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TMI Blog2015 (8) TMI 366X X X X Extracts X X X X X X X X Extracts X X X X ..... different characteristic. Further, in the case of the assessees, the foreign exchange exposure for the “relevant period” specified by “R.B.I” regulations is quiet substantial in order to justify the forex derivative transactions made by the assessee through Government recognized channel, otherwise the RBI would not have entertained these transactions and would have restrained the banks from entering into such transaction with its clients. Thus we direct the Revenue to set off of the losses incurred by the assessee on account of forex derivatives contracts against the business income of the assessee.- Decided in favour of assessee. Disallowance of the notional loss due to foreign currency fluctuation on the loan obtained for acquiring capital assets - Revenue has allowed to capitalize the actual loss resulting from repayment of loan during the relevant previous year and given the benefit of depreciation - Held that:- On reading Section 43A of the Act, it is abundantly clear that where the assessee has acquired an asset in any previous year from a country outside India for the purpose of his business or profession, any loss or gain arising out of the foreign currency fluctuation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore us, both the parties fairly conceded that this issue is squarely covered by the Jurisdictional High Court in the case of Velayudhaswamy Spinning Mills (P) Ltd Vs. ACIT in 231 CTR 368(Mad.) in assessee s favour. Therefore, respectively following the decision of Jurisdictional High Court (supra) we hereby confirm the order of the Ld. CIT (A) and allowed the deduction U/s. 80-IA of the Act amounting to ₹ 5,40,39,798/- 2.C Assessee s Appeal : M/s.Gajaananda Jewellery Maart Pvt Ltd. . (A.Y.2009-10 ) in ITA No.1646/Mds. /2013: - 1. The Revenue has erred in treating the loss incurred by the assessee on account of forex derivative contracts as speculative loss and thereby not allowing the assessee to set off the losses against its business income. 2. The Ld. CIT (A) has erred in confirming the order of the Ld. Assessing Officer for disallowing the notional capital loss of ₹ 6,37,54,000/-as a revenue loss which had arisen due to the foreign currency fluctuation on the loan taken for the purchase of capital asset and capitalizing the actual loss incurred during the year on repayment of loan due to foreign currency fluctuation instead of treating the same as reven ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oss on account of forex derivative contract was incurred by the assessee despite scientific analysis and expert advice due to global economic meltdown which had occurred during the second half of 2008. (vi) Foreign exchange is not a commodity but it is currency. Therefore, Section 43(5) of the Act will not be applied in the case of the assessee. 4.1. However, the Ld. Assessing Officer, after analyzing derivatives and money market such as futures contract, forward contract and options contract and provisions of the Income Tax, observed as under:- i) The cardinal issue under consideration is whether or not the transactions that is admitted by the assessee as cross currency Option s contract is a derivative transaction U/s. 43(5)(d) of the Act when it is transacted to prevent loss due to fluctuation in currency rate during the normal course of export/import business of the assessee. ii) There are four forward contracts in the nature of overthe- counter option (OTC) entered with State Bank of India (SBI) in respect to currency Euro, USD and JPY. iii) All the aforesaid contracts were finally settled not by the delivery of the currency but by paying the loss in Indian rupe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 337 ITR 452. ii) Until liberalization of Indian economy in 1991, foreign exchange was treated as scarce commodity and was not available for trade or purchase by the individuals. Only during mid 2000 the RBI allowed trading in foreign exchange. iii) Since trading in foreign exchange was not permissible earlier, the Income Tax Act, which was passed by the Parliament in 1962, did not foresee forex derivative transactions and therefore, there was no reference of the same in the Act. iv) The assessee s account was debited or credited by the contracting State Bank of India on the settlement date based on the currency movements upto the maturity date and therefore, they are speculative nature. v) Export bills or receivables of the assessee cannot be linked to the derivative transactions. vi) These transactions are clearly a speculative bet on the currency which is in the nature of wager contract. vii) These transactions are not settled by actual delivery of foreign exchange but by settling on the difference between the agreed price on maturity date which may either result into profit or loss by the assessee. viii) The assessee s claim that these transaction with SBI a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of such commodity or strips. Foreign currency can neither be called as commodity or stocks and shares. Reliance was placed on the decision of the Mumbai Tribunal in the case of Munjal Showa Ltd vs. DCIT reported in 94 TTJ (Del) 227. (vii) The forex derivative transactions entered by the assessee though nationalized banks are regulated and permitted by Reserve Bank of India keeping in view the nature of the business carried on by the assessee. (viii) These transactions carried out by the assessee in order to reduce the risk of foreign currency fluctuation during the course of the ordinary business of the assessee cannot be considered as business by itself bring it into the ambit of section 73(1) of the Act. (ix) Reliance was placed by the Ld. AR in the decision of the case :- a) CIT vs. Badridas Gauridu (P) Ltd [2003] 261 ITR 256 (Bom),. b) CIT vs. Sooraj Mull Nagarmull [1981] 129 ITR 169 (Cal) c) Munjal Showa Ltd vs. DCIT [2005] 94 TTJ (Del) 227 d) Rajshree Sugars Chemicals Ltd. vs. AXIS Bank 8 MLJ 261 Madras High Court. e) Ramachandar Shivnarayan vs. CIT (111 ITR 263) f) Sutlej Cotton Mills Ltd vs.CIT(116 ITR 1) 6. On the other hand the Ld. DR argued i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue to compensatory price movement. It protects an asset or liability against fluctuation in foreign exchange rate. One of the tools for hedging the forex risk is by way of foreign currency derivatives. Section 45 of the Reserve Bank India Act, 1949 defines derivative as a financial instrument whose value depends on the value of the underlying exposures. In the case before us, the underlying exposure is the foreign currency. The commonly used forex derivatives are Forward contracts, Options contracts and Swap contracts. These instruments are used to hedge the currency risk on account of adverse currency movements. In the present case before us, the assessee has selected to book Options Contract as per the advice of its bankers in order to hedge its foreign exchange risk. Options contract is a right to exercise the option of buying or selling of a foreign currency at a particular price. However, the assessee is not compelled to buy or sell, if the spot market prices are favorable or not favorable. The cost of this option is called Option Premium . Upon the payment of the same, the exporter is hedged against adverse currency movement and also not liable to loose in case of fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese transactions are transacted through recognized stock exchange. (viii) It is pertinent to note here that the bankers act as an advisory agent to the assessee in order to protect them from foreign exchange exposure by using their expertise and these services cannot be obtained by the assessee in the stock exchange where their scope of service is very limited. (ix) In the present case the assessee has taken a hedging position to the extent of ₹ 1.05 crores and USD ₹ 3 crores during the period 2007-2009 based on the RBI guidelines. The guidelines permitted hedging to the extent of last three years annual average turnover, or current year s actual export turnover whichever is higher. Where exact amount of underline transaction was not ascertainable according to RBI guidelines, the contracts could be booked on the basis of reasonable estimate. The assessee has taken its hedging position in accordance with the guidelines of RBI and the same is not disputed. (x) The claim of the assessee was that the underlying exposure both in respect of Euro and USD is more than adequate to cover the hedging positions taken in respect of cross currency derivative contracts enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n one s own. Currency is a generally accepted form of money including coins and paper notes which is issued by a government and circulated within an economy. It is a medium based on the value of an underlying commodity. It is used as medium of exchange for goods and services. The currency value of one country with another country fluctuates according to the economic factors prevalent in those countries. Therefore holding foreign currency is placing reliance on the economic factors prevalent in that country and Stock/Shares is placing reliance in the economic strength and business policies of the company. Section 43(5) of the Act defines speculative transactions as under:- Section 43 (Relevant provisions are highlighted herein below) (5): speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips : Provided that for the purposes of this clause- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or mercha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er through recognized stock exchange or through RBI. When the banks facilitates its clients to deal in foreign exchange derivatives through RBI, more stringent regulations are complied and therefore these transactions cannot be denied the benefits provided under the Act when traded through recognized stock exchange. 9. Now the question is whether to treat the foreign currency derivatives as commodities, or stocks and shares. If it is treated as commodities, Section 43(5)(a) of the Act comes to the rescue of the assessee because in the present case, the assessee is a manufacturer and exporter of garments and the assessee has entered into foreign currency derivative transactions to guard against future currency fluctuations which has a close proximity to the business of the assessee. On the other hand, if it is treated as stock /shares, such transactions will not be treated as speculative transactions if the transaction is carried out through a recognized stock exchange. The argument of the Revenue is that, if the transactions are made though banking sectors, then the same will fall within the scope of speculative transactions. This argument appears to be absurd and illogical beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ying on of the business. Undoubtedly, the contract for foreign exchange as such can be treated as a contract for commodity. But the question here essentially is that the assessee was carrying on business of export and import of jute goods. In order to carry out these transactions, the assessee had to enter into foreign exchange contract in order to cover up these transactions. In those foreign exchange contracts, if any loss occurred then such loss was a loss referable to and related to the business carried on and arising out of the business of the assessee . Here there is no finding that entering into foreign exchange contract was the nature of the business operation for the export and import of the goods by the assessee. The assessee was not a dealer in foreign exchange contract as such. Here in this case, the contract was for a full amount and what the assessee paid in fulfillment of the obligation which was an implied term at the time of entering into the contract did not amount to breach of contract. The breach of contract did not come within the meaning of contract settled as used in Expln.2 of s.24(1) of IT Act, 1922, contract settled meant contract settled before breac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns discussed herein above. Section-43(5) of the Act is applicable to transactions in commodity or stocks and shares. If currency is treated as commodity, then according to Section 43(5) (a) of the Act, such transaction shall not be deemed to be speculative transaction. Further currency cannot be treated as stock or shares because inherently they have different characteristic. Further, in the case of the assessees, the foreign exchange exposure for the relevant period specified by R.B.I regulations is quiet substantial in order to justify the forex derivative transactions made by the assessee through Government recognized channel, otherwise the RBI would not have entertained these transactions and would have restrained the banks from entering into such transaction with its clients. Thus considering the totality of the facts and circumstance of the case and the decisions relied upon herein above, we allow the grounds raised by the assessee s on this issue for all the three appeals in favour of the assessee and accordingly we hereby direct the Revenue to set off of the losses incurred by the assessee on account of forex derivatives contracts against the business income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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