TMI Blog2018 (2) TMI 253X X X X Extracts X X X X X X X X Extracts X X X X ..... Derivatives Contracts Regulations), 2000 and the Foreign Exchange Control Manual, Chapter -3 Securities Service Contracts (Regulation) Act, 1956. However, neither the aforesaid Regulations, nor the Manual were the subject matter of consideration before the Authorities below. The transactions in currency derivatives as entered into by the assessee, were not speculative transactions. There were no derivative contracts outstanding on 31.03.2014, which could be termed as a notional loss. Accordingly, the loss sustained by the assessee in trading of currency derivatives, amounting to ₹ 17,09,121/- for A.Y. 2013-14 and ₹ 11,84,370/- for A.Y. 2014- 15 are allowed to be set off against the other business income of the assessee. So far as regards A.Y. 2013-14, the assessee has contended that alternatively there were only transactions concerning 1200 currency derivatives sold by the assessee for ₹ 6,55,55,211/-. Thus, on account of being ‘marked-to-market’, resulted into a loss of ₹ 51,789/- against a total loss of ₹ 17,09,120.61. In this regard, the assessee has placed on record, at APB 238 to 245, stock results in the books of account of the assessee, in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loss of ₹ 1,709,121/- in such activities. The said loss of ₹ 1,709,121/- and activities relating thereto were duly disclosed in the e-return filed by the assessee, on being advised that that transaction in 'currency derivatives' was liable to be held as 'speculative' within meaning of section 43(5) of the Act, he did not claim set-off of the same with other income under the business head, or under any other head of income. The assessee s accounts in respect of the regular business, as well as the derivative transactions, were duly audited. The amount of turnover and other details declared in ITR -4, as well as the audit report, contained amounts of both segments. Similarly, for assessment year 2014-15, the loss suffered on trading of currency derivatives amounted to ₹ 1,184,370/-. 4. The case of the assessee for assessment year 2013-14 was selected under scrutiny and during the course of the assessment proceedings, the assessee, vide letter dated 26.12.2014 (APB 246 - 254), submitted that:- 5.2 Since the assessee has not claimed the loss sustained in currency derivative segment because he was advised that such transaction may fall in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness income of the assessee; that while doing so, the ld. CIT(A) has failed to take into consideration the fact that all the transactions in currency derivatives made by the assessee were duly supported by the time and stamped contract notes conducted with a recognized stock exchange, resulting into loss; that the ld. CIT(A) has further erred in holding that the said transactions were marked to market transactions, overlooking the fact that there was no derivative contract outstanding as on 31.03.2013, concerning A.Y. 2013-14, which could be termed as a notional lass; that the ld. CIT(A) has also erred in ignoring the fact that even as on 31.03.2014, with regard to A.Y. 2014-15, there was no derivatives contract outstanding, which could be termed as a notional loss. 8. The ld. DR, on the other hand, has placed strong reliance on the impugned order 9. I have heard the parties and have perused the material on record. In the order for A.Y. 2013-14, the ld. CIT(A) has made the following relevant observations: 8.2 The second reason for disallowance of the loss from trading of foreign currency derivatives, as mentioned by the A.O., relates to the question about its nature. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he scrap and the foreign currency derivative trading businesses, points to the fact that the transactions in the latter were not carried out by the assessee in order to hedge the transactions of the scrap business. Hence, in view of the above facts, the only conclusion which I can draw out of these facts is that the assessee had not carried out trading in foreign currency derivatives for the purpose of hedging his scrap- trading transactions. Proviso (d) to section 43(5), excludes from the ambit of 'speculative Transactions all eligible transactions in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 carried out in a recognized stock exchange. Vide paragraph 6.3 of his submission dated 08.09.2016 reproduced above, the assessee's A.R. has given his arguments why the said loss should be allowed and as regards to A.O.'s finding that the transactions were speculative, reliance has been placed on the following cases: a) IVF Advisors (P) Ltd. vs. ACIT reported as (2015) 55 taxmann.com 469 (Mumbai -Trib) b) Adani Enterprises Ltd. vs. Addl. CIT reported as (2015) 55 taxmann.com 375 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, he has shown loss of ₹ 17,09,120.61 on its foreign currency derivative transactions. This loss is reflected in the Statement of account for the period 01.04.2012 to 31.03.2013 issued by his broker, Mansukh Securities Finance Ltd, Delhi. A perusal of the said Statement of account and copies of the related contract notes filed by the assessee with his submission, reveals that all the assessee's foreign currency derivative transactions have been reported therein on 'marked to market basis'. Hence, in my opinion the first condition of section 73(1) about there being a loss , is not satisfied in the assessee's case. CBDT'S Instruction no. 3/2010 dated 23.03.2010 has dwelled upon the impugned issue and has pointed out that losses on foreign currency derivative transactions computed on 'marked to market basis' are notional losses and not actual losses, and therefore not allowable as deduction from business income. The assessee's reliance on certain judgments, with due respect to those, will not come to his rescue because the provisions of section 73(1) allow set-off against business income, of actual losses, and not notional losses. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction means any transaction,- (A) carried out electronically on screen-based system through a stock broker or sub-broker or through ... (B) which, is supported by a time stamped contract note issued by such stock broker or sub-broker or ... indicating in the contract note the unique client identity number allotted any Act referred to in sub-clause (A) and the permanent account number allotted under this Act; (ii) recognised stock exchange means a recognised stock exchange as referred to in clause (f) of section 2 of Securities Contract (Regulation) Act, 1956 (42 of 1956) and which fulfills such conditions as may be prescribed and notifies' by the Central Government for this purpose 14. Concerning the satisfaction of the condition with regard to an eligible transaction, it is a perusal of the contract notes, placed at APB 56 to 237 shows that the transactions are in relation to transactions carried out through an on-screen based system (Currency Derivatives Segment of MCX Stock Exchange Ltd.), through a stock broker, namely, Mansukh Securities Finance Ltd. (SEBI Regn. No. INE260781431, Trading Member Code No.38500, PAN: AAACMIV01D). The contract n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t be covered under clause (a) of the proviso to section 43(5) of the Act (i.e., the transactions could not be treated as hedging transactions), but to be considered under clause (d) of the proviso to section 43(5) of the IT Act and in the light of the cases relied on by the assessee. He has then referred to section 73(1) and explanation 2 to section 28. He also referred to CBDT Instruction no. 3/2010 dated 23.03.2010 and based on his interpretation of the said Instruction, it was held that the loss incurred by the assessee was a notional loss as being carried out in 'marked to market' and thus, the ld. CIT(A) denied the benefit of set off of losses. 17. Instruction no. 3/2010, dated 23.03.2010, issued by the CBDT (APB 342- 343) as rightly contended, is an internal instruction issued by the Board for the guidance of its officers with regard to the matter pertaining to trading in currency derivatives. It is broadly divided into two parts. One is actual loss in forex derivatives. The Board has drawn the attention of the officers to the statutory provisions contained in clause (d) of the proviso to section 43(5) read with the explanation thereof. This part of the Instruction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing stock at lower of cost or market value. The Hon'ble Bombay High Court, by its order dated 15.10.2016, in ITA No. 896/2014, in CIT vs. Munjani Brothers (copy placed on record), dismissed the revenue s appeal, where the substantial question of law for the consideration of the Hon'ble High Court was as under: Whether on the /acts and in circumstances of the case and in law, the Tribunal was right in deleting the addition of ₹ 59,90,341/- made by the Assessing Officer on account of disallowance of mark to market loss on foreign exchange forward contract loss and not appreciating the fact that the said loss was not a notional loss and cannot be allowed The said appeal arose from the order dated 19.09.2013 passed by theITAT, Mumbai, passed in ITA no. 7628/Mum/2011 (copy filed). A Similar view was taken by the Hon'ble Tribunal in the case of the same assessee in ITA No. 6065/Mum/2012, vide order dated 2.12.2014 (cope placed on record). The Hon'ble High Court, held that no substantial question of law was involved in the matter in view of its order dated 1.10.2016, passed in the case of M/s D. Chetan Co. , in ITA No. 278 of 2014. A copy of the said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Section 37(1) of the Act which allows deduction in respect of expenses laid out or expanded for the purpose of business. The concept of prudence is inherent in this. 23. Thus, the instruction no. 3/2010 dated 23.03.2010 is not in accordance with law, in so far as it terms the loss in respect of the position held as at the end of the accounting period as a 'notional loss' and calls for disallowance of the same and this aspect was discussed in various cases referred before learned CIT (Appeals) also. 24. The assessee also placed reliance on the order dated 13.02.2017 passed by the Income tax Appellate Tribunal, 'SMC -3' Bench, New Delhi, in the case of Sri Kamal Kishor vs. ACIT in (ITA No. 4952/Del/2016 (page 74 - 85). In this case, adjustment to the returned income was made by the AO under section 143(1) of the Act in respect of loss of ₹ 1,550,100 on foreign currency derivatives. The Tribunal, allowing the appeal on the merits of the case, followed the decision of the ITAT, Mumbai in the case IVF Advisors (P) Ltd. (APB 272 -277) and in the case of Inventures Knowledge Services (P) Ltd. (APB 317 -341). 25. In the case of Inventures Kn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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) to (c) xx xx xx (d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; or (e) xx xx xx shall not be deemed to be a speculative transaction, Explanation 1. - For the purposes of clause (d), the expressions-(i) eligible transaction means any transaction,- (A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on is a transaction in which contract for purchase and sale of any commodity is settled otherwise than by actual delivery. It is not in dispute that in case of transaction in derivatives, the transaction is always settled otherwise than by actual delivery. The derivative derives its value from underlying asset which can be securities, commodities, bullion, currency etc. and in this instant case, tlie derivative transaction undertaken by the assessee company, the underlying asset of derivative transaction is foreign currency. The word commodity is used in broadest sense in Section 43(5) of the Act as it mentions in the Section 43(5) of the Act that the commodity includes stock and shares. Thus, derivative will be included in the definition of the word 'commodity as held in Shree Capital Services Ltd. (supra). Hence, derivative transactions in foreign currency shall be exempted from purview of speculative transactions u/s 43(5) of the Act provided other conditions as contained in proviso (d) read with Explanation 1 to Section 43(5) of the Act are fulfilled. Our view is fortified by the Memorandum explaining the provisions in the Finance Bill, 2005 which introduced clause (d) ((2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s entered into derivative transactions in foreign currency through SEBI registered broker who is a member National Stock Exchange of India Limited and these derivative transactions are carried on through National Stock Exchange of India which is a recognized stock exchange and these transactions are backed by time stamped contract notes carrying unique client identity number and PAN allotted under the Act. The reliance of the Ld. DR on the case of Araska Diamond (P.) Ltd. (supra) is misconceived as in this case the assessee did not fulfill the conditions as stipulated under section 43(5) of the Act read with proviso and Explanation thereto to entitle the assessee to bring forward contract in foreign currency within four corners of exemption from being treated as non-speculative transaction as per mandate of Section 43(5) of the Act. Thus, we hold that these derivative transactions in foreign currency as entered into by the assessee company duly fulfil all the conditions as specified u/s 43(5) of the Act read with proviso (d) and Explanation 1 to Section 43(5) of the Act. We further hold that these transactions are covered by the exception as contained in proviso (d) to Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... counting Standard-11 prescribed by ICAI also stipulate that in situation like this when the derivative transaction in foreign currency has not been settled/squared during the accounting period, the effect of exchange rate difference on the un-expired foreign currency contracts as at the end of accounting period is to be accounted for in the books of account prepared for the afore-stated accounting period. The reliance of the DR on instruction no 17/2008 dated 26th November 2008 is misconceived as in the instant case under appeal it is not a contingent or notional liability rather it is an ascertained liability which has crystallized and can be determined with reasonable certainty based upon the adverse exchange rate prevailing between United States Dollars vis-avis in relation to Indian Rupees as on the date of Balance Sheet as at 31st March 2009. Hence, We hold that the said loss of ₹ 1,09,98,560/- incurred by the assessee company on account of marked to market loss arising on the date of Balance Sheet as at 31st March 2009 on account of un-expired derivative transactions in foreign currency entered by the assessee company arising due to the adverse movement in the exchange ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by him was entitled to be allowed to be set off with other income and no part of such loss could be disallowed by holding it to be a 'notional loss'. 29. The facts of the case for assessment year 2014 -15 are in pari materia with those of assessment year 2013-14, except for the fact that there was, undisputedly, no outstanding position as on 31.03.2014 and hence, the observations with regard to assessment year 2013-14 would, mutatis mutandis, apply to assessment year 2014-15 also. 30. The ld. DR has sought to place reliance on the Foreign Exchange Management (Foreign Exchange Derivatives Contracts Regulations), 2000 and the Foreign Exchange Control Manual, Chapter -3 Securities Service Contracts (Regulation) Act, 1956. However, neither the aforesaid Regulations, nor the Manual were the subject matter of consideration before the Authorities below. 31. In view of the above, the grievance of the assessee for both the years under consideration is found to be justified and is accepted as such. Both the orders under appeal are reversed. Respectfully following the case laws as discussed hereinabove, it is held that the transactions in currency derivatives as entered in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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