M/s Sunshine Foods, Ludhiana V. Addl. CIT, Ludhiana

ITA 460/CHANDI/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 6850 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 4 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2009-2010
• Appeal Filed On: 02-05-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Speculation loss
• Section: 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA NO.460/CHD/2016 (ASSESSMENT YEAR : 2009-10) M/S SUNSHINE FOODS, VS. THE ADDL.CIT, B-XXXIII/324,G.T. ROAD(WEST), RANGE-VI, JALANDHAR BYE PASS, LUDHIANA. LUDHIANA. PAN: ABJFS6374D (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI ASHISH AGGARWAL, CA RESPONDENT BY : SMT.MEENAKSHI VOHRA, SR.DR DATE OF HEARING : 04.09.2017 DATE OF PRONOUNCEMENT : 21.09.2017 O R D E R PER ANNAPURNA GUPTA, A.M . : THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINS T THE ORDER OF LD.CIT(APPEALS)-3, LUDHIANA DATED 8.2. 2016 RELATING TO ASSESSMENT YEAR 2009-10. 2. AT THE OUTSET THE IT MAY BE STATED THAT THE APPE AL OF THE ASSESSEE WAS INITIALLY DISMISSED FOR NON-PROSEC UTION VIDE ORDER DATED 15.09.2016 BUT WAS LATER RECALLED ON A MISCELLANEOUS APPLICATION FILED BY THE ASSESSEE, VI DE ORDER DATED 15.07.2017 IN M.A.NO.106/CHD/2016. IN PURSU ANCE OF THE SAME THE CASE WAS FIXED FOR HEARING. 3. THE ONLY ISSUE IN THE PRESENT APPEAL PERTAINS TO DISALLOWANCE OF LOSS ON FOREIGN EXCHANGE FORWARD CO NTRACT 2 AMOUNTING TO RS.10,77,369/- TREATING THE SAME AS SPECULATIVE LOSS AND GROUNDS OF APPEAL RAISED BY TH E ASSESSEE READ AS UNDER: 1. THAT THE LEARNED CIT(A)-3 HAS ERRED IN CONFIRMI NG ACTION OF THE AO IN TREATING THE LOSS ON FOREIGN EXCHANGE FORWARD CONTRACT OF RS.10,77,369/- AS A SPECULATIVE LOSS IGNORING THE SUBMISSIONS OF THE APPELLANT. 2. THAT IN ANY CASE THE CIT(A)'S ORDER IS AGAINST T HE LAW AND FACTS OF THE CASE. 3. THE APPELLANT CRAVES LEAVE FOR PERMISSION TO AD D, AMEND OR ALTER ANY GROUND OF APPEAL AT THE TIME OF HEARING. 4. BRIEF FACTS RELEVANT TO THE ISSUE ARE THAT DURIN G ASSESSMENT PROCEEDINGS IT WAS NOTICED THAT THE ASSE SSEE HAD CLAIMED FORWARD CONTRACT CANCELLATION LOSS OF RS.10,77,369/-. IT WAS EXPLAINED BY THE ASSESSEE BE FORE THE ASSESSING OFFICER THAT SINCE THE ASSESSEE WAS IN BU SINESS OF EXPORT, THERE WAS VARIATION IN AMOUNT OF SALE BOOKE D AT THE TIME OF EXPORT AND THE AMOUNT REALIZED. IT WAS STAT ED THAT THERE WAS OVERALL PROFIT ON ACCOUNT OF EXCHANGE RAT E FLUCTUATION AMOUNTING TO RS.30,98,829/- AND THE AM OUNT OF RS.10,77,369 HAD BEEN DEBITED UNDER THE HEAD EX CHANGE RATE FLUCTUATION ACCOUNT. THE ASSESSEE EXPLAINED T HAT THE LOSS WAS INCURRED ON ACCOUNT OF CANCELLATION OF FORWARD CONTRACT OF US$ BOOKED BY THE ASSESSEE FOR SALE OF FOREIGN EXCHANGE AGAINST EXPORTS PROCEEDS RECEIVABLE BY THE ASSESSEE. THE COPY OF CORRESPONDENCE WITH BANK IN T HIS REGARD ALONG WITH COPY OF STATEMENT OF BANK WAS ENC LOSED FOR THE REFERENCE OF THE ASSESSING OFFICER. THE AS SESSEE STATED THAT THIS WAS NOT A SPECULATIVE TRANSACTION. THE 3 ASSESSING OFFICER HELD THAT SINCE THE ASSESSEE HAD ENTERED INTO FORWARD CONTRACT THROUGH BANKS BUT NOT THROUGH RECOGNIZED STOCK EXCHANGE, AS PER THE REQUIREMENTS OF SECTION 43 (5) (D) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT), THEREFORE, IT WAS DEEMED TO BE A SPECULATIVE TRANSACTION. THE FORWARD CONTRACT CANCELLATION LOSS OF RS.10,77,369/- WAS THEREFORE TREATED AS SPECULATIO N LOSS AND ADDED TO THE INCOME OF THE ASSESSEE. 5. THE MATTER WAS CARRIED IN APPEAL BEFORE THE LD.CIT(APPEALS) WHERE THE ASSESSEE CONTESTED THE DISALLOWANCE MADE STATING THAT THE ASSESSING OFFICE R HAD COMPLETELY MISUNDERSTOOD THE MODUS OPERANDI OF THE FOREIGN EXCHANGE TRANSACTION AND HAD WRONGLY TREATE D AND COMPARED THE FOREIGN EXCHANGE TRANSACTION DONE BY T HE ASSESSEE WITH THE FOREX DERIVATIVES. THE ASSESSEE STATED THAT WHILE FOREIGN EXCHANGE DERIVATIVES ARE DONE TH ROUGH A RECOGNIZED STOCK EXCHANGE WHICH IS MCX IN INDIA, TH E FOREIGN EXCHANGE FORWARD CONTRACTS ARE DONE THROUGH BANKS AUTHORIZED BY RBI AND SUCH CONTRACTS ARE NOT ALLOWE D TO BE ENTERED INTO UNLESS THEY ARE SUPPORTED BY ACTUAL IM PORT OR EXPORT TRANSACTION. THE LD.CIT(APPEALS) REJECTED T HE CONTENTIONS OF THE ASSESSEE AND UPHELD THE DISALLOW ANCE MADE HOLDING THAT THE CANCELLATION OF FORWARD CONTR ACTS BY THE ASSESSEE WAS MERELY ON THE BASIS OF TRENDS IN T HE FOREIGN EXCHANGE RATES WHICH ESTABLISHED THAT THE A SSESSEE WAS ENTERING INTO SPECULATIVE TRANSACTIONS WHICH WE RE INDEPENDENT FROM THE EXPORT BUSINESS OF THE ASSESSE E. THE 4 RELEVANT PARA 4 OF THE LD.CIT(APPEALS)S ORDER ARE AS UNDER: 4.. (I) IT IS NOTICED THAT THE FORWARD CONTRACTS WE RE ENTERED BY THE ASSESSEE FOR DURATION OF LESS THAN A MONTH I.E FOR 28 DAYS, 30DAYS. F '29 DAYS AND 29 DAYS ONLY. (II) THOUGH THE ASSESSEE CLAIMED THAT FORWARD CONTRACT S WERE ENTERED INTO BY IT TO HEDGE AGAINST ANY LOSS ON ACCO UNT OF FOREIGN EXCHANGE AT THE TIME OF RECEIVING ANY EXPOR T ORDER, HOWEVER, IT IS OBSERVED THAT ON 14.05.2008 THE ASSE SSEE HAS BOOKED A FORWARD CONTRACT OF 1,00,000 US $ EVEN THO UGH NO EXPORT SALES WERE MADE BY THE ASSESSEE DURING THE MO NTHS OF MAY 08 AND JUNE 08. THE FORWARD CONTRACTS HAVE BEE N BOOKED FOR LUMP SUM AMTS WITHOUT ANY CONNECTION WHATSOEVER WITH THE EXPORT SALES MADE. (III) THE FORWARD CONTRACTS WERE ALLEGEDLY ENTERED INTO BY THE APPELLANT TO HEDGE AGAINST THE LOSS OF FOREIGN EXCHAN GE ON EXPORT CONTRACTS RECEIVED BY THE APPELLANT. THE ASSE SSEE HAS LATER ON CANCELLED THESE CONTACTS WITHOUT ANY REASON JUST KEEPING IN VIEW THE FOREIGN EXCHANGE RATES. IT IS NOT THE CASE OF THE ASSESSEE THAT EXPORT COULD NOT BE EXECUTED OR E XPORT SALES ORDER WAS CANCELLED. THE CANCELLATION OF THE FORWARD CONTRACTS BY THE ASSESSES JUST ON THE BASIS OF TRENDS IN THE FOREI GN EXCHANGE RATES ESTABLISHES THAT THE APPELLANT WAS EN TERING INTO SPECULATIVE TRANSACTIONS WHICH WERE INDEPENDE NT OF 'THE EXPORT BUSINESS OF THE APPELLANT. .. THE APPELLANT HAS NEITHER CO RELATED THE AMOUNTS OF FORWARD CONTRACTS TAKEN WITH THE EXPORTS MADE NOR BROUGHT ON RECORD ANY EXPLANATION FOR CANCELLATION THESE CONTRACTS. THE CONTRACTS ENTERED FOR FLUCTUATION OF FOREIGN EXCHANGE ENTERED BY THE ASSESSMENT PROCEEDINGS ARE INDEPENDENT OF THE EXPORTS BEING MADE BY HIM. THE APPELLANT IS TAKING DECISION OF CANCELING THESE CON TRACTS KEEPING IN VIEW ONLY THE FOREIGN EXCHANGE RATE. DUE TO VOLATILE POSITION OF US $ THE APPELLANT HAS ENTERED INTO FORWARD CONTRACT AND LOSS INCURRED THEREON HAS BEEN RIGHTLY TREATED AS SPECULATION LOSS BY THE ASSESSIN G OFFICER. 5 6. AGGRIEVED BY THE SAME, THE ASSESSEE FILED PRESEN T APPEAL BEFORE US. THE LD. COUNSEL FOR ASSESSEE REI TERATED THE CONTENTIONS MADE BEFORE THE LOWER AUTHORITIES. THE LD. COUNSEL FOR ASSESSEE PRIMARILY RAISED TWO CONTENTIO NS; I) THAT THE LOSS ON ACCOUNT OF FOREIGN EXCHANGE WAS INCURRED IN THE COURSE OF CARRYING ON THE BUSINESS OF THE ASSESSEE SINCE THE FORWARD EXCHANGE CONTRACTS WERE ENTERED INTO TO HEDGE AGAINST ANY LOSS ON ACCO UNT OF FOREIGN EXCHANGE EARNED ON ACCOUNT OF EXPORTS; II) THAT THE ASSESSEE HAD EARNED OVERALL PROFIT ON ACCOUNT OF EXCHANGE RATE FLUCTUATION AMOUNTING TO RS.30,98,839/- AND HAVING ACCEPTED THE PROFIT EARNE D ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION AND TREA TED THE SAME AS NORMAL BUSINESS PROFIT, THERE WAS NO REASON TO HOLD ONLY THE LOSS ON ACCOUNT OF CANCELLATION OF FORWARD CONTRACT OF FOREIGN EXCHAN GE FLUCTUATION AS SPECULATIVE IN NATURE. 7. IN SUPPORT OF HIS CONTENTION THAT THE LOSS WAS I NCURRED ON ACCOUNT OF FORWARD CONTRACTS ENTERED INTO WITH T HE BANKS FOR SALE OF FOREIGN EXCHANGE AGAINST EXPORT PROFITS , THE LD. COUNSEL FOR ASSESSEE POINTED OUT THAT THE FACT THAT THE LOSS WAS INCURRED ON CANCELLATION OF FORWARD CONTRACT, H AS NOT BEEN DISPUTED BY THE LD.CIT(APPEALS) AND THE ONLY R EASON FOR HOLDING THE SAME AS SPECULATIVE AND NOT FOR THE PURPOSE OF BUSINESS WAS THAT THE DURATION OF THE FORWARD CO NTRACT WAS FOR LESS THAN A MONTH, THE FORWARD CONTRACTS WE RE NOT BACKED BY EXPORT SALES MADE DURING THE PERIOD THE 6 CONTRACTS WERE BOOKED AND THAT THE CONTRACTS WERE CANCELLED WITHOUT ANY REASON AND KEEPING IN VIEW TH E FOREIGN EXCHANGE RATES. THE LD. COUNSEL FOR ASSESS EE EXPLAINED THAT THE ASSESSEE WAS AN EXPORTER AND WAS REGULARLY ENTERING INTO THE FORWARD EXCHANGE CONTRA CTS TO HEDGE AGAINST ANY FLUCTUATION IN THE FOREIGN EXCHAN GE. THE LD. COUNSEL FOR ASSESSEE FURTHER EXPLAINED THAT THE FORWARD CONTRACTS WERE ENTERED INTO ON THE BASIS OF SALES ORDERS RECEIVED IN A PARTICULAR PERIOD AND WERE ENTERED IN TO FOR A SPECIFIED PERIOD. THUS, THE LD. COUNSEL FOR ASSESS EE STATED THAT ALL FORWARD EXCHANGE CONTRACTS WERE GENERALLY BACKED BY SALES ORDERS RECEIVED BY IT. THE LD. COUNSEL FO R ASSESSEE STATED THAT WHEN THE FOREIGN CURRENCY WAS NOT RECEI VED WITHIN SPECIFIED PERIOD OF CONTRACT IN LIEU OF THOS E SALES ORDERS THE FORWARD CONTRACT GOT CANCELED AUTOMATIC ALLY. THE LD COUNSEL FOR THE ASSESSEE PLACED BEFORE US A CHART GIVING DETAILS OF THE FORWARD CONTRACTS CANCELLED D URING THE YEAR AS UNDER: SUNSHINE FOODS DETAIL OF FORWARD CONTRACT CANCELLED DURING F.Y. 20 08-09 BOOKING DATE FORWARD CONTRACT NO. US DOLLARS BOOKED BOOKING RATE AMOUNT (RS.) DUE DATE 14/05/08 042P080178 100,000 42.60 4,260,000 30/06/08 12/08/08 042P080243 200,000 42.96 8,592,000 31/12/08 18/08/08 042P080257 200,000 43.73 8.746.000 30/01/09 24/12/08 042P080469 44,565 43.73 1.948,827 30/01/09 TOTAL 544,565 23,546,827 DOLLARS UTILISATION UTILISATION DATE DOLLARS CANCELLED CANCELLATION DATE CANCELLATION RATE CANCELLATION AMOUNT 64,554 24/06/08 35,446 09/07/08 43.16 19,938 155,435 10/12/08 44,565 24/12/08 43.73 34,315 44.565 05/12/08 155,435 27/01/09 48.85 795,140 7 44,565 27/01/09 48.85 227,976 264,554 280,011 1,077,369 8. THUS THE LD. COUNSEL FOR THE ASSESSEE EXPLAINED THAT THE FINDINGS OF THE LD.CIT(APPEALS) TO HOLD THE LOS S INCURRED BY THE ASSESSEE DURING THE YEAR ON ACCOUNT OF CANC ELLATION OF FORWARD CONTRACT OF FOREIGN EXCHANGE WAS SPECULA TIVE, WAS ON A TOTAL MIS-APPRECIATION OF THE FACTS. 9. FURTHER THE LD. COUNSEL FOR ASSESSEE ALSO STATED THAT DURING THE IMPUGNED YEAR IT HAD EARNED AN OVERALL P ROFIT ON ACCOUNT OF EXCHANGE RATE FLUCTUATION AMOUNTING TO RS.38,99,829/- WHICH INCLUDED THE IMPUGNED LOSSES O F RS.10,77,369/-. THE LD. COUNSEL FOR ASSESSEE POINT ED OUT THAT HAVING ACCEPTED THE PROFIT EARNED ON FOREIGN E XCHANGE AS BUSINESS OF THE ASSESSEE, THERE WAS NO REASON TO HOLD THE LOSS ON FORWARD CONTRACTS OF FOREIGN EXCHANGE AS SPECULATIVE. ALTERNATIVELY, THE LD. COUNSEL FOR AS SESSEE STATED THAT IF THE LOSS ON FOREIGN EXCHANGE IS SPEC ULATIVE IN NATURE, THE GAIN ON THE SAME SHOULD ALSO BE CHARACT ERIZED AS SPECULATIVE AND NET PROFIT EARNED BE SUBJECTED T O TAX WHICH THE ASSESSEE HAD IN ANY CASE OFFERED TO TAX A S SUCH AND THERE WAS NO RHYME OR REASON TO EXCLUDE ONLY TH E LOSS EARNED ON FOREIGN EXCHANGE FLUCTUATION AND DISALLOW ED THE SAME. 10. THE LD. DR, ON THE OTHER HAND, RELIED UPON THE ORDER OF THE LD.CIT(APPEALS) AND STATED THAT THE CLEAR-CU T FINDING OF THE LD.CIT(APPEALS) CATEGORICALLY POINTED OUT TH AT THE ASSESSEE HAD ENTERED INTO THESE CONTRACTS NOT FOR H EDGING 8 THE FOREIGN EXCHANGE RECEIVED IN THE COURSE OF ITS BUSINESS AND THE SAME HAD BEEN CANCELLED KEEPING IN VIEW THE FOREIGN EXCHANGE RATES AND, THEREFORE, HAD BEEN RIG HTLY HELD AS SPECULATIVE IN NATURE. 11. WE HAVE HEARD CONTENTIONS OF BOTH THE PARTIES. THE ISSUE BEFORE US PERTAINS TO TREATMENT OF THE LOSS O N FOREIGN EXCHANGE FORWARD CONTRACT AMOUNTING TO RS.10,77,369 /- WHICH THE ASSESSEE HAS CLAIMED AS A NORMAL BUSINES S LOSS, WHILE THE REVENUE HAS CHARACTERIZED THE SAME AS SPECULATIVE IN NATURE AND DISALLOWED SET OFF OF THE SAME AGAINST NORMAL BUSINESS OF THE ASSESSEE. 12. THIS ISSUE, WE FIND, WAS DEALT WITH BY THE HON BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. FRIENDS S HIPPING PVT. LTD., 217 TAXMANN.COM 267 AND ALSO IN THE CASE OF CIT VS. PANCHAMAHAL STEEL LTD., 215 TAXMANN.COM 140, HO LDING THAT SUCH LOSSES COULD NOT BE REGARDED AS SPECULATI VE U/S 43(5) OF THE INCOME TAX ACT,1961.THEREAFTER THE MUM BAI BENCH OF THE I.T.A.T. IN THE CASE OF LONDON STAR DI AMOND COMPANY (I) P. LTD. VS. DCIT IN ITA NO.6169/2012 DE ALT EXHAUSTIVELY WITH THE ISSUE. THE COORDINATE BENCH EXAMINED THE ISSUE IN THE LIGHT OF THE PROVISIONS OF SECTION 43(5) OF THE ACT WHICH DEFINES THE EXPRESSION SPEC ULATIVE TRANSACTION AND AFTER REFERRING TO VARIOUS HIGH CO URT JUDGMENTS IN THE CASE OF CIT VS SOORAJ MULL NAGARMULL,(1981) 129 ITR 169 (CAL) AND CIT VS. BADR IDAS GAURIDU PVT. LTD., 261 ITR 256, HELD THAT THE FORWA RD CONTRACTS ARE COMMODITIES. HOWEVER, AT THE SAME TI ME, IT 9 HELD THAT SINCE THE FORWARD CONTRACTS WERE INTEGRAL PART OR INCIDENTAL TO THE CORE BUSINESS OF EXPORT OF THE AS SESSEE, THE SAID WOULD CONSTITUTE HEDGING TRANSACTIONS AND NOT SPECULATIVE CONTRACTS. RELYING UPON THE GUJARAT HIG H COURT DECISIONS CITED ABOVE IT WAS ALSO HELD THAT IT WAS NOT THE REQUIREMENT THAT THERE MUST BE ONE-TO-ONE CORRELATI ON BETWEEN THE FORWARD CONTRACTS AND CORRESPONDING EXP ORT INVOICE. IT WAS HELD THAT SO LONG AS THE TOTAL FOR WARD CONTRACTS DID NOT EXCEED THE EXPORT OF THE ASSESSEE PLUS OUTSTANDING EXPORT RECEIVABLE, THE SAME WOULD CONST ITUTE HEDGING TRANSACTIONS AND FURTHER MAY NOT ALTER THE AFORESAID CONCLUSION AS LONG THE ASSESSEE HAD VALID AND ACCEPTABLE EXPLANATION FOR SUCH CANCELLATION. THE I.T.A.T. THEREAFTER WENT TO HOLD THAT THE LOSS ARISING ON CA NCELLATION OF MATURED FORWARD CONTRACTS WAS ALLOWABLE AS DEDUC TION AND IN CASE OF PRE-MATURE CANCELLATION OF FORWARD C ONTRACTS IT HELD THAT THE SAME WOULD BE ALLOWED AFTER CONSID ERING THE SPECIFIC EXPLANATION OF THE ASSESSEE IN THIS REGARD . THE RELEVANT FINDINGS OF THE ITAT AT PARA 34-36 OF ITS ORDER IS AS UNDER: 34.FROM THE ABOVE ANALYSIS AND SUMMARY OF JUDGMENTS , IT IS SAFELY CONCLUDED THAT THE IMPUGNED FCS ARE COMMODITIES . HOWEVER, CONSIDERING THE FACT THAT THESE FCS ARE INTEGRAL PART OR INCIDENTAL TO THE CORE BUSINESS OF EXPORT OF DIAMONDS OR THE OUTSTANDING RECEIVABLES OF EXPORT PROCEEDS, IN PRINCIPLE, THE IMPUGNED FCS CONSTITUTE HEDGING TRANSACTION AND NOT THE SPECULATIVE CONTRACTS. AS SUCH, THE BANKS DO NOT ENTERTAIN FCS OF SPECULATIVE NATURE WITH THE CUSTOMERS LIK E THE ASSESSEE, THE EXPORTER. AS SUCH, THE EXTENSION OF FCS, IN CASE OF NON-RECEIPT OF EXPORT PROCEEDS ON THE DUE DATES, I S NOT ALLOWED WITHOUT CANCELLING THE EXISTING FCS. HOWEVER, TH E ONUS IS ON THE ASSESSEE TO EXPLAIN SATISFACTORILY W HY THE ASSESSEE RESORTED TO PREMATURE CANCELLATION OF SOME FCS. FURTHER, IT IS NOT THE REQUIREMENT THAT THERE MUST BE 1:1 10 PRECISE CORRELATION BETWEEN FC AND THE CORRESPONDIN G EXPORT INVOICE. SO LONG AS THE TOTAL FCS DOES NOT EXCEED THE EXPO RTS OF THE YEAR PLUS OUTSTANDING EXPORT RECEIVABLE, THE FCS C AN CONSTITUTE HEDGING TRANSACTION. FURTHER ALSO, THE PRE MATURE CANCELLATION OF FCS MAY NOT ALTER THE ABOVE CONCLUSIO NS SO LONG AS THE ASSESSEE HAS VALID AND ACCEPTABLE EXPLANA TION FOR SUCH CANCELLATIONS. IT SHOULD NOT BE THE CASE, TO START WITH, FC CAN BE A HEDGING TRANSACTION BUT THE ENDING OF SUC H FC IS SPECULATION. IN THE LIGHT OF THIS SYNOPSIS OF OUR V IEWS IN THE MATTER, WE SHALL NOT DELIBERATE ON THE IMPUGNED LOSSES. 35. THE SUBDIVISIONS OF THE LOSS OF RS. 4,69,42,680/-: WE HAVE ALREADY TABULATED ABOVE THE THREE SUBDIVISIONS OF THE IMPUGNED LOSSES BASED ON THE TIMING OF THE CANCELLATION OF THE FCS. BROADLY THE LOSS IS DIVIDED INTO TWO TYPES AND THE ADJUDICATION OF THE EACH SUBDIVISION OF LOSS IS GIVEN AS UND ER: (A) LOSS ON CANCELLATION OF MATURED FCS AMOUNTING TO RS 4,14,88,805/- RELATES TO THE FCS CANCELLED OR TERMINATED ON OR AFTER THE DUE DATE. IN OTHER WORDS, THE FCS BOOKED AS INTEGRAL PART OF THE EXPORT INVOICES LIVED ITS BOOKING PERIOD IN FULL AND THEY WERE EITHER TERMINATED BY THE BANK ON OR AFTER DUE DATE OF MATURITY DATE OF THE CONTRACT AS THE ACTUAL REALIZ ATION WERE NOT RECEIVED IN TIME. THESE ARE NOT PREMATURE CANCELLA TIONS BY THE ASSESSEE AND THEREFORE, IN OUR CONSIDERED VIEW, T HE SAID LOSS OF RS 4,14,88,805/-, BEING RELATED TO THE FCS WHICH ARE INTEGRAL OR INCIDENTAL TO THE EXPORTS OF THE DIAMONDS, SHOULD BE ALLOWED AS BUSINESS LOSS IN VIEW OF THE BINDING HIGH COURT OR TRIBUNAL DECISIONS/JUDGMENTS IN THE CASE OF D KISHORE KUMAR AND CO (SUPRA), BADRIDAS GAUR IDU PVT LTD (SUPRA), SOORAJ MUILL MAGARMULL, (SUPRA) ETC. THUS, LOSS ARISING FROM CANCELLATION OF THE MATURED CONTRACTS I S ALLOWED IN FAVOUR OF THE ASSESSEE. THUS, THIS PART OF THE GR OUND OF THE ASSESSEE IS ALLOWED. (B) (I) LOSS ON CANCELLATION OF PRE-MATURED FCS IS THE OTHER SEGMENT OF LOSS RELATES TO THE FCS CANCELLED PRIOR TO THE DATE OF MATURITY . THE QUESTION TO BE ANSWERED BY THE ASSESSEE RELATES TO THE ACCEPTABILITY OF THE EXPLANATION FOR SUCH PREMATURE CANCELLATION OF THE FCS BEFORE THE DUE DATE OF MATURITY OF THE CONTRACT. IT IS A SETTLED ISSUE THAT TH E ASSESSEE HAS TO DISCHARGE THE ONUS ON WHY HE HAD TO RESORT T O PREMATURE CANCELLATION. IN THIS CASE, THE EXPLANATION O F THE ASSESSEE REVOLVES AROUND THE FACT THAT THE MATURITY O F DATE OF SOME OF SUCH PREMATURE CANCELLED FCS FELL DURING THE WEEK- END DAYS AND THEREFORE, THE ASSESSEE CANCELLED SUCH FCS THREE DAYS PRIOR TO THE DUE DATE. RELATED LOSS IS QUANTIFIED AT RS 42,18,940/-. IN OUR OPINION, THE EXPLAN ATION OF THE ASSESSEE IS ACCEPTABLE AND THE AO IS DIRECTED TO ALLOW THE CLAIM AND OF COURSE, AFTER DUE VERIFICATION OF TH E FACTUM OF WEEK-ENDS. THUS, THIS PART OF THE GROUND OF THE ASSESS EE IS ALLOWED AS ABOVE WITHOUT GOING INTO THE ALTERNATE ARG UMENTS RELATING TO DAMAGES. 11 (II) THE OTHER SHADE OF LOSS OF PREMATURE CANCELLATIO N OF FCS RELATES TO THE FCS CANCELLED PRIOR TO LONGER THAN THREE DAYS CONSTITUTES ANOTHER FRACTION OF THE LOSS AND THE ASSESSEES EXPLANATION IN THIS REGARD REVOLVES AROUND THE GENERAL EXPLANATION OF REDUCTION OF LOSSES. RELEVANT LOS S IS WORKED OUT AT RS 18,92,078/- . THIS SEGMENT OF LOSSES RELATES TO PREMATURE CANCELLATIONS OF THE FCS AND THE EXPLAN ATION OF THE ASSESSEE IS VERY GENERAL. AS SUCH, PREMATURE CANCELLATIONS SHOULD ALSO BE ALLOWED AS BUSINESS LOSS IN VIEW OF THE DECISIONS DISCUSSED IN THE PRECEDING PARAGRA PHS, SO LONG AS THE RELATED FCS ARE INTEGRAL PART OF THE EXPO RTS. HOWEVER, THERE IS SOMETHING CALLED FOR IS THE ASSESSEE S EXPLANATION AND ITS CREDIBILITY AND ACCEPTABILITY BY THE AO. IN OUR OPINION, THESE EXPLANATIONS WERE NOT EXAMINED BY THE LOWER AUTHORITIES OF THE REVENUE. ASSESSEE NEEDS TO A NSWER AS TO WHY IT WENT FOR PREMATURE TERMINATION AND THE ONUS IS ON THE ASSESSEE AS PER THE RATIO OF THE SC JUDGMENT IN THE CASE OF JOSEF JOHN (SUPRA). FURTHER, DURING THE PROCEE DINGS BEFORE US, ON THIS ISSUE, LD COUNSEL FOR THE ASSESSEE P UT FORWARDED VARIOUS NEW ARGUMENTS DESCRIBING THE IMPUG NED LOSS AS DAMAGES PAYABLE TO THE BANKS FOR BREACH OF CONTRACTS OR SETTLEMENT OF THE CONTRACTS. THESE ASPEC TS ARE NOT EMANATING FROM THE ORDERS OF THE LOWER AUTHORITIES. ON E NEEDS TO STUDY THE CORRESPONDENCE WITH THE BANKS AND THE R BI GUIDELINES ON THE ISSUE WHETHER SUCH PAYMENTS TO BA NK SHOULD BE TREATED AS DAMAGES FOR BREACH OF CONTRACT. ONE NEEDS TO EXAMINE WHO THE BANK TREATS THE SAME AND RELEVANT ACCOUNTING PRINCIPLES . IN THIS REGARD, LD COUNSEL ALSO FILED WRITTEN SUBMISSION TOO. IN PRINCIPLE, THIS PA RT OF THE LOSSES RELATING TO PREMATURE CANCELLATIONS OF FCS AMO UNTING TO RS 18,92,078/- SHOULD BE REMANDED TO THE FILE OF THE AO FOR WANT OF SPEAKING ORDER ON THIS ISSUE AFTER CONSIDER ING THE CITED JUDGMENTS LIKE SHANTILAL (P) LTD (1983) 144 ITR 57 (SC) AND OTHERS ON THIS ISSUE. AO IS DIRECTED TO DISA LLOW THIS LOSS IN THE ABSENCE OF SPECIFIC EXPLANATION, IF ANY. AS SUCH, IMPUGNED ORDER IS DEFICIENT ON THESE ASPECTS OF THE ISSUE. THUS, THIS PART OF THE GROUND IS ALLOWED PRO-TANTO. 36. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 13. IN THE PRESENT CASE IT IS AN UNDISPUTED FACT TH AT THE ASSESSEE IS AN EXPORTER AND THE IMPUGNED LOSS WAS I NCURRED ON CANCELLATION OF FOUR FORWARD CONTRACTS OF FOREIG N CURRENCY AMOUNTING IN ALL TO 5,44,565 US $ WHICH IN RUPEE TE RMS AMOUNTED TO RS.2,35,46,827/-.THE REASON FOR HOLDING THE SAID TRANSACTIONS AS SPECULATIVE BY THE REVENUE , W E FIND ARE AS UNDER: 12 1) THAT THEY WERE ENTERED INTO FOR DURATION OF LES S THAN A MONTH. 2) THAT THE FORWARD CONTRACTS WERE BOOKED FOR LUMP SUM AMOUNT WITHOUT ANY CONNECTION WITH THE EXPORT SALES MADE. 3) THAT THE SAID CONTRACTS WERE CANCELLED WITHOUT ANY REASON. 14. WE FIND THAT THE FACT THAT THE FORWARD CONTRACT S HAVE BEEN BOOKED FOR LUMP SUM WITHOUT ANY CORRELATION TO THE EXPORT SALES MADE HAS ALREADY BEEN HELD NOT TO BE A VALID REASON FOR HOLDING THE TRANSACTION SPECULATIVE BY T HE ITAT MUMBAI BENCH IN THE CASE OF LONDON STAR DIAMOND COMPANY (I) P. LTD. (SUPRA) AND THE GUJARAT HIGH CO URT IN THE CASE OF FRIENDS & FRIENDS SHIPPING (P) LTD.(SUP RA) AND PANCHMAHAL STEEL LTD.(SUPRA). THE ASSESSEE HAS ALL ALONG CONTENDED THAT THE FORWARD CONTRACTS WERE ENTERED T O HEDGE THE FOREIGN EXCHANGE RECEIVED AGAINST EXPORT PROCEE DS AND COPY OF CORRESPONDENCE WITH BANK ALONGWITH COPY OF STATEMENT OF BANK WAS ALSO FILED. THE REVENUE HAS NOT DISPUTED THE SAME. AS LONG AS IT IS NOT DISPUTED TH AT THE ASSESSEE WAS AN EXPORTER WHO ENTERED INTO FORWARD CONTRACTS TO HEDGE HIS FOREIGN CURRENCY RECEIVABLE ON ACCOUNT OF HIS EXPORT BUSINESS, THE TRANSACTION IS TO BE HELD TO BE IN CONNECTION WITH ITS BUSINESS AND NOT SPECULATIVE. 15. AS FOR THE FINDINGS OF THE LD.CIT(A) THAT THE C ONTRACT PERIOD WAS NEVER MORE THAN A MONTH, WHICH WAS BASED ON A 13 DETAIL FILED BY THE ASSESSEE BEFORE THE CIT(A) REPR ODUCED AT PARA 4 OF THE ORDER OF THE CIT(A), WE FIND THAT THE DETAIL NOW SUBMITTED BEFORE US IS CONTRADICTORY TO THE ABOVE FINDINGS. AS PER THE SAID DETAIL THE CONTRACTS WERE FOR A PER IOD EXCEEDING A MONTH AND WERE ALSO PARTLY UTILIZED BY THE ASSESSEE ON RECEIPT OF FOREIGN EXCHANGE DURING THE PENDENCY OF THE CONTRACT AND IT WAS ONLY VIS A VIS BALANCE A MOUNT THAT THE CONTRACT WAS CANCELLED JUST A FEW DAYS BEF ORE THE MATURITY OF THE CONTRACT. FURTHER WE FIND THAT THE ASSESSEE HAS FURNISHED NO REASON FOR THE PREMATURE CANCELLAT ION OF THE CONTRACTS. IN VIEW OF THE CONTRADICTORY FACTS R ELATING TO THE PERIOD OF THE CONTRACT FILED BEFORE US AND THAT BEFORE THE LD.CIT(A) WE CONSIDER IT FIT TO RESTORE THE MATTER TO THE CIT(A) TO DETERMINE THE CORRECT FACTS RELATING TO T HE ISSUE CONSIDERING THE DETAILS AND EVIDENCES FILED BY THE ASSESSEE AND ALSO TO SEEK EXPLANATION FOR THE PRE MATURE CANCELLATION OF THE CONTRACTS. WE DIRECT THAT THE I SSUE BE THEREAFTER DECIDED IN ACCORDANCE WITH LAW AFTER AFF ORDING THE ASSESSEE DUE OPPORTUNITY OF HEARING. 16. AS FOR THE CONTENTION OF THE LD.COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE HAD ALSO EARNED GAINS O N FOREIGN EXCHANGE FLUCTUATION AND THE IMPUGNED LOSS SHOULD BE SET OFF AGAINST THE SAME ,WE FIND NO MERIT IN TH IS ARGUMENT. ADMITTEDLY THE GAINS HAVE BEEN EARNED ON ACCOUNT OF FLUCTUATION IN FOREIGN EXCHANGE. IT WAS NOT THE CASE OF LD.COUNSEL FOR THE ASSESSEE THAT THE GAIN A LSO PERTAINED TO FORWARD CONTRACTS OF FOREIGN CURRENCY NOR WAS 14 THE SAME DEMONSTRATED EITHER BEFORE US OR THE LOWER AUTHORITIES. THEREFORE THERE CANNOT BE ANY PARITY B ETWEEN THE TWO SO AS TO ALLOW THE SAME TREATMENT TO BOTH. 17. IN THE RESULT, THE APPEAL OF THE ASSESSEE, THER EFORE, STANDS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (SANJAY GARG) ( ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 21 ST SEPTEMBER, 2017 *RATI* COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 4. THE CIT 5. THE DR ASSISTANT REGISTRAR, ITAT, CHANDIGARH 15