TMI Blog2016 (2) TMI 502X X X X Extracts X X X X X X X X Extracts X X X X ..... t relates to the assessment year 2009-10. The assessee is aggrieved by the decision of Ld CIT(A) in confirming the disallowance of claim of ₹ 7.84 crores relating to the loss suffered in cancellation of foreign currency forward contracts by treating the same as speculation loss. 2. The facts necessary for the disposal of the above said issue are set out in brief. The assessee is engaged in the business of importer, manufacturer and exporter of diamonds. It is also engaged in generation and distribution of power by windmill. The AO noticed that the assessee has entered into forward contracts in foreign exchange to hedge against foreign currency fluctuation risks. The assessee had declared a loss of ₹ 7.84 crores on cancellation of foreign exchange forward contracts. It is pertinent to note that the assessee had revalued the outstanding receivables in foreign currency and declared a gain of ₹ 20.39 crores. The assessee had also declared a loss of ₹ 5.29 crores on revaluation of outstanding payable in foreign currency. The AO did not disturb both the items stated above. 3. The assessee submitted that it, being an exporter of diamonds, enters into sales tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of K. Mohan Co. (Exports) P Ltd, and held as under:- In K. Mohan Exports case, it was concluded by the Hon ble earlier Bench that- Assessee-exporter having entered into forward contracts in respect of foreign exchange receivable as a result of export in respect of the export turnover and settled the same without actual delivery, the profit from such forward contract is assessable as profit from speculation business in view of Expln. 2 to s. 28 r/w s. 43(5), and speculation business not being the business of assessee s undertaking, profit from forward contracts could not be included in the profits of the business of the undertaking for the purposes of computing deduction under s. 10B. With due regards, we have perused the above findings and of the firm view that the issue itself was on different footing. To be precise, the issue before the earlier Bench was deduction u/s 10B and whether the profits from forward contracts can be said to be derived from the assessee s undertaking for the purpose of deduction u/s 10B of the Act whereas the issue on hand is entirely different. The above reasoning has been fairly conceded by the CIT(A) in her findings. For ready refe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nally decided the issue in favour of the assessee. The relevant discussions made by the Tribunal are extracted below, for the sake of convenience:- 17. Before declaring the decisions of the Tribunal on the issues raised before us, we find it relevant to scan the relevant provisions ie section 43(5) of the Act, Explanation to section 28 etc. Definitions of the speculation transaction on speculation business: 18. The provisions of section 43(5) provides for definition of speculation transactions . The said provisions read as under: 43. (1) (2) . (3) (4) . (5) speculative transaction means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips: Provided that for the purposes of this clause- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and therefore, the commodity includes the forward contract . Thus, in principle, the forward contracts, being commodity, should fall in the definition of speculation transaction and the same is subjected to fulfillment of other conditions specified in sub-section (5) of section 43 of the Act. Having held so, we shall now examine if the impugned contracts/transactions constitute hedging transactions and covered by the exclusion provisions of clause (a) to the proviso to section 43(5) of the Act. The clause (a) of the proviso to section 43(5) provides for exclusion of the hedging transaction from the definition of the speculation transactions . There are number of judgments in support of the assessee and relevant ratios or conclusions are discussed in the succeeding paragraphs. 20. Before taking up these discussions, we shall now take up the provisions of the Explanation to section 28 of the Act, which also provide definition of Speculative Business . The said explanation reads as under: Explanation 2.-Where speculative transactions carried on by an assessee are of such a nature as to constitute a business, the business (hereinafter referred to as speculation busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with the arguments of Ld Counsel for the assessee. Further, we also agree with the Ld Counsel s argument that the fact of premature cancellation cannot alter the nature of the transaction . Thus, Ld Counsel s comments on CIT(A) conclusions on treating or equating the FCs as derivatives of currency is also allowed considering the specific definition provided to derivatives in section 2(ac) of Securities Contract Regulation Act, 1956 and it is not the requirement of the law that the 1:1 correlation between the FCs and the export invoices should exist and should be established by the assessee. So long as the total value of the FCs does not exceed, the claim of the assessee is sustainable as business loss. We have also analyzed the decisions relied on by Ld DR and find they are distinguishable. Now, we shall proceed to import some conclusions of the said decisions. Relevant judgmental laws Conclusions Held portions 23. Relevant extracts from the cited judgments are inserted in the succeeding paragraphs here as under: A. Held portion in the case of D. Kishorekumar 2 SOT 769 (Mum) The details of forward exchange contract clearly show that all the forward exchan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that is the reason as to why the forward contracts were cancelled midway and the profits were booked on the same instead of using these contracts to actually meet the foreign exchange requirements at the time of paying the import bills . The due dates of payment at that point of time were only 16 days to 77 days away. The decision as to whether further hedging against the increase in foreign currency is warranted or not is essentially a commercial decision which depends on a number of factors, most important factor being the trend of currency markets at that point of time and businessman s perception about future trends of the currency market. For example, when a businessman perceives that the market value of foreign currency vis-a-vis the domestic currency will not go any higher or when the market starts the declining trend, he may see business expediency in cancellation of contract. The fact of premature cancellation, therefore, cannot alter the nature of transaction. For all these reasons, the credit shown in the P L a/c as profit on cancellation of forward contracts is as integral part of the export business, as purchases or imports .. The assessee succeeds on this issue. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e foreign exchange covered. This finding of fact has not been challenged. If in the course of normal carrying on of business certain loss or obligation or interest arise these must be deferrable to the carrying on the business and these must be incidental to the carrying on of the business. Undoubtedly, the contract for foreign exchange as such can be treated as a contract for commodity . The Conclusion of this judgment as reported reads as under: Where in the normal course of business of import and export of jute, the assessee entered into foreign exchange contract to cover up the losses and differences in exchange valuation, the transaction is not a speculative transaction. 26. The above extracts unanimously support that the FCs entered by the assessee, an exporter and not the dealer in foreign exchange, with the Banks as incidental to the export business, are business transactions and loss or gains is notof speculation nature. The only relevant decision cited by Ld DR is the one delivered in the case of S.Vinodkumar Diamonds Pvt. Ltd, (supra) and in this case, AO allowed the relevant loss as business loss and relevant portion is extracted as under: 4 He f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elling the existing FCs. However, the onus is on the assessee to explain satisfactorily why the assessee resorted to premature cancellation of some FCs. Further, it is not the requirement that there must be 1:1 precise correlation between FC and the corresponding export invoice. So long as the total FCs does not exceed the exports of the year plus outstanding export receivable, the FCs can constitute hedging transaction . Further also, the premature cancellation of FCs may not alter the above conclusions so long as the assessee has valid and acceptable explanation for such cancellations. It should not be the case, to start with, FC can be a hedging transaction but the ending of such FC is speculation . In the light of this synopsis of our views in the matter, we shall not deliberate on the impugned losses. 35. The subdivisions of the loss of ₹ 4,69,42,680/-: we have already tabulated above the three subdivisions of the impugned losses based on the timing of the cancellation of the FCs. Broadly the loss is divided into two types and the adjudication of the each subdivision of loss is given as under: (a) Loss on Cancellation of Matured FCs amounting to ₹ 4,14,8 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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