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2015 (11) TMI 417 - ITAT KOLKATA

2015 (11) TMI 417 - ITAT KOLKATA - TMI - Treatment of hedging loss as speculation loss or business loss - Held that:- 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 honoured by the assessee for which it has to pay and which was debited to the P&L Account and claimed the same as business loss/hedging loss. In order to hedge against losses, .....

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ed:- 29-9-2015 - Shri Mahavir Singh, JM & Shri Waseem Ahmed, AM For The Appellant: Shri S. K. Tulsiyan & Shri Ravi Tulsiyan, 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 A .....

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ry 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 accordingly. 3. (a) On the facts and in the circumstances of the case the learned assessing officer and CIT(A) erred in observing that, the appellant had carried on independent business of dealing in forward contr .....

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to adduce supporting documents in support that, the loss incurred is business loss and not speculative loss. 5. On the facts and in the circumstances of the case the learned CIT (A) erred in holding that the loss of ₹ 3,78,44,872/- incurred in course of export business is speculative business loss and not the ordinary business loss which is wrong and contrary to the facts and evidence on record. 6. The appellant prays that the booking of forward contracts in foreign exchange was in ordinar .....

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ernational. The assessee is a recognized Export House. The assessee does not have any other business and he is not a dealer in foreign exchange. The particulars of the assessee s export sales in the preceding three years are as follows: Assessment year Export sale US$ Export sale in Rupees 2006-07 98,76,644.18 44,89,23,474 2007-08 1,90,78,433 87,49,14,679 2008-09 2.08,24,334 85,80,57,226 The assessee during the assessment year under consideration entered into forward contract in foreign exchange .....

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zed 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 t .....

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, CIT(A) observed in para 3.2 as under: 3.2. I have perused the assessment order and considered the submission of the appellant. The fact of the case is that the A.O. observed that the appellant was engaged in trading including export of sesame seeds, raw cotton, maize, bazaar etc. The appellant had not claimed to be ill the business of dealing in foreign exchange. The A.O. noticed that the appellant was dealing in forward contracts in foreign exchange. The forward contracts were settled otherwi .....

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concern M/s Navjyot International on account of Foreign Exchange Difference on cancellation or forward bookings. From the details submitted, it was observed that out of the toted debit of ₹ 3,87,50,017/-, a sum of ₹ 9,05,145/- pertains to expenditure claimed on account of foreign exchange difference and the balance of ₹ 3,78,44,872/- was loss on cancellation of forward contracts in foreign exchange booked with his bank. The A.0. asked the appellant to explain as to why the said .....

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even before this ban the export 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 wa .....

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sponding 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 extent of confirmed export sales. The appellant was unable to substantiate that at the time of booking of forward contracts he had reasonable equivalent export contracts. Further, the guidelines of RBI might have been followed in booking of forward contracts but the re .....

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subsequently cancelled but could not produce any evidence in support of such claim. The oral testimony was not supported by any corroborative evidence. The claim of oral contract is afterthought on the part of the appellant. The appellant had failed to put forward any plausible explanation to deny that the substantial number of forward transactions had been undertaken which could be held to be constituting on independent business within the meaning of explanation 2 to sec. 28 of I.T. Act. There .....

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is, he was required to prove the existence of export sales and that he had entered into the forward contracts only fm safeguarding the loss which might have occurred due to future price fluctuation in foreign currency. However, he could not prove the same with supporting documentary evidences. It was found that there was no reasonable equivalence between the period of subsistence of two contracts and the amounts involved in the two contracts. It was also found that cancellation of 9 forward cont .....

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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 con .....

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the submission of the appellant, it is observed that there is very thin line of difference to treat the nature of any transaction as to whether it is of hedging or speculation. It depends on facts of each case, even in the same line, the small deviation of facts may change the nomenclature of the transaction. In the instant case, looking to the facts and circumstances of the case, this view is stronger that the intention of the appellant during this particular year was to speculate in the forei .....

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ssee s business, export orders are sometimes received for shipments staggered over a period of several months and sometimes for immediate shipment or shipment in the next month and the export orders are denominated in foreign currency. He explained that the sale value in Indian currency which the assessee realises depends on the rate of exchange prevailing at the time of presentation of the export invoice for payment and due to adverse fluctuations in the exchange rate, it can so happen that the .....

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turnover or the previous year's actual export turnover whichever is higher. It is permissible to cancel such forward contracts. For the same Ld. Counsel referred to the relevant period s RBI's master 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 .....

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ncial 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 not exceeding the value of the export orders. At any point of time the assessee had more export o .....

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9,208 could be made. He explained that the balance export orders could not be executed because of world-wide slowdown, global recession and sluggish market conditions, which is a matter of public record. Many big business houses, financial institutions and banks world-wide faced bankruptcy. He explained that during September-November 2008 the rupee adversely fluctuated against the dollar by more than 30%. The assessee s customers did not open letters of credit resulting in non fulfillment/cancel .....

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assessee had confirmed orders for export of maize to the tune of US$ 36,62,000. The assessee exported maize of the value of US$ 7,57,159 during the financial year 2008-09 before imposition of the ban. Due to the sudden ban by the Government of India on the export of maize on July 3, 2008 the assessee had to cancel all the pending orders worth US$ 29,04,841 and was left with no other option but to cancel the forward booking as well. The details of export orders for maize to the extent executed be .....

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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 .....

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ed nine forward contracts were booked and thus the assessee could not prove his claim that the transactions were hedging in nature. In respect to the claim of hedging loss for remaining amount of ₹ 1,45,21,122/- the assessee could come forward with some transactions but there was no reasonable equivalence of period and amounts between the two contracts. Accordingly, the lower authorities have rightly treated the loss as speculative transaction as per the provisions of section 43(5) of the .....

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s and circumstances of the case in hand. We have also perused the case records. We find from records that, against the export orders for US$ 2,16,08,278, exports of US$ 41,76,126 were made during the financial year 2007-08 but during the financial year 2008-09 exports worth only US$ 57,59,208 could be made. But the balance export orders could not be executed because of world-wide slowdown, global recession and sluggish market conditions, which is a matter of public record. We observed that the I .....

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ze to the tune of US$ 36,62,000. The assessee exported maize of the value of US$ 7,57,159 during the financial year 2008-09 before imposition of the ban. Due to the sudden ban by the Government of India on the export of maize on July 3, 2008 the assessee had to cancel all the pending orders worth US$ 29,04,841 and was left with no other option but to cancel the forward booking as well. The details of export orders for maize to the extent executed before the ban and subsequently cancelled on impo .....

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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. .....

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reference to the higher export realisation. Such forward contracts for US$ 28,00,000 were consequently cancelled but the higher export realisation to the extent of ₹ 1,35,1l,357 and the higher export incentives went to offset the loss arising from such cancellation. To minimize the loss, the assessee took the spot rates which were more beneficial instead of conversion as per forward contract rates. Relevant details in this behalf are furnished in a statement annexed to the paper book of t .....

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s of ₹ 3,78,44,872/- was incurred in support of his contention that forward contracts were made on the basis of export orders in hand. The purported findings of the AO that the assessee had not submitted the export orders or that forward contracts were booked without having export orders in hand are contrary to the record. The assessee has since obtained from the AO certified copies of the export orders filed by him in course of the assessment proceedings which bear out the assessee s cont .....

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s 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 .....

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ng 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 the forward contracts were made by the assessee in accordance with RBI guidelines. The AO and CIT(A) were wholly unjustified in treating the business loss as speculative in nature. 10. This issue is now covered by the judgment of the Hon'ble Calcutta High Court in CIT v Soorajmull Nagarmull, (1981) 129 IT .....

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ld that the assessee was not a dealer in foreign exchange and the foreign exchanges were only incidental to the assessee's regular course of business and the loss was thus not a speculative loss but incidental to the assessee's business and allowable as such. Facts in the present case are very similar. Admittedly, the assessee is not a dealer in foreign exchange. For the purpose of hedging the loss due to fluctuation in foreign exchange while implementing the export contracts, the assess .....

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ay High Court in CIT v Badridas Gauridu (P) Ltd., (2003) 261 JTR 256 (Bom), wherein, the judgment of the Hon'ble Calcutta High Court was followed. To quote from the judgment of the Hon'ble Bombay High Court (at pages 257-8 of 261 HR) : "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 Tribun .....

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