TMI Blog2024 (4) TMI 590X X X X Extracts X X X X X X X X Extracts X X X X ..... on 43(5) of the Act, it would be necessary that the raw materials or merchandise in respect of which the forward transactions have been made by the assessee must have a direct connection with the goods manufactured or the merchandise sold by him. As per Board s Circular, in order to be genuine and valid hedging contracts of sales, the total of such transactions should not exceed the total stocks of the raw materials or the merchandise on hand which would include existing stocks as well as the stocks acquired under the firm contracts of purchase as held by Mumbai Tribunal in the case of Araska Diamond (P.) Ltd [ 2014 (10) TMI 776 - ITAT MUMBAI] - This decision considered the decision of MP Sugar Mills (P.) Ltd. [ 1983 (8) TMI 42 - ALLAHABAD HIGH COURT] which held that it will depend upon the facts of each case whether a particular transaction by way of forward sale, which is mutually settled otherwise than by actual delivery of the said goods, has been entered into with a view to safeguard against loss through price fluctuation in respect of the contract for actual delivery of the goods manufactured. Therefore, the loss was held to be not allowable either u/s 43(5) or under proviso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in support of its claim. The Ld. CIT-DR also submitted that the losses were speculative in nature and the assessee did not make any exports during the year but claimed losses on cancelled contracts only. Reliance has been placed on the decision of Mumbai Tribunal in Araska Diamond Pvt. Ltd. Vs. ACIT (52 Taxmann.com 238) to support the stand of Ld. AO. The Ld. AR, on the other hand, submitted that the transactions would not be covered u/s 43(5) but the losses were allowable to the assessee as business expenditure u/s 37(1). The Ld. AR submitted that adequate details were furnished by the assessee before lower authorities. The Ld. AR also submitted that the assessee entered into derivative contracts with State Bank of India (SBI) against foreign currency exposure which is an Authorized Dealer of RBI. The said contracts were pre-closed / cancelled and the losses arose out of cancellation of currency contracts. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. Assessment Proceedings 3.1 The assessee being resident corporate assessee is stated to be engaged in manufacturing and sale of safety matches. In the return of income, the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ood and natural calamities and increase of currency valuation led to cancellation of orders. The assessee s intention to book forward contract was to safeguard the business against currency fluctuations. In support of its claim, the assessee submitted as under: - (i) The company is an exporter of Safety Matches to various foreign Countries and most of its receivables are in US Dollar and EURO Currency (ii) There was an unprecedented depreciation of Rupee against US Dollar and EURO due to which the bankers of the company advised the company to exercise sophisticated hedging tools such as options and swaps in order to contain the risk of foreign currency exposures. (iii) Thus, the company has acted only on the advice of its bankers in order to reduce the risk due to foreign currency exposures and there was no intention to indulge in any speculative activities. (iv) In order to cover up the foreign currency exposures due to the normal business activity of the appellant, they had to enter into forward options contract which are mostly settled by delivery of currency. (v) The profit or loss on account of forex derivative contract is incidental to the normal business of the appellant hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts with the bank, copy of its ISDA master agreement with SBI etc. However, it was not ascertainable as to how much losses were relatable to the events such as floods and bombings and how much were attributable to cancellations done by the assessee on its own to take advantage of weakening rupee. Therefore, the assessee was asked to explain the losses claimed with reference to purchase orders, invoices vis-a-vis exchange contracts with banks for specific transactions, at least on a sample basis. In spite of further opportunities given, the assessee could not provide such details. The assessee merely submitted that it did not get individual purchase orders but had regular orders arranged by its foreign agent. As such, the assessee could not relate any individual bills to the forward contracts entered with the bank. Further, no purchase orders against which the forward contracts had been entered were provided during the course of either the assessment proceedings or remand proceedings. The assessee claimed that it had firm export orders for 35 containers per month (420 containers per year). However, as per the copies of contracts, the assessee had orders for 380 containers per year on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exchange contracts. As per the accepted commercial norms, object of a hedging contract is to secure oneself against loss in a future delivery contract. In order to be genuine and valid hedging contracts of sales, the total of such transactions should not exceed the total stocks of the raw materials or the merchandise on hand which would include existing stocks as well as the stocks acquired under the firm contracts of purchase as held by Mumbai Tribunal in the case of Araska Diamond (P.) Ltd v. ACIT (supra). This decision considered the decision of Hon ble Allahabad High Court in CIT vs. MP Sugar Mills (P.) Ltd. [148 ITR 203) which held that it will depend upon the facts of each case whether a particular transaction by way of forward sale, which is mutually settled otherwise than by actual delivery of the said goods, has been entered into with a view to safeguard against loss through price fluctuation in respect of the contract for actual delivery of the goods manufactured. Therefore, the loss was held to be not allowable either u/s 43(5) or under proviso thereof. 4.5 The Ld. CIT(A) observed that the assessee produced relevant details of cancelled export orders. Due to cancellation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... foreign currency risk. However, the basis of such estimation is not available on record. The fact that how much currency exposure was foreseen by the assessee is also not available on record. The assessee merely stated that it was not able to procure export orders and adverse market conditions led to cancellation of export orders. The Ld. AO, in the remand report, noted that the assessee entered into hedging transactions to safeguard against currency fluctuations. However, it was not ascertainable as to how much losses were relatable to the adverse market conditions such as floods and bombings and how much were attributable to cancellations done by the assessee on its own to take advantage of weakening rupee. Though the assessee was asked to explain the losses claimed with reference to purchase orders, invoices vis-a-vis exchange contracts with banks for specific transactions, at least on a sample basis, it could not provide such details. It merely submitted that it did not get individual purchase orders but had regular orders arranged by its foreign agent. As such, the assessee could not relate any individual bills to the forward contracts entered with the bank. Further, no purcha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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