Loss on foreign currency forward contracts which is not in respect of specified export or import is speculation loss

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INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES “E” MUMBAI

ITA No. 506/Mum/2013

Assessment Year 2008-09

S. Vinodkumar Diamonds Pvt. Ltd.,

Vs.

Addl. C.I.T. Range – 5(3)

Date of Hearing : 18-03-2013

Date of Pronouncement : 03-05-2013

 

Forward transactions in commodities may fall within proviso (a) to section 43(5) of the Act, it is necessary that the raw materials or merchandise in respect of which the forward transactions have been made by the assessee must have a direct connection with the goods manufactured or the merchandise sold by him. In other words raw material in respect of which the assessee has entered into forward transactions must be the same raw material which is used by him in his manufacturing business. We find that in the case under consideration assessee was not dealing in Foreign Exchange, therefore transactions entered into by it in Foreign Exchange cannot be held to be hedging transactions. Assessee is dealing in diamonds and FC entered into only for diamonds would have been covered by the proviso (a) to the section 43(5)of the Act. As held by the Hon’ble High Court of Calcutta in the matter of Gourepore Co. Ltd.(135 ITR 606) onus was on the assessee to prove that the transactions in question were not of a speculative nature. We are of the opinion that the assessee has failed to discharge the onus cast upon him by the statute. Assessee was also not able to contradict the finding of fact that booking and cancellation of FC of exchange were not in respect of specified export or import. Besides, finding of fact given by the Revenue Authorities remained un-contravened that loss shown by the assessee pertained to these FCs transctions, against which no actual delivery of foreign exchange was made. On appreciation of the facts surrounding the transaction we have reached at the conclusion that transactions entered in to by the assessee were not hedging transaction, but same were speculative and thus the case of the assessee is not covered by proviso(a) of the section 43(5) of the Act.Now we would like to discuss the cases relied upon by the AR. In the case of Ramchandra Shivnarain (supra) question decided by the Hon’ble Court was about applicability of proviso to manufacturing business/ to a business of sale of goods. Hon’ble court held that ‘proviso was not confined to contracts in respect of raw materials entered into by persons in the course of their manufacturing business, that it applied equally to cases of persons carrying on manufacturing as well as persons carrying on business of selling goods, that there was no scope to confine it to manufacturers.’ Thus, facts of the matter of Ramchandra Shivnarain(supra) are not applicable to the case under consideration. In the instant case booking and cancellation of forward contracts of exchange were not in respect of specified export or import orders and all contracts had been cancelled. Not only this, there was no actual delivery of Foreing Exchange. In these circumstances, we are of the opinion that finding of the FAA does not suffer from any legal infirmity. In the case of Pali Ram Bhadarmal (supra), it is found that loss suffered by the assessee, in forward contracts, was directly related to the merchandised goods dealt with by assessee. It was in this context and factual position that ITAT Jodhpur had decided the issue in favour of the assesssee holding that transaction was not speculative loss in view of cl. (a) of proviso to sec.43 (5). In the case under consideration FCs were entered into with regard to Foreign Exchange and assessee is not businesss of foreign exchange, as stated earlier. It is also a fact that loss shown by the assessee was due to FCs against which no actual delivery of foreign exchange was made. As per the settled law FCs are to be settled either by delivery of the difference has to credited/debited by the Bankers. As in the case under consideration all the FCs were cancelled, so they were not settled by actual delivery or transfer of the commodity. Therefore, in our opinion cases relied upon by the AR of no help.