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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 ..... same proportion to the profit of the business of the undertaking as it bears to the export turnover to the total turnover. The words uses are profit of the business of the undertaking . The business of the undertaking is to manufacture and export readymade garments. As held profit from forward contract is profit to be assessed under the head Speculation business and speculation business is not the business of the undertaking. Hence, for the purpose of computing deduction u/s 10B, speculation business cannot be considered as the business of the undertaking. Thus we hold that the CIT(A) was not justified in holding that profit from forward contract is to be included in the profit of the business of the undertaking for the purposes of computing deduction u/s 10B. X X X X Extracts X X X X X X X X Extracts X X X X ..... refore held that profit attributable to the forward contract is not a profit derived from export and is therefore not eligible for deduction under section 10B. The Assessing Officer treated such profit as income from other sources. 5. Before the learned CIT(A), the assessee mentioned that the assessee had made an export turnover of 54.412 million dollars from exports to USA, UK, Europe. The assessee booked forward contracts for 25.150 million dollars which is 46 per cent of the export turnover. The assessee has not over-book forward contracts in order to speculate. The forward contracts were booked based on business requirements substantiated by actual exports performed. Before the learned CIT(A) the assessee filed the details of forward contracts booked, goods delivered in respect of forward contracts and forward contracts cancelled. The assessee also filed the details of brought forward contracts and carry forward contracts. It was also submitted that cancellations were made only in a case where on a particular date of delivery of the contracted amount to the banker, the assessee did not either have export proceeds which are realized on that or exports which are ready for negoti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned DR drew our attention to the decision of the Hon'ble Apex Court in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT [1978] 113 ITR 84 to buttress her point that profit from forward contracts is not a profit derived from export. The learned CIT(A) thereafter referred to the decision of the Chennai Bench in the case of Tocheunglee Stationery Mfg. Co. (P.) Ltd. v. ITO [2006] 5 SOT 428 in which it was held that for the purpose of claiming deduction under section 10B, the income should be derived from export business and should form part of export turnover. For coming to such conclusion, the Chennai Bench relied on the decision of the Hon'ble Madras High Court in the case of CIT v. Menon Impex (P.) Ltd. [2003] 259 ITR 403 2. 8. On the other hand, the learned AR placed reliance on the decision of the Mumbai Bench in the case of D. Kishorekumar & Co. (supra). In this case, it was held that profit on cancellation of forward contracts effectively reduces cost of purchase in respect of imports and cannot be construed as independent of assessee's business. It was therefore held that 90 per cent of such profit cannot be excluded under section 80HHC(4B). The learned AR als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract is in respect of those contracts against which no actual delivery of foreign exchange was made. The forward contract is to be settled either by delivery or the difference is either credited or debited by the banker. 10. Section 43(5) is as under- "Speculative transaction" means a transaction in which a contract for the purpose 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 )a contract in respect of raw materials or 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 merchandise sold by him; or (b)a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c )a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction' it must be a transaction in which a contract for 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. What is important to be noticed is that the contract for purchase or sale of any commodity must be settled otherwise than by the actual delivery or transfer of the commodity or scrips'. The view taken by this court has been approved by the Supreme Court in CIT v. Shantilal (P.) Ltd. [1983] 144 ITR 57 wherein it was observed that a contract can be said to be settled for the purpose of speculative transaction under section 43(5) of the Act if, instead of effecting the delivery or transfer of the commodity envisaged by the contract, the promisee, in terms of section 63 of the Contract Act, 1872, accepts instead of it, any satisfaction which he thinks fit and what is really settled by damages is the dispute between the parties and, therefore, it is quite different from the settlement of the contract. A contract is settled when it is either performed or the promisee dispenses with or remits, wholly or in part, the performance of the promise made to hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the decision of the Hon'ble Calcutta High Court in the case of CIT v. Sooraj Mull Nagarmull [1981] 129 ITR 169 3. In this case, the assessee entered into foreign exchange contract in 1952. The assessee disputed its liability and the dispute was settled in 1955. On the basis of these facts, it was held by the fact finding authority that the assessee was required to pay difference by way of liquidated damages. On this basis, it was held that the loss is not speculative. This aspect has been considered by the jurisdictional High Court as mentioned above. If the contract is settled during the subsistence of the contract without actual delivery then it amounts to a speculative transaction. If dispute arises and it is the breach of the contract, which is settled, then it may not amount to speculative transaction. 17. Proviso to section 43(5) specifies certain categories of trans- actions which cannot be treated as speculative transaction. Exclusion is of transaction in respect of contract for actual delivery of goods manufactured or merchandise sold by him. In this case contract is in respect of foreign exchange which is not a good manufactured by assessee or merchandise sold by him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oriented undertaking is to be allowed as deduction. For the purposes of sub-section (1), the quantum of deduction is to be computed as per section 10B(4). The deduction permissible is in the same proportion to the profit of the business of the undertaking as it bears to the export turnover to the total turnover. The words uses are "profit of the business of the undertaking". The business of the undertaking is to manufacture and export readymade garments. We had already held that profit from forward contract is profit to be assessed under the head 'Speculation business' and speculation business is not the business of the undertaking. Hence, for the purpose of computing deduction under section 10B, speculation business cannot be considered as the business of the undertaking. We have also considered the decision of the jurisdictional Bench on which the learned AR has placed reliance. The facts in that case are different, as in that case, the issue was in respect of interest and not profit from other business. Hence, the ratio of law as laid down by the jurisdictional Bench in the case of Motorola India Electronics (P.) Ltd. (supra) is not applicable. 23. Considering the fac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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