DCIT, CHENNAI vs. ASVINI FISHERIES P LTD., CHENNAI

आदेश/ O R D E R

PER S. JAYARAMAN, ACCOUNTANT MEMBER:

The Revenue filed these appeals against the common orders of the

Commissioner of Income Tax (Appeals)-1, Chennai in ITA Nos. 199 & 107

/CIT(A)-1/2014-15 dated 03.03.2016 for the assessment years 2010-11&

2011-12, respectively.

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processing and export of marine products. In its returns filed for ay 2010-11

and 2011-12, the assessee claimed loss on forward contracts in forex

derivatives. The Assessing Officer required the assessee to furnish relevant

materials and thereafter disallowed such claim for the reason that the

assessee’s claim falls within the ambit of speculative business which cannot be

allowed to be set off against the normal business income as per section 73.

Aggrieved, the assessee filed the appeal before the CIT(A). At the appellate

stage the assessee has solely relied upon the order of the ITAT, Chennai B

Bench in ITA No. 2246/Mds/2014 dated 18.12.2005 for ay 2009-10, based

upon which the CIT(A) directed the AO to compute the disallowance, if any, in

conformity with directions of the Hon’ble tribunal.

under:

“ 1. The order of the learned CIT(A) is contrary to law, facts and circumstances of the case. 2.1 The learned CIT(A) erred in directing the AO to recompute the disallowance of loss from foreign currency derivatives of Rs.5,14,08,317/- in conformity with the directions of the Tribunal's order for A. Y. 2009-10. 2.2 The learned CIT(A) erred in holding that loss on forward contracts in foreign exchange derivatives is not speculative loss. 2.3 The learned CIT(A) erred in following the decision of the Tribunal by holding that the loss on forward contract in forex derivatives upto the amount of export turnover should be treated as business loss.

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2.4 The learned CIT(A) ought to have appreciated the fact that the decision of the Hon'ble ITAT in the assessee's own case for A.Y.2009-10 has not been accepted by the department and appeal is pending before the Hon'ble High Court. 3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.”

assessee has not laid the relevant material before the AO for claiming the

impugned deduction. Per Contra, the AR supported the order on the basis of

this tribunal order in ITA No. 2246/Mds/2014 dated 18.12.2005 for ay

2009-10.

order in ITA No. 2246/Mds/2014 dated 18.12.2005 for ay 2009-10. It is seen

that the CIT(A) has appreciated the facts of the case and decided the issue.

Thereafter, this tribunal disposed the matter. In the impugned years, since,

the AO has passed almost similar order, the relevant portion of the order for

ay 2010-11 is extracted as under:

“ D. Based on the above discussion and the facts of the instant case, thee assessee's transactions are regarded as speculative transactions since it satisfies the provisions of Section 43(5) to treat it as 'Speculative transaction' for reasons mentioned below. a. There are contracts between the assessee company and the Financial Institutions (in this case Banks) for the non deliverable derivative

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specifically Cross currency Call Option Contract without any underlying exposure. The assessee had not furnished any risk analysis statement with underlying exposure and in fact the contract notes submitted by the assessee do not have any underlying asset / exposure. b. The assessee had neither furnished the contract notes nor the risk analysis statement submitted to the banks while applying for forward contracts. There was no evidence furnished with regard to the underlying risk for which derivative instruments were taken. c. The commodity referred in Section 43(5) includes stock, shares and also the non deliverableForex derivatives. As per section 43 (5) the contracts for purchase and sale of any commodity including stock and shares also includes derivatives which can be inferred from the proviso (d) to the above section where it is mentioned that the trading in derivatives referred in clause (ac) of section 2 of Securities Contracts Regulation Act, 1956 done in a recognized stock exchange are deemed to be excluded from the definition of speculation business under the Income Tax Act. Forex Derivatives are covered under the definition of clause (ac) of section 2 of Securities Contracts Regulation Act, 1956. The term Securities as defined under Securities Contracts Regulation Act, 1956 in clause (h) of section 2 include derivatives (sub-clause ia). The transaction falls into exclusion under proviso (d) only when it is done through a Recognised Stock Exchange. If the commodity does not include Derivatives, then the same would not have been excluded in the proviso (d) to section 43(5). This clearly indicates that the Derivatives transacted by the assessee falls within the scope of commodities but not transacted through Recognised Stock Exchanges. Thus the contention of the assessee that its transactions by way of Forex Derivatives based on Foreign Currencies through forward contracts are not commodities as per section 43(5) is not valid. d. Since the Act specifically provides exclusion only to those transactions done through recognized Stock Exchanges, the assessee's transactions with Banks are not covered for any exemption from the purview of Sec.43(5). e. The assessee's claim that derivatives are excluded under proviso (d) to section 43(5) is not acceptable since the proviso do not give blanket

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exclusion to all the derivative contracts but only to such contracts that are traded in the recognized stock exchange. Thus the assessee's argument that Forex Derivatives are not Speculative Transactions is not accepted and accordingly these transactions are to be treated as speculative transactions under section 43(5). f. Also, the assessee had not actually delivered the currency to the Banks with whom it had entered such contracts. In the instant case, the assessee either cancelled or squared up the forex forward contracts without delivery of any underlying asset either the Foreign Currencies or the Export Proceeds in denominated currencies. g. In the absence of any tri-partite agreement between the assessee, Banks and the person to whom the exports were to be made, there would be no control for the Banks in case if the alleged transactions by the assessee were based only against future export by way of hedging to protect the return/minimise the risk. This clearly indicates that the assessee's regular export business activities were independent to the exotic forward contracts entered by the assessee and the assessee act was earn more profit through such derivative instrument by way of speculation. h. These forward contract transactions of the assessee were only with Banks and not routed through or done through any recognized stock exchanges. i. The cross currency pegging between two different foreign currencies by the assessee through these forward contracts further asserts the intention of the assessee and nature of such transactions as these transactions are of speculative in nature. j. The assessee neither proved that there was underlying asset nor furnished any confirmation in this regard (i.e. details the underlying asset) from the Bank(s) with whom such contracts were entered. k. The Nature, Frequency and the volume of transactions also strengthen the fact that the assessee had entered numerous contracts which even outstate the number of exports/export invoices that the assessee would have made in the ordinary course of business. The nature of transaction by way of Buy and Sell Forex derivatives coupled with swap and cross currency pegging. The frequency and the

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magnitude/ quantum of such exotic forward contracts entered by the assessee clearly establishes that the assessee's act was only of speculative in nature in order earn profit not only through regular business activities but also through such exotic forex derivative contracts. Any such act falls within the ambit of S.43(5). l. In the decision of Comfund Financial Services(l) Ltd vs DCIT, The ITAT Bangalore bench has also held that " Even the definition of the word "commodity" as per Oxford Illustrated Dictionary is "useful thing; article of trade" When the Court of Appeal (in an English judgement) held even dollar, which is nothing but a currency also to represent a commodity, we find no difficulty in holding that shares and securities and also units of UTI should also be considered as commodity .... " m. Further reliance is placed on the recent decision of the Honorable ITAT, Bangalore 'A' Bench, in the case of Assistant Commissioner of Income-tax vsK.Mohan&Co(Exports) (P) Ltd. (2010) 39 DTR 97 wherein it was held that settlement of Forward contracts without actual delivery of currency as a speculative transaction under section 43(5) of the Income-tax Act, 1961. This adds further strength for treating the assessee's transactions in forex derivatives as speculative transactions. In view of the above discussions, the income/loss from options and forward contracts entered by the assessee forms part of the Speculation Business of the assessee as per explanation 2 to section 28. Accordingly, the net loss of Rs.5,14,08,317/ - claimed by the assessee falls within the ambit of speculative business which cannot be allowed to be set off against the normal business income as per section 73 of the Income tax Act, 1961. Such losses from speculation business of Rs.2,56,46,747/ - is allowed to be carried forward for set off against any future speculation income accrue in succeeding period and in relevant assessment years, as per the provisions of the Act on 'Set-off of Losses'. [ Disallowance: Rs.5, 14,08,317/- ]”

From the above and from the assessment orders, it is clear that the relevant

facts are not placed before the AO by the assessee. The assessee has not

placed proper submission on the facts of the case before the CIT(A) and the

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CIT(A) has also not appreciated the facts with reference to the impugned

issues. However, the CIT(A), merely relying on the order of this tribunal in

earlier year, has directed the AO to pass order in conformity with the direction

of the tribunal. In view of the above facts and circumstances, we deem it fit

to set aside the impugned issues to the AO for afresh examination. The AO

shall afford adequate opportunity to the assessee to lay the relevant materials

in support of its contention and after affording adequate opportunity, shall

pass speaking orders in accordance with law. The appeals filed by the

Revenue are treated as allowed for statistical purposes.

are treated as allowed for statistical purposes.

Order pronounced on Friday, the 08th day of December, 2017 at Chennai.

Sd/- Sd/- (एन.आर.एस .गणेशन) (एसजयरामन) (N.R.S. GANESAN) (S. JAYARAMAN) !या�यकसद"य/Judicial Member लेखासद"य/Accountant Member

चे�नई/Chennai, 0दनांक/Dated: 08th December, 2017 JPV आदेशक&)�त1ल2पअ3े2षत/Copy to: 1. अपीलाथ%/Appellant 2. )*यथ%/Respondent 3. आयकरआयु4त ) अपील(/CIT(A) 4. आयकरआयु4त/CIT 5. 2वभागीय)�त�न�ध/DR 6. गाड7फाईल/GF