TMI Blog2018 (1) TMI 133X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant : Shri M.N.Murthy Naik, DR For The Respondent : Shri G.V.N.Hari, AR ORDER PER D.S. SUNDER SINGH, Accountant Member: 1. This appeal is filed by the revenue against the order of the Commissioner of Income-Tax (Appeals)-1, Guntur vide ITA No.56/CIT(A)- 1/GNT/2013-14dated 29.02.2016 for the assessment year 2010-11. 2. All the grounds of appeal are related to forward contracts loss on foreign exchange transactions assessed as speculation loss u/s 43(5) of I.T.Act. The assessee is exporter of tobacco and during the assessment proceedings, the assessing officer (AO) found that the assessee debited a sum of ₹ 1,43,14,575/- in Foreign Exchange difference account which included the sum of ₹ 62,20,829/- foreign exchange forward contract loss. 3. The assessee explained that a sum of ₹ 62,20,829/- was incurred by the assessee due to cancellation of foreign exchange forward contracts. The assessee entered into foreign forward contract in order to hedge the currency fluctuation risk while realizing export debtors. It was also acknowledged by the assessee that it has entered into forex exchange forward contracts with the bank in order to f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee holding that the forward contract loss is incidental to the business and relied on the decision of Hon'ble ITAT, Mumbai Bench in the case of London Star Diamond Company ITA No.6169/M/2012, taking into account various judicial pronouncements has held that forward contracts entered into with banks for hedging foreign exchange loss on outstanding receivables in foreign currency are integral or incidental to exports. Therefore, loss on such forward contracts is by nature a business loss rather than a speculative loss. The Ld. CIT(A) relied on the following observation of the Tribunal in the case cited (supra) (i) FCs were a commodity (ii) FCs, when entered into with banks for hedging losses with respect to foreign exchange fluctuations of the export proceeds, had to be considered integral or incidental to the assessee's export activity. As such, the losses and gains constituted business loss or gains, as opposed to speculation loss or gains. The fact that forward contracts were prematurely cancelled could not alter the nature of the transaction. (iii) The law does not require one-to-one correlation between the FCs and export invoices. Where total value of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely covered by the order of this Tribunal. On the similar facts and circumstances, this Tribunal, in the case of ACIT Circle-1 Vs. Southern Rocks Minerals (P) Ltd. in ITA No.195/Vizag/2015 dated 11.10.2017 allowed the appeal of the assessee following the decision of Hon ble ITAT Mumbai Bench in the case of London Star Diamond Company (I) Pvt. Ltd. Vs. DCIT in ITA No.6169/M/2012 and the decision of this tribunal in the case of ACIT, Circle-1, Rajahmundry Vs. Ramalingeswara Rice and Oil Mill on similar facts which reads as under: 8.1. The Coordinate Bench, Visakhapatnam in the case of Assistant Commissioner of Income-tax, Circle-1, Rajahmundry .v.Sri Ramalingeswara Rice Oil Mill* on similar facts in 2017] 78 taxmann.com 17 (Visakhapatnam - Trib.) held that 12. Before we, go in to the facts of the present case, let us understand, forward contracts, speculative transactions, hedging, foreign exchange loss and treatment of loss in the books of account. A forward contract is a agreement between an enterprises and a banker to purchase or sell a particular quantity of currency for a mutually agreed price at a particular date. These forward contracts are used by exporters to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nge contracts. 14. The treatment to be given to foreign currency items as per the amended AS - 11 of ICAI, notified by Central Government u/s. 211(3C) of Companies Act, does not make any distinction between items of capital nature and revenue nature. Both are required to be recognized in the Profit Loss Account. In view of the aforesaid amendment, there exists a divergence of views on the treatment to be meted out in the books of account and in the Indian Tax Laws. Further, with an increased flow of inbound/outbound transactions and their complex dynamic structuring, the tax treatment of foreign exchange gains/losses has been surrounded by huge litigation and various Courts have discussed the same in great detail. Exchange Fluctuation Difference and tax treatment of the captioned issue was discussed in great detail in the recent landmark ruling of Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326 where in the SC relied on the earlier judgment in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, observed that the law may, therefore, now be taken to be well settled that where profit or loss arises to an assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present case on hand, the assessee is into the business of export of rice and other commodities. During the previous financial year, it has achieved export turnover of about ₹ 80 crores. The forward exchange contracts are entered in the previous financial year, which was not disputed by the A.O. Though there is no export turnover for the current financial year, this is because of a ban imposed by the Government of India, on export of rice and other commodities. As rightly pointed out by the Ld. A.R. for the assessee, the Government of India imposed ban on export of rice for a temporary period. Although the ban was extended for a further period i.e. up to end of financial year 2008-09, the assessee was on the bona fide belief that the ban on export is temporary and Government may review the ban, therefore, it can continue its exports and accordingly it has continued its forward exchange contracts with the banks. Since the ban was continued for the whole financial year and also fact that during the same period, the Indian currency had a dramatic fall in the international market, the assessee has closed forward exchange contracts and suffered loss. The assessee being a prude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the ICICI Bank for hedging the cross currency transactions to insulate the revenue and to mitigate the loss. The Reserve Bank of India vide circular 22/2007-08 dated 02.07.2007 permitted a person, resident of India to enter into foreign contract with an authorized dealer to hedge an export to exchange risk in respect of transactions for which sale and purchase of foreign exchange is permitted under the Act. It means, authorized dealer can hedge the business receivables so as to enable the parties to avoid exchange value differences. The authorized dealer i.e. bank can do this only for hedging not for speculation. The Reserve Bank of India in July 2006 had issued a master circular consolidating all notifications, guidelines and circulars on the forward and derivative contracts in foreign exchange. To summarise the derivatives and option contracts are permitted for the following purposes : (i) To cover the risk of exchange in foreign exchange borrowings. (ii) To cover interest rate variations (iii) To cover exposure receivables or import payables in foreign exchange. (iv) No net flow, inflow of premium and Annexure VII to RBI Master Circular July 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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