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M/s. Majestic Exports, Tirupur Versus The Joint Commissioner of Income Tax, Tirupur Range, Tirupur

Addition treating business loss as speculative loss in respect of loss on account of forex derivative contracts (Exotic Cross Currency Option Contracts) - Held that:- Explanation to sec.73 creates a deeming fiction by which among the assessee, who is a company, as indicated in the said Explanation dealing with the transaction of share and suffer loss, such loss should be treated to be speculative transaction within the meaning of sec.73 of the Act, notwithstanding the fact that the definition of .....

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sactions and derivative transactions are having the same meaning, so far as sec.43(5) of the Act is concerned. Again, in view of the fact that both delivery transactions and derivative transactions are non-speculative as far as sec.43(5) is concerned, it follows that both will have the same treatment as far as application of Explanation to sec.73 is concerned. Therefore, aggregation of the share trading profit and loss from derivative transactions should be done before the Explanation to sec.73 .....

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3 is concerned, which creates a deeming fiction.

From the above decision of the Calcutta High Court in the case of Baljit Securities Pvt. Ltd. cited [2014 (6) TMI 475 - CALCUTTA HIGH COURT] the issue stands covered in favour of the assessee. However, we make it clear that total transaction considered for determining this business loss from derivative transactions cannot be more than the total export turnover of the assessee for the assessment year under consideration and if the deriva .....

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If any capital is introduced by the partner, the assessee shall prove the identity of the partner, genuineness of the transaction and credit worthiness of the partner. In the present case, if the partner confirmed the introduction of the capital from their account then the burden cast upon the assessee is discharged as held by the Andhra Pradesh and Telangana High Court in the case of CIT vs. M. Venkateswara Rao, [2015 (3) TMI 153 - ANDHRA PRADESH HIGH COURT]. Accordingly, in the interest of ju .....

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sekar, C.A For the Respondent : Shri. Krishnamurthy, IRS, CIT. ORDER PER BENCH These two appeals by the assessee are directed against different orders of Commissioner of Income Tax (Appeals)-II, Coimbatore for the above assessment years. 2. The first common ground in this appeal is with regard to confirmation of addition made by the Assessing Officer treating business loss as speculative loss in respect of loss on account of forex derivative contracts (Exotic Cross Currency Option Contracts). 3. .....

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the structured contracts with State Bank of India on various dates, the assessee incurred huge losses to the extent of ₹ 4,30,44,915/- and the assessee claimed the said loss as business loss. As per the assessee trading in futures and options is no longer speculative transactions as per proviso (d) to Sec.43(5) inserted by the Finance Act, 2005 w.e.f. 01.04.2006. However, the Assessing Officer observed that loss incurred out of trading in futures and derivatives contract could not be cons .....

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he assessee is in appeal before us. 4. The ld. Authorised Representative for assessee submitted that derivatives had been excluded from the definition of speculative business u/s.43(5) by sub-clause (d) to the Provision inserted with effect from 01.04.2006. Further, he submitted that Explanation to sec.73 was introduced to prevent companies from trading in their own group shares and showing losses to be set off against business profit. The legislature decided to exempt the derivatives from the p .....

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tion 8 of the Foreign Exchange Regulations Act, 1973, provides that except with prior general or special permission of the RBI, no person other than an authorized dealer shall purchase, acquire, borrow or sell foreign currency. Further he submitted that in the normal course of business of import and export, the assessee entered into foreign exchange contract to cover up the losses and differences in exchange valuation, the transaction is not a speculative transaction. Further, the ld. Authorised .....

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tion as to cover under sub-section (5) of Section 43 of the Act. 5. The ld. Authorised Representative for assessee relied on the order of the Co-ordinate Bench in the case of M/s. Cotton Blossom (India) P. Ltd, in ITA No.2032/Mds/2012, dated 21st February, 2013 wherein it was held that The assessee is an exporter of hosiery garments. There is no dispute that the assessee is not a dealer in foreign exchange. The assessee s forex transactions only in the course of its business and not as a separat .....

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tained in foreign currency is capital receipt and not speculative profit. 5.2 The ld. Authorised Representative for assessee relied on the judgment in the case of CIT vs. Badridas Gauridu (P) Ltd 261 ITR 256, (Mumbai) wherein it was held that The assessee was not a dealer in foreign exchange. The assessee was a cotton exporter. The assessee was an export house. Therefore, foreign exchange contracts were booked only as incidental to the assessee s regular course of business. The Tribunal has reco .....

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osses, the assessee had booked foreign exchange in the forward market with the bank. However, the export contracts entered into by the assessee for export of cotton in some cases failed. In the circumstances, the assessee was entitled to claim deduction in respect of ₹ 13.50 lakhs as a business loss. This matter is squarely covered by the judgment of the Calcutta High Court, with which we agree, in the case of CIT v. Soorajmull Nagarmull [1981] 129 ITR 169. 5.3 The ld. Authorised Represent .....

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ative for assessee relied on the order of the Co-Ordinate Bench, Mumbai in the case of DCIT vs. Intergold (I) Ltd, 124 TTJ 337, wherein it was held that Profits on cancellation forward exchange contract were assessee s profits of business, but as such profits were not derived from export activity and were received from banks in India not in convertible foreign exchange in terms of subs( 2), of s.80HHC,90 percent of the same has to be reduced from profits of business as per Expln.(baa) of s.80HHC .....

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ermed as a wager. The first test is that there must be two persons holding opposite views touching a future uncertain event. The second test is that one of those parties is to win and the other is to lose upon the determination of the event. The third test is that both the parties have no actual interest in the occurrence or nonoccurrence of the event, but have an interest only on the stake. The first test is satisfied in this case as there are 2 parties. But, the second test may not be satisfie .....

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he rate of exchange hitting a high or low. This is because of the fact that the very intention of the transaction is to hedge an underlying exposure. It is like a contract of insurance, where, on the happening of an uncertain event, the sum assured becomes payable Therefore the argument that the contract was a wager, that it was brought forth by misrepresentation, that Mr.P.K.Viswanathan had no authority and that there was a payment of premium by the Bank, are all rejected. As a matter of fact, .....

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strike price of the option (iv) volatality of the underlying asset (how much it moves up or down during a given period) (v) risk free rate of return (usually the interest rate paid by Govt ot banks on guaranteed investments). After Black-Scholes model, several models were developed, the noted among them being the Garman- Kohlhagen model designed to arrive at the price of FX options. Therefore derivatives transactions ceased to be purely speculative deals, long time ago. The pricing of the deals, .....

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3) of the Foreign Exchange (Regulation) Act, 1973, permitting authorised dealers (of foreign exchange) to offer forward cover to resident customers in any currency of their choice. Normally customers used to require forward cover facilities in respect of the foreign currency, in which their receivables or payables are denominated, against the Indian Rupee. But these circulars acknowledged the fact that the customers may at times, wish to hedge against a third currency instead of the rupee. There .....

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dian rupee. If for any reason, customers wish to hedge them against a third currency instead of the rupee, authorised dealers may provide forward sale or purchase facilities as appropriate, in the currency of the receivables or payables against the third currency provided the latter currency is also a permitted currency and is actively traded in the markets. Partial hedging may also be permitted whereby the customer hedges the currency of receivables or payables against the third currency first .....

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sed dealers were permitted by this circular to provide forward sale or purchase facilities as appropriate, in the currency of the receivables or payables against the third currency provided the latter currency is also a permitted currency and is actively traded in the markets. This facility was allowed in view of the fact that at times, a third currency other than the rupee may be more stable, while the rupee may be volatile and in turbulent weather. 5.6 The ld. Authorised Representative for ass .....

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t the transaction of the assessee cannot be treated as speculative transaction. We have also gone through the copies of the contract notes incorporated in the paper book filed before us. A perusal of the contract note shows that the assessee has either entered into call option or put option and on the settlement day the transaction has been settled by delivery, either the assessee has paid US dollar on the settlement day or has taken delivery of US dollar. 7.5 To sum up, the derivatives include .....

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, in ITA No.1645/Mds/2013 and ITA No.2275/Mds/2014, dated 27.02.2015 wherein it was held that We have heard the rival submissions and carefully perused the material on record and case laws relied by both the parties. In this case before us, one of the major business activities of the assessee is export of business garments as it appears from the financial statements submitted by the assessee. Therefore, it is obvious that the assessee would be having huge sundry debtors resulting from export of .....

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the Reserve Bank India Act, 1949 defines derivative as a financial instrument whose value depends on the value of the underlying exposures. In the case before us, the underlying exposure is the foreign currency. The commonly used forex derivatives are Forward contracts, Options contracts and Swap contracts. These instruments are used to hedge the currency risk on account of adverse currency movements. In the present case before us, the assessee has selected to book Options Contract as per the ad .....

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.Therefore, it is apparent in the case of the assessee that the assessee had entered into Options Contract (derivative) with the bank in order to hedge its foreign exchange risk. In the case of the assessee, what has happened is that due to adverse foreign exchange movement, the bank has debited the loss to the assessee s account. Thus, the loss debited by the bank in the assessee s account has crystallized and is a realistic loss suffered by the assessee. In these circumstances, the issue under .....

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ctly attributable to the normal business of the assessee. (iii) The loss incurred by the assessee is realistic and not notional. (iv) Only money changers and banks are allowed to trade in foreign currency and the assessee is neither a money changer nor a bank. (v) The assessee has only utilized the service of nationalized bank in order to iron out the loss arising out of foreign currency fluctuation risk by entering into forex derivative contract. (vi) The Special Bench of the ITAT, Kolkata Benc .....

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reat the same as non-speculative transaction. By the above directions, it appears that though the CBDT has recognized the loss arising out of forex derivatives on actual settlement of the contracts, directed the Revenue to treat the same as speculative transaction when they are transacted through nationalized banks and as not speculative, when these transactions are transacted through recognized stock exchange. (viii) It is pertinent to note here that the bankers act as an advisory agent to the .....

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actual export turnover whichever is higher. Where exact amount of underline transaction was not ascertainable according to RBI guidelines, the contracts could be booked on the basis of reasonable estimate. The assessee has taken its hedging position in accordance with the guidelines of RBI and the same is not disputed. (x) The claim of the assessee was that the underlying exposure both in respect of Euro and USD is more than adequate to cover the hedging positions taken in respect of cross curre .....

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ons transacted by the assessee are through nationalized banks in compliance with the RBI regulations. These regulations permit the assessee to enter into such derivative transactions only by fulfilling certain conditions in the course of the business of the assessee. These regulations do not permit the assessee to enter into forex derivative contract as a separate business. (xiii) Section 73(1) of the Act restricts the set off of speculation loss against the other business income in only those c .....

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sdictional Madras High Court in the case M/s.Rajashree sugars and chemicals Ltd Vs. Axis Bank Ltd., in O.A Nos.251 & 252 of 2008 in C.S.No.240 of 2008 O.A. Nos.526 & 527 of 2008 in C.S No.240 of 2008A. Nos.1926, 1927, 2446 and 2447 of 2008 in S.S No.240 of 2008 vide order dated 14.10.2008 reported in 8 MLJ 261 has held that derivative transactions ceased to be speculative transactions or wages because pricing of the deal follows a scientific pattern on the basis of financial mathematics. .....

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ort business of the assessee, which cannot be considered as speculative. Moreover in the case of the assessee foreign currency contracts cannot be treated as wagering contracts for the reasons discussed herein above. Section-43(5) of the Act is applicable to transactions in commodity or stocks and shares. If currency is treated as commodity, then according to Section 43(5) (a) of the Act, such transaction shall not be deemed to be speculative transaction. Further currency cannot be treated as st .....

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he totality of the facts and circumstance of the case and the decisions relied upon herein above, we allow the grounds raised by the assessee s on this issue for all the three appeals in favour of the assessee and accordingly we hereby direct the Revenue to set off of the losses incurred by the assessee on account of forex derivatives contracts against the business income of the assessee . 5.8 Further, he also relied on the order of the Co-ordinate Bench in the case of M/s. S.P. Apparels Ltd vs. .....

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purely to hedge the currency exposure of the assessee and he prays that both the appeals may be allowed. 6. On the other hand, the Departmental Representative submitted that one has to examine whether the derivative transaction for foreign currency will be included in the definition of 'commodity' or not. According to ld. Departmental Representative a perusal of Section 43(5) would indicate that it reads as "a contract for purchase and sale of any commodity including stocks and shar .....

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ld not have specifically excluded trading through stock exchange under Section 43(5)(d) of the Act. Therefore, it was evident that derivatives will form part of 'commodity' mentioned u/s.43(5). He placed reliance on the order of the Special Bench of the Calcutta Tribunal in the case of Sri Capital Services vs. ACIT(2009) (121)TD (Cal) wherein it was clarified that derivatives are commodities for the purpose of Sec.43(5)(d). The relevant head notes of the judgement is reproduced as under: .....

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ons, i.e., a form of derivatives, in which underlying asset was shares, said loss was rightly disallowed by revenue authorities by invoking provisions of section 43(5)- Held yes". 6.1 Further, ld. Departmental Representative submitted that the Bombay High Court in the case of CIT vs. Bharat R. Ruia(HUF) 337 ITR 452(Bom) wherein it was held that transactions in derivatives are speculative transactions and not business loss. It was held as under:- "Held, allowing the appeal, that the ass .....

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A perusal of the above judgements and averments contained therein, it was evident that the derivative transactions are included in the meaning of commodities and in these cases the transactions were held as speculative transactions before Section 43(5)(d) was brought in by Finance Act 2005, wherein transactions in shares alone were treated as non- speculative. The dictionary meaning of commodity is "any product that can be used for commerce or an article of commerce which is traded on an a .....

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r purchase by individuals. It was only in mid 2000, that the Government and Reserve Bank of India allowed the trading in foreign currency. It was much later, in 2007, that the State Bank of India come out with a scheme for trading in foreign currency derivatives.Therefore it is evident that when the Income Tax Act framed in 1962 the Parliament in its wisdom could not have foreseen large scale forex and forex derivatives transactions could be undertaken by the assessee. This is the reason why tra .....

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his derivative contracts assessee can neither deliver US dollars nor Japanese Yen from the export earnings. The assessee can derive a profit or loss based on the currency movement ie. Japanese Yen Vs. US Dollars. Therefore, the claim of the assessee that these are hedging based on the export earnings cannot be accepted. The argument of the assessee that these contracts were entered into based on development research report of the RBI is merely a fiction created by the assessee to justify its ent .....

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date/knock of date mentioned in the contract has resulted in huge losses to the assessee as shown in-the copy of the ledger account. Further it may be noticed that the assessee's export bills for the past four years did not have a single exports in Japanese Yen. Therefore, it is also pointed out the fact that these transactions had nothing to do with export receivables of the assessee. A careful analysis of the nature and type of cross currency derivative transactions whether to be treated .....

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nese Yen with US Dollars during a fixed period. These transactions are clearly a speculative bet on the currency which are in the nature of a wager contract. c) The forex derivative transactions are not settled by actual delivery of foreign exchange but only the difference between the agreed price on the maturity date that is credited or debited to the account of the assessee. d) The assessee claims that his transactions are as per RBI guidelines and FEMA regulations a conclusive view cannot be .....

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dertaken the risk of buying dollars and selling Japanese Yen, when the company was never a buyer of Dollars nor did they ever have any Japanese Yen assets. These derivative transactions were complex leveraged structures which were sold by the bankers to the assessee. Based on the currency movement at the maturity date or at the knock out time the assessee suffered huge losses which were disproportionate to their normal business. f) The fact that the Reserve Bank of India has passed penalty order .....

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a_statement made in the contract note which is devoid of any merit. Neither the bank nor the assessee has analysed or stated any specific underlying exposure or balance sheet exposure of the assessee in the derivative transaction. If there was a real underlying exposure as mentioned, the assessee could not have suffered such a huge loss. Therefore, what is mentioned in the Contract Note is a mere recital to overcome the conditions mentioned by the Reserve Bank of India for the bank and the asses .....

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the arguments but forward by the assessee and has passed a detailed assessment order and the Commissioner of Income Tax (Appeals) confirmed the view of the Assessing Officer. He placed reliance on the order of the Tribunal in the case of Shri Vinodkumar Diamonds, (P) Ltd. vs. Additional Commissioner of Income Tax (2013) 35 Taxmann 337, the Tribunal wherein it was held as under Section 43(5) of the Income-tax Act, 1961 - Speculative transactions [Hedging transactions] - Assessment year 2008-09 - .....

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Held, yes - Whether for hedging transactions it is necessary that commodity in respect of which forward transactions have been made by assessee must have a direct connection with goods manufactured or sold by assessee - Held, yes - Whether, where assessee was dealing in diamonds and forward contract transactions entered into by it was in foreign exchange, same could not be held as hedging transactions - Held, yes Whether, therefore, forward contract transactions in foreign exchange, against whi .....

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derivative transaction entered into by the assesses are without hedge, underlying and there cannot be any delivery against derivative transactions. The principle laid down in the above judgement will squarely apply in the case of the assessee. The claim of the assessee's derivative transactions are having an underlying hedge against export bills of the assessee, is akin to saying that an exporter visiting Hong Kong and having a loss from his gambling in a Casino in Macau are to be treated as .....

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ctions were a separate activity to obtain speculative profit based on the currency movements ie. US Dollar Vs. Japanese Yen during a particular period. In other words US Dollar and Japanese Yen were mere dices on the gambling table. The movement of Japanese Yen Vs. US Dollar went against assessee's call on them. This resulted in a huge speculation loss. Therefore, the derivative transactions undertaken by the assessee have no relation whatsoever with the assessee's export business either .....

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n nature as such the loss incurred on this transaction cannot be set off against business income of the assessee. According to the ld. Authorised Representative for assessee, the derivative transaction cannot fall under sec.73. Explanation to sec.73 creates a deeming fiction by which among the assessee, who is a company, as indicated in the said Explanation dealing with the transaction of share and suffer loss, such loss should be treated to be speculative transaction within the meaning of sec.7 .....

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Therefore, both profit/loss from all the share delivery transactions and derivative transactions are having the same meaning, so far as sec.43(5) of the Act is concerned. Again, in view of the fact that both delivery transactions and derivative transactions are non-speculative as far as sec.43(5) is concerned, it follows that both will have the same treatment as far as application of Explanation to sec.73 is concerned. Therefore, aggregation of the share trading profit and loss from derivative .....

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er it is from share delivery or from share derivative. 8. From the above, it is concluded that both trading of shares and derivative transactions are not coming under the purview of Section 43(5) of the Act which provides definition of speculative transaction exclusively for purposes of section 28 to 41 of the Act. Again, the fact that both delivery based transaction in shares and derivative transactions are non-speculative as far as section 43(5) is concerned goes to confirm that both will have .....

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ment of the Calcutta High Court in the case of M/s. Baljit Securities Pvt. Ltd. (88 CCH 313) wherein held as under:- Clause (d) of Section 43(5) became effective with effect from 1st April, 2006. Therefore, prior to 1st April, 2006 any transaction in which a contract for the purchase or sale of any commodity including stocks and shares was periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrip was a speculative transaction. Sub-section 1 of .....

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also in shares where delivery was not ultimately taken. In other words, the assessee has been dealing in actual selling and buying of shares as also dealing in shares only for the purpose of settling the transaction otherwise than by actual delivery. The question arise whether the losses arising out of the dealings and transaction in which the assessee did not ultimately take delivery of the shares or give delivery of the shares could be set off against the income arising out of the dealings an .....

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f shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase. In order to resolve the issue before us, the section has to be read in the manner as follows: Explanation : Where any part of the business of a company (… … … … … … … … … … … … … … …. … &helli .....

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med to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares. It would, thus, appear that where an assessee, being the company, besides dealing in other things also deals in purchase and sale of shares of other companies, the assessee shall be deemed to be carrying on a speculation business. The assessee, in the present case, principally is a share broker, as already indicated. The assessee is also in the business of buying and .....

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ove decision of the Calcutta High Court in the case of Baljit Securities Pvt. Ltd. cited supra, the issue stands covered in favour of the assessee. However, we make it clear that total transaction considered for determining this business loss from derivative transactions cannot be more than the total export turnover of the assessee for the assessment year under consideration and if the derivative transaction is in excess of export turnover, then that loss suffered in respect of that portion of e .....

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g Officer had added a sum of ₹ 25,23,500/- introduced by cash in the name of Mrs. K. Angathal in the capital account of the firm. The assessee was unable to furnish the source for the same to the Assessing Officer. Similarly during the course of appeal before the Commissioner of Income Tax (Appeals) also, the assessee was not able to establish the source of capital introduced by Mrs. K. Angathal. Even a perusal of the Mrs.Angathals return of income would show that apart from share from Maj .....

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Forum: 3B mistake

Notification: Seeks to amend notification no. 1/2017- central tax(rate) dated 28.06.2017 to give effect to gst council decisions regarding gst rates

Notification: Seeks to amend notification no. 1/2017- integrated tax(rate) dated 28.06.2017 to give effect to gst council decisions regarding gst rates.

Forum: GST - TRAN1 - filed - Data uploaded with Remarks Processed with Error - Not coming in Electronic credit ledger - need suggession guidance

News: Notification Issued For GST Actionable Claim On Branded Food Products

Highlight: Classification printed computer stationary/manifold Business Forms - to be classified under Chapter Heading 4820.00 or under Chapter Heading 4901.90 - items like A4 sheets, advertisement and job card to be classified under Chapter 49

Forum: GST Invoice

Article: Websites of Government Departments need lot of improvement. We are noticing detoriations in them for example, case of website of ITAT.

Article: RCM Applicability to persons not liable to get registered us 23(1)

Article: Credit of unsold stock [Section 140(3)] - Actual Credit as well as Notional Credit - Part-I - GST Transitional provisions

News: GST Refund - Blockage of Working Capital of Exporters - earlier also there was a normal blockage of funds for a period of 5-6 months at least

News: Clarification about Transition Credit - ₹ 1.27 lakh crore of credit of Central Excise and Service Tax was lying as closing balance as on 30th June, 2017 - claim of credit of ₹ 65,000 crore is not unexpected

Article: 20 Things You must know about E Way Bills in GST Law

Article: MISTAKES IN DRAFTING

Forum: Duty Drawback- Urgent

Highlight: The Customs and Central Excise Duties Drawback Rules, 2017 and All Industry Rates (AIRs) of Drawback related changes -reg. - Circular

Highlight: The definition of "subsidiary company" or "subsidiary" u/s 2(87) of the Companies Act, 2013 shall come into force w.e.f. 20-9-2017

Highlight: Central Government notified the All Industry Rates of Duty Drawback Schedule w.e.f. 1.10.2017 - Notification

Notification: All Industry Rates of Duty Drawback Schedule w.e.f. 1.10.2017

Circular: Investment by Foreign Portfolio Investors in Corporate Debt Securities Review

Notification: Exemptions on supply of services under UTGST Act

Notification: Rates for supply of services under UTGST Act

Notification: Exemptions on supply of services under IGST Act

Notification: Rates for supply of services under IGST Act

Notification: List of Exempted supply of services under the CGST Act

Notification: Rates for supply of services under CGST Act

Highlight: Acceptance of deposits by companies from its members - conditions relaxed in case of Specified IFSC Public company and a private company - Rule 3 amended

Notification: Rate of exchange of conversion of the foreign currency with effect from 8th September, 2017

News: Tax Payers Advised To Confirm Identities Of Income Tax Search Authorities

Notification: Amendment in Appendix 3 (SCOMET items) to Schedule- 2 of ITC (HS) Classification of Export and Import Items 2012

Notification: The Customs and Central Excise Duties Drawback Rules, 2017

Circular: The Customs and Central Excise Duties Drawback Rules, 2017 and All Industry Rates (AIRs) of Drawback related changes -reg.

News: GST implementation smoother than expected: Jaitley

Forum: Due date of Filing TRAN-1



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