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TMI Blog2016 (8) TMI 1094X X X X Extracts X X X X X X X X Extracts X X X X ..... in our opinion, the phrase shall not covers a situation where income earned in future or whenever it is earned, then it shall not form part of the total income at any time. Thus, this contention of the assessee prima facie does not appears to be in correct interpretation or in line with the Rule 8D(2)(iii). Accordingly, we direct the AO to remove the strategic investments only from the working and from the balance, he should work out the disallowance as per Rule 8D (2)(iii). Loss on account of foreign currency forward/option contracts - Held that:- Hedging is often done based on actual estimated exposure looking to the past transactions undertaken and based on that, hedging is done in respect of transaction yet to be done in the near future. Bill to bill or one to one basis exposure of hedging cannot be done in a continuum business and nothing has been brought on record that RBI puts such kind of condition or bar for hedging of foreign currency based on actual bill to bill exposure. Hedging contracts need not succeed the contract for sale and actual goods manufactured but may get settled within a reasonable time. Quantity and timing may not be relevant for a short period in a cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ning of such an exempt income and accordingly, no disallowance was offered in the computation. The AO observed that, assessee has common pool of funds and composite books of accounts from where it is not possible to exactly identify the expenses attributable to earning of this exempt income. In response to the show cause notice as to why the disallowance under section 14A should not be made as per Rule 8D, the assessee submitted that, all the loans taken were utilized for the business purpose and also gave the details of payment of interest on various kinds of loans. Thus, the entire interest payment was stated to be for the various business purposes including that of export. The Ld. AO, did not accept completely the assessee's contention and held that only the interest on packaging credit, post shipment credit, specific overdraft and bill discounting should be excluded from the calculation of disallowance of interest under Rule 8D. He also held that, since assessee was unable to produce any fund flow statement or bank statement proving the nexus between investment and income yielding products, disallowance under section 14A has to be made. Accordingly, he worked out the disallowan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appears to be correct from the perusal of the Balance-sheet as on 31st March, 2008 from where it is evident that, the share capital and reserve & surplus itself was at ₹ 183,33,70,726/- whereas, the investment which has been made are at ₹ 48,29,02,642/-. Thus, it can be safely be presumed that investments have been made from surplus/interest free funds. This proposition has been upheld by the Hon'ble Bombay High Court in various other Courts several times including that of Reliance Utilities and HDFC Bank (supra), that when assessee has surplus funds and interest bearing funds, then presumption is that assessee must have made the investments from surplus/interest free funds . Thus, respectfully following the ratio and principle laid down by the Hon'ble jurisdictional High Court, we hold that no disallowance of interest under Rule 8D(2)(ii) can be made and accordingly, the same is directed to be deleted. 8. So far as the disallowance of indirect expenditure, under Rule 8D(2)(iii), by taking 0.5% of the average value of investments, the contention of the assessee before us is twofold, firstly, most of the investments have been made in the subsidiary and associated compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h the Rule 8D(2)(iii). Accordingly, we direct the AO to remove the strategic investments only from the working and from the balance, he should work out the disallowance as per Rule 8D (2)(iii). With this direction, ground No.1 is treated as partly allowed. 10. The brief facts qua the second ground are that, the assessee had debited a sum of ₹ 26,18,34,176/- on account of foreign exchange rate difference (net) under the head "raw materials consumed/trading goods utilized". The break-up of this head was given in Schedul-17 to the audited account. On the perusal of the exchange difference, it was found that the assessee has reduced the sum of ₹ 49,23,25,597/- pertaining to loss on account of foreign currency forward/option contracts. The computation of this net figure was given by the assessee in the following manner: "a) Exchange difference gain on account of import/export/working capital borrowings in US$: ₹ 23,04,89,420/- b) Loss on account of foreign currency forward/ option hedging contract : ₹ 49,23,23,597/- Net Loss: ₹ 26,18,34,176/- AO further noted that, this loss of ₹ 49,23,23,597/- is actually suffered by the assessee on ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch transactions are executed in foreign currency. It also meets its working capital needs by way of borrowings in foreign currency. Thus, assessee is exposed to risks arising out of fluctuations in foreign currency exposure. In view of the regulatory guidelines and on the facts of the case he observed that the foreign currency forward/ option transactions entered into by the Assessee in order to mitigate the risks form an integral and inseparable part of its diamond business and is not a separate and distinct business by itself. b. Assessing Officer himself admitted that it is not the Department's case that transactions entered by the Assessee are not legal. Assessee has entered into derivative contracts permitted as per norms mentioned in Master Circular and other guidelines of the Reserve Bank of India. c. RBI allows business entitles to manage their foreign exchange exposure by undertaking derivative products offered by Authorized Dealers for hedging group of assets and liabilities, e.g. export receivables, payments for imports, borrowings in foreign currency for imports and exports. Thus, from the above, it was contended that there is no stipulation for undertaking hedgin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een affirmed by the Hon'ble Bombay High Court also vide order dated 17.01.2011, following the decision of Bombay High Court in the case of Badridas Gauridu, reported in 261 ITR 256. He further submitted that, transactions are carried out as per the Foreign Management Act, 1999 as well as circular issued by the RBI. So far as allegation of the AO that, break-up of option and contracts and position on date of contract and cancellation has not been provided, he submitted that it is not correct observation, because the complete details were furnished which is evident from para 1.7 page 24 of the assessment order itself, wherein, he has incorporated the reply of the assessee highlighting furnishing of details of transactions. The position of exposure on respective dates were also given before the AO vide letter dated 14.12.2010. In any case, the same where produced before the Ld. CIT(A) also. The assessee is in the business of diamonds and not in the business of currency sales and, therefore, the hedging cannot be done in the currency. In support, reliance was placed on the decision of Bombay High Court in the case of CIT v Badridas Gauridu, 261 ITR 256. The hedging of value of diamond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss carried out by the assessee and, therefore, risk associated with the fluctuation of foreign currency also forms part and parcel of same business. To mitigate the foreign currency loss, RBI introduced the regulations so that exporters and importers can hedge the same through authorized dealers, mostly Banks. The assessee had entered into hedging transaction through banks and the amount for which the hedging transactions are entered are within the amount of the underlying transactions of imports and exports. There is no independent transaction of foreign exchange on standalone basis. The details of transaction on which the assessee has made profit and loss on various foreign exchange contracts has already been discussed in the impugned orders along with the copy of the contract entered with the banks. Thus, such a loss cannot be in any manner equated with hedging of foreign currency alone, but ceases to fall within the realm of 'speculation' albeit it is inextricable linked with the business of the assessee. This matter had already been decided by the Tribunal in the assessee's own case in the earlier years which has been upheld by the Hon'ble Bombay High Court following the ratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, it should be substantiated, the assessee before us, has contended that in any genuine hedging transaction where there is huge volume of purchase exposure and sales exposure, the hedging transaction keeps on fluctuating. The Ld. CIT(A) has upheld the disallowance keeping in mind the fact that in any particular month the hedging transactions were higher than foreign exchange exposure, the excess cannot be accepted as for the purpose of business transaction. We find that such an observation in general may not prevail in every case, because in normal business practice the hedging is often done based on actual estimated exposure looking to the past transactions undertaken and based on that, hedging is done in respect of transaction yet to be done in the near future. Bill to bill or one to one basis exposure of hedging cannot be done in a continuum business and nothing has been brought on record that RBI puts such kind of condition or bar for hedging of foreign currency based on actual bill to bill exposure. Hedging contracts need not succeed the contract for sale and actual goods manufactured but may get settled within a reasonable time. Quantity and timing may not be relevant fo ..... 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