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Before: Shri V. Durga Rao & Shri Manjunatha, G.
O R D E R
PER V. DURGA RAO, JUDICIAL MEMBER:
Both the cross appeals filed by the assessee as well as Revenue are directed against the order of the ld. Commissioner of Income Tax (Appeals) 1, Chennai, dated 16.01.2018 relevant to the assessment year 2009-10. The Revenue has raised following grounds:
1. The order of the learned Commissioner of Income Tax (Appeals) is erroneous on facts of the case and in law.
2. The learned CIT(Appeals) erred in allowing relief to the assessee company to the extent of Rs 9,79,10,317/- out of the disallowance of Rs.40,98,03,268/- made by the Assessing Officer(AO) on account of provision for loss on restatement of foreign exchange, in the assessment order passed u/s 143(3) r.w.s. 147 of the Income Tax Act, 1961 in the assessee's case, by upholding the disallowance to the extent of Rs.31,18,92,950/- only. 2.1 The ld. CITA) is not justified in holding that disallowance to the extent of Rs.31,18,92,950/- in respect of transactions relating to Chennai Unit is upheld when the amount of loss on forex fluctuations claimed by the assessee and disallowed by the AO in respect of Chennai Unit was Rs.31,57,41,203/-, thus giving relief to the assessee to the extent of Rs. 38,48,253/-. 2.2 Having regard to the holding of the A0 that the provisions for loss on forex fluctuations claimed for of Rs.40,98,03,268/- in this case for A.Y 2009-10, is a contingent liability and that it is not an expenditure having been laid out or expended", the ld. CIT(A) is not justified in giving relief of Rs.9,79,10,317 on this count without specifically holding whether the same was an ascertained liability and whether laid out or expended during the previous year relevant to AY 2009-10. 2.3 Having held that the loss booked was Rs.9,40,62,064- in respect of 4 transactions for Mumbai unit and Rs.31,57,41,203/- in respect of 20 transactions for Chennai unit, totalling Rs.40,98,03,268/- and that the four Chennai transactions and all 4 Mumbai transactions are not covered by forward contracts and that 16 transactions of Chennai Unit are stated to be covered by forward contract agreements, the ld. CIT(A) ought to have appreciated that the Unit wise(Chennai/Mumbai breakup of transactions or the details of transactions covered and not covered by forward contract agreement was not furnished by the assessee before the AO during the assessment proceedings. 2.4 Having held that loss to the extent of Rs. 31,18,92,950/- pertaining to the 16 transactions of Chennai unit that are stated to be supported by forward comer, but in respect of which the assessee failed to produce any substantiating documents is disallowed, the ld.CIT(A) erred in remaining silent and not discussing whether the assessee produced any substantiating documentation 2.5 Having quantified the value of 16 Chennai Unit transactions which are stated to be covered by forward contract at Rs.31,18,92,950/- and having upheld the disallowance of the same, the ld.CIT(A) ought to have discussed the basis for this quantification in her appellate order. 2.6 Having regard to the fact that the disallowance was made by the AO on the ground that no evidence was submitted by the assessee company and having allowed partial relief of Rs.9,79,10,317/-, the ld. CIT(A) ought to have specified whether any evidences was produced before him and if so, ought to have accorded an opportunity to the AO to examine the correctness of the such evidence, as envisaged in Rule 46A(3) of the IT Rules, 1962. 2.7 Having agreed with the grounds for which the AO made the disallowance, that the provision for loss on forex fluctuations was not computed on scientific basis and that no corroborative evidence could be produced by the assessee to substantiate its claim, the ld.CIT(A) ought to have confirmed the entire disallowance of Rs.40,98,03,268/- made by the AO in the assessment order passed u/s 143(3) r.w.s 147 of the Income Tax Act, 1961 in the assessee's case.
3. For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the order of learned CIT(Appeals) may be set aside and that of the Assessing officer restored.
2. In its appeal, besides challenging confirmation of quantum additions towards disallowance of provision for forex loss of ₹.31,18,92,950/- and disallowance of loss on forward contracts at ₹.41,31,84,699/-, the assessee has challenged reopening of assessment under section 147 of the Income Tax Act, 1961 [“Act” in short].
Brief facts of the case are that the assessee I engaged in the business of providing fuel management solutions for fossil fuel users and supply of fossil fuel. The assessment under section 143(3) of the Act was completed on 31.03.2013 assessing total income of the assessee at ₹.8,27,24,670/- against returned income of ₹.8,20,15,541/-. Thereafter, notice under section 148 of the Act was issued on 18.03.2015 and served on the assessee on 19.03.2015. Reassessment under section 143(3) r.w.s. 147 of the Act was completed on 30.03.2016. In the reassessment proceedings, the loss claimed by the assessee on foreign exchange fluctuation to the extent of ₹.41,31,84,609/- and the loss claimed on account of restatement of the payables to the extent of ₹.40,98,03,268/- was disallowed and accordingly, the Assessing Officer has completed the assessment under section 143(3) r.w.s. 147 of the Act assessing total income of the assessee at ₹.90,57,12,547/-. On appeal, by granting partial relief towards disallowance of provision for forex loss, the ld. CIT(A) upheld the disallowance of loss on forward contracts as well as confirmed reopening of assessment under section 147 of the Act.
In the appeal filed by the assessee, the first ground raised is general in nature, no adjudication is required and therefore, the same is dismissed.
The second ground raised by the assessee relates to reopening of assessment. The ld. Counsel for the assessee has submitted that the original assessment was completed under section 143(3) of the Act dated 31.03.2013 by considering all relevant materials and subsequently, the Assessing Officer issued notice under section 148 of the Act, which is beyond four years from the end of the relevant assessment year. Therefore, the proviso to section 147 of the Act clearly applies to assessee’s case and submitted that there is no failure on the part of the assessee to disclose fully and truly all the material facts, the reopening is not valid. He also pointed from paper book page 132 and submitted that all the details were submitted by the assessee during the course of original assessment proceedings vide its letter dated 05.03.2013.
The issue for consideration before us is whether the assessee has disclosed fully and truly all the material facts before the Assessing Officer to complete the assessment under section 143(3) of the Act dated 31.03.2013 or not. To decide the above issue, it is necessary to examine the reasons recorded by the Assessing Officer and reproduced by the ld. CIT(A) in the appellate order are extracted as under: “7. The reasons recorded by the Assessing officer for reopening are as follows: “During the original assessment the case was referred to TPO as the assessee had international transactions with its AEs. The TPO passed on order dated 17.10.2011 making a downward adjustment of Rs. 18,72,25,570/- to the purchases made by the assessee from its AEs. A draft assessment order u/s.143(3) r. W.s. 92CA was passed on 23.12.201l determining the income as Rs.42,19,93,630/-. The DRP vide its order /s. 144C(5) dated 31. 08.2012 revised the adjustments made in the TPO. Consequently, the TPO, in its order dated 07.09.2012 made a revision to the downward adjustment of Rs.3,07,39,105/- to the purchases. Finally, the total income Was assessed u/s. 143(3) r.w.s. 92CA(3) on 19.10.2013, assessing the total income as Rs.29,52,99,177/-. On verification of Annual Report for the AY 2007-08 (relevant to AY 2008-09) it is seen that the assessee had claimed Rs.5,20,72,552/- towards foreign exchange loss. In the Note to Accounts- Sch.24 (Pg. 21)- 6. Foreign Currency Transactions (AS-11), it is stated that transactions in foreign Currency is recorded at the exchange rate existing at the time of transaction and exchange differences arising from foreign currency transaction are dealt within the Profit & Loss account. Current Assets and Current Liabilities related to foreign currency transactions remaining unsettled at the yearned are stated at contracted rates for forward foreign exchange contracts and others at the prevalent closing rates. The statement of forex loss/gain provision to be made against C&O which is been furnished 31.03.2008 has outstanding as on Rs.82,29,87,877 relating to Chennai and Mumbai respectively.
On a perusal of the ledger copies in respect of the YE provision towards Exchange Fluctuation for the period ending 31.03.2009, it is seen that merely a journal entry has been passed in r/o the above amounts, stating the closing balance. At the time of making year end provision, the opening balance of the provisions made in the earlier years, its withdrawal/utilization during the current year, the closing balance in the current year have not been disclosed. No foreign exchange gain/ loss reserve/provisions is made in the balance sheet. Thus, it is clear that only restatement in respect of the outstanding at the yearned are only made year after year by debit to the P&L account, without any adjustments in the subsequent year(s). In view of the above, the assessee's claim of forex loss, both at the time of remittances through banks and for the provisions made in the year end restatements is not in order. Further the loss On account of forward contract on foreign Currency/ exchange is not allowable as a business loss. It cannot be attributed that the loss is out of an activity arising from the conduct of the business. Since the transactions are ended up and ultimately settled by means otherwise than by actual delivery of foreign exchange, the transaction is speculative in nature and falls within ambit of section 43(5). Since, the assessee had not made any provisions/ reserve in its accounts and any adjustments thereto, amounting to Rs.82,29, 87, 877/- is required to be disallowed for the A.Y. 2009-10.” 6.1 The ld. CIT(A) has considered the issue of reopening of assessment and also application of relevant proviso in depth and came to a conclusion that the assessee has not fully and truly disclosed all material facts before the Assessing Officer during the course of original assessment proceedings. Therefore, he came to a conclusion that the Assessing Officer has rightly reopened the assessment by issue of notice under section 148 of the Act. We have gone through the orders of authorities below as well as reasons recorded by the Assessing Officer for reopening of assessment. From the reasons recorded, it is very clear that the assessee has not disclosed fully and truly all the relevant materials and facts to complete the assessment. Particularly, no details are filed in respect of loss on restatement of foreign exchange during the course of 143(3) proceedings. Therefore, the Assessing Officer has rightly invoked the provisions of section 147 of the Act.
6.2 In so far as disallowance of loss on forward contract, the assessee has not filed any details during the original assessment proceedings under section 143(3) of the Act. Therefore, the Assessing Officer has rightly issued notice under section 148 of the Act.
6.3 As per the proviso to section 147 of the Act, it is the duty of the assessee to disclose all the material facts fully and truly to complete the assessment. In this case, we find that the assessee has not filed any details in respect of claim made by the assessee. Therefore, the Assessing Officer, by issuing notice under section 148 of the Act dated 18.03.2015, reopened the assessment, which is in accordance with law. So far as paper book page 132 is concerned, some details are filed and those are not the details actually required to complete the assessment under section 143(3) of the Act and not only that, the details filed by the assessee cannot be said that those are the material facts to complete the assessment. Therefore, we are of the opinion that the Assessing Officer has rightly reopened the assessment by issuing notice under section 148 of the Act. Thus, we hold that the reopening is valid.
6.4 The ld. Counsel for the assessee has also submitted that there is change of opinion and relied on the decision in the case of CIT v. Kelvinator of India Ltd. [2010] 187 Taxman 312 (SC). In the present case, the assessee has not filed relevant details and therefore, application of mind by the Assessing Officer has not arises at all. Thus, change of opinion does not arise in this case and the decision in the case of CIT v. Kelvinator of India Ltd. (supra) has no application.
6.5 On perusal of the reasons recorded by the Assessing Officer, we find that the assessee has not filed fully and truly all the relevant material facts for completing the assessment. Therefore, there is no need to record separately that there is a failure on the part of the assessee to file fully and truly all the materials for completing the assessment. Therefore, the arguments of the ld. Counsel are rejected.
6.6 Further, the ld. Counsel for the assessee has relied on the decisions in the case of ITO v. TechSpan India (P.) Ltd. [2018] 92 taxmann.com 361 (SC), Techspan India (P.) Ltd. v. ITO [2007] 158 Taxman 182 (Delhi), ACIT v. Seshasayee Paper and Board Ltd. [2023] 148 taxmann.com 432 (Madras) and DCIT v. Financial Software and Systems (P) Ltd. [2022] 145 taxmann.com 37(SC). We have gone through the above case law and find no application to the facts of the present case.
6.7 In view of the above, we find that the Assessing Officer has rightly reopened the assessment under section 147 of the Act, which is in accordance with law and the same was upheld by the ld. CIT(A) by passing detailed order on this issue. Thus, we find no reason to interfere with the order passed by the ld. CIT(A). The ground raised by the assessee is dismissed.
7. With regard to the disallowance of provision for foreign exchange losses, the Assessing Officer has observed that during the previous year the assessee has created a total provision of ₹.40,98,03,268/ towards restatement of the liability in foreign currency. In this connection, before the Assessing Officer, the assessee has produced two ledger accounts - one for a provision of ₹.31,57,41,203/- and the other account creating a provision to the extent of ₹.9,40,62,064/-. The two amounts aggregate to the sum of ₹.40,98,03,268/-. The assessee has further provided a break- up of the amount in a table. As per the details submitted by the assessee, the Assessing Officer has noted that a provision of ₹.31.57 crores has been created for 20 transactions, out of which 4 transactions are in respect of purchases or which there are no forward cover whereas the balance 16 transactions are in respect of purchases for which there is a forward cover. In Mumbai branch, there are in all 4 transactions, all of which are not covered by any forward cover. It was explained before the Assessing Officer that their method of accounting required the transactions which are not supported by any forward contract to be restated at the rate of exchange prevailing on the last day of the relevant previous year. As regards transactions that are covered by forward contracts, they are to be restated at the rate agreed in the forward cover agreement. This is the method of accounting disclosed by the assessee in its annual accounts also. After considering the submissions of the assessee, the Assessing Officer has observed that the assessee has failed to establish before him how the provision was calculated on a scientific basis in accordance with the method of accounting disclosed by the assessee. Accordingly, the Assessing disallowed the sum of ₹.40.98 crores created as provision and brought to tax. On appeal, after considering the submissions of the assessee, the ld. CIT(A) sustained the addition to the extent of ₹.31,18,92,950/- and granted relief of ₹.9,79,10,317/-.
On being aggrieved, the assessee is in appeal before the Tribunal against the confirmation of addition of ₹.31,18,92,950/-. Similarly, the Revenue is also in appeal against the deletion of addition of ₹.9,79,10,317/-.
We have heard both the sides, perused the materials available on record and gone through the orders of authorities below including paper book filed by the assessee. The assessee has created a total provision of ₹.40,98,03,268/- towards restatement of the liability in foreign currency. Since the assessee failed to establish as to how the provision was calculated on a scientific basis in accordance with the method of accounting, the Assessing officer disallowed the entire claim of ₹.40.98 crores and brought to tax. On appeal, after considering the submissions of the assessee, the ld. CIT(A) granted relief to the assessee to the extent of ₹.9,79,10,317/- by observing as under: “31. In the course of appeal, the appellant was required to explain how the provision created was in accordance with the disclosed method of accounting. In this connection, the appellant stated that the rate of exchange prevailing on the last day of the previous year was Rs.50.95 per USD. It is submitted by the appellant that transactions which are not covered by any forward cover agreements have been restated at this value resulting in a loss that has been booked to the extent of Rs.9,40,62,064 /- in the case of Mumbai branch and to the extent of Rs.31,57,41,203/- in the case of Chennai branch. 32. It is further explained that the remaining 16 transactions of the Chennai branch were covered by forward cover contracts. The appellant was therefore asked to produce the forward cover contracts against each of these 16 transactions to show that they have been restated at the rates agreed in the forward cover agreement. In this connection, the appellant expressed their inability to produce the forward cover in respect of all the transactions. They finally were able to produce forward cover transactions in respect of two voyages. A reference to these two contracts also indicates that the appellant has not restated the payable at the rate as per the forward contract.
In fact, it is found that in respect of all the 16 transactions, the appellant has used the same rate of Rs.50.22 per USD whereas it was unable to produce any forward cover contract wherein this rate was agreed. When this aspect was pointed out to the appellant, the appellant stated orally that the rate of Rs.50.22 represents the average rate of the forward cover contracts entered into by the appellant. Though it is neither the appellant's method of accounting to adopt the average rate nor is there any such general practise followed, the appellant was still asked to substantiate even that understanding. However, the appellant was unable to produce any calculation to show that the rate of ₹.50.22 per USD represents the average rate. In the light of these facts, it is concluded that the provision created at the end of the year in respect of transactions that are supported with forward cover have not been restated on any scientific basis. In fact, the Table clearly indicates that the appellant has adopted an ad-hoc rate of Rs.50.22 per USD, which is not supported by any documentation. In view of the same, the loss to the extent of Rs.31,18,92,950/- pertaining to these 16 transactions that are stated to be supported by forward cover, but in respect of which the appellant failed to produce any substantiating documents, is disallowed. Therefore, addition to the extent of Rs.31,18,92,950/ - is upheld in this regard.” 9. 1 In this case, the assessee has created a total provision of ₹.40,98,03,268/ towards restatement of the liability in foreign currency. Before the Assessing Officer, the assessee has produced two ledger accounts - one for a provision of ₹.31,57,41,203/- and the other account creating a provision to the extent of ₹.9,40,62,064/-. The two amounts aggregate to the sum of ₹.40,98,03,268/-. The assessee has further provided a break-up of the amount in a table. As per the details submitted by the assessee, the Assessing Officer has noted that a provision of ₹.31.57 crores has been created for 20 transactions, out of which 4 transactions are in respect of purchases or which there are no forward cover whereas the balance 16 transactions are in respect of purchases for which there is a forward cover. In Mumbai branch, there are in all 4 transactions, all of which are not covered by any forward cover. Before the ld. CIT(A) also the assessee has explained that for 16 transactions of the Chennai Branch were covered by forward cover contracts. However, the assessee expressed their inability produce the forward cover in respect of all the transactions, and finally able to produce forward cove r transactions in respect of two voyages. After examining the same, the ld. CIT(A) has observed that these two contracts also indicate that the assessee has not restated the payable at the rate a per the forward contract and in fact, it was found that in respect of all the 16 transactions, the assessee has used the same rate of ₹.50.22 per USD, whereas, it was unable to produce any forward cover contract, wherein this rate was agreed. Thus, the ld. CIT(A) observed that the assessee has adopted an ad-hoc rate of ₹.50.22 per USD, which was not supported by any document. Accordingly, the ld. CIT(A) sustained the loss to the extent of ₹.31,18,92,950/- and allowed relief to the extent of ₹.9,79,10,317/-. We have perused the details filed by the assessee in the form of paper book as was filed before the ld. CIT(A) and find that the ld. CIT(A) has rightly confirmed the disallowance of ₹.31,18,92,950/- and granted relief of ₹.9,79,10,317/-. We do not find any merits in the arguments of the ld. Counsel for further relief over and above the relief granted by the ld. CIT(A). Thus, we find no infirmity in the order passed by the ld. CIT(A).
9.2 Thus, the ground raised by the assessee towards confirmation of disallowance of ₹.31,18,92,950/- is dismissed. Similarly, the ground raised by the Revenue of deletion of addition to the extent of ₹.9,79,10,317/- stands dismissed.
The next ground raised in the appeal of the assessee relates to confirmation of addition of loss on forward contracts at ₹.41,31,84,699/-. The Assessing Officer has noted that during the previous year the appellant has incurred a loss to the extent of ₹.41,31,84,609/- on account of remittance of foreign exchange which are represented by forward contracts. The Assessing Officer required the assessee to establish how the transactions were not in the nature of speculative transactions as mentioned in section 43(5) of the Act. The Assessing Officer further required the assessee to show how the forward contracts are supported by underlying trading transactions. On the assessee’s failure to establish the same, the Assessing Officer concluded that the entire losses were speculative in nature as the same were not supported by underlying contracts. On appeal, the ld. CIT(A) confirmed the disallowance made by the Assessing Officer.
10.1 On being aggrieved, the assessee is in appeal before the Tribunal. The ld. Counsel for the assessee has submitted that the ld. CIT(A) has erroneously disallowed the loss on forward contract by treating the same as speculative in nature. It was further submission that even in the absence of forward contracts, where the purchase rates are supported by purchase invoice, the losses claimed by the assessee is allowable on account of actual remittance and prayed for deleting the addition.
10.2 On the other hand, the ld. DR has submitted that the assessee has not filed any evidence in respect of the underlying transactions, cancellation of the forward cover contract as well as the circumstances under which they were cancelled and whether the same was a premature cancellation or not and pleaded for confirming the order passed by the ld. CIT(A) on this issue.
10.3 We have considered the rival contentions. After considering the submissions of the assessee and relying upon the case law, the ld. CIT(A) has passed a well reasoned detailed order by giving his observations on the five sample documents. For the sake of brevity, the conclusive findings of the ld. CIT(A) are reproduced as under: “43. The appellant's contentions are considered. The production of purchase invoices will justify the deduction on the basis of rate on the date of purchases. This deduction has already been allowed as purchases are booked as per the rates prevailing on date of raising the invoices. The appellant is claiming further deduction at the time of remittances stating that the rate as per forward cover or spot rate on the date of remittances as against the rate booked at the time of purchase has resulted in further loss to the appellant. This loss can be allowed only when the appellant shows that rate of settlement is spot rate and there was no forward cover or alternatively rate of settlement is the forward rate and produce the forward contract. As per Annexure to their letter dated 13.12.2017, all transactions of loss appear to be on account of forward covers. But the contracts are not produced. Therefore, there is no ground to allow the deduction. Further as already explained the appellant is claiming a further deduction in respect of remittances made against the opening balance of sundry creditors. In this connection the appellant failed to explain why any further deduction on account of payment against opening balance was allowable when the appellant had already restated the sundry creditors at the end of the preceding year on the basis of the forward cover rate applicable in respect of the same. Therefore in any event, in respect of payments made against the opening balance, there is no ground for any further deduction on account of exchange difference.
As regards the contention that the deduction be allowed on actual basis by assuming there was no forward cover, if such a view is accepted, the entire claim for loss will change. For example the working of loss in respect of the 5 sample transactions will be as follows: Date of transaction Forward cover rate applied by the Spot rate at which loss is appellant to quantify the loss claimed on alternative basis 26 June 2008 40.1500 42.7300 6th June 2008 42.7900 7 June 2008 40.0950 9th June 2008 42.8900 23 March 2009 45.8200 50.5200 7 February 2009 44.8650 6 February 2009 48.7300 9 February 2009 48.6000 4 August 2008 421.6900 42.4000 The above table shows that there is substantial difference between the forward cover rate at which the loss has been claimed by the appellant and the spot rate prevailing on the dates when the payments are made. If the appellant is permitted to make the claim on the basis of spot rate, which is in fact contrary to the factual material on record, an even higher loss will be quantified in its case. That is contrary to appellant's method of accounting and their claim for deduction on account of restatement of closing balance of sundry creditors at the forward cover rates. The appellant cannot claim deduction for restatement of its payables at the year-end by restating them at the forward cover rate and also subsequently claim the deduction based on the difference between the rate at which purchase was recorded and the spot rate on the date of payment.
All the 91 transactions as per Annexure 10 of their letter dated 22.11.2017 are stated to be covered by forward contracts, but the appellant was unable to produce these forward contracts, despite opportunities given on 26.10.2017, 23.11.2017 and thereafter on 07.12.2017, 13.12.2017 and 15.12.2017. For all these reasons, though the loss of Rs.82 crores is not speculative, it is not allowable for want of evidence to substantiate the claim. The disallowance is being upheld because the appellant could not produce any documentary evidence to quantify the loss computed.
As regards the gain, the appellant has submitted a break-up of transactions in respect of cancellation of forward cover contracts. The total profit on cancellation of forward cover contracts amounts to Rs,41,57,25,685/- consisting of 64 transactions. The appellant was unable to produce even a single forward cover contract that has been cancelled during the year nor was it able to produce any document in respect of the underlying transaction towards which the forward cover was taken initially. The appellant was also unable to explain the circumstances under which the forward cover transactions were cancelled and whether the cancellation was premature. Therefore, the Assessing Officer's conclusion that the net gain or loss represents a speculative transaction as the appellant has merely paid or received the difference between the spot rate and the agreed rate, is correct. Such gain or loss is clearly in the nature of a speculative loss unless the appellant could have placed on record the underlying transactions against which the same was entered.
The Mumbai Bench of the ITAT in the case of Jaimin Jewellery Exports P. Ltd, v. ACIT (2014) 43 Taxman.com 380 had occasion to consider a similar issue. The ITAT held that such profit or loss on cancellation can be considered as business loss or business profit only if they are supported by underlying transactions of actual purchase / sale. The following paragraphs are relevant in this regard: 11. In view of the above discussions, it can be safely held that in case of import/export business, where the transactions are demonetarized in the foreign currencies and for the purpose of hedging of the anticipated loss resulting from such import-export business and not otherwise, if the assessee enters into a forward contract in foreign exchange, then such forward contracts are to be treated as integral part or incidental to the business of export/import and cannot be said to be the speculative contracts attracting the provisions of section 43(5) of the Act. The loss from such hedging transactions would be treated as business loss eligible to be set off against the profits and gains of business and profession.
It is held accordingly that the foreign exchange loss incurred by the assessee on account of entering into forward contracts with the banks for the purpose of hedging the loss in connection with his import/export business of diamonds cannot be held to be a speculative loss rather a business loss which can be set off against profit and gains of business subject to the condition that the assessee will have to satisfactorily prove that the maturity of the hedge did not exceed the maturity of the underlying transaction and further to explain the requirement/necessity for premature cancellation of such forward contracts or that such cancellations or re-bookings were done to minimize the anticipated future losses from such transactions. The findings of the CIT(A) given vide impugned order are therefore set aside and the issue is restored back to the file of the AO to decide the same accordingly after giving proper opportunity to the assessee to represent its case.
The Chennai Bench of the ITAT in the case of DCIT v. Aswini Fisheries P Ltd. dated 18.12.2015 has again reiterated the fact that profit or loss on forward contract can be treated as business profit or loss only when linked with underlying transactions of purchase / sale that are executed through actual delivery. In this connection the following observations are relevant: 6. In view of the above orders of the Tribunal, we are of the opinion that the Assessing Officer has to consider the foreign exchange derivative in proportion to export turnover as regular business transaction of the assessee. If the derivative transaction undertaken by the assessee is in excess of export turnover then that loss suffered in respect of that portion of excess transaction has to be considered as speculative loss only and that excess derivative transaction has no proximity with export turnover and the Assessing Officer is directed to compute accordingly. Further, the Assessing Officer has to see whether there is any premature cancellation of forward contract of foreign exchange and that transaction should be taken out for the purpose of considering the business loss and only the transactions which are completed to be considered for the purpose of determining the business loss from these foreign exchange forward contract. With this observation, we remand this issue to the file of the Assessing Officer for fresh consideration.
Before us, the ld. Representative relied on the judgment of Gujarat High Court in CIT v. Friends and Friends Shipping P. Ltd. [2013] 217 Taxman 267, for the proposition that if the assessee failed to take delivery within the period indicated in contract and the assessee had given instructions to bank for cancellation of contract on payment of agreed charges to the bank these transactions cannot be considered as speculative transaction. However, there is no finding in this judgment towards this effect and the reliance placed by the assessee is misplaced. More so, this issue was considered by the Mumbai Tribunal while delivering the decision in the case of Araska Diamond P. Ltd. 152 ITD 203, and after following the judgments of Calcutta High Court in the case of Bengal & Assam Co. Ltd. v. CIT 227 CTR 399, and Bombay High Court judgment in the case of CIT v. Badridas Gauridu P. Ltd. 261 ITR 256, the Tribunal came to the conclusion that the transactions, which were prematurely cancelled, cannot be considered as business transaction and it is to be considered as speculative transaction.
This view has again been reiterated by the Chennai Bench of the ITAT in the case of Cotton Blossom India P. Ltd. v. JCIT (2016) 68 Taxman.com 38. Therefore, the Assessing Officer's action in treating the same as speculative profit is upheld, though the reason for upholding the same is the failure of the appellant to place on record any evidence whatsoever in respect of the underlying transactions, cancellation of the forward cover contract, the circumstances under which they were cancelled and whether same was a premature cancellation. The appellant has relied upon a number of decisions in this regard. All the decisions relied upon by the appellant have been considered in the above mentioned decisions of the Chennai ITAT wherein the loss has been allowed subject to the conditions the appellant is able to establish that the cancelation is not premature In this case, number opportunities were given to the appellant to produce these documents, but the appellant expressed its inability to produce even a single document for cancellation. Therefore ground No. 4 is dismissed. 10.4 In this case, the assessee has claimed total loss on account of remittance during the year due to exchange fluctuations was ₹.82 crores. Before us, the ld. Counsel for the assessee has contended that the purchase rates are supported by purchase invoice and therefore, the losses claimed by the assessee are allowable on account of actual remittance. The production of purchase invoices justifies the deduction on the basis of rate on the date of purchases, thereby, deduction was allowed as purchases are booked as per the rates prevailing on the date of raising the invoices. However, the assessee was claiming further deduction at the time of remittances stating that the rate as per forward cover or spot rate on the date of remittances as against the rate booked at the time of purchase has resulted in further loss to the assessee. As rightly pointed out by the ld. CIT(A), we are also of the opinion that this loss can be allowed only when the assessee shows that rate of settlement is spot rate and there was no forward cover or alternatively rate of settlement was the forward rate and produce the forward contract. Admittedly, the assessee has not produced forward contract either before the Assessing Officer or before the ld. CIT(A) or even before the Tribunal. Moreover, the assessee has not produced any evidence whatsoever in respect of the underlying transactions, cancellation of the forward cover contract, the circumstances under which they were cancelled and whether same was a premature cancellation. Since the assessee could not produce even a single document for cancellation, the ld. CIT(A) dismissed the ground raised by the assessee. Before the Tribunal also the assessee has not furnished any document in support of its claim. Under the above facts and circumstances, we uphold the order passed by the ld. CIT(A) on this issue and thus, the ground raised by assessee is dismissed.
In the result, both the appeals filed by the assessee as well as Revenue are dismissed. Order pronounced on 06th September, 2023 at Chennai.