THE VARDHMAN STAMPINGS PVT. LTD.,,AHMEDABAD vs. THE ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE-4(1)(2),, AHMEDABAD
आयकर अपीलीय अिधकरण
आयकर अपीलीय अिधकरण
आयकर अपीलीय अिधकरण
आयकर अपीलीय अिधकरण, अहमदाबाद यायपीठ
अहमदाबाद यायपीठ
अहमदाबाद यायपीठ
अहमदाबाद यायपीठ ‘A’ अहमदाबाद।
अहमदाबाद।
अहमदाबाद।
अहमदाबाद।
IN THE INCOME TAX APPELLATE TRIBUNAL
“A” BENCH, AHMEDABAD
]
]
BEFORE SMT.ANNAPURNA GUPTA, ACCOUNTANT MEMBER
AND SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER
ITA No.362 AND 363/Ahd/2020
Assessment Year : 2014-15 AND 2015-16
Vardhman Stampings P.Ltd.
S/2, Murlidhar Complex
Nr. Snehkunj Bus Stand
S.M.Road, Ambawadi
Ahmedabad 380 015. PAN : AAACV 7624 G
Vs
Pr.Commission of IT-4
Ambawadi
Ahmedabad.
(Applicant)
(Responent)
Assessee by :
Shri Manish J. Shah and Shri Rushin Patel, ARs.
Revenue by :
Shri H. Phani Raju, CIT-DR
सुनवाई क तारीख/Date of Hearing : 18/10/2024
घोषणा क तारीख /Date of Pronouncement: 16/01/2025
आदेश
आदेश
आदेश
आदेश/O R D E R
PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER
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
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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.
For the sake of convenience, we shall be dealing with the facts in the case of the appeal of the assessee pertaining to the Asst.Year
2014-15 in ITA No.362/Ahd/2020 and our decisions rendered therein will apply pari passu to the other appeal of the assessee as well.
ITA No.362/Ahd/2020 Asst.Year 2014-15
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 ITA No.362 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 –
i) the ld.Pr.CIT without appreciating the correct facts of the case, had held the assessment order erroneous; ii) considering the facts of the case, the issues were squarely covered in favour of the assessee by various judicial decisions and the distinction made by the ld.Pr.CIT was wrong and incorrect since it was based on incorrect appreciation of facts of the present case.
iii) that the issues had been duly examined by the AO during the assessment proceedings and rightly allowed as per the prevailing position of law;
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iv) the ld.Pr.CIT had invoked Explanation to section 73 for holding the claim of loss on derivatives wrongly allowed to the assessee by the AO, without confronting the same to the assessee during revisionary proceedings, thus holding the assessment order passed to be erroneous in gross violation of the principles of natural justice.
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.
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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 this loss of Rs.1,50,12,699/- on “FCDT” was identified by the ld.Pr.CIT in the show cause notice issued to the assessee under section 263 of the Act, as pertaining to two types of losses viz. (i) being loss on foreign currency derivative transaction of Rs.82.91 lakhs, and (ii) being loss on account of exchange rate difference of Rs.53.49 lakhs in respect of outstanding payment of raw-material from some parties/ creditors.
In this regard, he drew our attention to show cause notice issued by the ld.Pr.CIT, identifying these two types of foreign currency loss incurred by the assessee, as contained at para-2 of the notice as under:
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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.
That the loss on exchange rate difference of creditors was pointed out to be not on account of any forward contract of foreign currency derivative, but on account of restating the outstanding balance of foreign operational creditors at the exchange rate prevailing at the end of the year, following the accounting standard prescribed by the Institute of Chartered accountants of India(ICAI) in this regard in AS -11 . That the Hon’ble apex court had held such losses allowable u/s 37(1) of the Act.
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It was also pointed out that the explanation to this effect was also furnished to the AO, who has rightly appreciated the same, and allowed the assessee’s claim.
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:
“2. In the above context, it is necessary to place the relevant facts on record as under:
a. During the course of assessment proceedings, the learned Assessing Officer has asked us to furnish explanation regarding the above-mentioned losses. Vide our letter dated 18th December, 2017, we submitted to the learned A.O., a detailed response explaining as to how the above-mentioned loss is an allowable business expenditure.
In this connection, we reproduce hereunder relevant paras, as submitted before the learned A.O.:
Details of foreign exchange currency loss incurred in case of Novex Trading (Swiss)
SA-
•
The learned AO has noticed that the assessee company has incurred loss on account of foreign currency exchange amounting to Rs.2,48,57,249. Copy of ledger account is attached herewith as Annexure-31
o
Also, the sheet showing working of the fluctuation loss incurred by the assessee is attached herewith as Annexure-31A o
In terms of the provisions of the Companies Act, 2013, the assessee is mandatorily required to follow the accounting standards issued by the Institute of Chartered Accountants of India ("ICAI").
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o
The reporting currency of the assessee is Indian Rupee hence, all the transactions entered into by it during the course of its business are recorded in Indian Rupees.
o
In respect of the accounting of the transactions entered into Foreign Currency, the assessee follows the following accounting treatment as prescribed under Accounting Standard - 11 "The Effects of Changes in Foreign Exchange Rates"
issued by ICAI:
o
The transactions in foreign currencies on revenue accounts are stated at the rates of exchange prevailing on the dates of transactions.
o
The net gain or loss on account of exchange differences either on settlement or on translation is recognised in the statement of Profit and Loss. The foreign currency assets and liabilities including forward contracts are restated at the prevailing exchange rates at the year end. The premium in respect of forward contracts is accounted over the period of the contract.
o
In terms of the above, the transactions in respect of import of raw materials for its consumption/use in the normal course of business have been recorded at the rate of exchange prevailing during the period of transactions.
When, subsequent payment / settlement thereof has been affected, there have been changes in the exchange rates which has resulted in the exchange differences as compared to the amount of transaction recorded on the date of transaction. During the financial year: 2014-15, the U rate has moved from Rs. 60.36 during April
2014 to Rs. 62.23 during March, 2015. The total volume of imports of raw materials from Novax Trading in terms of U has been U 99,43,470 and the impact of the above movement in U rates has been an additional charge of Rs. 2,48,57,249/- pertaining to revenue transactions relating import of goods for its use in normal course of the business activities carried on by the assesses.
Thus, the assessee has rightly and consistently recorded the effect of exchange rate differences and as a result has claimed such loss arising due to changes in exchange rate as an allowable business expenses.”
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 ITA No.362 and 363/Ahd/2025 9 No.4604/Mum/2013 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:
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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:
“Details regarding Currency derivative transactions:
The assessee company has incurred loss of Rs. 82,91,206 on Currency Derivative
Transactions carried out during the assessment year 2015-16 and claimed as business expenditure.
During the year under assessment, Assessee Company has made forward contracts of foreign currency derivative though MCX Stock Exchange Ltd. in order to hedge its open exposure in respect of transactions entered into for import of raw materials during normal course of its business.
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MCX-SX (now renamed as Metropolitan Stock Exchange Ltd.) was incorporated on August 14, 2008 under the provisions of the Companies Act. The registered office of MCX-SX is situated at Exchange Square, Suren Road, Andheri (East), Mumbai 400
093. MCX-SX is a stock exchange recognised by SEBI and it has approval for operating currency derivatives segment. MCX Stock Exchange limited (MCX-SX),
India's new stock exchange, commenced operations in the Currency Derivatives (CD) segment on October 7, 2008 under the regulatory framework of Securities &
Exchange Board of India (SEBI) and Reserve Bank of India (RBI).
The Exchange is recognized by SEBI under Section 4 of Securities Contracts
(Regulation) Act, 1956. SEBI recognized Stock Exchange List is attached herewith for your immediate reference marked as an Annexure-32
The Exchange was also notified a "recognised stock exchange" under Section 2(39) of the Companies Act, 1956 by Ministry of Corporate Affairs, Gout, of India, on December 21, 2012. (Copy of the said notification is attached for your immediate reference marked as an Annexure-32A).
It is also notified by the Central Government as a recognised association for the purposes of clause (e) of the proviso to clause (5) of the said section 43 of the Income- tax Act, 1961 (43 of 1961) read with sub-rule (4) of rule 6DDD of the Income-tax Rules,
1962. Copy of the said notification is attached for your immediate reference marked as an Annexure-32B.
Shareholders of the Exchange include India's top public sector banks, private sector banks and domestic financial institutions who, together hold over 88% stake in the Exchange. MSEI is subjected to CAG Audit and has an independent professional management. In line with global best practices and regulatory requirements, clearing and settlement is conducted through a separate clearing corporation, MCX-SX
Clearing Corporation Ltd. (MCX-SX CCL). All the Foreign Currency derivative transaction carried out by a broker of MCX Stock Exchange Ltd. electronically and it is supported by time stamped contract note issued by such broker.
Your honour has asked to provide copies of certain bills as mentioned below which are attached herewith as Annexure-32C
(i) Loss of Rs. 29.66 lacs dated 22/05/2014
(ii) Loss of Rs. 13.45 lacs dated 02/07/2014
(iii) Loss ofRs.25.78 lacs dared 14/08/2014
In terms of the provisions clause (iii) of the Explanation 2 of clause (e) of the proviso to clause (5) of section 43 of the Income-tax Act, 1961 (43 of 1961) read with sub-rule
(4) of rule 6DDD of the Income-tax Rules, 1962, the speculative transaction is defined as under:
(5) "speculative transaction" means 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 ITA No.362 and 363/Ahd/2025
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(b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; or (d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42
of 1956) carried out in a recognised stock exchange; or (e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognised association , which is chargeable to commodities transaction tax under Chapter VII of the Finance Act, 2013 (17 of 2013), shall not be deemed to be a speculative transaction.
The eligible transaction is defined as under:
Explanation l.—For the purposes of clause (d), the expressions—
(i) "eligible transaction" means any transaction,—
(A) carried out electronically on screen-based systems through a stock broker or sub-broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye- laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and (B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) and permanent account number allotted under this Act;
(ii) "recognised stock exchange" means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act,
1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified!9 by the Central Government for this purpose;
Based on the documents placed on record, it is apperant that the currency derivative transactions carried out by the assessee on MCX-SX are eligible transactions and hence, not considered as speculative transaction. "
In view of the above, the assessee has rightly claimed loss arising out of eligible currency derivative transactions as a business loss u/s 37 of the Income Tax Act,
1961.”
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 ITA No.362 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)
No.4604/Mum/2013; iii)
Suzlon Energy Ltd. Vs. ACIT, (2017) – 188 TTJ 278 (Ahd)
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:
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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
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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.
With respect to the loss on derivative transactions, he pointed out that the ld.Pr.CIT failed to appreciate that the assessee had not booked any speculative loss in the said case without settlement of transactions. He, therefore, contended that the finding of the error by the ld.Pr.CIT in the assessment order passed was incorrect, and therefore, order passed therefore to be quashed.
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
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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 23. 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 ITA No.362 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
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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.
Admittedly, the applicability of provisions of section 73 of the Act was never confronted to the assessee during the revisionary proceedings. Therefore, holding the assessment order erroneous on account of the applicability of a provision, which was never confronted to the assessee is, we agree with the ld.counsel for the assessee, in gross violation of principles of natural justice. Besides, we have gone through the order of the ld.Pr.CIT and we find that there is no clarity in the order of the ld.Pr.CIT as to how the Explanation to section 73
would disentitle the assessee to set off any loss on transactions on trading in foreign currency. The relevant finding of the ld.Pr.CIT are at para 3.10 to 3.12 of his order as under:
“3.10 Without prejudice to the above, even if it is assumed that the above transactions were not falling in the definition of speculative transactions" as per the exception clauses (d) & (e) of section 43(5) of the Act, the explanation below section 73 the Act would be applicable. This is so ITA No.362 and 363/Ahd/2025
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because it is not the company whose gross total income consisted mainly of income which is chargeable under the heads:-
• "Interest on securities",
• "Income from house property",
• "Capital gains"
• "Income from other sources", or a company [the principal business of which is the business of trading in shares or banking]or the granting of loans and advances).
11 To understand this more clearly, the explanation below section 43(5) of the Act is reproduced as under:-
"Explanation.—Where any part of the business of a company [other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources"/, or a company [the principal business of which is the business of trading in shares or banking for the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.]"
12 Thus, under the deeming provisions of section 73(5) of the Act, the assessee-company would not be entitled to set off any loss on transactions of buy and sale of US $ through two brokers as mentioned above.”
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.
Be that so, we have gone through the provisions of section 73, and we find that it has absolutely no applicability to the facts of the present case. The provisions of section 73 are reproduced hereunder:
“73. (1) Any loss, computed in respect of a speculation business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.
(2) Where for any assessment year any loss computed in respect of a speculation business has not been wholly set off under sub-section (1), so much of the loss as is not so set off or the whole loss where the assessee had ITA No.362 and 363/Ahd/2025
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no income from any other speculation business, shall, subject to the other provisions of this Chapter, be carried forward to the following assessment year, and—
(i) it shall be set off against the profits and gains, if any, of any speculation business carried on by him assessable for that assessment year; and (ii) if the loss cannot be wholly so set off, the amount of loss not so set off shall be carried forward to the following assessment year and so on.
(3) In respect of allowance on account of depreciation or capital expenditure on scientific research, the provisions of sub-section (2) of section 72 shall apply in relation to speculation business as they apply in relation to any other business.
(4) No loss shall be carried forward under this section for more than four assessment years immediately succeeding the assessment year for which the loss was first computed.
Explanation.—Where any part of the business of a company (other than a company whose gross total income consists mainly of income which is chargeable under the heads "Interest on securities", "Income from house property", "Capital gains" and "Income from other sources", or a company the principal business of which is the business of trading in shares or banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase and sale of such shares.”
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.
Coming to the Explanation to section 73, which the ld.Pr.CIT has invoked, what it merely states is that if a company indulges in the business of trading in shares primarily, such transactions would be ITA No.362 and 363/Ahd/2025 31
treated as speculative business. Thus, the Explanation to section 73
deems the transactions in trading of shares in specific circumstances to be speculative in nature. The facts of the present case are not that the transactions entered into by the assessee were in relation to trading of shares. There is no question, therefore, for the Explanation to section 73 being attracted. Therefore, we find that the ld.Pr.CIT had grossly erred in holding that the Explanation to section 73 would be attracted in the facts of the present case.
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.
The appeal of the assessee is allowed.
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.
Order pronounced in the Court on 16th January, 2025 at Ahmedabad. (T.R. SENTHIL KUMAR)
JUDICIAL MEMBER
Ahmedabad,dated 16/01/2025