Rajendra, Member (A) -
(1.) CHALLENGING the order dt. 09.07.2012 of the CIT(A) -9, Mumbai, assessee -company has raised following Grounds of Appeal:
1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming disallowance of loss of Rs. 2,98,48,551/ - on account of cancellation of foreign currency forward contract by treating it as speculation loss
2. ON the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in believing that forward contracts are not relatable to any specific export bills of the assessee On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ought to have considered that foreign currency is not a "Commodity"
3.ON the facts and in the circumstances of the case and in law, the Ld. ClT(A) erred in not relying on the case of CIT vs. Badridas Gauridu (P.) Ltd. : 261 ITR 256 Bom, Bench: 5 Kapadia, J Devadhar and DCIT v. Intergold (I) Limited : (2010) 1 ITR 2571 27 50T 239 (ITAT -MUM) which are on identical facts of the assessee
4.THE assessee craves Your Honour leave to add, alter or amend or delete any of the above grounds.
(2.) Assessee -company, engaged in the business of trading of cut and polished diamonds, filed its return of income on 26.09.2009 declaring loss at Rs. 2,19,91,359/ -.Assessing officer(AO) finalised the assessment u/s. 143(3) of the Act, on 29.12.2011, determining the total income of Rs. 78,57,190/ -.
Effective ground of appeal is about disallowance of loss of Rs. 2,98,48,551/ - on account of cancellation of foreign currency forward contract. During the assessment proceedings, the AO found that the assessee had debited loss on account of exchange rate fluctuation amounting to Rs. 2.98 Crores. He directed the assessee to furnish details on account of exchange rate difference and of forward contracts. After considering the explanation filed by the assessee, the AO observed that any loss incurred by an assessee on entering into currency derivatives, due to forward contract of foreign exchange(FE) rate, had to be taken as forex derivative loss, that such loss had to be on account of dealing in forex derivatives which had actually been incurred by way of settling the difference at the end of the expiry of period of derivative contract or its termination, that assessee had to prove that currency derivative losses incurred was on account of hedging (reducing) risk and had not been undertaken as a speculative transaction to earn more profit. He referred to the provisions of section 43(5), 28(2), 72 and 73.
He further held that the assessee had entered into 24 forward contracts, that total forward contract cancelled order were of Rs. 28 Crores(approximately), that the total sales during the year was of Rs. 27.78 Crores. Referring to circular No. 23d dated 12.09.1960 of the CBDT, he held that the intention of the assessee was to speculate, that the table furnished by the assessee proved that out of US $ 70,50,000 book transaction worth US $ 64,45,623 were cancelled, that none of the booking were utilised, that most of them were cancelled, that all the contracts had been honoured by cancellation, that delivery of currency had not taken place, that the assessee had not hedged its outstanding receipts by way of these forward contracts and due to cancellation of assessee's obligation to pay, that the assessee dealing in diamond and these contracts were in currency, that the assessee had not entered into certain number of contracts against specific bills or in the same commodity -diamond and out of those contracts of few were cancelled, that the transaction undertaken by the assessee did not suggest that those contracts were part of normal business activity of the assessee and the cancellation was incidental to the business, that none of the transaction could be categorised as hedging transaction, that the forward contracts were not relatable to the specific bills of the assessee, that the assessee could not relate any single bill to any of the contracts, that no purchase order had been provided during the course of assessment proceedings against which the forward contracts bad been booked, that the transaction in forward contracts cancellation had been carried out by the assessee were in a systematic manner, that the volume of transaction was quite substantial, that the volume and frequency of the assessee's transaction proved that it had systematically and in an organized manner carried out the business activity in currency forwards. The AO further referred to the instruction No. 3 of 2010 issued by the CBDT. Defining the term hedging transaction, the AO held that the contracts in not in respect of material or merchandise to which the assessee generally dealt with, that same were the currency contracts and were purely speculative in nature. He AO also referred to proviso -D to section 43(5) of the Act that was inserted w.e.f. 01.04.2000. He held that the proviso excluded certain derivative transaction, that the proviso strengthened the view that the transaction in the derivative were basically speculative in nature, that only certain transaction were treated as non -speculative, that section 43(5) of the Act was amended w.e.f. AY 2006 -07, that the proviso D of the section provided that such transaction had to be carried out through a recognised stock -exchange if same were to be treated as non -speculative transaction.
Finally, he held that transactions of forex derivative undertaken by the assessee for the year under consideration did not satisfy any of the conditions given in proviso (d) to section 43(5) of the Act, that forex derivative transaction were speculative in nature, that any Profit & Loss arising from such transaction had to be computed separately in view of the explanation 2 to section 28 of the Act, that the loss on such transaction had to be dealt with in accordance with section 73 of the Act. The AO referred to the decision of Soprophasa ( : 268 ITR 37) and Josheph John ( : 67 ITR 74).
(3.) Aggrieved by the order of the AO, the assessee filed an appeal before the First Appellate Authority (FAA).After considering the submissions of the assessee and the assessment order he held that the it had claimed loss of Rs. 2,98,48,551/ - on account of forward exchange contracts, that the assessee was not a dealer in foreign exchange, that it was an importer -exporter of diamonds, that the assessee had cancelled relevant forward contracts of foreign exchange, that not a single forward contract was settled by actual delivery. Referring to the provisions of section 73 and 43(5) of the Act, he defined the term speculation loss. He also made a reference to the cases of Seksaria Riswan Sugar Factory( : 121 ITR 196) Budge Investment Co. Ltd. (73 ITR 722) and Davenport & Co. (P) Ltd. ( : 100 ITR 715).
He further held that the expression 'Speculative transaction' meant and included a transaction of any commodity, including stocks and shares, periodically or ultimately settled otherwise than by actual delivery, that the expression commodity was not defined under the Act, that that the word commodity meant an article of trade or commerce which was tangible in nature, that the expression commodity would cover all articles of trade including stocks and shares, that section 43(5) did not seek to expand the scope of expression commodity, that it merely emphasized that the transaction in commodity included transactions in stocks and shares, that transactions in future contracts, like transactions in stock and shares, when settled otherwise than by actual delivery would be speculative transactions u/s. 43(5) of the Act, that derivatives could be used as insurance cover against certain types of business risks such as fluctuations in the rate of foreign exchange, fluctuations in the rate of interest on borrowings, fluctuations in the value of specified assets etc., that derivatives were assets whose values were derived from valuation of underlying assets, that those underlying assets could be commodities, metals, energy resources and financial assets such as shares, bonds, foreign currencies, that even after insertion of clause (d), all transactions in derivatives are not taken outside the purview of Section 43(5) of the Act, that it was only those derivative transactions which were covered under clause (d) that were outside the purview of Section 43(5) and rest of the transactions in derivatives were covered u/s. 43(5) of the Act.
The FAA relied upon the decision of the Hon'ble Bombay High Court delivered in the case of Bharat R Ruia(HUF) and held that only exchange traded derivatives are covered under clause (d), that the derivatives under dispute were not eligible transactions in respect of trading in derivatives, that the assessee had cancelled all relevant forward contracts in US Dollars which were booked during accounting year relevant to assessment year 2009 -10 which resulted into net loss, that in respect of export of diamonds, the assessee had entered into forward contract in respect of foreign exchange to be received as a result of export, that it had undertaken the transactions to avoid the risk of loss due to foreign exchange fluctuation, that the assessee at the time of agreeing to export took into consideration its cost in rupees and also considered the spot price of rupee against foreign exchange, that during the course of assessment proceedings and during the course of appellate proceedings the fact remained uncontroverted that loss shown by the assessee was exclusively due to forward contracts against which no actual delivery of foreign exchange was made, that the forward contract was to be settled either by delivery or the difference was either credited or debited by the banker, that in the matter under appeal all relevant forward contracts were cancelled, that same were never settled by actual delivery or by transfer of the commodity.
He distinguished the cases relied upon by the assessee. He held that in the case of Badridas Gauridu Pvt. Ltd. ( : 261 ITR 256), the Contract was linked with the assessee's business and on account of forward booking contracts with the banks with respect of assessee's export orders, that in the instant case the AO had given a finding that booking and cancellation of forward contracts of exchange were not in respect of specified export or import orders, that in the present case all contracts had been cancelled, that the facts of the present case were clearly distinguishable from the facts mentioned in the case of Badridas Gauridu Pvt. Ltd(supra).He cited cases of Shree Capital Services Ltd. (121 ITD 498), Bengal & Assam Co. Ltd. vs. CIT ( : 227 CTR 399), AJWA Fund World & Resorts Ltd. (9 SOT 354).He finally held that the burden of proof was upon the assessee to show that transactions were merely hedging transactions within the meaning of proviso to section 43(5) of the Act, that where the assessee had not produced any evidence to show that the transactions in question were only hedging then the transactions must be held to be speculative transaction. In the result, he upheld the order of the AO.;