DCIT, CHENNAI V. Rajkumar Impex Pvt. Ltd., CHENNAI

ITA 518/CHNY/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 95952 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: D
• Assessment Year: 2009-2010
• Appeal Filed On: 28-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR U ANJANEYALU
• Assessee Lawyers: B RAMAKRISHNAN
• Keywords: Business income; Transactions in derivatives; Speculation loss; Capital receipt
• Section: 143(3); 43(5); 28

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL , D B ENCH, CHENNAI . , ' $ , % ' BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER ./ I.T.A.NO . 518/MDS/2014 ( / ASSESSMENT YEAR: 2009-10) DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE-V(3) 4 TH FLOOR, MAIN BUILDING CHENNAI-34. VS. M/S.RAJKUMAR IMPEX PVT.LTD. OLD NO.93 NEW NO.119, 4 TH FLOOR ST.MARYS ROAD, ABHIRAMAPURAM, CHENNAI-600 018. PAN: AAACR3577J ( /APPELLANT) ( /RESPONDENT) / APPELLANT BY : DR. U.ANJANEYALU, CIT /RESPONDENT BY : MR. B.RAMAKRISHNAN, C.A. /DATE OF HEARING : 23 RD JUNE, 2015 /DATE OF PRONOUNCEMENT : 26 TH AUGUST, 2015 / O R D E R PER CHALLA NAGENDRA PRASAD, JM: THIS APPEAL IS FILED BY THE REVENUE AGAINST THE OR DER OF THE COMMISSIONER OF INCOME TAX (APPEALS-V), CHENNAI DATED 22.11.2013 FOR THE ASSESSMENT YEAR 2009-10. THE ON LY ISSUE IN THE APPEAL OF THE REVENUE IS THAT COMMISSIONER O F INCOME TAX (APPEALS) ERRED IN HOLDING THAT FORWARD CONTRAC TS IN RESPECT OF FOREX TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH THE BANKS WILL NOT FALL UNDER THE DEFINITION O F SPECULATIVE TRANSACTION AND HOLDING THAT ASSESSEE IS ENTITLED T O CLAIM SUCH LOSS AS BUSINESS LOSS. 2 ITA NO.518/MDS/2014 2. COUNSEL FOR THE ASSESSEE SUBMITS THAT THE ISSUE IN APPEAL HAS BEEN DECIDED BY THE CO-ORDINATE BENCH I N VARIOUS CASES HOLDING THAT LOSS INCURRED ON ACCOUN T OF FORWARD CONTRACTS IS BUSINESS LOSS AND CONTRACTS EN TERED INTO BY THE ASSESSEE WITH THE BANKS TO HEDGE AGAINST AN Y LOSS ARISING DUE TO FLUCTUATION IN FOREIGN CURRENCY IS B USINESS LOSS AND SUCH TRANSACTIONS ARE NOT SPECULATIVE TRANSACTI ONS. COUNSEL FOR THE ASSESSEE PLACES RELIANCE ON THE FOL LOWING DECISIONS IN SUPPORT OF HIS CONTENTIONS:- 1) CIT VS.VISHINDAS HOLARAM [50 TAXMANN.COM 337(BOM )] 2) CIT VS.BADRIDAS GAURIDU P.LTD.[261 ITR 256 (BOM) ] 3) CIT VS.SOORAJ MULL NAGARMULL [129 ITR 169(CAL)] 4) CIT VS.PANCHMAHAL STEEL [215 TAXMANN 140 (GUJ)] 5) CIT VS.FRIENDS & FRIENDS SHIPPING P.LTD. IN TCA NO.251 OF 2010 DATED 23.08.2011 (GUJ) 6) COTTON BLOSSOMS (I) PVT.LTD. VS. ACIT IN ITA NO.2032/MDS/2912 DT.21.02.2013 7) MUNJAL SHOWA LTD. VS. DCIT [94 TTJ (DEL) 227] 8) D.KISHORE KUMAR & CO. VS.DCIT (2 SOT 769) 9) DCIT VS. INTERGOLD (I) LTD., (124 TTJ (MUM) 337) 10)RAJASHREE SUGARS & CHEMICALS VS. AXIS BANK LTD. IN APPEAL NOS.1926 & 1927 OF 2008 DT.14.10.200 8 11) IVF ADVISORS P.LTD. VS.ACIT IN ITA NO.4798/MUM/ 2012 3 ITA NO.518/MDS/2014 DT.13.02.2015 12) SCM GARMENTS P.LTD. VS. DCIT IN ITA NO. 1645/MDS/2013 DT. 27.02.2015 13) S.P.APPARELS LTD. VS DCIT IN ITA NO.1327/MDS/20 14 DT. 17.04.2015 14) DCIT VS. AVT MC COMIC INGREDIENTS LTD. IN ITA N O. 2170/MDS/2013 3. DEPARTMENTAL REPRESENTATIVE STRONGLY SUPPORTS TH E ORDER OF ASSESSING OFFICER AND PLACES RELIANCE ON THE GROUNDS OF APPEAL. 4. HEARD BOTH SIDES. PERUSED ORDERS OF LOWER AUTHOR ITIES AND THE DECISIONS RELIED ON. BRIEF FACTS ARE THAT A SSESSEE FILED RETURN OF INCOME ON 24.09.2009 DECLARING INCOME OF ` 8,79,68,458/-. ASSESSMENT WAS COMPLETED UNDER SECTI ON 143(3) OF THE ACT DETERMINING TOTAL INCOME AT ` 55,64,40,120/-. WHILE COMPLETING THE ASSESSMENT ASS ESSING OFFICER DISALLOWED THE CLAIM OF LOSS OF ` 46,82,32,979/- ON ACCOUNT OF FOREX LOSS HEDGING CONTENDING THAT INC OME OF LOSS FROM FORWARD CONTRACTS ENTERED INTO BY THE ASS ESSEE IS LOSS INCURRED IN SPECULATION BUSINESS, THEREFORE HE DID NOT 4 ITA NO.518/MDS/2014 ALLOW SET OFF OF SUCH LOSS AGAINST BUSINESS INCOME BUT WAS ALLOWED TO BE CARRIED FORWARD FOR SET OFF AS PER SE CTION 73 OF THE ACT. THE ASSESSING OFFICER OBSERVED IN THE ASSE SSMENT ORDER AS UNDER:- 4.7.2 HAVING REGARD TO THE FACT THAT ASSESSEE HAS CANCELLED 96% OF FORWARD CONTRACTS ENTERED INTO BY THE ASSESSEE AND THE DISCUSSION IN PARA 4.7.1. ABOVE, I HOLD THAT THE LOSS OF ` 46,82,32,979/- ON ACCOUNT OF FOREX LOSS HEDGING IS A LOSS INCURRED IN SPECULATION BUSINESS AND THE SAME SHALL NOT BE ALLOWED TO BE SET OFF AGAINST BUSINESS INCOME. THE LOSS OF ` 46,82,32,979/- ON ACCOUNT OF FOREX LOSS HEDGING HAVING BEEN HELD TO BE INCURRED IN A SPECULATION BUSINESS, SHALL BE ALLOWED TO BE CARRIED FORWARD AND SET OFF AS PER PROVISIONS OF SECTION 73. 5. ON APPEAL, COMMISSIONER OF INCOME TAX (APPEALS) CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND CON TENTIONS OF THE ASSESSING OFFICER AND FOLLOWING THE DECISION OF CALCUTTA HIGH COURT IN THE CASE OF CIT VS. SOORAJM ULL NAGARMULL (129 ITR 169), BOMBAY HIGH COURT IN THE C ASE OF CIT VS.BADRIDAS GAURIDU P.LTD. (261 ITR 256) AND T HE DECISION OF CO-ORDINATE BENCH IN THE CASE OF COTTON BLOSSOMS IN ITA NO.2032/MDS/2012 DATED 21.2.2013 HELD THAT V ARIOUS CONTRACTS ENTERED INTO BY THE ASSESSEE WILL NOT FAL L UNDER THE DEFINITION OF SPECULATIVE TRANSACTION AND ASSESSEE IS ENTITLED 5 ITA NO.518/MDS/2014 TO CLAIM DEDUCTION AS THE LOSS AS BUSINESS LOSS. WE FIND THAT RECENTLY THE CO-ORDINATE BENCH HAS DECIDED SIMILAR ISSUE IN THE CASE OF M/S. MAJESTIC EXPORTS IN ITA NO.1336 & 3072/MDS/2014 DATED 24.7.2015 WHEREIN SIMILAR VIEW HAS BEEN TAKEN BY THE CO-ORDINATE BENCH OBSERVING AS UN DER:- 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORT OF HOSIERY GARMENTS TO VARIOUS COUNTRIES AND RECEIVES DOLLARS OR EUROS. PAYMENTS FROM FOREIGN BUYERS IN FOREIGN CURRENCIES ARE RECEIVED THROUGH THE STATE BANK OF INDIA. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE ENTERED INTO MANY FOREX DERIVATIVE CONTRACTS INCLUDING SIX STRUCTURED CONTRACTS. THESE ARE ST ATED TO BE CALLED AS EXOTIC CROSS CURRENCY OPTION CONTRACTS. IN RESPECT OF ONE OF THE STRUCTURED CONTRACTS WITH STATE BANK OF INDIA ON VARIOUS DAT ES, THE ASSESSEE INCURRED HUGE LOSSES TO THE EXTENT OF ` 4,30,44,915/- AND THE ASSESSEE CLAIMED THE SAID LOS S AS BUSINESS LOSS . AS PER THE ASSESSEE TRADING IN FUTURES AND OPTIONS IS NO LONGER SPECULATIVE TRANSACTIONS AS PER PROVISO (D) TO SEC.43(5) INSERT ED BY THE FINANCE ACT, 2005 W.E.F. 01.04.2006. HOWEVER, THE ASSESSING OFFICER OBSERVED THAT LOSS INCURRED OUT OF TRADING IN FUTURES AND DERIVATIVES CONTRACT COULD NOT BE CONSIDERED AS BUSINESS LOSS AND IT IS TO BE CONSIDERED AS SPECULATIVE TRANSACTI ONS AND DISTINCT FROM ASSESSEES BUSINESS AND IT IS A SPECULATIVE BUSINESS OF THE ASSESSEE. ACCORDINGLY , THE ASSESSING OFFICER TREATED THE SPECULATION LOSS NOT ALLOWABLE TO SET OFF AGAINST BUSINESS INCOME OF TH E ASSESSEE. AGAINST THIS, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS). THE COMMISSIONER OF INCOME TAX (APPEALS) CONFIRMED THE VIEW OF THE 6 ITA NO.518/MDS/2014 ASSESSING OFFICER. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 4. THE LD. AUTHORISED REPRESENTATIVE FOR ASSESSEE SUBMITTED THAT DERIVATIVES HAD BEEN EXCLUDED FROM THE DEFINITION OF SPECULATIVE BUSINESS U/S.43( 5) BY SUB-CLAUSE (D) TO THE PROVISION INSERTED WITH EFFEC T FROM 01.04.2006. FURTHER, HE SUBMITTED THAT EXPLANATION TO SEC.73 WAS INTRODUCED TO PREVENT COMPANIES FROM TRADING IN THEIR OWN GROUP SHARES AND SHOWING LOSSES TO BE SET OFF AGAINST BUSINESS PROFIT. THE LEGISLATURE DECIDED TO EXEMPT THE DERIVATIVES FROM THE PURVIEW OF SPECULATIVE TRANSACTIONS ONLY AFTER CONFIRMING THAT THERE WAS SUFFICIENT TRANSPARENCY IN THE TRANSACTIONS I.E. O NLY TRADING IN DERIVATIVES CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE. HE SUBMITTED THAT FOREIGN CURRENCY OR ANY CURRENCY IS NEITHER COMMODITY NOR SHARES. THE SALE OF GOODS ACT, SPECIFICALLY EXCLUDES CASH FROM THE DEFINITION OF GOODS. BESIDES, NO PERSON OTHER THAN AUTHORIZED DEALERS AND MONEY CHANGERS ARE ALLOWED IN INDIA TO TRADE IN FOREIGN CURRENCY, MUCH LESS SPECULATE. SECTION 8 OF THE FOREIGN EXCHANGE REGULATIONS ACT, 1973, PROVIDES THAT EXCEPT WITH PRIOR GENERAL OR SPECIAL PERMISSION OF THE RBI, NO PERSON OTHER THAN AN AUTHORIZED DEALER SHAL L PURCHASE, ACQUIRE, BORROW OR SELL FOREIGN CURRENCY. FURTHER HE SUBMITTED THAT IN THE NORMAL COURSE OF BUSINESS OF IMPORT AND EXPORT, THE ASSESSEE ENTERED INTO FOREIGN EXCHANGE CONTRACT TO COVER UP THE LOSS ES AND DIFFERENCES IN EXCHANGE VALUATION, THE TRANSACTION IS NOT A SPECULATIVE TRANSACTION. FURT HER, THE LD. AUTHORISED REPRESENTATIVE FOR ASSESSEE FURTHER CONTENTED THAT THE ASSESSEE IS NOT A DEALER IN FOREIGN EXCHANGE. FOR THE PURPOSE OF HEDGING THE LOSS DUE TO FLUCTUATION IN FOREIGN EXCHANGE WHILE IMPLEMENTING THE EXPORT CONTRACTS, THE ASSESSEE HAD ENTERED INTO FORWARD CONTRACT WITH THE BANKS. IN SOME CASES, THE EXPORT COULD NOT BE EXECUTED AND THE ASSESSEE HAD TO PAY CERTAIN EXPENSES. THESE EXPENSES THE ASSESSEE CLAIMED BY WAY OF EXPENDITURE TOWARDS BUSINESS AND THE TRANSACTION 7 ITA NO.518/MDS/2014 CAN BE STATED TO BE IN SPECULATION AS TO COVER UNDE R SUB-SECTION (5) OF SECTION 43 OF THE ACT. 5. THE LD. AUTHORISED REPRESENTATIVE FOR ASSESSEE RELIED ON THE ORDER OF THE CO-ORDINATE BENCH IN THE CASE OF M/S. COTTON BLOSSOM (INDIA) P. LTD, IN ITA NO.2032/MDS/2012, DATED 21 ST FEBRUARY, 2013 WHEREIN IT WAS HELD THAT THE ASSESSEE IS AN EXPORTER OF HOSIERY GARMENTS. THERE IS NO DISPUTE THAT THE ASSESSEE IS NOT A DEAL ER IN FOREIGN EXCHANGE. THE ASSESSEES FOREX TRANSACTION S ONLY IN THE COURSE OF ITS BUSINESS AND NOT AS A SEP ARATE BUSINESS AS OBSERVED BY THE ASSESSING OFFICER BECAU SE THE ASSESSEE IS NOT A DEALER IN FOREIGN EXCHANGE. 5.1 THE LD. AUTHORISED REPRESENTATIVE FOR ASSESSEE RELIED ON THE ORDER OF THE CO-ORDINATE BENCH, DELHI IN THE CASE O F MUNJAL SHOWA LTD VS. DCIT, 94 TTJ 227, DATED 26 TH JUNE, 2003 WHEREIN IT WAS HELD THAT PROFIT ON CANCELLATION OF FORWARD CONTRACT IN FOREI GN CURRENCY ENTERED INTO FOR SAFEGUARDING AGAINST LOSS BY FLUCTUATION IN FOREIGN CURRENCY FOR PURCHASE OF PLA NT AND MACHINERY WITH LOAN OBTAINED IN FOREIGN CURRENC Y IS CAPITAL RECEIPT AND NOT SPECULATIVE PROFIT . 5.2 THE LD. AUTHORISED REPRESENTATIVE FOR ASSESSEE RELIED ON THE JUDGMENT IN THE CASE OF CIT VS. BADRIDAS GAURIDU (P) LTD 261 ITR 256, (MUMBAI) WHEREIN IT WAS HELD THAT THE ASSESSEE WAS NOT A DEALER IN FOREIGN EXCHANGE. THE ASSESSEE WAS A COTTON EXPORTER. THE ASSESSEE WAS AN EXPORT HOUSE. THEREFORE, FOREIGN EXCHANGE CONTRACTS WERE BOOKED ONLY AS INCIDENTAL TO THE ASSESSEES REGULAR COURSE OF BUSINESS. THE TRIBUNAL HAS RECORDED A CATEGORICAL FINDING TO THIS EFFECT I N ITS ORDER. THE ASSESSING OFFICER HAS NOT CONSIDERED THESE FACTS. UNDER SECTION 43(5) OF THE INCOME-TAX ACT, SPECULATIVE TRANSACTION HAS BEEN DEFINED TO MEAN A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF A COMMODITY IS SETTLED OTHERWIS E THAN BY THE ACTUAL DELIVERY OR TRANSFER OF SUCH COMMODITY. HOWEVER, AS STATED ABOVE, THE ASSESSEE WAS NOT A DEALER IN FOREIGN EXCHANGE. THE ASSESSEE 8 ITA NO.518/MDS/2014 WAS AN EXPORTER OF COTTON. IN ORDER TO HEDGE AGAINS T LOSSES, THE ASSESSEE HAD BOOKED FOREIGN EXCHANGE IN THE FORWARD MARKET WITH THE BANK. HOWEVER, THE EXPORT CONTRACTS ENTERED INTO 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 BUSINE SS LOSS. THIS MATTER IS SQUARELY COVERED BY THE JUDGMENT OF THE CALCUTTA HIGH COURT, WITH WHICH WE AGREE, IN THE CASE OF CIT V. SOORAJMULL NAGARMULL [1981] 129 ITR 169. 5.3 THE LD. AUTHORISED REPRESENTATIVE FOR ASSESSEE RELIED ON THE ORDER OF THE CO-ORDINATE BENCH, MUMBAI IN THE CASE OF D. KISHORE KUMAR & CO VS. DCIT, 2 SOT 769 WHEREIN IT WAS HELD THAT ASSESSEE ENGAGED IN IMPORTING ROUGH DIAMONDS AND EXPORTING CUT AND POLISHED ONES, PROFITS FROM CANCELLATION OF FORWARD CONTRACTS IN FOREIGN EXCHANGE ENTERED INTO WITH A VIEW TO MINIMIZE RISK WERE INTEGRAL PART OF ASSESSEES EXPORTS PROFITS ELIGIBLE FOR DEDUCTION U/S.80HHC AND EXPLN.(BAA) HAD NO APPLICATION . 5.4 THE LD. AUTHORISED REPRESENTATIVE FOR ASSESSEE RELIED ON THE ORDER OF THE CO-ORDINATE BENCH, MUMBAI IN THE CASE OF DCIT VS. INTERGOLD (I) LTD, 124 TTJ 337, WHEREIN IT WAS HELD THAT PROFITS ON CANCELLATION FORWARD EXCHANGE CONTRACT WERE ASSESSEES PROFITS OF BUSINESS, BUT AS SUCH PR OFITS WERE NOT DERIVED FROM EXPORT ACTIVITY AND WERE RECE IVED FROM BANKS IN INDIA NOT IN CONVERTIBLE FOREIGN EXCH ANGE IN TERMS OF SUB-S(2), OF S. 80HHC,90 PERCENT OF THE SAME HAS TO BE REDUCED FROM PROFITS OF BUSINESS AS PER EXPLN.(BAA) OF S.80HHC. 5.5 THE LD. AUTHORISED REPRESENTATIVE FOR ASSESS EE RELIED ON THE JUDGMENT OF JURISDICTIONAL HIGH COURT IN THE CASE OF M/S. RAJSHREE SUGARS & CHEMICALS VS. M/S AXIS BANK LIMITED, IN O .A. NOS.251 &252 OF 2008 AND OTHERS DATED 14 TH OCTOBER, 2008 WHEREIN IT WAS HELD THAT THE ABOVE SEQUENCE OF EVENTS WOULD SHOW THAT THE TRANSACTION IN QUESTION, FROM ITS VERY NATURE, CANNOT BE TERMED AS A WAGER. WE HAVE SEEN IN PARAGRAPH-55 ABOVE THAT THREE TESTS ARE TO BE 9 ITA NO.518/MDS/2014 SATISFIED IF A CONTRACT IS TO BE TERMED AS A WAGER. THE FIRST TEST IS THAT THERE MUST BE TWO PERSONS HOLDING OPPOSITE VIEWS TOUCHING A FUTURE UNCERTAIN EVENT. THE SECOND TEST IS THAT ONE OF THOSE PARTIES IS TO WIN AND THE OTHER IS TO LOSE UPON THE DETERMINATION OF THE EVENT. THE THIRD TEST IS THAT BOTH THE PARTIES HAVE NO ACTUAL INTEREST IN THE OCCURRENCE OR NON-OCCURRENCE OF THE EVENT, BUT HAVE AN INTEREST ONLY ON THE STAKE. THE FIRST TEST IS SATISFIED IN THIS CASE AS THERE ARE 2 PARTIES. BUT, THE SECOND TEST MAY NOT BE SATISFIED IN THIS CASE SINCE THE PLAINTIFF MAY NOT ALWAYS STAND TO LOSE. IF THE PLAINTIFF LOSES IN THE UNDERLYING CONTRACT ON ACCOU NT OF CURRENCY FLUCTUATION, IT MAY GET COMPENSATED BY THE HEDGING AND VICE VERSA. THEREFORE BOTH PARTIES CANNOT BE TAKEN TO BE WINNERS OR LOSERS IN ABSOLUTE TERMS. EVEN IF WE TAKE FOR THE SAKE OF ARGUMENT THA T THE FIRST TWO TESTS ARE SATISFIED IN THIS CASE, THE THIRD TEST IS CERTAINLY NOT SATISFIED IN THE CASE ON HAND . BOTH THE PARTIES DEFINITELY HAVE AN ACTUAL INTEREST IN THE RATE OF EXCHANGE HITTING A HIGH OR LOW. THIS IS BECAUSE OF THE FACT THAT THE VERY INTENTION OF THE TRANSACTION IS TO HEDGE AN UNDERLYING EXPOSURE. IT IS LIKE A CONTRACT OF INSURANCE, WHERE, ON THE HAPPENING OF AN UNCERTAIN EVENT, THE SUM ASSURED BECOMES PAYABLE THEREFORE THE ARGUMENT THAT THE CONTRACT WAS A WAGER, THAT IT WAS BROUGHT FORTH BY MISREPRESENTATION, THAT MR.P.K.VISWANATHAN HAD NO AUTHORITY AND THAT THERE WAS A PAYMENT OF PREMIUM BY THE BANK, ARE ALL REJECTED. AS A MATTER OF FACT, THE PRICES OF DERIVATIVES ARE NOW SCIENTIFICALLY DETERMINED ON THE BASIS OF A MATHEMATICAL MODEL (OR FORMULAE) DEVELOPED BY 2 MEN BY NAME FISCHER BLACK AND MYRON SCHOLES IN 1973. THE FORMULAE ITSELF WAS NAMED AFTER THEM, AS BLACK-SCHOLES MODEL. THE APPLICATION OF THE MODEL, LED TO THE AWARD OF THE NOBEL IN ECONOMICS. THE DERIVATIVES PRICES ARE DETERMINED BY FEEDING CERTAIN INPUTS INT O THIS MODEL. THESE INPUTS ARE (I) STOCK PRICE OF THE UNDERLYING ASSET (II) AMOUNT OF TIME UNTIL EXPIRATI ON (III) STRIKE PRICE OF THE OPTION (IV) VOLATALITY OF THE UNDERLYING ASSET (HOW MUCH IT MOVES UP OR DOWN DURING A GIVEN PERIOD) (V) RISK FREE RATE OF RETURN (USUALLY THE INTEREST RATE PAID BY GOVT OT BANKS ON GUARANTEED INVESTMENTS). AFTER BLACK-SCHOLES MODEL, SEVERAL MODELS WERE DEVELOPED, THE NOTED AMONG 10 ITA NO.518/MDS/2014 THEM BEING THE GARMAN-KOHLHAGEN MODEL DESIGNED TO ARRIVE AT THE PRICE OF FX OPTIONS. THEREFORE DERIVATIVES TRANSACTIONS CEASED TO BE PURELY SPECULATIVE DEALS, LONG TIME AGO. THE PRICING OF TH E DEALS, FOLLOWS A SCIENTIFIC PATTERN ON THE BASIS OF FINANCIAL MATHEMATICS. JUST AS ACTUARIES SCIENTIFICALLY DETERMINE THE VALUE OF INSURANCE RIS KS AND THE PREMIUM PAYABLE, FINANCIAL MATHEMATICIANS (OR PORTFOLIO MANAGERS) EVALUATE THE PRICE OF THESE DERIVATIVES. HENCE THEY CANNOT BE TERMED AS WAGERS.. TWO OF THE EARLIEST CIRCULARS SO ISSUED BY THE RESERVE BANK OF INDIA, WERE A.D (M.A. SERIES) CIRCULAR NOS. 21 AND 26 DATED 23.12.1994. THEY WERE ISSUED IN EXERCISE OF THE POWER CONFERRED UNDE R SECTION 73(3) OF THE FOREIGN EXCHANGE (REGULATION) ACT, 1973, PERMITTING AUTHORISED DEALERS (OF FOREIG N EXCHANGE) TO OFFER FORWARD COVER TO RESIDENT CUSTOMERS IN ANY CURRENCY OF THEIR CHOICE. NORMALLY CUSTOMERS USED TO REQUIRE FORWARD COVER FACILITIES IN RESPECT OF THE FOREIGN CURRENCY, IN WHICH THEIR RECEIVABLES OR PAYABLES ARE DENOMINATED, AGAINST THE INDIAN RUPEE. BUT THESE CIRCULARS ACKNOWLEDGED THE FACT THAT THE CUSTOMERS MAY AT TIMES, WISH TO HEDGE AGAINST A THIRD CURRENCY INSTEAD OF THE RUPEE . THEREFORE THESE CIRCULARS PERMITTED THE AUTHORISED DEALERS TO PROVIDE FORWARD SALE OR PURCHASE FACILITIES, IN THE CURRENCY OF RECEIVABLES OR PAYAB LES AGAINST A THIRD CURRENCY, PROVIDED THE LATTER CURRENCY IS ALSO A PERMITTED CURRENCY AND IS ACTIVE LY TRADED IN THE MARKET, IF THE CUSTOMER WISHED TO HED GE AGAINST A THIRD CURRENCY INSTEAD OF THE RUPEE. CUSTOMERS WILL ORDINARILY REQUIRE FORWARD COVER FACILITIES FOR THE FOREIGN CURRENCY IN WHICH THEIR RECEIVABLES OR PAYABLES ARE DENOMINATED, AGAINST THE INDIAN RUPEE. IF FOR ANY REASON, CUSTOMERS WISH TO HEDGE THEM AGAINST A THIRD CURRENCY INSTEAD OF THE RUPEE, AUTHORISED DEALERS MAY PROVIDE FORWARD SALE OR PURCHASE FACILITIES AS APPROPRIATE, IN THE CURRENCY OF THE RECEIVABLES OR PAYABLES AGAINST THE THIRD CURRENCY PROVIDED THE LATTER CURRENCY IS ALSO A PERMITTED CURRENCY AND IS ACTIVELY TRADED IN THE MARKETS. PARTIAL HEDGING MAY ALSO BE PERMITTED 11 ITA NO.518/MDS/2014 WHEREBY THE CUSTOMER HEDGES THE CURRENCY OF RECEIVABLES OR PAYABLES AGAINST THE THIRD CURRENCY FIRST AND COMPLETES THE HEDGE AGAINST THE RUPEE SUBSEQUENTLY. PARTIAL HEDGING MAY ALSO BE PERMITTED IN REVERSE ORDER WHEREIN THE THIRD CURRENCY IS HEDGED AGAINST THE RUPEE FIRST. THE CONTENTS OF THE ABOVE CIRCULAR SHOW THAT IT IS NOT NECESSARY FOR THE CUSTOMERS TO SEEK FORWARD COVER FACILITIES FOR THE FOREIGN CURRENCY IN WHICH THEIR RECEIVABLES OR PAYABLES ARE DENOMINATED, AGAINST THE INDIAN RUPEE. IF FOR ANY REASON, CUSTOMERS WISHED TO HEDGE THEM AGAINST A THIRD CURRENCY INSTEAD OF THE RUPEE, AUTHORISED DEALERS WERE PERMITTED BY THIS CIRCULAR TO PROVIDE FORWARD SALE OR PURCHASE FACILITIES AS APPROPRIATE, IN THE CURRENCY OF THE RECEIVABLES OR PAYABLES AGAINST THE THIRD CURRENCY PROVIDED THE LATTER CURRENCY IS ALSO A PERMITTED CURRENCY AND IS ACTIVELY TRADED IN THE MARKETS. THIS FACILITY WAS ALLOWED IN VIEW OF THE FACT THAT AT TIMES, A THIRD CURRENCY OTHER THAN THE RUPEE MAY BE MORE STABLE, WHILE THE RUPEE MAY BE VOLATILE AND IN TURBULENT WEATHER. 5.6 THE LD. AUTHORISED REPRESENTATIVE FOR ASSESSEE FURTHER PLACED RELIANCE ON THE ORDER OF THE CO-ORDINATE BENCH, MUM BAI IN THE CASE OF IVF ADVISORS PRIVATE LIMITED VS. ACIT IN ITA NO.4798/MUM/2012, DATED 13.02.2015 WHEREIN IT WAS HELD THAT 7.4 CONSIDERING THE RELEVANT PROVISIONS OF THE RELEVANT ACTS, DISCUSSED HEREIN ABOVE IN THE LIGHT OF HONBLE MADRAS HIGH COURT AND THE ANSWERS GIVEN TO FREQUENTLY ASKED QUESTIONS BY THE SEBI AND THE INCORPORATION OF EXCHANGE TRADED CURRENCY DERIVATIVE FROM AUGUST, 2008, THERE REMAIN NO IOTA OF DOUBT THAT THE TRANSACTION OF THE ASSESSEE CANNO T BE TREATED AS SPECULATIVE TRANSACTION. WE HAVE ALSO GONE THROUGH THE COPIES OF THE CONTRACT NOTES INCORPORATED IN THE PAPER BOOK FILED BEFORE US. A PERUSAL OF THE CONTRACT NOTE SHOWS THAT THE ASSESSE E HAS EITHER ENTERED INTO CALL OPTION OR PUT OPTION A ND ON THE SETTLEMENT DAY THE TRANSACTION HAS BEEN SETTLED BY DELIVERY, EITHER THE ASSESSEE HAS PAID U S DOLLAR ON THE SETTLEMENT DAY OR HAS TAKEN DELIVERY OF US DOLLAR. 12 ITA NO.518/MDS/2014 7.5 TO SUM UP, THE DERIVATIVES INCLUDE FOREIGN CURRENCY AND CALL OPTION/ PUT OPTION, ARE TRANSACTIONS OF DERIVATIVE MARKETS AND CANNOT BE TERMED AS SPECULATIVE IN NATURE. CONSIDERING THE TOTALITY OF THE FACTS AND IN THE LIGHT OF THE JUDIC IAL DISCUSSION HEREIN ABOVE, WE HAVE NO HESITATION IN SETTING ASIDE THE ORDER OF LD. CIT(A). APPEAL FILED BY THE ASSESSEE IS ACCORDINGLY ALLOWED. 5.7 THE LD. AUTHORISED REPRESENTATIVE ALSO PLACED R ELIANCE ON THE ORDER OF THE CO-ORDINATE BENCH, MADRAS IN THE CASE OF M/S. SCM GARMENTS (P) LTD VS. DCIT, IN ITA NO.1645/MDS/2 013 AND ITA NO.2275/MDS/2014, DATED 27.02.2015 WHEREIN IT W AS HELD THAT WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY PERUSED THE MATERIAL ON RECORD AND CASE LAWS RELIED BY BOTH THE PARTIES. IN THIS CASE BEFORE US, ONE OF T HE MAJOR BUSINESS ACTIVITIES OF THE ASSESSEE IS EXPORT OF BUSINESS GARMENTS AS IT APPEARS FROM THE FINANCIAL STATEMENTS SUBMITTED BY THE ASSESSEE. THEREFORE, I T IS OBVIOUS THAT THE ASSESSEE WOULD BE HAVING HUGE SUND RY DEBTORS RESULTING FROM EXPORT OF GARMENTS WHICH ARE RECEIVABLE IN THE FOREIGN CURRENCY. THESE SUNDRY DEBTORS ARE EXPOSED TO CURRENCY FLUCTUATION RISK. ONE OF THE METHODS TO PROTECT LOSS AGAINST FOREIGN CURR ENCY FLUCTUATION IS BY WAY OF HEDGING. HEDGING TRANSACTIONS ARE ENTERED IN ORDER TO PROTECT AGAINS T THE LOSS DUE TO COMPENSATORY PRICE MOVEMENT. IT PROTEC TS AN ASSET OR LIABILITY AGAINST FLUCTUATION IN FOREIG N EXCHANGE RATE. ONE OF THE TOOLS FOR HEDGING THE FO REX RISK IS BY WAY OF FOREIGN CURRENCY DERIVATIVES. SEC TION 45 OF THE RESERVE BANK INDIA ACT, 1949 DEFINES DERIVATIVE AS A FINANCIAL INSTRUMENT WHOSE VALUE DEPENDS ON THE VALUE OF THE UNDERLYING EXPOSURES. I N THE CASE BEFORE US, THE UNDERLYING EXPOSURE IS THE FOREIGN CURRENCY. THE COMMONLY USED FOREX DERIVATI VES ARE FORWARD CONTRACTS, OPTIONS CONTRACTS AND SWAP CONTRACTS. THESE INSTRUMENTS ARE USED TO HEDGE THE CURRENCY RISK ON ACCOUNT OF ADVERSE CURRENCY MOVEMENTS. IN THE PRESENT CASE BEFORE US, THE ASSE SSEE HAS SELECTED TO BOOK OPTIONS CONTRACT AS PER THE ADVICE OF ITS BANKERS IN ORDER TO HEDGE ITS FOREIGN EXCHANGE RISK. OPTIONS CONTRACT IS A RIGHT TO EXE RCISE THE OPTION OF BUYING OR SELLING OF A FOREIGN CURREN CY AT A PARTICULAR PRICE. HOWEVER, THE ASSESSEE IS NOT 13 ITA NO.518/MDS/2014 COMPELLED TO BUY OR SELL, IF THE SPOT MARKET PRICES ARE FAVORABLE OR NOT FAVORABLE. THE COST OF THIS OPTIO N IS CALLED OPTION PREMIUM. UPON THE PAYMENT OF THE SAME, THE EXPORTER IS HEDGED AGAINST ADVERSE CURREN CY MOVEMENT AND ALSO NOT LIABLE TO LOOSE IN CASE OF FAVORABLE CURRENCY MOVEMENT. THEREFORE, IT IS APPARENT IN THE CASE OF THE ASSESSEE THAT THE ASSES SEE HAD ENTERED INTO OPTIONS CONTRACT (DERIVATIVE) WI TH THE BANK IN ORDER TO HEDGE ITS FOREIGN EXCHANGE RIS K. IN THE CASE OF THE ASSESSEE, WHAT HAS HAPPENED IS THAT DUE TO ADVERSE FOREIGN EXCHANGE MOVEMENT, THE BANK HAS DEBITED THE LOSS TO THE ASSESSEES ACCOUNT. THUS, T HE LOSS DEBITED BY THE BANK IN THE ASSESSEES ACCOUNT HAS CRYSTALLIZED AND IS A REALISTIC LOSS SUFFERED BY TH E ASSESSEE. IN THESE CIRCUMSTANCES, THE ISSUE UNDER CONSIDERATION BEFORE US IS THAT, WHETHER LOSS ON AC COUNT FOREX DERIVATES ARE TO BE CONSIDERED AS A BUSINESS LOSS IN PARLANCE WITH SECTION 28 OF THE ACT. FURTHER, IN THE CASE OF THE ASSESSEE BEFORE US, THE FOLLOWING FACTS EMERGE AND THE LEGAL ISSUES INVOLVED ARE DISCUSSED AND SUMMARIZED HEREIN BELOW:- (I) THE ASSESSEE HAS ENTERED INTO FOREX DERIVATIVE TRANSACTIONS ONLY IN ORDER TO CONTAIN THE FOREIGN CURRENCY FLUCTUATION RISK. (II) THUS, THE LOSS ON ACCOUNT FOREX DERIVATIVE TRANSACTIONS ARE DIRECTLY ATTRIBUTABLE TO THE NORMAL BUSINESS OF THE ASSESSEE. (III) THE LOSS INCURRED BY THE ASSESSEE IS REALISTIC AND NOT NOTIONAL. (IV) ONLY MONEY CHANGERS AND BANKS ARE ALLOWED TO TRADE IN FOREIGN CURRENCY AND THE ASSESSEE IS NEITHER A MONEY CHANGER NOR A BANK. (V) THE ASSESSEE HAS ONLY UTILIZED THE SERVICE OF NATIONALIZED BANK IN ORDER TO IRON OUT THE LOSS ARISING OUT OF FOREIGN CURRENCY FLUCTUATION RISK BY ENTERING INTO FOREX DERIVATIVE CONTRACT. (VI) THE SPECIAL BENCH OF THE ITAT, KOLKATA BENCH IN THE CASE OF SHRI CAPITAL SERVICES LTD VS. ACIT IN 121 ITD 498(KOL.)(SB) HAS HELD THAT FOREIGN CURRENCY IS NEITHER COMMODITY NOR SHARES AS DEFINED U/S. 43(5) OF THE ACT. 14 ITA NO.518/MDS/2014 (VII) THE INSTRUCTIONS ISSUED BY CBDT INSTRUCTION NO.03/2010 DATED 23.03.2010 HAS RECOGNIZED THE LOSS OUT OF FOREX DERIVATIVES ON ACTUAL SETTLEMENT/CONCLUSION OF CONTRACTS AS ALLOWABLE BUSINESS LOSS, HOWEVER THEY HAVE DIRECTED THE REVENUE TO EXAMINE WHETHER THE TRANSACTIONS WOULD FALL U/S. 43(5)(D) OF THE ACT, AND IF SO TO TREAT THE SAME AS NON-SPECULATIVE TRANSACTION. BY THE ABOVE DIRECTIONS, IT APPEARS THAT THOUGH THE CBDT HAS RECOGNIZED THE LOSS ARISING OUT OF FOREX DERIVATIVES ON ACTUAL SETTLEMENT OF THE CONTRACTS, DIRECTED THE REVENUE TO TREAT THE SAME AS SPECULATIVE TRANSACTION WHEN THEY ARE TRANSACTED THROUGH NATIONALIZED BANKS AND AS NOT SPECULATIVE, WHEN THESE TRANSACTIONS ARE TRANSACTED THROUGH RECOGNIZED STOCK EXCHANGE. (VIII) IT IS PERTINENT TO NOTE HERE THAT THE BANKE RS ACT AS AN ADVISORY AGENT TO THE ASSESSEE IN ORDER TO PROTECT THEM FROM FOREIGN EXCHANGE EXPOSURE BY USING THEIR EXPERTISE AND THESE SERVICES CANNOT BE OBTAINED BY THE ASSESSEE IN THE STOCK EXCHANGE WHERE THEIR SCOPE OF SERVICE IS VERY LIMITED. (IX) IN THE PRESENT CASE THE ASSESSEE HAS TAKEN A HEDGING POSITION TO THE EXTENT OF 1.05 CRORES AND USD `3 CRORES DURING THE PERIOD 2007-2009 BASED ON THE RBI GUIDELINES. THE GUIDELINES PERMITTED HEDGING TO THE EXTENT OF LAST THREE YEARS ANNUAL AVERAGE TURNOVER, OR CURRENT YEARS ACTUAL EXPORT TURNOVER WHICHEVER IS HIGHER. WHERE EXACT AMOUNT OF UNDERLINE TRANSACTION WAS NOT ASCERTAINABLE ACCORDING TO RBI GUIDELINES, THE CONTRACTS COULD BE BOOKED ON THE BASIS OF REASONABLE ESTIMATE. THE ASSESSEE HAS TAKEN ITS HEDGING POSITION IN ACCORDANCE WITH THE GUIDELINES OF RBI AND THE SAME IS NOT DISPUTED. (X) THE CLAIM OF THE ASSESSEE WAS THAT THE UNDERLY ING EXPOSURE BOTH IN RESPECT OF EURO AND USD IS MORE THAN ADEQUATE TO COVER THE HEDGING POSITIONS TAKEN IN RESPECT OF CROSS CURRENCY DERIVATIVE CONTRACTS ENTERED INTO BY THE ASSESSEE. THE REVENUE HAS NOT BROUGHT OUT ANY MATERIAL ON RECORD TO CONTROVERT TO THIS CLAIM OF THE ASSESSEE. 15 ITA NO.518/MDS/2014 (XI) SINCE THE ASSESSEE HAS ENTERED INTO FOREIGN CURRENCY DERIVATIVE CONTRACT ADEQUATE ENOUGH TO COVER THE OVERALL EXPOSURES OF FOREIGN CURRENCY, THE CONTENTION OF THE REVENUE THAT THE PROPORTION OF THE LOSS IN DERIVATIVES IS EIGHT TIMES MORE THAN THE LOSS FROM CURRENCY FLUCTUATION DOES NOT HAVE ANY MERITS. (XII) THE FOREX DERIVATIVE TRANSACTIONS TRANSACTE D BY THE ASSESSEE ARE THROUGH NATIONALIZED BANKS IN COMPLIANCE WITH THE RBI REGULATIONS. THESE REGULATIONS PERMIT THE ASSESSEE TO ENTER INTO SUCH DERIVATIVE TRANSACTIONS ONLY BY FULFILLING CERTAIN CONDITIONS IN THE COURSE OF THE BUSINESS OF THE ASSESSEE. THESE REGULATIONS DO NOT PERMIT THE ASSESSEE TO ENTER INTO FOREX DERIVATIVE CONTRACT AS A SEPARATE BUSINESS. (XIII) SECTION 73(1) OF THE ACT RESTRICTS THE SET OFF OF SPECULATION LOSS AGAINST THE OTHER BUSINESS INCOME IN ONLY THOSE CASES WERE SPECULATIVE TRANSACTIONS CARRIED ON BY THE ASSESSEE ARE OF SUCH NATURE SO AS TO CONSTITUTE A BUSINESS BY ITSELF. IT IS PERTINENT TO MENTION HERE THAT RBI DOES NOT PERMIT ANY BANK UNDER ITS UMBRELLA TO ENTERTAIN ITS CLIENT IN ANY SEPARATE BUSINESS OF FOREX DERIVATIVE TRANSACTIONS. PERMISSION IS GRANTED ONLY FOR THE CLIENTS OF THE BANK TO HEDGE ON FOREIGN EXCHANGE IN ORDER TO MINIMIZE THE RISK OF THE FOREIGN CURRENCY EXPOSURE ARISING OUT OF IMPORT AND EXPORT TRADE. (XIV) THE HONBLE JURISDICTIONAL MADRAS HIGH COURT IN THE CASE M/S.RAJASHREE SUGARS AND CHEMICALS LTD VS. AXIS BANK LTD., IN O.A NOS.251 & 252 OF 2008 IN C.S.NO.240 OF 2008 O.A. NOS.526 & 527 OF 2008 IN C.S NO.240 OF 2008A. NOS.1926, 1927, 2446 AND 2447 OF 2008 IN S.S NO.240 OF 2008 VIDE ORDER DATED 14.10.2008 REPORTED IN 8 MLJ 261 HAS HELD THAT DERIVATIVE TRANSACTIONS CEASED TO BE SPECULATIVE TRANSACTIONS OR WAGES BECAUSE PRICING OF THE DEAL FOLLOWS A SCIENTIFIC PATTERN ON THE BASIS OF FINANCIAL MATHEMATICS. JUST AS ACTUARIES SCIENTIFICALLY DETERMINED THE VALUE OF INSURANCE RISK AND THE PREMIUM PAYABLE, FINANCIAL MATHEMATICIAN/PORTFOLIO MANAGERS EVALUATE THE PRICE OF THESE DERIVATIVES. 16 ITA NO.518/MDS/2014 THUS TO SUM UP IN THE PRESENT CASE BEFORE US, THE ASSESSEE IS AN EXPORTER OF GARMENTS WHO HAS ENTERED INTO FOREX DERIVATIVE TRANSACTIONS THROUGH ITS BANKERS WITH A VIEW TO EFFECTIVELY HEDGE ITS FOREIGN CURRENCY RISK. THEREFORE, THESE FOREX DERIVATIVE TRANSACTIONS HAVE A CLOSE PROXIMITY OR RATHER INCIDENTAL TO THE EXPORT BUSINESS OF THE ASSESSEE, WHICH CANNOT BE CONSIDERED AS SPECULATIVE. MOREOVER IN THE CASE OF THE ASSESSEE FOREIGN CURRENCY CONTRACTS CANNOT BE TREATED AS WAGERING CONTRACTS FOR THE REASONS DISCUSSED HEREIN ABOVE. SECTION-43(5) OF THE ACT IS APPLICABLE TO TRANSACTIONS IN COMMODITY OR STOCKS AND SHARES. IF CURRENCY IS TREATED AS COMMODITY, THEN ACCORDING TO SECTION 43(5) (A) OF THE ACT, SUCH TRANSACTION SHALL NOT BE DEEMED TO BE SPECULATIVE TRANSACTION. FURTHER CURRENCY CANNOT BE TREATED AS STOCK OR SHARES BECAUSE INHERENTLY THEY HAVE DIFFERENT CHARACTERISTIC. FURTHER, IN THE CASE OF THE ASSESSEES, THE FOREIGN EXCHANGE EXPOSURE FOR THE RELEVANT PERIOD SPECIFIED BY R.B.I REGULATIONS IS QUIET SUBSTANTIAL IN ORDER TO JUSTIFY THE FOREX DERIVATIVE TRANSACTIONS MADE BY THE ASSESSEE THROUGH GOVERNMENT RECOGNIZED CHANNEL, OTHERWISE THE RBI WOULD NOT HAVE ENTERTAINED THESE TRANSACTIONS AND WOULD HAVE RESTRAINED THE BANKS FROM ENTERING INTO SUCH TRANSACTION WITH ITS CLIENTS. THUS CONSIDERING THE TOTALITY OF THE FACTS AND CIRCUMSTANCE OF THE CASE AND THE DECISIONS RELIED UPON HEREIN ABOVE, WE ALLOW THE GROUNDS RAISED BY THE ASSESSEES ON THIS ISSUE FOR ALL THE THREE APPEALS IN FAVOUR OF THE ASSESSEE AND ACCORDINGLY WE HEREBY DIRECT THE REVENUE TO SET OFF OF THE LOSSES INCURRED BY THE ASSESSEE ON ACCOUNT OF FOREX DERIVATIVES CONTRACTS AGAINST THE BUSINESS INCOME OF THE ASSESSEE. 5.8 FURTHER, HE ALSO RELIED ON THE ORDER OF THE CO-ORDINATE BENCH IN THE CASE OF M/S. S.P. APPARELS LTD VS. DCI T. IN ITA NO.1327/MDS/2014, DATED 17.04.2015 IN SUPPORT OF HI S CONTENTIONS. 17 ITA NO.518/MDS/2014 5.9 TO SUM UP THE CONTENTION THE LD. AUTHORIS ED REPRESENTATIVE SUBMITTED IS AS FOLLOWS:- (I) FOREIGN EXCHANGE IS NOT A COMMODITY AND THEREFORE IT WAS OUTSIDE THE PURVIEW OF SECTION 43 (5). (II) DERIVATIVE CONTRACTS ENTERED INTO BY THE ASSESSEE HAVE A DIRECT UNDERLYING CURRENCY EXPOSURE ON ACCOUNT OF EXPORT PROCEEDS RECEIVABLE BY THE ASSESSEE. (III) THE DECISION TO GO FOR CROSS CURRENCY OPTION CONTRACT WAS A DECISION PURELY TO HEDGE THE CURRENCY EXPOSURE OF THE ASSESSEE AND HE PRAYS THAT BOTH THE APPEALS MAY BE ALLOWED. 6. ON THE OTHER HAND, THE DEPARTMENTAL REPRESENTATI VE SUBMITTED THAT ONE HAS TO EXAMINE WHETHER THE DERIVATIVE TRANSACTION FOR FOREIGN CURRENCY WILL BE INCLUDED I N THE DEFINITION OF 'COMMODITY' OR NOT. ACCORDING TO LD. DEPARTMENTAL REPRESENTATIVE A PERUSAL OF SECTION 43 (5) WOULD INDICATE THAT IT READS AS 'A CONTRACT FOR PURC HASE AND SALE OF ANY COMMODITY INCLUDING STOCKS AND SHARES . ... '. FROM THIS IT WAS CLEAR THAT IT WAS AN INCLUSIVE DEF INITION AND NOT AN EXCLUSIVE DEFINITION. FURTHER SEC.43(5)(D) E XCLUDES TRADING IN DERIVATIVES CARRIED OUT THROUGH A RECOGN IZED STOCK EXCHANGE FROM THE AMBIT OF SPECULATIVE TRANSA CTION. THIS CLEARLY EXCLUDES DERIVATIVES TRADING THROUGH S TOCK EXCHANGES AND CONVERSELY THERE CANNOT BE ANY EXCLUS ION WITHOUT AN EARLIER INCLUSION. UNLESS IT WAS THE INT ENTION OF THE LEGISLATURE THAT TRADING DERIVATIVES ARE INCLUD ED IN COMMODITY, THEY WOULD NOT HAVE SPECIFICALLY EXCLUDE D TRADING THROUGH STOCK EXCHANGE UNDER SECTION 43(5)( D) OF THE ACT. THEREFORE, IT WAS EVIDENT THAT DERIVATIVE S WILL FORM PART OF 'COMMODITY' MENTIONED U/S.43(5). HE PLACED RELIANCE ON THE ORDER OF THE SPECIAL BENCH OF THE C ALCUTTA TRIBUNAL IN THE CASE OF SRI CAPITAL SERVICES VS. AC IT(2009) 18 ITA NO.518/MDS/2014 (121)TD (CAL) WHEREIN IT WAS CLARIFIED THAT DERIVA TIVES ARE COMMODITIES FOR THE PURPOSE OF SEC.43(5)(D). THE RE LEVANT HEAD NOTES OF THE JUDGEMENT IS REPRODUCED AS U NDER: 'SECTION 43(5) OF THE INCOME TAX ACT 1961 - SPECULATIVE TRANSACTIONS - ASSESSMENT YEAR 2004-05 -WHETHER CLAUSE (D) OF PROVISO TO SECTION 43(5) IS PROSPECTIVE IN NATURE AND WILL BE EFFECTIVE FROM DATE ON WHICH LEGISLATURE MADE IT EFFECTIVE I.E.1.4.2006 - HELD YES - WHETHER TERM DERIVATIVES ' IN WHICH UNDERLYING ASSETS IS SHARES, WOULD FALL WITHIN MEANING OF COMMODITY ' USED IN SECTION 43(5) - HELD, YES WHETHER, THEREFORE, WHERE ASSESSEE SUFFERED A LOSS ON ACCOUNT OF FUTURES AND OPTIONS, I.E., A FORM OF DERIVATIVES, IN WHICH UNDERLYING ASSET WAS SHARES, SAID LOSS WAS RIGHTLY DISALLOWED BY REVENUE AUTHORITIES BY INVOKING PROVISIONS OF SECTION 43(5)- HELD YES'. 6.1 FURTHER, LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE BOMBAY HIGH COURT IN THE CASE OF CIT VS. B HARAT R. RUIA(HUF) 337 ITR 452(BOM) WHEREIN IT WAS HELD THAT TRANSACTIONS IN DERIVATIVES ARE SPECULATIVE TRANSAC TIONS AND NOT BUSINESS LOSS. IT WAS HELD AS UNDER:- 'HELD, ALLOWING THE APPEAL, THAT THE ASSESSEE HAD ENTERED INTO FUTURES CONTRACTS FOR PURCHASE OF SHARES OF CERTAIN COMPANIES AT A SPECIFIED FUTURE DATE AND AT A SPECIFIED PRICE, WHICH WERE TO BE SETTLED IN CASH WITHOUT ACTUAL DELIVERY OF 19 ITA NO.518/MDS/2014 SHARES. THE EXCHANGE TRADED DERIVATIVE TRANSACTIONS CARRIED ON BY THE ASSESSEE DURING ASSESSMENT YEAR 2003-04 WERE SPECULATIVE TRANSACTIONS COVERED UNDER SECTION 43(5) OF THE ACT AND ,THE LOSS INCURRED IN THOSE TRANSACTIONS WAS LIABLE TO BE TREATED AS SPECULATIVE LOSS AND NOT BUSINESS LOSS.' 6.2 A PERUSAL OF THE ABOVE JUDGEMENTS AND AVERMENTS CONTAINED THEREIN, IT WAS EVIDENT THAT THE DERIVATI VE TRANSACTIONS ARE INCLUDED IN THE MEANING OF COMMODI TIES AND IN THESE CASES THE TRANSACTIONS WERE HELD AS SPECUL ATIVE TRANSACTIONS BEFORE SECTION 43(5)(D) WAS BROUGHT IN BY FINANCE ACT 2005, WHEREIN TRANSACTIONS IN SHARES AL ONE WERE TREATED AS NON- SPECULATIVE. THE DICTIONARY MEANING OF COMMODITY IS 'ANY PRODUCT THAT CAN BE USED FOR COMME RCE OR AN ARTICLE OF COMMERCE WHICH IS TRADED ON AN AUT HORIZED COMMODITY EXCHANGE WAS KNOWN AS COMMODITY'. BY THIS DEFINITION FOREIGN EXCHANGE SUCH AS US DOLLAR AND J APANESE YEN OR DERIVATIVES ARISING FROM THESE CURRENCIES HA VE TO BE TREATED AS ARTICLES OF COMMERCE WHICH WAS TRADED ON A COMMODITY EXCHANGE. THEREFORE, FOREX DERIVATIVES AR E CLEARLY COMMODITIES AS UNDERSTOOD IN BUSINESS PARLA NCE. FURTHER TILL THE LIBERALIZATION OF INDIAN ECONOMY U NDERTAKEN IN 1991 FOREIGN EXCHANGE WAS TREATED AS SCARCE COMMODI TY AND WAS NOT AVAILABLE FOR TRADE OR PURCHASE BY INDIVIDU ALS. IT WAS ONLY IN MID 2000, THAT THE GOVERNMENT AND RESERVE BANK OF INDIA ALLOWED THE TRADING IN FOREIGN CURRENCY. IT W AS MUCH LATER, IN 2007, THAT THE STATE BANK OF INDIA COME O UT WITH A SCHEME FOR TRADING IN FOREIGN CURRENCY DERIVATIVES. THEREFORE IT IS EVIDENT THAT WHEN THE INCOME TAX ACT FRAMED I N 1962 THE PARLIAMENT IN ITS WISDOM COULD NOT HAVE FORESEEN LA RGE SCALE FOREX AND FOREX DERIVATIVES TRANSACTIONS COULD BE U NDERTAKEN BY THE ASSESSEE. THIS IS THE REASON WHY TRADING IN FOREX DERIVATIVES WAS NOT SEPARATELY INCORPORATED INTO TH E INCOME TAX ACT. 6.3 THE LD. DEPARTMENTAL REPRESENTATIVE FURTHER CONTENTED THAT A PERUSAL OF THE CONTRACT NOTE AND SCENARIO ANALYSIS AND RISK WOULD CLEARLY INDICATE THAT THESE CONTRACTS HA VE NOTHING TO DO WITH OVERALL FOREX EARNINGS OF THE ASSESSEE E ITHER IN US 20 ITA NO.518/MDS/2014 DOLLARS OR JAPANESE YEN. THE ASSESSEE'S ACCOUNT IS DEBITED OR CREDITED ON SETTLEMENT DATE GIVEN IN THE CONTRACT B ASED ON THE CURRENCY MOVEMENTS UPTO MATURITY DATE. IN THIS DERIVATIVE CONTRACTS ASSESSEE CAN NEITHER DELIVER U S DOLLARS NOR JAPANESE YEN FROM THE EXPORT EARNINGS. THE ASSE SSEE CAN DERIVE A PROFIT OR LOSS BASED ON THE CURRENCY M OVEMENT IE. JAPANESE YEN VS. US DOLLARS. THEREFORE, THE CLA IM OF THE ASSESSEE THAT THESE ARE HEDGING BASED ON THE EXPORT EARNINGS CANNOT BE ACCEPTED. THE ARGUMENT OF THE AS SESSEE THAT THESE CONTRACTS WERE ENTERED INTO BASED ON DEV ELOPMENT RESEARCH REPORT OF THE RBI IS MERELY A FICTION CREA TED BY THE ASSESSEE TO JUSTIFY ITS ENTERING INTO DERIVATIVE TR ANSACTIONS IF THE ASSESSEE HAD EXPORT RECEIVABLES IN US DOLLARS O R JAPANESE YEN, THAT COULD BE HEDGED BY FORWARD CONTR ACT BASED ON THE MATURITY OF THE BILLS. HOWEVER, THE ANALYSIS OF THE DERIVATIVES TRANSACTIONS GIVEN IN THE ASSESSMEN T ORDER WOULD CLEARLY INDICATE THAT THE ASSESSEE WAS ONLY HAVING A SPECULATIVE BET ON THE CURRENCY MOVEMENT BETWEEN US DOLLARS AND JAPANESE YEN. ALL THESE TRANSACTIONS BA SED ON CURRENCY MOVEMENTS BETWEEN US DOLLAR AND JAPANESE Y EN ON MATURITY DATE/KNOCK OF DATE MENTIONED IN THE CON TRACT HAS RESULTED IN HUGE LOSSES TO THE ASSESSEE AS SHOW N IN-THE COPY OF THE LEDGER ACCOUNT. FURTHER IT MAY BE NOTIC ED THAT THE ASSESSEE'S EXPORT BILLS FOR THE PAST FOUR YEARS DID NOT HAVE A SINGLE EXPORTS IN JAPANESE YEN. THEREFORE, I T IS ALSO POINTED OUT THE FACT THAT THESE TRANSACTIONS HAD NO THING TO DO WITH EXPORT RECEIVABLES OF THE ASSESSEE. A CAREF UL ANALYSIS OF THE NATURE AND TYPE OF CROSS CURRENCY D ERIVATIVE TRANSACTIONS WHETHER TO BE TREATED AS BUSINESS LOSS OR SPECULATION LOSS CAN BE CONCLUDED AS SPECULATION LO SS BASED ON THE FOLLOWING POINTS A) THE DERIVATIVE TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH STATE BANK OF INDIA IS NOT IN THE ORDINARY COURSE OF BUSINESS OF THE . ASSESSEE WHO IS AN EXPORTER OF GARMENTS. EXPORT BILLS OR RECEIVABLES OF THE ASSESSEE CANNOT BE LINKED TO THE DERIVATIVE TRANSACTIONS. B) BY ENTERING INTO A CURRENCY DERIVATIVE TRANSACTION THE ASSESSEE IS CLEARLY TAKING A SPECULATIVE BET ON 21 ITA NO.518/MDS/2014 THE MOVEMENT OF JAPANESE YEN WITH US DOLLARS DURING A FIXED PERIOD. THESE TRANSACTIONS ARE CLEARLY A SPECULATIVE BET ON THE CURRENCY WHICH ARE IN THE NATURE OF A WAGER CONTRACT. C) THE FOREX DERIVATIVE TRANSACTIONS ARE NOT SETTLED BY ACTUAL DELIVERY OF FOREIGN EXCHANGE BUT ONLY THE DIFFERENCE BETWEEN THE AGREED PRICE ON THE MATURITY DATE THAT IS CREDITED OR DEBITED TO THE ACCOUNT OF THE ASSESSEE. D) THE ASSESSEE CLAIMS THAT HIS TRANSACTIONS ARE AS PER RBI GUIDELINES AND FEMA REGULATIONS A CONCLUSIVE VIEW CANNOT BE TAKEN IN THIS MATTER AT PRESENT. IT IS PERTINENT TO NOTE THAT ORISSA HIGH COURT JUDGEMENT IN THE CASE OF PRAVANJAN PATRA VS. REPUBLIC OF INDIA IN WP (RL) NO. 344 OF 2009 DIRECTING THE CBI TO CONDUCT ENQUIRIES IS A POINTER TO THE FACT THAT THE DERIVATIVE TRANSACTIONS ENTERED INTO BY THE BANKS ARE NOT WITHIN THE FOUR CORNERS OF LAW. E) AN ANALYSIS OF THE COMPLEX DERIVATIVE TRANSACTIONS ENTERED INTO BY THE ASSESSEE DOES NOT CORRELATE TO THEIR TRADE EXPOSURE. IN THESE DERIVATIVES THE ASSESSEE HAD UNDERTAKEN THE RISK OF BUYING DOLLARS AND SELLING JAPANESE YEN, WHEN THE COMPANY WAS NEVER A BUYER OF DOLLARS NOR DID THEY EVER HAVE ANY JAPANESE YEN ASSETS. THESE DERIVATIVE TRANSACTIONS WERE COMPLEX LEVERAGED STRUCTURES WHICH WERE SOLD BY THE BANKERS TO THE ASSESSEE. BASED ON THE CURRENCY MOVEMENT AT THE MATURITY DATE OR AT THE KNOCK OUT TIME THE ASSESSEE SUFFERED HUGE LOSSES WHICH WERE DISPROPORTIONATE TO THEIR NORMAL BUSINESS. F) THE FACT THAT THE RESERVE BANK OF INDIA HAS PASSED PENALTY ORDERS ON MANY 22 ITA NO.518/MDS/2014 BANKERS INCLUDING SBI. G) THE CONTRACT NOTES MENTIONED CERTAIN SCENARIO ANALYSIS AND RISK STATEMENT. HOWEVER, A PERUSAL OF THE SAME WOULD INDICATE THAT THESE SCENARIOS AND RISKS HAVE NOT BEEN PROPERLY ANALYSED BY THE ASSESSEE BUT HAVE BEEN MERELY INCORPORATED IN THE CONTRACT NOTE. SIMILARLY THE DECLARATION OF THE EXPOSURE GIVEN IN THE SECOND PAGE OF THE CONTRACT NOTE' THE SIZE AND TENOR OF THE ABOVE TRANSACTION IS NOT IN EXCESS OF THE UNDERLYING EXPOSURE IN BALANCE SHEET' IS A_STATEMENT MADE IN THE CONTRACT NOTE WHICH IS DEVOID OF ANY MERIT. NEITHER THE BANK NOR THE ASSESSEE HAS ANALYSED OR STATED ANY SPECIFIC UNDERLYING EXPOSURE OR BALANCE SHEET EXPOSURE OF THE ASSESSEE IN THE DERIVATIVE TRANSACTION. IF THERE WAS A REAL UNDERLYING EXPOSURE AS MENTIONED, THE ASSESSEE COULD NOT HAVE SUFFERED SUCH A HUGE LOSS. THEREFORE, WHAT IS MENTIONED IN THE CONTRACT NOTE IS A MERE RECITAL TO OVERCOME THE CONDITIONS MENTIONED BY THE RESERVE BANK OF INDIA FOR THE BANK AND THE ASSESSEE TO ENTER INTO DERIVATIVE TRANSACTIONS. H) A FOREX DERIVATIVE TRANSACTION, IF IT IS A HEDGE SHOULD REDUCE THE RISK AND LOSS TO THE ASSESSEE. A PERUSAL OF THE CONTRACT NOTES AND CORRESPONDING HUGE LOSS INCURRED BY THE ASSESSEE DURING THE SHORT PERIOD WOULD INDICATE THAT THE DERIVATE TRANSACTIONS HAVE ONLY INCREASED THE RISK TO THE ASSESSEE AND NOT REDUCED THE RISK LIKE AS A 'HEDGE'. 6.4 THE LD. DEPARTMENTAL REPRESENTATIVE FURTHER SU BMITTED THAT T HE ASSESSING OFFICER HAS CONSIDERED ALL THE ARGUMEN TS BUT FORWARD BY THE ASSESSEE AND HAS PASSED A DETAILED ASSESSMENT ORDER AND THE COMMISSIONER OF INCOME TAX (APPEALS) CONFIRMED THE VIEW OF THE ASSESSING OFFIC ER. HE PLACED RELIANCE ON THE ORDER OF THE TRIBUNAL IN THE CASE OF SHRI 23 ITA NO.518/MDS/2014 VINODKUMAR DIAMONDS, (P) LTD. VS. ADDITIONAL COMMIS SIONER OF INCOME TAX (2013) 35 TAXMANN 337, THE TRIBUNAL WHER EIN IT WAS HELD AS UNDER SECTION 43(5) OF THE INCOME-TAX ACT, 1961 - SPECULATIVE TRANSACTIONS [HEDGING TRANSACTIONS] - ASSESSMENT YEAR 2008-09 - ASSESSEE COMPANY EXPORTER OF DIAMOND ENTERED INTO FORWARD CONTRACTS IN RESPECT OF FOREIGN EXCHANGE AND INCURRED LOSS ON CANCELLATION OF SUCH CONTRACTS - IT CLAIMED THAT THESE TRANSACTIONS WERE HEDGING CONTRACTS TO COVER RISK OF FLUCTUATION IN FOREIGN CURRENCY RATES AND NOT SPECULATIVE TRANSACTION AS HELD BY REVENUE - WHETHER, WHERE A CONTRACT FOR PURCHASE OR SALE OF COMMODITY IS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY ACTUAL DELIVERY, SAME WOULD FALL WITHIN SPECULATIVE TRANSACTION - HELD, YES - WHETHER FOR HEDGING TRANSACTIONS IT IS NECESSARY THAT COMMODITY IN RESPECT OF WHICH FORWARD TRANSACTIONS HAVE BEEN MADE BY ASSESSEE MUST HAVE A DIRECT CONNECTION WITH GOODS MANUFACTURED OR SOLD BY ASSESSEE - HELD, YES - WHETHER, WHERE ASSESSEE WAS DEALING IN DIAMONDS AND FORWARD CONTRACT TRANSACTIONS ENTERED INTO BY IT WAS IN FOREIGN EXCHANGE, SAME COULD NOT BE HELD AS HEDGING TRANSACTIONS - HELD, YES WHETHER, THEREFORE, FORWARD CONTRACT TRANSACTIONS IN FOREIGN EXCHANGE, AGAINST WHICH THERE WAS NO ACTUAL DELIVERY BY ASSESSEE WERE SPECULATIVE AND NOT HEDGING TRANSACTIONS AND, THUS, LOSS ON SAME WAS NOT ALLOWABLE - HELD, YES IN FAVOUR OF REVENUE. 6.5 THE LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT A PERUSAL OF THE ABOVE JUDGEMENT CLEARLY INDICATES THAT FOREIGN CURRENCY WAS TREATED AS A COMMODITY AND 24 ITA NO.518/MDS/2014 TRANSACTIONS INCLUDING CANCELLATION OF FOREIGN CURR ENCY FORWARD CONTRACTS WHICH WAS SETTLED OTHERWISE THAN THE ACTUAL DELIVERY WILL BE TREATED AS SPECULATIVE TRAN SACTION. THE DERIVATIVE TRANSACTION ENTERED INTO BY THE ASSE SSES ARE WITHOUT HEDGE, UNDERLYING AND THERE CANNOT BE ANY D ELIVERY AGAINST DERIVATIVE TRANSACTIONS. THE PRINCIPLE LAID DOWN IN THE ABOVE JUDGEMENT WILL SQUARELY APPLY IN THE CASE OF THE ASSESSEE . THE CLAIM OF THE ASSESSEE'S DERIVATIVE TRANSACTIONS ARE HAVING AN UNDERLYING HEDGE AGAINST EXPORT BILLS OF THE ASSESSEE, IS AKIN TO SAYING THAT AN EX PORTER VISITING HONG KONG AND HAVING A LOSS FROM HIS GAMBL ING IN A CASINO IN MACAU ARE TO BE TREATED AS A BUSINESS LOS S. THE EXPORTER MAY HAVE RECEIVABLES IN HONG KONG DOLLARS. HOWEVER HIS GAMBLING IN MACAU CASINO, IF RESULTED I N A LOSS WAS A SEPARATE SPECULATIVE ACTIVITY EVEN THOUGH THE LOSS IN GAMBLING WAS PAID IN HONG KONG DOLLARS. SIMILAR WAS THE SITUATION HERE WITH THE ASSESSEE. THE ASSESSEE'S EX PORT BILLS IN THE LAST 4 YEARS HAVE PERMITTED HIM TO ENTER INT O DERIVATIVE TRANSACTIONS WITH THE BANK. HOWEVER, THE ASSESSEE'S DECISION TO ENTER INTO SEPARATE CROSS CU RRENCY DERIVATIVE TRANSACTIONS WERE A SEPARATE ACTIVITY TO OBTAIN SPECULATIVE PROFIT BASED ON THE CURRENCY MOVEMENTS IE. US DOLLAR VS. JAPANESE YEN DURING A PARTICULAR PERIOD. IN OTHER WORDS US DOLLAR AND JAPANESE YEN WERE MERE DICES ON THE GAMBLING TABLE. THE MOVEMENT OF JAPANESE YEN VS. US DOLLAR WENT AGAINST ASSESSEE'S CALL ON THEM. THIS R ESULTED IN A HUGE SPECULATION LOSS. THEREFORE, THE DERIVATIVE TRANSACTIONS UNDERTAKEN BY THE ASSESSEE HAVE NO RE LATION WHATSOEVER WITH THE ASSESSEE'S EXPORT BUSINESS EITH ER AS UNDERLYING OR A HEDGE. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THIS CASE, THE ASSESSEE WAS ENGAGED IN T HE BUSINESS OF MANUFACTURING AND EXPORT OF HOSIERY GARMENTS. DURI NG THE COURSE OF EXPORT, THE ASSESSEE ENTERED INTO DERIVATIVE CON TRACT. THE ASSESSEE INCURRED LOSS IN THIS TRANSACTION. THE AS SESSEE CLAIMED IT AS BUSINESS LOSS. ACCORDING TO THE ASSESSING OFFICE R THIS LOSS WAS NOT BUSINESS LOSS AND IT IS A SPECULATIVE LOSS AND THIS TRANSACTION IS SPECULATIVE IN NATURE AS SUCH THE LOSS INCURRED ON THIS TRANSACTION CANNOT BE SET OFF AGAINST BUSINESS INCO ME OF THE ASSESSEE. ACCORDING TO THE LD. AUTHORISED REPRESEN TATIVE FOR ASSESSEE, THE DERIVATIVE TRANSACTION CANNOT FALL UNDER SEC.73. 25 ITA NO.518/MDS/2014 EXPLANATION TO SEC.73 CREATES A DEEMING FICTION BY WHICH AMONG THE ASSESSEE, WHO IS A COMPANY, AS INDICATED IN THE SAID EXPLANATION DEALING WITH THE TRANSACTION OF SHARE A ND SUFFER LOSS, SUCH LOSS SHOULD BE TREATED TO BE SPECULATIVE TRANS ACTION WITHIN THE MEANING OF SEC.73 OF THE ACT, NOTWITHSTANDING T HE FACT THAT THE DEFINITION OF SPECULATIVE TRANSACTION MENTIONED IN SEC.43(5) OF THE ACT, THE TRANSACTION IS NOT OF THAT NATURE AS THERE HAS BEEN ACTUAL DELIVERY OF THE SCRIPS OF SHARE. AS PER THE DEFINITION OF SEC.43(5), TRADING OF SHARES WHICH IS DONE BY TAKIN G DELIVERY DOES NOT COME UNDER THE PURVIEW OF THE SAID SECTION. SI MILARLY, AS PER CLAUSE (D) OF SEC.43(5), DERIVATIVE TRANSACTION IN SHARES IS ALSO NOT SPECULATION TRANSACTION AS DEFINED IN THE SAID SECT ION. THEREFORE, BOTH PROFIT/LOSS FROM ALL THE SHARE DELIVERY TRANSA CTIONS AND DERIVATIVE TRANSACTIONS ARE HAVING THE SAME MEANING , SO FAR AS SEC.43(5) OF THE ACT IS CONCERNED. AGAIN, IN VIEW OF THE FACT THAT BOTH DELIVERY TRANSACTIONS AND DERIVATIVE TRANSACTI ONS ARE NON- SPECULATIVE AS FAR AS SEC.43(5) IS CONCERNED, IT FO LLOWS THAT BOTH WILL HAVE THE SAME TREATMENT AS FAR AS APPLICATION OF EXPLANATION TO SEC.73 IS CONCERNED. THEREFORE, AGGREGATION OF THE SHARE TRADING PROFIT AND LOSS FROM DERIVATIVE TRANSACTION S SHOULD BE DONE BEFORE THE EXPLANATION TO SEC.73 IS APPLIED. THE A BOVE VIEW HAS BEEN TAKEN BY SPECIAL BENCH OF THIS TRIBUNAL, MUMBA I BENCH, IN THE CASE OF CIT V. CONCORD COMMERCIAL PVT. LTD. (20 05) 95 ITD 117 (MUM)(SB). IN THIS CASE, THE SPECIAL BENCH HEL D THAT : BEFORE CONSIDERING WHETHER THE ASSESSEES CASE IS HIT BY THE DEEMING PROVISION OF EXPLANATION TO SEC. 73 OF THE ACT, THE AGGREGATE OF THE BUSINESS PROFIT / LOSS HA S TO BE WORKED OUT BASED ON THE NON-SPECULATIVE PROFITS; EI THER IT IS FROM SHARE DELIVERY OR FROM SHARE DERIVATIVE . 8. FROM THE ABOVE, IT IS CONCLUDED THAT BOTH TRADING O F SHARES AND DERIVATIVE TRANSACTIONS ARE NOT COMING UNDER TH E PURVIEW OF SECTION 43(5) OF THE ACT WHICH PROVIDES DEFINITION OF SPECULATIVE TRANSACTION EXCLUSIVELY FOR PURPOSES OF SECTION 28 TO 41 OF THE ACT. AGAIN, THE FACT THAT BOTH DELIVERY BASED TRANS ACTION IN SHARES AND DERIVATIVE TRANSACTIONS ARE NON-SPECULATIVE AS FAR AS SECTION 43(5) IS CONCERNED GOES TO CONFIRM THAT BOTH WILL H AVE SAME TREATMENT AS REGARDS APPLICATION OF THE EXPLANATION TO SECTION 73 IS CONCERNED, WHICH CREATES A DEEMING FICTION. NOW, BEFORE APPLICATION OF THE SAID EXPLANATION, AGGREGATION OF THE BUSINESS 26 ITA NO.518/MDS/2014 PROFIT/LOSS IS TO BE WORKED OUT IRRESPECTIVE OF THE FACT, WHETHER IT IS FROM SHARE DELIVERY TRANSACTION OR DERIVATIVE TR ANSACTION. 8.1 NOW, THIS VIEW HAS BEEN TAKEN BY CO-ORDINATE, CHENNAI IN THE CASE M/S. AISHWARYA & CO P. LTD IN ITA NO.860/ MDS/2014, DATED 29.05.2015, WHEREIN THEY FOLLOWED THE JUDGMEN T OF THE CALCUTTA HIGH COURT IN THE CASE OF M/S. BALJIT SECU RITIES PVT. LTD. (88 CCH 313) WHEREIN HELD AS UNDER:- CLAUSE (D) OF SECTION 43(5) BECAME EFFECTIVE WITH EFFECT FROM 1ST APRIL, 2006. THEREFORE, PRIOR TO 1ST APRIL , 2006 ANY TRANSACTION IN WHICH A CONTRACT FOR THE PURCHAS E OR SALE OF ANY COMMODITY INCLUDING STOCKS AND SHARES W AS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN B Y THE ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY OR SCR IP WAS A SPECULATIVE TRANSACTION. SUB-SECTION 1 OF SECTION 73 PROVIDES AS FOLLOWS: (1) ANY LOSS, COMPUTED IN RESPECT OF A SPECULATIO N BUSINESS CARRIED ON BY THE ASSESSEE, SHALL NOT BE S ET OFF EXCEPT AGAINST PROFITS AND GAINS, IF ANY, OF ANOTHE R SPECULATION BUSINESS. THE RESULTANT EFFECT WAS THAT ANY LOSS ARISING OUT OF SPECULATIVE TRANSACTION COULD ONLY HAVE BEEN SET OF F AGAINST PROFITS ARISING OUT OF SPECULATIVE TRANSACT ION. IN THE PRESENT CASE, THE ASSESSEE, AS ALREADY INDICATE D, HAS BEEN DEALING IN SHARES WHERE DELIVERY WAS IN FACT T AKEN AND ALSO IN SHARES WHERE DELIVERY WAS NOT ULTIMATEL Y TAKEN. IN OTHER WORDS, THE ASSESSEE HAS BEEN DEALIN G IN ACTUAL SELLING AND BUYING OF SHARES AS ALSO DEALING IN SHARES ONLY FOR THE PURPOSE OF SETTLING THE TRANSAC TION OTHERWISE THAN BY ACTUAL DELIVERY. THE QUESTION ARI SE WHETHER THE LOSSES ARISING OUT OF THE DEALINGS AND TRANSACTION IN WHICH THE ASSESSEE DID NOT ULTIMATEL Y TAKE DELIVERY OF THE SHARES OR GIVE DELIVERY OF THE SHAR ES COULD BE SET OFF AGAINST THE INCOME ARISING OUT OF THE DE ALINGS AND TRANSACTIONS IN ACTUAL BUYING AND SELLING OF SH ARES. AN ANSWER TO THIS QUESTION IS TO BE FOUND IN THE EXPLANATION APPENDED TO SECTION 73 WHICH READS AS FOLLOWS: EXPLANATION: WHERE ANY PART OF THE BUSINESS OF A COMPANY OTHER THAN A COMPANY WHOSE GROSS TOTAL INCO ME CONSISTS MAINLY OF INCOME WHICH IS CHARGEABLE UNDER THE HEADS INTEREST ON SECURITIES, OR A COMPANY THE 27 ITA NO.518/MDS/2014 PRINCIPAL BUSINESS OF WHICH IS THE BU9SINESS OF BAN KING OR THE GRANTING OF LOANS AND ADVANCES) CONSISTS IN THE PURCHASE AND SALE OF SHARES OF OTHER COMPANIES, SUC H COMPANY SHALL, FOR THE PURPOSES OF THIS SECTION, BE DEEMED TO BE CARRYING ON A SPECULATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSISTS OF THE PURCHA SE. IN ORDER TO RESOLVE THE ISSUE BEFORE US, THE SECTION H AS TO BE READ IN THE MANNER AS FOLLOWS: EXPLANATION : WHERE ANY PART OF THE BUSINESS OF A COMPANY ( . . . .. .. .. .. .. .. .. . .. .. . ) CONSIST IN THE PURCHASE AND SALE OF SHA RES OF OTHER COMPANIES, SUCH COMPANY SHALL, FOR THE PUR POSES OF THIS SECTION, BE DEEMED TO BE CARRYING ON A SPEC ULATION BUSINESS TO THE EXTENT TO WHICH THE BUSINESS CONSIS TS OF THE PURCHASE AND SALE OF SUCH SHARES. IT WOULD, THUS, APPEAR THAT WHERE AN ASSESSEE, BEIN G THE COMPANY, BESIDES DEALING IN OTHER THINGS ALSO DEALS IN PURCHASE AND SALE OF SHARES OF OTHER COMPANIES, THE ASSESSEE SHALL BE DEEMED TO BE CARRYING ON A SPECUL ATION BUSINESS. THE ASSESSEE, IN THE PRESENT CASE, PRINCI PALLY IS A SHARE BROKER, AS ALREADY INDICATED. THE ASSESSEE IS ALSO IN THE BUSINESS OF BUYING AND SELLING OF SHARES FOR SELF WHERE ACTUAL DELIVERY IS TAKEN AND GIVEN AND ALSO I N BUYING AND SELLING OF SHARES WHERE ACTUAL DELIVERY WAS NOT INTENDED TO BE TAKEN OR GIVEN. THEREFORE, THE E NTIRE TRANSACTION CARRIED OUT BY THE ASSESSEE, INDICATED ABOVE, WAS WITHIN THE UMBRELLA OF SPECULATIVE TRANSACTION. THERE WAS, AS SUCH, NO BAR IN SETTING OFF THE LOSS ARISIN G OUT OF DERIVATIVES FROM THE INCOME ARISING OUT OF BUYING A ND SELLING OF SHARES. THIS IS WHAT THE LEARNED TRIBUNA L HAS DONE. 9. FROM THE ABOVE DECISION OF THE CALCUTTA HIGH COURT IN THE CASE OF BALJIT SECURITIES PVT. LTD. CITED SUPRA , THE ISSUE STANDS COVERED IN FAVOUR OF THE ASSESSEE. HOWEVER, WE MAKE IT CLEAR THAT TOTAL TRANSACTION CONSIDERED FOR DETERMINING THIS BUSINESS LOSS FROM DERIVATIVE TRA NSACTIONS CANNOT BE MORE THAN THE TOTAL EXPORT TURNOVER OF T HE ASSESSEE FOR THE ASSESSMENT YEAR UNDER CONSIDERATIO N AND IF THE DERIVATIVE TRANSACTION IS IN EXCESS OF EXPORT T URNOVER, THEN THAT LOSS SUFFERED IN RESPECT OF THAT PORTION OF EXCESS 28 ITA NO.518/MDS/2014 TRANSACTIONS TO BE CONSIDERED AS SPECULATIVE LOSS O NLY AS THAT EXCESS DERIVATIVE TRANSACTION HAS NO PROXIMITY WITH EXPORT TURNOVER AND THE ASSESSING OFFICER IS DIRECT ED TO COMPUTE ACCORDINGLY. THIS GROUND IS ALLOWED AS INDI CATED ABOVE . 6. AS COULD BE SEEN FROM THE ABOVE, THE TRIBUNAL HE LD THAT FOREX TRANSACTIONS ENTERED INTO BY THE ASSESSEE AR E NOT DERIVATIVE TRANSACTIONS. HOWEVER, IT WAS HELD THAT TRANSACTIONS CONSIDERED FOR DETERMINING THE BUSINES S LOSS FROM DERIVATIVE TRANSACTIONS CANNOT BE MORE THAN T HE TOTAL EXPORT TURNOVER OF THE ASSESSEE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION AND IF DERIVATIVE TRANSACTIONS ARE IN EXCESS OF EXPORT TURNOVER THEN THE LOSS SUFFERED IN RESPECT OF PORTION OF THAT EXCESS TRANSACTIONS ARE TO BE CONSI DERED AS SPECULATIVE LOSS ONLY SINCE THE EXCESS DERIVATIVE T RANSACTION HAS NO PROXIMITY WITH THE EXPORT TURNOVER. IN THIS CASE ALSO, IT APPEARS THAT FOREX TRANSACTIONS ENTERED INTO BY THE ASSESSEE ARE MORE THAN THE EXPORT TURNOVER. THEREFORE, WE DI RECT THE ASSESSING OFFICER TO FOLLOW THE DECISION OF THIS TR IBUNAL IN THE CASE OF MAJESTIC EXPORTS (SUPRA) AND RECOMPUTE THE BUSINESS LOSS IN LINE WITH THE ORDER OF THE TRIBUNA L, AFTER 29 ITA NO.518/MDS/2014 CALLING FOR DETAILS FROM THE ASSESSEE AND GIVING O PPORTUNITY OF BEING HEARD . 7. IN THE RESULT, APPEAL OF THE REVENUE IS PARTLY A LLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 26 TH AUGUST, 2015. SD/- SD/- ( # ) ( & (# ) ( CHANDRA POOJARI ) ( CHALLA NAGENDRA PRASAD ) * / ACCOUNTANT MEMBER ( * / JUDICIAL MEMBER ( /CHENNAI, , /DATED 26 TH AUGUST, 2015 SOMU ./ 0/ /COPY TO: 1. APPELLANT 2. RESPONDENT 3. 1 () /CIT(A) 4. 1 /CIT 5. / 5 /DR 6. /GF .