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TMI Blog2024 (12) TMI 1337X X X X Extracts X X X X X X X X Extracts X X X X ..... nd cess. Subsequently, this case was selected for scrutiny on the basis of CASS and notice u/s 143(2) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") dated 29.06.2021 was issued and duly served upon the assessee within the stipulated time. 4. The assessee is engaged in trading of agricultural commodities including palm oil. The assessee, during the year, has received a further consideration amounting to Rs. 10,58,32,302/- from Adani Wilmar group. The Assessing Officer found that assessee entered into a buying contract for Palm Cargo with Adani Wilmar, however, at the later stage, the assessee decided to settle the contract and thus, it entered into another contract for selling of Palm Cargo to Adam Wilmar. The difference between the buying price and selling price between both contracts is recorded as "Washout Charges" by the assessee. The AO held that the assessee did not offer the consideration received for washout charges amounting to Rs. 10,58,32,302/- as income. 5. The assessee explained that in the normal course of business, for the purpose of protecting itself from risk of price fluctuations of various commodities (as in its industry, prices are subject t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess Income" does not distinguish between speculation business income and normal business income. While the Income Tax Act distinguishes business income into normal business income and speculative business income for the purpose of taxing the same under Business Income but at different tax rates. Explanation 2 of section 28 treats speculation income as business income but to be taxed as separate income. However, for the purpose of tax treaty, speculative income is also taxed as part of business income governed by Article 7 read with Article 5 of the tax treaty. 10. The ld. counsel for the assessee placed reliance on Delhi ITAT in case Louis Defrus TS 657-ITAT-2019 wherein washout charges are held to be business expense in the hands of tax payer and submitted that the transaction is nothing more than a business transaction. 11. Further, it was submitted that the assessee has undertaken transaction with Adani Wilmar which are washed out at later stage to guard against loss through future price fluctuations in respect of the contracts for actual delivery of goods sold by it. However, the Assessing Officer, without appreciating that the washout transaction is an integral part of the b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention, ld. counsel for the assessee submitted that : * The term "source" has not been defined under the Act Hence, one needs to determine what can constitute source of income. * Merely because the payer is in India, the same cannot be the sole basis to state that the source in India. Had that been so, the provisions of section 9 "Interest "Royalty, Rum "Fees for technical services" etc would not have been introduced and would become redundant as they deem income to be taxable in India based "situs of the payer. * Reliance is placed on the provisions of section 9(1)(vi) of the Act "Fees for technical services which deems FTS to be taxable in India based on situs of the payer. * In contrast, section 9(1)(i) of the Act deems income based on all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India. 16. Accordingly, the ld. counsel for the assessee submitted that the payer, Adani Wilmar, is only source of money received and not source of income. The source of inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e find that the assessee has undertaken transaction with Adani Wilmar resulting in receipt of washout charges after being washed out at later stage, to guard against loss through future price fluctuations in respect of the contracts for actual delivery of goods sold by it. We are of the considered view that the income arising out of washout transaction is not in the nature of income from speculative activities. This view is supported by the circular by CBDT in Circular No. 23 (XXXIX)D of 1960, dated 12 September 1960. 21. We also find from the details filed in Pg 251 of paper book that the transactions entered into by the assessee with Adani Wilmar which were washed out, are few of the contracts which are entered into to hedge its price risk on entire sales portfolio of the assessee for the given shipment period. The details show many contracts of sales undertaken by the assessee involves actual physical delivery of commodities. There are some cases of sales contract against which the assessee had entered into hedge contract for hedging price risk. Hedging thus, are related to the main business of the assessee and cannot be held to be "speculative". 22. We also find considerable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ans 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) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him, or (b) ...... (c) .... (d) ..... (e) .... shall not be deemed to be a speculative transaction." 26. Though we have already held that the said transactions are not speculative in nature, but hedging transactions entered to protect the price risk fluctuation, let us examine the result of the Assessing Officer's contention that transactions being entered into by the assessee are in the nature of speculative activities u/s 43(5) of the Act. We find that the income from the same would still be covered under business income as the proviso (a) of section 43(5) excludes hedging transaction from being specul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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