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2016 (4) TMI 706 - ITAT MUMBAI

2016 (4) TMI 706 - ITAT MUMBAI - TMI - MTM losses disallowed - loss in respect of cancellation of forward contracts disallowed being speculative in nature - treatment of forex losses or gains - Held that:- Assessee had recognized a loss of ₹ 2,13,43,725/- on forward foreign exchange contract of $83,45,000/- which were made in order to cover the loss due to fluctuation in exchange rate and were pending for maturity at the close of the year. At the same time the assessee also booked a gain o .....

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e business houses engaged in import/export and these days specially the exchange rate is highly volatile.

The special bench decision in case of DCIT Vs Bank of Bahrain and Kuwait (2010 (8) TMI 578 - ITAT, MUMBAI ) the special bench held that MTM losses in respect of forward foreign exchange contract debited to the profit and loss account are allowable and further held (i) a binding obligation is accrued against the assessee the moment it entered into forward foreign exchange contract .....

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in the ultimate analysis , there is no revenue effect and it is only timing of taxation of loss/profit.

Following the decision of apex court in the case of Woolward Governor India Pvt. Ltd (2009 (4) TMI 4 - SUPREME COURT ) and special bench decision in the case of Bank of Bahrain and Kuwait(supra) , we are of the considered view that case of the assessee is fully covered by the decisions of the coordinate note benches and we therefore respectfully following the same allow the appeal o .....

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assessee has raised the following grounds of appeal: 1. The learned CI.T.(A) erred in upholding the addition made of ₹ 2,13,43,725/- by the learned AO on a mistaken fact that this amount represents loss in respect of cancellation of forward contracts and being speculative in nature is not allowable as per the provisions of Sec.43(5) whereas in reality, this loss is on restatement of outstanding forward contracts (marked to market) as at year end. He has totally misunderstood the facts and .....

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e appellant that the loss shown was exclusively due to forward contract against which no delivery was made. 3. The learned CI.T.(A), inspite of driving home specifically in writing on the subject, erred in not following various judicial pronouncements squarely on the issue relied upon by the appellant including that of the Hon. Supreme Court in the case of Woodward Governor(312 ITR 254) and of jurisdictional Mumbai ITAT Special Bench in the case of Bank of Baharain & Kuwait (2010) 5 ITR (Tri .....

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iness income. 2. At the outset the ld AR submitted that the ground no. 1 was only effective ground and pressed. The facts in brief are that the assessee filed its return of income on 30.09.2009 declaring an income of ₹ 2,37,29,127/-. The assessee was engaged in the business of trading, manufacturing and export of cut and polished diamond for which the assessee had to import the raw diamond. Case of the assessee was selected for scrutiny and statutory notices were issued u/s 143(2) and 142( .....

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ring the course of assessment proceedings noticed that the assessee had charged to the profit and loss account, a loss of ₹ 2,13,43,275/- on forward contract for sale re-stating the same at the exchange rate prevalent at the yearend which was not allowable under the Income Tax Act as being contingent and notional in nature on the analogy that the actual loss or profit would materialize only upon when the contract was performed. The ld AO relied upon the instruction no. 3 of 2010 which prov .....

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1.2 I have carefully and dispassionately considered the facts and circumstances of the case. It is not disputed that the appellant had claimed in its return of income for assessment year 2008-09, a loss of ₹ 2,13,43,725/- on account of exchange rate fluctuation of outstanding debtors and creditors for sale and purchase of foreign currency considering the exchange rate as on 31.3.2009. It is also not disputed that the appellant has cancelled forward contracts in US dollar which were booked .....

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rom its bankers. However due to various commercial consideration exigencies and / or changes in the forex market the appellant company had to cancel forward contracts which were booked during the accounting year relevant to assessment year 2009-10. 5.2.2 A perusal of the relevant details available before me indicates that the appellant had indeed entered into several forward contracts all of which were cancelled during the year. A forward contract is a an agreement between a buyer and seller who .....

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is was done to avoid the risk of loss due to foreign exchange fluctuation. The appellant at the time of agreeing to export took into consideration its cost in rupees and also considered the spot price of rupee against foreign exchange. When the actual export is made, this spot price may be different as against' the spot price on the date on which the appellant expected an export order. On the date or receipt of foreign exchange, if the spot price of rupee against foreign exchange increases t .....

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r forward contract at the sale price of export. Alternatively, he can get the spot price on the date of accepting the export order as the sale price and the difference due to spot price on the date of settlement of forward contract may be credited as profit due to forward contract. However, during the course of assessment proceedings before the AO and during the course of appellate proceedings before me it is not disputed that loss shown is exclusively due to forward contracts against which no a .....

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ally or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips. It is clear that a transaction is speculative in case the contract is periodical or ultimately settled otherwise than by actual delivery or transfer of the commodity. In the instant case, it has been admitted that the loss debited on account of forward contract is in respect contracts in which there has been no actual delivery. 5.2.4 The Hon'ble Karnataka High Court in the case of V. N. S .....

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t delivery then the transaction is speculative. In case a dispute arises and the amount is paid as a breach of, the -contract then the matter is to be considered differently. 5.2.5 In order that a transaction may fall within the scope of the expression speculative transaction' it must be a transaction in which a contract for purchase or sale of any commodity, including stocks and shares, periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or .....

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ery or transfer of the commodity envisaged by the contract, the promisee, in terms of s. 63 of the Indian Contract Act, 1872, accepts instead of it, any satisfaction which he thinks fit and what is really settled by damages is the dispute between the parties' and, therefore, it is quite different from the settlement of the contract. A contract is settled when it is either performed or the promise dispenses with or remis, wholly or in part, the performance of the promose made to him or accept .....

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of Hoosen Kasqm Dada (India) Limited V/s CIT (1964) 52 ITR 171 (Cal) had an occasion to consider as to whether the intention to give delivery or not is material to ,decide the transaction as speculative when there is no actual delivery. The Hon'ble High Court held that the definition of speculative transaction as contained in the Act has restricted the meaning of the expression 'speculative transaction' and in a sense simplified it for the purposes of computation of income tax. When .....

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as Ginning & Oil Mills Vs CIT (1982) 133 ITR 85 (Mad) had an occasion to consider the meaning of 'speculation business'. In the case before the Hon‟ble High Court, the assessee was dealing in the business of groundnut oil.. The assessee entered into forward contract for supply of groundnut 0il. Forward contract was settled not by actual delivery but by payment of difference. Such loss was held to be loss of speculation business. 5.2.10 The Hon'ble Andhra Pradesh High Court .....

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nperformed contracts was cnsidered as speculation loss. 5.2.11 Proviso, to s. 43(5) specifies certain categories of transactions which cannot be treated as speculative transaction. Exclusion is of transaction in respect of contract for actual delivery of goods manufactured or merchandise sold by him. In this case, contract is in respect of foreign exchange which is not goods manufactured by assessee. Hence, it cannot be said that transaction of settlement of foreign exchange contract settled wit .....

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ss. 5.2.13 The Hon'ble Madras High Court in the case of Sri Ranga Vilas Ginning and Oil Mills (supra) had an occasion to consider as to whether the ward contract for supply of groundnut oil which were settled not by actual delivery is to be considered as a speculation business in view of Expln. to s. 28." The Hon'ble Madras High Court held that if in a business, the assessee is doing regular business in spot dealings in commodity and also indulges in speculative transactions in the .....

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of transactions and forward contracts have been taken by the appellant and cancelled. Thus, it is not an isolated transaction. Hence, in view of Expl No.2 to s.28, the profit from the forward contract will have to be assessed as profit from speculation business. 5.2.16 The LAO has relied on the provision of sub-section 5 of Section of 43 the Act and the provision of Section 73 r.w. Instruction NO.3 of 2010 dated 23.3.2010 issued by the CBDT in order to come to a considered conclusion that the d .....

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1960 dated 12.9.1960 issued vide (F No.4 (124)6060-TPL) wherein hedging transaction is connected though not the same, commodities not to be treated as speculative transactions provided other conditions of explanation 2 section 24 are satisfied. As per the answer to point No.3 of the CBDT‟s circular No.23 of 1960, it was clarified by the Board that only in the case of bonafide ready delivery contract having been settled by actual delivery the transactions need not be treated as speculative .....

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system of accounting the question to be asked is whether the liability is crystallized during the previous year. Hon'ble Bombay High Court in the case of CIT vs Kamani Metal Products Pvt Ltd (1994) 208 ITR 107 BOM has held that where the liability has not crystallized during the previous year, the loss was not allowable. Similar views have been held in the following decisions:- (i) CIT vs Indian Overseas Bank(1985) 151 ITR 446 (Mad) (ii) Indian Molasses Co.Ltd vs CIT (1959) 37 ITR 66 (SC) ( .....

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upra)'s case. In that case, wherever dollar rates stood reduced, the department had taxed the gains and it was only in the year in question when the loss was not allowed. Whereas in the present case, the appellant itself has submitted that whenever 'mark to market' valuation results in loss the same is debited to Profit and Loss Account. However, if such valuation results in profit the same is ignored and not credited to the Profit and Loss Account. 5.2.19 I have also perused the dec .....

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of forward contracts of exchange were not in respect of specified export or import orders. In the present case all contracts have been cancelled. Therefore the facts of the present case are clearly distinguishable from the facts mentioned in the case of CIT vs Badridas Gauridu Pvt Ltd(supra). The LAO has further distinguished the case of B Vijaykumar & Co. (ITN No.2510/Mum/2002) and facts of Kishorekumar & Co. vs DCIT in ITA No. 3883/Muml.97with the facts of the present case. As far as t .....

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fact necessarily to be determined on appreciation of facts surrounding the transaction and by not mere application of a principle of law. Therefore the decision of Hon'ble Delhi High Court does not come to the rescue of the appellant. On the other hand there are various decisions as cited below which support the case of the revenue in this case. a) Shree Capital Services Ltd vs Acti (2009) 121 ITD 498; b) ACIT vs K Mohanan Export Pvt Ltd (2011) 7 ITR 507; c) Bengal & Assam Co.Ltd vs CIT .....

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trine of res-judicata or estoppels by record does not apply to income-tax proceedings. The fact that in subsequent or earlier assessment year, the LAO has treated the speculation loss as business loss will not estoppel the LAO from giving a finding as to whether the loss arising on account of cancellation of forward exchange contracts without actual delivery was' speculation loss even if it is held otherwise in the subsequent assessment year. Strong reliance is placed on the following decisi .....

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ted before us that the case of the assessee was covered in its favor by decisions of the Hon‟ble Supreme court, High court and Tribunals which the AO and CIT(A) failed to appreciate. The effective sole ground as argued by the ld AR was against the disallowance of marked to market loss of ₹ 2,13,43,725/- which has accrued from the revaluation and re-statement of outstanding forward contract at the end of the year as per accounting standard -11 based foreign exchange on the closing dat .....

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ed at the current exchange rate prevailing at the end of the year. The ld counsel strongly placed reliance on the following decisions of Tribunal in which the decision of hon‟ble Supreme Court in the case of Woolward Governor India Pvt. Ltd(2009) 312 ITR 254 and Special Bench decision in the case of Bank of Bahrain and Kuwait (41SOT29) were followed:- a) Venus Jewel -ITA No.7328 and 7329/Mum/2013 dated 31.7.2015; b) Rikin Exports-ITA No.3757/Mum/2013 dated 24.6.2015; c) Raj Gems-ITA No.448 .....

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10.2013; l) Societe Generale -ITA No.3597,3595,8198/Mum/2005 dated 30.1.2013; m) Bhavani Gems -ITA No.2855/Mum/2010 dated 30.3.2011; n) H Dipak and Co-ITA No.7629/M/2011 dated 30.4.20; o) Kumbh Gems-ITA No.6600/M/2012 dated 2.1.2014; and p) Raj Gems-ITA No.4486/M/2012 dated 28.10.2013. 6. The ld DR on the other hand relied heavily on the orders of authority below. 7. We have considered the rival submissions and perused the materials on records and also after going through the decisions relied up .....

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ex losses or gains which were not actually realized but a likely gain if the value of receivables are realized at the yearend .The same practice was being followed in the earlier year and was also accepted by the Revenue. The need to hedge is a commercial expediency and necessity which is practically followed in all the business houses engaged in import/export and these days specially the exchange rate is highly volatile. The special bench decision in case of DCIT Vs Bank of Bahrain and Kuwait ( .....

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d to have crystallized when a pending obligation on the date of balance sheet is determinable with reasonable certainty(iv) as per AS-11 when the transaction is not settled in the same accounting year as that in which it occurred , the exchange difference arises over more than one accounting period (v)in the ultimate analysis , there is no revenue effect and it is only timing of taxation of loss/profit. The Tribunal in the case of Venus Jewel (supra) has vide para 10 observed and held as under : .....

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hus dismissed. The Tribunal in the case of Rikin Exports (supra) has vide para 6 held as under : 6. Having regard to the circumstances of the case and in the light of the decision cited (supra), we uphold the order passed by CIT(A) and dismiss the appeal filed by Revenue The Tribunal in the case of Inter Jewl Private Limited (supra) vide para 10 has observed and held as under : 10. We have carefully perused the order of Ld. CIT(A) and the decisions brought to our notice. In our considered opinio .....

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