TMI Blog2013 (8) TMI 941X X X X Extracts X X X X X X X X Extracts X X X X ..... ng Officer when asked the assessee to explain why it should not be disallowed as per the provisions contained under sec. 43(5)(d), the assessee submitted that it had used the forward contracts are for hedging foreign currency exposure. It was submitted that a binding obligation accrued against the company the minute it entered into forward exchange contracts. It was submitted that most of the forward contracts are settled by delivery of currency (USD) and loss on account of forward contracts springs directly from and is incidental to the carrying on of business. It was submitted that a direct and proximate nexus exists between export/import business and the loss on account of forex derivatives. It was submitted that the loss is not incurred on a capital account or fixed assets so as to make it a capital loss and it was submitted that the company consistently followed the same method of accounting in regard to recognition of profit or loss both, in respect of forward foreign exchange contract as per the rate prevailing on 31st March of the year. It was submitted that liability is said to have been crystallised when a pending obligation on the balance sheet date is determinable wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f contract has taken place and the asset continues to be owned by the company. He further observed that in the instruction, it has been explained that in cases where no sale or settlement has actually taken place and the loss on marked to market basis has resulted in reduction of book profits, such a notional loss would be contingent in nature and cannot be allowed to be set off against the taxable income. He further noted that with regard to loss on a forex derivative transaction arising on actual settlement/conclusion of contract and is not a notional or marked to market book entry, a further question will arise as to whether such a loss is on account of a speculative transaction as contemplated in section 43(5)(d) of the Act. 4. As per proviso (d) to sub-section (5) of section 43, any eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956, that has been carried out in a recognised stock exchange shall not be treated as a speculative transaction. The Assessing Officer following aforesaid instruction of CBDT ultimately came to a conclusion that the assessee s claim of loss is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot over-ride the settled principles of law. It was further contended by the assessee that the requirements of section 37 were fully satisfied as loss pertained to the revenue transactions of the assessee and the same is laid down and expended for the purpose of business. It was contended that the term paid also includes payable and what is relevant and necessary is a binding obligation on the part of the assessee. In support of his contention, the assessee relied upon the decision of Hon ble Supreme Court in case of CIT vs. Woodward Governor India Pvt. Ltd. 312 ITR 254 and the decision of Income-tax Appellate Tribunal (Special Bench) in case of DCIT vs. Bank of Bahrain and Kuwait ( 41 SOT 290). 6. The CIT (A) after considering the submissions of the assessee though accepted the fact that the forward contracts of the assessee had been entered into in the ordinary course of business in respect of underlying import/export business transactions but he however observed that the forward contracts in essence cannot be said to be different from derivatives. He further was of the view that marked to market is only a methodology of assigning value to a position held in a financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of underlying export business transactions and that in any event the CBDT instructions are against the settled principles of accounting and precedent cases and therefore is not tenable. 7. The learned authorised representative for the assessee reiterating the contentions raised before the lower authorities submitted that there is no dispute with regard to the liability claimed by the assessee but the dispute is only with regard to allowability as the Assessing Officer has disallowed the loss by treating it as notional. It was submitted that not only loss was recognised in the books of accounts but also debited to profit and loss account. Hence, it cannot be considered to be a notional. It was further contended that the Board s Instruction No.3 of 2010 dated 23-3-2010 issued by the CBDT is not applicable as it is relating to derivative transaction. In any event, the circular issued by the Board cannot supersede or over-ride settled position of law. It was submitted that the forward contract being part and parcel of business transactions of the assessee, the loss arising there from is allowable as a business expenditure as it is laid out and expended for the purpose of busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such a conclusion, the CIT (A) was not justified in disallowing the claim of loss by treating it as notional and in the nature of derivatives by simply following the Board s Instruction No.3 of 2010 dated 23-3-2010 issued by the CBDT which in our view is not applicable to the assessee as it relates to only derivative transaction whereas the forward contracts in the case of the assessee is clearly linked to the export/import business transactions of the assessee. In the circumstances, it cannot be said that the loss is notional. The co-ordinate bench of this Tribunal while considering identical issue in case of Leo Edibles Fats Ltd. Vs. DCIT (ITA No.396/Hyd/2012 dated 31-5-2013 held as under:-. 13. We have heard both the parties and perused the material on record. Admittedly, in this case, the assessee is not a dealer in foreign exchange. The assessee is engaged in the business of edible oils. In the course of import of vegetable oil from foreign supplier, the company entered into a contract. If the assessee in accordance with the proposed purchase booked a foreign currency forward contract with its banker in order to safeguard the company s interest from loss on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the foreign exchange contract. Here, in this case, the contract was for 1,00,000 and what the assessee paid in fulfilment of that obligation which was an implied term at the time of entering into the contract' did not amount to a breach of the contract. He referred us to Section 56 of the Contract Act and the decision of the Supreme Court in the case of Naihati Jute Mills Ltd. v. Khyaliram Jagannath. He specially drew our attention to the observations appearing at p. 825 (of SCR) onwards where undoubtedly the question of liquidated damages arose in the case of nonperformance of a breach of contract. Section 56 of the Contract Act itself provides that for bargain and in certain contingencies of non-performance liquidated damages might be provided for in the contract, but the liquidated damages proceed on the basis that the contract has been breached by the conduct of the parties, i. e., the rights of the parties are adjusted in the manner contemplated by the parties at the time of bargain. After considering several other decisions this view was expressed by this court in the case of CIT v. Pioneer Trading Co. P. Ltd. [1968] 70 ITR 347, where this court held that a claim based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion has to be considered as speculative transactions. The assessee before us filed a chart showing the details of speculative transaction at ₹ 19,63,702/-. The Assessing Officer is directed to exclude these contracts and decide accordingly. For this limited purpose, we remit the issue back to the file of the Assessing Officer and to decide accordingly. 10. The Hon ble Gujarat High Court in case of Friends and Friends Shipping Pvt. Ltd. (Tax Appeal; No.251 of 2010 dated 23- 8-2011)(supra) after following the decisions of the Hon ble Bombay High Court in case of CIT vs. Badridas Gaurida (P) Ltd (261 ITR 256) and the decision of Hon ble Calcutta High Court in case of CIT vs. Soorajmull Nagarmull (129 ITR 169) held that when the assessee is not a dealer in foreign exchange and for the purpose of ledging the loss due to fluctuation in foreign exchange while implementing export contract, the assessee had entered into the forward contract with the bank, then the loss arising as a result of such forward contract cannot be said to be speculative as per section 43(5)(d) of the Act. Considered in the light of ratio in the judicial precedents mentioned hereinabove, it is admitted ..... X X X X Extracts X X X X X X X X Extracts X X X X
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