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TMI Blog2009 (8) TMI 1249X X X X Extracts X X X X X X X X Extracts X X X X ..... profit of forward contracts of Rs. 60,98,362 was netted off against the finance expenses paid and the net finance expenses were debited to the profit and loss account. The Assessing Officer further noticed that the assessee has claimed a deduction under section 10B of the Income-tax Act. As per section 10B, deduction is allowed on such profit and gains as are derived by a 100 per cent export oriented undertaking from the export of articles or things. The Assessing Officer was of the view that deduction can be allowed in respect of that profit, which is derived from the export of articles or things. The assessee was therefore given an opportunity to explain as to how the deduction can be allowed under section 10B in respect of income earned from forward contracts. Before the Assessing Officer, the assessee has submitted that in order to protect the export sales from the exchange fluctuation, the assessee entered into forward contracts at an agreed rate at different points of time for the export bills to be realized. Such contracts are settled against realization of export bills. On the due date if the export bill is not realized, the forward contract gets cancelled and the differenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermined date at different points of time for export bills which were yet to be realized. Such contracts were settled against realization of export bills. The excess of realization on account of such exercise is nothing but export turnover as per standard accounting norms. If, on the other hand, the export bills are not realized on the due date, the forward contract gets cancelled and the difference thereon is credited/debited by the banker and treated as profit/loss on forward contracts. Forward contracts can be booked on the strength of export contracts or export bills. Such forward con- tracts were booked to safeguard against adverse fluctuations in foreign exchange. The learned CIT(A) has referred to the decision of the Mumbai Bench in the case of D. Kishorekumar & Co. v. Dy. CIT [2005] 2 SOT 769 in which, it was held that income from cancellation of forward contract is part and parcel of income eligible for deduction under section 80HHC. The learned CIT(A) after taking into consideration the decision of the Mumbai Bench held that profit on forward contract is nothing but sale proceeds of goods exported out of India and are part and parcel of the business profits of the enterpri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween a buyer and a seller obligating the seller to deliver a specified asset of specified quality and quantity to the buyer on a specified date at a specified place and the buyer in turn is obligated to pay the seller a pre-negotiated price in exchange of the delivery. In the instant case, the assessee is engaged in the business of manufacture and export of readymade garments. In respect of export of readymade garments, the assessee enters into forward contract in respect of foreign exchange to be received as a result of export. This is done to avoid the risk of loss due to foreign exchange fluctuation. The assessee at the time of agreeing to export takes into consideration its cost in rupees and also considers the spot price of rupee against foreign exchange. When the actual export is made, this spot price may be different as against the spot price on the date on which the assessee expected an export order. On the date of receipt of the foreign exchange, if the spot price of rupee against foreign exchange increases then the assessee will be benefited. For example, when the assessee undertakes to accept an export order, the value of one dollar is 40 rupees and when the assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there has been no actual delivery. 12. The Hon'ble jurisdictional High Court in the case of V.N. Sarsetty v. CIT [1987] 163 ITR 727 1 (Kar.) had an occasion to consider the meaning of the words "speculative transaction". In the case before the Hon'ble jurisdictional High Court, the issue was allowability of deduction of Rs. 35,150 which was to be paid by the assessee on account of non-delivery of certain quantity of cotton under the agreement dated 5-2-1969. The Hon'ble jurisdictional High Court held that if the contract is settled during the subsistence of the contract without delivery then the transaction is speculative. In case a dispute arises and the amount is paid as a breach of the contract then the matter is to be considered differently. The Hon'ble jurisdictional High Court in that case observed as under :- "On the date of the settlement, the contract was subsisting and the amount liable to be paid was computed by the panchas and, as per the award of the panchas, the assessee was made to part with the money. It cannot, therefore, be said that the amount paid was by way of damages for breach of the contract. The settlement clearly indicates that the contract on that day ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e intention to give delivery or not is material to decide the transaction as speculative when there is no actual delivery. The Hon'ble High Court held that the definition of speculative transaction as contained in the Act has restricted the meaning of the expression 'speculative transaction' and in a sense simplified it for the purposes of computation of Income-tax. When there is no delivery under a settlement contract, it is a speculative transaction. On the other hand, however speculative the transaction might be, if there is delivery, it cannot be considered as a speculative transaction. Hence, the intention of the assessee that forward contract will be settled through actual delivery is not material and the only material thing is to see as to whether there has been actual delivery or not. 14. The Hon'ble Madras High Court in the case of Sri Ranga Vilas Ginning & Oil Mills v. CIT [1982] 133 ITR 851 had an occasion to consider the meaning of 'speculation business'. In the case before the Hon'ble High Court, the assessee was dealing in the business of groundnut oil. The assessee entered into forward contract for supply of groundnut oil. Forward contract was settled not by actual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as 'speculation business') shall be deemed to be distinct and separate from any other business. 19. The Hon'ble Madras High Court in the case of Sri Ranga Vilas Ginning & Oil Mills (supra) had an occasion to consider as to whether the forward contract for supply of groundnut oil which were settled not by actual delivery is to be considered as a speculation business in view of Explanation 2 to section 28. The Hon'ble Madras High Court held that if in a business, the assessee is doing regular business in spot dealings in a commodity and also indulges in speculative transactions in the same commodity then speculative transactions are to be held as distinct business as speculation business on account of Explanation 2 to section 28. 20. It is true that in the following cases it was held that a single transaction cannot be held as speculative business in view of Explanation 2 to section 28 :- * Addl. CIT v. Maggaji Shermal [1978] 114 ITR 862 (AP). * CIT v. Indian Commercial Co. (P.) Ltd. [1977] 106 ITR 465 (Bom.). However, the Hon'ble Rajasthan High Court in the c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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