THE VARDHMAN STAMPINGS PVT. LTD.,,AHMEDABAD vs. THE ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE-4(1)(2),, AHMEDABAD

The above two appeals have been filed by the Assessee against order passed by the Pr.Comissioner of Income Tax-4, Ahmedabad (Ld.Pr.CIT” for short) in exercise of his revisionary power under section 263 of the Income Tax Act, 1961 ("the Act" for short) pertaining to assessment years 2014-15 & 2015-16 .

At the outset, it was common ground that in both the orders passed for the two assessment years, the Ld.PCIT found the assessment order passed by the AO to be erroneous causing prejudice to the Revenue for identical reasons/issues in identical backdrop of facts. That the arguments of the assessee against the orders passed and 363/Ahd/2025 2 by the Ld.PCIT was also therefore common. Therefore, both the appeals were heard together and are being disposed of by way of this common consolidated order.

The ld.counsel for the assessee pointed out that error noted by the ld.Pr.CIT in the assessment order was with respect to the allowance of loss incurred by the assessee on foreign currency derivative transactions (“FCDT” for short) amounting to Rs.1,50,12,699/- which the ld.Pr.CIT found to be “marked to market” loss (“M2M” for short) and noting the same to be notional loss, contingent in nature and not allowable in terms of the CBDT Instruction No.3/2010 dated 23.03.2010 (“Board Instruction” for short), he found, the AO to have allowed this claim erroneously without examining the issue and conducting due enquiries with regard to the same.

The assessee when confronted with the same by the Ld.PCIT in the proceedings conducted under section 263 of the Act filed reply explaining the facts relating to the claim of loss of “FCDT” of Rs.1,50,12,699/- and also pointing out that the issue was duly examined during assessment proceedings and rightly allowed by the AO, considering various judicial decisions, holding such claims allowable in terms of provisions of law in this regard. The entire facts relating to the issue were also explained to the ld.Pr.CIT and his attention was drawn to the various judicial decisions, holding such and 363/Ahd/2025 3 claims to be allowable. However, the ld.Pr.CIT was not convinced with the explanation of the assessee. He rejected the contention of the assessee and distinguished the case laws relied upon by the assessee, and held that in terms of provisions of law, the transactions conducted by the assessee was speculative in nature, and hence not allowable in terms of section 43(5) of the Act; that the assessee was not saved by the exception to speculative transactions carved out in the said section under sub-clause (e) thereto. And alternatively the Ld.PCIT held that the said claim was not allowable in view of the Explanation to section 73 of the Act, which would be applicable to the facts of the present case. Holding so, the ld.Pr.CIT restored the issue back to the AO with direction to carry out thorough inquiries on the issues mentioned in the order, and other issues, which may be noticed during the course of assessment proceeding’s in pursuance of his order under section 263 of the Act.

Before us, arguments at length were made by the ld.counsel for the assessee relying on and reiterating the contentions made before the ld.Pr.CIT in the revisionary proceedings. Briefly put, his arguments were to the effect that –

The ld.DR strongly supported the order of the ld.Pr.CIT, and made contentions at length on the issue of “FCDT” entered into by the assessee being not allowable in terms of provisions of law, referring to various judicial decisions in this regard.

We have heard contentions of both the parties carefully, and have gone through the order of the ld.Pr.CIT and various documents referred to before us by both the parties, as also, judicial decisions referred to during course of hearing before us. We shall now proceed to adjudicate the present appeals.

It is to be kept in mind that the appeal arises from the order of the ld.Pr.CIT in exercise of his revisionary powers ,passed u/s 263 of the Act, holding the assessment order erroneous causing prejudice to the Revenue. And our scope of adjudication is therefore, confined to deciding, whether the ld.Pr.CIT has rightly found so, in accordance with law. The Ld.PCIT has held the assessment order erroneous on account of the AO not having examined the issue of allowability of claim of foreign currency derivative transactions in the light of the provisions of section 43(5) of the Act and Explanation to section 73 of the Act, as per which the said claims were apparently not allowable as per the Ld.PCIT. The Ld.PCIT after finding so has restored the issue back to the AO for examination afresh in accordance with law. and 363/Ahd/2025 5 What has to be therefore considered by us is whether prima facie , basis the facts relating to the issue on record and the judicial decisions on the issue, the Ld.PCIT ‘s finding was correct of the claim of the assessee to loss on foreign currency derivative transactions being not allowable. And for the said purpose what is to be considered is whether or not the assessee was able to demonstrate to the Ld.PCIT to the contrary, that the claim of the assessee was allowable.

As stated above, the ld.Pr.CIT noted, the assessment order to be erroneous for having allowed the claim of loss of the “FCDT” amounting to Rs.1,50,12,699/- which according to him, was loss booked on mark to market (“M2M” for short) basis, therefore not actual loss but notional and contingent loss, which was not allowable as per the CBDT instruction no.3/2010 dated 23.03.2010.

The ld.counsel for the assessee pointed out that with respect to both these types of “FCDT” a different explanation was furnished to the ld.Pr.CIT on account of the different nature of the loss, and it was also pointed out to him that in terms of position of law as laid down by courts in various decisions, both losses were allowable.

He stated that it was pointed out to the Ld.PCIT that the foreign currency derivative loss was on account of forward contracts and was not an “M2M” loss, but in fact it was an actual loss incurred by the assessee on settlement of the transactions, and therefore not covered by the CBDT instruction and thus allowable as per law.

In this regard, the ld.counsel for the assessee first took the issue of loss on account of exchange rate difference of Rs.53.49 lakhs in respect of the outstanding payment of raw-material from such parties, and pointed out the explanation furnished to the AO in this regard was in accordance with the Accounting Standard-11 issued by the Institute of Chartered Accountants of India; that though this apparently was an M2M loss, but the same was allowable as held by the Hon’ble Apex Court in the case of (i) CIT Vs. Woodward Govenor P.Ltd., 312 ITR 254 (SC), and (ii) ONGC Vs. CIT, 322 ITR 189, that the loss was not on account of any forward contract in foreign currecy derivatives. Our attention was drawn to page no.5 to 7 wherein the assessee had furnished explanation with regard to this claim of loss to the AO, reproduced as under:

The ld.counsel for the assessee pointed out that it was explained to the ld.Pr.CIT that he had incorrectly noted the impugned transaction to be a forward contract; that as explained to the AO, it was merely a loss on account of exchange rate difference in respect of outstanding payment of a creditor; that the above CBDT Instruction No.3 of 2010 applied only to forward contracts and therefore did not apply to the facts of the present case; that loss had been booked by the assessee following the Accounting Standard-11 issued by the ICAI and was allowable in view of the decision of the Hon’ble Apex Court, as noted above. It was also pointed out that the ITAT Delhi Bench in and 363/Ahd/2025 9 the case of DCIT Vs. International Gold Co. Ltd., had categorically held such transaction to be not covered by the above CBDT Circular referred to by the ld.Pr.CIT. Our attention was drawn to PB Page No.11 pointing out that loss of Rs.53.49 lakhs was not on account of forward contract as under:

He also drew our attention to PB Page No.14, pointing out to the ld.Pr.CIT that Instruction NO.3 of 2010 did not apply to the impugned transaction, and that loss had been booked in accordance with AS- 11, as under:

With respect to the loss claimed by the assessee on “FCDT” transaction of Rs.82.91 lakhs, the ld.counsel for the assessee pointed out that this issue was also shown to have been examined by the AO during the assessment proceedings, and explained to him that the loss was incurred on account of hedging from foreign currency fluctuations the operating expenses of the assessee in respect of transaction for importing of raw-material and was thus allowable business loss; that the transaction was undertaken on MCX-SX which was recognized by the SEBI for currency derivative segments and was recognized for the purpose of section 43(5)(e) of the Act; that all conditions of section 43(5)(e) of the Act stood fulfilled in the facts of the present case, and transaction, therefore, was not to be treated as speculative transaction. The submissions made in this regard were pointed to us, and is from page no.7 to 10 as under:

The ld.counsel for the assessee pointed out that it was also explained to the ld.Pr.CIT that the loss claimed by the assessee on account of the impugned transaction was a settled loss and it was and 363/Ahd/2025 13 only the profit booked on account of these transactions, which was unsettled and marked to market. Our attention was drawn to PB No.11 where the assessee had explained the position of total foreign currency loss suffered by the assessee to the ld.Pr.CIT which is reproduced above in our order at para-13. He also pointed out that several judicial decisions were also brought to the notice of the ld.Pr.CIT pointing out that the in respect of “FCDT” undertaken for hedging of the business operation, no disallowance of loss booked, was warranted. More particularly, the following case laws referred to- i) CIT Vs. Chetan & Co., 390 ITR 36 (Bom); ii) DCIT Vs. International Gold Co. Ltd., ITA No.4604/Mum/2013;

Having stated so, the ld.counsel for the assessee pointed out that the ld.Pr.CIT, despite the above explanation furnished to him, went on to hold the assessment order erroneous for having allowed the loss on “FCDT”, noting that the provisions of section 43(5)(e) of the Act did not come to rescue of the assessee, and that as per the Explanation to 73 of the Act, this claim was not allowed to the assessee. Our attention was drawn to the finding of the ld.Pr.CIT in this regard at para-3.0 to 3.11 as under:

The ld.counsel for the assessee contended that the ld.Pr.CIT failed to appreciate the facts of the case that, firstly the loss on account of exchange rate difference of creditors was not a forward contract at all, and secondly, the loss on foreign currency derivative transaction which was a forward contract was mainly settled loss, and not a notional one; that disregarding these two pertinent facts, he noted, the loss to be only a “M2M” loss on forward contracts of foreign currency derivatives not falling in the definition of section 43(5)(d) or (e) of the Act, and hence speculative in nature. He contended that the ld.Pr.CIT had alternatively referred to the Explanation to section 73 of the Act without even confronting the same to the assessee. He pointed out that the even the distinction made by the ld.Pr.CIT of the decision pointed out by the assessee to be squarely applicable to the facts of the assessee was incorrect. He drew our attention to the decision of the Hon’ble Apex Court in the case of CIT Vs. Woodward Governor P.Ltd. and ONGC Vs. CIT (supra) referred to by the assessee for the proposition that foreign currency fluctuation loss booked in accordance with AS-11 issued by the ICAI being revenue in nature was allowable. He pointed out that the ld.Pr.CIT distinguished the said decision, noting that in the facts of the present case before the Hon’ble Apex Court the assessee had debited difference between the rate of foreign currency as prevailing as on the date of obtaining the foreign loan and the rate of foreign currency as at the close of the year; that in the case of the assessee, however, trading of foreign currency on day-to-day basis had been made without taking any delivery. He pointed out that the ld.Pr.CIT had proceeded on incorrect assumption and 363/Ahd/2025 25 of the facts that the impugned transactions were also with regard to the forward contract of the foreign currency, though, it was clearly pointed out to him that the loss booked were on account of difference in exchange rate of creditors balance as on the date of entering the transaction and that prevailing as at the end of the year, and was identical to the facts in the case considered by the Hon’ble Apex Court. He pointed out therefore that the ld.Pr.CIT had wrongly appreciated again the facts of the present case for holding the decision of the Hon’ble Apex Court, not applicable in the present case.

The ld.DR, however, heavily relied on the finding of the ld.Pr.CIT and made many arguments on the merits of the issue also, drawing our attention to various decisions, holding that the loss in commodity transactions are speculative and not allowable in terms of section 43(5) of the Act.

Having considered the contentions of the ld.counsel for the assessee, we find merit in the contention of the Ld.Counsel for the assessee that the finding of error by the Ld.PCIT in the order of the AO is not based on correct appreciation of both the facts of the case on record and the judicial interpretation of the provision of law in this regard.

Undoubtedly, the ld.Pr.CIT has found assessment order passed in the case of the assessee to be erroneous proceeding on the factual and 363/Ahd/2025 26 premise that entire loss claimed by the assessee of Rs.1,50,12,699/- pertained to forward contracts in foreign currency derivate transactions. And this despite the assessee clearly pointing out that entire loss booked by the assessee was not on account of foreign currency derivative transactions but partly on account of the exchange rate difference of outstanding balance of creditors and part on account of forward contracts in derivates transactions .

With respect to the portion of the loss claimed by the assessee on account of exchange difference in respect of outstanding balance of creditors, this fact undoubtedly had been brought to the notice of the AO, and the ld.Pr.CIT also during the revisionary proceedings. The assessee had also demonstrated that the claim of this loss had been made following the AS-11 recommended by the ICAI for this purpose; that it was also pointed out that the Hon’ble Apex Court in a series of the decisions beginning with CIT Vs. Woodward Governor P.Ltd. and ONGC Vs. CIT (supra) had held such identical claims to be allowable in terms of section 37(1) of the Act.

The ld.Pr.CIT, we agree with the ld.counsel for the assessee, has found the claim to be wrongly allowed by the AO, completely misappreciating the facts of the present case and noting it to be on account of loss on forward contract of “FCDT”. Noting this incorrect fact, he has held the transaction to be speculative in terms of section 43(5) of the Act, and noting this incorrect fact alone, he has distinguished the decision, the assessee had cited as applicable in the facts of the case. Therefore, we agree with the ld.counsel for the assessee that the finding of the error by the ld.Pr.CIT on account of incorrect allowance of claim of loss on account of foreign exchange difference in relation to outstanding creditors of Rs.53.49 lakhs was and 363/Ahd/2025 27 an incorrect finding of the error based on incorrect appreciation of the facts, and therefore, the same is held to be not sustainable.

As for the other component of the loss, admittedly, the same was on account of forward contract of “FCDT” but the assessee had pointed out that the loss was a settled loss and not an M2M loss. The ld.Pr.CIT, we find, still goes on to record an incorrect finding that the loss was an unsettled M2M loss and hence not allowable in terms of CBDT Instruction No.3 of 2010 (supra). On the second issue also, we find, that the ld.Pr.CIT has failed to appreciate the correct facts of the case, while finding the assessment order erroneous. The assessee had demonstrated the loss claimed to be not an M2M loss, but a settled loss, and the ld.Pr.CIT, we find, however goes on to record fact to the contrary that it was an M2M loss. Basis this incorrect fact noted by him, the Ld.PCIT, we find, went on hold the assessment order erroneous causing prejudice to the Revenue for having allowed such M2M loss in contradiction/in violation of the Instruction issued by the CBDT in this regard.

Further, we find that the assessee had explained such loss to have been incurred while hedging its foreign currency transaction from fluctuations, which transactions were entered into in the course of carrying out its business activities for importing raw-material, and had also pointed out that in various judicial decisions such losses were held to be allowable. The ld.Pr.CIT, we find, has failed to appreciate this contention of the assessee, and has merely noted the fact that the loss booked by the assessee was a notional/contingent loss on account of unsettled transaction, which, as we have noted above, was an incorrect finding of the fact by the ld.Pr.CIT. Therefore, the second issue also of loss on forward contract of foreign currency derivatives booked by the assessee of Rs.82.91 lakhs being wrongly and 363/Ahd/2025 28 allowed by the AO, the finding of the error by the ld.Pr.CIT is again based on mis-appreciation of the facts of the case before it, and also by not appreciating the judicial decisions cited by the assessee to it.

In view of the same, the finding of the error by the ld.Pr.CIT on the loss on forward contract of “FCDT” of Rs.82.91 lakhs is also held to be not sustainable.

We have also noted that the ld.Pr.CIT has alternatively held that even if transactions entered into by the assessee has not treated as speculative, the Explanation to section 73 of the Act was applicable to the facts of the present case, as per which, the assessee would not be entitled to set off any loss on transaction of buy and sale of US dollar through brokers as in the facts of the present case. The AO has not examined the issue from this perspective, and therefore, rendering the assessment erroneous.

The ld.Pr.CIT has merely reproduced the Explanation below the section 73, and on perusing the contents of the same, we fail to understand, how it can be derived therefrom that loss on transaction in “FCDT” is not allowed to be set off in terms of the said section. Even the order of the ld.Pr.CIT gives no clarity on how the Explanation is so interpreted by him.

A perusal of the said provision would reveal that it restricts the set off of loss in respect of a speculation business against the profits from another speculation business alone. Meaning thereby that, the loss incurred in speculation business are not allowed to be set off against any other income except profits from speculation business alone. Thus, the section 73 primarily deals with the treatment of set off of loss on speculation business.

In the facts of the present case, the ld.Pr.CIT has alternatively applied section 73 stating that if the “FCDT” transactions are not treated as speculative, then section 73 will be applicable. But since section 73 applies only to loss incurred in speculative business, this interpretation of the ld.Pr.CIT, we find, is incorrect.

In the light of the above, we hold that the order passed by the ld.Pr.CIT under section 263 of the Act is not sustainable, and therefore, directed to be quashed.

As consequence of quashing of the impugned order of the ld.Pr.CIT in the Asst.Year 2014-15, similar order passed in the succeeding Asst.Year 2015-16 also stands quashed.

In the result, both the appeals of the assessee are allowed.