M/s Southern Rocks & Minerals Private Limited, Hyderabad V. THE ACIT, Guntur

CO 1/VIZ/2016

• Counselvise Citation: [2017] 123 COUNSELVISE.COM (IT) 3299 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 1 year(s) 9 month(s) 7 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 11-10-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2010-2011
• Appeal Filed On: 04-01-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R GOVINDARAJAN
• Assessee Lawyers: A V RAGHURAM
• Keywords: Capital asset; Depreciation; Business expenditure; Residential status; Transactions in derivatives; Speculation loss; Speculative transactions
• Section: 37(1); 43(5); 28

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . . , BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH , ACCOUNTANT MEMBER . / I . T .A.NO. 195 /VIZ/ 201 5 ( / ASSESSMENT YEAR: 2010 - 11 ) THE ACIT, CIRCLE - 1 ONGOLE M/S SOUTHERN ROCKS & MINERALS (P) LTD., ONGOLE [ PAN : AA DCS1378K ] ( / APPELLANT ) ( / RESPONDENT ) CROSS OBJECTION NO.01/VIZ/2016 ARISING OUT OF I.T.A.NO.195/VIZ 2015 M/S SOUTHERN ROCKS & MINERALS (P) LTD., ONGOLE [ PAN : AA DCS1378K ] THE ACIT, CIRCLE - 1 GUNTUR ( / APPELLANT ) ( / RESPONDENT ) / REVENUE BY : SHRI R.GOVINDARAJAN, DR / ASSESSEE BY : SHRI A.V.RAGHU RAM, AR / DATE OF HEARING : 08 .0 9 .2017 / DATE OF PRONOUNCEMENT : . 10 .2017 / O R D E R PER D.S. SUNDER SINGH , ACCOUNTANT MEMBER : THIS APPEAL IS FILED BY THE REVENUE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS) [CIT(A)] - 1 VIDE ITA 2 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE NO.189/CIT(A - 1)/GNT/2013 - 14 DATED 19.03.2015 FOR THE ASSESSMENT YEAR 2010 - 11. 2. ALL THE GROUNDS OF APPEAL ARE RELATED TO THE ADDITION OF RS.10,34,23,949/ - DISALLOWED BY THE ASSESSING OFFICER AS SPECULATION LOSS WHICH IS DELETED BY THE LD.CIT(A). THE REVENUE HAS FILED APPEAL RAISING ELEVEN GROUNDS COVERING TWO ISSUES. (I) DISALLOWANCE OF FOREIGN EXCHANGE FLUCTUATION LOSS AS SPECULATION LOSS U/S 43(5) OF I.T.ACT. (II) YEAR OF ALLOWABILITY OF DEDUCTION. 3 . THE ASSESSEE IS IN THE BUSINESS OF QUARRYING, CUTTING AND POLISHING OF ROUGH GRANITE BLOCKS & MONUMENTS , FILED THE RETURN OF INCOME ON 24.09.2010 FOR THE ASSESSMENT YEAR 2010 - 11 ADMITTING LOSS OF RS.1,35,26,139/ - . DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFF ICER FOUND THAT THE ASSESSEE HAD DEBITED AN AMOUNT OF RS.12,26,79,604 AS 'DERIVATIVE LOSS UNDER THE HEAD 'ADMINISTRATIVE EXPENSES' WHILE AN AMOUNT OF RS . 1,92,55,655 / - WAS CREDITED AS 'DERIVATIVE INCOME UNDER THE HEAD 'OTHER INCOME' THUS EFFECTIVELY CLAIMED THE NET LOSS OF RS. 1 0 ,34,23,949 / - FROM FOREIGN EXCHANGE DERIVATIVES. THE ASSESSING OFFICER HAS CALLED FOR THE DETAILS, BUT THE 3 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE ASSESSEE FAILED TO FURNISH THE DETAILS. SUBSEQUENTLY, THE ASSESSING OFFICER CALLED FOR INFORMATION FROM THE BANK AND OBTAINED DETAILS FOR OPTIONS AND DERIVATIVES ENTERED INTO BY THE ASSESSEE WITH ICICI BANK LTD. THE ASSESSING OFFICER FOUND THAT THE ASSESSEE HAS ENTERED INTO CONTRACTS IN RESPECT OF FOREIGN EXCHANGE DERIVATIVES WITH ICICI BANK LTD. QUOTING CERTAIN SPOT RATE ON A FUTURE DATE AND CANCELLED THE CONTRACT EITHER BEFORE THE FIXED DATE OR ON THE FIXED DATE WITHOUT TAKING POSSESSION OF SUCH FOREIGN EXCHANGE (US DOLLARS). CONSEQUENT ON SUCH CANCELLATION THE AMOUNT RECEIVABLE /PAYABLE IN INDIAN CURRENCY RESULTED IN GAIN OF RS.1,92,55,655/ - AND LOSS OF RS.12,26,79,604/ - RESULTING IN NET LOSS OF RS.10,34,23,949/ - . IT WAS ALSO OBSERVED BY THE ASSESSING OFFICER THAT IN RESPECT OF THE DERIVATIVE TRANSACTIONS EXECUTED UNDER ISDA MASTER AGREEMENT WITH ICICI BANK, THE BANK HAS FILED OA NO. 391/2009 AGAINST THE COMPANY BEFORE THE DEBTS RECOVERY TRIBUNA L - III AT MUMBAI AND THE COMPANY HAS FIELD OS NO. 340 OF 2008 BEFORE THE 2 ND ADDL. CHIEF JUDGE, CITY CIVIL COURT AT HYDERABAD. THE ASSESSING OFFICER HAS ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE LOSS ON DERIVATIVES SHOULD NOT BE TREATED AS SPECULATIVE L O SS. THE ASSESSING OFFICER ALSO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE LOSS INCURRED SHOULD BE ALLOWED IN THE YEAR UNDER CONSIDERATION WHEN IT WAS INCURRED IN THE 4 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE EARLIER YEARS. IN RESPONSE TO THE SHOW CAUSE NOTICE ISSUED BY THE ASSESSING OFFICER, THE ASSESSEE HAS EXPLAINED THAT THE ASSESSEE HAD ENTERED INTO DERIVATIVE TRANSACTIONS WITH THE ICIC I BANK LTD UNDER ISDA MASTER AGREEMENT DATED 06.03.2007 TO INSULATE ITS REVENUE EARNINGS AGAIN ST W IDE FLUCTUATIONS IN THE EXCHANGE RATE OF USD . FURTHER ON TH E ADVICE OF ICICI BANK LTD. THAT CROSS CURRENCY HEDGING AGAINST USD VIS - - VIS CHF CONSIDERED AS THE BETTER OPTION, SINCE THE CHF HAD HISTORY OF STABILITY AGAINST THE USD. HOWEVER, BY THE END OF 2008, THE DOLLAR WENT INTO STEEP DECLINE VIS - - VIS CHF RESULT ING IN HUGE ACCUMULATED LOSS TO THE ASSESSEE COMPANY. THE ASSESSEE IS AN EXPORTER OF GRANITE BLOCKS AND NOT A DEALER IN FOREIGN EXCHANGE. THE FORWARD CONTRACTS WERE ENTERED INTO ONLY TO MITIGAT E THE POSSIBLE LOSS OF THE REVENUE DUE TO FOREX FLUCTUATION S AND THE LOSS INCURRED IN DERIVATIVE TRANSACTIONS WAS CYSTALLIZED IN THE YEAR UNDER CONSIDERATION HENCE THE ASSESSEE EXPLAINED THAT LOSS WAS CLAIMED AS DEDUCTION IN THE YEAR UNDER CONSIDERATION. FURTHER, THE ASSESSEE SUBMITTED BEFORE THE ASSESSING OFFIC ER THAT THE CRYSTALLIZED LOSS ON ACCOUNT OF FOREX DERIVATIVE CONTRACTS ARE NOT SPECULATIVE IN NATUR E WITHIN MEANING OF 43(5) OF THE I.T.ACT . AS THE DEFINITION FOR SPECULATIVE TRANSACTION IS AN EXHAUSTIVE ONE AND THE TERM COMMODITY DOES NOT INCLUDE CURRE NCY. THE ASSESSING OFFICER 5 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE CONSIDERED THE SUBMISSIONS MADE BY THE ASSESSEE BUT NOT CONVINCED WITH THE REASONING GIVEN AND HELD THAT THE LOSS DERIVED BY THE ASSESSEE WAS SPECULATIVE LOSS AND ACCORDINGLY DISALLOWED THE NET LOSS OF RS.10,34,23,949/ - AND ALLO WED THE CARRY FORWARD OF LOSS TO BE SET OFF AGAINST THE INCOME FROM SPECULATION IN FUTURE YEARS. 4. AGGRIEVED BY THE ORDER OF THE ASSESSING OFFICER, THE ASSESSEE WENT ON APPEAL BEFORE THE CIT (A) AND THE LD. CIT (A) OBSERVED THAT THE BUSINESS ACTIVITY OF THE ASSESSEE IS NOT TRADING IN SHARES AND FOREIGN EXCHANGE MARKET. T HE ASSESSEE IS AN EXPORTER OF GRANITE B LOCKS . TO C ARRY OUT BUSINESS TRANSACTIONS AND TO MITIGATE THE LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATIONS, THE A SSESSEE HAD ENTERED INTO FORWARD C ONTRACTS (F.C) IN THE VALUE OF FOREIGN CURRENCY. THEREFORE, LD.CIT(A) ALLOWED THE EXPENDITURE AS BUSINESS EXPENDITURE U/S 37(1) OF THE I.T.ACT AND ALLOWED THE APPEAL OF THE ASSESSEE. WHILE ALLOWING THE APPEAL OF THE ASSES SEE, LD.CIT(A) ALSO RESTRICTED THE AMOUNT OF LOSS CLAIMED BY ASSESSEE TO RS.9,10,00,000/ - INSTEAD OF RS.10,24,23,949/ - SINCE THE ASSESSING OFFICER HAS ADDED THE AMOUNT OF RS.1,35,26,139/ - TWICE. 4.1. THE LD.CIT(A) FURTHER HELD THAT BY THE LETTER OF IC ICI BANK DATED 6 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE 30/12/2009 THE LOSS OF RS.9,10,00,000/ - WAS SETTLED AS AGAINST THE ORIGINAL CLAIM OF RS.18,53,21,184/ - BY THE BANK, THUS THE LOSS WAS CRYSATLISED IN THE F.Y.2009 - 10 RELEVANT TO THE A.Y.2010 - 11 AND THEREFORE ALLOWABLE IN THE YEAR UNDER CONSI DERATION. AGAINST THE ORDER OF THE LD.CIT(A), THE DEPARTMENT IS IN APPEAL BEFORE THE TRIBUNAL. 5. APPEARING FOR THE DEPARTMENT, THE LD.DR ARGUED THAT THE ASSESSEE IS AN EXPORTER OF GRANITE BLOCKS AND TRADING IN FOREIGN EXCHANGE DERIVATIVES HEDGING CROSS CURRENCY TRANSACTIONS. THE ASSESSEE WAS INVOLVED IN FREQUENT PURCHASES AND SALE WITHOUT TAKING DELIVERY . C OMPANY HAS ENTERED INTO CONTRACTS IN RESPECT OF FOREIGN EXCHANGE DERIVATIVES WITH ICICI BANK, QUOTING CERTAIN SPOT RATE ON A FUTURE DATE AND CA NCELLED THE CONTRACT EITHER BEFORE THE FIXED DATE OR ON THE FIXED DATE WITHOUT TAKING POSSESSION OF SUCH FOREIGN EXCHANGE (US DOLLARS) AND THE SAME CONSTITUTE SPECULATION LOSS. THE ASSESSEE HAS NOT BROUGHT ON RECORD THE BILLS, INVOICES PROPOSED TO BE RECEI VED FROM THE IMPORTERS FOR HEDGING THE TRANSACTIONS. THEREFORE, IN THE ABSENCE OF BILL TO BILL HEDGING, THE TRANSACTIONS CANNOT BE TREATED AS BUSINESS LOSS AND INCURRED IN THE NORMAL COURSE OF BUSINESS. LD. DR REFERRING TO O.S. NO.340/2008 FILED BY 7 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE THE ASS ESSEE IN THE COURT OF II ADDITIONAL CHIEF JUDGE, CITY CIVIL COURTS, HYDERABAD AND ALSO REFERRING TO PAGE NO.81, PARA 7 OF THE PAPER BOOK STATED THAT THE ASSESSEE ITSELF HAD ACCEPTED BEFORE THE HONBLE COURT THAT THE TRANSACTIONS WERE TOTALLY UNCONNECTED WI TH THE BUSINESS OF THE ASSESSEE. SIMILARLY IN PARA N O.8 ADMITTED THAT ALL THE TRANSACTIONS ARE EXOTIC TRANSACTIONS BASED ON PROBABLE FLUCTUATION OF USD AND SWISS FRANC. THERE WAS NO INR LOAN SWAP OR A HEDGE AGAINST EXPORT IN THESE DEALS THEREBY MAKING IT PURELY SPECULATIVE. SIMILARLY, IN PARA N O.10 ALSO THE ASSESSEE STATED THAT THE DEAL AND THE REVISED DEAL IS NOT A SWAP DEAL OR TO HEDGE THE EXPORT RECEIVABLES. FURTHER, THE ASSESSEE IN PARA NO. 13 STATED THAT RBI PERMITS TO ENTER INTO CROSS CURRENCY OPTION WITH AN AUTHORIZED DEALER WITH A VIEW ONLY TO HEDGE FOREIGN EXCHANGE EXPOSURE, ONLY ONE HEDGE TRANSACTION CAN BE BOOKED AGAINST A PARTICULAR EXPOSURE. LD.DR ARGUED THAT SINCE THE ASSESSEE ITSELF HAD ACCEPTED THAT THE TRANSACTION WA S A SPECULATIVE TRANSACT ION, THERE IS NO REASON TO DISCARD THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE HONBLE COURT. LD.DR VEHEMENTLY ARGUED THAT THE LOSS CLAIMED BY THE ASSESSEE IS SPECULATIVE LOSS AND THE LD.CIT(A) HAS ERRED IN DELETING THE ADDITION AND REQUESTED TO REST ORE THE ASSESSMENT ORDER. 8 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE 6. ON THE OTHER HAND, LD.AR ARGUED THAT THE ICICI BANK HAS FILED THE CASE AGAINST THE ASSESSEE COMPANY IN O.A.NO.391 OF 2009 BEFORE DEBTS RECOVERY TRIBUNAL - III, MUMBAI MAKING THE COMPANY AS RESPONSIBLE FOR PAYMENT OF THE ENTIRE LOSS OF RS.18,53,21,184/ - . TO BAIL OUT THE COMPANY FROM DEBTS RECOVERY TRIBUNAL - III, THE ASSESS EE FILED A COUNTER IN O.S. NO.340/2008 BEFORE THE HONBLE COURT OF II ADDITIONAL CHIEF JUDGE, CITY CIVIL COURT, HYDERABAD. THE SUBMISSIONS WERE MADE IN O.S.340 ONLY TO SAVE THE COMPANY FROM THE DEBTS RECOVERY TRIBUNAL. ULTIMATELY, BOTH THE PARTIES HAVE RE ACHED , OUT OF COURT SETTLEMENT O N AGREEMENT BETWEEN THE ASSE SSEE AND THE BANKER AND THERE WAS NO JUDGEMENT DELIVERED BY THE CITY CIVIL COURT ON THE PETITION MADE BY THE ASSESSEE. THEREFORE, LD.AR ARGUED THAT AVERMENT S MADE IN O.A.NO.340/2008 SHOULD NOT GO AGAINST THE ASSESSEE AND THE CASE BE DECIDED ON FACTS. THE LD.AR FURTHER ARGUED THAT THE ASSESSEE IS A GRANITE EXPORTER EXPORTING THE GRANITE BLOCKS TO EUROPEAN COUNTRIES, CHINA AND USA. THE EXPORT TURNOV ER PER ANNUM IS APPROXIMATELY 40.00 CRORES, I.E. 88 % OF THE COMPANYS REVENUE GENERATED FROM THE EXPORTS. DUE TO FLUCTUATING EXCHANGE RATE OF USD DURING THE YEAR 2007, TO INSULATE THE REVENUE EARNINGS, THE ASSESSEE HAS ENTERED INTO DERIVATIVE TRANSACTIONS WITH CROSS CURRENCY HEDGING AGAINST USD VIS - - VIS CHF. THE DECISION OF DERIVATIVE TRANSACTIONS IS PURELY 9 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE BUSINESS INTEREST TO MITIGATE THE POSSIBLE LOSS OF REVENUE DUE TO FOREX FLUCTUATIONS. SINCE THE CHF HAS HAD A HISTORY OF STABILITY AGAINST USD, ON THE ADVICE OF ICICI BANK LTD. THE COMPANY HAD ENTERE D INTO 12 DERIVATIVE TRANSACTIONS PURSUANT TO ISDA AGREEMENT DATED 06.03.2007. DUE TO STEEP DECLINE IN DOLLAR, THE ASSESSEE HAS INCURRED HUGE LOSSES WHICH IS IN DISPUTE NOW. LD.AR FURTHER ARGUED THAT THE RBI RECALLS BOOKINGS AS WELL AS QUANTUM FOREX FORWA RD CONTRACTS WITH THE BANKS FOR THE PURPOSE OF HEDGING OF IMPORT PAYABLE OR EXPORT RECEIVABLES. SINCE THE ASSESSEE IS IN THE BUSINESS OF EXPORT, THE ASSESSEE COULD ENTER INTO DERIVATIVE TRANSACTIONS. SINCE THE ASSESSEE IS A REGULAR EXPORTER, IT RECEIVES T HE EXPORT RECEIVABLES FREQUENTLY AS AND WHEN EXPORTS ARE MADE. I T IS NOT LIKE IMPORTERS TO SELECT THE HEDGING ON TRANSACTION TO TRANSACTION BASIS. THE LD.AR FURTHER ARGUED THAT ON THE SIMILAR FACTS HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. SOORA JMULL NAGARMULL [129 ITR 169] HELD THAT IT IS NOT A SPECULATIVE TRANSACTION. LD.AR RELIED ON THE DECISION OF ITAT MUMBAI BENCH IN THE CASE OF D CI T VS. SSKI INVESTOR SERVICES P LTD [113 TTJ 511] AND THE DECISION IN THE CASE OF CIT VS BADRIDAS GAURIDU (P) L TD [2003] 261 ITR 256 (BO M ) . THE LD.A.R SUBMITTED THAT THE ABOVE DECISIONS WERE REFERRED BEFORE THE AO BUT THE LD.AO DID NOT CONSIDER THE 10 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE ABOVE DECISIONS SINCE THE DECISIONS WERE NOT RENDERED BY THE JURISDICTIONAL HIGH C OURT OR THE JURISDICTIONAL TRIBUNAL. 6.1. ALTERNATIVELY, LD.AR ARGUED THAT TRANSACTIONS MADE BY THE ASSESSEE ARE NOT SPECULATIVE AND ALLOWABLE U/S 28 AS BUSINESS LOSS AND RELIED ON THE DECISION OF SUTLEJ COTTON MILLS LTD VS CIT (116 ITR 1) . 7. LD. AR FURTHER ARGUED THAT THE LOSS WAS INCURRED IN THE F.Y. 2 008 - 09 I.E RELEVANT TO THE ASSESSMENT YEAR 2009 - 10. THE LOSS WAS CRYSTALISED IN THE YEAR UNDER CONSIDERATION. THE ICICI BANK LTD HAS FILED SUIT IN THE DEBTS RECOVERY TRIBUNAL AND THE ASSESSEE COMPANY HAS MOVED I.A.NO.2164/2008 FOR INJUNCTION AGAINST ICICI BANK LTD. AND HONBLE HIGH COURT PLEASED TO GRANT AD - INTERIM INJUNCTION ON 20.06.2008, HENCE THE ENTIRE MATTER BECAME SUB - JUDICE . BOTH THE COMPANY AND THE ASSESSEE HA VE REACHED THE MUTUAL AGREEMENT ON 30.12.2009 AND SETTLED THE LOSS TO RS.9,10,00,000/ - AGAINST OUTSTANDING AMOUNT RS.18,53,21,181 / - IN THE YEAR 2008 - 09. SINCE THE LOSS IS CRYSTALLIZED BY MUTUAL AGREEMENT, THE ASSESSEE ARGUED THAT IT HA D SAVED RS.9,43,21,181/ - AND RIGHTLY CLAIMED THE LOSS IN THE YEAR UNDER CONSIDERATION. THEREFORE, LD.AR ARGUED THAT THERE WAS NO ERROR IN THE CLAIM MADE BY THE ASSESSEE. 11 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE 8 . WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL PLACED ON RECORD. THE ASSESSEE IS AN EXPORTER OF GRANITE BLOCKS TO CHIN A, EUROPEAN COUNTRIES AND USA AND THE APPROXIMATE TURNOVER OF THE ASSESSEE WA S 51 CRORES OUT OF WHICH 40.00 CRORES WAS EXPORT TURNOVER WHICH CONSTITUTE 88 % OF TOTAL TURNOVER. DURING TH E YEAR 2008 - 09, THE ASSESSEE HAD ENTERED INTO DERIVATIVE TRANSACTIONS BY HEDGING CROSS CURRENCY AND INCURRED THE LOSS OF RS. 12,26,79,604 / - AND THE PROFIT OF RS. 1,92,55,655 / - . IN FACT AS PER THE MASTER AGREEMENT THE AMOUNT DUE AND PAYABLE BY THE ASSESSEE INCLUSIVE OF INTEREST AS ON 30.12.2009 WAS RS.18,53,21,184/ - INCLUDING TH E PRINCIPAL AMOUNT OF RS.14,72,91,184 / - . T HE BANK HAS FILED IN OA NO. 391/2009 AGAINST THE COMPANY BEFORE DEBTS RECOVERY TRIBUNAL AND THE COMPANY HAS FILED A SUIT IN O.S.NO.310/2008 BEFORE THE II ADDITIONAL JUDGE, CITY CIVIL COURT, HYDERABAD. HOWEVER, FINALLY, THE ASSESSEE COMPANY AND THE BANK HA VE AGREED FOR FULL AND FINAL SETTLEM ENT OF RS.9,10,00,000/ - WITH RESPECT TO ALL TRANSACTIONS. THE ASSESSEE HAS SUBMITTED THAT THE CROSS CURRENCY HEDGING IS ENTERED INTO WITH ICICI BANK, ISDA MASTER AGREEMENT TO INSULATE ITS REVENUE AGAINST WIDE FLUCTUATIONS IN THE EXCHANGE RATE OF USD VIS - - VIS RUPEE. ON THE ADVICE OF ICICI BANK LTD., THE CROSS CURRENCY HEDGING WAS MADE AGAINST USD VS. CHF AS CHF HAD HISTORY OF STABILITY. HOWEVER, AGAINST EXPECTATIONS OF THE ASSESSEE, THERE WAS 12 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE STEEP FALL IN THE USD AGAINST CROSS CURRENCY WHICH RESULTED INT O HUGE LOSSES BY THE ASSESSEE COMPANY IN THE DERIVATIVES TRANSACTIONS. IT IS UNDISPUTED FACT THAT THE ASSESSEE IS AN EXPORTER OF GRANITE BLOCKS AND NOT A DEALER IN FOREIGN EXCHANGE. THERE IS NOTHING TO DISBELIEVE THE ASSESSEES SUBMISSION THAT THE FORWA RD CONTRACTS WERE ENTERED INTO TO MITIGATE THE POSSIBLE LOSS IN REVENUE DUE TO FOREX BOOKINGS AS WELL AS QUANTUM WHICH WAS PERMITTED BY THE RESERVE BANK OF INDIA FOR THE PURPOSE OF HEDGING ON IMPORT PAYABLES AND EXPORT RECEIVABLES. THE ASSESSEE SUMITTED T HAT MERELY BECAUSE HEDGING COULD NOT BE IDENTIFIED WITH TRANSACTION TO TRANSACTION, I T SHOULD NOT BE HELD AS SPECULATIVE. IN THE EXPORT ACTIVITY IT IS DIFFICULT TO IDENTIFY THE TRANSACTION TO TRANSACTION FOR HEDGING. THE ASSESSEE RELIED ON THE DECISION O F CIT VS. SOORAJMULL NAGARMULL , D CI T VS. SSKI INVESTOR SERVICES P LTD AND THE DECISION IN THE CASE OF CIT VS BADRIDAS GAURIDU (P) LTD (SUPRA) AND SUBMITTED THAT THE ASSESSEES CASE IS COVERED BY THE DECISION RENDERED BY THE HIGH COURT AND TRIBUNALS REFERRED ABOVE, BUT THE ASSESSING OFFICER IGNORED THE DECISIONS HOLDING THAT THE DECISIONS ARE NOT OF JURISDICTIONAL COURT / TRIBUNAL AND TH E DECISIONS ARE DELIVERED PRIOR TO THE INSERTION OF PROVISO TO EXPLANATION TO SECTION 43(5) OF I.T.ACT. HOWEVER, HONBLE ITAT, MUMBAI BENCH SUBS EQUENT TO INSERTION OF CLAUSE D OF SECTION 43(5) OF 13 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE I.T.ACT HAS CONSIDERED THE IDENTICAL ISSUE IN THE CASE O F LONDON STAR DIAMOND COMPANY (I) P LTD. VS. DCIT , RANGE 5(2), MUMBAI AND HELD THAT FOREIGN CONTRACTS ENTERED INTO BY THE ASSESSEE , AN EXPORTER AND NOT THE DEALER IN FOREIGN EXCHANGE WITH THE BANKS AS INCIDENTAL TO THE EXPORT BUSINESS AND A RE BUSINESS T RANSACTIONS AND RESULTANT LOSS OR GAIN IS NOT SPECULATIVE IN NATURE. HONBLE COORDINATE BENCH, ITAT, MUMBAI WHILE RENDERING THE DECISION CONSIDERED THE DECISION S IN THE CASE OF D.KISHORE K UMAR AND CO. [ 2 SOT 769 (MUM) ], HONBLE GUJARATS HIGH COURTS DECISION IN THE CASE OF FRIENDS AND FRIENDS SHIPPING PVT. LTD AND THE DECISION RELIED UPON BY THE LD.AR . FOR READY REFERENCE, WE E X TRACT THE RELEVANT PARAGRAPHS OF THE DECISION OF HONBLE ITAT MUMBAI BENCH IN THE CASE CITED SUPRA. [PARA 18 - 26). 18 . THE PROVISIONS OF SECTION 43(5) PROVIDES FOR DEFINITION OF SPECULATION TRANSACTIONS. THE SAID PROVISIONS READ AS UNDER: 43. (1)... (2).... (3)... (4).... (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 T HIS CLAUSE -- (A) A CONTRACT IN RESPECT OF RAW MATERIALS OR MERCHANDISE ENTERED INTO BY A PERSON IN THE COURSE OF HIS MANUFACTURING OR MERCHANTING BUSINESS TO GUARD AGAINST LOSS THROUGH FUTURE PRICE 14 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE FLUCTUATIONS IN RESPECT OF HIS CONTRACTS FOR ACTUAL DELIV ERY OF GOODS MANUFACTURED BY HIM OR MERCHANDISE SOLD BY HIM; OR (B) A CONTRACT IN RESPECT OF STOCKS AND SHARES ENTERED INTO BY A DEALER OR INVESTOR THEREIN TO GUARD AGAINST LOSS IN HIS HOLDINGS OF STOCKS AND SHARES THROUGH PRICE FLUCTUATIONS; OR (C) A CO NTRACT ENTERED INTO BY A MEMBER OF A FORWARD MARKET OR A STOCK EXCHANGE IN THE COURSE OF ANY TRANSACTION IN THE NATURE OF JOBBING OR ARBITRAGE TO GUARD AGAINST LOSS WHICH MAY ARISE IN THE ORDINARY COURSE OF HIS BUSINESS AS SUCH MEMBER; [OR] [ (D) AN ELIGI BLE 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; [ OR]] (E) AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN COMMODITY DERIVATIVES CARRIED OUT IN A RECOGNISED ASSOCIATION, SHALL NOT BE DEEMED TO BE A SPECULATIVE TRANSACTION..........' 19. THE ABOVE PROVISION PROVIDES THAT A TRANSACTION IN WHICH A CONTRAC T IN RESPECT OF TRADING OF ANY COMMODITY' INCLUDING STOCKS AND SHARES IS SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF COMMODITY / SCRIPS. HERE THE MEANING OF EXPRESSION ANY COMMODITY' IS A MATTER OF DEBATE. THIS DEFINITION PROVIDES FOR EX CLUSION OF CERTAIN SPECIFIED CONTRACTS DISCUSSED IN CLAUSE (A) TO (E) OF THE PROVISO TO SECTION 43(5) OF THE ACT. CLAUSE (A) OF THE PROVISO DEALS WITH THE HEDGING CONTRACTS ENTERED INTO IN THE COURSE OF MANUFACTURING AND MERCHANDIZING OF THE BUSINESS TO GUARD AGAINST THE LOSSES THROUGH FUTURE PRICE FLUCTUATIONS IN RESPECT OF CONTRACTS FOR ACTUAL DELIVER. CLAUSE (B) DEALS WITH THE CONTRACTS ENTERED INTO BY DEALER OR INVESTOR IN RESPECT OF STOCK EXCHANGE AN D CLAUSE (D) DEALS WITH AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING DERIVATIVES CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE. CLAUSE (E) DEALS WITH ELIGIBLE TRANSACTIONS IN RESPECT OF THE TRADING IN COMMODITY DERIVATIVES CARRIED OUT IN A RECOGNIZED ASSOCIA TION. THESE FIVE TYPES OF CONTRACTS / ELIGIBLE TRANSACTIONS SHALL NOT BE DEEMED AS SPECULATIVE TRANSACTIONS. ALTHOUGH THERE IS DECISION OF THE TRIBUNAL WHERE IT IS HELD THAT THE FCS ARE NOT COMMODITIES, CONSIDERING THE JUDGMENT OF HON'BLE HIGH COURT OF CALCUTTA IN THE CASE OF SOORAJ MUILL NAGARMULL SUPRA, WHICH WAS FOLLOWED BY THE JUDGMENT OF JURISDICTIONAL HIGH COURT IN THE CASE OF BADRIDAS GAURIDU PVT LTD (SUPRA), NEEDS TO BE FOLLOWED BY US. THE PRINCIPLE OF JUDICIAL DISCIPLINE ASSUMES IMPORTANCE AND THEREFORE, THE 'COMMODITY' INCLUDES THE FORWARD CONTRACT'. THUS, IN PRINCIPLE, THE FORWARD CONTRACTS, 15 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE BEING CO MMODITY, SHOULD FALL IN THE DEFINITION OF SPECULATION TRANSACTION' AND THE SAME IS SUBJECTED TO FULFILLMENT OF OTHER CONDITIONS SPECIFIED IN SUB - SECTION (5) OF SECTION 43 OF THE ACT. HAVING HELD SO, WE SH ALL NOW EXAMINE IF THE IMPUGNED CONTRACTS/TRANSACTIONS CONSTITUTE 'HEDGING TRANSACTIONS' AND COVERED BY THE EXCLUSION PROVISIONS OF CLAUSE (A) TO THE PROVISO TO SECTION 43(5) OF THE ACT. THE CLAUSE (A) OF THE PROVISO TO SECTION 43(5) PROVIDES FOR EXCLUSION OF THE HEDGING TRANSACTION' FROM THE DEFINITION OF THE SPECULATION TRANSACTIONS'. THERE ARE NUMBER OF JUDGMENTS IN SUPPORT OF THE ASSESSEE AND RELEVANT RATIOS' OR CONCLUSIONS ARE DISCUSSED IN THE SUCCEEDING PARAGRAPHS. 20. BEFORE TAKING UP THESE DISCUSSIONS, WE SHALL NOW TAKE UP THE PROVISIONS OF THE EXPLANATION TO SECTION 28 OF THE ACT, WHICH ALSO PROV IDE DEFINITION OF SPECULATIVE BUSINESS'. THE SAID EXPLANATION READS AS UNDER: EXPLANATION 2. -- WHERE SPECULATIVE TRANSACTIONS CARRIED ON BY AN ASSESSEE ARE OF SUCH A NATURE AS TO CONSTITUTE A BUSINESS, THE BUSINESS (HEREINAFTER REFERRED TO AS SPECULATION BUSINESS) SHALL BE DEEMED TO BE DISTINCT AND SEPARATE FROM ANY OTHER BUSINESS 21. EXPLANATION TO SECTION 28 USES THE EXPRESSION SPECULATIVE TRANSACTIONS CARRIED ON BY AN ASSESSEE ARE OF SUCH A NATURE AS TO CONSTITUTE A BUSINESS ', AND THUS, CONSIDERING THE NATURE OF THESE TRANSACTIONS, THE IMPUGNED FCS CANNOT BE DEEMED AS THE SPECULATION BUSINESS WITHOUT GOING INTO THE 'NATURE OF THE TRANSACTIONS'. FOR ANALYZING THE NATURE, WE NEED TO EXAMINE WHY THE FC T RANSACTIONS ARE ENTERED, HOW THESE TRANSACTIONS ARE DEALT WITH DURING THEIR SUSTENANCE TILL THEY ARE CANCELLED BY THE ASSESSEE OR TERMINATED BY THE BANKS AND IF THEY CONSTITUTE HEDGING TRANSACTIONS ETC. BASING ON THE 'NATURE', CERTAIN SPECULATION TRANSACTI ONS SHALL CONSTITUTE AS SPECULATION BUSINESS AND SUCH SPECULATION BUSINESS SHALL BE DEEMED TO BE DISTINGUISHED AND SEPARATE FROM ANY OTHER BUSINESS. FURTHER, THE PROVISION OF SECTION 73 RELATING TO LOSS IN SPECULATION BUSINESS' IS ANOTHER RELEVANT PROVISION IN THIS REGARD. THUS, THE EXPLANATION 2 TO SECTION 73 ALSO DEALS WITH DEEMED SPECULATION BUSINESS WHERE THERE IS SOME TRADING ACTIVITY OF SHARES BY THE ASSESSEE BEING OTHER BUSINESS ACTIVITY. NOW, WE SHALL TAKE UP RELEVANT JUDGMENTS ON THE SUBJECT RAISED BEFORE US. 22. RELEVANT JUDGMENTAL LAWS: IN THIS REGARD, RELEVANT DECISIONS INCLUDE THE DECISION IN THE CASE OF D KISHORE KUMAR AND CO SUPRA, BINDING JUD GMENT OF THE BOMBAY HIGH COURT IN THE CASE OF CIT VS. BADRIDAS GAURIDU PVT LTD (SUPRA), JUDGMENT IN THE CASE OF SOORAJ MUILL MAGARMULL 129 ITR 169 (PARA 3) FROM CALCUTTA HIGH COURT. THE JUDGMENTS FROM THE HIGH COURT OF AHMEDABAD IN THE CASES OF FRIENDS AND FRIENDS SHIPPING PVT. LTD (SUPRA) AND IN THE CASE OF PANCHAMAHAL STEEL LTD (SUPRA) ARE ALSO RELEVANT. THESE DECISIONS / JUDGMENTS ARE UNANIMOUSLY RELEVANT FOR THE 16 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE PROPOSITION THAT THE FC TRANSACTIONS, WH EN ENTERED INTO WITH THE BANKS FOR HEDGING THE LOSSES DUE TO FOREIGN EXCHANGE FLUCTUATIONS ON THE EXPORT PROCEEDS, ARE TO BE CONSIDERED INTEGRAL OR INCIDENTAL TO THE EXPORT ACTIVITY OF THE ASSESSEE. THEREFORE, THE LOSSES OR GAINS CONSTITUTE THE BUSINESS LO SS OR GAINS AND NOT THE SPECULATION ACTIVITIES. IN THE PRECEDING PARAGRAPHS OF THE ORDER, IN THE PORTIONS ASSIGNED TO THE AR'S ARGUMENTS, WE HAVE ANALYZED THESE ISSUES AND THE DR HAS NOT PROVIDED ANY REASONS TO REJECT THE SAID ARGUMENTS OF LD COUNSEL FOR T HE ASSESSEE. THEREFORE, IN PRINCIPLE, WE AGREE WITH THE ARGUMENTS OF LD COUNSEL FOR THE ASSESSEE. FURTHER, WE ALSO AGREE WITH THE LD COUNSEL'S ARGUMENT THAT THE FACT OF PREMATURE CANCELLATION CANNOT ALTER THE NATURE OF THE TRANSACTION'. THUS, LD COUNSEL'S COMMENTS ON CIT(A) CONCLUSIONS ON TREATING OR EQUATING THE FCS AS DERIVATIVES' OF CURRENCY IS ALSO ALLOWED CONSIDERING THE SPECIFIC DEFINITION PROVIDED TO DERIVATIVES IN SECTION 2(AC) OF SECURITIES CO NTRACT REGULATION ACT, 1956 AND IT IS NOT THE REQUIREMENT OF THE LAW THAT THE 1:1 CORRELATION BETWEEN THE FCS AND THE EXPORT INVOICES SHOULD EXIST AND SHOULD BE ESTABLISHED BY THE ASSESSEE. SO LONG AS THE TOTAL VALUE OF THE FCS DOES NOT EXCEED, THE CLAIM O F THE ASSESSEE IS SUSTAINABLE AS BUSINESS LOSS. WE HAVE ALSO ANALYZED THE DECISIONS RELIED ON BY LD DR AND FIND THEY ARE DISTINGUISHABLE. NOW, WE SHALL PROCEED TO IMPORT SOME CONCLUSIONS OF THE SAID DECISIONS. RELEVANT JUDGMENTAL LAWS - CONCLUSIONS & HELD PORTIONS 23. RELEVANT EXTRACTS FROM THE CITED JUDGMENTS ARE INSERTED IN THE SUCCEEDING PARAGRAPHS HERE AS UNDER: A. HELD PORTION IN THE CASE OF D. KISHOREKUMAR 2 SOT 769 (MUM) 'THE DETAILS OF FORWARD EXCHANGE CONTRACT CLEARLY SHOW THAT ALL THE FORWARD EXCH ANGE CONTRACTS WERE IN RESPECT OF EACH SPECIFIC IMPORT ORDER PLACED BY THE ASSESSEE. THE PURPOSE OF THESE TRANSACTIONS WAS CLEARLY TO MINIMISE ASSESSEES RISK ON ACCOUNT OF FALL IN VALUE OF RUPEE, BUT THE QUANTUM OF FOREIGN EXCHANGE COVERED BY THESE FORWAR D CONTRACTS WAS LIMITED TO THE EXTENT OF ASSESSEES ACTUAL EXPOSURE IN RESPECT OF IMPORT VALUE COMMITMENTS. THAT ASPECT IS NOT DISPUTED. ON THESE FACTS, EVEN THOUGH THE TRANSACTIONS HAVING BEEN SETTLED WITHOUT DELIVERY, THE CONDITIONS OF S. 43(5) , DESCRIBING SPECULATIVE TRANSACTIONS, ARE CLEARLY FULFILLED, THE REQUIREMENT OF EXPLN. 2 TO S. 28 IS NOT FULFILLED INASMUCH AS IT CANNOT BE CONCLUDED THAT THE TRAN SACTIONS ARE SUCH A NATURE AS TO CONSTITUTE A BUSINESS BY ITSELF. THESE TRANSACTIONS ARE GENUINE BUSINESS TRANSACTION TO HEDGE AGAINST INCREASED COST OF PURCHASES OF ROUGH DIAMOND IMPORTS. IT IS A COMMONLY ACCEPTED PART OF THE FINANCIAL MANAGEMENT PRACTI CES TODAY THAT THE RISK ELEMENT, DUE RISE IN VALUE OF FOREIGN CURRENCY IN RESPECT OF THE IMPORT TRANSACTIONS ENTERED, IS MINIMISED BY ENTERING INTO FORWARD CONTRACTS FOR PURCHASE OF THAT CURRENCY. THIS IS PARTICULARLY NECESSARY IN A MARKET IN WHICH THE VAL UE OF DOMESTIC CURRENCY IS FALLING, WHICH IS EVIDENT 17 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE FROM THE FACT THAT THE ASSESSEE REALIZED PROFITS ON CANCELLATION OF THOSE CONTRACTS. THESE TRANSACTIONS ARE INTEGRAL PART OF THE EXPORT BUSINESS AND CANNOT BE CONSIDERED IN ISOLATION OF THE EXPORT BUSINE SS IN THE COURSE OF WHICH THE TRANSACTIONS HAVE BEEN ENTERED INTO. AS A MATTER OF FACT, THIS PROFIT ON CANCELLATION OF FORWARD CONTRACTS IS GENERALLY REVENUE NEUTRAL BECAUSE THE QUESTION OF PROFIT ON CANCELLATION OF FORWARD CONTRACTS CAN ONLY ARISE IN A SI TUATION WHEN THE VALUE OF FOREIGN CURRENCY IS INCREASING VIS - A - VIS DOMESTIC CURRENCY, AND WHEN THE FOREIGN EXCHANGE VALUE IS SO INCREASING THE ULTIMATE PAYMENT MADE IN FOREIGN EXCHANGE BY THE ASSESSEE ALSO INCREASES. ...... SINCE IT IS AN UNDISPUTED POSIT ION THAT THE IMPORTS, IN CONNECTION WITH WHICH THE ASSESSEE HAD ENTERED INTO FORWARD CONTRACTS, ACTUALLY TOOK PLACE, THIS PROFIT ON CANCELLATION OF FORWARD FOREIGN EXCHANGE CONTRACTS EFFECTIVELY ONLY REDUCES THE COSTS OF PURCHASES IN RESPECT OF THOSE IMPOR TS, AND CANNOT BE, BY ANY LOGIC, CONSTRUED AS TRANSACTIONS INDEPENDENT OF ASSESSEES BUSINESS OF IMPORTING ROUGH DIAMONDS AND EXPORTING CUT AND POLISHED DIAMONDS. THERE IS ONE MORE ASPECT OF THE MATTER, AND THAT IS THE REASON AS TO WHY THE FORWARD CONTRACT S WERE CANCELLED MIDWAY AND THE PROFITS WERE BOOKED ON THE SAME INSTEAD OF USING THESE CONTRACTS TO ACTUALLY MEET THE FOREIGN EXCHANGE REQUIREMENTS AT THE TIME OF PAYING THE IMPORT BILLS....... THE DUE DATES OF PAYMENT AT THAT POINT OF TIME WERE ONLY 16 DA YS TO 77 DAYS AWAY. THE DECISION AS TO WHETHER FURTHER HEDGING AGAINST THE INCREASE IN FOREIGN CURRENCY IS WARRANTED OR NOT IS ESSENTIALLY A COMMERCIAL DECISION WHICH DEPENDS ON A NUMBER OF FACTORS, MOST IMPORTANT FACTOR BEING THE TREND OF CURRENCY MARKETS AT THAT POINT OF TIME AND BUSINESSMANS PERCEPTION ABOUT FUTURE TRENDS OF THE CURRENCY MARKET. FOR EXAMPLE, WHEN A BUSINESSMAN PERCEIVES THAT THE MARKET VALUE OF FOREIGN CURRENCY VIS - A - VIS THE DOMESTIC CURRENCY WILL NOT GO ANY HIGHER OR WHEN THE MARKET ST ARTS THE DECLINING TREND, HE MAY SEE BUSINESS EXPEDIENCY IN CANCELLATION OF CONTRACT. THE FACT OF PREMATURE CANCELLATION, THEREFORE, CANNOT ALTER THE NATURE OF TRANSACTION. FOR ALL THESE REASONS, THE CREDIT SHOWN IN THE P&L A/C AS 'PROFIT ON CANCELLATION O F FORWARD CONTRACTS' IS AS INTEGRAL PART OF THE EXPORT BUSINESS, AS PURCHASES OR IMPORTS..... THE ASSESSEE SUCCEEDS ON THIS ISSUE. IN THE RESULT, THE APPEAL IS ALLOWED.' 24. ALTHOUGH, THE SAID DECISION WAS PRONOUNCED IN THE CONTEXT OF SECTION 80HC OF THE ACT, THE RATIO OF THE SAID DECISION IS OF PARAMOUNT IMPORTANCE. B. BOMBAY HIGH COURT JUDGMENT IN THE CASE OF CIT VS. BADRIDAS GAURIDU (P) LTD . [2004] 134 TAXMAN 376 (BOM.) 25. IN THIS CASE, HONBLE HIGH COURT OF BOMBAY ANSWERED THE FOLLOWING QUESTION IN FAVOUR OF THE ASSESSE AND THE QUESTION READS THAT, - 'WHETHER, WHERE ASSESSEE, NOT BEING A DEALER IN FOREIGN EXCHANGE BUT AN EXPORTER OF COTTON, HAD BOOKED FO REIGN EXCHANGE IN FORWARD MARKET WITH 18 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE BANK IN ORDER TO HEDGE AGAINST LOSSES, TO CLAIM DEDUCTION IN RESPECT OF LOSS SUFFERED BY IT AS A BUSINESS LOSS' - HELD YES. 25.1. RELEVANT FINDING IS DISCUSSED IN PARA 3 OF THE JUDGMENT AND THE SAME READS AS FOLLOWS: - ' 3. THE ASSESSEE WAS NOT A DEALER IN FOREIGN EXCHANGE. THE ASSESSEE WAS A COTTON EXPORTER. THE ASSESSEE WAS AN EXPORT HOUSE. THEREFORE, FOREIGN EXCHANGE CONTRACTS WERE BOOKED ONLY AS INCIDENTAL TO THE ASSESSEES REGULAR COURSE OF BUSINESS. THE TRIBUNAL HAS RECORDED A CATEGORICAL FINDING TO THIS EFFECT IN ITS ORDER. THE ASSESSING OFFICER HAS NOT CONSIDERED THESE FACTS. UNDER SECTION 43(5) OF THE INCOME TAX ACT, 'SPECULATIVE TRANSACTION' HAS BEEN DEFINED TO ME AN A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF COMMODITY IS SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF SUCH COMMODITY. HOWEVER, AS STATED ABOVE, THE ASSESSEE WAS NOT A DEALER IN FOREIGN EXCHANGE. THE ASSESSEE WAS AN EXPO RTER OF COTTON. IN ORDER TO HEDGE AGAINST LOSSES, THE ASSESSEE HAD BOOKED FOREIGN EXCHANGE IN THE FORWARD MARKET WITH THE BANK. HOWEVER, THE EXPORT CONTRACTS ENTERED INTO BY THE ASSESSEE FOR EXPORT OF COTTON IN SOME CASES FAILED. IN THE CIRCUMSTANCES, THE ASSESSEE WAS ENTITLED TO CLAIM DEDUCTION IN RESPECT OF RS. 13.50 LAKHS AS A BUSINESS LOSS. THIS MATTER IS SQUARELY COVERED BY THE JUDGMENT OF THE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. SOORAJ MULL NAGARMULL (1981) 129 ITR 169.' JUDGMENT OF CALCUTTA HI GH COURT IN THE CASE OF CIT VS. SOORAJ MULL NAGARMULL [1981] 129 ITR 169 (CAL.) HELD: THE ASSESSEE USED TO CARRY ON EXPORT AND IMPORT OF JUTE BUSINESS. IN THE COURSE OF NORMAL BUSINESS IT USED TO ENTER INTO FOREIGN EXCHANGE CONTRACTS IN ORDER TO COVER UP L OSS AND DIFFERENCE IN FOREIGN EXCHANGE VALUATION. THE ASSESSEE UTILIZED PART OF THE AMOUNT OF THE FOREIGN EXCHANGE COVERED. THIS FINDING OF FACT HAS NOT BEEN CHALLENGED. IF IN THE COURSE OF NORMAL CARRYING ON OF BUSINESS CERTAIN LOSS OR OBLIGATION OR INTER EST ARISE THESE MUST BE DEFERRABLE TO THE CARRYING ON THE BUSINESS AND THESE MUST BE INCIDENTAL TO THE CARRYING ON OF THE BUSINESS. UNDOUBTEDLY, THE CONTRACT FOR FOREIGN EXCHANGE AS SUCH CAN BE TREATED AS A CONTRACT FOR COMMODITY.............' THE CONCLUS ION OF THIS JUDGMENT AS REPORTED READS AS UNDER: WHERE IN THE NORMAL COURSE OF BUSINESS OF IMPORT AND EXPORT OF JUTE, THE ASSESSEE ENTERED INTO FOREIGN EXCHANGE CONTRACT TO COVER UP THE LOSSES AND DIFFERENCES IN EXCHANGE VALUATION, THE TRANSACTION IS NOT A SPECULATIVE TRANSACTION. 19 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE 26. THE ABOVE EXTRACTS UNANIMOUSLY SUPPORT THAT THE FCS ENTERED BY THE ASSESSEE, AN EXPORTER AND NOT THE DEALER IN FOREIGN EXCHANGE, WITH THE BANKS AS INCIDENTAL TO THE EXPORT BUSINESS, ARE BUSINESS TRANSACTIONS AND LOSS OR GAINS IS NOT OF SPECULATION NATU RE. 8 .1. THE C OORDINATE B ENCH , VISAKHAPATNAM IN THE CASE OF ASSISTANT COMMISSIONER OF INCOME - TAX, CIRCLE - 1, RAJAHMUNDRY . V. SRI RAMALINGESWARA RICE & OIL MILL * ON SIMILAR FACTS IN 2017] 78 TAXMANN.COM 17 (VISAKHAPATNAM - TRIB.) HELD THAT 12. BEFORE WE, GO IN TO THE FACTS OF THE PRESENT CASE, LET US UNDERSTAND, FORWARD CONTRACTS, SPECULATIVE TRANSACTIONS, HEDGING, FOREIGN EXCHANGE LOSS AND TREATMENT OF LOSS IN THE BOOKS OF ACCOUNT. A FORWARD CONTRACT IS A AGREEMENT BETWEEN AN ENTERPRISES AND A BANKER TO PURCHASE OR SELL A PARTICULAR QUANTITY OF CURRENCY FOR A MUTUALLY AGREED PRICE AT A PARTICULAR DATE. THESE FORWARD CONTRACTS ARE USED BY EXPORTERS TO GET THEIR EXPORT RECEIVABLES HEDGED AGAINST ADVERSE CURRENCY MOVEMENTS. HE DGING IS DEFINED AS TO ENTER IN TO TRANSACTIONS TO REDUCE THE RISK OF ADVERSE MOVEMENT OF CURRENCY. ANY PERSON HAVING EXPOSURE TO FOREIGN CURRENCY MAY ENTER INTO HEDGING TO FIX HIS COST AND PROFITS AT A PARTICULAR LEVEL. THEREFORE, FORWARD CONTRACTS MEANS ENTERING INTO AGREEMENT WITH BANKERS TO HEDGE THE CURRENCY FLUCTUATIONS TO MITIGATE THE LOSS IN THE COURSE OF IMPORT/EXPORT BUSINESS. FORWARD EXCHANGE CONTRACTS AND TREATMENT OF ANY PROFIT/LOSS ARISING ON CANCELLATION OR RENEWAL OF SUCH FORWARD EXCHANGE CO NTRACTS HAS BEEN DEALT BY ACCOUNTING STANDARD - 11 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, IN PARAS 36, 37, 38 & 39. ACCORDING TO THE AS - 11, OF ICAI, ANY FORWARD EXCHANGE CONTRACTS ENTERED TO HEDGE THE FOREIGN CURRENCY EXPOSURE, TO MITIGAT E UNEXPECTED LOSS WITH ITS IMPORT/EXPORT BUSINESS HAS TO BE REGARDED AS BUSINESS LOSS AND INCOME AS THE CASE MAY BE. IN CASE OF SUCH FORWARD EXCHANGE CONTRACT IS NOT IN THE NATURE OF HEDGING, THEN SUCH LOSS SHOULD BE IGNORED. 13 . SIMILARLY, THE PROVISIONS OF SECTION 43(5) OF THE ACT DEFINES THE TERM SPECULATIVE TRANSACTIONS, MEANS A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY, INCLUDING STOCK AND SHARES IS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY OR SCRIPTS. SUB - CLAUSE (A) OF SECTION 43(5) OF THE ACT, EXCLUDES CERTAIN TRANSACTIONS WITHIN THE MEANING OF SPECULATIVE TRANSACTION. ACCORDING TO THE SUB - CLAUSE (A), A CONTRACT IN RESPECT OF RAW MATERIALS OR MERCHANDISE ENTERE D INTO BY A PERSON IN THE COURSE OF HIS MANUFACTURING OR MERCHANDISING BUSINESS, TO GUARD AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATIONS IN RESPECT OF HIS CONTRACTS FOR ACTUAL DELIVERY OF 20 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE GOODS MANUFACTURED BY HIM OR MERCHANDISE SOLD BY HIM. A PLAIN READIN G OF SUB - CLAUSE (A) OF SECTION 43(5) OF THE ACT, MAKES IT CLEAR THAT ANY FORWARD EXCHANGE CONTRACTS ENTERED INTO IN ITS BUSINESS OF IMPORT OR EXPORT OF GOODS TO HEDGE THE POSSIBLE FLUCTUATION IN FOREIGN CURRENCY, THEN SUCH TRANSACTIONS ARE KEPT OUTSIDE THE PURVIEW OF THE DEFINITION OF SPECULATIVE TRANSACTIONS. THEREFORE, TO SEE WHETHER A PARTICULAR TRANSACTION IS A SPECULATIVE TRANSACTION OR A MERE HEDGING TRANSACTION, THERE SHOULD BE EXPORT OR IMPORT OF GOODS OR MERCHANDISE AT LEAST TO THE EXTENT OF VALUE OF FORWARD EXCHANGE CONTRACTS. 14. THE TREATMENT TO BE GIVEN TO FOREIGN CURRENCY ITEMS AS PER THE AMENDED AS - 11 OF ICAI, NOTIFIED BY CENTRAL GOVERNMENT U/S. 211(3C) OF COMPANIES ACT, DOES NOT MAKE ANY DISTINCTION BETWEEN ITEMS OF CAPITAL NATURE AND REVEN UE NATURE. BOTH ARE REQUIRED TO BE RECOGNIZED IN THE PROFIT & LOSS ACCOUNT. IN VIEW OF THE AFORESAID AMENDMENT, THERE EXISTS A DIVERGENCE OF VIEWS ON THE TREATMENT TO BE METED OUT IN THE BOOKS OF ACCOUNT AND IN THE INDIAN TAX LAWS. FURTHER, WITH AN INCREAS ED FLOW OF INBOUND/OUTBOUND TRANSACTIONS AND THEIR COMPLEX DYNAMIC STRUCTURING, THE TAX TREATMENT OF FOREIGN EXCHANGE GAINS/LOSSES HAS BEEN SURROUNDED BY HUGE LITIGATION AND VARIOUS COURTS HAVE DISCUSSED THE SAME IN GREAT DETAIL. EXCHANGE FLUCTUATION DIFFE RENCE AND TAX TREATMENT OF THE CAPTIONED ISSUE WAS DISCUSSED IN GREAT DETAIL IN THE RECENT LANDMARK RULING OF SUPREME COURT IN THE CASE OF CIT V. WOODWARD GOVERNOR INDIA (P.) LTD. [2009] 312 ITR 254/179 TAXMAN 326 WHERE IN THE SC RELIED ON THE EARLIER JUDGMENT IN THE CASE OF SUTLEJ COTTON MILLS LTD. V. CIT [1979] 116 ITR 1 , OBSERVED THAT THE LAW MAY, THEREFORE, NOW BE TAKEN TO BE WELL SETTLED THAT WHERE PROFIT OR LOSS ARISES TO AN ASSESSEE ON ACCOUNT OF APPRECIATION OR DEPRECIATION IN THE VALUE OF FOREIGN CURRENCY HE LD BY IT, ON CONVERSION INTO ANOTHER CURRENCY, SUCH PROFIT OR LOSS WOULD ORDINARILY BE A TRADING PROFIT OR LOSS IF THE FOREIGN CURRENCY IS HELD BY THE ASSESSEE ON REVENUE ACCOUNT OR AS A TRADING ASSET OR AS PART OF CIRCULATING CAPITAL EMBARKED IN THE BUSIN ESS. BUT, IF ON THE OTHER HAND, THE FOREIGN CURRENCY IS HELD AS A CAPITAL ASSET OR AS FIXED CAPITAL, SUCH PROFIT OR LOSS WOULD BE OF CAPITAL NATURE.' 15. FURTHER IN THE AFORESAID RULING THE APEX COURT ALSO AFFIRMED THE PRINCIPLES LAID DOWN IN THE RULING OF CIT V. V.S. DEMPO & CO. (P.) LTD. [1994] 206 ITR 291/72 TAXMAN 134 (BOM.) , WHEREIN IT WAS HELD THAT A LOSS ARISING IN THE PROCESS OF CONVERSION OF FOREIGN CURRENCY WHICH IS PART OF TRADING ASSET OF THE ASSESSEE IS A TRADING LOSS AS ANY OTHER LOSS. IN DETERMINING THE TRUE NATURE AND CHARACTER OF THE LOSS, THE CAUSE WHICH OCCASIONS THE LOSS IS IMMATERIAL; WHAT IS MATERIAL IS WHETHER THE LOSS HAS OCCURRED IN THE COURSE OF CA RRYING ON THE BUSINESS OR IS INCIDENTAL TO IT. IF THERE IS LOSS IN A TRADING ASSET, IT WOULD BE A TRADING LOSS, WHATEVER BE ITS CAUSE BECAUSE IT WOULD BE A LOSS IN THE COURSE OF CARRYING ON THE BUSINESS. LOSS IN RESPECT OF CIRCULATING CAPITAL IS REVENUE LO SS WHEREAS LOSS IN RESPECT OF FIXED CAPITAL IS NOT. LOSS RESULTING FROM DEPRECIATION OF THE 21 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE FOREIGN CURRENCY WHICH IS UTILISED OR INTENDED TO BE UTILISED IN BUSINESS AND IS PART OF THE CIRCULATING CAPITAL, WOULD BE A TRADING LOSS, BUT DEPRECIATION OF FIXED CAPITAL ON ACCOUNT OF ALTERATION IN EXCHANGE RATE WOULD BE CAPITAL LOSS. FOR DETERMINING WHETHER DEVALUATION LOSS IS REVENUE LOSS OR CAPITAL LOSS WHAT IS RELEVANT IS THE UTILISATION OF THE AMOUNT AT THE TIME OF DEVALUATION AND NOT THE OBJECT FOR WHICH THE LOAN HAD BEEN OBTAINED. THE WAY IN WHICH THE ENTRIES ARE MADE BY AN ASSESSEE IN THE BOOKS OF ACCOUNT IS NOT DETERMINATIVE OF THE QUESTION WHETHER THE ASSESSEE HAS EARNED ANY PROFIT OR SUFFERED ANY LOSS. WHAT IS NECESSARY TO BE CONSIDERED IS THE TRUE NATUR E OF THE TRANSACTION AND WHETHER IN FACT IT HAS RESULTED IN PROFIT OR LOSS TO THE ASSESSEE. THEREFORE, ONCE LOSS INCURRED ON ACCOUNT OF FLUCTUATION IN FOREIGN CURRENCY, THEN THE LOSS SUFFERED SHALL BE ALLOWED AS BUSINESS LOSS, UNLESS IT IS IN THE NATURE OF SPECULATION LOSS. 16. HAVING SAID THAT, LET US COME TO THE FACTS OF THE PRESENT CASE. IN THE PRESENT CASE ON HAND, THE ASSESSEE IS INTO THE BUSINESS OF EXPORT OF RICE AND OTHER COMMODITIES. DURING THE PREVIOUS FINANCIAL YEAR, IT HAS ACHIEVED EXPORT TURNOV ER OF ABOUT RS. 80 CRORES. THE FORWARD EXCHANGE CONTRACTS ARE ENTERED IN THE PREVIOUS FINANCIAL YEAR, WHICH WAS NOT DISPUTED BY THE A.O. THOUGH THERE IS NO EXPORT TURNOVER FOR THE CURRENT FINANCIAL YEAR, THIS IS BECAUSE OF A BAN IMPOSED BY THE GOVERNMENT O F INDIA, ON EXPORT OF RICE AND OTHER COMMODITIES. AS RIGHTLY POINTED OUT BY THE LD. A.R. FOR THE ASSESSEE, THE GOVERNMENT OF INDIA IMPOSED BAN ON EXPORT OF RICE FOR A TEMPORARY PERIOD. ALTHOUGH THE BAN WAS EXTENDED FOR A FURTHER PERIOD I.E. UP TO END OF FI NANCIAL YEAR 2008 - 09, THE ASSESSEE WAS ON THE BONA FIDE BELIEF THAT THE BAN ON EXPORT IS TEMPORARY AND GOVERNMENT MAY REVIEW THE BAN, THEREFORE, IT CAN CONTINUE ITS EXPORTS AND ACCORDINGLY IT HAS CONTINUED ITS FORWARD EXCHANGE CONTRACTS WITH THE BANKS. SIN CE THE BAN WAS CONTINUED FOR THE WHOLE FINANCIAL YEAR AND ALSO FACT THAT DURING THE SAME PERIOD, THE INDIAN CURRENCY HAD A DRAMATIC FALL IN THE INTERNATIONAL MARKET, THE ASSESSEE HAS CLOSED FORWARD EXCHANGE CONTRACTS AND SUFFERED LOSS. THE ASSESSEE BEING A PRUDENT BUSINESS PERSON ENTERED FOREIGN EXCHANGE CONTRACTS WITH A HOPE THAT THE INDIAN CURRENCY MAY RECOVER AND IT MAY RECOUP THE LOSSES. BUT, ULTIMATELY WHEN THINGS ARE NOT TURNED AROUND, IT HAS CANCELLED FORWARD EXCHANGE CONTRACTS, WHICH RESULTS INTO LO SS. THEREFORE, THE LOSS SUFFERED BY THE ASSESSEE CANNOT BE CONSIDERED AS SPECULATIVE LOSS WITHIN THE MEANING OF SECTION 43(5) OF THE ACT. 17. COMING TO THE ALLEGATIONS OF THE A.O. THE A.O.'S MAIN ALLEGATION IS THAT LOSS CLAIMED BY THE ASSESSEE IS MTM LOSS OR NOTIONAL LOSS AS THE LOSS IS NOT CRYSTALLIZED IN THE BOOKS OF ACCOUNT. THE A.O. OBSERVED THAT ONLY CRYSTALLIZED LOSS IS ALLOWABLE AS DEDUCTIONS, BUT NOT NOTIONAL LOSS. AS THE FORWARD CONTRACTS HAVE BEEN ENTERED INTO AGAINST CURRENCY FLUCTUATIONS, THERE WOULD NOT BE ANY CRYSTALLIZATION OF LIABILITY. THE A.O. FURTHER OBSERVED THAT LOSS INCURRED BY THE ASSESSEE IS A MTM LOSSES, WHICH IS IN THE NATURE OF NOTIONAL LOSS CANNOT BE ALLOWED AS DEDUCTIONS. THE A.O. REFERRED TO AS - 30 ISSUED BY THE ICAI AND CBDT CIR CULAR AND OBSERVED THAT 22 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE MTM LOSS PROVIDED IN THE BOOKS OF ACCOUNT CANNOT BE ALLOWED. WE DO NOT FIND MERITS IN THE FINDINGS OF THE A.O., FOR THE REASON THAT IN THE PRESENT CASE ON HAND, THE A.O. HIMSELF HAS ACCEPTED THAT THE LOSS CLAIMED BY THE ASSESSEE ARE ON ACCOUNT OF CANCELLATION/RENEWAL OF FORWARD EXCHANGE CONTRACTS, WHICH HAS BEEN DEBITED BY THE BANKERS. THE ASSESSEE HAS FILED DETAILS OF FORWARD EXCHANGE CONTRACTS AND BANK ACCOUNT. ON PERUSAL OF THE BANK STATEMENTS, WE FIND THAT THE LOSSES INCURRED BY THE ASSESSEE IS ON ACCOUNT OF CANCELLATION/RENEWAL OF FORWARD EXCHANGE CONTRACTS, WHICH IS CRYSTALLIZED AND DEBITED BY THE BANKERS. CONSIDERING FACTS AND CIRCUMSTANCES OF THIS CASE, WE ARE OF THE VIEW THAT FOREIGN EXCHANGE LOSS INCURRED BY THE ASSESSEE ON ACCOUNT OF ENTERING INTO FORWARD CONTRACTS WITH BANKS FOR THE PURPOSE OF HEDGING LOSS IN CONNECTION WITH ITS IMPORT/EXPORT BUSINESS HAS TO BE REGARDED AS BUSINESS LOSS. THE CIT (A) AFTER CONSIDERING THE RELEVANT EXPLANATIONS RIGHTLY DELETED THE ADDITIONS M ADE BY THE A.O. WE DO NOT SEE ANY REASONS TO INTERFERE WITH THE ORDER OF CIT (A). HENCE, WE INCLINED TO UPHOLD THE CIT (A) ORDER AND REJECT THE GROUND RAISED BY THE REVEN 8 .2. IN THE ASSESSE S CASE, THE ASSESSEE IS AN EXPORTER OF GRANITE AND BECAUSE OF THE ASSESSEES BUSINESS OF EXPORT OF GRANITE, THE ASSESSEE COULD ENTER INTO CONTRACT WITH THE ICICI BANK FOR HEDGING THE CROSS CURRENCY TRANSACTIONS TO INSULATE THE REVENUE AND TO MITIGATE THE LOSS. THE RESERVE BANK OF INDIA VIDE CIRCULAR 22/2007 - 08 DATED 02.07.2007 PERMITTED A PERSON, RESIDENT OF INDIA TO ENTER INTO FOREIGN CONTRACT WITH AN AUTHORIZED DEALER TO HEDGE AN EXPORT TO EXCHANGE RISK IN RESPECT OF TRANSACTIONS FOR WHICH SALE AND PURCHASE OF FOREIGN EXCHANGE IS PERMITTED UNDER THE ACT. IT MEANS, AUTHORIZED DEALER CAN HEDGE THE BUSINESS RECEIVABLES SO AS TO ENABLE THE PARTIES TO AVOID EXCHANGE VALUE DIFFERENCES. THE AUTHORIZED DEALER I.E. BANK CAN DO THIS ONLY FOR HEDGING NOT FOR SPECULATION. THE RESERVE BANK OF INDIA IN JULY 2006 HAD ISSUED 23 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE A MA STER CIRCULAR CONSOLIDATING ALL NOTIFICATIONS, GUIDELINES AND CIRCULARS ON THE FORWARD AND DERIVATIVE CONTRACTS IN FOREIGN EXCHANGE. TO SUMMARISE THE DERIVATIVES AND OP TION CONTRACT S ARE PERMITTED FOR THE FOLLOWING PURPOSES : (I) TO COVER THE RISK OF EXCHANG E IN FOREIGN EXCHANGE BORROWINGS. (II) TO COVER INTEREST RATE VARIATIONS (III) T O COVER EXPOSURE RECEIVABLES OR IMPORT PAYABLES IN FOREIGN EXCHANGE. (IV) NO NET FLOW, I NFLOW OF PREMIUM AND ANNEXURE VII TO RBI MASTER CIRCULAR JULY 2006 STATES THAT MARKET PARTICIPANTS SHALL FOLLOW ONLY ISDA DOCUMENT ATION . IN THE INSTANT CASE, THE ASSESSEE IS NOT A FOREIGN EXCHANGE DEALER AND NOT IN THE BUSINESS OF FOREIGN EXCHANGE DEALINGS . OUT OF THE TOTAL TURNOVER OF THE ASSESSEE OF 50 CRORES, 88% OF THE TURNOVER OF THE BUSINESS WAS EXPORT TURNOVER. IN THE DECISION RELIED BY THE ASSESSEE IN THE CAS E OF LONDON STAR DIAMOND COMPANY LTD. (SUPRA), THE COORDINATE BENCH HELD THAT HEDGING NEED NOT BE 1 : 1 BASIS . THE COORDINATE BENCH OF ITAT, 24 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE VISAKHAPATNAM IN THE CITED CASE HELD THAT N O DISALLOWANCE OF LOSS UNDER FORWARD CONTRACT JUST BECAUSE ASSESSEE HAD NIL EXPORT TURNOVER DUE TO BAN ON EXPORT . IN THE INSTANT CASE THE ASSESSHAD MADE EXPORT TURNOVER OF RS.40.00 CRORES AND THE AO HAD NOT MADE OUT A CASE THAT THE TOTAL TURNOVER FROM THE DERIVATIVE TRANSACTIONS WAS MORE THAN THE EXPORT TURNOVER. THEREFORE, WE HOLD THAT THE ASSESSEES CASE IS SQUARELY COVERED BY THE CASE LAWS RELIED UPON BY THE ASSESSEE AND THE DECISION OF THE LONDON STAR DIAMOND CO. LTD. (SUPRA) AND THE DECISION OF THIS TR IBUNAL CITED. HENCE, THE TRANSACTIONS ENTERED BY THE ASSESSEE CANNOT BE HELD AS SPECULATION LOSS AND REQUIRED TO BE ALLOWED AS BUSINESS LOSS. ACCORDINGLY, WE UPHOLD THE ORDER OF THE LD. CIT (A) ON THIS ISSUE AND ALLOW THE APPEAL OF THE ASSESSEE. 9 . THE NEXT GROUND OF APPEAL RAISED BY REVENUE IS YEAR OF ALLOWABILITY. AS ON 31.03.2009, THERE WAS AN AMOUNT OF RS.18,53,21,184/ - UNDER THE MASTER AGREEMENT DUE AND PAYABLE TO THE BANK INCLUSIVE OF INTEREST. THE SAID AMOUNT WAS DISPUTED BY THE ASSESSEE BY FILING O .S. IN THE CITY CIVIL COURT, HYDERABAD AND THE ICICI BANK HAS FILED O.A.NO.3181/2009 BEFORE DEBTS RECOVERY TRIBUNAL - III, MUMBAI. SINCE THE LIABILIT Y IS IN DISPUTE AND THE SAME WAS NOT CRYSTALISED AND THE ASSESSEE DID NOT CLAIM THE DEDUCTION. BOTH THE AS SESSEE AND THE BANK REACHED AN AGREEMENT 25 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE FOR FULL AND FINAL SETTLEMENT OF RS.9,10,00,000/ - THIS IS EVIDENCED BY A LETTER OF ICICI BANK DATED 30.1 2.2009 RELEVANT TO THE ASSESSMENT YEAR 2010 - 11. THEREFORE, THE LOSS WAS CRYSTALLIZED IN THE YEAR UNDER CONSID ERATION THOUGH INCURRED IN THE EARLIER YEAR, DUE TO PENDING LITIGATION . THEREFORE, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD.CIT(A) AND THE SAME IS UPHELD. 10 . IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED AND CROSS OBJECTION FILED BY THE ASSESSEE IN SUPPORT OF THE ORDER OF THE LD.CIT(A) IS ALLOWED . T HE ABOVE ORDER I S PRONOUNCED IN THE OPEN COURT ON OCT 2017 . ( . ) ( . . ) (V. DURGA RAO) ( D.S. SUNDER SINGH ) /JUDICIAL MEMBER /ACCOUNTANT MEMBER /VISAKHAPATNAM /DATED : . 10 .2017 L. RAMA, SPS 26 ITA NO. 195 /VIZ/201 5 AND CO NO.01/VIZ/2016 M/S SOUTHERN ROCKS & MINERALS PVT. LTD., ONGOLE /COPY OF THE ORDER FORWARDED TO: - 1. / THE REVENUE THE ACIT, CIRCLE - 1 , ONGOLE (II) THE ACIT, CIRCLE - 1 , GUNTUR 2 . / THE ASSESSEE M/S SOUTHERN ROCKS & MINERALS (P) LTD., ONGOLE 3 . THE ACIT RANGE 2, GUNTUR 4. THE CIT (APPEALS) - 1, GUNTUR 5 . , , / DR, ITAT, VISAKHAPATNAM 6 . / GUARD FILE / BY ORDER // TRUE COPY // SR. PRIVATE SECRETARY ITAT, VISAKHAPATNAM