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TMI Blog2024 (11) TMI 237X X X X Extracts X X X X X X X X Extracts X X X X ..... that in order to be a 'speculative transaction', there should be a contract for purchase or sale of a commodity, including stocks and shares and such contract should be settled otherwise than by actual delivery or transfer of the commodity. In other words, the transaction must be settled on a net-net basis, whereby the difference between the price prevailing on the settlement date and the contracted price is paid/ received by the parties to the contract. In the instant case of the assessee the contracts are settled by actual delivery and not on a net-to-net basis and hence the same does not fall within the meaning of 'speculative transaction' as mentioned in section 43(5) of the Act. As respectfully following the decision of Woodward Governor India (P.) Ltd [ 2009 (4) TMI 4 - SUPREME COURT] we do not find fault in the order of the CIT(A) in deleting the disallowance made by the AO in the reassessment order. Therefore, we are of the considered view that both the provision for foreign exchange fluctuations and loss on forward contract are allowable as expenditure in the impugned year and hence we uphold the order of the CIT(A) and dismiss the appeal of the revenue. - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et aside and the additions/disallowances made by the Assessing Officer be restored. 3. The brief facts of the case are that the assessee is a private limited company incorporated under the Companies Act, 1956 and is engaged in providing Fuel Management Solutions for Fossil Fuel Users and supply of Fossil Fuel. The assessee being a trader in imported coal has entered into forward contracts with banks in order to cover itself against the risk of foreign exchange fluctuation. This has been undertaken by the assessee only to mitigate the loss arising on settlement made for the imports made by the Company. The assessee filed its return of Income u/s.139(1) of the act on 29.09.2008 admitting a total income of Rs. 16,09,22,079/-. The assessment was completed u/s.143(3) of the Act on 19.10.2012. Subsequently, the case was reopened u/s.148, since the AO is of the opinion that the income to the extent of Rs. 5,20,72,552/- has escaped assessment stating that the assessee did not disallow the year end provision on foreign exchange fluctuations and loss on forward contract. The re-assessment was completed vide order u/s 143(3) r.w.s 147 of the Act for AY 2008-09 on 30.03.2016, by disallowing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has observed that the transactions entered into by the assessee were not hedging transactions but the same were speculative and therefore the assessee's case is not covered by proviso to (a) to section 43(5) of the Act. The AO has further held that the finding rendered in the decision of the Bombay High Court in the case of Bharat R Ruia (HUF) INCOME TAX APPEAL NO. 1539 OF 2010 dated 18th April, 2011 where the Court has held that future contracts for purchase / sale of an underlying security permitted to be traded on the stock exchange and settled otherwise than by actual delivery would be speculative transactions under Section 43(5) of the Act, would be apply to the facts of assessee's case and disallowed the same. 10.5 On the other hand, the assessee submitted that the total foreign exchange fluctuation loss claimed is actually Rs. 8,02,49,839/- consisting of yearernd translation loss of Rs. 4,09,91,273/- (restatement of foreign Currency) and remittance loss of Rs. 3,92,58,566/- on transactions during the year. 10.6 The assessee also claimed that the year-end provision is made in compliance with Accounting Standard AS11 and in the subsequent year, the difference between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held and assets and liabilities to be received or paid in fixed amounts, e.g. , cash, receivables and payables. The word paid is defined under Section 43(2). This has been discussed earlier. Similarly, it is important to note that foreign currency notes, balance in bank accounts denominated in a foreign currency, and receivables/payables and loans denominated in a forcing Currency as well as sundry creditors are all monetary items which have to be valued at the closing rate under AS-11 Under para 5, a transaction in a foreign currency has to be recorded in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the dale of the transaction. This is known as recording of transaction on Initial Recognition. Para 7 of AS-11 deals with reporting of the effects of changes in exchange rates subsequent to initial recognition. Para 7(a) inter alia states that on cash balance sheet date monetary items, enumerated above, denominated in a foreign currency should be reported using the closing rate. In case of revenue items falling under Section 37(1), para 9 of AS-1 1 which deals with recognition of exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is adopted only with a view to reducing the incidence of taxation. 10.12 The case of the assessee is seen from the above principle laid down by the Hon'ble Supreme Court. The AO in his order did not bring any of the above factors mentioned by the Court while disallowing the claim. Therefore, the exchange loss gain claimed by the assessee under AS-11 as year-end provision of transactions in foreign exchange is covered in terms of the above decision of the Hon ble Supreme Court. In respect of the loss on forward contracts, the AO has relied on the decision of Bombay High Court in the case of Bharat R Ruia (HUF). The case law is related to AY 2003-04 and the provisions of Section 43(5) have been amended w.e.f. 1.4.2006. This aspect has not been taken into account by the AO. Further, the assessee has claimed that the forward contracts were cancelled actually and it is not notional. In this regard also, no contrary facts have been brought on record by the AO. 10.13 Moreover unlike for AY 2010-11 and later assessment years. where the search materials had shown that the assessee was inflating his expenditure through over invoicing and major amount is involved with over invoicing of co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... detailing currency exchange remittances and adjustments for the Chennai branch for FY 2007-08. 30-43 4 Copy of the Foreign Exchange Fluctuation Ledger account tracking exchange losses for the Chennai branch for FY 2007-08. 44 5 Copy of the, Foreign exchange Fluctuation ledger account documenting currency exchange transactions and adjustments for the Mumbai branch for FY 2007-08. 45-54 6 Copy of the Foreign Exchange Fluctuation - Ledger account tracking indirect foreign exchange gains and losses for the Mumbai branch in FY 2007-08. 55 7 Copy of the Ledger account for year-end provisions related to exchange rate fluctuations for the Chennai branch. 56 8 Copy of the Ledger account for year-end provisions related to exchange rate fluctuations for the Mumbai branch. 57-58 9 Copy of the Summary Forex Loss Gain Vessel wise Sample, detailing financial fluctuations per vessel. 59 10 Copy of the MV Giorgos B Invoice 108 foreign currency (FC) 60-77 11 Copy of the forward sales contract with an Indian Overseas Bank (IOB) booking dated July 17, 2007, providing forward cover for future currency exchange rates. 78 12 Copy of the invoice for the import order of MV Orientor2, detailing the financia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relating to import of raw materials using closing rate of exchange. Any difference, loss or gain arising on conversion of the said liability at the closing rate, should be recognized in the profit and loss account for the reporting period. 6.2 In this regard, Ld.AR submitted that the year end provision was created for each AY. Further, a Reconciliation Statement of Exchange (Gain)/Loss between books of accounts and Financial Statements along with their respective ledger extracts were produced before the CIT(A) and AO during the course of assessment proceedings. Hence, the ld.AR prayed for confirming the deletion of disallowance of provision for Foreign exchange loss made by the Ld.CIT(A). 6.3 Disallowance of loss on forward contracts: Further, the Ld.AR stated that the assessee had entered into a forward contract not for the purpose of purchase and sale of the foreign currency but for the purpose of hedging against foreign exchange fluctuation risk on its import payables. Hence, it is important to note that the intention of the Company is only to cover itself against the risk of foreign currency fluctuation in the ordinary course of business and not to trade in foreign currency. Fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, borrow or sell foreign currency, 32. In fact, prior to the LERMS, residents in India were not even permitted to cancel forward contracts. The presumption of any speculative transaction is, therefore, directly rebutted in view of the legal impossibility and in view of the fact that foreign currency was neither commodity nor shares. (Emphasis supplied) In view of the aforesaid, ld.AR stated that foreign currency forward contracts cannot be regarded as 'commodity' and, therefore, the ingredients required to be present for a transaction to qualify as a 'speculative transaction' under section 43(5) of the Act are not satisfied. Consequently, the provisions of the said section are not applicable in the instant case. 6.6 Transaction settled by way of actual delivery or transfer is not 'speculative' in nature: Further, the Ld.AR argued that in order to be a 'speculative transaction', there should be a contract for purchase or sale of a commodity, including stocks and shares and such contract should be settled otherwise than by actual delivery or transfer of the commodity. In other words, the transaction must be settled on a net-net basis, whereby the diff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notional unascertained losses: The Ld.AR also argued that the Section 145(1) of the Act provides that income chargeable under the head 'profits and gains of business or profession' shall be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. Section 209(3) of the erstwhile Companies Act, 1956 provides for mandatory use of accrual basis and the Double Entry System of Accounting. The term Mark to Market is a concept under which the un-matured forward contracts are valued at market rate so as to report their actual value on the reporting date. In such an adjustment, a corresponding loss is booked through the profit and loss account, being the difference between the purchase price and the value as on the valuation date. Further, this issue is squarely covered by the decision of Supreme Court in the case of CIT vs. Woodward Governor India (P.) Ltd: 312 ITR 254 wherein, the Apex Court dismissed the appeal filed by the Department and affirming the decision of High Court has held that: loss suffered by the assessee in respect of a revenue liability on account of exchange difference as on the balance sheet would be an item ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minated in a foreign currency, and receivables/payables and loans denominated in a forcing Currency as well as sundry creditors are all monetary items which have to be valued at the closing rate under AS-11 Under para 5, a transaction in a foreign currency has to be recorded in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the dale of the transaction. This is known as recording of transaction on Initial Recognition. Para 7 of AS-11 deals with reporting of the effects of changes in exchange rates subsequent to initial recognition. Para 7(a) inter alia states that on cash balance sheet date monetary items, enumerated above, denominated in a foreign currency should be reported using the closing rate. In case of revenue items falling under Section 37(1), para 9 of AS-1 1 which deals with recognition of exchange differences, needs to be considered. Under that para, exchange differences arising on foreign currency transactions have to be recognized as income or as expense in the period in which they arise, except as stated in para 10 and para 11 which deals with exchange differences arising o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an actionable claims, money and securities. Since the provisions of section 43(5) of the Act apply only to transactions in 'commodity', it is respectfully submitted that the provisions of the said section are not at all applicable in the present case for the simple reason that foreign currency is not a trading commodity. 8. We note that in order to be a 'speculative transaction', there should be a contract for purchase or sale of a commodity, including stocks and shares and such contract should be settled otherwise than by actual delivery or transfer of the commodity. In other words, the transaction must be settled on a net-net basis, whereby the difference between the price prevailing on the settlement date and the contracted price is paid/ received by the parties to the contract. In the instant case of the assessee the contracts are settled by actual delivery and not on a net-to-net basis and hence the same does not fall within the meaning of 'speculative transaction' as mentioned in section 43(5) of the Act. In view of the above discussion and materials placed on records and respectfully following the decision of the Hon ble Apex Court in the case of CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n for foreign exchange fluctuations and loss on forward contract as detailed below: Sl.No. Date of AO order A.Y. Amount in Rs. 1 30.03.2015 2011-12 4,23,17,975/- 2 30.03.2016 2012-13 14,62,02,308/- 3 29.12.2016 2013-14 10,03,79,186/- Aggrieved by the orders of the AO, the assessee preferred an appeal before the Ld.CIT(A) 18, Chennai. 12. The Ld.CIT(A) has dismissed the appeals of the assessee for the all the three A.Ys, by upholding the disallowance made by the assessee as shown above by passing a common order on 29.09.2023. Aggrieved by the order of the Ld.CIT(A), the assessee is before us. 13. The ld.AR reiterated the arguments held in the revenue s appeal for the assessment year 2008-09 and further, submitted as below: Additionally, it is vital to note that CIT(A), for AY 2008-09, having followed the decision of the Apex Court in the case of M/s. Woodward Governor India (P.) Ltd: 312 ITR 254 had deleted the disallowances made by the AO and allowed the appeal in favour of the appellant, against which the Department is in appeal before this Hon ble Tribunal. 3. However, it is pertinent to note that the very same CIT(A), for AY 2011-12 to AY 2013-14, has dismissed the appeals merel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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