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Before: Shri N.R.S. Ganesan & Shri S. Jayaraman
आदेश /O R D E R
PER S. JAYARAMAN, ACCOUNTANT MEMBER:
The assessee filed this appeal against the order of the Commissioner of Income Tax (Appeals) 1, Chennai, in [Old ITA
:-2-: I.T.A. No.2937/Mds/2016 No. 261/12-13/A-III] dated 16.08.2016 pertaining to the assessment year 2009-10.
M/s. BS & B Safety Systems (India) Ltd., the assessee, is engaged in the business of manufacture and sale of rupture disks, safety heads and accessories. Its business includes both exports of its products as well as imports of raw materials. During the assessment year 2009-10, the assessee admitted a net gain on account of difference in foreign exchange at Rs. 19,95,107/-. The AO required the assessee to furnish a detailed note on foreign currency transactions and asked it to explain why the loss on cancellation of forward contract should not be disallowed. The assessee submitted that the above sum included a loss of F. 10,66,499/- on account of cancellation of forward contracts entered by it was on account of imports and exports and it is a business loss. It relied on the decision of Income Tax Appellate Tribunal, Mumbai, in the case of DCIT Circle 3(1) vs. Bombay Diamond Co. Ltd., wherein the Tribunal, based on the decisions rendered by the Hon’ble Supreme Court in the case of CIT v. Woodword Governor (I) Pvt. Ltd. and by the Hon’ble Mumbai High Court in the case of ITO vs. Badradas Gauridu Pvt. Ltd, has held that loss on account of cancellation of foreign exchange forward contract is a business loss . The AO after perusing the details filed by the assessee held that the assessee's transactions are :-3-: I.T.A. No.2937/Mds/2016 regarded as speculative transactions since it satisfies the provisions of Sec.43(5) for the following reasons:
(i) These are contracts entered into between the assessee company and the bank and there is no underlying asset/exposure. (ii) The Act specifically provides exclusion of only those transactions done through recognized stock exchanges. In the instant case, the assessee’s transactions are all with the banks and are not covered under the exemption clause of Sec. 43(5). (iii) The assessee has not actually delivered the underlying currency to the banks with whom it had entered into such contracts. In the instant case, the assessee had cancelled most of the forex forward contracts without delivery of an underlying asset either the foreign currencies or the export proceeds in the denominated currencies.
2.1 In view of the above facts, relying on the Hon’ble Madras High Court decision in the case of Sri Ranga Vilas Ginning & Oil Mills v. CIT (1982) 133 ITR 85 which held that the loss on forward contract settled not by actual delivery but by payment of differences as speculative business and the decision of the Honorable ITAT, Bangalore ‘A' Bench in the case of Assistant Commissioner of Income-tax vs. K. Mohan & Co. (Exports) (P) Ltd. (2010) 39 DTR 97 wherein it was held that settlement of Forward contracts without actual delivery of currency is a speculative transaction under section 43(5), the AO held that the net loss of F.10,66,499/- claimed by the assessee towards
:-4-: I.T.A. No.2937/Mds/2016 cancellation of forward contract falls within the ambit of speculative business which cannot be allowed to be set off against the normal business income as
per Sec.73 and allowed it to be carried forward for set off against any speculation income that may arise in any succeeding financial years.
Aggrieved, the assessee filed an appeal before the CIT(A). The CIT (A) asked the assessee to provide the relevant details and after considering them held that “ the jurisdictional ITAT in Ambattur Clothing Ltd. v. JCIT in 1643/Mds/2014, 910/Mds/2015 in its order dated 12.10.2015 took the view that loss arising out of derivative transaction in excess of export turnover has to be considered as speculative loss because excessive derivative transaction has not proximity with export turnover. The observation of the ITAT was subsequent to the finding which upheld the direction of the CIT (A) for the AO to verify any forward contracts which have been cancelled prematurely and verify the reasons for premature cancellation in the light of the order of the Tribunal in London Star Diamond Company (India) P Ltd v.
DCIT in dated 11.10.2013 wherein it was observed that loss arising from cancellation of premature contract is not to be allowed as business loss. Applying the ratio to the particulars furnished by the appellant with regard to forward contracts and the underlying export orders show that out of the six export orders only one export order being P/2008-2009/00051
:-5-: I.T.A. No.2937/Mds/2016 for which booking date was 21st July 08 was terminated prematurely resulting in a loss of Rs.2,39,430. The AO is directed to exclude this sum from the claim and allow the balance as business loss in this case being Rs. 8,27,069/- (Rs.10,66,499 - Rs.2,39,430). This ground of appeal is partly allowed.”
Aggrieved against that order, the assessee filed this appeal with following grounds :
(a) The order of the learned Commissioner of Income Tax (Appeals) - 15, is contrary to the law, facts and circumstances of the case.
(b) The learned Commissioner of Income Tax (Appeals) - 1, erred in confirming the cancellation of forward contracts as speculation loss amounting to Rs.2,39,430/-
(c) The learned Commissioner of Income Tax (Appeals) - 1 failed to appreciate the fact that the cancellation of forward contracts entered into by the Appellant is in the normal course of business and the same has to be treated as business loss.
(d) The learned Commissioner of Income Tax (Appeals) - 1 failed to appreciate the fact the Appellant is not a dealer in foreign exchange and hence the loss on cancellation cannot be treated as speculation loss in this case.
The AR submitted that the cancellation of forward contracts entered into by the appellant is in the normal course of business and the same has to be treated as business loss. The appellant is not a dealer in foreign exchange
:-6-: I.T.A. No.2937/Mds/2016 and hence the loss on cancellation cannot be treated as speculation loss and relied on the decision of the Hon’ble Gujarat High Court in the case of CIT v Friends and Friends Shipping ( P)(2013) 217 Taxman 276(Guj). Per Contra, the DR relied on the order of the CIT (A) .
We heard the rival contentions, gone through relevant orders and material. The assesse submitted before the AO that the company made a net foreign exchange gains / Loss as follows:
Table A: “ Particulars Amount Gain on account of Exports 26,76,469 Loss on account of Imports (7,01,222) Gain on account of Others 19,860 Total 19,95,107 5.1 The assessee also submitted that the above sum included a loss of F.10,66,499/- on account of cancellation of forward contracts entered into by the company on account of imports and exports. After examining the asssessee’s claim, the AO held that its claim of Rs 10,66,499/- towards cancellation of forward contract falls within the ambit of speculative business.
Further, the CIT (A) examined the claim as under : :-7-: I.T.A. No.2937/Mds/2016 Table B “ Details of loss on forward contract: Export Contracts :
Contact Booking Date on Cancelled Name Currency Booked Utilization Cancell Profit/loss No. date which to date of the USD in USD in USD ation in be Bank USD utilised 102033865 04.02.08 30.04.08 30.04.08 ICICI USD 165755 95701 102033865 04.02.08 Bank 11670 102033865 04.02.08 ICICI 36405 -124,446 102033865 04.02.08 Bank 21979 ICICI Bank ICICI Bank P/2008- 21.07.08 01.08.08 08.08.08 Corp USD 196000 48443 147557 92,223 2009/00049 to Bank 29.08.08 P/2008- 21.07.08 01.08.08 09.08.08 Corp USD 205000 39971 165029 -112,853 2009/00050 to Bank 29.08.08 P/2008- 21.07.08 01.08.08 09.09.08 Corp USD 138000 138000 -239,430 2009/00051 to Bank 29.08.08 P/2008- 08.08.08 01.08.08 06.10.08 Corp USD 116000 49843 66157 -334,247 2009/00051 to Bank 29.08.08 P/2008- 08.08.08 01.08.08 04.11.08 Corp USD 109000 48827 60173 -366,153 2009/00052 to Bank 29.08.08 TOTAL – A 929755 187084 742671 (1,084,095 )
:-8-: I.T.A. No.2937/Mds/2016 Import Contracts Contact No. Booking Date on Cancelled Name Currency Booked Utilization Cancellation Profit/loss date which to date of USD be the utilised Bank 102092829 11.03.08 ICICI EUR 2291 2291 3,729 Bank 102131502 02.04.08 ICICI EUR 6278 6278 1,031 Bank 102108174 USD 3317 3084 233 -169 S/2009- 06.02.09 10.02.09 27.02.09 Corp GBP 51000 49865 1135 829 2010/13007 to Bank 27.02.09 S/2009- 06.03.09 06.03.09 31.03.09 Corp EUR 13378 5337 8041 12,987 2010/13014 to Bank 31.03.09 TOTAL – B 76264 58285 17979 18,406 Grand total = A +B = (-) F.10,66,499” and held , inter alia, that “out of the six export orders only one export order being P/2008-2009/00051 for which booking date was 21st July 08 was terminated prematurely resulting in a loss of Rs. 2,39,430” .
5.2 From the Table A, supra, the assessee admitted a net foreign exchange gains at Rs 19,95,107. However, later on, it claimed that it included a loss of F10,66,499/-.The CIT (A) examined the transactions as per Table B, supra, and took cognizance that the loss from Export Contracts is at Rs. 1,084,095 and the gain from Import Contracts is at Rs 18,406 and total loss is at Rs.10,66,499. If we see table A , the assessee has shown a net loss on :-9-: I.T.A. No.2937/Mds/2016 account of imports at Rs 7,01,222. If the assessee’s stand is correct , then the import gain of Rs 18,406 as per table B, should have been netted against the net loss on account of imports shown at Rs 7,01,222 in table A, supra. Further, the CIT (A) held that export order being P/2008-2009/00051 for which booking date was 21st July 08 was terminated prematurely resulting in a loss of Rs. 2,39,430. If we see the 4th item in table B , supra, the booking date is given as 21.07.2008 , the date on which to be utilised as 01.08.2008 to 21.08.2008 and cancelled date is given as 09.9.2008 but a finding is given as “prematurely terminated”. Thus, it is not clear from the above, whether the impugned claim of loss of F10,66,499/-, is an independent transactions of export or import or part of the transactions specified in Table A. On the facts and circumstances, we deem it fit to restore this matter to the AO for a fresh examination. The AO shall decide the issue in accordance with law after giving due opportunity to the assessee. If the assessee establishes that each and every of the impugned foreign exchange loss transaction arose on account of an integral or incidental activity to the export or import , as the case may be, and on or after the maturity date, then, the AO shall treat such loss as business loss . In respect of premature terminations, the Onus is on the assessee to explain and place relevant materials before the AO.
Thereafter, the AO shall pass a speaking order in accordance with law on them.
:-10-: I.T.A. No.2937/Mds/2016
In the result, the appeal of the assessee is treated as allowed.
Order pronounced on Monday, the 25th day of September, 2017 at Chennai.