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TMI Blog2016 (4) TMI 706X X X X Extracts X X X X X X X X Extracts X X X X ..... The special bench decision in case of DCIT Vs Bank of Bahrain and Kuwait (2010 (8) TMI 578 - ITAT, MUMBAI ) the special bench held that MTM losses in respect of forward foreign exchange contract debited to the profit and loss account are allowable and further held (i) a binding obligation is accrued against the assessee the moment it entered into forward foreign exchange contract(ii) consistent accounting method followed by the assessee to account for the forex gain and loss at the yearend based upon the current exchange rate cannot be disregarded(iii) the liability is said to have crystallized when a pending obligation on the date of balance sheet is determinable with reasonable certainty(iv) as per AS-11 when the transaction is not settled in the same accounting year as that in which it occurred , the exchange difference arises over more than one accounting period (v)in the ultimate analysis , there is no revenue effect and it is only timing of taxation of loss/profit. Following the decision of apex court in the case of Woolward Governor India Pvt. Ltd (2009 (4) TMI 4 - SUPREME COURT ) and special bench decision in the case of Bank of Bahrain and Kuwait(supra) , we are of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue account on marked to market basis is not notional loss and the same is allowable u/s 37(1) of the Income tax Act. The Appellant prays that the order of the CIT(A) on the above grounds be quashed and the learned AO be directed to allow the loss of ₹ 2,13,43,725/- as business loss and allow the same to be set off against business income. 2. At the outset the ld AR submitted that the ground no. 1 was only effective ground and pressed. The facts in brief are that the assessee filed its return of income on 30.09.2009 declaring an income of ₹ 2,37,29,127/-. The assessee was engaged in the business of trading, manufacturing and export of cut and polished diamond for which the assessee had to import the raw diamond. Case of the assessee was selected for scrutiny and statutory notices were issued u/s 143(2) and 142(1) of the Act and served upon the assessee. For the purpose of its business, the assessee was having forward foreign exchange contract both for import, export sundry debtors and creditors. The assessee had entered into foreign exchange forward contract for sales which were outstanding at the year end amounting to ₹ 40,50,58,275/- which were re-st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9-10. 5.2.2 A perusal of the relevant details available before me indicates that the appellant had indeed entered into several forward contracts all of which were cancelled during the year. A forward contract is a an agreement between a buyer and seller wholly 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. In the instant case, the appellant is engaged in the business of manufacture and export of diamonds. ,In respect of export of diamonds, the appellant has entered into forward contract in respect of foreign exchange to be received as a result of export. This was done to avoid the risk of loss due to foreign exchange fluctuation. The appellant at the time of agreeing to export took into consideration its cost in rupees and also considered the spot price of rupee against foreign exchange. When the actual export is made, this spot price may be different as against' the spot price on the date on which the appellant expected an export order. On the date or receipt of foreign exchange, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antity of cotton under the agreement dated 5th Feb. 1969. The Hon'ble High Court held that if the contract is settled during the subsistence' of the contract without delivery then the transaction is speculative. In case a dispute arises and the amount is paid as a breach of, the contract then the matter is to be considered differently. 5.2.5 In order that a transaction may fall within the scope of the expression speculative transaction' it must be a transaction in which a contract for purchase or sale of any commodity, including stocks and shares, periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. What is important to be noticed is that the contract for purchase or sale of any commodity must be settled otherwise' than by the actual delivery or transfer of the commodity or Hon'ble Supreme Court in the case of CIT Vs Shantilal (P) Limited (1983) 35 CTR 395: (1983) 144 ITR 57 (SC) has observed that contract can be said to be settled for the purpose of speculative transaction under s. 43(5) of the Act if, instead of effecting the delivery or transfer of the effecting the delivery or transfer of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held to be loss of speculation business. 5.2.10 The Hon'ble Andhra Pradesh High Court in the case of CIT Vs Puttaiah Seshaiash and Company (1984) 186 ITR 168 (AP) also had an occassion to consider the definition of speculation business. The Hon'ble High Court held that the intention of the parties is immaterial and irrelevant. In that case, majority of contracts were performed. However, for some of the contracts, the assessee was not able to perform on account of want of wagons and the assessee paid difference in respect of unfulfilled contracts. The loss in respect of such unperformed contracts was cnsidered as speculation loss. 5.2.11 Proviso, to s. 43(5) specifies certain categories of transactions which cannot be treated as speculative transaction. Exclusion is of transaction in respect of contract for actual delivery of goods manufactured or merchandise sold by him. In this case, contract is in respect of foreign exchange which is not goods manufactured by assessee. Hence, it cannot be said that transaction of settlement of foreign exchange contract settled without actual delivery can be covered under proviso to section 43(5). 5.2.12 The LAR has re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht of CBDT‟s circular No.23 of 1960 dated 12.9.1960 issued vide (F No.4 (124)6060-TPL) wherein hedging transaction is connected though not the same, commodities not to be treated as speculative transactions provided other conditions of explanation 2 section 24 are satisfied. As per the answer to point No.3 of the CBDT‟s circular No.23 of 1960, it was clarified by the Board that only in the case of bonafide ready delivery contract having been settled by actual delivery the transactions need not be treated as speculative transactions. However in the present case all contracts have been settled without actual delivery as CBDT has also clarified in answer to point No.4. In the said CBDT's Circular No.23 of 1960 as regards the share investors case, transaction in scrips outside the holding were not to be treated as hedging transaction but in this case admittedly the appellant has not entered into forward contracts in cotton yarn but only in US dollars. 5.2.17 Secondly, without prejudice, even in the mercantile system of accounting the question to be asked is whether the liability is crystallized during the previous year. Hon'ble Bombay High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of CIT vs Hotz Hotel Ltd (2003) 260 ITR 132 (Del)is concerned, in that case both appellate authorities recorded concurrent findings of fact about the existence of the contract between parties and intention of the parties to enter into the transactions. The said findings were not challenged by the Revenue by means of specific question. Hon'ble Delhi High Court held that the question whether the transaction is hedging transaction or not is primarily one of the fact necessarily to be determined on appreciation of facts surrounding the transaction and by not mere application of a principle of law. Therefore the decision of Hon'ble Delhi High Court does not come to the rescue of the appellant. On the other hand there are various decisions as cited below which support the case of the revenue in this case. a) Shree Capital Services Ltd vs Acti (2009) 121 ITD 498; b) ACIT vs K Mohanan Export Pvt Ltd (2011) 7 ITR 507; c) Bengal Assam Co.Ltd vs CIT(2009)227 CTR 399(Cal); and d) ACT vs AJWA Fund World Resorts Ltd. (2006) 9 SOT 354 (Ahd) 5.2.20 As far as the LAR‟s reliance on earlier assessment order for assessment year 2008-09 is concerned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar. The ld counsel strongly placed reliance on the following decisions of Tribunal in which the decision of hon‟ble Supreme Court in the case of Woolward Governor India Pvt. Ltd(2009) 312 ITR 254 and Special Bench decision in the case of Bank of Bahrain and Kuwait (41SOT29) were followed:- a) Venus Jewel ITA No.7328 and 7329/Mum/2013 dated 31.7.2015; b) Rikin Exports-ITA No.3757/Mum/2013 dated 24.6.2015; c) Raj Gems-ITA No.4486/Mum/2012 dated19.5.2015; d) Inter Jewl Private Limited ITA No.7013/Mum/2012 dated 13.2.2015; e) Munjani Bros-ITA No.7628/Mum/2011 dated 2.12.2014; f) Sugtariya Gems Private Limited- - ITA No.3361/Mum/2013 dated 6.8.2014; g) H Sherul and Co ITA No.4481/Mum/2012 dated 25.6.2014; h) S Rajiv and Co-ITA No.7095/Mum/2012 dated 12.2.2014; i) D Chetan and Co.-ITA No.4456/Mum/2012 dated 14.8.2013; j) Munjani Bros ITA No.6065/Mum/2012 dated 19.9.2013; k) Gandhi Enterprises-ITA No.4485/M/2012 dated 28.10.2013; l) Societe Generale ITA No.3597,3595,8198/Mum/2005 dated 30.1.2013; m) Bhavani Gems ITA No.2855/Mum/2010 dated 30.3.2011; n) H Dipak and Co-ITA No.7629/M/2011 dated 30.4.20; o) Kumbh Gems-ITA No.6600/M/201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd also in view of the ratio laid down by the Hon'ble Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd. (supra) which squarely covers the issue in favour of the assessee, we uphold the order of the CIT(A) in deleting the addition made on account of disallowance of the loss incurred on forward contract in foreign exchange. The grounds of appeal raised by the Revenue are thus dismissed. The Tribunal in the case of Rikin Exports (supra) has vide para 6 held as under : 6. Having regard to the circumstances of the case and in the light of the decision cited (supra), we uphold the order passed by CIT(A) and dismiss the appeal filed by Revenue The Tribunal in the case of Inter Jewl Private Limited (supra) vide para 10 has observed and held as under : 10. We have carefully perused the order of Ld. CIT(A) and the decisions brought to our notice. In our considered opinion and the understanding of the facts we find that the Revenue Authorities have proceeded on a wrong assumption of facts. We find that the decision of the Tribunal‟s Special Bench in the case of Bank of Bahrain Kuwait (supra) squarely apply on the facts of the case and als ..... X X X X Extracts X X X X X X X X Extracts X X X X
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