M/s. LEO Edibles & Fats Ltd., Hyderabad V. DCIT, Cirlce-16(1), Hyderabad

ITA 396/HYD/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2905 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 2 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2013
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 14-03-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: Y V S T SAI
• Assessee Lawyers: T S AJAY
• Keywords: Business income; Business expenditure; Speculation loss; Speculative transactions
• Section: 143(3); 43(5); 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A : HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA.NO.396/HYD/2012 - ASSESSMENT YEAR 2008-2009 LEO EDIBLES & FATS LTD. HYDERABAD 500 082. PAN AAACL4123E VS. DCIT, CIRCLE 16 (1) HYDERABAD ( ASSESSEE ) (RESPONDENT) ASSESSEE BY: SHRI T.S. AJAY RESPONDENT BY: SHRI Y.V.S.T. SAI DATE OF HEARING: 18 .0 4 .2013 DATE OF PRONOUNCEMENT: 31. 0 5 .2013 ORDER PER SMT. ASHA VIJAYARAGHAVAN, J.M. THIS APPEAL FILED BY THE ASSESSEE AGAINST THE ORDE R OF THE CIT(A)- V, HYDERABAD DATED 02.01.2012 FOR THE A.Y. 2008-200 9. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY CARRYING ON THE BUSINESS OF TRADING IN EDIB LE OILS. FOR THE ASSESSMENT YEAR 2008-09, THE ASSESSEE FILED ITS RETURN OF INCOME ON 24.09.2008 DISCLOSING ITS TOTAL INCOME OF RS.3,34,74,746/-. THE ASSESSMENT WAS COMPLETED U/S 143(3) VIDE ORDER DATED 29.12.2010 DETERMINING TOTAL INCOM E AT RS.6,26,45,985/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER PROPOSED DISALLO WANCE OF RS.2,80,64,658/-(NET OF REINSTATEMENT LOSSES) BEING LOSS INCURRED ON ACCOUNT OF SETTLEMENT OF FOREIGN EXCHAN GE FORWARD COVER CONTRACTS, ENTERED INTO BY THE ASSESS EE COMPANY. THE ASSESSEE FILED DETAILED EXPLANATION TH AT THE 2 SAID LOSS IS ON ACCOUNT OF SETTLEMENT OF FORWARD CO NTRACTS, CARRIED-OUT TO HEDGE ITS LIABILITY TOWARDS IMPORT O F ITS STOCK- IN-TRADE VIZ. EDIBLE OILS. THE ASSESSEE EXPLAINED A S FOLLOWS : 'IN THE COURSE OF THE BUSINESS, THE COMPANY ENTERS INTO A CONTRACT FOR THE IMPORT OF VEGETABLE OIL FROM THE FOREIGN SUPPLIER. THE IMPORTED VEGETABLE OIL SUCH AS CRUDE PALM OIL, CRUDE PALM KERNEL OIL WHICH ARE SOURCED FROM C OUNTRIES SUCH AS MALAYSIA AND INDONESIA WILL TAKE ABOUT 6-7 DAYS TO REACH THE EASTERN DESTINATION PORT IN INDIA AND WHEREAS IN CASE OF SOYBEAN OIL, SUNFLOWER OIL IT WILL TAKEN ABOUT 40 - 45 DAYS AS THEY ARE SOURCED FROM SOUTH AMERICA. IN ACCORDANCE WITH THE PROPOSED PURCHASE, THE COMPA NY BOOKS A CURRENCY FORWARD CONTRACT WITH ITS BANKER IN ORDER TO SAFEGUARD THE COMPANY INTEREST FROM FLUCTUATION IN THE RATE OF FOREIGN CURRENCY AT A FUTURE DATE. A FORWARD CONTRACT IN THE FOREX MARKET IS A DEAL THAT LOCKS IN THE PRICE AT WHICH AN ENTITY CAN BUY OR SELL A CURRENCY AT A FUTURE DATE IS KNOWN AS CURRENCY FORWARD CONTRACT OR OUTRIGHT FORWARD CURRENCY TRANSACTION. IN CURRENCY FORWARD CONTRACTS, THE CONTRACT HOLDERS ARE OBLIGATED TO BU Y OR SELL THE CURRENCY AT A SPECIFIED PRICE AT A SPECIFIED QUANTITY AND AT A SPECIFIED FUTURE DATE. THE CONTRACTS CANNO T BE TRANSFERRED. THE CURRENCY FUTURES CONTRACTS ARE MAR KED-TO- MARKET DAILY, INVESTORS CAN EXIT THEIR OBLIGATION T O BUY OR SELL THE CURRENCY PRIOR TO THE CONTRACT'S DELIVERY DATE. THIS IS DONE BY CLOSING OUT THE POSITION. THE DIFFERENCE BETWEEN THE SPOT RATE ON THE CLOSURE DATE AND THE BOOKING R ATE WILL BE CONSIDERED PROFIT OR LOSS ON ACCOUNT OF FORWARD CONTRACT. IF THE SPOT RATE WOULD BE MORE THAN THE B OOKING RATE IT WILL BE CONSIDERED AS CURRENCY FORWARD CONT RACT 3 GAIN OR VICE VERSA. IN CASE O F THE COMPANY, IT ENTERS INTO A CURRENCY FORWARD CONTRACT TO MINIMIZE THE EXPOSURE FROM THE FLUCTUAT ION OF THE FOREIGN CURRENCY. THE COMPANY BOOKS THE LOSS OR GAIN DEPENDING ON THE SPOT RATE OF THE FOREIGN CURRENCY ON THE DATE OF DELIVERY. IN CASE THE SPOT RATE OF THE FOREIGN CURRENCY FALLS BELOW THE BOOKING RATE THE COMPANY W ILL CANCEL THE CURRENCY FORWARD CONTRACT BEFORE THE DUE DATE AND BOOK SITAS CURRENCY FORWARD CONTRACT CANCELLATI ON LOSS. TO CONCLUDE IT WILL BE OBSERVED THAT THE PRACTICE O F CURRENCY FORWARD CONTRACT IS VERY COMMON IN THE FIE LD OF COMMERCE AND TRADE TO SAFEGUARD THE INTEREST OF THE ENTITY FROM THE FLUCTUATION IN THE RATE OF FOREIGN CURRENCY AT A FUTURE DATE ESPECIALLY FOR THOSE WHO ARE INVOLVED I N FOREIGN TRADE TRANSACTION WHETHER IMPORT OR EXPORT OF MATERIAL, GOODS OR SERVICES'. 3. THE ASSESSEE ALSO FILED AN ADDITIONAL NOTE ON F ORWARD CONTRACT AND A DETAILED STATEMENT LISTING OUT THE I NVOICES FOR IMPORT OF RAW MATERIAL, THE RELEVANT FORWARD CONTRA CTS OF FOREIGN EXCHANGE ENTERED INTO BY THE COMPANY, THE D ETAILS OF CANCELLATION OF SUCH FORWARD CONTRACTS AND THE PROF IT OR LOSS INCURRED THEREON. THE ADDITIONAL NOTE ALSO STATED A S FOLLOWS: (I) A STATEMENT OF DETAILS OF FORWARD CONTRACTS IS ENCLOSED FOR YOUR READY REFERENCE. (II) OUTSTANDING AMOUNTS FOR IMPORT SUPPLIES ARE GREATER THAN OUTSTANDING FORWARD CONTRACT AMOUNTS ON ANY GIVEN DAY. (III) THE FORWARD CONTRACTS AMOUNTS WERE TAKEN IN LUMP SUM FOR OPERATIONAL CONVENIENCE. 4 4. ON THE BASIS OF THE ABOVE SAID FACTUAL DETAILS, THE ASSESSEE REITERATED ITS CLAIM THAT THE FOREX FORWAR D CONTRACTS WERE IN RESPECT OF UNDERLYING SUPPLY CONTRACTS / PU RCHASE BILLS AND HENCE IS A BUSINESS EXPENDITURE. THE ASSESSEE C OMPANY ALSO FILED CONFIRMATIONS FROM THE BANKERS THAT ALL THE TRANSACTIONS OF FORWARD CONTRACT WERE CARRIED OUT I N RESPECT OF UNDERLYING PURCHASE TRANSACTIONS OF THE ASSESSEE. 5. THE LEARNED ASSESSING OFFICER, HOWEVER, IGNORED THE SUBMISSIONS OF THE ASSESSEE AND HELD THAT THE FORWA RD CONTRACT ENTERED INTO BY THE COMPANY WERE ONLY FOR THE PURPOSE OF PURCHASE OF FOREIGN EXCHANGE ARE NOT AGAINST THE VA LUE OF INVOICES. HE HELD THAT THE FORWARD FOREX CONTRACTS ARE INDEPENDENT TRANSACTIONS HAVING NO CONNECTION TO TH E BUSINESS OF ASSESSEE AND HELD THAT THE ASSESSEE'S C ONTENTION THAT THE FORWARD CONTRACTS ENTERED INTO FOR THE PUR POSE OF TRADE AND IMPORT OF GOODS CANNOT ACCEPTED. CONSEQUENTLY, THE ASSESSING OFFICER CONCLUDED THAT ALL TRANSACTIO NS IN WHICH LOSS ARE BOOKED ARE OF THE NATURE OF SPECULATIVE TR ANSACTIONS AS DEFINED IN SEC 43(V) OF THE ACT AND THAT THEY DO NOT FALL UNDER THE CATEGORY OF EXCEPTIONS GIVEN IN THE PROVISO TO THE DEFINITION. 6. AGGRIEVED, THE ASSESSEE PREFERRED AN APPEAL BEF ORE THE LEARNED CIT(A) AND THE CIT(A) HELD THAT T HE ASSESSEE CLAIMS THAT EACH CONTRACT IS TAKEN FOR 6 DAYS TO 45 DAYS TO COV ER THE RISK OF FOREIGN EXCHANGE FLUCTUATION DURING THE PERIOD OF TR ANSIT, HOWEVER, I.E., IN THE CURRENT CASE, THE INVOICE IS D ATED 16.04.2007 AND THE SHIPPING HAS BEEN DONE FROM BELAWAN, INDONESIA TO CHENNAI, INDIA. FURTHER, THE CIT(A) OBSERVED THAT CONTRACT WAS EFFECTIVE FROM 5 TH JUNE 2006 I.E., NEARLY 11 MONTHS BEFORE THE ACTUAL SUPPLY INVOICE WAS MADE AND THE CONTRACT EXPIRED ON 30.03.2007 I.E., BEFORE THE 5 INVOICE DATE. HE, THEREFORE, CONCLUDED THAT IT IS N OT CLEAR AS TO HOW THE FORWARD CONTRACTS ARE RELATED TO THE INVOIC E INQUESTION. HE OBSERVED THAT A LOOK AT THE OTHER CONTRACTS AND INVOICES CLEARLY REVEALS THAT CONTRARY TO THE CLAIMS OF THE ASSESSEE, THE INVOICES DO NOT HAVE CORRELATION WITH THE FORWARD C ONTRACT FOR PURCHASE OF CURRENCY. HE, THEREFORE, HELD THAT THE CLAIM OF THE ASSESSEE THAT THE FORWARD CONTRACT ARE ENTERED INTO ONLY TO HEDGE THE FOREIGN EXCHANGE BILLS DURING THE PERIOD OF TRANSIT OF OIL IS NOT BORNE OUT BY THE DOCUMENTATION PROVIDED BY THE ASSESSEE. CURRENCY CONTRACTS ARE FOR 6 MONTHS OR MOR E AS HAS BEEN SHOWN ABOVE IN THE EXAMPLE AND NOT FOR 6 TO 45 DAYS AS CLAIMED BY THE ASSESSEE. 7. THE CIT (A) FURTHER HELD THAT THE ASSESSEE HAS GIVEN ITS EXPLANATION THAT THE FORWARD CONTRACTS ARE ONLY WIT H RESPECT TO PURCHASE. HOWEVER, AS PER THE DETAILS GIVEN BY THE ASSESSEE, A LARGE NUMBER OF CONTRACTS ARE SALE OF OILS AS WELL. IT WAS FURTHER NOTED BY THE CIT(A) THAT THE ASSESSEE DOES NOT HAVE STORAGE FACILITIES TO TAKE THE DELIVERY OF AND TO LATER ON SELL THE IMPORTED OIL AND THE ASSESSEE HAS NOT BEEN ABLE TO SHOW TRAN SACTION- WISE IMPORT OF OIL, ITS DELIVERY IN INDIA AND LATER ON FOR THE EXPORTS TO OTHER COUNTRIES OR SALE IN THE DOMESTIC MARKET. THE CIT(A) WAS OF THE OPINION THAT THERE WILL BE CONSIG NMENTS FOR WHICH DELIVERY HAS NOT BEEN TAKEN BY THE ASSESSEE B UT THE SAME HAS BEEN SOLD. THE CIT(A) OBSERVED THAT THE C ERTIFICATION OF THE ICLCI BANK IS VERY GENERAL IN NATURE. IT DOE S NOT AT ALL SPEAK OF CONTRACT WISE HEDGING AND DELIVERIES AND T HERE IS ABSOLUTELY NO CORRELATION BETWEEN THE INVOICES AND CONTRACTS AT ANY POINT OF TIME AND THE AMOUNT OF 'HEDGING' CONTR ACTS TAKEN. THE CIT(A) EXPLAINED THAT IN OTHER WORDS, DURING TH E YEAR, THE TOTAL CONTRACTS MAY BE OF A VALUE LESS THAN THAT OF THE TURNOVER' 6 BUT AT VARIOUS POINTS IN TIME THE CONTRACTS ARE MOR E THAN THE INVOICES. 8. THE CIT(A) CONCLUDED THAT THE CASE OF THE ASSESS EE DOES NOT FALL WITHIN THE PURVIEW OF A BUSINESS HEDGING T RANSACTION. RATHER, DUE TO THE ABOVE REASONS, IT FALLS WITHIN T HE PURVIEW OF SPECULATIVE TRANSACTION AS PER SECTION 43(5) OF THE ACT. ACCORDINGLY, THE LEARNED CIT(A) HELD THAT THE LOSS CLAIMED CANNOT BE ALLOWED TO BE DEDUCTED FROM THE BUSINESS INCOME OF THE ASSESSEE WHICH HAS BEEN RIGHTLY HELD BY THE ASSESSING OFFICER. 9. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESS EE PREFERRED AN APPEAL BEFORE TRIBUNAL. THE LEARNED DEPARTMENTAL RE PRESENTATIVE FILED THE FOLLOWING WRITTEN SUBMISSIONS. 1. THE ARGUMENT OF THE ASSESSEE THAT SECTION 43(5) IS NOT APPLICABLE TO TRANSACTIONS OF FORWARD CON TRACT S IN FOREIGN EXCHANGE (CROSS-CURRENCY) IS DEVOID OF MERIT. RELIANCE IS PLACED ON DECISION BOMBAY HIGH COURT IN THE CASE OF BHARAT R. RUIA (337 ITR 452), WHERE IN IT WAS HELD THAT 'THE EXCHANGE TRADED DERIVATIVE TRANSACTIONS CARRIED ON BY THE ASSESSEE ARE SPECULATIVE TRANSACTIONS COVERED UNDER SECTION 43 ( 5) OF THE ACT' . 2. THE ASSERTION THAT RBI WOULD NOT ALLOW SPECULATION IS BASELESS. RBI DOES NOT DIRECTLY MONITOR TRANSACTIONS IN EACH CASE. AS PER THE MASTE R CIRCULAR OF RBI ON THE SUBJECT, THE RESPONSIBILITY TO ENSURE THAT THERE IS UNDERLYING FOR SUCH TRANSACTIONS LIES WITH THE BANK WHICH IS BOOKING TH E 7 FORWARD CONTRACTS. COPIES OF CONTRACTS FILED BY THE ASSESSEE IN ITS PAPER BOOK CLEARLY SHOW THAT IN CAS E OF THE SAID TRANSACTIONS NO UNDERLYING IS REPORTED. 3. THE ONUS LIES ON THE ASSESSEE TO PROVE THAT THE FORWARD CONTRACTS WERE ENTERED INTO FOR RISK COVER OF UNDERLYING TRANSACTIONS AND THE ASSESSEE COULD NOT DISCHARGE THE ONUS AS EXPLAINED IN THEIR ORDERS IN DETAIL BY THE AO AND CIT(A). 4. AS CAN BE SEEN THERE IS NO CORRELATION BETWEEN THE INVOICES AND THE FORWARD CONTRACTS. IN FACT SOME OF THE TRANSACTIONS IN OIL ARE MERE HIGH SEA PURCHASES AND SALES WITHIN A SHORT SPAN OF 2 TO 3 DAYS. 5. SOME OF THE FORWARD CONTRACTS ARE IN THE NATURE OF DAY TRADING WITH NO RELEVANCE TO THE OIL PURCHASE AND SALE. THE CLEAR MOTIVE APPEARS TO MAKE MONEY OUT OF SPECULATIVE TRADING THROUGH CROSS CURRENCY CONTRACTS INSTEAD OF HEDGING EXISTING RISK IN OIL DEALS. 10. BEFORE US, LEARNED COUNSEL APPEARING ON BEHALF OF THE ASSESSEE SHRI T.S. AJAY RELIED ON THE FOLLOWING CASE LAWS. (I) DCIT, MUMBAI VS. INTERGOLD (I) LTD. (2009) 27 SOT 239 (MUM.) (II) CIT VS. BADRIDAS GAURIDU (P.) LTD. 261 ITR 25 6 (BOM.) (HC) (III) CIT V. SOORAJMULI NAGARMULI 129 ITR 169 (KOL .) (HC) 11. LEARNED COUNSEL SUBMITTED THAT IN ALL THE EARLI ER YEARS THE RETURN FILED BY THE ASSESSEE HAS BEEN ACCEPTED. THE LEARNE D COUNSEL EXPLAINED THAT THE FORWARD CONTRACTS WERE TAKEN ON ROLLING BA SIS AND THE RBI FORWARD COVER TAKEN IN ADVANCE BASED ON THE PERFORM ANCE. THE LEARNED 8 COUNSEL FOR THE ASSESSEE HAS ALSO POINTED OUT THAT UNDER SCHEDULE FOR THE YEAR ENDED 31 ST MARCH, 2008 WHILE ARRIVING AT THE GRAND TOTAL THE ASSESSEE HAD REDUCED THE SETTLEMENT INCOME AMOUNTIN G TO RS.197,25,000/- TREATING IT AS BUSINESS INCOME. HE NCE, IT WAS ARGUED BY THE LEARNED COUNSEL THAT THE ASSESSEE WAS NOT TR YING TO SAVE TAX AND THE TRANSACTION IS NOT SPECULATIVE. THE LEARNED COU NSEL ALSO FILED STATEMENT OF DETAILS OF FORWARD CONTRACTS ENTERED D URING THE YEAR AND UNDERLYING INVOICES FOR THE FINANCIAL YEAR 2007-200 8. THE LEARNED COUNSEL FILED SEPARATE STATEMENT OF DETAILS OF FORW ARD CONTRACTS CLOSED WITHIN THE WEEK DURING THE FINANCIAL YEAR 2007-2008 . THE PROFIT FROM THEM WAS RS.9,63,702/- AND SUBMITTED THAT IF AT ALL ANY AMOUNT HAS TO BE EXCLUDED THE CONTRACT CLOSED WITHIN A WEEK AMOUN TING TO RS.19,63,702/- CAN BE EXCLUDED. 12. THE LEARNED COUNSEL FOR THE ASSESSEE IN HIS REJ OINDER POINTED OUT THAT THE CASE VIZ., CIT VS. BHARAT RUIA (SUPRA) REL IED ON BY THE D.R. WAS NOT RELEVANT SINCE THE QUESTION INVOLVED IN THAT CA SE WAS, WHETHER THE TRANSACTION IN EXCHANGE TRADED FINANCIAL DERIVATIVE S ARE SPECULATIVE TRANSACTIONS AS DEFINED IN SECTION 43(5) OF THE ACT . THE LEARNED COUNSEL POINTED OUT THAT THE QUESTION R EFERRED IN THE CASE OF BHARAT RUIA (SUPRA) IS IN NO WAY SIMILAR TO THE CASE OF THE ASSESSEE. 13. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. ADMITTEDLY, IN THIS CASE, THE ASSESSEE IS N OT A DEALER IN FOREIGN EXCHANGE. THE ASSESSEE IS ENGAGED IN THE BUSINESS O F EDIBLE OILS. IN THE COURSE OF IMPORT OF VEGETABLE OIL FROM FOREIGN SUPP LIER, THE COMPANY ENTERED INTO A CONTRACT. IF THE ASSESSEE IN ACCORDA NCE WITH THE PROPOSED PURCHASE BOOKED A FOREIGN CURRENCY FORWARD CONTRACT WITH ITS BANKER IN ORDER TO SAFEGUARD THE COMPANYS INTEREST FROM LOSS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION THAT CONTRACT CANNOT F ALL UNDER THE PURVIEW OF SECTION 43(5) OF THE INCOME TAX ACT. AS PER SECT ION 43(5), SPECULATIVE TRANSACTION MEANS A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR 9 SALE OF COMMODITY SETTLED OTHERWISE THEREBY ACTUAL DELIVERY OR TRANSFER OF SUCH COMMODITY. IF AN ASSESSEE IN ORDER TO HEDGE AGAINST THE EXCHANGE FLUCTUATION LOSSES HAD BOOKED FOREIGN EXCH ANGE TRANSACTION IN THE FORWARD MARKET WITH THE BANK AND INCURRED ANY L OSS, THAT LOSS CANNOT BE CONSIDERED AS SPECULATIVE LOSS AND IT IS A BUSINESS LOSS. IT WAS HELD IN THE CASE OF CIT VS. BADRIDAS GAURIDU PV T. LTD. (2003) 261 ITR 256 (BOM.) (H.C.) BY THE HONBLE BOMBAY HIGH CO URT THAT ASSESSEE WAS NOT A DEALER IN FOREIGN EXCHANGE. THE ASSESSEE WAS AN EXPORTER OF COTTON. IN ORDER TO HEDGE AGAINST THE LOSSES, THE A SSESSEE HAD BOOKED FOREIGN EXCHANGE IN THE FORWARD MARKET WITH THE BAN K. HOWEVER, THE EXPORT CONTRACTS ENTERED INTO BY THE ASSESSEE FOR E XPORT OF COTTON IN SOME CASES FAILED. IN THE CIRCUMSTANCES, THE ASSESS EE WAS ENTITLED TO CLAIM DEDUCTION IN RESPECT OF PAYMENT MADE ON ACCOU NT OF CANCELLATION OF FORWARD BOOKING OF FOREIGN EXCHANGE WITH BANKS A S A BUSINESS LOSS. 14. FURTHER IN THE CASE OF CIT VS. SOORAJMULL NAGUR MULL (1981) 129 ITR 169 IT HAS BEEN HELD AS FOLLOWS : 7. HERE THERE IS NO FINDING THAT ENTERING INTO FOREIG N EXCHANGE CONTRACT WAS THE NATURE OF THE BUSINESS OF THE ASSESSEE. THIS WAS ONLY AN INCIDENTAL PART OF T HE BUSINESS OPERATION FOR THE EXPORT AND IMPORT OF THE GOODS BY THE ASSESSEE. THE ASSESSEE WAS NOT A DEALER IN FOREIGN EXCHANGE CONTRACTS AS SUCH. FOREI GN EXCHANGE CONTRACTS WERE ONLY INCIDENTAL TO THE ASSESSEE'S REGULAR COURSE OF BUSINESS. THEREFORE, A LL THE ARGUMENTS REGARDING WHETHER IT CONIES WITHIN TH E EXPLN. 2, IN OUR OPINION, IS NOT QUITE RELEVANT BEC AUSE THE LOSS WAS NOT SUSTAINED IN SPECULATIVE TRANSACTIONS WHICH ARE IN THE NATURE OF THE BUSINES S OF THE ASSESSEE. THE AAC HAD MADE A CATEGORICAL FINDING TO THIS EFFECT IN HIS ORDER WHICH HAS BEEN UPHELD BY THE APPELLATE TRIBUNAL AND THAT FINDING O F FACT HAS NOT BEEN IN ANY WAY CHALLENGED IN THE QUESTION REFERRED BEFORE US. LEARNED ADVOCATE FOR T HE REVENUE DREW OUR ATTENTION TO SECTION 56 OF THE CONTRACT ACT AND SUBMITTED IN AID OF HIS SUBMISSION THAT THERE WAS AN IMPLIED TERM THAT THE ASSESSEE MIGHT NOT BE ABLE TO PERFORM THE FULL EXTENT OF THE AMOUNT COVERED BY THE FOREIGN EXCHANGE CONTRACT. 10 HERE, IN THIS CASE, THE CONTRACT WAS FOR 1,00,000 A ND WHAT THE ASSESSEE PAID IN FULFILMENT OF THAT OBLIGA TION WHICH WAS AN IMPLIED TERM AT THE TIME OF ENTERING I NTO THE CONTRACT' DID NOT AMOUNT TO A BREACH OF THE CONTRACT. HE REFERRED US TO SECTION 56 OF THE CONTR ACT ACT AND THE DECISION OF THE SUPREME COURT IN THE CA SE OF NAIHATI JUTE MILLS LTD. V. KHYALIRAM JAGANNATH . HE SPECIALLY DREW OUR ATTENTION TO THE OBSERVATIONS APPEARING AT P. 825 (OF SCR) ONWARDS WHERE UNDOUBTEDLY THE QUESTION OF LIQUIDATED DAMAGES AROSE IN THE CASE OF NON-PERFORMANCE OF A BREACH OF CONTRACT. SECTION 56 OF THE CONTRACT ACT ITSELF PRO VIDES THAT FOR BARGAIN AND IN CERTAIN CONTINGENCIES OF NO N- PERFORMANCE LIQUIDATED DAMAGES MIGHT BE PROVIDED FOR IN THE CONTRACT, BUT THE LIQUIDATED DAMAGES PROCEED ON THE BASIS THAT THE CONTRACT HAS BEEN BREACHED BY THE CONDUCT OF THE PARTIES, I. E., THE RIGHTS OF THE PARTIES ARE ADJUSTED IN THE MANNER CONTEMPLATED BY THE PARTIES AT THE TIME OF BARGAIN. AFTER CONSIDERING SEVERAL OTHER DECISIONS THIS VIEW WAS EXPRESSED BY THIS COURT IN THE CASE OF CIT V. PIONEER TRADING CO. P. LTD. [1968] 70 ITR 347, WHER E THIS COURT HELD THAT A CLAIM BASED ON BREACH OF CONTRACT DID NOT COME WITHIN THE MEANING OF ' CONTR ACT SETTLED ' AS USED IN EXPLN. 2 OF S, 24(1) OF THE IN DIAN I.T. ACT, 1922. 'CONTRACT SETTLED' MEANT CONTRACT SETTLED BEFORE BREACH. AFTER BREACH OF CONTRACT, TH E CAUSE OF ACTION WAS NO LONGER BASED ON THE CONTRACT ITSELF BUT ON ITS BREACH. WHERE THE MONEY WHICH THE ASSESSEE RECEIVED WAS IN SETTLEMENT OF THE AMOUNT O F DAMAGES SUFFERED BY THE ASSESSEE BY REASON OF BREACH OF THE CONTRACT TO DELIVER, IT WAS HELD THAT THE RECEIPT WAS NOT A RECEIPT FROM A SPECULATIVE TRANSACTION AS DEFINED IN EXPLN. 2 AND THE MONEY RECEIVED WAS NOT LIABLE TO BE SET OFF AGAINST SPECULATION LOSS OF EARLIER YEARS. THIS VIEW HAS BE EN CONSISTENTLY FOLLOWED BY THIS COURT. REFERENCE MAY BE MADE TO THE DECISION IN THE CASE OF C1T V. RAMJEEVA N SARAWGEE & SONS [1977] 107 ITR 845, WHERE THIS COURT ALSO CONSIDERED THE DECISION OF THE SUPREME COURT IN THE CASE OF DAVENPORT & CO. P. LTD. V. CIT [1975] 100 ITR 715, ON WHICH RELIANCE WAS PLACED ON BEHALF OF THE REVENUE AND IT WAS DISTINGUISHED. WE ARE IN RESPECTFUL AGREEMENT WITH THE OBSERVATIONS O F MR. JUSTICE SEN IN THAT CASE AT P. 849 OF THE REPOR T IN SO FAR AS IT DISTINGUISHED THE DECISION OF THE SUPR EME COURT IN THE CASE OF DAVENPORT & CO. P. LTD. [1975] 100 ITR 715. WE MAY ALSO REFER TO THE DECISION OF T HIS 11 COURT IN THE CASE OF CIT V. ARUN GENERAL INDUSTRIES LTD. [1977] 110 ITR 286, WHERE ALL THESE PREVIOUS DECISIONS OF THIS COURT HAVE BEEN NOTED. EXCEPT THE MADRAS HIGH COURT IN THE CASE OF R. CHINNASWAMI CHETTIAR V. CIT [1974] 96 ITR 353, ALL OTHER HIGH COURTS HAVE TAKEN A SIMILAR VIEW. THE DECISION OF T HE SUPREME COURT IN THE CASE OF DAVENPORT & CO. P. LTD . [1975] 100 ITR 715 UPON WHICH RELIANCE WAS PLACED BY LEARNED ADVOCATE FOR THE REVENUE IS IN OUR OPINI ON NOT RELEVANT IN VIEW OF THE NATURE OF THE TRANSACTI ON WITH WHICH WE ARE DEALING. FURTHERMORE, IN VIEW OF THE CLEAR FINDING OF THE AAC AND THE TRIBUNAL, WE A RE OF THE OPINION THAT QUESTION NO. 1 MUST BE ANSWERED IN THE AFFIRMATIVE AND IN FAVOUR OF THE ASSESSEE. 15. IN VIEW OF THE ABOVE DISCUSSION, IN OUR OPINIO N, THE ASSESSING OFFICER HAS TO SEE THE FORWARD CONTRACT E NTERED BY THE ASSESSEE FOR COVERING RISK OF UNDERLYING TRANSACTIO N AND SUCH UNDERLYING TRANSACTION TO BE SEGREGATED AND LOSS ON THESE TRANSACTIONS TO BE CONSIDERED AS BUSINESS LOSSES. LOSS ON OTHER TRANSACTION WHICH ARE NOT UNDERLYING TRANSACTION HAS TO BE CONSIDERED AS SPECULATIVE TRANSACTIONS. THE ASSESSEE BEFORE US FILED A CHART SHOWING THE DETAILS OF SPECULATIVE TRANSACTION AT RS.19,63,702/-. THE ASSE SSING OFFICER IS DIRECTED TO EXCLUDE THESE CONTRACTS AND DECIDE ACCO RDINGLY. FOR THIS LIMITED PURPOSE, WE REMIT THE ISSUE BACK TO THE FIL E OF THE ASSESSING OFFICER AND TO DECIDE ACCORDINGLY. 15. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST MAY, 2013. SD/- SD/- (CHA NDRA POOJARI) ACCOUNTANT MEMBER ( ASHA VIJAYARAGHAVAN ) JUDICIAL MEMBER HYDERABAD, DATED 31 ST MAY, 2013 VBP/- 12 COPY TO 1. LEO EDIBLES & FATS LTD. FLAT NO. 203, DIAMOND HOUSE , BEHIND TOPAZ BUILDING, PUNJAGUTTA, HYDERABAD 500 082. PAN AAACL4123E 2. D CIT, CIRCLE 16 (1), HYDERABAD. 3. CIT(A) - V , HYDERABAD 4. CIT - IV , HYDERABAD 5. DR A BENCH, ITAT, HYDERABAD