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TMI Blog2019 (2) TMI 792X X X X Extracts X X X X X X X X Extracts X X X X ..... loss on account of Cancelled Forward Contract for hedging of Foreign Currency Risk and is an allowable Business Loss under section 28 of the Act. The loss on account of forward contract and loss on cancellation of forward contract, is a business loss and assessee is entitled to set offthe said loss against the business income, hence we delete the disallowance - Decided against revenue Disallowance being prior period expenses the liability for which crystallized during the relevant previous year - Held that:- We note that the transportation charges of ₹ 1,00,000/- paid to M/s Santosh Transport Services pertaining to assessment year 2007-08 and it was stated that there was a dispute regarding the bill amount therefore, it could not be paid in the year in which it was incurred. The dispute got resolved during the assessment year under consideration hence, it was finally paid. We not that assessee is following mercantile system of accounting and the assessee’s expenditure has got crystallized during the assessment year under consideration, therefore the assessee is entitled to claim the expenses. We note that the assessee had incurred the said expenditure for the purpose of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeals filed by the Assessee for Assessment Year 2009-10 and A.Y.2010-11 contain multiple ground of appeals. However, at the time of hearing we have carefully perused all the grounds raised by the Assessee. Most of the grounds raised by the Assessee, are either academic in nature or contentious in nature. However, to meet the end of justice, we confine ourselves to the core of the controversy and main grievances of the Assessee. With this background, we summarize and concise the grounds raised by the Assessee as follows: Grounds relating to derivatives:- (1).GroundNo.2 raised by the assessee in I.T.A. No. 906/Kol/2018 for assessment year 2009-10 and Ground No. 1 raised by the assessee in I.T.A. No. 947/Kol/2016 for assessment year 2010-11 are identical and common which relate to disallowance of crystallized losses of foreign exchange contracts, the details of which are given below. (i). Disallowance of crystallized losses of ₹ 78,51,250/- on Forex contracts, for assessment year 2009-10. (ii).Disallowance of crystallized losses of ₹ 1,54,44,375/- on Forex contracts, for assessment year 2010-11. (2). Foreign Exchange loss of ₹ 4,74,84,669/- on acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ieved by the stand so taken by the Assessing Officer, the assessee carried the matter in appeal before the ld. CIT(A) who has confirmed the action of the Assessing Officer. The ld CIT(A) noted that onus was on the assessee to prove that the derivative transactions in question were not of a speculative nature. The booking of forward contract of currency was not in respect of specified export of goods and there was no actual delivery of foreign exchange. The ld CIT(A) therefore noted that forward contracts entered into by the assessee was not hedging transaction but was speculative in nature. The assessee also failed to establish the nexus between the forward contracts and specified export receivables, hence the ld CIT(A) confirmed the action of the Assessing Officer holding that the derivative transaction of ₹ 78,51,250/- is in the nature of speculative transaction and hence the assessee is not entitled to set off, said derivative loss form normal business income. 8. Aggrieved by the order of the ld CIT(A), the assessee is in appeal before us. 9. The ld. Counsel for the assessee begins by pointing out that the Assessee Company is engaged in the business of Export of Cott ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowed. 11. We have heard both the parties and perused the material available on record. Before, we come to the final conclusion, let us first deal with the nature of transactions in derivatives and the treatment given to these transactions in the income tax Act, 1961. As to what is the nature of a derivative transaction, we find useful guidance from Hon ble Madras High Court s judgment in the case of Rajshree Sugars Chemicals Ltd. vs. Axis Bank Ltd. reported in [2008] 8 MLJ 261, referred to with approval by Hon ble Bombay High Court in the case of Bharat S.RuiaVs. CIT (2011) TIOL 238 HC), in the following terms: What are these derivatives which have gains such a great deal of notoriety? In simple terms, derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The International Accounting Standard (IAS) 39, (Now IFRS 9) defines derivatives as follows: A derivative is a financial instrument (a) whose value changes in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar varia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus the same is an admissible loss since it is already recovered by the Banker from the Assessee Company. We note that the Loss of ₹ 78,51,250/- was crystallized during the year which was related to Long Term Forex Derivatives Contracts. This loss was amortized in books but claimed as a deduction while filing Return of Income. The assessee submitted the following evidences in support of above claim which are as under: a. Ledger Account of Foreign Currency Monetary Item Transaction Difference Account [FCMITD A/C] wherein there are both credits (income) as well as debits (losses). b. Bank Statements wherein the amounts were debited by Bank in the assessee`s bank account. c. USD/INR Export Hedging Term Sheet issued by ING Vysya Bank d. Copy of Derivatives Deal Confirmation issued by ING Vysya Bank. These documents and evidences were submitted before the Assessing Officer as well as during the appellate proceedings. We note that theassessee took the forward contract for the purpose of business, as the business of the assessee is to export textile goods therefore it is necessary to protect from the risk of fluctuations in foreign exchange currency, hence, to hedge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bench of ITAT Mumbai in the case of JaiminJewellery Exports (P) Ltd Vs ACIT-5(2) Mumbai [2014] 43 taxmann.com 380, wherein it was held as follows: Forward contracts which are integral part or incidental to core business of import/export of diamonds, in principle, constitute hedging transactions, and not speculative contracts. It was also held that it would be a business loss which can be set off against profit and gains of business. We also rely on the judgment of the coordinate bench of ITAT Mumbai in the case of DCIT v. Intergold (I) Ltd., (124 TTJ 337), wherein it was held that profits from cancellation of forward exchange contracts are business profits and not speculative profits. Our view is fortified by the judgment of the Hon`ble Calcutta High Court in the case of CIT v. Soorajmull Nagarmull, (129 ITR 169), wherein it was held that in the normal course of business of import and export of jute, the assessee entered into foreign exchange contract to cover up the losses and differences in exchange valuation, the transaction is not a speculative transaction. 15. We note that the Special Bench of ITAT Kolkata in the case of Shree Capital Services Ltd. v. ACIT, (12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal Term Loan Canara bank to cover forward contract losses. (c ). Bank Statements wherein the amounts were debited by Bank. We note that due to the fact that a substantial part of assessee company s turnover comprises of sales by way of export of goods out of India and hedging of foreign currency is carried out by way of forward contracts / options / derivatives in order of minimize losses on realization. Hence, loss to the tune of ₹ 4,74,84,669/- on account of cancellation of foreign exchange forward contract, should be allowed as business loss, for that we rely on the judgment of the Coordinate Bench of ITAT Mumbai in the case of Reliance Industries Ltd. vs. CIT Large Taxpayers unit ITAT Mumbai Bench [2013] 40 taxmann.com 431(Mum-trib) wherein it was held that loss due to foreign exchange fluctuation in foreign currency transactions in derivatives has to be considered on last date of accounting year and it is deductible under section 31(1) of the Act. Further, the Coordinate Bench of Mumbai ITAT in the case of DCIT v. Intergold (l) Ltd., (124 TTJ 337) has held that profits from cancellation of forward exchange contracts are business profits and not speculative profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t year 2010-11. 19. In the result, derivatives grounds raised by the assessee in A.Y.2009-10 and A.Y.2010-11 are allowed 20. Now we shall take Other Grounds raised by the assessee. (1). Ground No. 1 raised by the assessee in I.T.A. No. 906/Kol/2018 for assessment year 2009-10 relates to disallowance of ₹ 1,00,000/-being prior period expenses the liability for which crystallized during the relevant previous year. 21. The brief facts qua the issue are that as per tax audit report the assessee has paid ₹ 1,00,000/- as transportation charges, during the assessment year under consideration and claimed as an expense.However, assessing officer noted that the said amount was a prior period item therefore, he disallowed and added back to the total income of the assessee.On appeal by the assessee , the Ld. CIT(A) confirmed the additions made by the Assessing Officer. Aggrieved the assessee is in appeal before us. 22. We have heard both the parties and perused the material available on record, we note thatthe ld. Counsel for the assessee submitted before us that because of delay on the part of the party to submit the bill, the expenses could not be recorded during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowable u/s 37 of the Act. The Expenditure for replacement of a new ring frames is an addition to existing plant and machinery of the assessee giving enduring benefit and as such is capital in nature. However, we agree with the ld. AR that the treatment given by the assessee in its books of accounts of the expenses incurred could not be decisive to decide whether the claim of the assessee is allowable as revenue or capital in nature. In the case of the assessee before us, the nature of the expenditure incurred by the assessee is a capital expenditure and is not revenue, as the assessee has acquired the assets of capital in nature. 25. We note that as the issue is squarely covered against the assessee by the judgment of the co-ordinate Bench in assessee s own case (supra) and there is no change in facts and in law and the ld. Counsel for the assessee has failed to bring any cogent evidence on record or new facts to prove this otherwise. The ld. DR has fairly agreed that ld CIT(A) has rightly disallowed the claim of the assessee, as the said issue is covered against the assessee by the judgment of the ITAT, Kolkata in assessee s own case (supra). That being so, we decline to int ..... X X X X Extracts X X X X X X X X Extracts X X X X
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