DCIT, THANJAVUR vs. S.P.APPARELS, AVANASHI

आदेश /O R D E R

PER N.R.S. GANESAN, JUDICIAL MEMBER:

Both the appeals of the assessee and revenue are directed against

the same order of CIT(A) -3, Coimbatore dated 31.03.2015 and pertains

to Assessment year 2009-10. Therefore, we heard the same together

and disposing of the same by this common order.

The first ground of appeal is disallowance of Rs.10,97,35,472/- as

‘speculative loss’. Shri T.Banusekar, the learned representative for the

assessee submitted that the assessee entered into cross currency hybrid

option contract with several banks for the purpose of business.

Subsequently, due to fluctuation in the foreign currency market, the

assessee has suffered loss. The assessee claimed before the Assessing

Officer derivative transaction in foreign currencies are not speculative

transactions, therefore, the loss suffered by the assessee has to be

allowed as a deduction while computing the taxable income.

transaction was carried on by the assessee in conformity with the

guidelines issued by the Reserve Bank of India from time to time and it

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was relatable to export orders. The transaction in foreign currency was

made for the purpose of business and in the course of business.

Therefore, the loss suffered by the assessee according to the learned

representative shall be treated as business loss. An identical issue was

considered by this tribunal in the assessee’s own case in ITA

1327/Mds/2014 for the Assessment Year 2008-09 and this Tribunal found

that an identical issue was considered by this Tribunal in M/s. SCM

Garments Pvt.Ltd., in ITA No.1645/Mds/2013 and 2275/Mds/2014 dated

27.02.2015. After extracting the relevant finding of the Tribunal in

M/s.SCM Garments Pvt.Ltd., this Tribunal found that an identical loss

suffered by the assessee on the derivative transaction due to fluctuation

in foreign currency was a business loss, therefore, it has to be allowed to

be set off while computing the taxable income. Accordingly, the claim of

the assessee was allowed and in view of the coordinate bench decision

of this Tribunal in the assessee’s own case for Assessment Year 2008-

09, according to the learned representative, the CIT(A) is not justified in

confirming the disallowance made by the assessing officer as speculative

loss.

the department submitted that admittedly, the assessee entered into

Hybrid Option Contract with several banks purportedly, for the purpose of

its business. According to the learned department representative, the

4 I.T.A. Nos.1510 & 1699/Mds/2015

transaction carried on by the assessee is in the nature of speculative

transaction with the intention to earn fast money in the fluctuating foreign

currency market. In fact, the assessee claimed a sum of Rs.23.21 crores

as loss on the derivative transaction. The assessing officer after

examining the transaction of the assessee, found that forward contract

entered into by the assessee was also a derivative. The assessing officer

further found that derivative transaction in foreign currency would be

normally used by exporters and importers to hedge their currency

exposures. By entering into contract to sell currencies including cross

currencies, the assessee in fact entered into speculative transaction for

the purpose of exploiting fluctuation in foreign currency market. Referring

to the series of activities done by the assessee with various banks, the

assessing officer found that the assessee made an attempt to make

quick money in the fluctuating foreign exchange market.

assessee had a regular transaction with State Bank of Mysore, Avinashi

Branch through which the assessee was receiving the export proceeds.

The assessee has also entered into contract with other banks namely

ABN Amro Bank, HDFC Bank, Citi Bank, IDBI Bank, etc. for carrying on

the transaction in foreign exchange derivative. The assessing officer

found that the foreign derivatives are also commodities. Therefore, the

hedging activity carried on by the assssee in the foreign exchange

5 I.T.A. Nos.1510 & 1699/Mds/2015

currency has to be necessarily treated as speculative transaction. The

loss or profit has to be necessarily treated as arising out of speculative

transaction. Therefore, the assessee cannot set off the loss on

speculative transaction while computing the taxable income.

perused the material available on record. The assessee entered into the

Cross Currency Hybrid Derivative Contract with Axis Bank, Citi Bank,

HDFC Bank, IDBI Bank, ING Vysya Bank and ABN Amro Bank.

Admittedly, the above six bankers are not regular bankers for the

assessee. Admittedly, the assessee had regular transaction with State

Bank of Mysore, Avinashi Branch. From the order of the CIT(A), it

appears that Citi Bank is also one of their regular banker for assessee.

The main contention of the assessee before this Tribunal is that

derivative contract entered into by the assessee have a contract

underlying currency exposure on account of export proceeds receivable

by the assessee. The assessee also contends before this Tribunal that

foreign exchange is not a commodity. Therefore, it is outside the purview

of Section 43(5) of the Income Tax Act. The CIT(A) after examining the

provisions of Section 43(5) of the Income Tax Act found that derivative

transactions are excluded from the provisions of Section 43(5) of the Act.

6 I.T.A. Nos.1510 & 1699/Mds/2015

Craftsman Automation (Pvt.) Ltd. Vs. Additional Commissioner of Income

Tax, Range –IV, Coimbatore in ITA No.2153/Mds/2011 found that the

derivative transaction entered into by the assessee are short term

speculative transaction. Hence, the loss suffered by the assessee to the

extent of Rs.10,97,35,472/- has to be treated as speculative loss.

the Income Tax Act. Section 43(5) defines “speculative transaction” as

“Speculative transaction is one 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”. This Tribunal is the assessee’s own case for the

assessment year 2008-09 found that a similar arrangement made by the

assessee to protect the loss that may arise due to foreign exchange

fluctuation in the export of garments to various countries has to be

allowed as business loss. In fact, by placing reliance on the earlier

decision of this Tribunal in the case of SCM Garments Pvt.Ltd., it was

found that the loss suffered by the assessee has to be allowed as

business loss. This Tribunal has also placed its reliance on the judgment

of the Bombay High Court in the case of CIT Vs. Badridas Gauridu (P)

Ltd. reported in [2003] 261 ITR 256 (Bom.). In view of this decision of the

Tribunal in the assessee’s own case, this Tribunal is of the considered

7 I.T.A. Nos.1510 & 1699/Mds/2015

opinion that the loss suffered by the assessee on the derivative

transaction pursuant to cross currency hybrid derivative contract with

several banks are business loss, therefore, it has to be allowed as

‘business loss’ while computing the taxable income. Therefore, this

Tribunal is unable to uphold the order of the lower authorities.

Accordingly, the orders of the lower authorities are set aside. The

assessing officer is directed to allow a sum of Rs.10,97,35,472/- as

business loss.

assessing officer under Section 14A of the Act. Shri T.Banusekar, the

learned representative for the assessee submitted that the assessee

disclosed a sum of Rs.12,22,743/- as dividend income exempted from

tax. The assessee claimed before the assessing officer that no

expenditure was incurred. However, the assessing officer found that

0.5% of the average value of the investment to the extent of

Rs.7,99,000/- has to be added to the return income. Referring to Rule 8D

of the Income Tax Rule, the learned representative for the assessee

submitted that under Rule 8D (2)(iii), 0.5% of the average investment as

disclosed in the balance sheet income from which does not form part of

the total income has to be taken into consideration. In this case, the

assessing officer has taken the entire investment made by the assessee.

8 I.T.A. Nos.1510 & 1699/Mds/2015

Therefore, according to the learned representative, the assessing officer

is not justified in making an addition of Rs.7,99,000/-.

the department submitted that even though a specific ground was raised

by the assessee with regard to the disallowance made under Section 14A

read with Rule 8D, the CIT(A) has not recorded any finding. In fact, the

CT(A) has disposed off the ground which relates to derivative

transactions and he has not recorded any finding with regard other

grounds raised by the assessee. Therefore, the matter may be remanded

back to the file of the CIT(A) for re-consideration.

perused the material available on record. The assessee has specifically

raised a ground with regard to disallowance of Rs.7,99,000/- under

Section 14A. As rightly submitted by the department representative, the

CIT(A) while reproducing the grounds raised by the assessee has taken

out the disallowance made by the assessing officer under Section 14A.

However, he has not recorded any finding with regard to grounds raised

by the assessee. Therefore, this Tribunal is of the considered opinion that

the matter needs to be reconsidered. The disallowance under Section

14A has to be estimated on the basis of the method prescribed under

Rule 8D(2) of Income Tax Rules. Even though, the assessee claims that

9 I.T.A. Nos.1510 & 1699/Mds/2015

no expenditure was incurred for earning the exempted income, the

assessing officer was expected to compute the expenditure in case he is

not satisfied about the claim made by the assessee. The assessing

officer apparently has taken 0.5% of the average value of the investment

without considering the income earned by the assessee which does not

form part of the total income. The assessing officer has not considered

Rule 8D(2)(ii) with regard to expenditure incurred by the assessee which

is not directly attributable to any particular income.

to be reexamined by the assessing officer instead of CIT(A) as suggested

by the department representative. Accordingly, the orders of the lower

authorities are set aside and the disallowance made by the assessing

officer under Section 14A is remitted back to the file of the assessing

officer. The assessing officer shall re-examine the matter afresh in the

light of the material that may be filed by the assessee and therefore

compute the disallowance strictly as per the provisions of Rule 8D(2) of

the Income Tax Rules.

deduction under Section 35D of the Income Tax Act. Shri T.Banusekar,

the learned representative for the assessee submitted that the assessee claimed Rs.14,44,673/- being the 1/5th expenditure under Section 35D of

10 I.T.A. Nos.1510 & 1699/Mds/2015

the Act. According to the learned representative, this is the third year

claim of the capital issue expenses to the extent of Rs.72,23,365/-. The

Assessing Officer as well as the CIT(A) has not considered the claim of

the assessee.

the department submitted that it is not known whether the assessee

made a claim under Section 35D before the Assessing Officer. However,

the grounds reproduced by the CIT(A) shows that the assessee raised

the issue before the CIT(A). Therefore, the CIT(A) ought to have

disposed off the grounds raised by the assessee. Since the CIT(A) has

not disposed off the grounds, the learned representative submitted that

the matter may be remitted back to the file of the CIT(A) or the Assessing

Officer.

perused the material available on record. The claim of deduction under

Section 35D was not considered by the Assessing Officer as well as by

the CIT(A). Therefore, this Tribunal is of the considered opinion that in

the interest of justice, the Assessing Officer has to consider the issue

first. Accordingly, the claim made by the assessee under Section 35D is

remitted back to the file of the Assessing Officer. The Assessing Officer

shall reconsider the issue with regard to the claim made by the assessee

11 I.T.A. Nos.1510 & 1699/Mds/2015

under Section 35D and decide the same in accordance with law after

giving reasonable opportunity to the assessee.

the only issue arises for consideration is disallowance of speculation loss

of Rs.12,23,87,167/- on account of cancellation of foreign currency

forward contract. Shri M.M.Bhusari, the learned department

representative submitted that even though the CIT(A) treated transaction

as speculative loss in respect of cancellation of forward contract, the

CIT(A) found that cancellation of forward contract cannot be equated

without derivative contract. According to the learned department

representative, the forward contracts are not relatable to any specific

export bills of the assessee. The assessee failed to substantiate the

transaction in respect of export bills. Therefore, the CIT(A) is not correct

in allowing the claim of the assessee.

assessee submitted that the assessee entered into forward contract in

the ordinary course of business as on export of garments. The CIT(A)

after considering the material available on record found that the contract

note filed by the assessee shows that the forward contract is the part of

the regular business activity of the assessee. The CIT(A) placing his

reliance on the judgment of the Gujarat High Court decision in the case of

12 I.T.A. Nos.1510 & 1699/Mds/2015

CIT Vs. Panchmahal Steel reported in [2013] 215 taxmann 140 (Guj.)

and the judgment of Bombay High Court in the case of CIT Vs. Badridas

Gauridu (P) Ltd. reported in [2003] 261 ITR 256 (Bom.) found that the

assessee has entered into forward contract in the ordinary course of

business transaction. Therefore, the loss arising from forward contract

has to be treated as a normal business loss. Accordingly, he allowed the

same.

perused the material available on record. Admittedly, the assessee is

engaged in the business of export of garments to various countries. In

the course of business activities, the assessee claims that it entered into

forward contract to guard itself from the loss that may be incurred due to

foreign exchange fluctuation. However, the assessing officer disallowed

the claim of the assessee on the ground that the forward contracts

entered into by the assessee are in the nature of speculative transaction.

As discussed earlier, this Tribunal is of the considered opinion that the

derivative transaction entered into by the assessee to guard itself from

the loss that may arise due to foreign exchange fluctuation cannot be

considered to be a speculative transaction. Therefore, the CIT(A) has

rightly allowed the claim of the assessee by placing his reliance in

Gujarat High Court decision in the case of Panchmahal Steel and the

judgment of Bombay High Court in the case of Badridas Gauridu (P) Ltd.

13 I.T.A. Nos.1510 & 1699/Mds/2015

cited supra. Therefore, this Tribunal do not find any reason to interfere with the order of CIT(A). Accordingly, the same is confirmed.

Order pronounced on 09th September, 2016 at Chennai.

Sd/- Sd/- (ए. मोहन अलंकामणी) (एन.आर.एस. गणेशन) (A. Mohan Alankamony) (N.R.S. Ganesan) लेखा सद�य/Accountant Member �या�यक सद�य/Judicial Member

चे�नई/Chennai, �दनांक/Dated, the 09th September, 2016.

sp. आदेश क� ��त�ल�प अ�े�षत/Copy to: 1. अपीलाथ�/Appellant 2. ��यथ�/Respondent 3. आयकर आयु�त (अपील)/CIT(A) 4. आयकर आयु�त/CIT, 5. �वभागीय ��त�न�ध/DR 6. गाड� फाईल/GF.