ACIT, NEW DELHI vs. M/S. FIEM INDUSTRIES LTD., NEW DELHI

The facts in brief qua the first issue is concerned, Ld. AO from the perusal of the profit and loss account noted that assessee has claimed an amount of Rs. 1,92,50,300/- on account of forward contracts in US Dollar-Rupee to hedge the export receivable in USD. In response to the show cause notice as to why the said amount should not be allowed being speculative in nature, the assessee has submitted as under:- “The assessee carries on the business of manufacturing as well as exports of Automotive lighting & signalling equipments mirrors etc. Various manufactures of Two Wheelers, Four Wheelers & Automobiles. The assessee had entered into 2 (Two) hedging contracts termed as forward contracts with Standard Chartered Bank & City Bank, N.A. for the purpose of hedging of its export receivables denominated in USD. The contracts were entered into the year 200'7 for a period of 5 years. The copies of the same are enclosed herewith for your perusal. The loss was incurred by the assessee only because of the unprecedented foreign exchange volatility in the global markets triggered by the unfortunate fall of the biggest investment bank "Mis Lehmann's Brothers" of USA leading to unforeseen global recession staring from September 2008. The losses are duly allowable as revenue expenditure due to the following reasons: “(i) The losses have arisen and were directly incidental to the carrying on of the business operations of the assessee. (ii) There was a direct or proximate nexus between the business operations of export and import of goods and the loss on forward contracts. (iii) The assessee does not carry on the business of trading in forward contracts or derivatives. The forward contracts

Ld. AO however, rejected the assessee’s contention and observed that transaction against which the assessee has claimed expenses is for buying and selling of US Dollar and the settlement is not by way of physical delivery. The transaction is not for forward purchase of raw material or merchandise and therefore, in view of section 43(5) the same is to be treated as speculative transaction and loss arising is to be held as speculative loss.

Before the Ld. CIT (A), the assessee has made very elaborate submissions which have been incorporated from pages 2 to 10 of the appellate order. The Ld. CIT (A) has deleted the said disallowance after considering the entire facts and material on record. In sum and substance, the finding of fact given by the Ld. CIT (A) are that, firstly, assessee was carrying on the business of manufacturing and supplies of auto component, sheet metal parts, etc., to various automotive manufacturers in India. It also exports its goods to overseas customers and has undisputed track record of export sales for the past several years. Secondly, while conducting its business, assessee has entered into forward contract with M/s. Standard Chartered Bank and Citi Bank N.A. to hedge its export receivables denominated in foreign currency. The same was offered by the bankers after verifying the underlying export orders executed with MNCs. The forward contracts were in conformity with the regulations and criteria prescribed by Reserve Bank of India; thirdly, he noted that assessee has filed complete party wise details of the purchase orders against which exports were made un USD during the year and is also filed copies of PO’s exceeding USD 25,000; and fourthly, the AO has not disputed the genuineness of assessee in carrying out its business including its exports and also does not doubt the infrastructure of the assessee, the past history of actual exports made and the genuineness of the confirmed orders. Further, nowhere the AO has disputed the contracting terms with the bankers and the scientific basis and historical basis of the currency rates which went into freezing the negotiations of the forward contracts; and lastly, assessee has undisputedly exported goods denominated in USD which was USD 19,67,954. He has also analysed the historical data of USD and after detailed discussion and relying upon the various case laws he has directed the AO to allow the business loss /normal business profits.

Before us, Ld. DR strongly relied upon the order of the AO, and further submitted that the underlying hedging was for foreign currency, i.e., USD and settlement was not by way of physical delivery rather it mentions payment in exchange rate prevailing on the specified dates. Thus, it is clearly a speculative transaction in terms of section 43(5). He also strongly relied upon the judgment of Hon’ble Bombay High Court in the case of CIT vs. Shri Bharat R Ruia (HUF) (2011) 337 ITR 452, wherein it was held that future contracts for purchase / sale of an underlying security permitted to be traded on stock exchange and settled otherwise than by actual delivery would be speculative transactions.

On the other hand, Ld. Counsel for the assessee strongly relied upon the order of the Ld. CIT(A) and submitted that here in this case it is not a case of simple trading or contract for purchase and sale of USD. In fact assessee has entered into forward contracts with the bank on the basis of the confirmed orders of the export with the customers and past export performance of the assessee. The forward contracts were entered before the actual delivery of goods which is evidenced by the purchase orders placed by the customers. Therefore, there was direct nexus with the export and import of goods and the forward contracts. Therefore, it is purely on revenue account thus has to be allowed as business loss. In support of its contention it is relied upon the following decisions: 1. Copy of order of Hon’ble ITAT Mumbai in the case of Foods and Inns Ltd. vs AC1T reported in 159 ITD 1007.

We have heard the relevant submissions and also perused the relevant finding given in the impugned orders as well as the material referred to before us at the time of hearing. The assessee company is engaged in the business of manufacturing and supply of automotive parts and also export the same to overseas customers. It had entered into hedging contract with Citi Bank and with Standard Chartered Bank. The contracts were entered for a period of five years consisting of a series of 60 individual monthly contracts. The underlying exposure for eligibility was worked out by the bank on the basis of average of the export and import achieved by the assessee in past years as per the RBI guidelines and the assessee has also filed the details of exports sales in terms of USD for the financial year 2011-12. The purchase orders shown before the authorities below were to the tune of USD 21.60 lacs contracted with the bankers. Thus, the evidences clearly show that there was sufficient underlying export