TMI Blog2015 (11) TMI 417X X X X Extracts X X X X X X X X Extracts X X X X ..... ulsiyan, FCA For The Respondent: Shri Sanjit Kr. Das, JCIT, Sr. DR ORDER Per Shri Mahavir Singh, JM: This appeal by assessee is arising out of order of CIT(A)-XX, Kolkata in Appeal No.281/CIT(A)-XX/Wd-35(2)/2011-12/Kol dated 14.02.2013. Assessment was framed by ITO (TDS), Ward-35(2), Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the Act ) for AY 2009-10 vide its order dated 27.12.2011. 2. The only issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of business loss treating the same as speculation loss arising out of foreign exchange contracts. For this, assessee has raised following ground nos. 1 to 6: 1. On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the business loss of ₹ 3,78,44,872j - as speculation loss, which is bad in law, wrong and contrary to the facts and evidence on record. 2. On the facts and in the circumstances of the case the learned assessing officer and CIT (A) erred in treating the loss incurred on foreign exchange contracts as speculation loss. The appellant prays that, this being business loss it be allowed accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation entered into forward contract in foreign exchange in order to hedge his loss on account of fluctuations in foreign exchange rates. In the course of export business assessee claimed to have incurred total loss of ₹ 3,87,50,017/- consisting of ₹ 3,78,44,872/- on account of cancellation of forward contracts in foreign exchange and ₹ 9,05,145/- being expenditure on account of foreign exchange difference. During the course of assessment proceedings, the assessee explained before the AO that his is a recognized export house recognized by Ministry of Commerce Industries, Govt. of India. He also explained that forward contract in foreign exchange were entered into by the assessee through authorized bank following the procedures prescribed by RBI. According to assessee, he claimed the loss of ₹ 3,87,50,017/- as hedging loss in term of proviso (a) to section 43(5) of the Act and requested for treating of the same as ordinary business loss being eligible for set off with other business income. But the AO rejected the claim of the assessee and treated the hedging loss as speculation loss. Aggrieved, assessee preferred appeal before CIT(A). 4. The CIT(A) confi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of yellow maize constituted only 7.41% of his total export (01.04.2008 to 30.06.2008). The appellant submitted that due to ban on export of yellow maize he was unable to execute export contracts. But the facts on record did not show any such export contract of yellow maize having been cancelled due to this ban. Further, the appellant was also unable to prove that the cancelled forward contracts were in respect of any export order for yellow maize. The appellant was unable to adduce supporting documents in support of his contention though ample opportunities was given to him by the A.O. the appellant neither could prove that the forward contracts were in respect of export order for yellow maize nor he could produce any evidence for cancellation of such export order. The appellant was, thereby, unable to discharge his onus to prove that the transactions were hedging in nature. The forward contract were mostly booked in assessment year 2008-09 but the corresponding export sale were claimed to have been effected subsequently in the next assessment year 2009-10 exceeding the reasonable time limit. Further, the appellant was unable to prove that the forward contracts booked were to the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dentify the corresponding export/sale contract against which the said 9 forward contracts were booked and thus, the appellant could not prove his claim that the transactions were hedging in nature. In respect of the claim of loss for the remaining amount of ₹ 1,45,21,122/- (3,78,44,872 - 2,33,23,750) the appellant could come forward with some transactions but there was no reasonable equivalence of period and amount between the two contracts. Thus, the facts and circumstances of the case did not support the claim of the appellant that booking of forward contracts were hedging against his export sales. The transactions in forward contracts of foreign exchange which were settled otherwise than by actual delivery are nothing but 'speculative transaction' as per the provisions of sec 43(5). The claim of the appellant that the transactions in forward contract of foreign exchange were hedging against export sales is not acceptable in view of the discussions above. By virtue of provisions of sec 43(5), Explanation 2 to sec. 28 and sec. 73, the loss of ₹ 3,78,44,872/- in forward contract, set off with the income from export business is not allowable. Facts in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter circular No. 6/2007-08 dated July 2, 2007. According to him, booking of forward contracts in foreign exchange is a necessary incident of the assessee s export business. Such forward contracts are booked in the normal and usual course of the assessee s export business. Ld. Counsel explained the facts of this case that most of the forward contracts in question were entered into in the preceding financial year 2007-08 on the basis of the export orders in hand. Some of such export orders had shipment periods falling partly in the financial year 2007-08 and partly in the financial year 2008-09. Some of such export orders received during 2007-08 provided for shipment during 2008-09. The assessee could enter into forward contracts in the year of receipt of the export orders, namely, financial year 2007-08, covering the entire shipment period because the contracts had a validity period of one year. He explained the fact that at the time of booking of the forward contracts, the assessee had export orders in hand for US$ 2,16,08,278 but booked forward contracts only for US$ 1,00,70,000. The assessee had booked the forward contracts in round sums against the confirmed export orders but no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld. Counsel for the assessee the AO as well as CIT(A), both without going into the facts of the case disallowed the claim of hedging loss treating the same as speculation loss . 7. On the other hand Ld. SR DR argued that the assessee was unable to prove with evidence that booking of forward contracts were hedging against export sales. According to him, assessee was required to prove the existence of export sales and that he had entered into the forward contracts only for safeguarding the loss which might have occurred due to future price fluctuation in foreign currency. But he could not prove the same with documentary evidences. He drew our attention to assessment order and stated that the complete facts were discussed by AO and it was found that there was no reasonable equivalence between the period of subsistence of two contracts i.e. forward contracts and export sales contracts and the amount involved in the two contracts. According to him, the cancellation of nine forward contracts in foreign exchange aggregating to 28,00,000 US$ resulted in a loss of ₹ 2,33,23,750/- but the assessee failed to identify the corresponding export/sale contracts against which the above ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... details of export orders for maize to the extent executed before the ban and subsequently cancelled on imposition of ban are furnished in a statement annexed to in assessee s paper book. 9. We find from the above facts that the entire basis for disallowance of loss for AO was on the assumption as if ban on export of maize was the sole reason for cancellation of the export orders. He lost sight of the fact that the assessee exported diverse commodities and cancellation of export orders took place not only because of ban on export of maize but also because of global recession and world-wide slow down. Admittedly, the assessee had Shipped part quantities against several of the export orders and the exports proceeds were converted at the forward contract rate. Since the buyers did not open the letters of credit and thus cancelled the balance quantity, the assessee had no other alternative but to cancel the forward contracts to the extent unutilised. The assessee had the option to convert the export proceeds at the rate stipulated in the forward contract or alternatively at the spot market rate. In the latter case, the forward contract had to be cancelled. As a prudent businessman, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xport orders in hand. As against export orders of US$ 2,16,08,278, the assessee had entered into forward contracts only for US$ 1,00,70,000. Due to market conditions, such forward contracts could be utilised only to the extent of US$ 53,32,334.34 and the remaining contracts for US$ 47,37,665.66 had to be cancelled. We further observed that the findings of the AO that the assessee dealt in forward contracts or that it was an independent business are without any basis. Indisputably, the assessee is in export business. The booking of forward contracts in foreign exchange is a normal and necessary incident of the export business. This position is also borne out from the RBI circular. The forward contracts were booked to hedge the assessee s exposure to exchange risk in his export business as permitted by the RBI. The loss arising to the assessee upon cancellation of the forward contracts was referable to and related to the assessee's export business and arose out of the export business. The booking of forward contracts was not the assessee s business. It was not permissible for the assessee to carry on any business in forward contracts in foreign exchange. The AO also admitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer has not considered these facts. Under section 43(5) of the Income-tax Act, speculative transaction has been defined to mean a transaction in which a contract for the purchase or sale of a commodity is settled otherwise than by the actual delivery or transfer of such commodity. However, as stated above, the assessee was not a dealer in foreign exchange. The assessee was an exporter of cotton. In order to hedge against losses, 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 Vs. Sooraj Mull Nagarmull (1981) 129 ITR 169. 12. In view of the above facts and circumstances of the case, we are of the view when the assessee is not a dealer in foreign exchange but an exporter of commodities and assessee had entered into forward contracts with banks in respect of foreign exchange but some of these contracts could not be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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