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Income Tax Appellate Tribunal, ‘A’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI S. JAYARAMAN
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
This appeal of the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-3, Coimbatore, dated 25.02.2015 and pertains to assessment year 2009-10.
Sh. T. Banusekar, the Ld. representative for the assessee, submitted that the assessee entered into currency swap transaction against the term loan exposures and other foreign exchange exposures with ABN Amro Bank. According to the Ld. representative, ABN Amro Bank was providing term loan and working capital loan facilities. According to the Ld. representative, there was outstanding term loan of `10 Crores. The assessee intended to diversify the liability in Indian rupee and reduce the cost of interest by entering into swap transaction. In other words, in order to reduce the cost of interest or reduce the loss that may occur, the assessee has entered into foreign currency transaction with ABN Amro Bank. According to the Ld. representative, it is a common practice in business to convert Indian rupee loan into foreign currency loan or to take a foreign currency loan instead of Indian rupee loan in order to reduce the cost of interest by taking into advantage of foreign currency fluctuation in foreign exchange rate. In fact, Reserve Bank of India permitted this kind of transaction by converting Indian rupee loan into foreign currency loan.
According to the Ld. representative, foreign currency is not a commodity. Referring to Section 43(5) of the Income-tax Act, 1961 (in short 'the Act'), a transaction for purchase or sale of any commodity, including stocks and shares, periodically or ultimately settled otherwise than by way of actual delivery, has to be considered as speculative transaction subject to exceptions provided therein. Foreign exchange currency is not a commodity.
Therefore, provisions of Section 43(5) of the Act are not applicable at all. The Ld. representative placed his reliance on the decision of Delhi Bench of this Tribunal in Munjal Showa Ltd. v. DCIT (2005) 94 TTJ 227 and submitted that on identical circumstances, the Delhi Bench of this Tribunal found that foreign currency or any currency is neither commodity nor share. Therefore, according to the Ld. representative, the transaction entered into by the assessee in foreign currency cannot be construed as speculative transaction at all. The Ld. representative further pointed out that in order to safeguard their transaction, the assessee entered into foreign currency contract, therefore, the same cannot be construed as speculative transaction. The Ld. representative has also placed his reliance on the judgment of Madras High Court in Rajshree Sugars & Chemicals Limited v. Axis Bank Limited in O.A. Nos.251 and 252 of 2008 in C.S.No.240 of 2008, a copy of which is available at page 81 of the paper-book.
Referring to the order of this Tribunal in S.P. Apparels Ltd. v.
DCIT in dated 17.04.2015, a copy of which is available at page 170 of the paper-book, the Ld. representative for the assessee submitted that on identical set of facts, this Tribunal found that loss incurred by the assessee on derivative transaction shall be allowed to be set off against the business income of the assessee by treating the same as business loss. According to the Ld. representative, in the case of S.P.
Apparels Ltd. (supra), an identical issue was the subject matter of discussion before this Tribunal. The Ld. representative has also placed his reliance on the decision of this Bench of the Tribunal in DCIT v. A.V. Thomas Leathers & Allied Products Ltd. in I.T.A.
No.462/Mds/2014 dated 08.05.2015, a copy of which is available at page 190 of the paper-book. The Ld. representative has also placed his reliance on the judgment of Bombay High Court in CIT v.
Indian Commercial Company Pvt. Ltd. (1977) 106 ITR 465, a copy of which is available at page 252 of the paper-book and submitted that for the purpose of considering the loss as speculative loss, there should be a systematic or organized activity on the part of the assessee. According to the Ld. representative, there is no systematic or organized activity on the part of the assessee.
Therefore, the transaction cannot at all be construed as speculative transaction as held by Bombay High Court. The Ld. representative has also placed his reliance on the judgment of Andhra Pradesh High Court in ACIT v. Maggaji Shermal (1978) 114 ITR 862. The Ld. representative further submitted that recently this Tribunal in S.P. Apparels Ltd. in has taken an identical view.
On the contrary, Smt. Tripurasundari, the Ld. Departmental Representative, submitted that the loss suffered by the assessee on account of exchange rate fluctuation, the assessee has exposed itself to unlimited risks which were unfolded by subsequent events.
The Ld. D.R. submitted that the assessee had no export or import obligations. The transactions were mostly in the realm of speculation to earn profit by taking advantage of fluctuation in foreign currency. The derivative note, according to the Ld. D.R., is an option. The contract was finally settled not by the delivery of CHF but by paying the loss in Indian rupee. Referring to Section 43(5) of the Act, the Ld. D.R. submitted that the transaction entered into by the assessee with ABN Amro Bank is a speculative transaction. According to the Ld. D.R., purchase and sale of foreign exchange derivative was ultimately settled otherwise than actual delivery. Exceptions referred from (a) to (d) does not apply to the assessee’s case. The cross currency swap done by the assessee understood in the market circle is speculative transaction, therefore, the CIT(Appeals) has rightly confirmed the order of the Assessing Officer.
We have considered the rival submissions on either side and perused the relevant material available on record. It is not in dispute that in order to guard from loss that may occur, the assessee entered into a foreign currency transaction by converting Indian rupee loan into foreign currency loan. In that process, the assessee has suffered a loss of `1,50,60,695/-. The question arises for consideration is whether the loss suffered by the assessee in foreign exchange fluctuation is a business loss or speculative loss. The Revenue claims that it is a speculative loss.
This Tribunal in the case of S.P. Apparels Ltd. (supra) examined this issue elaborately and after referring to the judgment of Bombay High Court in CIT v. Badridas Gauridu (P) Ltd. (2003) 261 ITR 256, found that the loss suffered by the assessee in foreign exchange fluctuation is a business loss. This order of the Tribunal in S.P.
Apparels Ltd. was subsequently followed in A.V. Thomas Leathers & Allied Products Ltd. 9supra). In the case of S.P. Apparels Ltd. also for the assessment year 2009-10, vey same order was followed in I.T.A. No.1510/Mds/2015. In view of the above, when the assessee entering into foreign currency transaction to guard itself from the loss that may be caused to the assessee due to foreign exchange fluctuation, cannot be considered to be speculative loss. In view of the above order of this Tribunal and judgment of Bombay High Court, we are unable to uphold the order of the lower authority. Accordingly, the orders of the lower authorities are set aside and the disallowance made by the Assessing Officer to the extent of `1,50,60,695/- is deleted.
In the result, the appeal filed by the assessee is allowed.
Order pronounced on 29th June, 2017 at Chennai.