DCIT., Circle-17(2), Hyderabad, Hyderabad V. M/s Vijay Textiles Limited, Secunderabad

ITA 1932/HYD/2014

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 0349 (ITAT-HYDERABAD)
• Duration Of Justice: 3 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-04-2015
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 08-05-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 29-12-2014
• Court: TRIBUNAL
• Department Lawyers: RAJAT MITRA
• Assessee Lawyers: LAXMINIWAS SHAR MA
• Keywords: Business income; Rule of consistency; Speculation loss; Speculative transactions
• Section: 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCHES B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER I.T.A. NO. 1932/HYD/2014 ASSESSMENT YEAR: 2010-11 DY. COMMISSIONER OF INCOME TAX, CIRCLE-17(2) HYDERABAD VS M/S. VIJAY TEXTILE S L IMI T E D S.P.ROAD, SECUNDERABAD [PAN: AAACV8195L] (APPELLANT) (RESPONDENT) FOR REVENUE : SHRI RAJAT MITRA, DR FOR ASSESSEE : SHRI LAXMINIWAS SHARMA , AR DATE OF HEARING : 0 9 - 0 4 - 201 5 DATE OF PRONOUNCEME NT : 17 - 04 - 2015 O R D E R PER B. RAMAKOTAIAH, A.M. : THIS IS A REVENUE'S APPEAL AGAINST THE ORDER OF TH E COMMISSIONER OF INCOME TAX(APPEALS)-II, HYDERABAD DATED 08-10-20 14 ON THE ISSUE OF ALLOWING LOSS OF RS.3,45,77,663/-, WHICH WAS HELD BY THE ASSESSING OFFICER [AO] AS SPECULATIVE LOSS. REVENUE HAS RAIS ED MATERIAL GROUNDS 2 & 3 ON THE ISSUE. 2. ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTU RING AND TRADING OF HOUSE-HOLD FURNISHINGS AND DECLARED INCOME OF RS .2,63,19,334/- AFTER I.T.A. NO. 1932/HYD/2014 M/S. VIJAY TEXTILES LTD :- 2 -: CLAIMING A LOSS OF RS.3,45,77,663/- ON THE FOREIGN EXCHANGE TRANSACTIONS. AO TREATED SUCH LOSS AS LOSS FROM SP ECULATIVE BUSINESS U/S. 43(5) OF THE INCOME TAX ACT [ACT] AND DISALLOW ED THE SAME. IT WAS CONTENDED BEFORE LD.CIT(A) THAT ASSESSEE HAS INCURR ED THE LOSS FROM TRANSACTIONS OF DERIVATIVES IN FOREIGN EXCHANGE CON DUCTED THROUGH THE AXIS BANK. IT FILED CONFIRMATION FROM BANK THAT TH E TRANSACTION WAS SOLELY FOR THE PURPOSE OF HEDGING FOREIGN EXCHANGE EXPOSURE AND NOT FOR THE PURPOSE OF SPECULATION. LD.CIT(A) NOTED THE FA CTS OF THE CASE AND DECIDED AS UNDER: '4. THE INFORMATION ON RECORD IS CAREFULLY CONSIDE RED. THE APPELLANT IS A LEADING MANUFACTURER OF HOUSE-HOLD FURNISHINGS. THE FACTS OF THE ISSUE ARE: THE APPELLANT PLACED THE PURCHASE ORDER ON AN ITAL IAN COMPANY NAMELY - SINCRATEIA TRADING FOR PURCHASE O F COTTON PRINTED SHEETING WORTH US $ 6.3 MILLION. THIS ORDER WAS PLACED ON 05.07.2008. ON 16.07.2008 THE ASSESS EE HEDGED THE TRANSACTION BY TAKING CALL OPTION I.E., RIGHT TO BUY US $ 6 MILLION. THE EXPIRY DATE FOR THIS OPTION WAS 23.06.2009 AND SETTLEMENT DATE WAS 25.06.2009. AS THE SWISS CURRENCY WAS RELATIVELY MORE STABLE, THE CAL L OPTION WAS TAKEN IN US $ VS. SWISS FRANCS. ON MATURITY DATE, THE SWISS CURRENCY APPRECIATED AND THIS HAS RESULTED I N LOSS AS UNDER: US $ STRIKE PRICE SWISS FRANC DATE OF PURCHASE 16.07.2008 6,000,000 1.215 7,290,000 DATE OF SETTLEMENT 25.06.2009 6,706,532 1.087 7,290,000 LOSS 706,532 = RS.3,45,77,676/- THE FOREIGN EXCHANGE DERIVATIVES MATURED DURING TH E PREVIOUS YEAR AND RESULTED IN LOSS OF RS.3,45,77,6 76/- WHICH WAS CLAIMED BY THE APPELLANT AS BUSINESS LOS S. THE ASSESSING OFFICER DISCUSSED ABOUT SECTION 43(5) OF THE INCOME-TAX ACT, 1961 AND HELD THAT ALL THE TRANSAC TIONS OTHER THAN FOUR TYPES OF TRANSACTIONS WHICH ARE SP ECIFICALLY EXEMPTED IN SECTION 43(5) SHALL BE CONSIDERED AS I.T.A. NO. 1932/HYD/2014 M/S. VIJAY TEXTILES LTD :- 3 -: SPECULATIVE TRANSACTIONS. 4.1 THE PROVISIONS OF SECTION 43(5) AND WHETHER SU CH PROVISIONS ARE APPLICABLE TO THE APPELLANT ARE DIS CUSSED AS UNDER: (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 THIS 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 FLUCTUATIONS IN RESPECT OF HIS CONTRACTS FOR ACTUAL DELIVERY 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 CONTRACT 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; (D) AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN DERIVATIVES REFERRED TO IN CLAUSE OF SECTION 2 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 (42 OF 1956) CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE (E) AN ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN COMMODITY DERIVATIVES CARRIED OUT IN A RECOGNIZED ASSOCIATION) (WHICH IS CHARGEABLE TO COMMODITIES TRANSACTION TAX UNDER CHA PTER VII OF THE FINANCE ACT, 2013 (17 OF 2013). IN THE INSTANT CASE THE DERIVATIVES DO NOT PERTAIN TO COMMODITY / STOCK / SHARES. IT PERTAINS TO FOREIGN EXCHANGE AND IT IS WELL SETTLED THAT A FOREIGN EXCHANGE IS COMMODITY ONLY IN THE HANDS OF BANKS AND AUTHORIZED FOREIGN EXCHANGE DEALERS AS ONLY BANKS AND FOREIGN EXCHANG E DEALERS ARE AUTHORIZED TO TRADE IN FOREIGN EXCHANG E AND NOT OTHERS AS PER RBI GUIDELINES (MUNJAL SHOWA LTD. VS. DCIT I.T.A. NO. 1932/HYD/2014 M/S. VIJAY TEXTILES LTD :- 4 -: 94 TTJ 227 ITAT, NEW DELHI). 4.2 SINCE THE APPELLANT IS NOT A BANK AND NOT AN A UTHORIZED FOREIGN EXCHANGE DEALER SECTION 43(5) ITSELF IS NO T APPLICABLE. FURTHER, THE EXCEPTIONS MENTIONED IN ( A) TO (E) OF THE 43(5) ARE ALSO NOT APPLICABLE BECAUSE - (A) THE CONTRACT IS NOT IN RESPECT OF ANY GOODS OR RAW- MATERIAL. (B) THE APPELLANT IS NOT A DEALER IN STOCKS OR SH ARES. (C) THE APPELLANT IS NOT A MEMBER OF STOCK EXCHANGE. (D) THE TRANSACTION IS NOT CARRIED OUT IN THE REC OGNIZED STOCK EXCHANGE (E) THE APPELLANT IS NOT TRADING IN COMMODITY DERIVATIVES. IN SUMMARY, THE TRANSACTION UNDERTAKEN BY THE APPELLANT DOES NOT FALL U/S.43(5) AND ALSO DOES N OT FALL UNDER EXCEPTIONS PROVIDED THEREIN. IN SUMMARY, SE CTION 43(5) IS NOT RELEVANT IN THE APPELLANT'S CASE. 4.3 IN THE INSTANT CASE, THE TRANSACTION OF FOREIG N EXCHANGE DERIVATIVES CARRIED OUT BY THE APPELLANT ARE CLOSE LY CONNECTED TO HIS BUSINESS TRANSACTION AND WAS PRIM ARILY AIMED AT REDUCING THE RISK OF FOREIGN EXCHANGE FLU CTUATION. THE HEDGING IS EVIDENT FROM THE INFORMATION ON REC ORD. THE HEDGING WAS WELL BELOW THE EXTENT OF FOREIGN EXCHA NGE EXPOSURE. IT IS NOT A CASE WHERE THE HEDGING WAS D ONE FOR A MUCH HIGHER AMOUNT, THAN THE ACTUAL FOREIGN EXCH ANGE EXPOSURE. FURTHER, THE AXIS BANK IN ITS CORRESPOND ENCE WITH THE APPELLANT HAS SPECIFICALLY MENTIONED THAT HEDGING IS FOR THE PURPOSE OF FOREIGN EXCHANGE EXPOSURE AN D NOT FOR THE PURPOSE OF SPECULATION. IN AMPLE NUMBER OF CAS ES THE COURTS HAVE HELD THAT LOSS DUE TO HEDGING AGAINST FOREIGN EXCHANGE FLUCTUATION WITH THE BANK CANNOT BE CONSI DERED AS SPECULATIVE LOSS. IN THE CASE OF CIT VS. BADRIDAS GAURIDU PVT. LTD.(2003) 261 ITR 256 (BORN) (HC) IT WAS HELD THAT 'IF AN ASSESSEE INORDER TO HEDGE AGAINST EXCHANGE FLUCTUA TION LOSS HAD BOOKED FOREIGN EXCHANGE TRANSACTION IN FORWAR D MARKET WITH THE BANK AND INCURRED LOSS, SUCH LOSS CANNOT BE I.T.A. NO. 1932/HYD/2014 M/S. VIJAY TEXTILES LTD :- 5 -: CONSIDERED AS SPECULATIVE LOSS. MORE PARTICULARLY, WHEN THE ASSESSEE IS NOT A DEALER IN FOREIGN EXCHANGE.' FURTHER, IN THE CASE OF CIT VS.SOORAJRNULL NAGURMULL (1981) 129 ITR 169 IT WAS HELD THAT 'HERE THERE IS NO FINDING THAT ENTERING INTO FOREIGN EXCHANGE CONTRACT WAS THE NA TURE OF BUSINESS OF THE ASSESSEE. THIS WAS ONLY AN INCIDEN TAL PART OF THE BUSINESS OPERATION FOR THE EXPORT AND IMPOR T OF THE GOODS BY THE ASSESSEE. THE ASSESSEE WAS NOT A DEALER IN FOREIGN EXCHANGE CONTRACTS AS SUCH. FOREIGN EXCHANGE CONTRACTS WERE ONLY INCIDENTAL TO THE ASSESSEE'S R EGULAR COURSE OF BUSINESS. THEREFORE, ALL THE ARGUMENTS R EGARDING WHETHER IT CONIES WITHIN THE EXPLN.2 IN OUR OPINIO N, IS NOT QUITE RELEVANT BECAUSE THE LOSS WAS NOT SUSTAINED IN SPECULATIVE TRANSACTIONS WHICH ARE IN THE NATURE O F THE BUSINESS OF THE ASSESSEE. 4.4 KEEPING IN VIEW THE ABOVE DISCUSSION, THE APPE LLANT CARRIED OUT, THE DERIVATIVE TRANSACTION DURING ITS COURSE OF BUSINESS AND IS NOT A DEALER IN FOREIGN EXCHANGE, THE PROVISIONS OF SECTION 43(5) ARE NOT RELEVANT IN APPELLANT'S CASE, THE ENTIRE TRANSACTION WAS CARRIED OUT TO RE DUCE ITS RISK OF FOREIGN CURRENCY EXPOSURE AND THE LOSS INC URRED IN SUCH PROCESS IS A BUSINESS LOSS AND THEREFORE ALLO WABLE TO THE APPELLANT. ACCORDINGLY, GROUND NO. 2 & 3 ARE ALLOWED'. 3. NOT ONLY THAT, LD.CIT(A) ALSO NOTICED THAT ASSES SEE HAS OFFERED GAIN OF RS.68,88,287/- IN AY.2008-09 AS 'BUSINESS INCOME ' AND IN AY.2007- 08, FOREIGN EXCHANGE LOSS OF RS.41,46,204/- WAS ACC EPTED AS 'BUSINESS LOSS' IN SCRUTINY ASSESSMENT. CONSIDERING THE FACT S AND ALSO THE PRINCIPLE OF CONSISTENCY, THE LD.CIT(A) ACCEPTED AS SESSEE'S CONTENTION THAT THIS TRANSACTION IS NOT A SPECULATIVE TRANSACT ION. IN ARRIVING AT THE DECISION, LD.CIT(A) ALSO CONSIDERED THE PROVISIONS OF SECTION 43(5) AND ALSO THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. BADRIDAS GAURIDU (P) LTD., [261 ITR 256]. THER EFORE, REVENUE IS AGGRIEVED. 4. AFTER CONSIDERING THE RIVAL CONTENTIONS AND THE ORDERS OF THE ITAT, IN AY.2009-10, WHEREIN SIMILAR ISSUE WAS ALSO CONSI DERED, WE FIND I.T.A. NO. 1932/HYD/2014 M/S. VIJAY TEXTILES LTD :- 6 -: OURSELVES IN AGREEMENT WITH THE LD.CIT(A). LD.CIT( A) NOT ONLY CONSIDERED THE FACTS OF THE CASE THAT ASSESSEE HAS ONLY ONE PU RCHASE AGAINST WHICH HEDGING TRANSACTION WAS UNDERTAKEN WHICH RESULTED I N LOSS OF $706,532 (US DOLLARS) CONVERTED TO RS.3,45,77,676/- ON A TRA NSACTION OF US $6 MILLION UNDERTAKEN THROUGH AXIZ BANK. THE TRANSACT ION OF FOREIGN EXCHANGE DERIVATIVES CARRIED OUT BY ASSESSEE IS CLO SELY CONNECTED TO ITS BUSINESS TRANSACTION AND WAS PRIMARILY FOR REDUCING THE RISK OF FOREIGN EXCHANGE FLUCTUATION. THE HEDGING IS EVIDENT IN TH E INFORMATION ON RECORD. 5. CONSIDERING THE FACTS OF THE CASE AND CASE LAW R ELIED UPON BY ASSESSEE BEFORE THE CIT(A), WE DO NOT SEE ANY REASO N TO INTERFERE WITH THE DETAILED ORDER OF CIT(A). NOTHING WAS BROUGHT ON R ECORD TO COUNTER THE FINDINGS OF CIT(A). IN VIEW OF THIS, WE UPHOLD THE ORDER OF CIT(A) AND DISMISS THE GROUNDS RAISED BY REVENUE. 6. IN THE RESULT, APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 17 TH APRIL, 2015 SD/- SD/- (ASHA VIJAYARAGHAVAN) (B. RAMA KOTAIAH) JUDICIAL MEMBER ACC OUNTANT MEMBER HYDERABAD, DATED 17 TH APRIL, 2015 TNMM I.T.A. NO. 1932/HYD/2014 M/S. VIJAY TEXTILES LTD :- 7 -: COPY TO : 1. DY. COMMISSIONER OF INCOME TAX, CIRCLE - 17( 2), 6 TH F LOOR, 'B' BLOCK, IT TOWERS, AC GUARDS, HYDERABAD. 2. M/S. VIJAY TEXTILES LTD., GROUND FLOOR, SURYA TO WERS, 104, SP ROAD, SECUNDERABAD. 3. CIT(APPEALS)-II, HYDERABAD 4. CIT-III, HYDERABAD 5. D.R. ITAT, HYDERABAD