value of currencies at the time of payment was allowed while finalising the assessment, that M to M losses were of notional losses and contingent in nature. Finally, loss on a/c. of outstanding forward contract as on 31.03.2008 were disallowed by him. 4.1. Assessee preferred an appeal before the FAA. After considering the submissions of the assessee-company and the assessment order he held that assessee was engaged in the business of manufacture and export of diamonds, tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cular AY, that in the case under consideration crystallisation of expenditure had not taken place during the year. Finally, confirming the order of the AO and dismissing the appeal of the assessee, he held that M to M loss of Rs.4,02,96,435/- could not be allowed. 5. Before us, AR submitted that the exchange difference credited to the profit and loss account included loss on account of forward contract taken and squared up during the year and also the conversion of outstanding forward contract at the closing rate, that conversion at the dosing rate of foreign exchange assets and liabilities was regularly employed accounting treatment, that assessee was exposed to the risk of fluctuation in the prices of foreign exchange, that as a prudent business policy the assessee always hedged the risk by taking forward cover to safeguard against the losses due to fluctuation in foreign currency rates, that losses in the forward contract conversion were purely hedging loss and could not be considered to be speculative nature, that instruction issued by the CBDT was applicable to M to M loss in respect of Foreign Exchange Derivative transaction, that in the case under consideration forward cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not new concepts of tax laws. Distinction between the two is vital and both have consequences in determining the tax liability arising out of them. 5.2.1. The definition of 'speculative transaction' in section 43(5) of the Act, gives a simple test for deciding for the purpose of income-tax what a speculative transaction means. If a contract for sale or purchase is ultimately settled and no actual delivery of the goods was effected under the settlement then it is a speculative transaction. The requirement of section 30 of the Indian Contract Act of the existence of the intention of the parties even at the time of the original contract not to give or take delivery of the goods in order to make it a speculative/wagering transaction is dispensed with for the purpose of the Act and if actual delivery is not given/taken under the settlement of contract, then the intention of the parties at the time of the contract becomes im-material. Thus, the true test is delivery of commodities/goods as per the contract, including a forwarding contract. Profit/loss in respect of unperformed contracts is considered speculation profit/loss. In short, in order that a transaction may fall within the scop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of purchase. As per the accepted commercial norms object of a hedging contract is to secure oneself against loss in a future delivery contract, but such transactions cannot be regarded as inter-connected. Each one is independent of the other. So far as the profit or loss arising from a future delivery contract is concerned, it is determined on the date of actual delivery irrespective of the date on which the contract was entered into. In respect of a hedging contract, profit/loss arising there from can be ascertained or crystallised at fixed intervals of the term when the clearance takes place. 5.2.2.a. By resorting to counterbalancing transactions in the market for the ready commodity on the one hand and in the hedge market on the other hand, the hedger seeks to safeguard his position. The movement of prices in the two markets may not always follow an identical course and the hedger might at times gain and at times lose but such a gain or loss would be marginal and far less than what it would be if the person had not hedged at all. While, however, the hedging operation protects the hedger against loss arising from adverse fluctuations in prices, it also prevents him from making ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) The hedging contract need not necessarily be in the same variety of the commodity they could be in connected commodities, e.g., one type of cotton against another type of cotton. In other words unless the assessee shows 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 against such loss that he entered into the forward contracts of sale, he could not claim the benefit of clause (a) of the proviso to section 43(5). With regard to speculative/hedging transactions we had benefit of perusing the judgments of M.G.Brothers (154 ITR 695), Nuddea Mills Co.Ltd (171 ITR 169), Delhi Flour Mills Co. Ltd. (95 ITR 151) and Pankaj Oil Mills, (115 ITR 824) delivered by the Hon'ble High Courts of Andhra Pradesh, Calcutta, Delhi and Gujarat respectively. 5.4. From the principles laid down by these judgments one thing becomes clear that for hedging transaction commodity dealt should be the same. If the subject matter of the transactions is different it cannot be termed a hedging transaction. In the case of M. G. Brothers (supra) assessee-firm was carrying on business of the manufacturing and s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anufacturing business, to guard against any loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him, that are taken out of the ambit of speculative transactions, the contracts taken out of the scope of such transactions in the case of merchants are those which he enters into in respect of his merchandise with a view to safeguard loss through future price fluctuations in respect of contracts for actual delivery of the merchandise sold by him. ...It will depend upon the facts of each case whether a particular transaction by way of forward sale, which is mutually settled otherwise than by actual delivery of the said goods, has been entered into with a view to safeguard against loss through price fluctuation in respect of the contract for actual delivery of the goods manufactured." In order that forward transactions in commodities may fall within proviso (a) to section 43(5) of the Act, it is necessary that the raw materials or merchandise in respect of which the forward transactions have been made by the assessee must have a direct connection with the goods manufactured or the merchandise sold by him. In other words raw mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. In these circumstances, we are of the opinion that finding of the FAA does not suffer from any legal infirmity. In the case of Pali Ram Bhadarmal (supra), it is found that loss suffered by the assessee, in forward contracts, was directly related to the merchandised goods dealt with by assessee. It was in this context and factual position that ITAT Jodhpur had decided the issue in favour of the assesssee holding that transaction was not speculative loss in view of cl. (a) of proviso to sec.43 (5). In the case under consideration FCs were entered into with regard to Foreign Exchange and assessee is not business of foreign exchange, as stated earlier. It is also a fact that loss shown by the assessee was due to FCs against which no actual delivery of foreign exchange was made. As per the settled law FCs are to be settled either by delivery of the difference has to credited/debited by the Bankers. As in the case under consideration all the FCs were cancelled, so they were not settled by actual delivery or transfer of the commodity. Therefore, in our opinion cases relied upon by the AR of no help. 5.6. As far as submissions of allowing the deduction in subsequent AY. is concerned we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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