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2015 (9) TMI 494 - ITAT CHENNAI

2015 (9) TMI 494 - ITAT CHENNAI - TMI - Disallowance of loss incurred by the assessee on forward contracts and other derivative contracts as speculation loss - Held 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-specu .....

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stipulated for payment of export proceeds or within the time period allowed for payment of interest to the concerned bank. Further, it is to be seen whether the volume / quantum of derivative transaction entered by the assessee is more than the total export turnover and payment of interest to bank and volume of transaction cannot be more than these two components. Accordingly, we are directing the Assessing Officer to keep these facts in mind and decide the issue in the light of the Tribunal or .....

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y the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-I, Coimbatore dated 01.11.2012 for the assessment year 2009-2010. 2. The grievance of the assessee in this appeal is with regard to confirming the disallowance of loss incurred by the assessee on forward contracts and other derivative contracts as speculation loss. 3. The facts of the case are that during the relevant previous year, the assessee were granted credit arrangement by ICICI Bank limited to hedge .....

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e assessee and also in favour of the bank, to settle the contract, upon movement of exchange rate. This facility was arranged purely for management of exchange risk in connection with its business of production and sale of auto castings. With the above objective, the assessee arranged for credit facilities through ICICI Bank limited and obtained the following credit facilty:- (i) Forward contract limit for ₹ 5.0 Million. (ii) Other Derivative limit ₹ 10.0 Million and (iii) Total limi .....

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s expenditure. 3.2 The Assessing Officer disallowed the loss of ₹ 90,08,639/- as speculation loss. Aggrieved the assessee preferred an appeal before the Commissioner of Income Tax (Appeals). 4. The Commissioner of Income Tax (Appeals) observed that the Assessing Officer held that the options are speculative in nature and also held that the loss incurred by the assessee cannot be accepted as business loss but as a speculative loss. The contracts show that they are for the sale/purchase when .....

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otional sale of the foreign currency. It was further seen that these transactions have been done as a business by itself. As mentioned in the annexure of ICICI Bank terms and conditions, the forward contract is for one year and other derivatives contract is for three years. The purpose of this derivative contract was to hedge interest rates and or currency risks. Nowhere in the contract it was seen that the purpose of this contract was to manage and minimize the exchange fluctuation loss against .....

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rencies including cross currencies, the assessee has entered into the realm of speculation in a fluctuating foreign exchange Forex markets. It has to be examined whether the derivative transaction for foreign exchange will be included in the definition of commodity. A perusal of Section 43(5) would indicate that it reads as a contract for purchase and sale of any commodity including stocks and shares. From this, it was clear that it was an inclusive definition and not an exclusive definition. Fu .....

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re, it was evident that derivative will form part of commodity mentioned u/s 43(5). The Commissioner of Income Tax (Appeals) placed reliance on the order of Special Bench of Calcutta Tribunal in the case of Shree Capital Services Ltd vs. ACIT (2009) 121 ITD 498, it was clarified that derivatives are commodities for the purpose of Section 43(5)(d). It was also held that where the assessee suffer loss on account of futures and options i.e., a form of derivative in which underlying asset was share, .....

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ntained 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 nonspeculative. A perusal of the contract note and details furnished by the assessee would indicate that the transaction entered into by the assessee was not based on any export bill or export receivable .....

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nst the export bill or receivables by the assessee. A foreign exchange derivative, if it is a hedged, should reduce the risk and loss to the assessee. A perusal of the contract notes and corresponding hedge loss incurred by the assessee during the short period, would indicate that the derivative transactions have only increased the risk to the assessee and not reduced the risk like a hedge. Considering the facts and circumstances contained in the above transaction, it was evident that the deriva .....

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came up for consideration before this Tribunal in the case of M/s. in ITA Nos.1336 & 3072/Mds/2014 for the assessment years 2009-2010 and 2010-2011 vide order dated 24.07.2015, wherein it was held as under:- "6. We have heard both the parties and perused the material on record. In this case, the assessee was engaged in the business of manufacturing and export of hosiery garments. During the course of export, the assessee entered into derivative contract. The assessee incurred loss in t .....

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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 speculative transaction mentioned in sec.43(5) of the Act, the transaction is not of that nature as there has been actual delivery of the scrips of share. As per the definition of sec.43(5), trading of shares which is done by taking delivery does .....

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ned, 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 is applied. The above view has been taken by Special Bench of this Tribunal, Mumbai Bench, in the case of CIT v. Concord Commercial Pvt. Ltd. (2005) 95 ITD 117 (Mum)(SB). In this case, the Special Bench held that: "Before considering whether .....

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es 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 same treatment as regards application of the Explanation to Section 73 is concerned, which creates a deeming fiction. Now, before application of the said Explanation, aggregation of the business profit/loss is to be worked out irrespective of the fact, whether it is from share del .....

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urchase 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 Section 73 provides as follows: '(1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.' The resultant effect was that any loss arising out .....

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ise 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 and transactions in actual buying and selling of shares. An answer to this question is to be found in the explanation appended to Section 73 which reads as follows: 'Explanation: where any part of the business of a company other than a company whose gross total inc .....

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to be read in the manner as follows: "Explanation: Where any part of the business of a company (… … … … … … … … … … … … … … …. … … … … … …. … … … … … … … … …. … … .. .. … .. … … … .. … .. … … … .. … … .....

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n 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 selling of shares for self where actual delivery is taken and given and also in buying and selling of shares where actual delivery was not intended to be taken or given. Therefore, the entire transaction carried out by the assessee, indicat .....

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