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TMI Blog2018 (2) TMI 253X X X X Extracts X X X X X X X X Extracts X X X X ..... while holding so, ld.CIT(A)has erred on fact in binding himself with the authoritative decisions referred and relied upon before him. 3. Because ld.CIT(A)has further erred in holding that transactions in currency derivatives were 'marked to market' transactions and liable to be treated as 'speculative transactions' ignoring that there were no derivative contracts outstanding as on 31.03.2013, which at any rate could be termed as 'notional loss'. 4. Because without prejudice to the aforesaid grounds, the order dated 28.10.2016 passed by the 'CIT' is wrong and illegal in so far as disallowance of Rs. 1,709,121 has been confirmed." 3. The facts of the case are that the assessee is a trader in non-ferrous metal scrap under the name and style of Kanishk Metalloys. During assessment year 2013-14, the assessee undertook trading in currency derivatives, and suffered loss of Rs. 1,709,121/- in such activities. The said loss of Rs. 1,709,121/- and activities relating thereto were duly disclosed in the e-return filed by the assessee, on being advised that that transaction in 'currency derivatives' was liable to be held as 'speculative' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n claimed by the assessee and also being speculative loss." 6. The ld. CIT(A), after considering the submissions of the assessee, decided the issue of loss not claimed in the return in favour of the assessee, but on merits, decided the issue of allowing loss against the assessee as per his findings recorded in para 8.2 and para 8.21 of the impugned order. The ld.CIT(A), besides, taking note of CBDT Instruction no. 3/2010 dated 23.03.2010, further observed that no loss had occurred to the assessee as the transactions in currency derivatives were 'marked to market' and the loss sustained was a 'notional loss'. 7. Challenging the impugned order, the ld. Counsel for the assessee has contended that the ld. CIT(A) has erred in holding the transactions in question as speculative transaction and not allowing the set-off thereof against other business income of the assessee; that while doing so, the ld. CIT(A) has failed to take into consideration the fact that all the transactions in currency derivatives made by the assessee were duly supported by the time and stamped contract notes conducted with a recognized stock exchange, resulting into loss; that the ld. CIT(A) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or sold by him. The assessee has not explicitly pleaded in the present proceedings that he had entered into any contract of the nature^ specified in proviso (a) to section 43(5). He has also not furnished any evidence to substantiate this possibility. Further, it is observed that as against a turnover of Rs. 34.23 crores from the trading of nonferrous scrap the turnover of his foreign currency derivatives is Rs. 84.26 crores approximately for which he had entered into as many as 15,558 contracts during the period between 13.09.2012 and 31.03.2013. This relative mismatch between the volume of operations in the scrap and the foreign currency derivative trading businesses, points to the fact that the transactions in the latter were not carried out by the assessee in order to hedge the transactions of the scrap business. Hence, in view of the above facts, the only conclusion which I can draw out of these facts is that the assessee had not carried out trading i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome may be classified as "speculative transactions" in conformity with the provisions of section 43(5). Further, a direct implication of the provisions of Explanation 2 to section 28 is that out of such "speculative transactions" of the assessee, only those that are of such nature as to constitute a business, shall be further categorized as a "speculation business". The provisions of section 73(1), on their part, stipulate that for any loss to be eligible to be set-off against business income, will have to comply with two conditions-that it should be a "loss", and that it should be computed in respect of a "speculation business" carried on by the assessee. The factual matrix in the present case is that the assessee is a trader of non- ferrous metal scrap and during the year under consideration, he has shown loss of Rs. 17,09,120.61 on its foreign currency derivative transactions. This loss is reflected in the Statement of account for the period 01.04.2012 to 31.03.2013 issued by his broker, Mansukh Securities & Finance Ltd, Delhi. A perusal of the said Statement of account and copies of the related contract notes filed by the assessee with his submission, reveals that all the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of a proviso containing clauses (a) to (e), where the transaction, despite having been settled otherwise than by actual delivery, is not to be treated as a 'speculative transaction'. The assessee's contention is that his case falls under clause (d) of the proviso to section 43(5) of the IT Act. 13. Clause (d) of the proviso to section 43(5) provides that 'an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contract (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange shall not be deemed to be a speculative transaction. The explanation 1 to section 43(5) of the IT Act further defines certain words referred to in the said clause (d), as under:- (i) "eligible transaction" means any transaction,- (A) carried out electronically on screen-based system through a stock broker or sub-broker or through ... (B) which, is supported by a time stamped contract note issued by such stock broker or sub-broker or ... indicating in the contract note the unique client identity number allotted any Act referred to in sub-clause (A) and the permanent account number allotted under this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is covered by the definition of 'derivatives' as contained in clause (d) of the proviso to section 43(5) of the IT Act. This position also stands accepted by the CBDT in its Instruction no. 3/2010 (APB 342 -343). Thus, the assessee fully complies with the conditions prescribed under clause (d) of Proviso to section 43(5) of the Act, read with the explanation thereto. 16. The ld. CIT(A) has taken due note of the contention of assessee that the transactions of currency derivatives were conducted through a recognised stock broker, on a rccognised Stock Exchange and they were duly supported by time stamped contract notes. He examined the provisions of section 43(5) of the IT Act and the proviso thereto and held that the case of the assessee could not be covered under clause (a) of the proviso to section 43(5) of the Act (i.e., the transactions could not be treated as hedging transactions), but to be considered under clause (d) of the proviso to section 43(5) of the IT Act and in the light of the cases relied on by the assessee. He has then referred to section 73(1) and explanation 2 to section 28. He also referred to CBDT Instruction no. 3/2010 dated 23.03.2010 and based o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts in respect of each series of contracts are placed at APB 239 to 245. All series of contracts except for USD (26.04.2013) (APB 240) had expired before the close of the financial year, on 31.03.2013 and thus, there was no occasion that contracts for those series of transactions could be outstanding as on 31.03.2013. 19. The logic of the Board in terming loss in respect of unexpired contracts (or, in other words, in respect of position held as at the close of accounting period) has not found favour with the Courts and even the loss on account of 'marked to market' in respect of such outstanding position could not be treated as notional loss, because same is based / on the time-tested and well accepted theory of valuing stock at lower of cost or market value. The Hon'ble Bombay High Court, by its order dated 15.10.2016, in ITA No. 896/2014, in 'CIT vs. Munjani Brothers' (copy placed on record), dismissed the revenue's appeal, where the substantial question of law for the consideration of the Hon'ble High Court was as under: "Whether on the /acts and in circumstances of the case and in law, the Tribunal was right in deleting the addition of Rs. 59,90,341/- made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'The Chamber of Tax Consultants & Others vs. Union of India &, Others', reported as (2017) 87 taxmann.com 82 (Delhi), while holding certain 'ICDS' as ultra-virus, held that non-acceptance of the concept of prudence in ICDS I is per se contrary to the provisions of the Act and therefore, it cannot be countenanced. While holding so, the Hon'ble Delhi High Court in para 61 of its judgment held that:- "The Petitioners rightly point out that cases not governed by any specific ICDS are governed by ICDS-I, CBDT has in ICDSI notified that expected losses and marked-to-market losses are not be recoginized/allowed. It is rightly pointed out by the Petitioners that the concept of prudence is embedded in Section 37(1) of the Act which allows deduction in respect of expenses "laid out" or "expanded" for the purpose of business. The concept of prudence is inherent in this." 23. Thus, the instruction no. 3/2010 dated 23.03.2010 is not in accordance with law, in so far as it terms the loss in respect of the position held as at the end of the accounting period as a 'notional loss' and calls for disallowance of the same and this aspect was discussed in various cases referred befo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on which the assessee company has booked marked to market loss of Rs. 1,09,98,560/- on the date of Balance Sheet as at 31st March 2009 based on the movement of value of United States Dollar vis-a-vis in relation to Indian Rupees based on prevailing rate as on 31-03-2009. Before we proceed further, it would be relevant to analyse the provisions of Section 43(5) of the Act read with proviso (d) and explanation 1 to Section 43(5) of the Act which reads as under: 'Definitions of certain terms relevant to income from profits and gains of business or profession. 43. In sections 28 to 41 and in this section, unless the context otherwise requires- XX XX XX (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) to (c) xx xx xx (d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (B) a contract which derives its value from the prices, or index of prices, of underlying securities; Section 2(h) of the Securities Contract (Regulation) Act, 1956 reads as under: Section 2 in The Securities Contracts (Regulation) Act, 1956 2 Definitions. - In this Act, unless the context otherwise requires,- (h) "securities" include- XX XX XX (ia) derivative; XX XX XX From the above, it is clear that speculative transaction is a transaction in which contract for purchase and sale of any commodity is settled otherwise than by actual delivery. It is not in dispute that in case of transaction in derivatives, the transaction is always settled otherwise than by actual delivery. The derivative derives its value from underlying asset which can be securities, commodities, bullion, currency etc. and in this instant case, tlie derivative transaction undertaken by the assessee company, the underlying asset of derivative transaction is foreign currency. The word commodity is used in broadest sense in Section 43(5) of the Act as it men ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t assessment years to four assessment years. These amendments will take effect from 1st April 2006 and will, accordingly, apply in relation to asst. ys 2006-07 and subsequent years." From the above it is evident that the eligible transactions in derivatives carried out through recognized stock exchanges are exempted from the purview of speculation transactions u/s 43(5) of the Act provided other conditions are satisfied because of recent and systemic and technological changes introduced by stock exchanges. We have observed that the assessee company has entered into derivative transactions in foreign currency through SEBI registered broker who is a member National Stock Exchange of India Limited and these derivative transactions are carried on through National Stock Exchange of India which is a recognized stock exchange and these transactions are backed by time stamped contract notes carrying unique client identity number and PAN allotted under the Act. The reliance of the Ld. DR on the case of Araska Diamond (P.) Ltd. (supra) is misconceived as in this case the assessee did not fulfill the conditions as stipulated under section 43(5) of the Act read with proviso and Explan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e hold that the marked to market losses of Rs. 1,09,98,560/- determined by the assessee company due to the movement in the prevailing exchange rate of foreign currency i.e. United States Dollar vis-a-vis in relation to Indian Rupee as on the date of Balance Sheet viz 31st March 2009 is not a notional or contingent loss rather it is an ascertained liability which has crystallized whereby a pending obligation of derivative contract on the balance sheet date i.e 31st March 2009 is determinable with reasonable certainty and accuracy. The Accounting Standard-11 prescribed by ICAI also stipulate that in situation like this when the derivative transaction in foreign currency has not been settled/squared during the accounting period, the effect of exchange rate difference on the un-expired foreign currency contracts as at the end of accounting period is to be accounted for in the books of account prepared for the afore-stated accounting period. The reliance of the DR on instruction no 17/2008 dated 26th November 2008 is misconceived as in the instant case under appeal it is not a contingent or notional liability rather it is an ascertained liability which has crystallized and can be determ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng of taxation of loss/profit and in case the derivative contract is squared off/settled in the succeeding year, the difference in loss/profit will be brought to tax in the succeeding assessment year and hence its allowability in the current year is tax neutral." 27. These discussions were relied on by the assessee before the Authorities below. 28. Thus, as rightly contended, not only were the losses incurred by the assessee entitled to be held as non-speculative, but also the whole of the loss sustained by him was entitled to be allowed to be set off with other income and no part of such loss could be disallowed by holding it to be a 'notional loss'. 29. The facts of the case for assessment year 2014 -15 are in pari materia with those of assessment year 2013-14, except for the fact that there was, undisputedly, no outstanding position as on 31.03.2014 and hence, the observations with regard to assessment year 2013-14 would, mutatis mutandis, apply to assessment year 2014-15 also. 30. The ld. DR has sought to place reliance on the Foreign Exchange Management (Foreign Exchange Derivatives Contracts Regulations), 2000 and the Foreign Exchange Control Manual, Chapter -3 Se ..... X X X X Extracts X X X X X X X X Extracts X X X X
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