Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “B” BENCH, CHENNAI
Before: SHRI CHANDRA POOJARI & SHRI V. DURGA RAO
आदेश / O R D E R
PER CHANDRA POOJARI, ACCOUNTANT MEMBER
This appeal by the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-I, Coimbatore dated 01.11.2012 for the assessment year 2009-2010.
I.T.A.No.209/Mds/2013. :- 2 -:
The grievance of the assessee in this appeal is with regard to confirming the disallowance of loss incurred by the assessee on forward contracts and other derivative contracts as speculation loss.
The facts of the case are that during the relevant previous year, the assessee were granted credit arrangement by ICICI Bank limited to hedge the currency risk arising from its exposure to foreign exchange receivables. The assessee business involved substantial amount of export turnover and export receivables from such turnover. The assessee also from time to time had working capital facility granted in foreign exchange. To manage and to minimize the exchange fluctuation loss against export receivables and the loan in foreign currency, the assessee entered into forward/other derivative contracts, with options conferred in favour of the assessee and also in favour of the bank, to settle the contract, upon movement of exchange rate.
This facility was arranged purely for management of exchange risk in connection with its business of production and sale of auto castings.
With the above objective, the assessee arranged for credit facilities through ICICI Bank limited and obtained the following credit facilty:-
(i) Forward contract limit for �5.0 Million. (ii) Other Derivative limit �10.0 Million and (iii) Total limit �15.0 Million.
I.T.A.No.209/Mds/2013. :- 3 -:
3.1 During the previous year under review, the assessee incurred net currency loss of �90,08,639/- as per demand from ICICI Bank in exercise of their option. The currency risk management loss had arisen only with reference to its business of production and sale of auto castings and hence it was a loss in the nature of financial expenditure for working capital. According to the assessee the amount written off as per Profit and Loss Account was allowable as a business expenditure.
3.2 The Assessing Officer disallowed the loss of �90,08,639/- as speculation loss. Aggrieved the assessee preferred an appeal before the Commissioner of Income Tax (Appeals).
The Commissioner of Income Tax (Appeals) observed that the Assessing Officer held that the options are speculative in nature and also held that the loss incurred by the assessee cannot be accepted as business loss but as a speculative loss. The contracts show that they are for the sale/purchase when the underlying currency was stated on the contingencies based on the prevailing rates of spot market of the currency. The underlying currency is Euro, US Dollars. It was an over the counter option and not the exchange traded and in the contract I.T.A.No.209/Mds/2013. :- 4 -: notes between the assessee and the bank, the transaction was termed derivative. It was also seen from the contract that the contract was finally settled not by the delivery of the Dollor,Yen, Euro but by paying the loss in Indian rupee computed on the notional sale of the foreign currency. It was further seen that these transactions have been done as a business by itself. As mentioned in the annexure of ICICI Bank terms and conditions, the forward contract is for one year and other derivatives contract is for three years. The purpose of this derivative contract was to hedge interest rates and or currency risks. Nowhere in the contract it was seen that the purpose of this contract was to manage and minimize the exchange fluctuation loss against export receivables. The ld. Authorised Representative for assessee could not produce any evidence to prove that the derivative contract / forward contract were entered into by the company considering the receivables from the export of auto castings. The assessee made a foreign exchange forward contract with regard to foreign currency as a business in itself. As seen from the format of the contract, element of speculation is in play in the contract itself. By entering into a contract to sell currencies including cross currencies, the assessee has entered into the realm of speculation in a fluctuating foreign exchange Forex markets. It has to be examined whether the derivative transaction for I.T.A.No.209/Mds/2013. :- 5 -: foreign exchange will be included in the definition of commodity. A perusal of Section 43(5) would indicate that it reads as a contract for purchase and sale of any commodity including stocks and shares.
From this, it was clear that it was an inclusive definition and not an exclusive definition. Further, Section 43(5)(d) excludes trading in derivatives carried out through recognized stock exchange from the ambit of speculative transaction. This clearly excludes derivative trading through stock exchange and conversely there cannot be any exclusion without any earlier inclusion. Unless, it was the intention of the legislature that trading derivative are included in commodity, they would not have specifically excluded trading through stock exchange u/s 43(5)(d) of the Income tax Act. Therefore, it was evident that derivative will form part of commodity mentioned u/s 43(5). The Commissioner of Income Tax (Appeals) placed reliance on the order of Special Bench of Calcutta Tribunal in the case of Shree Capital Services Ltd vs. ACIT (2009) 121 ITD 498, it was clarified that derivatives are commodities for the purpose of Section 43(5)(d). It was also held that where the assessee suffer loss on account of futures and options i.e., a form of derivative in which underlying asset was share, said loss was rightly disallowed by revenue authorities by invoking provisions of Section 43(5). According to the Commissioner of Income Tax I.T.A.No.209/Mds/2013. :- 6 -:
(Appeals) there was no underlying asset and it was a pure case of speculation. He placed reliance on the judgment of Bombay High Court in the case of CIT Vs Bharat R Ruia, HUF reported in 337 ITR 452, held that transactions in derivatives are speculative transactions and not business loss. He observed that on perusal of the above judgments and averments contained therein, it was evident that the derivative transactions are included in the meaning of commodities and in these cases, the transactions were held as speculative transactions. Before Section 43(5)(d) was brought in by Finance Act 2005, wherein transactions in shares alone were treated as non- speculative. A perusal of the contract note and details furnished by the assessee would indicate that the transaction entered into by the assessee was not based on any export bill or export receivable in foreign exchange but a short term speculative bet on the movement of the Rupee Vs Euro. Since the moment of Euro was against the prediction of the assessee, he has suffered substantive loss in the derivative transaction . The Forex derivative transaction was not actually settled by actual delivery of foreign exchange but only difference between the agreed price on the statement date is credited or debited to the account of the assessee. Forex derivative did not have any underlying hedge against the export bill or receivables by the I.T.A.No.209/Mds/2013. :- 7 -: assessee. A foreign exchange derivative, if it is a hedged, should reduce the risk and loss to the assessee. A perusal of the contract notes and corresponding hedge loss incurred by the assessee during the short period, would indicate that the derivative transactions have only increased the risk to the assessee and not reduced the risk like a hedge. Considering the facts and circumstances contained in the above transaction, it was evident that the derivatives and forward contract transactions entered into by the assessee are short term speculative transactions without any hedge or underlying on the regular export business of the assessee. The loss of �90,08,639/- has to be treated as speculative loss and aaccordingly, the Commissioner of Income Tax (Appeals) confirmed the order of the Assessing Officer.
Against this, the assessee is in appeal before us.
We have heard both the parties and perused the material on record. A similar issue came up for consideration before this Tribunal in the case of M/s. Majestic Exports in & 3072/Mds/2014 for the assessment years 2009-2010 and 2010-2011 vide order dated 24.07.2015, wherein it was held as under:-
“6. We have heard both the parties and perused the material on record. In this case, the assessee was engaged in the business of manufacturing and export of hosiery garments. During the course of I.T.A.No.209/Mds/2013. :- 8 -: export, the assessee entered into derivative contract. The assessee incurred loss in this transaction. The assessee claimed it as business loss. According to the Assessing Officer this loss was not business loss and it is a speculative loss and this transaction is speculative in nature as such the loss incurred on this transaction cannot be set off against business income of the assessee. According to the ld. Authorised Representative for assessee, the derivative transaction cannot fall under sec.73. Explanation to sec.73 creates a deeming fiction by which among the assessee, who is a company, as indicated in the said Explanation dealing with the transaction of share and suffer loss, such loss should be treated to be speculative transaction within the meaning of sec.73 of the Act, notwithstanding the fact that the definition of speculative transaction mentioned in sec.43(5) of the Act, the transaction is not of that nature as there has been actual delivery of the scrips of share. As per the definition of sec.43(5), trading of shares which is done by taking delivery does not come under the purview of the said section. Similarly, as per clause (d) of sec.43(5), derivative transaction in shares is also not speculation transaction as defined in the said section. Therefore, both profit/loss from all the share delivery transactions and derivative transactions are having the same meaning, so far as sec.43(5) of the Act is concerned. Again, in view of the fact that both delivery transactions and derivative transactions are non-speculative as far as sec.43(5) is concerned, it follows that both will have the same treatment as far as application of Explanation to sec.73 is concerned. Therefore, aggregation of the share trading profit and loss from derivative transactions should be done before the Explanation to sec.73 is applied. The above view has been taken by Special Bench of this Tribunal, Mumbai Bench, in the case of CIT v. Concord Commercial Pvt. Ltd. (2005) 95 ITD 117 (Mum)(SB). In this case, the Special Bench held that :
I.T.A.No.209/Mds/2013. :- 9 -:
Before considering whether the assessee’s case is hit by the deeming provision of Explanation to Sec. 73 of the Act, the aggregate of the business profit / loss has to be worked out based on the non- speculative profits; either it is from share delivery or from share derivative.
From the above, it is concluded that both trading of shares and derivative transactions are not coming under the purview of Section 43(5) of the Act which provides definition of “speculative transaction” exclusively for purposes of section 28 to 41 of the Act. Again, the fact that both delivery based transaction in shares and derivative transactions are non-speculative as far as section 43(5) is concerned goes to confirm that both will have same treatment as regards application of the Explanation to Section 73 is concerned, which creates a deeming fiction. Now, before application of the said Explanation, aggregation of the business profit/loss is to be worked out irrespective of the fact, whether it is from share delivery transaction or derivative transaction.
Now, this view has been taken by Co-Ordinate, Chennai in the case M/s. Aishwarya & Co P. Ltd in dated 29.05.2015, wherein they followed the judgment of the Calcutta High Court in the case of M/s. Baljit Securities Pvt. Ltd. (88 CCH 313) wherein held as under:- “Clause (d) of Section 43(5) became effective with effect from 1st April, 2006. Therefore, prior to 1st April, 2006 any transaction in which a contract for the purchase or sale of any commodity including stocks and shares was periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrip was a speculative transaction. Sub-section 1 of Section 73 provides as follows:
‘(1) Any loss, computed in respect of a speculation I.T.A.No.209/Mds/2013. :- 10 -: business carried on by the assessee, shall not be set off except against profits and gains, if any, of another speculation business.’ The resultant effect was that any loss arising out of speculative transaction could only have been set off against profits arising out of speculative transaction. In the present case, the assessee, as already indicated, has been dealing in shares where delivery was in fact taken and also in shares where delivery was not ultimately taken. In other words, the assessee has been dealing in actual selling and buying of shares as also dealing in shares only for the purpose of settling the transaction otherwise than by actual delivery. The question arise whether the losses arising out of the dealings and transaction in which the assessee did not ultimately take delivery of the shares or give delivery of the shares could be set off against the income arising out of the dealings and transactions in actual buying and selling of shares. An answer to this question is to be found in the explanation appended to Section 73 which reads as follows:
‘Explanation: where any part of the business of a company other than a company whose gross total income consists mainly of income which is chargeable under the heads “interest on securities”, or a company the principal business of which is the bu9siness of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase. In order to resolve the issue before us, the section has to be read in the manner as follows: “Explanation : Where any part of the business of a company (… … … … … … … … … … … … … … …. … … … … … …. … … … … … … … … …. … … .. .. … .. … … … .. … .. … … … .. … … .. …. … … … .. … .. … … … … …. … … …) consist in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business I.T.A.No.209/Mds/2013. :- 11 -: to the extent to which the business consists of the purchase and sale of such shares.” It would, thus, appear that where an assessee, being the company, besides dealing in other things also deals in purchase and sale of shares of other companies, the assessee shall be deemed to be carrying on a speculation business. The assessee, in the present case, principally is a share broker, as already indicated. The assessee is also in the business of buying and selling of shares for self where actual delivery is taken and given and also in buying and selling of shares where actual delivery was not intended to be taken or given. Therefore, the entire transaction carried out by the assessee, indicated above, was within the umbrella of speculative transaction. There was, as such, no bar in setting off the loss arising out of derivatives from the income arising out of buying and selling of shares. This is what the learned Tribunal has done.”
From the above decision of the Calcutta High Court in the case of Baljit Securities Pvt. Ltd. cited supra, the issue stands covered in favour of the assessee. However, we make it clear that total transaction considered for determining this business loss from derivative transactions cannot be more than the total export turnover of the assessee for the assessment year under consideration and if the derivative transaction is in excess of export turnover, then that loss suffered in respect of that portion of excess transactions to be considered as speculative loss only as that excess derivative transaction has no proximity with export turnover and the Assessing Officer is directed to compute accordingly. This ground is allowed as indicated above’’.
We are in complete agreement with the above order of the Tribunal. However, one has to see whether the assessee entered into these derivative within the period stipulated for payment of export I.T.A.No.209/Mds/2013. :- 12 -: proceeds or within the time period allowed for payment of interest to the concerned bank. Further, it is to be seen whether the volume / quantum of derivative transaction entered by the assessee is more than the total export turnover and payment of interest to bank and volume of transaction cannot be more than these two components.
Accordingly, we are directing the Assessing Officer to keep these facts in mind and decide the issue in the light of the Tribunal order in the case of M/s. Majestic Exports (supra). With these observations, we are remitting back this issue back to the file of the Assessing Officer for fresh consideration. The appeal of the assessee in is partly allowed for statistical purposes.
Order pronounced on Friday, the 28th day of August, 2015, at Chennai.