TMI Blog2004 (5) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... 'Green Coffee'. 2. The modus operandi of the proposed business plan relevant for purpose of advance ruling is as follows:- * The applicant's Branch office shall buy the "green coffee" in India and sell the same either to 'processors' in India or export them to parties outside India. 'Processors' are the persons who make processed coffee out of "Green Coffee". * The "green coffee" is essentially a seasonal crop which arrive in market once a year in second quarter of the year for very limited period. * The sale of "green coffee" to 'processors' in India or to parties outside India shall take place throughout the year and the sale price of "green coffee" is largely determined by the then prevailing price in the international market. * The applicant to carry on its business of sale of green coffee throughout the year will have to stock huge inventory of green coffee for most part of the year though it will have to buy its entire requirement during the short period of its availability in second quarter of the year * Since the sale price of "green coffee" is linked to its price in the international market, the applicant will be exposed to risk of price fluctuations between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s relevant to the applicant's case. The said proviso reads as under:- "(a) a contract in respect of raw material or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through price fluctuations in respect of his contract for actual delivery of goods manufactured by him or merchandise sold by him'" 6. The said exception is known as a hedging contract. The basic condition of exception created by this clause is that hedging in respect of merchandise should be intended to guard against price fluctuations in respect of contract of sale of actual delivery of merchandise. The counsel claimed that there is no warrant to read proviso (a) to section 43(5) so as to justify an inference that legislature intended to exclude from speculative transactions only the contract of sale of merchandise entered into by a person in the course of his merchandising business to guard against loss through price fluctuations. In the commercial world, in order to effectively hedge against adverse price fluctuations of merchandise, a merchant has necessarily to enter into forward transaction of both sale and purchase because without these c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such loss that he entered into forward contracts, he cannot claim the benefit of a hedging contract. The Madras High Court has also in the case of Gomraj Fatehchand v. CIT (1976) 102 ITR 131, taken the view that unless the assessee shows that the forward contracts of purchase entered into by him, which were ultimately settled by payment of the difference in price were to guard against loss through future price fluctuations in respect of specified contracts of sale for actual delivery, the transactions could not be treated as hedging transactions. Same view was taken by the Calcutta High Court also in the case of Becker Gray Co. v. CIT (1983) 139 ITR 203. Further, in para 4 of Annexure-II, the applicant has mentioned that hedging transaction would be in the form of a sale. The Madras High Court in CIT v. S.K. AR. K. AR. Somasunderam Chettiar Co. (1975) 101 ITR 832 has held that only contracts of purchases could be covered under hedging transactions. This decision was later on affirmed by the Supreme Court also (1992) 194 ITR 1 (SC). 10. In relation to question No.4, the Director has commented that the hedging transaction can be in connected commodity also (and n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eculative transactions only a "hedging purchase" and not a "hedging sale" transaction, replied that where bonafide forward sales are entered into with a view to guarding against the risk of raw-material or merchandise falling in value, the losses arising as a result of such forward sales should not be treated as speculation losses. 12. It is further stated that as far the decision of Somasundaram Chettiar Co. (supra) which has been affirmed by the Supreme Court in 194 ITR 1 (SC), is considered, it is stated that the view of the Central Board of Direct Taxes in Circular No.23 dated 12.9.60 was overlooked. Thus, the aforesaid view is against the benevolent circular, which is binding on the authorities. Reference in this regard is made to the decision of UCO Bank vs. CIT 237 ITR 889 (SC), wherein, the Hon'ble Apex-Court did not follow its earlier decision in the case of State Bank of Travancore vs. CIT 158 ITR 102 because in the earlier case benevolent circular was not pointed out to the court. Therefore, the decision of Supreme Court in Somasundaram Chettiar Co. (supra) is to be examined/understood with reference to the ratio laid down by Supreme Court in UC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f which he was likely to suffer a loss because of future price fluctuations and that it was to safeguard such loss that he entered into forward contracts, he cannot claim the benefit of hedging contracts. He pleaded that in the case S.K.AR. Somasundaram Chettiar Co. (1992) 1994 ITR 1, the Supreme Court has confirmed the Madras High Court order that only contracts of purchases could be covered under hedging contracts. The judgment of the Supreme Court being of a date subsequent to the date of the Board's Circular, was binding on all the authorities. 17. Before we deal with the merits of the arguments put forth by the learned counsel of the applicant and the departmental representative, it would be appropriate to extract the relevant provisions of the Act and the relevant paragraphs of the Board's Circular. 18. Section 43(5) and proviso (a) thereto reads as under:- "(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 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 2 - Hedging transactions in connected, though not the same, commodities should not be treated as speculative transactions. Board's decision - The Board accept this point. Attention in invited to Board's Letter No.13(102)IT/53, dated 8.9.1854 in which it was stated that as regards hedging in raw materials, the Income-tax Officers should not be too particular about the quantities and timing so long as the transactions constitute genuine hedging. Similarly, Income-tax Officers should not treat genuine hedging transactions in connected commodities as speculative transactions though the transactions may not be incidentally the same commodity. Thus, hedging transactions in one type of cotton against another type of cotton, one variety of oil seed against another, one type of grain against another, should not be treated as speculative transactions provided the other conditions of Explanation 2 to section 24 are satisfied. The condition mentioned in the last two sentences of the decision on point 1 above will apply here also." 20. We do not agree with the contention of the departmental representative that since the Supreme Court's judgment in the case of Somasundarm Chettiar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tocks held, the other did not and that some officers were taking a restrictive view and disallowing the deduction of hedging losses in commodities other than stocks and shares, if they were not against stocks held but against purchases. We have examined the same at some length. We find that even the Central Board of Revenue had put too rigid and restrictive an interpretation on this provision, which is not in accord with the spirit of the assurances given by the Finance Minister. It does not, therefore, surprise us that the assessing officers have also taken an unduly narrow view in the matter and the genuine businessmen have been put to considerable hardship. We certainly appreciate, as we have done earlier, the principle under-lying the proviso, but we equally disapprove of its wrong application for denying genuine hedging losses. We feel that the solution to the various problems which have been brought to our notice in relation to this subject can be found by expanding Explanation 2 to section 24(1) so as to classify and exclude such transactions which should not come under the mischief of this section. The assessing officer should first examine whether a hedging transaction i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aj Oil Mills, in the case of a trader, the following position emerges in regard to scope of hedging contracts:- * Hedging contracts can be both for purchase and sale; * In order to be genuine and valid hedging contract of sales, the total of such transactions should not exceed the total stock of the raw material or merchandise on hand; * In order to be genuine and valid hedging contract of purchase, there should be an existing forward contract of sale by actual delivery' * The hedging contracts need not necessarily be in the same variety of the commodity. They could be in connected commodities e.g. one type of cotton against another type of cotton. 25. The applicant is a trader in 'Green Coffee'. It has to purchase and stock substantial quantity of green coffee during the limited period since coffee is a seasonal crop. The sales of green coffee will be spread over the whole year at the price prevailing in the International market. The applicant to safeguard itself against price fluctuations will enter into hedging contracts in which it would initially sell green coffee in International Commodity exchange and thereafter settle said transaction by entering into purchase t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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