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TMI Blog2018 (3) TMI 1638X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee is sustainable as business loss. Accordingly, it was held that the forward contracts entered by the assessee, an exporter and not the dealer in foreign exchange, with the Banks as incidental to the export business, are business transactions and loss or gains is not of speculation nature. It was further specifically held that the loss arising on cancellation of matured forward contracts was allowable as deduction - Decided in favour of assessee - ITA No.576/Mum/2016 And ITA No.596/Mum/2016 - - - Dated:- 25-3-2018 - SHRI R.C.SHARMA, AM AND SHRI AMARJIT SINGH, JM For The Assessee : Shri Anuj Kisnadwala For The Revenue : Shri R.P. Meena ORDER PER R. C. SHARMA (A. M): These are the cross appeals filed by assessee and revenue against the order of CIT(A)-10 Mumbai, dated 26/10/2015 for A. Y. 2009- 10 in the matter of order passed u/s. 143(3) of the IT Act. 2. In the appeal filed by assessee, assessee is aggrieved for treating loss incurred in share trading activity as speculation loss instead of business loss . 3. At the outset, learned AR fairly conceded that the issue is covered against the assessee by the decision of Jurisdictional Hig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 1, 11, 08, 394/- in its computation of income and has claimed the same as exempt. The AO has also made a disallowance of ₹ 31, 34, 062/- u/s 14A. 8. While computing disallowance of interest, the AO has taken the total interest debited to P L Account amounting to ₹ 8, 58, 89, 421/-, whereas contention of assessee was that only interest of ₹ 57, 57, 409/- was attributable to share capital activity. 9. By the impugned order, CIT(A) directed the AO to recompute the disallowance of interest by taking interest of ₹ 57, 57, 409/- instead of ₹ 8, 58, 89, 421/- after having the following observation:- During the course of appellate proceedings before me the appellant has filed the details of own funds and borrowed funds bearing interest burden and work out the interest attributable to earning of exempt income and taxable income as under- As seen from the above, no doubt the appellant is having enough interest free funds when compared to the investments. It has also got borrowed funds but the same were utilized for specific purposes which has nothing to do with the earning of exempt income. Since a significant part of the bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers of the authorities below. We are in agreement with contention of learned AR that disallowance of interest under Rule 8D 2(ii) should be with reference to the interest attributable to the investment and not to the entire interest, accordingly, we confirm the action of CIT(A) for directing the AO to recompute the interest. Disallowance by taking interest of ₹ 57, 57, 409/- in place of ₹ 8, 58, 89, 421/-. We direct accordingly. 13. Revenue is also aggrieved for deleting disallowance of loss on cancellation of forward contract. In this regard, the AO noticed that the expenses claimed by the assessee under the head 'Administrative Other Expenses' include a sum of ₹ 25, 89, 49, 527/- on account of 'Exchange Difference-Forward Contract' cancellation. On verification of submissions, the AO held that the assessee has entered into FCs with the financial institutions and where closed without actual delivery of goods in spite of the fact that bills were settled later on by actual delivery of goods in an open position after cancellation of Forward Contracts. Thus, the AO has come to the conclusion that the assessee is in the business of entering into F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - - 19. 2. 09 - 0. 01 -do- Total. 27. 18 As seen from the above table it is evident that the appellant has closed one FC dated 20. 2. 2008 on which loss of ₹ 26, 74, 50, 500/- was claimed was closed only on maturity. Since as per the decision of jurisdictional ITAT in the case of London Star Diamonds Company (I) Ltd in ITA NO 6169/M/2012 dt. 11. 10. 2013 which has ruled that if the PCs were closed on maturity or they were closed prior to the date of maturity with reasonable explanation, that should not be taken as speculative activity and loss claimed should be allowed as expenditure for the year, the loss arising in the instant case on the closure of PCs on maturity will not constitute speculation. Respectfully following the above decision I hereby direct the AO to allow ₹ 26, 74, 50, 500/- as normal loss for the year without treating as speculative loss. However, with regard to other two heads stated in the table above in this para which were closed on 11. 12. 2008 and 19. 2. 2009 amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... requirement and for nothing else or for no other purpose. Thus, assessee s business and sources of borrowings are effectively in foreign currency and thus the assessee is exposed to adverse movements in foreign exchange which it receives and pays as part of its business. All these transactions entered by the assessee are incidental to its business activity of import and export and to protect against adverse movements in foreign exchange in a highly volatile global market. Thus, foreign exchange fluctuation is a risk which assessee has to face and therefore, it is prudent for it to mitigate it. The issue under consideration is squarely covered by the decision of co-ordinate Bench in case of Mahendra Brothers Exports Pvt. Ltd. , wherein the Tribunal observed as under:- 15. We have carefully considered rival submissions and also perused the relevant findings given in the impugned orders as well as materials placed before us. The assessee imports rough diamonds which are its principle raw material for manufacturing of polished diamonds, procured mainly form Diamond Trading Company which allocates and indicates on annual basis in advance for supply of rough diamonds through inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... down in the case of Badridas Gauridu (supra). We find that this issue is no longer res integra, because in various decisions as relied upon by Ld. Counsel before us, it has been consistently held that, if the assessee is not dealing in foreign exchange per se but has hedged against the foreign exchange loss in the forward market with the bank, then any loss or gain thereto is to be treated as business loss or business gain only. The Hon ble Bombay High Court in the case of Badridas Gauridu (supra), held that, if the assessee is not dealer in foreign exchange but an exporter and has hedged against the foreign exchange losses and for that purpose it had booked foreign exchange in the forward market with the bank, then the losses incurred on foreign exchange would be considered as business loss, because the foreign exchange contract is only incidental to the assessee s regular course of the business. While coming to this conclusion, the Hon ble High Court relied upon the decision of Hon ble Calcutta High Court in the case of CIT v Soorajmull Nagarmull, reported in [1981] 129 ITR 169. That apart, Hon ble Gujarat High Court in the case of CIT vs Star and Star Shipping P Ltd / Friends a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt period in a continuous transaction as long as transaction construed is based on genuine hedging and finally it coincides with the actual exposure undertaken. It is only at the year end that one can still reconcile the hedging transactions with the actual exposure or delivery and come to a conclusion whether hedging contract exceeded the actual exposure or not but certainly not on week to week or month to month basis. Thus, the disallowance of loss sustained by the Ld. CIT(A) of ₹ 8, 23, 26, 649/- cannot be upheld simply on the ground that the exposure do not tally with the month-wise transaction. In view of our above conclusion, we allow the claim of ₹ 8, 23, 26, 649/- and accordingly, the grounds raised by the assessee is allowed. 8. Similar view has been taken by ITAT Mumbai Bench in case of Hiraco India Pvt. Ltd. , ITA No. 2300/Mum/2015 vide order dated 20/01/2016, wherein the Tribunal held as under:- The assessee has filed this appeal challenging the order dated 15. 04. 2013 passed by Ld CIT(A)-10, Mumbai and it relates to the assessment year 2009-10. The assessee is aggrieved by the decision of Ld CIT(A) in confirming the disallowance of claim of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) confirmed the order of the AO by following the decision rendered in the case of M/s S. Vinodkumar Diamonds P Ltd (ITA No. 506/M/2013). 4. We heard the parties and perused the record. The decision rendered by the Bangalore bench of Tribunal in the case of K. Mohan Co. (Exports) P Ltd (supra) was considered by another bench of Bangalore Tribunal in the case of ACIT Vs. M/s Hanuman Weaving Factory in its order dated 28. 10. 2013 passed in ITA No. 1112/Bang/2012. The issue before the Tribunal in the case of M/s Hanuman Weaving factory (supra) was identical to the one contested before us, viz. , whether the expenditure incurred on cancellation of forward contract was a speculation loss or not. The above said assessee was exporter of silk fabrics and it has claimed the loss arising on cancellation of forward contract in foreign currency as deduction. The AO rejected the claim by holding the same was speculative loss and the same was confirmed by Ld CIT(A). The Tribunal proceeded to adjudicate the issue by duly considering the decision rendered in the case of K. Mohan Co. (Exports) P Ltd, and held as under:- -In K. Mohan Exports case, it was concluded by the Hon bl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A. R brought to our notice the decision dated 11. 10. 2013 rendered by the co-ordinate bench of Mumbai Tribunal in the case of London Star Diamond Company (I)P Ltd Vs. DCIT (ITA No. 6169/Mum/2012), wherein also the Tribunal considered the issue relating to the disallowance of loss arising on cancellation of foreign exchange forward contracts. It is pertinent to note that the co-ordinate bench also considered the decision rendered by another co-ordinate bench in the case of S. Vinod Kumar Diamonds Pvt Ltd (supra), on which the Ld CIT(A) had placed reliance. The Tribunal examined following two questions in the case of London Star Diamond Company (I) P Ltd (supra):- (i) if the Forward Contracts entered into with the Bank constitutes the integral or incidental to the activity of export of the diamonds by the assessee, who is not the dealer in foreign exchange. (ii) if the AO was justified in not setting off against the profits on actual realization or revaluation as speculative profits. The co-ordinate bench also examined the provisions of sec. 43(5), which defines the expression Speculative transactions and finally decided the issue in favour of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ified contracts discussed in clause (a) to (e) of the proviso to section 43(5) of the Act. Clause (a) of the proviso deals with the hedging contracts entered into in the course of manufacturing and merchandizing of the business to guard against the losses through future price fluctuations in respect of contracts for actual deliver. Clause (b) deals with the contracts entered into by dealer or investor in respect of Stock Exchange and Clause (d) deals with an eligible transaction in respect of trading derivatives carried out in a recognized Stock Exchange. Clause (e) deals with eligible transactions in respect of the trading in commodity derivatives carried out in a recognized association. These five types of contracts / eligible transactions shall not be deemed as speculative transactions. Although there is decision of the Tribunal where it is held that the FCs are not commodities, considering the judgment of Hon ble High court of Calcutta in the case of Sooraj Muill Magarmull supra, which was followed by the judgment of jurisdictional High Court in the case of Badridas Gauridu Pvt Ltd (supra), needs to be followed by us. The principle of judicial discipline assumes importa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant judgments on the subject raised before us. 22. Relevant judgmental laws: In this regard, relevant decisions include the decision in the case of D Kishore kumar and Co supra, binding judgment of the Bombay High Court in the case of CIT vs. Badridas Gauridu Pvt Ltd (supra), judgment in the case of Sooraj Muill Magarmull 129 ITR 169 (para 3) from Calcutta High Court. The judgments from the High Court of Ahmedabad in the cases of Friends and Friends Shipping Pvt. Ltd (supra) and in the case of Panchamahal Steel Ltd (supra) are also relevant. These decisions / judgments are unanimously relevant for the proposition that the FC transactions, when entered into with the banks for hedging the losses due to foreign exchange fluctuations on the export proceeds, are to be considered integral or incidental to the export activity of the assessee. Therefore, the losses or gains constitute the business loss or gains and not the speculation activities. In the preceding paragraphs of the order, in the portions assigned to the AR s arguments, we have analyzed these issues and the DR has not provided any reasons to reject the said arguments of Ld Counsel for the assessee. Therefore, in p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lue of domestic currency is falling, which is evident from the fact that the assessee realized profits on cancellation of those contracts. These transactions are integral part of the export business and cannot be considered in isolation of the export business in the course of which the transactions have been entered into. As a matter of fact, this profit on cancellation of forward contracts is generally revenue neutral because the question of profit on cancellation of forward contracts can only arise in a situation when the value of foreign currency is increasing vis-avis domestic currency, and when the foreign exchange value is so increasing the ultimate payment made in foreign exchange by the assessee also increases. Since it is an undisputed position that the imports, in connection with which the assessee had entered into forward contracts, actually took place, this profit on cancellation of forward foreign exchange contracts effectively only reduces the costs of purchases in respect of those imports, and cannot be, by any logic, construed as transactions independent of assessee s business of importing rough diamonds and exporting cut and polished diamonds. There is one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not considered these facts. Under section 43(5) of the Income Tax Act, speculative transaction has been defined to mean a transaction in which a contract for the purchase or sale of 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 entered into by the assessee for export of cotton in some cases failed. In the circumstances, the assessee was entitled to claim deduction in respect of ₹ 13. 50 lakhs as a business loss. This matter is squarely covered by the judgment of the Calcutta High Court in the case of CIT vs. Sooraj Mull Nagarmull (1981) 129 ITR 169. Judgment of Calcutta High Court in the case of CIT vs. Sooraj Mull Nagarmull [1981] 129 ITR 169 (Cal. ) Held: The assessee used to carry on export and import of jute business. In the course of normal business it used to enter into foreign exchange contracts in order to cover up loss and difference in foreign exchang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll take up the core issue of adjudication of the grounds raised in the appeal and the fate of the impugned losses of ₹ 4, 69, 42, 680/-. Relevant portion from the judgment of the Gujarat High Court in the case of Friends and Friends Shipping Pvt. Ltd (supra) is as follows: It is true that the CIT (A) has made some observations which would prima facie suggest that there was no direct co-relation between the exchange document and the precise contract. However, such observations cannot be seen in isolation . . We find that the decisions of the Bombay High Court and the Calcutta High Court noted above would cover the situation. 34. From the above analysis and summary of judgments, it is safely concluded that the impugned FCs are commodities . However, considering the fact that these FCs are integral part or incidental to the core business of export of diamonds or the outstanding receivables of export proceeds, in principle, the impugned FCs constitute hedging transaction and not the speculative contracts . As such, the banks do not entertain FCs of speculative nature with the customers like the assessee, the exporter. As such, the extension of FCs, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uations on the export proceeds are to be considered integral or incidental to the export activity of the assessee. It was further held that there is no requirement of law that there should be 1:1 correlation between the Forward Contracts and Export invoices and so long as the total value of forward contracts does not exceed, the claim of the assessee is sustainable as business loss. Accordingly, it was held that the forward contracts entered by the assessee, an exporter and not the dealer in foreign exchange, with the Banks as incidental to the export business, are business transactions and loss or gains is not of speculation nature. It was further specifically held that the loss arising on cancellation of matured forward contracts was allowable as deduction and for arriving at this decision, the Tribunal has placed reliance on the following case laws:- (a) CIT Vs. Badridas Gauridu Pvt Ltd (261 ITR 256)(Bom) (b) CIT Vs. SoorajMull Magarmull (129 ITR 169)(Cal) 7. The Ld A. R submitted that the Gujarat High Court has taken identical view in the case of CIT Vs. Friends and Friends Shipping Pvt Ltd (217 Taxman 267) and also in the case of CIT Vs. Panchmahal Steel ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X
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