ACIT, JODHPUR V. Shri Ram Prakash Singhal, JODHPUR

ITA 489/JODH/2013

• Counselvise Citation: 48923314 RSA 2013
• Duration Of Justice: 4 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-03-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 11-03-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 31-10-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N A JOSHI
• Keywords: Capital asset; Business income; Business expenditure; Speculation loss; Revenue expenditure
• Section: 43(5)

Judgement Text

IN THE INCOME TAX APPELALTE TRIBUNAL : JODHPUR BENC H : JODHPUR BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AND SHRI N.K. SAINI, ACCOUNTANT MEMBER. ITA NO. 489/JODH/2013 (A.Y. 2009-10) ACIT, CIRCLE-1, VS. SHRI RAM PRAKASH SINGHAL, JODHPUR. PROP. M/S. LALJI HANDICRAFTS, UMAID BHAWAN PALACE ROAD, JODHPUR. PAN NO. AFMPS 5229 Q (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI RAJENDRA JAIN DEPARTMENT BY : SHRI N.A. JOSHI- D.R. DATE OF HEARING : 11/03/2014. DATE OF PRONOUNCEMENT : 25/03/2014. O R D E R PER N.K. SAINI, A.M THIS IS AN APPEAL BY THE DEPARTMENT AGAINST THE OR DER DATED 30/08/2013 OF LD. CIT (A), JODHPUR. THE FOLLOWING GROUNDS HAVE BEEN RAISED IN THIS APPEAL: ON THE FACTS AND IN THE PRESENT CIRCUMSTANCES OF T HE CASE, THE LEARNED CIT(A), JODHPUR HAS ERRED IN:- 2 1. THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITIO N OF RS. 1,57,62,000/- ON ACCOUNT OF LOSS IN RESPECT OF FORWARD BOOKING O F FOREIGN EXCHANGE ACCEPTING ASSESSEES CLAIM THAT IT IS INCIDENTAL TO THE ASSESSEES BUSINESS AND WAS MADE IN THE REGULAR COURSE OF BUSI NESS. 2. THE LD. CIT(A) HAS ERRED IN APPLYING THE JUDICIA L CASE LAWS IGNORING THE FACTS OF THE CASE AS THE ASSESSEE IS DEALER IN HAND ICRAFTS ITEMS BUT FORWARD CONTRACT WAS IN RESPECT OF FOREIGN EXCHANGE AND THEREFORE, PROVISO (A) TO SECTION 43(5) WAS NOT APPLICABLE AND THEREFORE, LOSS ARISING ON CANCELLATION OF SUCH FORWARD CONTRACTS W HICH HAVE SETTLED WITHOUT ANY ACTUAL DELIVERY OF FOREIGN EXCHANGE WAS SPECULATIVE LOSS AND NOT BUSINESS LOSS. THAT THE APPELLANT CRAVES LEAVE TO ADD, AMEND OR A LTER THE GROUNDS OF APPEAL ON OR BEFORE THE DATE THE APPEAL IS FINALLY HEARD FOR DISPOSAL. 2 FROM THE ABOVE GROUNDS, IT IS CLEAR THAT THE ONLY GRIEVANCE OF THE DEPARTMENT RELATES TO THE DELETION OF ADDITION OF R S. 1,57,62,000/- ON ACCOUNT OF LOSS IN RESPECT OF FORWARD BOOKING OF FO REIGN EXCHANGE. 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE FILED THE RETURN OF INCOME ON 25/09/2009 DECLARING THE LOSS OF RS. 6,40 ,51,264/-. THE ASSESSEE IS PROPRIETOR OF M/S. LALJI HANDICRAFTS, E NGAGED IN MANUFACTURING AND EXPORT OF ARTISTIC HANDICRAFT. THE CASE WAS SE LECTED FOR SCRUTINY AND THE ASSESSING OFFICER DURING THE COURSE OF ASSESSME NT PROCEEDINGS, NOTICED THAT THE ASSESSEE HAD DEBITED OPTION LOSS O N US DOLLAR DERIVATIVES OF RS. 1,57,62,000/- IN THE PROFIT AND LOSS ACCOUNT . THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN THE NATURE OF THIS LO SS. THE ASSESSEE 3 EXPLAINED THAT THIS LOSS WAS INCURRED ON FORWARD BO OKING OF FOREIGN EXCHANGE AGAINST EXPORT CLAIMS RECEIVABLE AND IN TH IS TYPE OF TRANSACTION THE FORWARD CONTRACT IS SETTLED BY SQUARING UP THE DIFFERENCE OF BOOKING PRICE AND THE PRICE OF DOLLAR ON THAT DATE. IT WAS FURTHER EXPLAINED THAT THIS WAS A NORMAL BUSINESS LOSS AND HEDGING LOSS WH ICH WAS ALLOWABLE. THE ASSESSEE FURNISHED THE COPY OF AGREEMENT WITH T HE RBI, IN WHICH IT WAS MENTIONED THAT IT WAS NOT TREATED AS SPECULATIV E. THE ASSESSING OFFICER WAS NOT SATISFIED FROM THE REPLY OF THE ASS ESSEE AND WAS OF THE VIEW THAT THE TRANSACTIONS ENTERED BY THE ASSESSEE IN FORWARD BOOKING OF FOREIGN EXCHANGE WAS A SPECULATIVE TRANSACTION WHIC H COULD NOT BE ALLOWED FOR SET OFF AGAINST NORMAL BUSINESS INCOME FOR THE FOLLOWING REASONS:- 1. THERE IS A FORWARD BOOKING OF THE FOREIGN EXCHA NGE. 2. THE TRANSACTION IS ULTIMATELY SETTLED OTHERWISE THAN ACTUAL DELIVERY. 3. THE TRANSACTION IS NOT RELATED TO ANY RAW MATERI AL OR MERCHANDISE ENTERED INTO IN THE COURSE OF HIS MANUFACTURING OR MERCHANTING BUSINESS TO GUARD AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATIONS IN RESPECT OF HIS CONTRACT FOR ACTUAL DELIVERY OF GOOD S MANUFACTURED BY HIM OR MERCHANDISE SOLD BY HIM. 4. THE TRANSACTION DOES NOT FALL IN THE CATEGORY OF ANY OTHER EXCEPTION. THE ASSESSING OFFICER FURTHER OBSERVED THAT THE AS SESSEE WAS DEALING SHARES AND DERIVATIVES IN TRADING AND THAT THE DETAILS OF CONTRACT NOTES AND THE TRANSACTIONS REVEALED THAT MANY TRANS ACTIONS IN THE SHARE 4 TRADING HAD BEEN SQUARED UP ON THE SAME DAY, WHICH MEANS THE PURCHASE AND SALE OF PARTICULAR SCRIPT WAS DONE ON THE SAME DAY AND THE ACTUAL DELIVERY HAD NOT BEEN AFFECTED. THEREFORE, THE TRA NSACTIONS WERE SPECULATIVE TRANSACTIONS AS PER THE PROVISIONS OF S ECTION 43(5) OF THE I.T. ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT IN SHORT) AND THE PROFIT OR LOSS ON THOSE TRANSACTIONS WAS TO BE CONSIDERED SEP ARATELY. THE ASSESSING OFFICER SEGREGATED THE SPECULATIVE TRANSACTIONS WIT H NORMAL TRANSACTIONS AS UNDER:- TRANSACTION PROFIT LOSS NET PROFIT/LOSS SPECULATIVE 1405065 939951 465114 NON SPECU. 3572266 34109060 (30536794) TOTAL 4977331 35049011 (30071680) THE ASSESSING OFFICER CONCLUDED THAT THE TRANSACTI ON BY THE ASSESSEE IN FORWARD BOOKING OF FOREIGN EXCHANGE WAS A SPECULATIVE TRANSACTION, WHICH COULD NOT BE ALLOWED TO BE SET O FF AGAINST NORMAL BUSINESS INCOME. HE, THEREFORE, DISALLOWED THE SET OFF OF THE LOSS OF RS. 1,57,62,000/- AGAINST NORMAL BUSINESS INCOME BY HOLDING THAT THE SAME REPRESENTED SPECULATIVE LOSS. 4. BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTER TO THE LD. CIT(A) AND SUBMITTED AS UNDER:- 5 1. THE APPELLANT HAS CLAIMED BUSINESS LOSS OF RS. 1,57,62,000/- IN RESPECT OF FORWARD BOOKING OF FOREIGN EXCHANGE. IT IS FURTH ER SUBMITTED THAT THE ASSESSEE IS AN EXPORTER. IN ORDER TO AVOID LOSS ES ON FLUCTUATION OF EXCHANGE RATE, THE ASSESSEE BOOKED FOREIGN EXCHANGE IN THE FORWARD MARKET WITH THE BANK. THEREFORE, FOREIGN EXCHANGE C ONTRACTS BOOKED WERE INCIDENTAL TO THE ASSESSEE'S BUSINESS AND WAS MADE IN THE REGULAR COURSE OF BUSINESS. 2. THE ASSESSEE EXPLAINED BEFORE THE ID AO THAT THE ASSESSEE BOOKED DOLLARS AGAINST EXPORT VALUE WITH THE BANK FOR A FU TURE DATE WHEN THE SALE PROCEEDS FROM EXPORT IS ABOUT TO COME. IF THE SALE PROCEEDS IN FORM OF DOLLARS ARE NOT RECEIVED BY THAT DATE, THE BANK CHARGES DIFFERENCE OF THE BOOKED PRICE WITH THE PRICE OF DO LLAR ON THAT DATE AND DEBIT THE SAME TO THE ACCOUNT OF THE ASSESSEE. 3. THE PROVISION OF SEC. 43(5) OF THE IT ACT, 'SPECULATIVE TRANSACTION' HAS BEEN DEFINED TO MEAN A TRANSACTION IN WHICH A CONTR ACT FOR THE PURCHASE OR SALE OF A COMMODITY IS SETTLED OTHERWIS E THAN BY THE ACTUAL DELIVERY OR TRANSFER OF SUCH COMMODITY. HOWE VER, AS STATED ABOVE, THE ASSESSEE WAS NOT A DEALER IN FOREIGN EXC HANGE. THE FOREIGN EXCHANGE CONTRACTS BOOKED BY THE ASSESSEE WAS INCID ENTAL TO ITS REGULAR BUSINESS AND WAS DONE IN NORMAL COURSE OF B USINESS AND CAN BE BRANDED AS HEDGING CONTRACT. 4. HEDGING AND NEED FOR HEDGING: HEDGING IS DE FINED AS 'TO ENTER IN TO TRANSACTION THAT WILL PROTECT AGAINST LOSS THROUGH A COMPENSATORY PRICE MOVEMENT'. A HEDGING TRANSACTION IS ONE WHICH PROTECTS AN ASSETS OR LIABILITY AGAINST A FLUCTUATION IN THE FO REIGN EXCHANGE RATE. ANY PERSON HAVING AN EXPOSURE TO FOREIGN CURRENCY M AY RESORT TO HEDGING SO AS TO FIX HIS COST AND PROFITS AT A PART ICULAR LEVEL. FOR EXAMPLE, AN EXPORTER OF T-SHIRTS HAS THE FOLLO WING COST STRUCTURE: RS. SALE PRICE IN INDIA ......... 45 TOTAL COST .........40 PROFIT ............5 6 THE BUYER AGREES TO BUY THE T-SHIRT AT THE RATE OF USD 1 PER T-SHIRT. THE CURRENT PRICE OF USD IS RS. 46. THE SELLER PREFERS TO SELL THE T-SHIRT FOR US D 1 EACH, SINCE HE IS GOING TO MAKE RE 1 EXTRA BECAUSE FOR EACH DOLLAR HE WILL GET RS. 46. SALE PROCEEDS WILL BE RECEIVED THREE MONTHS F ROM TODAY. THE EXPORTER WISHES TO ENTER INTO HEDGING TRA NSACTION SO THAT FUTURE ADVERSE MOVEMENTS OF USD AGAINST INR WILL NOT AFFEC T HIS EARNING. 5. FORWARD CONTRACTS: A FORWARD CONTRACT IS NO THING BUT AN AGREEMENT BETWEEN AN ENTERPRISES AND A BANKER TO PURCHASE OR SELL A PARTICULAR QUANTITY OF A CURRENCY FOR A MUTUALLY AGREED PRICE AT A PARTICULAR FUTURE DATE. EXPORTERS ARE EXTENSIVELY USING FORWAR D CONTRACTS TO GET THEIR EXPORTS RECEIVABLES HEDGED AGAINST ADVERSE CU RRENCY MOVEMENTS. 6. IN THE ABOVE EXAMPLE, IF THE EXPORTER BOO KS A FORWARD CONTRACT FOR RS. 46 TO BE DELIVERED ON A SPECIFIED FUTURE DATE SYNCH RONIZING WITH THE DATE OF REALIZATION OF HIS EXPORT PROCEEDS, HIS RIS K IS NEUTRALIZED INASMUCH AS HE IS CERTAIN TO RECEIVE RS. 46 PER USD , IRRESPECTIVE OF THE SPOT PRICE ON THE DATE OF DELIVERY ON THE TRANSACTI ON. BUT IN CASE OF SPOT PRICE IS RS. 48 PER USD, THERE WILL BE AN OPPO RTUNITY LOSS OF RS. 2 ABOUT WHICH THE EXPORT IS CONSCIOUSLY TAKING THE RI SK. 7. THE SPECIAL BENCH OF ITAT KOLKATA IN THE C ASE OF SHREE CAPITAL SERVICES LTD. VS. ACIT, (121 ITD 498) HAS HELD THAT DERIVAT IVES WITH UNDERLYING AS SHARES AND SECURITIES SHOULD BE ALSO CONSIDERED AS COMMODITIES AS THE UNDERLYING SHARES AND SECURITIES AS SPECIFICA LLY INCLUDED WITHIN THE TERM COMMODITIES. ACCORDINGLY TRANSACTIONS I N SECURITY DERIVATIVES ARE SUBJECT TO THE PROVISIONS OF S. 43( 5). HOWEVER, A CURRENCY CANNOT BE TERMED AS A COMMODITY SO AS TO A TTRACT THE PROVISIONS OF S. 43(5).' 5. THE LEARNED CIT(A), AFTER CONSIDERING THE SUBMISSI ONS OF THE ASSESSEE, DELETED THE DISALLOWANCE MADE BY THE ASSE SSING OFFICER BY 7 MAKING THE OBSERVATIONS IN PARA 7.3 TO 7.10 OF THE IMPUGNED ORDER, WHICH ARE REPRODUCED VERBATIM AS UNDER:- 7.3. I HAVE CONSIDERED THE ORDER OF THE ASSESSING OFFICER AND SUBMISSION OF THE APPELLANT AND I FIND THAT THE ASSESSEE FIRM IS ENGAGED IN THE ACTIVITIES OF MANUFACTURING AND EXPORT OF HANDICRAF T ITEMS. THE APPELLANT HAS DEBITED OPTION LOSS ON US DOLLOR DERI VATIVES OF RS. 1,57,62,000/- IN THE P&L ACCOUNT AND CLAIMED IT AS LOSS ON FORWARD BOOKING OF US DOLLARS AGAINST EXPORT RECEIVABLE. HO WEVER, THE ASSESSING OFFICER CONSIDERED THIS AS A SPECULATIVE BUSINESS LOSS WHICH CANNOT BE SET OFF AGAINST NORMAL BUSINESS INCOME. H E THEREFORE, HELD THAT ASSESSEE'S TRANSACTION IN FORWARD BOOKING OF F OREIGN EXCHANGE FALLS UNDER THE DEFINITION U/S. 43(5) OF SPECULATIV E TRANSACTION AND ACCORDINGLY, HELD THAT AMOUNT OF RS. 1,57,62,000/- BEING SPECULATIVE LOSS CANNOT BE SET OFF AGAINST NORMAL BUSINESS INCO ME. 7.3.1. DURING THE COURSE OF THE APPELLATE PROCEEDIN G, IT IS SUBMITTED BY THE APPELLANT THAT ASSESSEE HAS CLAIMED BUSINESS LOSS O F RS. 1,57,62,000/- IN RESPECT OF FOREIGN EXCHANGE BOOKED IN THE COURSE OF EXPORT BUSINESS. IN ORDER TO AVOID LOSSES ON FLUCTUATION O F EXCHANGE RATE, THE ASSESSEE BOOKED FOREIGN EXCHANGE IN THE FORWARD MAR KET WITH THE BANK. THUS, IT WAS CONTENDED THAT FOREIGN EXCHANGE CONTRACTS BOOKED WERE INCIDENTAL TO THE ASSESSEE'S BUSINESS AND WAS MADE IN THE REGULAR COURSE OF BUSINESS. 7.4. I HAVE CAREFULLY EXAMINED THE ISSUE WITH REF ERENCE TO ASSESSMENT ORDER, SUBMISSION OF THE APPELLANT AND DECISION OF HON'BLE COURTS AND TRIBUNALS AVAILABLE IN THE MATTER. I FIND THAT APPE LLANT IS AN EXPORTER OF HANDICRAFT ITEMS AND TO COVER UP THE RISK ARISIN G OUT OF FLUCTUATION IN THE RATE OF DOLLAR, HE HAD ENTERED INTO A FORWAR D CONTRACT WITH HIS BANKER. 7.5. IT IS NOTICED THAT THE APPELLANT IS NOT ENGA GED IN THE TRANSACTIONS INVOLVING COMMODITIES AND SHARES WHICH IS DONE ELEC TRONICALLY. THE APPELLANT IS NOT A DEALER IN FOREIGN EXCHANGE. THE FOREIGN EXCHANGE CONTRACT BOOKED BY THE APPELLANT IN NORMAL COURSE O F BUSINESS IS A HEDGING CONTRACT. THE HON'BLE MUMBAI BENCH OF ITAT IN THE CASE OF DCIT VS. INTERGOLD (I) LTD REPORTED IN 124 TTJ 337 HAS HELD THAT THE PROFITS FROM CANCELLATION OF FORWARD EXCHANGE CONTR ACTS ARE BUSINESS 8 PROFIT AND NOT SPECULATIVE PROFIT. FURTHER THE HON' BLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. SURAJMULL NAGARMULL, R EPORTED IN 129 ITR 169 HAS HELD THAT WHERE IN THE NORMAL COURSE OF THE BUSINESS OF IMPORT AND EXPORT OF JUTE, THE ASSESSEE ENTERED INT O FOREIGN CONTRACT TO COVER UP THE LOSSES AND DIFFERENCE IN EXCHANGE V ALUATION, THE TRANSACTION IS NOT A SPECULATIVE TRANSACTION. 7.5.1. THE DECISION OF THE HON'BLE BOMBAY HIGH COUR T IN THE CASE OF CIT VS. BADRIDAS GAURIDU (P) LTD. REPORTED IN 261 ITR 256 ( BOM) IS ALSO RELEVANT. IN THIS CASE, ASSESSEE, AN EXPORTER OF CO TTON, HAD FORWARD CONTRACTS WITH BANKS IN RESPECT OF FOREIGN EXCHANGE . IT BOOKED FOREIGN EXCHANGE IN FORWARD MARKET TO HEDGE AGAINST LOSSES. IT WAS HELD THAT FAILURE OF ASSESSEE TO EXECUTE SOME EXPORT CONTRACT S FOR WHICH IT HAD TO PAY RS. 13.50 LAKHS WHICH WAS DEBITED TO P&L A/C WAS NOT SPECULATION LOSS BUT ALLOWABLE AS BUSINESS LOSS. 7.5.2. FURTHER, SIMILAR ISSUE WAS BEFORE THE HON'BL E GUJARAT HIGH COURT IN THE CASE OF CIT VS. FRIENDS AND FRIENDS SHIPPING P. LTD WHERE THE ASSESSEE WHO WAS AN EXPORTER HAD ENTERED INTO A FORWARD CONT RACT WITH THE BANKERS TO HEDGE AGAINST ANY LOSS ARISING OUT OF FL UCTUATION IN FOREIGN CURRENCY. THE HON'BLE GUJARAT HIGH COURT IN THE ORD ER DATED 23-8- 2011 OBSERVED THAT THE TRANSACTIONS IN FOREIGN EXCH ANGES WERE INCIDENTAL TO THE ASSESSEE'S REGULAR COURSE OF BUSI NESS AND THE LOSS WAS THUS NOT A SPECULATIVE LOSS U/S 43(5) BUT WAS I NCIDENTAL TO THE ASSESSEE'S BUSINESS AND ALLOWABLE AS SUCH. THUS, IT IS SEEN THAT DECISIONS OF THE CALCUTTA HI GH COURT IN THE CASE OF SURAJMULL NAGARMULL (SUPRA) AND DECISION OF HON'BLE BOMBAY IN THE CASE OF BADRIDAS GAURIDU (P) LTD (SUPRA) AS WELL AS ABOVE MENTIONED DECISION OF HON'BLE GUJRAT HIGH COURT ARE APPLICABL E ON THE FACTS OF THE CASE IN HAND. 7.5.3. IN THE CASE OF SUTLEJ COTTON MILLS VS. CIT R EPORTED IN 116 ITR THE HON'BLE SUPREME COURT HAS HELD THAT LOSS ON ACCOUNT OF REVALUATION OF FOREIGN CURRENCY IS A TRADING LOSS TO THE EXTENT IT DOES NOT RELATE TO ANY CAPITAL ASSET AND ACCORDINGLY ALLOWABLE. 7.5.4. IN THE CASE OF P. S. KAPUR REPORTED IN 15 DT R 181, IT WAS HELD THAT THE LOSS CLAIMED BY THE ASSESSEE IN DERIVATIVES TRANSAC TION IS ALLOWABLE AS A BUSINESS LOSS AS THE SAME IS NOT COVERED BY S. 43 (5). 9 7.5.5. IN THE CASE OF M/S. BALAR EXPORT VS. ACIT, A HMEDABAD 'B' BENCH ALSO, SIMILAR FINDING THAT SUCH TRANSACTIONS ARE NOT COVE RED U/S 43(5) HAS BEEN GIVEN. 7.6. THE ABOVE DISCUSSED CASES LAWS MAKE IT CLEAR THAT THE ASSESSING OFFICER'S DECISION TO TREAT BUSINESS LOSS OF RS. 1, 57,62,000/- AS SPECULATIVE LOSS IS NOT BASED ON TRUE APPRECIATION OF THE FACTS OF THE CASE. 7.7. APART FROM THE ABOVE, THE ISSUE BEFORE HAND CAN ALSO BE LOOKED INTO FROM ANOTHER INTERESTING ANGLE BY ASKING THE QUESTI ON - CAN FOREIGN CURRENCY OR ANY CURRENCY BE TERMED AS COMMODITY? IT ANSWER IS IN NEGATIVE, TRANSACTIONS INVOLVING FORWARD BOOKING O F FOREIGN EXCHANGE WOULD NOT ATTRACT S. 43(5) BECAUSE BY DEFINITION OF SPECULATIVE TRANSACTION THERE HAS TO BE PURCHASE OR SALE OF ANY COMMODITY INCLUDING STOCK AND SHARES. COMMODITY IS GENERALLY DEFINED AS 'ANY PRODUCT OR ARTICLE OF COMMERCE OR GOODS WHICH CAN B E TRADED- SOMETHING USEFUL OR VALUABLE, SOMETHING WHICH IS BO UGHT OR SOLD AND WHICH IS PRODUCED OR USED AS THE SUBJECT OF BARTER OR SALE. FORWARD CONTRACT (REGULATION) ACT, 1952 DEFINES GOODS AS 'E VERY KIND OF MOVABLE PROPERTY OTHER THAN THE ACTIONABLE CLAIMS, MONEY AND SECURITIES. THIS INTERESTING ISSUE HAS BEEN DEALT I N BY THE HON'BLE DELHI BENCH OF ITAT IN THE CASE OF MUNJAL SHOWA LTD. VS. DCIT (94 TTJ 227) WHEREIN IT HAS BEEN HELD AS UNDER- 'FOREIGN CURRENCY OR ANY CURRENCY IS NEITHER COMMOD ITY NOR SHARES. THE SALE OF GOODS ACT SPECIFICALLY EXCLUDES CASH FROM THE DEFINITION OF GOODS. BESIDES, NO PERSON OTHER T HAN AUTHORISED DEALERS AND MONEY CHANGERS ARE ALLOWED I N INDIA TO TRADE IN FOREIGN CURRENCY, MUCH LESS SPECULATE. SEC . 8 OF THE FOREIGN EXCHANGE REGULATION ACT, 1973, PROVIDES THA T EXCEPT WITH PRIOR GENERAL OR SPECIAL PERMISSION OF THE RBI , NO PERSON OTHER THAN AN AUTHORISED DEALER SHALL PURCHASE, ACQ UIRE, BORROW OR SELL FOREIGN CURRENCY. IN FACT, PRIOR TO THE LER M, RESIDENT IN INDIA WERE NOT EVEN PERMITTED TO CANCEL FORWARD CON TRACTS. THE PRESUMPTION OF ANY SPECULATIVE TRANSACTIONS, THEREF ORE, DIRECTLY REBUTTED IN VIEW OF THE LEGAL IMPOSSIBILITY AND IN VIEW OF THE FACT THAT FOREIGN CURRENCY WAS NEITHER COMMODITY NO R SHARES.' 10 7.7.1. THE SPECIAL BENCH OF ITAT, KOLKATA IN THE CA SE OF SHREE CAPITAL SERVICES LTD. VS ACIT (121 ITD 498) HAS HELD THAT D ERIVATIVES WITH UNDERLYING AS SHARES AND SECURITIES SHOULD ALSO BE CONSIDERED AS COMMODITIES AND THEREFORE TRANSACTIONS IN SECURITY DERIVATIVES ARE SUBJECT TO THE PROVISIONS OF SEC. 43(5). HOWEVER, I T WAS HELD THAT A CURRENCY CANNOT BE TERMED AS A COMMODITY SO AS TO A TTRACT THE PROVISIONS OF SEC.43(5). 7.7.2. THE ABOVE DECISIONS IMPART AN INTERESTING PE RSPECTIVE TO THE ENTIRE ISSUE. IF FOR THE SAKE OF ARGUMENT, IT IS HELD THAT FORWARD CONTRACT WITH RESPECT TO FOREIGN CURRENCY IS NOTHING BUT SPECULAT ION ON CURRENCY MOVEMENT, EVEN IN THAT CASE SEC.43(5) WOULD FAIL TO HIT SUCH TRANSACTIONS BECAUSE A CURRENCY CANNOT BE TERMED AS A COMMODITY OR GOODS. 7.7.3. THUS, SUMMING UP FROM ABOVE DISCUSSION, IT I S INFERRED THAT ASSESSEE BEING AN EXPORTER AND NOT A DEALER IN FOREIGN EXCHA NGE, IF ENTERS INTO FORWARD CONTRACT WITH RESPECT TO FOREIGN CURRENCY T O HEDGE AGAINST LOSSES ARISING OUT OF FLUCTUATION IN FOREIGN EXCHAN GE RATE FOR THE PURPOSE OF HIS EXPORT BUSINESS, SUCH TRANSACTIONS B EING INCIDENTAL TO HIS REGULAR BUSINESS ARE NORMAL BUSINESS TRANSACTIO NS AND NOT SPECULATIVE. THE PROFIT EARNED DURING THE PROCESS I S REAL, NORMAL AND REGULAR BUSINESS PROFIT AND THE LOSS IS SIMILARLY N ORMAL BUSINESS LOSS AND NOT SPECULATIVE LOSS. 7.8. WITHOUT PREJUDICE TO THE ABOVE, FORWARD BO OKING OF DOLLAR WITH BANK CANNOT BE HELD AS SPECULATION ON CURRENCY MOVEMENT IN TERMS OF SEC.43(5) AS THE SECTION APPLIES TO TRANSACTIONS IN COMMODITY INCLUDING STOCK AND SHARES AND CURRENCY IS NEITHER COMMODITY NOR SHARES. 7.9. IN VIEW OF ABOVE DISCUSSION, I AM OF THE CON SIDERED VIEW THAT ASSESSEE'S LOSS UNDER QUESTION IS NOT A SPECULATIVE LOSS U/S 43(5). SUCH A CONCLUSION IS BASED ON THE FINDINGS ALREADY DISCU SSED ABOVE AND CAN FURTHER BE SUMMARIZED AS UNDER:- A. THERE IS DISTINCT AND UNAMBIGUOUS CONNECTION BE TWEEN THE EXPORT BUSINESS AND FORWARD BOOKING OF FOREIGN CURRENCY BY THE APPELLANT. THE APPELLANT'S ACTION OF HAVING FORWARD CONTRACT W ITH BANKS TO HEDGE THE LOSS DUE TO FLUCTUATION IN FOREIGN EXCHAN GE COMES INTO PLAY 11 ONLY DURING THE PROCESS OF IMPLEMENTATION OF THE EX PORT CONTRACTS. THE LOSS/ PROFIT INCURRED AS A RESULT OF SUCH TRANS ACTIONS ARE NORMAL BUSINESS TRANSACTION CARRIED OUT BY THE APPELLANT D URING THE NORMAL AND REGULAR COURSE OF ASSESSEE'S EXPORT BUSINESS, A NY LOSS INCIDENTAL TO REGULAR COURSE OF BUSINESS CANNOT BE TERMED AS S PECULATIVE LOSS U/S 43(5) OF THE ACT. B. THE RESERVE BANK OF INDIA'S GUIDELINES ALLO W THE BANK TO ENTER INTO FORWARD FOREIGN EXCHANGE CONTRACT ONLY WHEN THE ASS ESSEE HAS VALID EXPORT CONTRACT TO EXECUTE. FROM THE ASSESSMENT REC ORD, IT IS NOTICED THAT IN ORDER TO START DERIVATIVE TRANSACTION FOR H EDGING OF CURRENCY AND INTEREST RATE EXPOSURES, THE ASSESSEE HAS EXECU TED AN AGREEMENT WITH HIS BANKER (PNB) WHICH HAS BEEN PRESCRIBED BY RBI. PARA VII OF THE SCHEDULE TO THE MASTER AGREEMENT READS AS UNDER :- '.....THIS AGREEMENT HAS BEEN, AND EACH TRANSACTION HEREUNDER HAS BEEN OR WILL BE AS THE CASE MAY BE, ENTERED INT O FOR THE PURPOSE OF MANAGING ITS BORROWING OR INVESTMENT, HE DGING ITS UNDERLYING ASSETS OR LIABILITIES OR THE CONNECTION WITH ITS LINE OF BUSINESS INCLUDING FINANCIAL INTERMEDIATION SERVICE S AND NOT FOR THE PURPOSE OF SPECULATION.' FROM THE AGREEMENT WITH BANKER WITH WHOM THE APPEL LANT HAS ENTERED INTO FORWARD FOREIGN EXCHANGE CONTRACT, IT IS OBVIOUS THAT SPECULATIVE TRANSACTION BY ASSESSEE IS NOT A LEGAL POSSIBILITY IN THE GIVEN SITUATION. C. ALSO, FOREIGN EXCHANGE REGULATION ACT, 19 73 DOES NOT ALLOW, EXCEPT WITH PRIOR PERMISSION OF THE RBI, ANYBODY OTHER THA N AN AUTHORIZED DEALER TO PURCHASE OR SELL FOREIGN CURRENCY. IN VIE W OF SUCH LEGAL PROVISIONS, PRESUMPTION OF ANY SPECULATIVE TRANSACT ION IN FOREIGN CURRENCY IS DISPELLED. D. ADMITTEDLY, THE ASSESSEE IS NOT A DEALER IN FOREIGN EXCHANGE BUT AN EXPORTER OF HANDICRAFT ITEMS. THE ASSESSING OFFICER HAS NOT GIVEN THIS FINDING THAT FOREIGN EXCHANGE CONTRACTS BOOKED ARE NOT INCIDENTAL TO ASSESSEE'S EXPORT BUSINESS. E. SINCE A CURRENCY CANNOT BE TERMED A S COMMODITY OR GOODS, SEC. 43(5) IS NOT ATTRACTED AS THE SAID SECTION DEFINES SPECULATIVE 12 TRANSACTION AS A TRANSACTION INVOLVING SALE OR PURC HASE OF ANY COMMODITY INCLUDING STOCKS AND SHARES. 7.10. IN VIEW OF THE ABOVE DISCUSSED FACTS AND DECI SIONS, IT IS HELD THAT BUSINESS LOSS OF RS. 1,57,62,000/- CLAIMED BY THE A PPELLANT IS NOT A SPECULATIVE LOSS AND THEREFORE, THE ASSESSING OFFIC ER IS DIRECTED TO ALLOW SET OFF OF THE SAME AGAINST NORMAL BUSINESS I NCOME. NOW THE DEPARTMENT IS IN APPEAL. 6 . LEARNED D.R. STRONGLY SUPPORTED THE ORDER OF THE ASSESSING OFFICER AND FURTHER SUBMITTED THAT THE TRANSACTIONS ENTERED BY THE ASSESSEE WITHOUT TAKING THE ACTUAL DELIVERY OF GOODS MANUFAC TURED THROUGH FUTURE PRICE FLUCTUATIONS WAS SPECULATIVE IN NATURE. THERE FORE, THE SPECULATIVE BUSINESS LOSS WAS NOT ALLOWABLE TO BE SET OFF AGAIN ST THE NORMAL BUSINESS INCOME AND THE ASSESSING OFFICER RIGHTLY MADE THE D ISALLOWANCE. THEREFORE, THE LD. CIT(A) WAS NOT JUSTIFIED IN DELE TING THE IMPUGNED ADDITION. 7 . IN HIS RIVAL SUBMISSIONS, LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW A ND STRONGLY SUPPORTED THE IMPUGNED ORDER PASSED BY THE LD. CIT( A). IT WAS FURTHER STATED THAT THIS ISSUE IS ALSO COVERED BY THE ORDER OF THIS BENCH OF THE TRIBUNAL IN THE CASE OF ACIT, CIRCLE-1, JODHPUR VS. M/S. SHREE NATH GUM & CHEMICALS IN I.T.A.NO. 355/JU/2013 ORDER DATED 26/11/2013, COPY OF 13 THE AFORESAID ORDER WAS ALSO FURNISHED, WHICH IS PL ACED ON RECORD. RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS:- 1) CIT VS. PANCHMAHAL STEEL LTD. REPORTED IN 215 TA XMAN 140 2) CIT VS. FRIENDS & FRIENDS SHIPPING (P) LTD. REPO TED IN (2012) 80 CCH 386 (GUJ. HIGH COURT) 3) CIT VS. BADRIDAS GAURIDU (P) LTD. REPORTED IN 26 1 ITR 256. 4) CIT VS. SOORAJ MULL NAGARMULL REORTED IN (1981) 129 CTR 8. 8 . WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PA RTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON RE CORD. ON A SIMILAR ISSUE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. BADRIDAS GAURIDU (P) LTD. REPORTED IN 261 ITR 256 HELD AS UNDER:- THE ASSESSEE WAS NOT A DEALER IN FOREIGN EXCHANGE. THE ASSESSEE WAS AN EXPORTER OF COTTON. IN ORDER TO HEDGE AGAIN ST LOSSES, THE ASSESSEE HAD BOOKED FOREIGN EXCHANGE IN THE FORWARD MARKET WITH THE BANK. HOWEVER, THE EXPORT CONTRACTS ENTERED IN TO 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. 9. SIMILARLY, THE HON'BLE GUJRAT HIGH COURT IN THE CASE OF CIT VS. FRIENDS & FRIENDS SHIPPING (P) LTD. (SUPRA) BY FOLLOWING THE AFORESAID REFERRED TO JUDGMENT OF HON'BLE BOMBAY HIGH COURT I N THE CASE OF CIT VS. BADRIDAS GAURIDU (P) LTD. (SUPRA) HELD AS UNDER:- 14 ISSUE IS COVERED BY DECISIONS OF BOMBAY HIGH COURT IN THE CASE OF BADRIDAS GAURIDA (P) LTD., WHERE IT WAS HELD THAT FOLLOWING DECISION OF CALCUTTA HIGH COURT IN THE CASE OF SOORAJMULL NAGARMULL HELD THAT EXPENDITURE WOULD NOT BE COVERED U/S 43(5) AS SPECULATIVE TRANSACTION. AS P ER CALCUTTA HIGH COURT, IN ONE CONTRACT, ASSESSEE HAD TO PAY TO BANK DIFFERENCE OF RS. 80,491/- WHICH WAS CLAIMED BY ASSESSEE AS REVENUE EXPENDITURE. FOREIG N EXCHANGES WERE ONLY INCIDENTAL TO ASSESSEES REGULAR COURSE OF BUSINESS AND LOSS WAS THUS NOT SPECULATIVE LOSS BUT INCIDENTAL TO ASSESSEES BUSIN ESS AND ALLOWABLE AS SUCH. THEREFORE, FOR PURPOSE OF HEDGING LOSS DUE TO FLUCT UATION IN FOREIGN EXCHANGE WHILE IMPLEMENTING EXPORT CONTRACTS, ASSESSEE HAD E NTERED INTO FORWARD CONTRACT WITH BANKS. IN SOME CASES, EXPORT COULD N OT BE EXECUTED AND ASSESSEE HAD TO PAY CERTAIN CHARGES TO BANK AND THEREBY INCU RRED CERTAIN EXPENSES. SAID EXPENSES CLAIMED BY ASSESSEE CLAIMED AS EXPENDITURE TOWARDS BUSINESS ARE PROPER AND SAME CANNOT BE STATED TO BE IN SPECULATI ON AS TO COVER U/S 43(5). IN THE PRESENT CASE ALSO, THE TRANSACTION INVOLVED WAS INCIDENTAL TO ASSESSEES REGULAR COURSE OF BUSINESS. THEREFORE, LOSS OUT OF THE SAID TRANSACTION WAS NOT SPECULATIVE LOSS, BUT INCIDENTA L TO ASSESSEES BUSINESS AND ALLOWABLE AS BUSINESS EXPENDITURE. WE, THEREFO RE, BY KEEPING IN VIEW THE RATIO LAID DOWN IN THE AFORESAID REFERRED TO CASES, ARE OF THE VIEW THAT NO INTERFERENCE IS CALLED FOR IN THE FIND INGS GIVEN BY THE LD. CIT(A). ACCORDINGLY, WE DO NOT SEE ANY MERIT IN TH IS APPEAL. 10 . IN THE RESULT, APPEAL OF THE DEPARTMENT IS DISMIS SED. (ORDER PRONOUNCED IN THE COURT ON 25 TH MARCH, 2014). SD/- SD/- (HARI OM MARATHA) (N.K.SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 25 TH MARCH, 2014. 15 VR/- COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE LD.CIT 4. THE CIT(A) 5. THE D.R ASSISTANT REGISTRAR, ITAT, JODHPUR.