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TMI Blog2018 (5) TMI 142X X X X Extracts X X X X X X X X Extracts X X X X ..... rd contracts as speculative by the Ld. CIT(A) - Held that:- We note that the Ld. CIT(A) has decided the issue in view of the facts noted in the case of forward contract transactions of the gold and no documentary evidence in support have been referred in his findings on the issue in dispute.We feel it appropriate to restore this issue to the file of the Assessing Officer for deciding afresh after providing adequate opportunity of being heard to the assessee, with liberty to the assessee to file necessary documentary evidence in support its claim. Thus, the ground Nos. 1 to 4 of the appeal of the Revenue are accordingly allowed for statistical purposes. Addition on account of interest at the rate of 10% on the sum expended by the assessee to partners on account of interest-free advances - Held that:- We find that the Ld. CIT(A) has arrived at the conclusion after verifying the capital accounts of the partners that no loans/advances have been given to the partners out of borrowed fund and no interest has been paid to the partners and thus the disallowance of notional interest was not justified. - ITA No.4487/Del/2014, ITA No. 4463/Del/2014 - - - Dated:- 27-4-2018 - Sh. Bhavnesh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich also finds consonance in the judgment of Apex Court in case of CIT Vs. Joseph John (1968) 67 ITR 74 (SC). 5. The Ld. CIT(A) has erred in deleting the addition of ₹ 78,400/- on account of notional interest @ 10% on the sum expended by the assessee to partners on account of interest free advance. 6. The appellant craves leave to add, alter or amend any/all of the grounds of appeal before or during the course of the hearing of the appeal. 2.1 The grounds raised by the assessee in ITA No. 4463/Del/2014 are reproduced as under: 1. That Learned ACIT and CIT (A) has erred in law and on facts while treating ₹ 1,03,93,854/- being the loss of gold desk account as speculative loss. 2. That the learned CIT (A) has not appreciated the facts of the case, explanation offered proceeded to hold the loss of ₹ 1,03,93,854/- as speculative loss. 3. That the learned CIT (A) has further erred in law and on facts while holding that proviso (a) to section 43(5) is not applicable to the facts of the appellant's case. 4. That the appellant requests for leave to add or amend the grounds of appeal before the appeal is heard and disposed off. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lared by the assessee. The Ld. CIT(A) allowed set off of speculative loss of ₹ 1,03,93,854/- against the speculative gain of ₹ 99,22,176/- and thus upheld the disallowance of net speculative loss of ₹ 4,71,678/-. He also deleted the addition of ₹ 78,400/-in respect of the interest disallowance. Aggrieved with the finding of the Ld. CIT(A), both the Revenue and the assessee are in appeal raising the respective grounds of appeal as mentioned above. 4. The ground Nos. 1 to 3 of the appeal of the assessee relate to holding loss of ₹ 1,03,93,854/-as speculative loss by the Ld. Assessing Officer as well as by the Ld. CIT(A) as against treating as business loss by the assessee. 4.1 The brief facts in respect of the issue in dispute are that the assessee purchased pure gold as raw material from M/s Minerals and Metals Trading Corporation Limited (MMTC) for manufacturing of jewellery. The Ld. CIT(A) has summarized the transaction of forward contracts entered into for Gold and Foreign Currency in relation to buying of gold and selling of finished goods. The relevant part of the order of the Ld. CIT(A) is reproduced as under: 2. Briefly, facts of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e purchase of pure gold and the export of jewellery. In this second situation, the appellant used to buy the pure gold from the MMTC. The appellant used to take physical possession of the pure gold. However, simultaneously, it used to enter into contractual sale of the entire purchased pure gold to the MMTC (future sale contracts on gold desk) at the same rate; wherein the physical possession of the pure gold remained with the appellant. Simultaneously the MMTC, on behalf direction of the appellant also used to buy Dollars/foreign currency equivalent to the value of pure gold on the same date. In order to cover the risk of wide fluctuation in the market price of gold as well as currency, the appellant entered into forward sale of gold as and when it is purchased/acquired from the MMTC and-also forward sale of foreign currency to the extent of expected realization to cover up the risk of fluctuation in the cost of purchases. On the finalization of export of the jewellery, the contractual sale of the entire purchased pure gold to the MMTC (future sale contracts on gold desk) is cancelled and the export is materialized. The sale consideration is received in Dollars. These Dollars ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how it actually resulted into hedging. The assessee could not provide any evidence for establishing that any particulars derivative transaction was for hedging of any particular asset / liability / expenditure / income / transaction. The assessee has simply stated that they have never booked contracts beyond their own stock. The assessee has also submitted copies of some of the contract notes issued by the bank. The assessee has submitted that it is not practically possible to match each derivative transaction with particular transaction which was hedged and the hedging may be for combination of transactions . In the case of In the case of ACIT vs. Dinesh K. Mehta HUF (ITAT Mumbai) 2010 39 SOT 488, it has been held that if the assessee is not able to prove that derivative transaction was for a particular / identified and related item, the same cannot be treated as hedging. The assessee has however failed to provide even detail of those combination of transactions which were hedged by a particular derivative transaction. Instead of giving documentary evidence of its alleged claim of hedging, the assessee is making general remarks without any documentary evidence. The assessee ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by him or merchandise sold by him; or The proviso marked as (a) to 43(5) is not attracted here as there is no element of loss embedded in respect of the contracts for actual delivery of jewellery manufactured and exported by the appellant which required to be guarded by entering into a contract in respect of raw material. Here, the appellant has basically entered into the forward contract with the bank to guard the loss through future price fluctuations in respect of his purchases of pure gold. The loss in respect of the contracts for actual delivery of jewellery manufactured exported by the appellant will take place only when the price of gold fall with in the time period commencing from the date of purchase of pure gold to the date of export/export price fixed. However, it is not a case here. Actually, the gold price has gone up which has resulted increase in the cost of purchase and consequentially loss on gold desk account. The CBDT Circular No. 23 of 1960 relied upon by the appellant, which also deals with the situation where the value of purchases is falling and not otherwise. Thus, the appellant's case is not hit by this Circular also. The above submission of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orward contracts is by nature a business loss rather than a speculative loss. In the case of London Star Diamond Company, the outstanding receivables have crystallized before entering into foreign currency forward contract. To hedge the possible foreign exchange loss on exports, the London Star Diamond Company had entered into forward contracts (FCs) with banks. There was one-to-one correlation between forward contracts and export invoices in the case of M/s London Star Diamond Company. In the case of M/s London Star Diamond Company also the assessee has entered into forward contract to guard the loss on sale and not the loss on purchases; therefore, the Hon'ble ITAT decided the issue in favour of the assessee. However, in the present case in the hands; the facts are different as mentioned above in para 5; therefore, the decision of the Hon'ble ITAT in the case of M/s London Star Diamond Company supports my inference mentioned above in para-5. Further, the appellant, in the preceding year, has shown similar loss as speculative loss. Thus, following the ratios laid down in judgments of the Hon'ble Supreme Court in the cases of Excel Industries Ltd. (Date of order 09.10.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hase, the exporter enters into a forward contract with bank or any authorized person on 01/04/2008 for sale of gold on the future date (which may be around the date of supply of jewellery to the buyer, say 30/06/2008 ), on the same price on which, the exporter has purchased the gold i.e. ₹ 30,000/- per 10 gms. Now, in case the price of the gold on the date of supply of jewellery goes up, say ₹ 40,000/- per 10 gms, then there will be a loss of ₹ 10,000 per gram to the exporter, at the time of settlement of this forward contract transaction, however there will be a gain of ₹ 10,000 per gram in export order supplied. Thus, when both the forward contract transaction and actual supply of the jewellery, are seen in combined manner, there is no loss to the exporter, but when forward contract transaction is seen isolated accounted separately, there will be a loss of ₹ 10,000 per 10 gms. Similarly, in case the price of the gold goes down say to ₹ 20,000/- per 10 gms, in that case at the time of settlement of the forward contract on 30/06/2008, the exporter will gain ₹ 10,000 per 10 gms, whereas in the export order supplied, value of the jewel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; [or] (e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognised association, which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013), shall not be deemed to be a speculative transaction. 4.9.3 Thus, according to the section any transactions of contract for purchase and sale of commodities (here in this case Gold), which is settled periodically, otherwise than by way of actual delivery or transfer of that commodity, the transaction would fall under speculative transaction. However, there are exceptional situations from sub-clause (a) to (e), where these transactions would not be speculative transaction. 4.9.4 In the instant case, there is no dispute that the contracts of sale of gold to MMTC are settled periodically without actual delivery and on the date of settlement of the contract , only difference in market price and the contract price is paid or received by the assesse. Thus under the main definition of the subsection, the transactions are speculative transaction, but the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt case. 4.9.9 The Ld. CIT(A) has also relied on the rule of consistency as laid down by the Hon ble Supreme Court in the case of Radhasami Stasang 193 ITR 321 in view of the loss treated by the assessee as speculative loss in the preceding assessment year. 4.9.10 In view of the above discussion, we uphold the decision of the Ld. CIT(A) on the issue in dispute. The grounds of the appeal of the assessee are accordingly dismissed. 5. The ground Nos. 1 to 4 of the appeal of the revenue relates to holding the transaction of foreign currency forward contracts amounting to ₹ 99,22,176/-as speculative by the Ld. CIT(A). 5.1 Before us the Ld. DR submitted that this amount was declared by the assessee itself as business profit in the return of income filed and therefore the Assessing Officer did not look into whether the transactions could be in the nature of speculative or not. According to him, the Ld. CIT(A) on the basis of his finding in respect of forward contract transaction of Gold, treated the gain from foreign currency forward contract transaction as speculation gain without looking into the documentary evidences of such transactions, which were already admitted b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l it appropriate to restore this issue to the file of the Assessing Officer for deciding afresh after providing adequate opportunity of being heard to the assessee, with liberty to the assessee to file necessary documentary evidence in support its claim. Thus, the ground Nos. 1 to 4 of the appeal of the Revenue are accordingly allowed for statistical purposes. 6. The ground No. 5 of the appeal of the Revenue relates to addition of ₹ 78,400/-on account of interest at the rate of 10% on the sum expended by the assessee to partners on account of interest-free advances. 6.1 The facts in brief in respect of the issue in dispute are that the Assessing Officer observed payment of interest of ₹ 5,40,000/-to partners on their capital however he noted that interest-free loan/advances of ₹ 7,84,000/-were given by the assessee to partners Sh. Nikhil Jain and Sh. Sakait Jain. According to the Assessing Officer, proportionate interest on interest-free advances given to the partner should have been disallowed to the assessee and accordingly, he issued a show cause to the assessee as why interest corresponding to the interest-free advances may not be disallowed out of the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtionate. In view of the above the notional interest @ 10% on an amount of ₹ 7,84,000/- which comes to ₹ 78,400/- is disallowed and added to the income of the assessee. 6.2 The Ld. CIT(A) deleted the addition with following finding: 6. The next issue is in respect of addition of ₹ 78,400/- being notional interest on amount standing to the debit of two of the partners. I have carefully considered the submission of the appellant and perused the record. I find merit in the appellant's submission that none of the partners has been paid any interest on their credit balance/capital and the partners have substantial capital balance aggregating to ₹ 1.14 crores as on 01.04.2009; therefore, withdrawals/payments made out of the capital account does not attract charging of interest as these withdrawals/ payments have no nexus with any borrowings. Accordingly, the addition of ₹ 78,400/- is hereby deleted. 6.3 Before us, the Ld. DR relied on finding of the Assessing Officer, whereas the Ld. counsel relied on the finding of the Ld. CIT(A). 6.4 We have heard the rival submission and perused the relevant material on record. We note that before th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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