TMI Blog2014 (10) TMI 776X X X X Extracts X X X X X X X X Extracts X X X X ..... ll to any of the contract and it had not provided detail of any purchase order relatable to specific transaction, during the assessment or appellate proceedings - Thus, the transactions undertaken by it have to be taken as transactions relatable to Foreign Exchange - the order of the FAA does not suffer from any legal or factual infirmity – Decded against assessee. - ITA No. 5631/Mum/2012 - - - Dated:- 17-10-2014 - D. Manmohan And Rajendra, AM,JJ. For the Appellant : Shri Manish J Sheth ORDER Per Rajendra,AM. Challenging the order dt.09.07.2012 of the CIT(A)-9,Mumbai,assessee-company has raised following Grounds of Appeal: 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming disallowance of loss of ₹ 2,98,48,551/- on account of cancellation of foreign currency forward contract by treating it as speculation loss 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in believing that forward contracts are not relatable to any specific export bills of the assessee 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ought to have considered tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utilised, that most of them were cancelled,that all the contracts had been honoured by cancellation, that delivery of currency had not taken place,that the assessee had not hedged its outstanding receipts by way of these forward contracts and due to cancellation of assessee's obligation to pay, that the assessee dealing in diamond and these contracts were in currency, that the assessee had not entered into certain number of contracts against specific bills or in the same commodity-diamond and out of those contracts of few were cancelled, that the transaction undertaken by the assessee did not suggest that those contracts were part of normal business activity of the assessee and the cancellation was incidental to the business, that none of the transaction could be categorised as hedging transaction, that the forward contracts were not relatable to the specific bills of the assessee, that the assessee could not relate any single bill to any of the contracts, that no purchase order had been provided during the course of assessment proceedings against which the forward contracts bad been booked, that the transaction in forward contracts cancellation had been carried out by the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also made a reference to the cases of Seksaria Riswan Sugar Factory (121 ITR 196) Budge Budge Investment Co. Ltd (73 ITR 722) and Davenport Co (P) Ltd. (100 ITR 715). He further held that the expression 'Speculative transaction' meant and included a transaction of any commodity, including stocks and shares, periodically or ultimately settled otherwise than by actual delivery, that the expression commodity was not defined under the Act, that that the word commodity meant an article of trade or commerce which was tangible in nature, that the expression commodity would cover all articles of trade including stocks and shares, that section 43(5) did not seek to expand the scope of expression commodity, that it merely emphadized that the transaction in commodity included transactions in stocks and shares, that transactions in future contracts, like transactions in stock and shares, when settled otherwise than by actual delivery would be speculative transactions u/s.43(5) of the Act, that derivatives could be used as insurance cover against certain types of business risks such as fluctuations in the rate of foreign exchange, fluctuations in the rate of interest on borrowings, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e AO had given a finding that booking and cancellation of forward contracts of exchange were not in respect of specified export or import orders, that in the present case all contracts had been cancelled,that the facts of the present case were clearly distinguishable from the facts mentioned in the case of Badridas Gauridu Pvt. Ltd(supra). He cited cases of Shree Capital Services Ltd.(121 ITD 498), Bengal Assam Co. Ltd vs. CIT (227 CTR 399), AJWA Fund World Resorts Ltd.(9 SOT 354). He finally held that the burden of proof was upon the assessee to show that transactions were merely hedging transactions within the meaning of proviso to section 43(5) of the Act, that where the assessee had not produced any evidence to show that the transactions in question were only hedging then the transactions must be held to be speculative transaction. In the result, he upheld the order of the AO. 4. Before us,Authorised Representative(AR)stated that the assessee was dealing in diamonds, that it had to cancel certain deals and had suffered losses,that total outstanding matched with total exports,that loss suffered by the assessee was not speculative loss,that facts of case of Bharat Ruia wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 24 such transaction during the year under consideration.It was claimed on behalf of the assessee that these transaction were not speculative transactions as held by the departmental authorities,as stated earlier Concepts of speculative transaction/hedging transactions are not new concepts of tax laws Distinction between the two type of transactions is vital and both have different consequences in determining the tax liability arising out of them. In our opinion, the definition of 'speculative transaction' in section 43(5) of the Act,gives a simple test for deciding, for the purpose of Act, as to what a speculative transaction means. If a contract for sale or purchase is ultimately settled and no actual delivery of the goods is effected under the settlement then it has to be treated a speculative transaction. The requirement of section 30 of the Indian Contract Act of the existence of the intention of the parties even at the time of the original contract not to give or take delivery of the goods in order to make it a speculative/ wagering transaction is dispensed with for the purpose of the Act Secondly, if actual delivery is not given/taken under the settlement of contr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... date on which the contract was entered into.In respect of a hedging contract, profit/loss arising there from can be ascertained or crystallised at fixed intervals of the term when the clearance takes place. By resorting to counterbalancing transactions in the market for the ready commodity on the one hand and in the hedge market on the other hand, the hedger seeks to safeguard his position. The movement of prices in the two markets may not always follow an identical course and the hedger might at times gain and at times lose but such a gain or loss would be marginal and far less than what it would be if the person had not hedged at all. While, however, the hedging operation protects the hedger against loss arising from adverse fluctuations in prices, it also prevents him from making windfall profit owing to favourable fluctuations in prices as well. The forgoing of such a possible windfall profit is the price which he pays for the insurance against loss. This well-known technique, of hedge trading clearly implies forward contracts both ways, namely, for sale and purchase with a view to guarding against adverse price fluctuations. These forward contracts by way of hedge transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clause (a) of the proviso to section 43(5). With regard to speculative/hedging transactions we had benefit of perusing the judgments of M.G.Brothers (154 ITR 695), Nuddea Mills Co.Ltd (171 ITR 169), Delhi Flour Mills Co.Ltd. (95 ITR 151) and Pankaj Oil Mills, (115 ITR 824) delivered by the Hon'ble High Courts of Andhra Pradesh, Calcutta, Delhi and Gujarat respectively. From the principles laid down by above mentioned judgments one thing becomes clear that for hedging transaction commodity dealt should be the same.If the subject matter of the transactions is different it cannot be termed a hedging transaction.In the case of M.G. Brothers(supra)assessee -firm was carrying on business of the manufacturing and sale of groundnut oil and its by-products. For the AY.1973-74, it filed return declaring an income of ₹ 2,90,807/- and claimed a loss of ₹ 1,60,946/- in respect of certain transactions which it had entered into in cotton seed oil and neem oil.The assessee claimed that said transactions were hedging transactions. Matter finally travelled up to the Hon'ble High Court of AP. Deciding the issue against the assessee Hon'ble Court held as under: .the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... handise sold by him. It will depend upon the facts of each case whether a particular transaction by way of forward sale, which is mutually settled otherwise than by actual delivery of the said goods, has been entered into with a view to safeguard against loss through price fluctuation in respect of the contract for actual delivery of the goods manufactured. In order that forward transactions in commodities may fall within proviso (a) to section 43(5) of the Act, it is necessary that the raw materials or merchandise in respect of which the forward transactions have been made by the assessee must have a direct connection with the goods manufactured or the merchandise sold by him.In other words raw material in respect of which the assessee has entered into forward transactions must be the same raw material which is used by him in his manufacturing business. We find that in the case under consideration assessee was not dealing in Foreign Exchange, therefore transactions entered into by it in Foreign Exchange cannot be held to be hedging transactions.As the assessee is dealing in diamonds and FC entered into only for diamonds would have been covered by the proviso (a) to the sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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