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Income Tax Appellate Tribunal, “B” BENCH : BANGALORE
Before: SHRI B. RAMAKOTAIAH & SHRI NARENDRA KUMAR CHOUDHARY
O R D E R Per B. Ramakotaiah, Accountant Member
This is a revenue’s appeal against the order dated 9.11.2012 of the CIT(Appeals)-I, Bangalore on the issue of claim of loss on account of fluctuation in foreign exchange.
Briefly stated, the assessee is a private limited company engaged in the manufacture and export of readymade garments. The Assessing Officer noticed that assessee has claimed foreign exchange loss of Rs.2,32,20,805 in the profit & loss account in Schedule-X and after issuing show cause notice to the assessee, disallowed the same stating that loss incurred by the assessee was speculative loss within the meaning of section 43(5). The AO also relied on the Board Circular No.3/2010 dated 22.3.2010 to hold that the transactions entered by the assessee are speculative transactions, accordingly the loss cannot be allowed. He added the same as business profit and did not even quantify the loss to be carried forward as even speculative loss.
Before the ld. CIT(Appeals), the assessee made detailed submissions (which are extracted in para 3.1 of the impugned order) to submit that assessee has received about Rs.84.38 crores of foreign exchange during the F.Y. 2007-08 and consequently entered into a master agreement with Standard Chartered Bank in Dec. 2007 covering its export risks for the subsequent period. Consequent to this agreement, from January 2008 onwards various foreign currency options were entered into and the rate was fixed in the forward rate of converting USD into INR at Rs.40.53. It was informed that this agreement was entered into only to protect and ensure that assessee earns Indian Rupees at a specified rate for every Dollar of export earnings. It was submitted that the transactions were business transactions and is very well covered by Explanation to section 43(5). It was further submitted that in the impugned year, assessee had earned foreign currency of Rs.72.14 crores in both USD and Euros and these transactions were entered into in the business interest. Assessee also relied on various case laws and justified the loss to an extent of Rs.2,32,20,805.
The ld. CIT(Appeals) after considering the submissions held as under:-
“3.5 I have carefully considered the appellant’s submissions and the reasons given by the AO in the assessment order. The amount of Rs.2,32,20,805/- claimed as exchange loss was disallowed by the AO on the ground that it was a speculative loss. The AO relied on the provisions section 43(5) of the Act in this regard apart from the following judicial decisions: i) Munjal Shows Ltd- v. DCIT (94 TTJ 227)(ITAT, Mumbai) (94 TTJ 227)(ITAT, Mumbai) ii) Shree Capital Services Ltd. v. ACIT (111 ITD 498) (Sp1. Bench of ITAT, Kolkata) 3.6 The appellant being an exporter entered into derivative transactions with Standard Chartered Bank to cover the possible foreign exchange fluctuation loss. Though the AO relied on the provisions of section 43(5) of the Act, he had overlooked the Explanation clause (d) of the proviso to sub-section (5) which of section 43, reads 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 ……. [(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;] shall not be deemed to be a speculative transaction;
Explanation--For the purposes of this clause, 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 04 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) an the rules, regulations or bye-laws made or directions issued Under those Acts or by banks or mutual funds on a recognized stock exchange, ……” 3.7. From the above, it is clear that speculative transaction does not include trading in derivatives if carried out electronically on screen-based system through a stock-broker or sub-broker or such other intermediary registered u/s 12 of the SEBI Act 1992. In the instant case, the derivative transactions are carried out by the appellant through the Standard Chartered Bank, which is an approved intermediary for carrying out the derivative transactions. The said Explanation was inserted by the Finance Act 2005 with effect from 1/4/2006. The decisions relied on by the AO are relating to the period prior to the introduction of the amendment and distinguish even or fact. Therefore, the loss suffered by the appellant on account of derivative transactions carried out by them cannot be categorized as speculative transaction in view of the said Explanation, which is applicable to the period under consideration. Hence, the AO is directed to allow the said loss as an allowable business loss.”
After considering the rival contentions, we do not see any reason to interfere with the well reasoned order of Ld. CIT(A). As clearly stated by the ld. CIT(Appeals), the said transactions are in a way hedging transactions and not covered by provisions of section 43(5). Not only that, as seen from Schedule 10 to Profit & Loss Account, the assessee had indeed earned a profit in earlier year to an extent of Rs.56,17,976 which was treated as business income. In view of that also, the stand taken by the AO cannot be justified. Therefore, we do not find any merits in the contentions raised by the revenue. Various case law on the issue also support the assessee’s contentions which need not be reiterated here.
Suffice to say that foreign exchange transactions with various intermediaries approved by RBI cannot be treated as speculative transactions.
5.1 However, there are no details on record as to how the losses of Rs.2,32,20,805 have been suffered by the assessee. The details are not placed on record for verification of quantity of loss suffered. Therefore, while accepting in principle that the loss is to be allowed as a business loss, the AO is directed to examine the loss vis-à-vis transactions entered into by the assessee and quantify the loss. It is also noticed that assessee has filed the return admitting net loss of Rs.33,57,230 after setting off income from other sources. However, in the amount to be carried forward, the assessee has quantified the same at Rs.99,10,746 consisting of business loss of Rs.24,55,202 and depreciation of Rs.74,55,544. We find that the AO has not quantified the losses/ depreciation to be carried forward. While giving effect to this order, AO is directed to examine the loss suffered in the foreign exchange transactions and then directed to quantify the losses to be carried forward along with any unabsorbed depreciation which is to be carried forward to next year, based on the record. With these directions, the revenue’s appeal is treated as dismissed.
Pronounced in the open court on this 16th day of March, 2016.