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TMI Blog2013 (8) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... oss is on account of settlement of forward contracts, carried-out to hedge its liability towards import of its stock- in-trade viz. Edible oils. The assessee explained as follows :- "In the course of the business, the company enters into a contract for the import of vegetable oil from the foreign supplier. The imported vegetable oil such as crude palm oil, crude palm kernel oil which are sourced from countries such as Malaysia and Indonesia will take about 6-7 days to reach the eastern destination port in India and whereas in case of soybean oil, sunflower oil it will taken about 40 - 45 days as they are sourced from South America. In accordance with the proposed purchase, the company books a currency forward contract with its banker in order to safeguard the company interest from fluctuation in the rate of foreign currency at a future date. A forward contract in the forex market is a deal that locks in the price at which an entity can buy or sell a currency at a future date is known as currency forward contract or outright forward currency transaction. In currency forward contracts, the contract holders are obligated to buy or sell the currency at a specified price at a specifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... underlying purchase transactions of the assessee. 5. The learned Assessing Officer, however, ignored the submissions of the assessee and held that the forward contract entered into by the company were only for the purpose of purchase of foreign exchange are not against the value of invoices. He held that the forward forex contracts are independent transactions having no connection to the business of assessee and held that the assessee's contention that the forward contracts entered into for the purpose of trade and import of goods cannot accepted. Consequently, the Assessing Officer concluded that all transactions in which loss are booked are of the nature of speculative transactions as defined in Sec 43(v) of the Act and that they do not fall under the category of exceptions given in the proviso to the definition. 6. Aggrieved, the assessee preferred an appeal before the learned CIT(A) and the CIT(A) held that the assessee claims that each contract is taken for 6 days to 45 days to cover the risk of foreign exchange fluctuation during the period of transit, however, i.e., in the current case, the invoice is dated 16.04.2007 and the shipping has been done from Belawan, Indon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned CIT(A) held that the loss claimed cannot be allowed to be deducted from the business income of the assessee which has been rightly held by the Assessing Officer. 9. Aggrieved by the Order of the CIT(A), the assessee preferred an appeal before Tribunal. The learned Departmental Representative filed the following written submissions. 1. The argument of the assessee that section 43(5) is not applicable to transactions of forward con tracts in foreign exchange (cross-currency) is devoid of merit. Reliance is placed on decision Bombay High Court in the case of Bharat R. Ruia (337 ITR 452), where in it was held that "the exchange traded derivative transactions carried on by the assessee are speculative transactions covered under section 43 (5) of the Act". 2. The assertion that RBI would not allow speculation is baseless. RBI does not directly monitor transactions in each case. As per the Master Circular of RBI on the subject, the responsibility to ensure that there is underlying for such transactions lies with the Bank which is booking the forward contracts. Copies of contracts filed by the assessee in its paper book clearly show that in case of the said transactions no underl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial derivatives are "speculative transactions" as defined in section 43(5) of the Act. The learned Counsel pointed out that the question referred in the case of Bharat Ruia (supra) is in no way similar to the case of the assessee. 13. We have heard both the parties and perused the material on record. Admittedly, in this case, the assessee is not a dealer in foreign exchange. The assessee is engaged in the business of edible oils. In the course of import of vegetable oil from foreign supplier, the company entered into a contract. If the assessee in accordance with the proposed purchase booked a foreign currency forward contract with its banker in order to safeguard the company's interest from loss on account of foreign exchange fluctuation that contract cannot fall under the purview of Section 43(5) of the Income Tax Act. As per section 43(5), speculative transaction means a transaction in which a contract for the purchase or sale of commodity settled otherwise thereby actual delivery or transfer of such commodity. If an assessee in order to hedge against the exchange fluctuation losses had booked foreign exchange transaction in the forward market with the Bank and incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p. 825 (of SCR) onwards where undoubtedly the question of liquidated damages arose in the case of non-performance of a breach of contract. Section 56 of the Contract Act itself provides that for bargain and in certain contingencies of non- performance liquidated damages might be provided for in the contract, but the liquidated damages proceed on the basis that the contract has been breached by the conduct of the parties, i. e., the rights of the parties are adjusted in the manner contemplated by the parties at the time of bargain. After considering several other decisions this view was expressed by this court in the case of CIT v. Pioneer Trading Co. P. Ltd. [1968] 70 ITR 347, where this court held that a claim based on breach of contract did not come within the meaning of " contract settled " as used in Expln. 2 of s, 24(1) of the Indian I.T. Act, 1922. "Contract settled" meant contract settled before breach. After breach of contract, the cause of action was no longer based on the contract itself but on its breach. Where the money which the assessee received was in settlement of the amount of damages suffered by the assessee by reason of breach of the contract to deliver, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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