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TMI Blog2015 (10) TMI 2771X X X X Extracts X X X X X X X X Extracts X X X X ..... bad in law, wrong and contrary to the facts and evidence on record. 2. On the facts and in the circumstances of the case the learned assessing officer and CIT (A) erred in treating the loss incurred on foreign exchange contracts as speculation loss. The appellant prays that, this being business loss it be allowed accordingly. 3. (a) On the facts and in the circumstances of the case the learned assessing officer and CIT(A) erred in observing that, the appellant had carried on independent business of dealing in forward contracts in foreign exchange and failed to appreciate that, it is part of the appellant's export business for hedging against the exchange fluctuations. (b) The learned assessing officer and CIT(A) erred in holding that, loss on cancellation of forward contract in foreign exchange is speculative transaction as per section 43(5) of the I. T. Act, 1961 which is contrary to the facts and evidence on record. 4. The learned CIT (A) erred in observing that, the appellant was unable to prove or unable to adduce supporting documents in support that, the loss incurred is business loss and not speculative loss. 5. On the facts and in the circumstances of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ging loss as speculation loss. Aggrieved, assessee preferred appeal before CIT(A). 4. The CIT(A) confirmed the action of AO, who observed that there is very thin line of difference to treat the nature of any transaction as to whether it is hedging or speculation. Accordingly, held that the assessee had carried on independent business of dealing in forward contract in foreign exchange and it is not linked to the export business of the assessee. For this, CIT(A) observed in para 3.2 as under: "3.2. "I have perused the assessment order and considered the submission of the appellant. The fact of the case is that the A.O. observed that the appellant was engaged in trading including export of sesame seeds, raw cotton, maize, bazaar etc. The appellant had not claimed to be ill the business of dealing in foreign exchange. The A.O. noticed that the appellant was dealing in forward contracts in foreign exchange. The forward contracts were settled otherwise than by the actual delivery and the transfer resulted in loss of Rs. 3,78,44,872/-. Such loss was claimed by the appellant in his computation of total income as business expenditure and not as speculation loss even though the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the appellant was unable to prove that the forward contracts booked were to the extent of confirmed export sales. The appellant was unable to substantiate that at the time of booking of forward contracts he had reasonable equivalent export contracts. Further, the guidelines of RBI might have been followed in booking of forward contracts but the resultant loss/income has to be computed in accordance with the provisions laid down in the Income Tax Act. Most of the forward bookings were made in the FY 2007-08 whereas ban on export of yellow maize came into effect from the month of July 2008 (FY 2008-09). The appellant was also unable to prove that there had been contracts for export sale at the time of booking of forward contracts which were subsequently cancelled due to global recession/depression. He entered into oral contracts which were subsequently cancelled but could not produce any evidence in support of such claim. The oral testimony was not supported by any corroborative evidence. The claim of oral contract is afterthought on the part of the appellant. The appellant had failed to put forward any plausible explanation to deny that the substantial number of forward transactio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the income from export business is not allowable. Facts in the cases on which case laws relied upon by the appellant, are not identical with the facts of the present case. On perusing the contents of the assessment order and after going through the submission of the appellant, it is observed that there is very thin line of difference to treat the nature of any transaction as to whether it is of hedging or speculation. It depends on facts of each case, even in the same line, the small deviation of facts may change the nomenclature of the transaction. In the instant case, looking to the facts and circumstances of the case, this view is stronger that the intention of the appellant during this particular year was to speculate in the foreign exchange rather than hedging. Further, the facts are distinguishable in the case laws relied upon by the appellant. Under these circumstances, I find no infirmity in the A.O's order, hence appeal is dismissed." Aggrieved, against the order of CIT(A), assessee came in second appeal before Tribunal. 5. Before us Ld. Counsel for the assessee aggrieved against the aforesaid treatment of hedging loss as speculation loss stated the brief proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in round sums against the confirmed export orders but not exceeding the value of the export orders. At any point of time the assessee had more export orders in hand than the forward booking amount. Relevant details in this behalf were furnished in a statement which is part of assessee paper book as annexed "A". Even Ld. Counsel referred to copies of the export orders which are annexed in assessee's paper book. 6. Ld. Counsel for the assessee explained the facts that against the export orders for US$ 2,16,08,278, exports of US$ 41,76,126 were made during the financial year 2007-08 but during the financial year 2008-09 exports worth only US$ 57,59,208 could be made. He explained that the balance export orders could not be executed because of world-wide slowdown, global recession and sluggish market conditions, which is a matter of public record. Many big business houses, financial institutions and banks world-wide faced bankruptcy. He explained that during September-November 2008 the rupee adversely fluctuated against the dollar by more than 30%. The assessee's customers did not open letters of credit resulting in non fulfillment/cancellation of the export orders. Additionally, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onding export/sale contracts against which the above stated nine forward contracts were booked and thus the assessee could not prove his claim that the transactions were hedging in nature. In respect to the claim of hedging loss for remaining amount of Rs. 1,45,21,122/- the assessee could come forward with some transactions but there was no reasonable equivalence of period and amounts between the two contracts. Accordingly, the lower authorities have rightly treated the loss as speculative transaction as per the provisions of section 43(5) of the Act as the transaction in forward contract of foreign exchange was settled otherwise than by actual delivery. According to ld. Sr. DR, the lower authorities have rightly treated the loss claimed by the assessee on account hedging loss as speculation loss by virtue of provisions of section 43(5) of the Act, explanation (2) to section 28 and section 73 of the Act. Accordingly, he urged the bench to uphold the orders of the lower authorities. 8. We have heard rival submissions and gone through facts and circumstances of the case in hand. We have also perused the case records. We find from records that, against the export orders for US$ 2,16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad to be cancelled. As a prudent businessman, in respect of export proceeds of US$ 31,15,167.41, the assessee opted for conversion at the spot market rate instead of the rate stipulated in forward contracts of the value of US$ 28,00,000. The option exercised by the assessee resulted in higher export realisation to the extent of Rs. 1,35,1l,357. Additionally, the assessee was able to obtain higher export incentives by way of drawback, OEPB, etc. with reference to the higher export realisation. Such forward contracts for US$ 28,00,000 were consequently cancelled but the higher export realisation to the extent of Rs. 1,35,1l,357 and the higher export incentives went to offset the loss arising from such cancellation. To minimize the loss, the assessee took the spot rates which were more beneficial instead of conversion as per forward contract rates. Relevant details in this behalf are furnished in a statement annexed to the paper book of the assessee. Even, copies of the relevant export orders are included in the paper book. Due to cancellation of the forward contracts partially or fully, the assessee had to pay the difference between the contract rate and the market rate to the bank. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xchange. The AO also admitted that the forward contracts were made by the assessee in accordance with RBI guidelines. The AO and CIT(A) were wholly unjustified in treating the business loss as speculative in nature. 10. This issue is now covered by the judgment of the Hon'ble Calcutta High Court in CIT v Soorajmull Nagarmull, (1981) 129 ITR 169 (Cal), wherein the assessee was a firm engaged in the business of import and export of jute and in course of business, the assessee would enter into forward contract in foreign exchange in order to cover the loss which may arise due to difference in foreign exchange valuation. In one such contract, the assessee had to pay to the Bank difference of Rs. 80,491/- which was claimed by the assessee as revenue expenditure. The Assessing Officer disallowed the claim. The Hon'ble High Court held that the assessee was not a dealer in foreign exchange and the foreign exchanges were only incidental to the assessee's regular course of business and the loss was thus not a speculative loss but incidental to the assessee's business and allowable as such. Facts in the present case are very similar. Admittedly, the assessee is not a dealer in f ..... 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