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Deputy Commissioner Of Income Tax Company Circle-I (1) , Chennai Versus M/s Asvini Fisheries Pvt Ltd

2016 (1) TMI 538 - ITAT CHENNAI

Treatment of loss arisen on account of foreign exchange derivative contracts - Held that:- Assessing Officer has to consider the foreign exchange derivative in proportion to export turnover as regular business transaction of the assessee. If the derivative transaction undertaken by the assessee is in excess of export turnover then that loss suffered in respect of that portion of excess transaction has to be considered as speculative loss only and that excess derivative transaction has no proximi .....

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sue to the file of the Assessing Officer for fresh consideration.

This issue was considered by the Mumbai Tribunal while delivering the decision in the case of Araska Diamond P. Ltd, [2014 (10) TMI 776 - ITAT MUMBAI ] wherein the Tribunal came to the conclusion that the transactions, which were prematurely cancelled, cannot be considered as business transaction and it is to be considered as speculative transaction. - Decided in favour of revenue for statistical purposes. - ITA No.2246 .....

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ts of the issue are that the assessee-company is engaged in the business of processing and export of marine products. The assessee suffered a loss of ₹ 2,56,46,747/- on account of foreign exchange forward contract transactions and treated the same as part of business loss and set off such loss against the business income of the assessee. The Assessing Officer was of the opinion that this is a speculative loss and cannot be set off against business income of the assessee in view of the prov .....

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ns dealt with in the course of carrying in the regular course of its business activities and not as a separate business activity and therefore, the forward contracts entered into with Bank in foreign exchange is not a speculative transaction and the same falls outside the purview of speculative transaction by proviso (c) to sec. 43(5) of the Act. The CIT(A) also relied on the decision of the Chennai Tribunal in the case of M/s Celebrity Fashions Ltd in I.T.A.Nos.1249 & 1250/Mds/2013 for asse .....

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l before us. 4. We have heard both the parties and perused the material on record. Similar issue was considered by this Tribunal where one of the Members is a party, in the case of M/s Majestic Exports vs The Joint CIT in I.T.A.Nos.1336 and 3072/Mds/2014, dated 24.7.2015 wherein it has been held as under: "7. 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 co .....

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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.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 shar .....

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ery 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 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 I .....

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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 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 .....

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st 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 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, .....

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ly 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 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: Explana .....

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e 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 (… … … … … … … … … … … … … … …. … … … … … …. … … … … … … … … …. … … .. .. &hellip .....

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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 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 intende .....

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ssee. 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 excess transactions to be considered as speculative loss only as that excess derivative transaction has no proximity with export turnover and t .....

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peculative transactions. ITAT found that the amount involved in the forward contract (FC) was more than 100% of the turnover of the assessee, that FC were not relatable to specific bills, that the assessee had not related any single bill to any of the contract and had not provided any purchase order during the assessment or appellate proceedings. ITAT found that in the case under consideration assessee was not dealing in Foreign Exchange, therefore transactions entered into by it in Foreign Exch .....

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able to contradict the finding of fact that booking and cancellation of FC of foreign exchange were not in respect of specified export or import. Besides, finding of fact given by the Revenue Authorities remained un-contravened that loss in question, shown by it pertained to those FC transactions, against which no actual delivery of foreign exchange was made. On appreciation of the facts surrounding the transaction ITAT had reached at the conclusion that transactions entered in to by the assesse .....

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. ITAT was of the opinion that the order of the FAA does not suffer from any legal or factual infirmity. Therefore, considering the peculiar facts and circumstances of the case, ITAT confirmed his order FAA and decide effective ground against the assessee." 6. In view of the above orders of the Tribunal, we are of the opinion that the Assessing Officer has to consider the foreign exchange derivative in proportion to export turnover as regular business transaction of the assessee. If the der .....

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