DCIT, CHENNAI V. Asvini Fisheries P Ltd., CHENNAI

ITA 1760/CHNY/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5666 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-12-2017
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 17-07-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 10-06-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: ASHISH TRIPATI
• Assessee Lawyers: B VIJAYARAGHAVAN
• Keywords: Business income; Speculative transactions
• Section: 43(5); 2

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI . . . , , # BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI S. JAYARAMAN, ACCOUNTANT MEMBER /. I.T.A. NOS. 1759 & 1760/MDS/2016 / ASSESSMENT YEARS : 2010-11 & 2011-12 DEPUTY COMMISSIONER OF INCOME TAX, CORPORATE CIRCLE -1(1), CHENNAI 600 034. VS. M/S. ASVINI FISHERIES P LTD., 136 & 139 OLD MAHABALIPURAM ROAD, KARAPAKKAM, CHENNAI 600 096. [PAN: AAACA 2931P] ) / APPELLANT) ) / RESPONDENT) %& / APPELLANT BY : SHRI. ASHISHTRIPATI, JCIT )*%& / RESPONDENT BY : SHRI B. VIJAYARAGHAVAN, ADVOCATE & /DATE OF HEARING : 14.09.2017 & /DATE OF PRONOUNCEMENT : 08.12.2017 / O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER: THE REVENUE FILED THESE APPEALS AGAINST THE CO MMON ORDERS OF THE COMMISSIONER OF INCOME TAX (APPEALS)-1, CHENNAI IN ITA NOS. 199 & 107 /CIT(A)-1/2014-15 DATED 03.03.2016 FOR THE ASSESS MENT YEARS 2010-11& 2011-12, RESPECTIVELY. :-2-: ITA NOS. 1759 & 1760/MDS/2016 2. M/S. ASVINI FISHERIES P. LTD., THE ASSESSEE, IS ENGAGED IN THE BUSINESS OF PROCESSING AND EXPORT OF MARINE PRODUCTS. IN ITS R ETURNS FILED FOR AY 2010-11 AND 2011-12, THE ASSESSEE CLAIMED LOSS ON FORWARD C ONTRACTS IN FOREX DERIVATIVES. THE ASSESSING OFFICER REQUIRED THE AS SESSEE TO FURNISH RELEVANT MATERIALS AND THEREAFTER DISALLOWED SUCH CLAIM FOR THE REASON THAT THE ASSESSEES CLAIM FALLS WITHIN THE AMBIT OF SPECULAT IVE BUSINESS WHICH CANNOT BE ALLOWED TO BE SET OFF AGAINST THE NORMAL BUSINESS I NCOME AS PER SECTION 73. AGGRIEVED, THE ASSESSEE FILED THE APPEAL BEFORE THE CIT(A). AT THE APPELLATE STAGE THE ASSESSEE HAS SOLELY RELIED UPON THE ORDER OF THE ITAT, CHENNAI B BENCH IN ITA NO. 2246/MDS/2014 DATED 18.12.2005 FO R AY 2009-10, BASED UPON WHICH THE CIT(A) DIRECTED THE AO TO COMPUTE TH E DISALLOWANCE, IF ANY, IN CONFORMITY WITH DIRECTIONS OF THE HONBLE TRIBUNAL. 3. AGGRIEVED THE REVENUE FILED THESE APPEALS WITH THE COMMON GROUND AS UNDER: 1. THE ORDER OF THE LEARNED CIT(A) IS CONTRARY TO LAW, FACTS AND CIRCUMSTANCES OF THE CASE. 2.1 THE LEARNED CIT(A) ERRED IN DIRECTING THE AO TO RECOMPUTE THE DISALLOWANCE OF LOSS FROM FOREIGN CURRENCY DERIVATIVES OF RS.5,1 4,08,317/- IN CONFORMITY WITH THE DIRECTIONS OF THE TRIBUNAL'S ORDER FOR A. Y. 20 09-10. 2.2 THE LEARNED CIT(A) ERRED IN HOLDING THAT LOSS O N FORWARD CONTRACTS IN FOREIGN EXCHANGE DERIVATIVES IS NOT SPECULATIVE LOS S. 2.3 THE LEARNED CIT(A) ERRED IN FOLLOWING THE DECIS ION OF THE TRIBUNAL BY HOLDING THAT THE LOSS ON FORWARD CONTRACT IN FOREX DERIVATIVES UPTO THE AMOUNT OF EXPORT TURNOVER SHOULD BE TREATED AS BUSINESS LO SS. :-3-: ITA NOS. 1759 & 1760/MDS/2016 2.4 THE LEARNED CIT(A) OUGHT TO HAVE APPRECIATED TH E FACT THAT THE DECISION OF THE HON'BLE ITAT IN THE ASSESSEE'S OWN CASE FOR A.Y .2009-10 HAS NOT BEEN ACCEPTED BY THE DEPARTMENT AND APPEAL IS PENDING BE FORE THE HON'BLE HIGH COURT. 3. FOR THESE AND OTHER GROUNDS THAT MAY BE ADDUCED AT THE TIME OF HEARING, IT IS PRAYED THAT THE ORDER OF THE LEARNED CIT(A) MAY BE SET ASIDE AND THAT OF THE ASSESSING OFFICER RESTORED. 4. THE DR TOOK US THROUGH THE ASSESSMENT ORDERS AND SUBMITTED THAT THE ASSESSEE HAS NOT LAID THE RELEVANT MATERIAL BEFORE THE AO FOR CLAIMING THE IMPUGNED DEDUCTION. PER CONTRA, THE AR SUPPORTED T HE ORDER ON THE BASIS OF THIS TRIBUNAL ORDER IN ITA NO. 2246/MDS/2014 DATED 18.12.2005 FOR AY 2009-10. 5. WE HAVE CONSIDERED THE RIVAL CONTENTIONS. WE HA VE GONE THROUGH THE ORDER IN ITA NO. 2246/MDS/2014 DATED 18.12.2005 FOR AY 2009-10. IT IS SEEN THAT THE CIT(A) HAS APPRECIATED THE FACTS OF THE CA SE AND DECIDED THE ISSUE. THEREAFTER, THIS TRIBUNAL DISPOSED THE MATTER. IN THE IMPUGNED YEARS, SINCE, THE AO HAS PASSED ALMOST SIMILAR ORDER, THE RELEVAN T PORTION OF THE ORDER FOR AY 2010-11 IS EXTRACTED AS UNDER: D. BASED ON THE ABOVE DISCUSSION AND THE FACTS OF THE INSTANT CASE, THEE ASSESSEE'S TRANSACTIONS ARE REGARDED AS SPECUL ATIVE TRANSACTIONS SINCE IT SATISFIES THE PROVISIONS OF SECTION 43(5) TO TREAT IT AS 'SPECULATIVE TRANSACTION' FOR REASONS MENTIONED BELOW. A. THERE ARE CONTRACTS BETWEEN THE ASSESSEE COMPANY AND THE FINANCIAL INSTITUTIONS (IN THIS CASE BANKS) FOR THE NON DELIV ERABLE DERIVATIVE :-4-: ITA NOS. 1759 & 1760/MDS/2016 SPECIFICALLY CROSS CURRENCY CALL OPTION CONTRACT WI THOUT ANY UNDERLYING EXPOSURE. THE ASSESSEE HAD NOT FURNISHED ANY RISK A NALYSIS STATEMENT WITH UNDERLYING EXPOSURE AND IN FACT THE CONTRACT N OTES SUBMITTED BY THE ASSESSEE DO NOT HAVE ANY UNDERLYING ASSET / EXP OSURE. B. THE ASSESSEE HAD NEITHER FURNISHED THE CONTRACT NOTES NOR THE RISK ANALYSIS STATEMENT SUBMITTED TO THE BANKS WHILE APP LYING FOR FORWARD CONTRACTS. THERE WAS NO EVIDENCE FURNISHED WITH REG ARD TO THE UNDERLYING RISK FOR WHICH DERIVATIVE INSTRUMENTS WE RE TAKEN. C. THE COMMODITY REFERRED IN SECTION 43(5) INCLUDES STOCK, SHARES AND ALSO THE NON DELIVERABLEFOREX DERIVATIVES. AS PER S ECTION 43 (5) THE CONTRACTS FOR PURCHASE AND SALE OF ANY COMMODITY IN CLUDING STOCK AND SHARES ALSO INCLUDES DERIVATIVES WHICH CAN BE INFER RED FROM THE PROVISO (D) TO THE ABOVE SECTION WHERE IT IS MENTIONED THAT THE TRADING IN DERIVATIVES REFERRED IN CLAUSE (AC) OF SECTION 2 OF SECURITIES CONTRACTS REGULATION ACT, 1956 DONE IN A RECOGNIZED STOCK EXC HANGE ARE DEEMED TO BE EXCLUDED FROM THE DEFINITION OF SPECULATION B USINESS UNDER THE INCOME TAX ACT. FOREX DERIVATIVES ARE COVERED UNDER THE DEFINITION OF CLAUSE (AC) OF SECTION 2 OF SECURITIES CONTRACTS RE GULATION ACT, 1956. THE TERM SECURITIES AS DEFINED UNDER SECURITIES CON TRACTS REGULATION ACT, 1956 IN CLAUSE (H) OF SECTION 2 INCLUDE DERIVA TIVES (SUB-CLAUSE IA). THE TRANSACTION FALLS INTO EXCLUSION UNDER PROVISO (D) ONLY WHEN IT IS DONE THROUGH A RECOGNISED STOCK EXCHANGE. IF THE CO MMODITY DOES NOT INCLUDE DERIVATIVES, THEN THE SAME WOULD NOT HAVE B EEN EXCLUDED IN THE PROVISO (D) TO SECTION 43(5). THIS CLEARLY INDICATE S THAT THE DERIVATIVES TRANSACTED BY THE ASSESSEE FALLS WITHIN THE SCOPE O F COMMODITIES BUT NOT TRANSACTED THROUGH RECOGNISED STOCK EXCHANGES. THUS THE CONTENTION OF THE ASSESSEE THAT ITS TRANSACTIONS BY WAY OF FOREX DERIVATIVES BASED ON FOREIGN CURRENCIES THROUGH FORWARD CONTRACTS ARE NO T COMMODITIES AS PER SECTION 43(5) IS NOT VALID. D. SINCE THE ACT SPECIFICALLY PROVIDES EXCLUSION ON LY TO THOSE TRANSACTIONS DONE THROUGH RECOGNIZED STOCK EXCHANGES, THE ASSESS EE'S TRANSACTIONS WITH BANKS ARE NOT COVERED FOR ANY EXEMPTION FROM T HE PURVIEW OF SEC.43(5). E. THE ASSESSEE'S CLAIM THAT DERIVATIVES ARE EXCLUD ED UNDER PROVISO (D) TO SECTION 43(5) IS NOT ACCEPTABLE SINCE THE PROVIS O DO NOT GIVE BLANKET :-5-: ITA NOS. 1759 & 1760/MDS/2016 EXCLUSION TO ALL THE DERIVATIVE CONTRACTS BUT ONLY TO SUCH CONTRACTS THAT ARE TRADED IN THE RECOGNIZED STOCK EXCHANGE. THUS T HE ASSESSEE'S ARGUMENT THAT FOREX DERIVATIVES ARE NOT SPECULATIVE TRANSACTIONS IS NOT ACCEPTED AND ACCORDINGLY THESE TRANSACTIONS ARE TO BE TREATED AS SPECULATIVE TRANSACTIONS UNDER SECTION 43(5). F. ALSO, THE ASSESSEE HAD NOT ACTUALLY DELIVERED TH E CURRENCY TO THE BANKS WITH WHOM IT HAD ENTERED SUCH CONTRACTS. IN T HE INSTANT CASE, THE ASSESSEE EITHER CANCELLED OR SQUARED UP THE FOREX F ORWARD CONTRACTS WITHOUT DELIVERY OF ANY UNDERLYING ASSET EITHER THE FOREIGN CURRENCIES OR THE EXPORT PROCEEDS IN DENOMINATED CURRENCIES. G. IN THE ABSENCE OF ANY TRI-PARTITE AGREEMENT BETW EEN THE ASSESSEE, BANKS AND THE PERSON TO WHOM THE EXPORTS WERE TO BE MADE, THERE WOULD BE NO CONTROL FOR THE BANKS IN CASE IF THE AL LEGED TRANSACTIONS BY THE ASSESSEE WERE BASED ONLY AGAINST FUTURE EXPORT BY WAY OF HEDGING TO PROTECT THE RETURN/MINIMISE THE RISK. THIS CLEAR LY INDICATES THAT THE ASSESSEE'S REGULAR EXPORT BUSINESS ACTIVITIES WERE INDEPENDENT TO THE EXOTIC FORWARD CONTRACTS ENTERED BY THE ASSESSEE AN D THE ASSESSEE ACT WAS EARN MORE PROFIT THROUGH SUCH DERIVATIVE INSTRU MENT BY WAY OF SPECULATION. H. THESE FORWARD CONTRACT TRANSACTIONS OF THE ASSES SEE WERE ONLY WITH BANKS AND NOT ROUTED THROUGH OR DONE THROUGH ANY RE COGNIZED STOCK EXCHANGES. I. THE CROSS CURRENCY PEGGING BETWEEN TWO DIFFERENT FOREIGN CURRENCIES BY THE ASSESSEE THROUGH THESE FORWARD CONTRACTS FUR THER ASSERTS THE INTENTION OF THE ASSESSEE AND NATURE OF SUCH TRANSA CTIONS AS THESE TRANSACTIONS ARE OF SPECULATIVE IN NATURE. J. THE ASSESSEE NEITHER PROVED THAT THERE WAS UNDER LYING ASSET NOR FURNISHED ANY CONFIRMATION IN THIS REGARD (I.E. DET AILS THE UNDERLYING ASSET) FROM THE BANK(S) WITH WHOM SUCH CONTRACTS WE RE ENTERED. K. THE NATURE, FREQUENCY AND THE VOLUME OF TRANSACT IONS ALSO STRENGTHEN THE FACT THAT THE ASSESSEE HAD ENTERED N UMEROUS CONTRACTS WHICH EVEN OUTSTATE THE NUMBER OF EXPORTS/EXPORT IN VOICES THAT THE ASSESSEE WOULD HAVE MADE IN THE ORDINARY COURSE OF BUSINESS. THE NATURE OF TRANSACTION BY WAY OF BUY AND SELL FOREX DERIVATIVES COUPLED WITH SWAP AND CROSS CURRENCY PEGGING. THE FREQUENCY AND THE :-6-: ITA NOS. 1759 & 1760/MDS/2016 MAGNITUDE/ QUANTUM OF SUCH EXOTIC FORWARD CONTRACTS ENTERED BY THE ASSESSEE CLEARLY ESTABLISHES THAT THE ASSESSEE'S AC T WAS ONLY OF SPECULATIVE IN NATURE IN ORDER EARN PROFIT NOT ONLY THROUGH REGULAR BUSINESS ACTIVITIES BUT ALSO THROUGH SUCH EXOTIC FO REX DERIVATIVE CONTRACTS. ANY SUCH ACT FALLS WITHIN THE AMBIT OF S .43(5). L. IN THE DECISION OF COMFUND FINANCIAL SERVICES(L) LTD VS DCIT, THE ITAT BANGALORE BENCH HAS ALSO HELD THAT ' EVEN THE DEFINITION OF THE WORD 'COMMODITY' AS PER OXFORD ILLUSTRATED DICTIONA RY IS 'USEFUL THING; ARTICLE OF TRADE' WHEN THE COURT OF APPEAL (IN AN E NGLISH JUDGEMENT) HELD EVEN DOLLAR, WHICH IS NOTHING BUT A CURRENCY A LSO TO REPRESENT A COMMODITY, WE FIND NO DIFFICULTY IN HOLDING THAT SH ARES AND SECURITIES AND ALSO UNITS OF UTI SHOULD ALSO BE CONSIDERED AS COMMODITY .... ' M. FURTHER RELIANCE IS PLACED ON THE RECENT DECISIO N OF THE HONORABLE ITAT, BANGALORE 'A' BENCH, IN THE CASE OF ASSISTANT COMMISSIONER OF INCOME-TAX VSK.MOHAN&CO(EXPORTS) (P) LTD. (2010) 39 DTR 97 WHEREIN IT WAS HELD THAT SETTLEMENT OF FORWARD CONTRACTS WI THOUT ACTUAL DELIVERY OF CURRENCY AS A SPECULATIVE TRANSACTION UNDER SECT ION 43(5) OF THE INCOME-TAX ACT, 1961. THIS ADDS FURTHER STRENGTH FO R TREATING THE ASSESSEE'S TRANSACTIONS IN FOREX DERIVATIVES AS SPE CULATIVE TRANSACTIONS. IN VIEW OF THE ABOVE DISCUSSIONS, THE INCOME/LOSS F ROM OPTIONS AND FORWARD CONTRACTS ENTERED BY THE ASSESSEE FORMS PART OF THE SPECULATION BUSINESS OF THE ASSESSEE AS PER EXPLANATION 2 TO SECTION 28. ACCORD INGLY, THE NET LOSS OF RS.5,14,08,317/ - CLAIMED BY THE ASSESSEE FALLS WIT HIN THE AMBIT OF SPECULATIVE BUSINESS WHICH CANNOT BE ALLOWED TO BE SET OFF AGAI NST THE NORMAL BUSINESS INCOME AS PER SECTION 73 OF THE INCOME TAX ACT, 196 1. SUCH LOSSES FROM SPECULATION BUSINESS OF RS.2,56,46,747/ - IS ALLOWE D TO BE CARRIED FORWARD FOR SET OFF AGAINST ANY FUTURE SPECULATION INCOME ACCRU E IN SUCCEEDING PERIOD AND IN RELEVANT ASSESSMENT YEARS, AS PER THE PROVISIONS OF THE ACT ON 'SET-OFF OF LOSSES'. [ DISALLOWANCE: RS.5, 14,08,317/- ] FROM THE ABOVE AND FROM THE ASSESSMENT ORDERS, IT I S CLEAR THAT THE RELEVANT FACTS ARE NOT PLACED BEFORE THE AO BY THE ASSESSEE. THE ASSESSEE HAS NOT PLACED PROPER SUBMISSION ON THE FACTS OF THE CASE B EFORE THE CIT(A) AND THE :-7-: ITA NOS. 1759 & 1760/MDS/2016 CIT(A) HAS ALSO NOT APPRECIATED THE FACTS WITH REFE RENCE TO THE IMPUGNED ISSUES. HOWEVER, THE CIT(A), MERELY RELYING ON THE ORDER OF THIS TRIBUNAL IN EARLIER YEAR, HAS DIRECTED THE AO TO PASS ORDER IN CONFORMITY WITH THE DIRECTION OF THE TRIBUNAL. IN VIEW OF THE ABOVE FACTS AND CI RCUMSTANCES, WE DEEM IT FIT TO SET ASIDE THE IMPUGNED ISSUES TO THE AO FOR AFRE SH EXAMINATION. THE AO SHALL AFFORD ADEQUATE OPPORTUNITY TO THE ASSESSEE T O LAY THE RELEVANT MATERIALS IN SUPPORT OF ITS CONTENTION AND AFTER AFFORDING A DEQUATE OPPORTUNITY, SHALL PASS SPEAKING ORDERS IN ACCORDANCE WITH LAW. THE A PPEALS FILED BY THE REVENUE ARE TREATED AS ALLOWED FOR STATISTICAL PURP OSES. 6. IN THE RESULT, THE REVENUES APPEALS IN ITA NOS. 1759 & 1760/MDS/2016 ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON FRIDAY, THE 08 TH DAY OF DECEMBER, 2017 AT CHENNAI. SD/- ( . . . ) (N.R.S. GANESAN) !' /JUDICIAL MEMBER SD/- ( ) (S. JAYARAMAN) ' /ACCOUNTANT MEMBER /CHENNAI, 0 /DATED: 08 TH DECEMBER, 2017 JPV &)1232 /COPY TO: 1. %/ APPELLANT 2. )*% /RESPONDENT 3. 4 ) (/CIT(A) 4. 4 /CIT 5. 2) /DR 6. 7 /GF