VST Industries Ltd., Hyderabad V. Addl. CIT, Range-3, Hyderabad

ITA 647/HYD/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 4809 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 3 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-08-2013
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 02-05-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M H NAIK
• Assessee Lawyers: T S AJAI
• Keywords: Business expenditure; Speculation loss; Speculative transactions
• Section: 37(1); 43(5); 37; 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD A BENCH, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.647/HYD/2012 ASSESSMENT YEAR 2008-09. VST INDUSTRIES LTD., -V- ADDL. CIT, RANGE-3, HYDERABAD. HYDERABAD. PAN: AAACV6799C (APPELLANT) (RESPONDENT) APPELLANT BY : SRI T.S. AJAI RESPONDENT BY : SHRI M.H. NAIK DATE OF HEARING : 25-6-2013 DATE OF PRONOUNCEMENT: 23-8 -2013 ORDER PER SAKTIJIT DEY, J.M: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 29-2-2012 OF CIT (A)-IV, HYDERABAD PASSED IN ITA NO.323/ADDL.CIT R.3/IT(A)-IV/2010-11 PERTAINING TO ASSESSMENT YEAR 2008-09. 2. BRIEFLY THE FACTS ARE, THE ASSESSEE IS A COMPAN Y ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF CIGARETTE S. FOR THE ASSESSMENT YEAR UNDER DISPUTE, THE ASSESSEE FILED I TS RETURN OF INCOME ON 26-9-2008 DECLARING A TOTAL INCOME OF RS.81,79,00,180/-. DURING THE SCRUTINY ASSESSMENT PROCEEDINGS, WHILE EXAMINING THE ASSESSEES ACCOUNTS THE ASSESSI NG OFFICER NOTICED THAT THE ASSESSEE HAD CLAIMED MARKED TO MA RKET LOSS 2 ITA NO.647 OF 2012 VST INDUSTRIES LTD., HYD. ON FORWARD COVERS OUTSTANDING AS ON 31-3-2008 AT RS .40,00,107. THE ASSESSING OFFICER WHEN ASKED THE ASSESSEE TO EX PLAIN WHY IT SHOULD NOT BE DISALLOWED AS PER THE PROVISIONS C ONTAINED UNDER SEC. 43(5)(D), THE ASSESSEE SUBMITTED THAT IT HAD U SED THE FORWARD CONTRACTS ARE FOR HEDGING FOREIGN CURRENCY EXPOSURE. IT WAS SUBMITTED THAT A BINDING OBLIGATION ACCRUED AGA INST THE COMPANY THE MINUTE IT ENTERED INTO FORWARD EXCHANGE CONTRACTS. IT WAS SUBMITTED THAT MOST OF THE FORWARD CONTRACTS ARE SETTLED BY DELIVERY OF CURRENCY (USD) AND LOSS ON ACCOUNT OF F ORWARD CONTRACTS SPRINGS DIRECTLY FROM AND IS INCIDENTAL T O THE CARRYING ON OF BUSINESS. IT WAS SUBMITTED THAT A DIRECT AND PRO XIMATE NEXUS EXISTS BETWEEN EXPORT/IMPORT BUSINESS AND THE LOSS ON ACCOUNT OF FOREX DERIVATIVES. IT WAS SUBMITTED THAT THE LOSS IS NOT INCURRED ON A CAPITAL ACCOUNT OR FIXED ASSETS SO AS TO MAKE IT A CAPITAL LOSS AND IT WAS SUBMITTED THAT THE COMPANY CONSISTE NTLY FOLLOWED THE SAME METHOD OF ACCOUNTING IN REGARD TO RECOGNIT ION OF PROFIT OR LOSS BOTH, IN RESPECT OF FORWARD FOREIGN EXCHANG E CONTRACT AS PER THE RATE PREVAILING ON 31 ST MARCH OF THE YEAR. IT WAS SUBMITTED THAT LIABILITY IS SAID TO HAVE BEEN CRYST ALLISED WHEN A PENDING OBLIGATION ON THE BALANCE SHEET DATE IS DET ERMINABLE WITH REASONABLE CERTAINITY. THE ASSESSEE REFERRING TO AS -11 OF ICAI SUBMITTED THAT WHEN THE TRANSACTION IS NOT SETTLED IN THE SAME ACCOUNTING PERIOD AS THAT IN WHICH IT OCCURRED, THE EXCHANGE DIFFERENCE ARISES OVER MORE THAN ONE ACCOUNTING PER IOD WHICH REQUIRES THE VALUE OF FORWARD CONTRACTS TO BE REAS SESSED AS ON 31 ST MARCH AND GAIN/LOSS ACCOUNTED IN THE CURRENT YEAR IS REVERSED IN THE NEXT YEAR. 3. IT WAS SUBMITTED THAT THE FORWARD FOREIGN EXC HANGE CONTRACTS HAVE ALL THE TRAPPINGS OF STOCK IN TRADE THE ASSESSEE SUBMITTED THAT IN THE ULTIMATE ANALYSIS, THERE IS NO REVENUE 3 ITA NO.647 OF 2012 VST INDUSTRIES LTD., HYD. EFFECT AND IT IS ONLY THE TIMING OF TAXATION OF LOS S/PROFIT. THE ASSESSEE FURTHER SUBMITTED THAT WHEN FORWARD CONTRA CT IS ENTERED INTO BY THE COMPANY TO SELL THE FOREIGN CURRENCY AT AN AGREED PRICE AT A FUTURE DATE FALLING BEYOND THE LAST DATE OF ACCOUNTING PERIOD, A GAIN OR LOSS AS THE CASE MAY BE ACCRUES T O THE COMPANY ON ACCOUNT OF EVALUATION OF THE CONTRACT ON THE LAS T DATE OF THE ACCOUNTING PERIOD I.E., BEFORE THE DATE OF MATURITY OF THE FORWARD CONTRACT. IT WAS SUBMITTED THAT THE MARKED TO MA RKET LOSS ON FORWARD CONTRACTS ARE TO BE ALLOWED AS EXPENDITURE U/S 37(1) OF THE ACT. IN SUPPORT OF SUCH CONTENTION, THE ASSES SEE RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN CASE O F CIT VS. WOODWARD GOVERNOR INDIA PVT. LTD. 312 ITR 254 AND T HE DECISION OF INCOME-TAX APPELLATE TRIBUNAL (SPECIAL BENCH) IN CASE OF DCIT VS. BANK OF BAHRAIN AND KUWAIT (ITA NOS. 4404 AND 1883/MUM/2004), THE ASSESSING OFFICER HOWEVER DID N OT ACCEPT THE CONTENTION OF THE ASSESSEE. THE ASSESSING OFFI CER REFERRING TO THE CLARIFICATION REGARDING ALLOWING LOSS ON ACCOU NT OF FOREIGN EXCHANGE DERIVATIVE AS PER THE INSTRUCTION NO.3 OF 2010 DATED 23-3-2010 ISSUED BY THE CBDT NOTED THAT IN THE SAID INSTRUCTION, IT HAS BEEN EXPLAINED THAT MARKED TO MARKET IS IN S UBSTANCE A METHODOLOGY OF ASSIGNING VALUE REGARDING ALLOWING LOSSES HELD IN THE FINANCIAL INSTRUMENT BASED ON ITS MARKET PRICE ON THE CLOSING DAY OF THE ACCOUNTING OR REPORTING THE PERIOD, SO AS TO REPORT THEIR ACTUAL VALUE ON THE REPORTING DATE. HE FURTHE R EXPLAINED THAT EVEN WHERE COMPANIES MAKE SUCH AN ADJUSTMENT THROU GH THEIR TRADING OR PROFIT/LOSS ACCOUNT, THEY BOOK A CORRESP ONDING LOSS (I.E. THE DIFFERENCE BETWEEN PURCHASES PRICE AND TH E VALUE AS ON THE VALUATION DATE) IN THEIR ACCOUNTS BUT SUCH LOS S IS A NOTIONAL LOSS AS NO SALE/CONCLUSION/SETTLEMENT OF CONTRACT H AS TAKEN PLACE AND THE ASSET CONTINUES TO BE OWNED BY THE COMPANY. HE FURTHER OBSERVED THAT IN THE INSTRUCTION, IT HAS BEEN EXPLA INED THAT IN 4 ITA NO.647 OF 2012 VST INDUSTRIES LTD., HYD. CASES WHERE NO SALE OR SETTLEMENT HAS ACTUALLY TAK EN PLACE AND THE LOSS ON MARKED TO MARKET BASIS HAS RESULTED IN REDUCTION OF BOOK PROFITS, SUCH A NOTIONAL LOSS WOULD BE CONTING ENT IN NATURE AND CANNOT BE ALLOWED TO BE SET OFF AGAINST THE TAX ABLE INCOME. HE FURTHER NOTED THAT WITH REGARD TO LOSS ON A FOR EX DERIVATIVE TRANSACTION ARISING ON ACTUAL SETTLEMENT/CONCLUSION OF CONTRACT AND IS NOT A NOTIONAL OR MARKED TO MARKET BOOK ENTR Y, A FURTHER QUESTION WILL ARISE AS TO WHETHER SUCH A LOSS IS ON ACCOUNT OF A SPECULATIVE TRANSACTION AS CONTEMPLATED IN SECTION 43(5)(D) OF THE ACT. 4. AS PER PROVISO (D) TO SUB-SECTION (5) OF SECTIO N 43, ANY ELIGIBLE TRANSACTION IN RESPECT OF TRADING IN DERI VATIVES REFERRED TO IN CLAUSE (AC) OF SECTION 2 OF THE SECURITIES CO NTRACTS (REGULATION) ACT, 1956, THAT HAS BEEN CARRIED OUT I N A RECOGNISED STOCK EXCHANGE SHALL NOT BE TREATED AS A SPECULATIV E TRANSACTION. THE ASSESSING OFFICER FOLLOWING AFORESAID INSTRUCTI ON OF CBDT ULTIMATELY CAME TO A CONCLUSION THAT THE ASSESSEES CLAIM OF LOSS IS NOT ALLOWABLE. WITH REGARD TO THE CONTENTION OF THE ASSESSEE REGARDING ALLOWABILITY OF LOSS AS ACCRUED EXPENDIT URE U/S 37(1) OF THE ACT, THE ASSESSING OFFICER NEGATED SUCH CLAIM BY OBSERVING THAT THE PROVISION CONTAINED U/S 37(1) IS A RESIDUA RY PROVISION AND THERE IS NO SPECIFIC PROVISION DEALING WITH ADJ USTMENTS BASED ON FOREIGN EXCHANGE FLUCTUATIONS. HE OPINED THAT T HE ESSENCE OF DEDUCTIBILITY UNDER SECTION 37 IS THAT THE INCREASE IN LIABILITY DUE TO FOREIGN EXCHANGE FLUCTUATIONS MUST FULFIL THE TW IN REQUIREMENTS OF EXPENDITURE AND THE FACTUM OF SUCH EXPENDIT URE HAVING BEEN LAID OUT OR EXPENDED. IT WAS FURTHER OBSERV ED BY THE ASSESSING OFFICER THAT THE EXPRESSION EXPENDITURE I S WHAT IS PAID OUT AND SOMETHING WHICH IS GONE IRRETRIEVABLE. HE FURTHER OPINED THAT INCREASE IN LIABILITY AT ANY POINT OF TIME PRI OR TO PAYMENT 5 ITA NO.647 OF 2012 VST INDUSTRIES LTD., HYD. CANNOT FALL WITHIN THE MEANING OF EXPENDITURE IN S ECTION 37(1) AS THE REQUIREMENT OF EXPENDITURE IS NOT MEANT AND SI MILARLY THE REQUIREMENT OF MONEY EXPENDED IS ALSO NOT SATISFIED . THE ASSESSING OFFICER WHILE COMING TO THE AFORESAID CON CLUSION RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN CAS E OF SOUTHERN TECHNOLOGIES LIMITED REPORTED IN 320 ITR 577 WHERE IN IT WAS HELD THAT WHAT IS NOT DEDUCTIBLE UNDER A SPECIFIC PROVIS ION IS NOT DEDUCTIBLE AS GENERAL BUSINESS EXPENDITURE. HE AL SO RELIED UPON A DECISION OF HONBLE A.P. HIGH COURT IN CASE OF M S RAJU REPORTED IN 298 ITR 373 WHEREIN IT IS HELD THAT THE AMOUNT PAID SUBSEQUENT TO THE DATE OF BALANCE-SHEET IS NOT DEDU CTIBLE. THE ASSESSEE BEING AGGRIEVED OF THE ASSESSMENT ORDER PR EFERRED AN APPEAL BEFORE THE CIT (A). 5. IN COURSE OF HEARING BEFORE US, IT WAS CONTENDED BY THE ASSESSEE THAT THE CONCERNED FORWARD CONTRACTS ARE R ELATED TO EXPORT/IMPORT TRANSACTIONS OF THE ASSESSEE AND THE RESTATEMENT OF LIABILITY WAS AS PER AS-11 OF ICAI. IT WAS SUBMI TTED THAT THE LOSS PERTAINED TO THE REVENUE TRANSACTIONS AND TH E FORWARD CONTRACTS ARE FOR HEDGING THE FOREIGN CURRENCY EXPO SURE AND THAT THE LIABILITY AT THE RE-STATED VALUES CRYSTALLISES WHEN THE PENDING OBLIGATIONS AS AT THE BALANCE-SHEET DATE IS DETERMI NABLE WITH CERTAINTY. IT WAS SUBMITTED THAT LOSS ON ACCOUNT OF RESTATEMENT OF THE OUTSTANDING FORWARD CONTRACTS IS REAL AND INCU RRED IN PRESENTI, SINCE AS PER THE CONTRACT, THE ASSESSEE I S BOUND AND OBLIGED TO PAY THE SAME. IT WAS SUBMITTED THAT IN ANY EVENT THE INSTRUCTION ISSUED BY THE CBDT CANNOT OVER-RIDE THE SETTLED PRINCIPLES OF LAW. IT WAS FURTHER CONTENDED BY THE ASSESSEE THAT THE REQUIREMENTS OF SECTION 37 WERE FULLY SATISFIED AS LOSS PERTAINED TO THE REVENUE TRANSACTIONS OF THE ASSESS EE AND THE SAME IS LAID DOWN AND EXPENDED FOR THE PURPOSE OF B USINESS. IT 6 ITA NO.647 OF 2012 VST INDUSTRIES LTD., HYD. WAS CONTENDED THAT THE TERM PAID ALSO INCLUDES PAYABLE AND WHAT IS RELEVANT AND NECESSARY IS A BINDING OBLIGA TION ON THE PART OF THE ASSESSEE. IN SUPPORT OF HIS CONTENTION, THE ASSESSEE RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN CASE OF CIT VS. WOODWARD GOVERNOR INDIA PVT. LTD. 312 ITR 254 AND T HE DECISION OF INCOME-TAX APPELLATE TRIBUNAL (SPECIAL BENCH) IN CASE OF DCIT VS. BANK OF BAHRAIN AND KUWAIT ( 41 SOT 290). 6. THE CIT (A) AFTER CONSIDERING THE SUBMISSIONS O F THE ASSESSEE THOUGH ACCEPTED THE FACT THAT THE FORWARD CONTRACTS OF THE ASSESSEE HAD BEEN ENTERED INTO IN THE ORDINARY COURSE OF BUSINESS IN RESPECT OF UNDERLYING IMPORT/EXPORT BUS INESS TRANSACTIONS BUT HE HOWEVER OBSERVED THAT THE FORWA RD CONTRACTS IN ESSENCE CANNOT BE SAID TO BE DIFFERENT FROM DERI VATIVES. HE FURTHER WAS OF THE VIEW THAT MARKED TO MARKET IS ON LY A METHODOLOGY OF ASSIGNING VALUE TO A POSITION HELD I N A FINANCIAL INSTITUTION BASED ON ITS MARKET PRICE ON THE CLOSI NG DAY OF THE ACCOUNTING OR REPORTING PERIOD. HE ACCORDINGLY HE LD THAT THE MARKED TO MARKET LOSS THEREFORE IS BASICALLY A NOTI ONAL LOSS. THE CIT (A) FURTHER CONCLUDED THAT AS THE ACTION OF TH E ASSESSING OFFICER IS IN CONFORMITY WITH THE BOARDS INSTRUCT ION NO.3 OF 2010 DATED 23-3-2010 ISSUED BY THE CBDT, MARKED TO MARK ET LOSS IS ONLY NOTIONAL AND CONTINGENT LOSS, THERE IS NO INFI RMITY IN THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING THE SAME. SO FAR AS THE DECISIONS RELIED UPON BY THE ASSESSEE ARE CONCE RNED, THE CIT (A) HELD THAT THE DECISION OF HONBLE SUPREME COURT IN CASE OF WOODWARD GOVERNOR INDIA PVT. LTD. (SUPRA) IS NOT A PPLICABLE TO FORWARD CONTRACTS/DERIVATIVES BUT ONLY TO FOREIGN E XCHANGE FLUCTUATIONS IN RESPECT OF ASCERTAINED POSITIONS ON LY. WITH REGARD TO THE DECISION OF THE INCOME-TAX APPELLATE TRIBUNA L MUMBAI SPECIAL BENCH IN CASE OF BANK OF BAHRAIN AND KUWA IT (SUPRA), 7 ITA NO.647 OF 2012 VST INDUSTRIES LTD., HYD. THE CIT (A) OBSERVED IN THAT DECISION BOARDS INSTR UCTIONNO.3 OF 2010 HAD NOT BEEN CONSIDERED. BEING AGGRIEVED OF T HE AFORESAID ORDER OF THE CIT (A), THE ASSESSEE IS IN APPEAL BEF ORE US RAISING THE FOLLOWING GROUNDS:- 1. THE CIT (A) HAS ERRED IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE CASE IN CONFIRMING THE DISALLO WANCE OF THE AMOUNT OF RS.40,00,107/- BEING THE MARKED TO MA RKET LOSS (MTM) INCURRED BY THE ASSESSEE IN RESPECT OF I TS OUTSTANDING FOREIGN CURRENCY FORWARD CONTRACT, IGNO RING/ DISREGARDING THE FACT THAT SUCH FORWARD CONTRACTS H AVE BEEN ENTERED INTO IN THE ORDINARY COURSE OF BUSINE SS IN RESPECT OF THE UNDERLYING EXPORT BUSINESS TRANSACTI ONS OF THE APPELLANT. 2. THE CIT (A) HAVING HELD THAT THE FORWARD CONTRAC TS ARE BUSINESS TRANSACTIONS IS NOT CORRECT IN MAKING A CONTRADICTORY OBSERVATION THAT THE FO4RWARD CONTRAC TS IN ESSENCE CANNOT BE SAID TO BE DIFFERENT FROM DERIVA TIVES. 3. THE CIT (A) OUGHT TO HAVE APPRECIATED THE MTM LO SS CLAIMED BY THE APPELLANT IS NOT A NOTIONAL LOSS, BU T IS AN ACCRUED LIABILITY ON ACCOUNT OF THE UNDERLYING FORW ARD CONTRACTS, FOLLOWING THE RATIO LAID DOWN BY THE HON BLE SUPREME COURT IN THE CASE OF CIT VS. WOODWARD GOVER NOR INDIA (P) LTD. (3123 ITR 254). 4. THE CIT (A) OUGHT TO HAVE ALSO APPRECIATED THE CONTENTION THAT THE CBDT INSTRUCTION NO.3 OF 2010 I S NOT APPLICABLE TO THE FORWARD CONTRACTS ENTERED INTO IN THE ORDINARY COURSE OF BUSINESS IN RESPECT OF UNDERLYIN G EXPORT BUSINESS TRANSACTIONS AND THAT IN ANY EVENT THE CBD T INSTRUCTIONS ARE AGAINST THE SETTLED PRINCIPLES OF ACCOUNTING AND PRECEDENT CASES AND THEREFORE IS NOT TENABLE. 8 ITA NO.647 OF 2012 VST INDUSTRIES LTD., HYD. 7. THE LEARNED AUTHORISED REPRESENTATIVE FOR THE AS SESSEE REITERATING THE CONTENTIONS RAISED BEFORE THE LOWER AUTHORITIES SUBMITTED THAT THERE IS NO DISPUTE WITH REGARD TO T HE LIABILITY CLAIMED BY THE ASSESSEE BUT THE DISPUTE IS ONLY WIT H REGARD TO ALLOWABILITY AS THE ASSESSING OFFICER HAS DISALLOWE D THE LOSS BY TREATING IT AS NOTIONAL. IT WAS SUBMITTED THAT NOT ONLY LOSS WAS RECOGNISED IN THE BOOKS OF ACCOUNTS BUT ALSO DEBITE D TO PROFIT AND LOSS ACCOUNT. HENCE, IT CANNOT BE CONSIDERED TO BE A NOTIONAL. IT WAS FURTHER CONTENDED THAT THE BOARDS INSTRUCTION NO.3 OF 2010 DATED 23-3-2010 ISSUED BY THE CBDT IS NOT APPLICABL E AS IT IS RELATING TO DERIVATIVE TRANSACTION. IN ANY EVENT, THE CIRCULAR ISSUED BY THE BOARD CANNOT SUPERSEDE OR OVER-RIDE S ETTLED POSITION OF LAW. IT WAS SUBMITTED THAT THE FORWARD CONTRACT BEING PART AND PARCEL OF BUSINESS TRANSACTIONS OF THE ASS ESSEE, THE LOSS ARISING THERE FROM IS ALLOWABLE AS A BUSINESS EXPEN DITURE AS IT IS LAID OUT AND EXPENDED FOR THE PURPOSE OF BUSINESS. IN SUPPORT OF SUCH CONTENTION, THE LEARNED AUTHORISED REPRESENTAT IVE FOR THE ASSESSEE RELIED UPON THE FOLLOWING DECISIONS:- I) CIT, DELHI VS. WOODWARD GOVERNOR INDIA PVT. LTD (312 ITR 254) II) DCIT VS. BANK OF BAHRAIN AND KUWAIT (41 SOT 29 0 (MUM S.B) III) LEO EDIBLES & FATS LTD. VS. DCIT (ITA NO.396/H YD/2012 DATED 31-5-2013. IV) JUDGMENT OF HONBLE GUJARAT HIGH COURT IN TAX APPEAL NO.131 OF 2013 DATED 28-3-2013 IN CASE OF CIT VS. PANCHMAHAL STEEL LTD. 9 ITA NO.647 OF 2012 VST INDUSTRIES LTD., HYD. V) DECISION OF HONBLE GUJARAT HIGH COURT IN CASE O F CIT VS. FRIENDS AND FRIENDS SHIPPNG PVT. LTD. (TAX APPE AL; NO.251 OF 2010 DATED 23-8-2011) 8. THE LEARNED DEPARTMENTAL REPRESENTATIVE ON THE O THER HAND, STRONGLY SUPPORTING THE ORDERS OF THE REVENUE AUTHO RITIES SUBMITTED THAT AS PER THE BOARDS INSTRUCTION NO.3 OF 2010 DATED 23-3-2010 ISSUED BY THE CBDT, ASSESSEES CLAIM OF L OSS IS NOT ALLOWABLE U/S 43(5)(D) OF THE ACT AS IT IS IN THE N ATURE OF DERIVATIVES. IT WAS SUBMITTED THAT AS THE LOSS I S NOT UNDER ANY SPECIFIC PROVISION OF THE ACT, THE SAME CANNOT BE A LLOWED UNDER GENERAL PROVISIONS CONTAINED U/S 37 OF THE ACT. IN SUPPORT OF SUCH CONTENTION, THE LEARNED DEPARTMENTAL REPRESENT ATIVE RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN C ASE OF SOUTHERN TECHNOLOGIES LTD. (320 ITR 577). HE FURT HER SUBMITTED THAT SINCE THE AMOUNT HAS BEEN PAID BY THE ASSESSE E AFTER THE DATE OF BALANCE-SHEET, IT CANNOT BE ALLOWED AS AN E XPENDITURE U/S 37 OF THE ACT. IN SUPPORT OF SUCH CONTENTION, THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON THE DECISI ON OF HONBLE A.P. HIGH COURT IN CASE OF M.S. RAJU VS. CIT (29 8 ITR 373. 9. WE HAVE CONSIDERED RIVAL SUBMISSIONS OF THE PART IES AND PERUSED THE MATERIAL ON RECORD. THE UNDISPUTED FACT S ARE THE ASSESSEE IS NOT A DEALER IN FOREIGN EXCHANGE. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE O F CIGARETTES AND IN THE PROCESS OF ITS BUSINESS ACTIVITY IT EXPO RTS CIGARETTES TO FOREIGN COUNTRIES. IT IS ALSO A FACT THAT FOR THE PURPOSE OF ITS EXPORT/IMPORT ACTIVITIES, THE ASSESSEE HAS ENTERED INTO FORWARD CONTRACTS WITH BANKS RELATING TO ITS EXPORT/IMPORT BUSINESS TRANSACTIONS. THE CIT (A) HAS ALSO ACCEPTED THIS POSITION BY OBSERVING THAT THE FORWARD CONTRACT IN CASE OF THE ASSESSEE WAS ENTERED INTO IN THE ORDINARY COURSE OF BUSINESS IN RESPECT OF 10 ITA NO.647 OF 2012 VST INDUSTRIES LTD., HYD. UNDERLYING IMPORT/EXPORT BUSINESS TRANSACTIONS OF T HE ASSESSEE. HAVING COME TO SUCH A CONCLUSION, THE CIT (A) WAS N OT JUSTIFIED IN DISALLOWING THE CLAIM OF LOSS BY TREATING IT AS NOT IONAL AND IN THE NATURE OF DERIVATIVES BY SIMPLY FOLLOWING THE BOARD S INSTRUCTION NO.3 OF 2010 DATED 23-3-2010 ISSUED BY THE CBDT WHI CH IN OUR VIEW IS NOT APPLICABLE TO THE ASSESSEE AS IT RELATE S TO ONLY DERIVATIVE TRANSACTION WHEREAS THE FORWARD CONTRACT S IN THE CASE OF THE ASSESSEE IS CLEARLY LINKED TO THE EXPORT/IMP ORT BUSINESS TRANSACTIONS OF THE ASSESSEE. IN THE CIRCUMSTANCES , IT CANNOT BE SAID THAT THE LOSS IS NOTIONAL. THE CO-ORDINATE BE NCH OF THIS TRIBUNAL WHILE CONSIDERING IDENTICAL ISSUE IN CASE OF LEO EDIBLES & FATS LTD. VS. DCIT (ITA NO.396/HYD/2012 DATED 31- 5-2013 HELD AS UNDER:-. 13. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. ADMITTEDLY, IN THIS CASE, THE ASSESSEE IS N OT A DEALER IN FOREIGN EXCHANGE. THE ASSESSEE IS ENGAGED IN THE BU SINESS OF EDIBLE OILS. IN THE COURSE OF IMPORT OF VEGETABLE O IL FROM FOREIGN SUPPLIER, THE COMPANY ENTERED INTO A CONTRACT. IF T HE ASSESSEE IN ACCORDANCE WITH THE PROPOSED PURCHASE BOOKED A FORE IGN CURRENCY FORWARD CONTRACT WITH ITS BANKER IN ORDER TO SAFEGUARD THE COMPANYS INTEREST FROM LOSS ON ACCOUNT OF FORE IGN EXCHANGE FLUCTUATION THAT CONTRACT CANNOT FALL UNDER THE PUR VIEW OF SECTION 43(5) OF THE INCOME TAX ACT. AS PER SECTION 43(5), SPECULATIVE TRANSACTION MEANS A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF COMMODITY SETTLED OTHERWISE THE REBY ACTUAL DELIVERY OR TRANSFER OF SUCH COMMODITY. IF AN ASSES SEE IN ORDER TO HEDGE AGAINST THE EXCHANGE FLUCTUATION LOSSES HAD B OOKED FOREIGN EXCHANGE TRANSACTION IN THE FORWARD MARKET WITH THE BANK AND INCURRED ANY LOSS, THAT LOSS CANNOT BE CONSIDERED A S SPECULATIVE LOSS AND IT IS A BUSINESS LOSS. IT WAS HELD IN THE CASE OF CIT VS. BADRIDAS GAURIDU PVT. LTD. (2003) 261 ITR 256 (BOM. ) (H.C.) BY THE HONBLE BOMBAY HIGH COURT THAT ASSESSEE WAS NOT A DEALER IN FOREIGN EXCHANGE. THE ASSESSEE WAS AN EXPORTER OF C OTTON. IN ORDER TO HEDGE AGAINST THE LOSSES, THE ASSESSEE HAD BOOKED FOREIGN EXCHANGE IN THE FORWARD MARKET WITH THE BAN K. HOWEVER, THE EXPORT CONTRACTS ENTERED INTO BY THE ASSESSEE F OR EXPORT OF COTTON IN SOME CASES FAILED. IN THE CIRCUMSTANCES, THE ASSESSEE WAS ENTITLED TO CLAIM DEDUCTION IN RESPECT OF PAYME NT MADE ON ACCOUNT OF CANCELLATION OF FORWARD BOOKING OF FOREI GN EXCHANGE WITH BANKS AS A BUSINESS LOSS. 11 ITA NO.647 OF 2012 VST INDUSTRIES LTD., HYD. 14. FURTHER IN THE CASE OF CIT VS. SOORAJMULL NAGUR MULL (1981) 129 ITR 169 IT HAS BEEN HELD AS FOLLOWS : HERE THERE IS NO FINDING THAT ENTERING INTO FOREIG N EXCHANGE CONTRACT WAS THE NATURE OF THE BUSINESS OF THE ASSESSEE. THIS WAS ONLY AN INCIDENTAL PART OF T HE BUSINESS OPERATION FOR THE EXPORT AND IMPORT OF THE GOODS BY THE ASSESSEE. THE ASSESSEE WAS NOT A DEALER IN FOREIGN EXCHANGE CONTRACTS AS SUCH. FOREIGN EXCHANGE CONTRACTS WERE ONLY INCIDENTAL TO THE ASSESSEE'S REGULAR COURSE OF BUSINESS. THEREFOR E, ALL THE ARGUMENTS REGARDING WHETHER IT CONIES WITHIN THE EXPLN. 2, IN OUR OPINION, IS NOT QUITE RELEVANT BECAUSE THE LOSS WAS NOT SUSTAINED IN SPECULATIVE TRANSACTIONS WHICH ARE IN THE NATURE OF THE BUSINESS OF THE ASSESSEE. THE AAC HAD MADE A CATEGORICAL FINDING TO THIS EFFECT IN HIS ORDER WHI CH HAS BEEN UPHELD BY THE APPELLATE TRIBUNAL AND THAT FINDING OF FACT HAS NOT BEEN IN ANY WAY CHALLENGED IN THE QUESTION REFERRED BEFORE US. LEARNED ADVOCAT E FOR THE REVENUE DREW OUR ATTENTION TO SECTION 56 OF THE CONTRACT ACT AND SUBMITTED IN AID OF HIS SUBMISSION THAT THERE WAS AN IMPLIED TERM THAT THE ASSESSEE MIGHT NOT BE ABLE TO PERFORM THE FULL EXTE NT OF THE AMOUNT COVERED BY THE FOREIGN EXCHANGE CONTRACT. HERE, IN THIS CASE, THE CONTRACT WAS FOR 1,00,000 AND WHAT THE ASSESSEE PAID IN FULFILMENT OF THAT OBLIGATION WHICH WAS AN IMPLIED TERM AT THE TIME OF ENTERING INTO THE CONTRACT' DID NOT AMOUNT TO A BREACH OF THE CONTRACT. HE REFERRED US TO SECTION 56 OF THE CONTRACT ACT AND THE DECISION OF THE SUPREME COURT IN THE CASE OF NAIHATI JUTE MILLS LTD. V. KHYALIRAM JAGANNATH . HE SPECIALLY DREW OUR ATTENTION TO THE OBSERVATIONS APPEARING AT P. 825 ( OF SCR) ONWARDS WHERE UNDOUBTEDLY THE QUESTION OF LIQUIDATED DAMAGES AROSE IN THE CASE OF NON- PERFORMANCE OF A BREACH OF CONTRACT. SECTION 56 OF THE CONTRACT ACT ITSELF PROVIDES THAT FOR BARGAIN A ND IN CERTAIN CONTINGENCIES OF NON-PERFORMANCE LIQUIDATED DAMAGES MIGHT BE PROVIDED FOR IN THE CONTRACT, BUT THE LIQUIDATED DAMAGES PROCEED ON THE BASIS THAT THE CONTRACT HAS BEEN BREACHED BY THE CONDUCT OF THE PARTIES, I. E., THE RIGHTS OF THE PA RTIES ARE ADJUSTED IN THE MANNER CONTEMPLATED BY THE PARTIES AT THE TIME OF BARGAIN. AFTER CONSIDERING SEVERAL OTHER DECISIONS THIS VIEW WAS EXPRESSED BY THIS COURT IN THE CASE OF CIT V. PIONEER TRADING CO . 12 ITA NO.647 OF 2012 VST INDUSTRIES LTD., HYD. P. LTD. [1968] 70 ITR 347, WHERE THIS COURT HELD TH AT A CLAIM BASED ON BREACH OF CONTRACT DID NOT COME WITHIN THE MEANING OF ' CONTRACT SETTLED ' AS USED IN EXPLN. 2 OF S, 24(1) OF THE INDIAN I.T. ACT, 1922. 'CONTRACT SETTLED' MEANT CONTRACT SETTLED BEFORE BREACH. AFTER BREACH OF CONTRACT, THE CAUSE OF ACTI ON WAS NO LONGER BASED ON THE CONTRACT ITSELF BUT ON I TS BREACH. WHERE THE MONEY WHICH THE ASSESSEE RECEIVED WAS IN SETTLEMENT OF THE AMOUNT OF DAMAGES SUFFERED BY THE ASSESSEE BY REASON OF BREACH OF THE CONTRACT TO DELIVER, IT WAS HELD THAT THE RECEIPT WAS NOT A RECEIPT FROM A SPECULATIVE TRANSACTION AS DEFINED IN EXPLN. 2 AND THE MONEY RECEIVED WAS NOT LIABLE TO BE SET OFF AGAINST SPECULATION LOSS OF EARLIER YEARS. THIS VIEW HAS BE EN CONSISTENTLY FOLLOWED BY THIS COURT. REFERENCE MAY BE MADE TO THE DECISION IN THE CASE OF C1T V. RAMJEEVAN SARAWGEE & SONS [1977] 107 ITR 845, WHERE THIS COURT ALSO CONSIDERED THE DECISION OF TH E SUPREME COURT IN THE CASE OF DAVENPORT & CO. P. LTD. V. CIT [1975] 100 ITR 715, ON WHICH RELIANCE WAS PLACED ON BEHALF OF THE REVENUE AND IT WAS DISTINGUISHED. WE ARE IN RESPECTFUL AGREEMENT WITH THE OBSERVATIONS OF MR. JUSTICE SEN IN THAT CASE AT P. 849 OF THE REPORT IN SO FAR AS IT DISTINGUISHED THE DECISION OF THE SUPREME COURT IN THE CASE OF DAVENPORT & CO. P. LTD. [1975] 100 ITR 715. WE MAY ALSO REFER TO THE DECISION OF THIS COURT IN THE CAS E OF CIT V. ARUN GENERAL INDUSTRIES LTD. [1977] 110 ITR 286, WHERE ALL THESE PREVIOUS DECISIONS OF THIS COU RT HAVE BEEN NOTED. EXCEPT THE MADRAS HIGH COURT IN THE CASE OF R. CHINNASWAMI CHETTIAR V. CIT [1974] 96 ITR 353, ALL OTHER HIGH COURTS HAVE TAKEN A SIMILAR VIEW. THE DECISION OF THE SUPREME COURT IN THE CASE OF DAVENPORT & CO. P. LTD. [1975] 100 ITR 715 UPON WHICH RELIANCE WAS PLACED BY LEARNED ADVOCATE FOR THE REVENUE IS IN OUR OPINION NOT RELEVANT IN VIEW OF THE NATURE OF THE TRANSACTION WITH WHICH WE ARE DEALING. FURTHERMORE, IN VIEW OF THE CLEAR FINDING OF THE AAC AND THE TRIBUNAL, WE ARE OF THE OPINION THAT QUESTION NO. 1 MUST BE ANSWERED IN THE AFFIRMATIVE AND IN FAVOUR OF THE ASSESSEE. 15. IN VIEW OF THE ABOVE DISCUSSION, IN OUR OPINIO N, THE ASSESSING OFFICER HAS TO SEE THE FORWARD CONTRACT E NTERED BY THE ASSESSEE FOR COVERING RISK OF UNDERLYING TRANSACTIO N AND SUCH 13 ITA NO.647 OF 2012 VST INDUSTRIES LTD., HYD. UNDERLYING TRANSACTION TO BE SEGREGATED AND LOSS ON THESE TRANSACTIONS TO BE CONSIDERED AS BUSINESS LOSSES. L OSS ON OTHER TRANSACTION WHICH ARE NOT UNDERLYING TRANSACTION HA S TO BE CONSIDERED AS SPECULATIVE TRANSACTIONS. THE ASSESSE E BEFORE US FILED A CHART SHOWING THE DETAILS OF SPECULATIVE TR ANSACTION AT RS.19,63,702/-. THE ASSESSING OFFICER IS DIRECTED T O EXCLUDE THESE CONTRACTS AND DECIDE ACCORDINGLY. FOR THIS LIMITED PURPOSE, WE REMIT THE ISSUE BACK TO THE FILE OF THE ASSESSING O FFICER AND TO DECIDE ACCORDINGLY. 10. THE HONBLE GUJARAT HIGH COURT IN CASE OF FRIE NDS AND FRIENDS SHIPPING PVT. LTD. (TAX APPEAL; NO.251 OF 2 010 DATED 23- 8-2011)(SUPRA) AFTER FOLLOWING THE DECISIONS OF THE HONBLE BOMBAY HIGH COURT IN CASE OF CIT VS. BADRIDAS GAUR IDA (P) LTD (261 ITR 256) AND THE DECISION OF HONBLE CALCUTTA HIGH COURT IN CASE OF CIT VS. SOORAJMULL NAGARMULL (129 ITR 169) HELD THAT WHEN THE ASSESSEE IS NOT A DEALER IN FOREIGN EXCHAN GE AND FOR THE PURPOSE OF LEDGING THE LOSS DUE TO FLUCTUATION IN FOREIGN EXCHANGE WHILE IMPLEMENTING EXPORT CONTRACT, THE AS SESSEE HAD ENTERED INTO THE FORWARD CONTRACT WITH THE BANK, T HEN THE LOSS ARISING AS A RESULT OF SUCH FORWARD CONTRACT CANNO T BE SAID TO BE SPECULATIVE AS PER SECTION 43(5)(D) OF THE ACT. CO NSIDERED IN THE LIGHT OF RATIO IN THE JUDICIAL PRECEDENTS MENTIO NED HEREINABOVE, IT IS ADMITTED FACT THAT THE ASSESSEE IS NOT A DEAL ER IN FOREIGN EXCHANGE BUT ENGAGED IN THE BUSINESS OF EXPORT/IMP ORT OF CIGARETTES AND TOBACCO. IN FACT, THE CIT (A) HIM SELF HAS ACCEPTED THE FACT THAT THE FORWARD CONTRACT HAS BEE N ENTERED INTO IN THE ORDINARY COURSE OF ITS BUSINESS IN RESPECT O F UNDERLYING IMPORT/EXPORT BUSINESS TRANSACTIONS OF THE ASSESSEE . IN THE CIRCUMSTANCES, THE LOSS/EXPENDITURE CLAIMED BY THE ASSESSEE ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHA NGE CANNOT BE CONSIDERED TO BE NOTIONAL BY FOLLOWING THE INSTRUCT ION NO.3 OF 2010 OF CBDT. THE DECISION OF HONBLE SUPREME COUR T IN CASE OF CIT, DELHI VS. WOODWARD GOVERNOR INDIA PVT. LTD., (SUPRA) AND 14 ITA NO.647 OF 2012 VST INDUSTRIES LTD., HYD. INCOME-TAX APPELLATE TRIBUNAL, SPECIAL BENCH IN BAN K OF BAHRAIN AND KUWAIT (SUPRA) ALSO SUPPORT SUCH A VIEW. THER EFORE, CONSIDERING THE CASE OF THE ASSESSEE IN THE LIGHT O F THE LAW PROPOUNDED IN THE JUDICIAL PRECEDENTS DISCUSSED HER EINABOVE, WE ARE OF THE VIEW THAT THE ASSESSEE IS ENTITLED TO CL AIM THE LOSS OF RS.40,00,107. SO FAR AS THE DECISIONS RELIED UPON BY THE LEARNED DEPARTMENTAL REPRESENTATIVE ARE CONCERNED, THEY DO NOT APPLY TO THE FACTS OF THE PRESENT CASE. IN AFORESAID VIEW O F THE MATTER, WE SET ASIDE THE ORDER OF THE CIT (A) AND DIRECT THE A SSESSING OFFICER TO DELETE THE ADDITION OF RS.40,00,107/-. 11. IN THE RESULT, THE APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE COURT ON 23-8-2013. SD/- ( CHANDRA POOJARI) ACCOUNTANT MEMBER SD/- (SAKTIJIT DEY) JUDICIAL MEMBER HYDERABAD, DATED THE 23 RD AUGUST, 2013 COPY TO:- 1) M/S. VST INDUSTRIES LIMITED, 1-7-1063/1065, AZAM ABAD, HYDERABAD- 500 020. 2) ADDL CIT, RANGE-3, HYDERABAD. 3) CIT(A)IV, HYDERABAD. 4) CIT CONCERNED, HYDERABAD. 5.THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDERA BAD. JMR* 15 ITA NO.647 OF 2012 VST INDUSTRIES LTD., HYD.