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TMI Blog2015 (4) TMI 1049X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be held as stock or shares. The loss incurred by the assessee on its derivative transactions shall be allowed to be set off from the business income of the assessee by treating the same as business loss and not loss due to speculation as held by the Revenue. - Decided in favour of assessee. - I.T.A.No.1327/Mds. /2014 - - - Dated:- 17-4-2015 - SHRI A.MOHAN ALANKAMONY, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER For the Petitioner : Mr. T Banusekar, C.A. For the Respondent : Mr. Guru Bhashyam ORDER PER A.MOHAN ALANKAMONY , ACCOUNTANT MEMBER: This appeal is filed by the Assessee, aggrieved by the order of the Learned Commissioner of Income Tax(A)-II, Coimbatore, dated 26.02.2014 in ITA No.146/10-11 passed under section 143(3) read with section 250 of the Act. 2. The assessee has raised three elaborate grounds in its appeal; however the crux of the issues is that the Ld. CIT (A) had erred in upholding the order of the Ld.A.O wherein the loss incurred by the assessee on account of forex derivative contracts was treated as speculative loss and thereby not allowing the assessee to set off the same against its business income. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rit ies Contracts Regulat ion Act ,1956. The term Securi t ies as def ined under Secur it ies Contracts Regulat ion Act . 1956 in clause (h) of sect ion 2 include der ivat ives (sub-clause- ia). Thus it falls into exclusion under proviso (d) if i t is done through a Recognized Stock Exchange. As a result , there cannot be exclusion without an inclusion. I f the commodi ty does not include Derivat ives the same would not have been excluded in the proviso (d) to sect ion 43(5). So the claim made by the assessee that Foreign Cur rencies are not commodit ies as per sect ion 43(5) is not val id. The assessee also claimed that derivat ives are excluded under proviso (d) to sect ion 43(5) is also not acceptable as the proviso does not give blanket exclusion to al l the der ivat ive contracts but only to such cont racts that are traded in the recognized stock exchange. Thus, the assessee s argument that Forex Der ivat ives are not Speculat ive Transact ions is not accepted and accordingly these transact ions are treated as speculat ive transact ions U/s. 43(5) . Accordingly, the loss on derivatives amounting to ₹ 5,44,50,660/- was disallowed to be set off against the business income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) CIT V Vishindas Holaram [2014] 50 taxmann.com 337(Bom.) b) CIT V Badridas Gauridu (P) Ltd [2003] 261 ITR 256(Bom.) c) CIT V Sooraj Mull Nagarmull [1981] 121 ITR 169(Cal.) d) CIT V Panchmahal Steel [2013] 215 taxmann 140(Guj.) e) CIT V Friends Friends Shipping Pvt Ltd in Tax appeal No.251 of 2010 dated 23.08.2011 (Guj. HC) f) Cotton Blossoms (India) Pvt Ltd. V ACIT [2014] in ITA No.2032/Chny./2012 dated 21.02.2013 g) Munjal Showa Ltd V DCIT [2005] 94 TTJ 227(Del.) h) D.Kishore Kumar Co V DCIT [2005] 2 SOT 769(Mum.) i) DCIT V Intergold (I) Ltd [2009] 124 TTJ 337(Mum.) j) Rajshree Sugars Chemicals V Axix Bank Ltd in appeal No.1926, 1927, 2446 and 2447 of 2008 dated 14.10.2008-Mad Hc. k) IVF Advisors Pvt Ltd Vs. ACIT in ITA No.4798/Mum/2012 dated 13.02.2015. 4.1. The Ld. D.R on the other, hand argued in support of the order of the Revenue and pleaded that the additions sustained by the Ld. CIT (A) may be upheld. 5. At the outset we find this issue to be identical to the issue heard by the Chennai Bench of the Tribunal in the case of M/s.SCM Garments Pvt Ltd., I.T.A.No.1645/Mds./2013 2275/Mds./2014 for the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r to hedge its foreign exchange risk. In the case of the assessee, what has happened is that due to adverse foreign exchange movement, the bank has debited the loss to the assessee s account. Thus, the loss debited by the bank in the assessee s account has crystallized and is a realistic loss suffered by the assessee. In these circumstances, the issue under consideration before us is that, whether loss on account forex derivates are to be considered as a business loss in parlance with Section 28 of the Act. Further, in the case of the assessee before us, the following facts emerge and the legal issues involved are discussed and summarized herein below:- (i) The assessee has entered into forex derivative transactions only in order to contain the foreign currency fluctuation risk. (ii) Thus, the loss on account forex derivative transactions are directly attributable to the normal business of the assessee. (iii) The loss incurred by the assessee is realistic and not notional. (iv) Only money changers and banks are allowed to trade in foreign currency and the assessee is neither a money changer nor a bank. (v) The assessee has only utilized the service of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee has entered into foreign currency derivative contract adequate enough to cover the overall exposures of foreign currency, the contention of the Revenue that the proportion of the loss in derivatives is eight times more than the loss from currency fluctuation does not have any merits. (xii) The forex derivative transactions transacted by the assessee are through nationalized banks in compliance with the RBI regulations. These regulations permit the assessee to enter into such derivative transactions only by fulfilling certain conditions in the course of the business of the assessee. These regulations do not permit the assessee to enter into forex derivative contract as a separate business. (xiii) Section 73(1) of the Act restricts the set off of speculation loss against the other business income in only those cases were speculative transactions carried on by the assessee are of such nature so as to constitute a business by itself. It is pertinent to mention here that RBI does not permit any bank under its umbrella to entertain its client in any separate business of forex derivative transactions. Permission is granted only for the clients of the bank to hedge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of actual delivery , see Taxman s Direct Taxes Manual, Vol. 3. Jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; [or] (d) an eligible transaction in respect of trading in derivatives referred to in clause 35[(ac)] of section 236 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange;] shall not be deemed to be a speculative transaction. Explanation.-For the purposes of this clause, the expressions- (i) eligible transaction means any transaction,- (A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c of the currency and stock/shares are not the same and therefore, currency cannot be held as stock or shares. This view is also fortified with the various decisions. 10. Now let us examine the following decisions:- A. In the case of CIT Vs. Badridas Gauridu (P) Ltd., reported in (2003) 261 ITR (Bom) wherein it was held that the assessee was not a dealer in foreign exchange. The assessee was a cotton exporter. The assessee was an export house. Therefore, foreign exchange contracts were booked only as incidental to the assessee s regular course of business. The Tribunal has recorded a categorical finding to this effect in its order. The Assessing Officer has not considered these facts. Under s.43(5) of the IT Act, Speculative transaction has been defined to mean a transaction in which a contract for the purchase or sale of a commodity is settled otherwise than by the actual delivery or transfer of such commodity. However, as stated above, the assessee was not a dealer in foreign exchange. The assessee was an exporter of cotton. In order to hedge against losses, the assessee had booked foreign exchange in the forward market with the bank. However, the export contracts entere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be held that the payment was not a loss from a speculative transaction as defined in Expln.2 of s.24(1) of IT Act, 1922. C. In the case of Cotton Blossoms (India) Pvt. Ltd. V ACIT, in ITA No.2032/Chny/2012 vide order dated 21.02.2013, also the Chennai Bench of the Tribunal held that, in respect of forex contracts entered into by the assessee in similar circumstances will not fall under the definition of speculative transaction. D. In the case of Sutlej Cotton Mills Ltd Vs. CIT, reported in 116 ITR 1(SC) wherein it was held that loss on account of revaluation of foreign currency is a trading loss to the extent it does not relate to any capital asset and accordingly allowable. E. In the case of Munjal Showa Ltd. Vs. Dy.CIT, reported in (2005) 94 TTJ (Del.) wherein it was held that profit on cancellation of forward contract in foreign currency entered into for safeguarding against loss by fluctuation in foreign currency for purchase of plant and machinery with loan obtained in foreign exchange is capital receipt and not speculative profit. F. In the case of CIT Mumbai Vs. Vishindas Holaram, reported in (2014) taxmann.com 37(Bombay) it was held that once main ..... X X X X Extracts X X X X X X X X Extracts X X X X
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