TMI Blog2022 (2) TMI 527X X X X Extracts X X X X X X X X Extracts X X X X ..... e enters into a hedging transaction to minimize the possible loss from fluctuation in foreign currency, then profit or loss arises on account of appreciation or depreciation in the value of foreign currency held by it on conversion into another currency, such profit or loss would ordinarily be a trading profit or loss, if the foreign currency is held by the assessee on Revenue account or as a trading asset or as a part of circulating capital embarked in the business, if the underline asset is more than the amount of forward contracts entered into by the assessee. This legal principle is supported by the decision of the Hon ble Supreme Court in the case of CIT v. Woodward Governor India Pvt. Ltd. [ 2009 (4) TMI 4 - SUPREME COURT] wherein, it was held that the loss arising in the process of conversion of foreign currency, which is part of trading asset of the assessee, is a trading loss as any other loss. In this case, the facts available on record clearly shows that the assessee being an export of goods had huge receivables from customers entered into a hedging contract with its bankers to minimize the possible fluctuation in foreign currency, which resulted in loss and the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the assessee but the perusal of the contract notes and corresponding huge loss incurred by the assessee during the short period would indicate that the derivate transactions have only increased the risk to the assessee and not reduced the risk like as a 'hedge'? 8. The ld. CIT(A) failed to appreciate the decision of Hon ble Mumbai ITAT in the case of Shri Vinodkumar Diamonds (P) Ltd. vs. Additional Commissioner of Income lax (2013) 35 Taxmann 337, wherein it was held 'In order that forward transactions in commodities may fall within proviso (a) to section 43(5) of the Act, it is necessary that the raw materials or merchandise in respect of which the forward transactions have been made by the assesses must have a direct connection with the goods manufactured or the merchandise sold by him. In other words, raw material in respect of which the assesses has entered into forward transactions must be the same raw material which is used by him in his manufacturing business. We find that in the case under consideration assesses was not dealing in Foreign Exchange, therefore transactions entered into by it in Foreign Exchange cannot be held to be hedging transactions. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsaction and consequent loss is to be treated as speculative loss. The AO discussed the issue at length in light of provisions of Sec.43(5) of the Act and Securities Contracts (Regulation) Act, 1956 and opined that the claim of the assessee that derivatives comes under the proviso (d) to Section 43(5) of the Act, is not acceptable, because, said proviso does not give blanket exclusion to all derivative contracts, but only to such contracts that are treated in the recognized Stock Exchange. Therefore, by following certain judicial precedents, rejected the arguments of the assessee and made additions towards foreign exchange fluctuation loss of ₹ 5,45,96,356/-. 4. Being aggrieved by the Assessment Order, the assessee preferred an appeal before the Ld.CIT(A). Before the Ld.CIT(A), the assessee has filed detailed Written Submissions on this issue, which has been re-produced at Page Nos.3-13 of the Ld.CIT(A) s Order. The sum and substance of the arguments of the assessee before the Ld.CIT(A) are that Forex derivative contracts entered into with State Bank of India is mainly for hedging, possible fluctuation in foreign currency on account of receivables from exports. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were assured, Kunnam Granite Works in consultation with State Bank of India took steps to hedge the foreign currency risk involved in these transactions by entering into certain long term USD - JPY currency contracts. 5.2 From appellant's records, it was noted that for the year 2007-08 the Firm has made some gains in Forward Contracts which was accounted as Income from Foreign Exchange Gain and was assessed as Business Income. However, in the years to come starting 2008 till date, the JPY currency had appreciated greatly against the USD which meant that the currency equation went in the direction opposite of what was anticipated by the Bank and the appellant at the time of entering the contract. 5.3 The appellant is not a dealer in foreign exchange and has entered in to forward contracts with the bank, as per the advice given by the bank, for the purpose of hedging the future loss due to fluctuation in foreign exchange. While performing the export contract some of these contracts could not be honoured for which the assessee has paid exchange loss to the bank amounting to ₹ 5,45,96,356/- for the relevant Financial Year which is debited to the Profit Loss Acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... derivative contracts entered into by the assessee is only ₹ 5 lakhs USD per month, which is much lower than the value of exports. The Ld.AR further submitted that it is a well settled principle of law by the decision of various Courts including the decision of the Hon ble Supreme Court in the case of CIT v. Woodward Governor India Pvt. Ltd. (supra) that profit or loss arises on account of conversion of one currency into another currency, is Revenue in nature, if such foreign currency is held in the ordinary course of business of the assessee as a trading asset or circulating capital. In this case, the assessee has entered into forex derivative to hedge the possible loss in fluctuation in currency, which resulted in loss for the year under consideration. The assessee has accounted profit or loss as an income or expenses in the relevant AY and further, whenever, the assessee had earned profit on account of appreciation in foreign currency, the same has been offered as income and the Department has accepted the same. Therefore, the AO cannot take a different view for the year under consideration when there is no change in the facts and circumstances of the case. 8. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t or loss arises on account of appreciation or depreciation in the value of foreign currency held by it on conversion into another currency, such profit or loss would ordinarily be a trading profit or loss, if the foreign currency is held by the assessee on Revenue account or as a trading asset or as a part of circulating capital embarked in the business, if the underline asset is more than the amount of forward contracts entered into by the assessee. This legal principle is supported by the decision of the Hon ble Supreme Court in the case of CIT v. Woodward Governor India Pvt. Ltd. (supra), and it is also supported by the principles laid down by the Hon ble Bombay High Court in the case of CIT v. V.S. Dempo Co. Pvt. Ltd. reported in (1994) 206 ITR 291 (Bombay), wherein, it was held that the loss arising in the process of conversion of foreign currency, which is part of trading asset of the assessee, is a trading loss as any other loss. In this case, the facts available on record clearly shows that the assessee being an export of goods had huge receivables from customers entered into a hedging contract with its bankers to minimize the possible fluctuation in foreign currency, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X
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