Income Tax Appellate Tribunal - Kolkata
Rampuria Industries & Investments ... vs Principal Cit, Central - 1, Kolkata , ... on 26 February, 2020
IN THE INCOME TAX APPELLATE TRIBUNAL
KOLKATA 'C' BENCH, KOLKATA
(Before Sri J. Sudhakar Reddy, Accountant Member & Sri S.S. Godara, Judicial Member)
ITA No. 651/Kol/2018
Assessment Year: 2013-14
Rampuria Industries & Investments Ltd................................................................................Appellant
C/o. Subash Agarwal & Associates
Siddha Gibson
1, Gibson Lane
2nd Floor
Suite-213
Kolkata - 700 069
[PAN : AABCR 6319 P]
Vs.
Pr. Commissioner of Income Tax, Central (1), Kolkata....................................................Respondent
Appearances by:
Shri Subash Agarwal, Advocate, appeared on behalf of the assessee.
Shri Supriyo Pal, JCIT Sr. D/R, appearing on behalf of the Revenue.
Date of concluding the hearing : January 15th, 2020
Date of pronouncing the order : February 26th, 2020
ORDER
Per J. Sudhakar Reddy, AM :-
This appeal filed by the assessee is directed against the order of the Learned Pr. Commissioner of Income Tax (Appeals) - 1, Kolkata, (hereinafter the "ld. Pr. CIT"), passed u/s. 263 of the Income Tax Act, 1961 (the 'Act'), dt. 28/03/2018, for the Assessment Year 2013-14.
2. The assessee is a company and derives income from share trading, services and also rental income. The Assessing Officer passed an order u/s 143(3) of the Act on 19/03/2016. The ld. CIT(A) issued a showcause notice to the assessee proposing to revise the order passed by the Assessing Officer u/s 143(3) of the Act on 19/03/2016, on the ground that:-
a) Currency is not covered under the definition of securities u/s 2(ac) of Securities Contracts (Regulation) Act, 1956 ('SCRA') and hence the net loss on foreign currency transaction debited to the profit and loss account under the head "other expenses", is a speculative loss and as the transaction of foreign currency do not qualify to be derivative transactions under the provision of Section 43(5)(d) of the Act, they cannot be treated as business transactions. Thus, he concludes that 2 ITA No. 651/Kol/2018 Assessment Year: 2013-14 Rampuria Industries & Investments Ltd.
Ltd loss on such foreign currency transaction is speculative loss and not allowable as business expenditure.
b) That the Assessing Officer has not conducted any verification o of this issue during the course of assessment proceedings and hence there non application of mind by the Assessing Officer. Thus the order is erroneous.
After considering the reply of the assessee, the ld. Pr. CIT passed an order u/s 263 of the Act dt. 28/03/2018, wherein he has set aside the assessment order passed ssed by the Assessing Officer u/s 143(3) of the Act on 19/03/2016 and restored to the file of the Assessing Officer to the extent of examining the transactions of foreign currency and passing a fresh order as per the directions given in his order.
3. Aggrieved eved the assessee is in appeal before us.
4. The ld. Counsel for the assessee, Shri Subash Agarwal, submitted that the assessee, in its reply to the showcause notice notice, has brought to the notice of the Assessing Officer that the definition of the term deriva derivative tive in Section 2(ac) of the SCRA is an inclusive definition and that any other item confirming to the given characteristics characteristics, will also qualify to be a derivative transaction. He relied on press release No. 297/2007 dt. 14/11/2007 of SEBI and also the Cent Central ral Government Notification, S.O. 1327 (E) dated 22/05/09, oN MCX Stock Exchange Ltd.
Ltd.,, for the proposition that it was the intention of the Government of India to o consider currency as part of SSecurities ecurities for all practical and legal purposes. He relied on the judgment of the Hon'ble Madras High Court in the case of Rajshree Sugars & Chemicals Ltd. v. AXIS Bank 8 MLJ 261 (Mad.) (Mad.),, wherein the term derivative has been defined to include foreign currency as underlying derivative for securities. He further relied on the judgment of the Agra Bench of the ITAT in the case of Nand Nandan Agarwal vs. DCIT reported in [2018] 90 taxmann.com 3 (Agra - Trib.) and the judgment in the case of M/s. IVF Advisors vs. ACIT (2015) 39 ITR (T) 541 (Mumbai Trib.), in support of his contentions. He also referred to CBDT Instruction No. 3/2010 dt. 23/03/2010, wherein it was decided that the loss on forex derivative transactions arising from actual settlement/conclusions of contract should not be considered as speculative transactions.
3 ITA No. 651/Kol/2018Assessment Year: 2013-14 Rampuria Industries & Investments Ltd.
Ltd 4.1. On the issue of whether the Assessing Officer has conducted proper enquiry, the ld. Counsel for the assessee filed a certified copy of the order sheet entry from the assessment record at pages 48 to 53 and pointed out that the Assessing Officer has repeatedly epeatedly asked for explanations on the net loss on foreign currency transactions, transactions on various occasions i.e., As Point No. 16 during the hearing on 13/07/2015 As Point No. 2 during the hearing on 09/10/2015 As Point No. 2 during the hearing on 02/11/2015 During the hearing 14/12/2015 During the hearing 07/03/2016 4.2. He also pointed out that the Assessing Officer on the last date of hearing hearing, has clearly recorded that the papers submitted by the assessee have been perused and thereafter consciously chose not to disallow the loss in question and hence the conclusion that the Assessing Officer has not called for the details and verified the same after application of mind, is a factually incorrect observation.
He relied on the following case case-law in support of his contentions that the order passed u/s 263 of the Act is bad in law law:-
Narayan Tatu Rane vs. ITO (2016) 70 taxmann.com 227 (Mum) Gabriel India Ltd. (Bom) 203 ITR 108 Malabar Co. Ltd. vs. CIT (SC) (2000) 243 ITR 83 CIT vs. G.M. Mittal Stainless Steel P. LTd. (SC) (2003) 263 ITR 255 CIT vs. Greenworld Corporation (SC) (2009) 314 IR 81 CIT vs. Max India Ltd. (SC) (2007) 295 ITR 282 Medicare TPA Service (I) Pvt. Ltd. vs. Pr. CIT
5. The ld. D/R, Shri Supriyo Pal, JCIT, submitted that the A Assessing ssessing Officer has not called for any records and examined the issue as to whether thee assessee is eligible to claim, speculative loss on trading and derivatives as deduction.. He took this Bench through the assessment order and submitted that a perusal of the same demonstrates total non-application application of mind by the Assessing Officer and this resulted the order being 4 ITA No. 651/Kol/2018 Assessment Year: 2013-14 Rampuria Industries & Investments Ltd.
Ltd erroneous and prejudicial to the interest of the revenue. He re relied lied on the order of the ld.
Pr. CIT passed u/s 263 of the Act and submitted that the issue has been restored to the file of the Assessing Officer for fresh examination in accordance with law and hence the assesseee should not have any grievance and that al alll these arguments can be raised before the Assessing Officer. He rebutted the contentions of the assessee.
6. We have heard rival contentions. On careful consideration of the facts and circumstances of the case, perusal of the papers on record, orders of tthe authorities below as well as case law cited, we hold as follows:
follows:-
7. The first issue that arises for our consideration is whether currency transactions are included within the definition of derivatives under clause 2(ac) of the SCRA.
The Mumbai 'I' Bench nch of the Tribunal in the case of M/s. IVF Advisors (supra) has held as follows:-
"7. We have carefully perused the orders of the Revenue Authorities and the submissions made by the assessee in the light of the relevant provisions of the IT Act and also Securities ecurities Contract Regulation Act, 1956. Section 43(5) of the I.T. Act read as under:
(5) 32"speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity33, including stocks and shares, is periodically or ultim ultimately ately settled33 otherwise than by the actual delivery33 or transfer of the commodity or scrips:
Provided that for the purposes of this clauseclause-- (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufactu manufacturing ring or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or
(c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; [or] (d) an eligible transaction in respect of trading in derivatives referred to in clause [(ac)] of section 236 of the Securities Contracts (Regula (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange;[or] (e) an eligible transaction in respect of trading in commodity derivatives carried out in a recognized association[ which is chargeable to commodities transaction tax under ChapteChapterr VII of the Finance Act, 2013 (17 of 2013)] shall not be deemed to be a speculative 5 ITA No. 651/Kol/2018 Assessment Year: 2013-14 Rampuria Industries & Investments Ltd.
Ltd transaction. [Explanation.
[Explanation.--ForFor the purposes of this clause, the expressions expressions-- (i) "eligible transaction" means any transaction,--(A) transaction, carried out electronically on screen screen-based ed systems through a stock broker or sub sub-broker broker or such other intermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stoc stockk exchange; and(B) which is supported by a time stamped contract note issued by such stock broker or sub sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause clause (A) and permanent account number allotted under this Act; (ii) "recognised stock exchange" means a recognised stock exchange as referred to in clause (f) of section 238 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified39 by the Central Government for this purpose;] [Explanation 2 - For the purposes of clause (e), the expressions - (i) 'commodity derivative"
shall have the meaning as assigned to it in Chapter VII of the Finance Act, 2013; (ii) "eligible transaction" means any transaction, transaction,-
(A)carried out electronically on screenscreen-based based systems through member or an intermediary, registered under the bye bye-laws, laws, rules and regulations of the recognized association for tratrading ding in commodity derivative in accordance with the provisions of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and the rules, regulations or bye bye-laws laws made or directions issued under that Act on a recognized association; and (B) which is suppor supported ted by a time stamped contract note issued by such member or intermediary to very client indicating in the contract note, the unique client identity number allotted under the Act, rules, regulations or bye bye-laws referred to in sub sub-clause (A), unique trade number umber and permanent account number allotted under this Act. (iii) "recognized association" means a recognized association as referred to in clause (j) of section 2 of the Forward Contracts (Regulation) Act, 1952 (74 of 1952) and which fulfils such conditio conditionsns as may be prescribed and is notified by the Central Government for this purpose"
Proviso (d) excludes the transaction from the definition of speculative transaction in respect of trading of derivatives referred to in section 2(ac) of the Securities Contract ract (Regulation) Act, 1956 carried in recognized stock exchange. Section 2(ac) of the Securities Contract (Regulation) Act, 1956 read as under:
" 2.[ac] "derivative" includes includes-- (A)a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; (B)a contract which derives its value from the prices, or index of prices, of underlying securities;]"6 ITA No. 651/Kol/2018
Assessment Year: 2013-14 Rampuria Industries & Investments Ltd.
Ltd 7.1 Thus, it can be seen that the derivatives also includes securi securities.
ties. The definition of eligible transaction mentioned herein above clearly show that the transaction must have been carried out electronically in accordance with the provisions of Securities Contracts (Regulation) Act and the Rules and Regulations or bye laws made or directions issued under this Act or by banks or mutual funds on a recognized stock exchange and which is supported by time stamped contract note issued by such stock broker or sub-broker broker or intermediary to every client indicating in the contra contract note the unique client identity number and permanent account number.
7.2 It would be pertinent to consider the decision of Hon'ble Madras High Court in the case of Rajshree Sugar & Chemicals Ltd. vs. Axis Bank Ltd., AIR 2011 (Mad) 144, wherein the term derivative has been defined to include foreign currency as an underlying security of the derivative. The relevant extract of the case is quoted below:
"What are these derivatives which have gained such a great deal of notoriety? In simple terms, derivatives are financial instruments whose values depend on the value of other underlying financial instruments. The International Accounting Standard (IAS) 39, defines "derivatives" as follows: - "A derivative is a financial instrument: (a) whose value cchanges hanges in response to the change in a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, a credit rating or credit index, or similar variable (sometimes called the 'underlying'); (b) that requires no initial net investment or little initial net investment relative to other types of contracts that have a similar response to changes in market conditions; and (c) that is settled at a future date." Actually, derivatives are assets, whose values are derived from values of underlying assets. These underlying assets can be commodities, metals, energy resources, and financial assets such as shares, bonds, and foreign currencies."
7.3 Further, the SEBI website in its section 'frequently asked questions' has exp explained the meaning of derivative as under: Q 1. What are Derivatives? A. The term "Derivative" indicates that it has no independent value, i.e. its value is entirely "derived" from the value of the underlying asset. The underlying asset can be securities, commodities, bullion, currency, live stock or anything else. In other words, Derivative means a forward, future option or any other hybrid contract of pre determined fixed duration, linked for the purpose of contract fulfillment to the value of a specified real or financial asset or to an index of securities. With Securities Laws (Second Amendment) Act,1999, Derivatives has been included in the definition of Securities. The term Derivative has been defined in Securities Contracts (Regulations) Act, as: A Derivative rivative includes: - a. a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security; b. a contract which derives its value from the prices, or index of prices, es, of underlying securities; It is further provided by SEBI that in Aug.2008 SEBI permitted exchange traded currency derivative.
7.4 Considering the relevant provisions of the relevant Acts, discussed herein above in the light of Hon'ble 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 cannot be treated as speculative transaction. We have also gone through the copies 7 ITA No. 651/Kol/2018 Assessment Year: 2013-14 Rampuria Industries & Investments Ltd.
Ltd of the contract notes incorporated in the paper book filed before us. A perusal of the contract ract note shows that the assessee has either entered into call option or put option and on the settlement day the transaction has been settled by delivery, either the assessee has paid US dollar on the settlement day or has taken delivery of US dollar.
7.55 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 judicial discussion hereinn above, we have no hesitation in setting aside the order of Ld. CIT(A). Appeal filed by the assessee is accordingly allowed.
allowed."
8. The Agra Bench of the Tribunal in the case of Nand Nandan Agrawal (supra) has considered this issue and held as follows:
follows:-
10. The ld. CIT(A) has, therefore, considered the transactions entered into by the assessee, to be speculative transactions. The loss incurred by the assessee has, thereby, not been allowed to be set off against other business income of the assessee. The ld.
CIT(A) IT(A) has held that these transactions in currency derivatives, 'marked to market' transactions.
11. Now, the Explanation 2 below section 28 of the Act provides that where speculative transactions earned by an assessee are of such nature as to constitute a business, the said speculation business shall be deemed to be distinct and separate from any other business. Section 73(1) prohibits the loss on speculation business being adjusted against income from any other business. Thus, the main issue up for consid consideration is whether the trading currency derivative transactions conducted by the assessee constitute 'speculative transactions'.
12. The term 'speculative transaction' has been defined under section 43(5) of the Act to mean a transaction in which a contrac contractt for the purchase or sale of any commodity, including stock and shares is periodically or ultimately settled otherwise than by actual delivery or transfer of the commodity or script. However, there are five exceptions to this general rule provided by way of a proviso containing clauses (a) to
(e), where the transaction, despite having been settled otherwise than by actual delivery, is not to be treated as a 'speculative transaction'. The assessee's contention is that his case falls under clause (d) of the proviso to section 43(5) of the IT Act.
13. Clause (d) of the proviso to section 43(5) provides that 'an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contract (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange shall not be deemed to be a speculative transaction. The explanation 1 to section 43(5) of the IT Act further defines certain words referred to in the said clause
(d), as under:--
(i) "eligible transaction" means any transaction, transaction,--
(A) carried out electronically on screen
screen-based
based system through a stock broker or
sub
sub-broker or through ...
8
ITA No. 651/Kol/2018
Assessment Year: 2013-14
Rampuria Industries & Investments Ltd.
Ltd
(B) which, is supported by a time stamped contract note issued by such stock
broker or sub
sub-broker
broker or ... indicating in the contract note the unique client identity number allotted any Act referred to in sub sub-clause (A) and the permanent account number allotted under this Act;
(ii) "recognised stock exchange" means a recognised stock exchange as referred to in clause
(f) of section 2 of Securities Contract (Regulation) Act, 1956 (42 of 1956) and which fulfills such conditions as may be prescribed and notifie notifiess by the Central Government for this purpose'
14. Concerning the satisfaction of the condition with regard to an eligible transaction, it is a perusal of the contract notes, placed at APB 56 to 237 shows that the transactions are in relation to transactions carried out through an on on-screen based system (Currency Currency Derivatives Segment of MCX Stock Exchange Ltd.), through a stock broker, namely, Mansukh Securities & Finance Ltd. (SEBI Regn. No. INE260781431, Trading Member Code No.38500, PAN: AAACMIV01D). The contract notes bear the unique identity code AZNNI and PAN of the assessee i.e., AQZPA3204D. The contract notes also mention order numbers, order time, trade no. and trade time, besides other details. Thus, all the conditions of an 'eligible transaction' are satisfied. So far as the condition of a 'recognisedised stock exchange' is concerned, the transaction has been carried out at MCX Stock Exchange Ltd., which is recognised by SO 1327(E) dated 22.05.2009 (note 24 at page 1.322 of Taxmann's Income tax Act, 2017). Thus this condition is also satisfied.
15. The third condition is 'trading in derivatives' referred to in clause (ac) of section 2 of the Securities Contract (Regulation) Act, 1956 (42 of 1956). In the case of IVF Advisors (P.) Ltd. v. Asstt. CIT CIT[2015] 55 taxmann.com 469 (Mum.-Trib Trib.) (APB 272 -
277), the Mumbai Tribunal, has referred to the definition of derivatives as contained in clause (ac) of section 2 of the Securities Contract (Regulation) Act, 1956, referred to by the Hon'ble Madras High Court in its decision in the case of Raj Rajshree Sugar & Chemicals Ltd. v. Axis Bank Ltd. AIR 2011 Mad 144, where the term 'derivatives' has been defined to include foreign currency as underlying security of derivatives, also referred to FAQ available on the SEBI website and the fact that the SEBI permitted exchange traded currency derivatives in August, 2008 and came to the conclusion that (para 7.5, APB 276) derivatives include foreign currency and call option/put option, are transactions of derivative markets. Thus, as rightly submitted, the trad trading of currency derivatives made by the assessee is covered by the definition of 'derivatives' as contained in clause (d) of the proviso to section 43(5) of the IT Act. This position also stands accepted by the CBDT in its Instruction no. 3/2010 (APB 342 -343). Thus, the assessee fully complies with the conditions prescribed under clause (d) of Proviso to section 43(5) of the Act, read with the explanation thereto.
16. The ld. CIT(A) has taken due note of the contention of assessee that the transactions of currency derivatives were conducted through a recognised stock broker, on a rccognised Stock Exchange and they were duly supported by time stamped contract notes. He examined the provisions of section 43(5) of the IT Act and the proviso thereto and held th that at the case of the assessee could not be covered under clause (a) of the proviso to section 43(5) of the Act (i.e., the transactions could not be treated as hedging transactions), but to be considered under clause (d) of the proviso to section 43(5) of the IT Act and in the light of the cases relied on by the assessee. He has then referred to section 73(1) and explanation 2 to section 28. He also referred to 9 ITA No. 651/Kol/2018 Assessment Year: 2013-14 Rampuria Industries & Investments Ltd.
Ltd CBDT Instruction no. 3/2010 dated 23.03.2010 and based on his interpretation of the said Instruction,, it was held that the loss incurred by the assessee was a notional loss as being carried out in 'marked to market' and thus, the ld. CIT(A) denied the benefit of set off of losses.
17. Instruction no. 3/2010, dated 23.03.2010, issued by the CBDT (APB 342 342-343) as rightly contended, is an internal instruction issued by the Board for the guidance of its officers with regard to the matter pertaining to trading in currency derivatives. It is broadly divided into two parts. One is actual loss in forex derivative derivatives.
s. The Board has drawn the attention of the officers to the statutory provisions contained in clause (d) of the proviso to section 43(5) read with the explanation thereof. This part of the Instruction supports the case of assessee, as above. The second par part of the said Instruction is regarding loss on account of 'marked 'marked-to-market' market' losses. As per the Instruction, losses arising on account of the position held in a financial instrument based on market price on the closing day of an accounting period is not ththe actual loss. Rather, it is a notional loss and should not be allowed.
18. The ld. CIT(A), without looking into the position held by the assessee as on the close of the financial year and as to what was the loss on such position, which, at most, in accordance ance with the Board's Instruction, may be held to be a notional loss, has held the whole of the trading loss to be a notional loss. The assessee contends that though the transactions entered by it in currency derivatives are 'marked 'marked-to-market', market', there was only nly transaction of 1,200 nos. of lot of currency derivatives sold by the assessee for a total amount of Rs. 65,555,211, which, on account of being 'marked to market', resulted into a loss of Rs. 51,789/ 51,789/- (APB 240) against a total loss of Rs. 1,709,120.61/-
1,709,120.61/ and hence, going by the reasoning of the ld. CIT (A), at the most, loss of Rs.51,789/ Rs.51,789/-
only could be disallowed and the balance Rs. 16,57,332/ 16,57,332/- was liable to be allowed.
Even the said (notional) loss of Rs. 51,789/ 51,789/- was liable to be allowed for assessment year 2014-15, 15, together with the loss of Rs.1,184,370/ Rs.1,184,370/- sustained during assessment year 2014-15, 15, as there no contract outstanding as on 31.03.2014. It has been clarified that the assessee had traded in total seven series of contracts during the year (APB
238). Ledger accounts in respect of each series of contracts are placed at APB 239 to
245. All series of contracts except for USD (26.04.2013) (APB 240) had expired before the close of the financial year, on 31.03.2013 and thus, there was no occasion that contracts for those series of transactions could be outstanding as on 31.03.2013.
19. The logic of the Board in terming loss in respect of unexpired contracts (or, in other words, in respect of position held as at the close of accounting period) has not found und favour with the Courts and even the loss on account of 'marked to market' in respect of such outstanding position could not be treated as notional loss, because same is based / on the time time-tested tested and well accepted theory of valuing stock at lower of cost st or market value. The Hon'ble Bombay High Court, by its order dated 15.10.2016, in ITA No. 896/2014, in 'CIT vs. Munjani Brothers' (copy placed on record), dismissed the revenue's appeal, where the substantial question of law for the consideration of the Hon'ble High Court was as under:
"Whether on the /acts and in circumstances of the case and in law, the Tribunal was right in deleting the addition of Rs. 59,90,341/ 59,90,341/- made by the Assessing Officer on account of disallowance of mark to market loss on forei foreign gn exchange forward contract loss and not appreciating the fact that the said loss was not a notional loss and cannot be allowed"10 ITA No. 651/Kol/2018
Assessment Year: 2013-14 Rampuria Industries & Investments Ltd.
Ltd The said appeal arose from the order dated 19.09.2013 passed by theITAT, Mumbai, passed in ITA no. 7628/Mum/2011 (copy filed)filed).. A Similar view was taken by the Hon'ble Tribunal in the case of the same assessee in ITA No. 6065/Mum/2012, vide order dated 2.12.2014 (cope placed on record). The Hon'ble High Court, held that no substantial question of law was involved in the matter in view of its order dated 1.10.2016, passed in the case of CIT v. D. Chetan & Co., [2016] 75 taxmann.com 300/243 Taxman 356 (Bom.) (Bom.). A copy of the said order has been filed.
20. The Hon'ble Bombay High Court, in ITA No. 30 of 2015, vide Order dated 24.07.2017 in the case of CIT v. Paper Products Ltd. (copy filed), relying on the Supreme Court decision in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326 326,, held that the loss due to foreign exchange fluctuation in foreign currency transactions in derivatives has to be considered as on the last date of the accounting counting year and is deductible under section 37(1) of the Act and affirmed the order dated 28.03.2014 passed by the Tribunal in ITA No. 7761/Mum/2012.
21. Remarkably, though the reasoning of the Board to term the loss on account of 'market to market' tran transactions, sactions, as contained in Instruction no. 3/2010, was disapproved by the Courts, it resurfaced in the Income Computation and Disclosure Standards (the 'ICDS') notified on 29.09.2016, made effective from the accounting period beginning on 1.04.2016, i.e., aassessment year 2017-18.
18. The 'ICDS' -1 relating to accounting policies, in paragraph 4 held that:
that:--
"4. Accounting policies adopted by a person shall be such so as to represent a true and fair view of the state of affairs and income of the business, professi profession or vocation. For this purpose,
(i) The treatment and presentation of transaction and events shall be governed by their substance and not merely by the legal form; and
(ii) Marked to market loss or an expected loss shall not be recognised unless the recognition of such loss is in accordance with the provisions of any other Income Computation and Disclosure Standard."
22. The Hon'ble Delhi High Court, by its recent decision in the case of The Chamber of Tax Consultants v. Union of India [2017] 87 taxmann.com 92/[2018]] 252 Taxman 77 (Delhi),, while holding certain 'ICDS' as ultra ultra-virus, held that non-acceptance acceptance of the concept of prudence in ICDS I is per se contrary to the provisions of the Act and therefore, it cannot be countenanced. While holding so, the Hon'ble Delhi High Court in para 61 of its judgment held that:
that:--
"The Petitioners rightly point out that cases not governed by any specific ICDS are governed by ICDS-I, I, CBDT has in ICDS ICDS-II notified that expected losses and marked-
marked to-market market losses are not be recoginized/allowed. It is rightly pointed out by the Petitionerss that the concept of prudence is embedded in Section 37(1) of the Act which allows deduction in respect of expenses "laid out" or "expanded" for the purpose of business. The concept of prudence is inherent in this."
23. Thus, the instruction no. 3/2010 d dated ated 23.03.2010 is not in accordance with law, in so far as it terms the loss in respect of the position held as at the end of the accounting period as a 'notional loss' and calls for disallowance of the same and this aspect was discussed in various cases referred before learned CIT (Appeals) also.
11 ITA No. 651/Kol/2018Assessment Year: 2013-14 Rampuria Industries & Investments Ltd.
Ltd
24. The assessee also placed reliance on the order dated 13.02.2017 passed by the Income tax Appellate Tribunal, 'SMC -3'' Bench, New Delhi, in the case of 'Sri Kamal Kishor v. ACIT' in (ITA No. 4952/Del/2016 (pag(page 74 - 85). In this case, adjustment to the returned income was made by the AO under section 143(1) of the Act in respect of loss of Rs. 1,550,100 on foreign currency derivatives. The Tribunal, allowing the appeal on the merits of the case, followed the de decision cision of the ITAT, Mumbai in the case 'IVF Advisors (P) Ltd.' (APB 272 -277)
277) and in the case of 'Inventures Knowledge Services (P) Ltd.' (APB 317 -341).
25. In the case of Inventures Knowledge Services (P.) Ltd. v. ITO ITO[2016] [2016] 156 ITD 727/65 taxmann.com 94 (Mumbai - Trib.) , both the issues, i.e., applicability of clause (d) of the proviso to section 43(5) and the notional loss in respect of unexpired / unsettled contracts were discussed.
26. In 'Inventures Knowledge Services' (supra), it has been held as follows:
'7. Ld. DR R on the other hand relied upon the orders of the authorities below. The Ld. DR submitted that these forward foreign exchange contracts are not backed by any business transactions and these are not hedging transactions and marked to market transaction cann cannot ot be allowed as per Instruction of CBDT no. 3/2010 dated 23th March 2010. The Ld DR relied upon the orders of Tribunal Mumbai in Araska Diamond (P.) Ltd. v. Asstt. CIT [2015] 2015] 152 ITD 203 (Mum.) to contend that these losses are speculative in nature and cannot be allowed to be set off against business income other than speculative income.
8. We have heard the rival submissions and carefully perused the relevant material on n record and case laws relied upon by the parties. We have observed that the assessee company is a domestic company registered with the Development Commissioner, Vishakhapatnam Special Economic Zone as an approved SEZ and is a KPO primarily involved in the revenue cycle management for the clients across America and the assessee company is billing its overseas clients in foreign currency. The assessee company has a turnover of Rs. 5.83 crores during the assessment year under consideration. We have observed tthat assessee company has entered into forward foreign exchange contracts and the contract worth USD 4 Million were outstanding as un un-expired expired as on 31st March 2009 on which the assessee company has booked marked to market loss of Rs.
1,09,98,560/- on the dadate te of Balance Sheet as at 31st March 2009 based on the movement of value of United States Dollar visvis-a-vis vis in relation to Indian Rupees based on prevailing rate as on 31 31-03-2009.
Before we proceed further, it would be relevant to analyse the provisions of Section 43(5) of the Act read with proviso (d) and explanation 1 to Section 43(5) of the Act which reads as under:
Definitions of certain terms relevant to income from profits and gains of business or profession.
43. In sections 28 to 41 and in this sec section, tion, unless the context otherwise requires--
** ** ** 12 ITA No. 651/Kol/2018 Assessment Year: 2013-14 Rampuria Industries & Investments Ltd. Ltd
(5) "speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips scrips:
Provided that for the purposes of this clause clause--
(a) to (c)** ** **
(d) an eligible transaction in respect of trading in derivatives referred to in clause (ac) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognised stock exchange; or
(e) ** ** ** shall not be deemed to be a speculative transaction, Explanation 1. - For the purposes of clause (d), the expressions expressions-(i)
(i) "eligible transaction" means any transaction,-
(A) carried out electronically on screen screen-based based systems through a stock broker or sub-broker broker or such other int intermediary ermediary registered under section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and (B) which is supported by a time stamped contract note issued by such stock broker or sub-broker broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub-clause (A) A) and permanent account number allotted under this Act;
(ii) "recognised stock exchange" means a recognised stock exchange as referred to in clause (f) of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such co conditions nditions as may be prescribed and notified by the Central Government for this purpose;' Section 43(5) of the Act provides that a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately imately settled otherwise than by actual delivery or transfer of the commodity or scrips while proviso(d) to Section 43(5) of the Act inter inter-alia alia provides that an eligible transaction in respect of trading in derivatives referred to in clause (ac) of Sectionn 2 of the Securities Contracts (Regulation) Act, 1956 carried out in a recognized stock exchange shall not be deemed to be a speculative transaction.
We would, also like to refer to the relevant definitions as contained in the Securities Contract (Regula (Regulation) Act, 1956 as under:
Section 2(ac) of the Securities Contract (Regulation) Act, 1956 reads as under:
Section 2 in the Securities Contracts (Regulation) Act, 1956 2 Definitions. - In this Act, unless the context otherwise requires, requires,----13 ITA No. 651/Kol/2018
Assessment Year: 2013-14 Rampuria Industries & Investments Ltd.
Ltd
** ** **
(ac)) "derivative" includes
includes--
(A) a security derived from a debt instrument, share, loan, whether secured or unsecured, risk instrument or contract for differences or any other form of security;
(B) a contract which derives its value from the prices, or index of prices, of underlying securities;
Section 2(h) of the Securities Contract (Regulation) Act, 1956 reads as under:
Section 2 in The Securities Contracts (Regulation) Act, 1956 2 Definitions. - In this Act, unless the context otherwise requires, requires,----
(h) "securities" include include-
** ** ** (ia) derivative; ** ** **
From the above, it is clear that speculative transaction is a transaction in which contract for purchase and sale of any commodity is settled otherwise than by actual delivery. It is not in dispute that in case of transaction in derivatives, the transaction n is always settled otherwise than by actual delivery. The derivative derives its value from underlying asset which can be securities, commodities, bullion, currency etc. and in this instant case, tlie derivative transaction undertaken by the assessee comp company, any, the underlying asset of derivative transaction is foreign currency. The word commodity is used in broadest sense in Section 43(5) of the Act as it mentions in the Section 43(5) of the Act that the commodity includes stock and shares. Thus, derivative will be included in the definition of the word 'commodity' as held in Shree Capital Services Ltd. (supra). Hence, derivative transactions in foreign currency shall be exempted from purview of speculative transactions u/s 43(5) of the Act provided other con conditions as contained in proviso (d) read with Explanation 1 to Section 43(5) of the Act are fulfilled. Our view is fortified by the Memorandum explaining the provisions in the Finance Bill, 2005 which introduced clause (d) ((2005) 194 CTR(St.) 147, the purpose pose of introduction of clause (d) has been explained, which reads as under:
"Measures to rationalize the tax treatment of derivative transaction. Under the existing provisions (cl.( (cl.(5)
5) of s.43) a transaction for the purchase and sale of any commodity including stocks and shares is deemed to be a 'speculative transaction', if it is settled otherwise than by actual delivery. However, certain categories of transactions are excluded from the purview of said provision.
Further, the unabsorbed speculation losses are allowed to be carried forward for eight years for setset-off off against speculation profits in subsequent years. These restrictions were essentially designed as an anti anti-evasion evasion measure to prevent claims of artificially generated losses in the absence of an appropriate institutional infrastructure.
14 ITA No. 651/Kol/2018Assessment Year: 2013-14 Rampuria Industries & Investments Ltd.
Ltd Recent systemic and technological changes introduced by stock markets have resulted in sufficient transparency to prevent generating fictiti fictitious ous losses through artificial transactions or shifting of incidence of loss from one person to another. The screen based computerized trading provides for an excellent audit trail. Therefore, the present distinction between speculative and non non-speculative transactions, particularly relating to derivatives is no more required. The proposed amendment therefore, seeks to provide that an eligible transaction carried out in respect of trading in derivatives in a recognized stock exchange shall not be deemed to be a speculative transaction. The proposed amendment also seeks to notify relevant rules etc. regarding conditions to be fulfilled by recognized exchanges in this regard. Further it is also proposed to amend subsub-s. (4) of s.73 so as to reduce the period of carry forward of speculation losses from eight assessment years to four assessment years. These amendments will take effect from 1st April 2006 and will, accordingly, apply in relation to asst. ys 2006 2006-07 and subsequent years."
From the above it is evid evident ent that the eligible transactions in derivatives carried out through recognized stock exchanges are exempted from the purview of speculation transactions u/s 43(5) of the Act provided other conditions are satisfied because of recent and systemic and techn technological ological changes introduced by stock exchanges.
We have observed that the assessee company has entered into derivative transactions in foreign currency through SEBI registered broker who is a member National Stock Exchange of India Limited and these deriv derivative ative transactions are carried on through National Stock Exchange of India which is a recognized stock exchange and these transactions are backed by time stamped contract notes carrying unique client identity number and PAN allotted under the Act. The reliance ance of the Ld. DR on the case of Araska Diamond (P.) Ltd. (supra) is misconceived as in this case the assessee did not fulfill the conditions as stipulated under section 43(5) of the Act read with proviso and Explanation thereto to entitle the assessee to bring forward contract in foreign currency within four corners of exemption from being treated as non non-speculative speculative transaction as per mandate of Section 43(5) of the Act.
Thus, we hold that these derivative transactions in foreign currency as entered into by the assessee company duly fulfil all the conditions as specified u/s 43(5) of the Act read with proviso (d) and Explanation 1 to Section 43(5) of the Act. We further hold that these transactions are covered by the exception as contained in proviso (d) to Section 43(5) of the Act and hence are not speculative transactions as defined under Section 43(5) of the Act. Thus, we hold that loss of Rs. 1,09,98,560/- incurred by the company on derivative transactions in foreign currency in the instant appeal is n not ot a speculative loss within the definition as contained in Section 43(5) of the Act.
Regarding contention of the Revenue that, these marked to market loss of Rs. 1,09,98,560/- as at 31st March 2009 is a notional or contingent loss and cannot be allowed ass revenue expenditure as in view of Revenue the assessee company has claimed the losses on unexpired derivative transactions in foreign currency based on the prevailing exchange rates of United States Dollar vis vis--a-vis in relation to Indian Rupee as on the date of Balance Sheet as at 31st March 2009 while the 15 ITA No. 651/Kol/2018 Assessment Year: 2013-14 Rampuria Industries & Investments Ltd.
Ltd actual loss has not yet crystallized in the view of revenue because the derivative transactions had not yet been squared/settled as on the date of Balance Sheet as at 31st March 2009, we are guided by tthe he decision of Tribunal Special Bench, Mumbai in Bank of Bahrain & Kuwait (supra) as detailed here in under:
"..., 59. We, accordingly, hold that where a forward contract is entered into by the assessee to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period, the loss is incurred to the assessee on account of evaluation of the contract on the last date of the accounting period i.e. before the date of maturity of the forward contract."
The transactionion in derivatives in foreign currency as entered into by the assessee company are similar to forward contract in foreign currency as discussed in the decision of Bank of Bahrain & Kuwait (supra). Respectfully following the decision of Tribunal, Special BeBench, nch, Mumbai in Bank of Bahrain & Kuwait (supra) we hold that the marked to market losses of Rs. 1,09,98,560/ 1,09,98,560/- determined by the assessee company due to the movement in the prevailing exchange rate of foreign currency i.e. United States Dollar visvis-a-vis in relation to Indian Rupee as on the date of Balance Sheet viz 31st March 2009 is not a notional or contingent loss rather it is an ascertained liability which has crystallized whereby a pending obligation of derivative contract on the balance sheet date i.e 31st March 2009 is determinable with reasonable certainty and accuracy. The Accounting Standard Standard- 11 prescribed by ICAI also stipulate that in situation like this when the derivative transaction in foreign currency has not been settled/squared during the accounting counting period, the effect of exchange rate difference on the un un-expired foreign currency contracts as at the end of accounting period is to be accounted for in the books of account prepared for the aforeafore-stated stated accounting period. The reliance of the DR oon n instruction no 17/2008 dated 26th November 2008 is misconceived as in the instant case under appeal it is not a contingent or notional liability rather it is an ascertained liability which has crystallized and can be determined with reasonable certainty based upon the adverse exchange rate prevailing between United States Dollars vis vis-a a vis in relation to Indian Rupees as on the date of Balance Sheet as at 31st March 2009. Hence , We hold that the said loss of Rs. 1,09,98,560/ 1,09,98,560/- incurred by the assessee company pany on account of marked to market loss arising on the date of Balance Sheet as at 31st March 2009 on account of un-expired expired derivative transactions in foreign currency entered by the assessee company arising due to the adverse movement in the exchange rat rate prevailing between United State Dollar vis vis-a-vis vis in relation to Indian Rupee as on the date of Balance Sheet as at 31st March 2009 can not be considered as notional or contingent loss rather it is an ascertained loss which has already occurred during the assessment year which can be computed with reasonable certainty and accuracy and is a fait accompli as held in Oil & Natural Gas Corpn. Ltd. (supra).
9. Thus in view of our above foregoing discussions, we allow the appeal of the assessee company on follo following reasons:
1. That the assessee company has entered into derivative transactions in foreign currency through recognised stock exchange and has complied with the other conditions as stipulated in Section 43(5) read with proviso(d) and Explanation 1 tto the said Section 43(5) of the Act for which cogent material is brought on record.16 ITA No. 651/Kol/2018
Assessment Year: 2013-14 Rampuria Industries & Investments Ltd.
Ltd
2. That the contract for derivatives in foreign currency are commodity as defined u/s 43(5) of the Act, the underlying asset being foreign currency and are hence entitled for exemption from being treated as speculative provided all other conditions as stipula stipulated u/s 43(5) are complied with.
3. A binding obligation accrued against the assessee the minute it entered into contract for derivative in foreign currency
4. A liability is said to have crystallized when a pending obligation on the balance shee sheet date is determinate with reasonable certainty. The considerations for accounting the income are entirely on different footing.
5. As per AS-11, 11, 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 period.
6. The contract for derivative in foreign currency have all the trapping trappings of stock-in-trade.
7. In the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit and in case the derivative contract is squared off/settled in the succeeding year, the difference in loss/profit will be brought to tax in the succeeding assessment year and hence its allowability in the current year is tax neutral.'
27. These discussions were relied on by the assessee before the Authorities below.
28. Thus, as rightly contended, not only were the losses incurred by the assessee entitled to be held as non non-speculative, speculative, but also the whole of the loss sustained by him was entitled to be allowed to be set off with other income and no part of such loss could be disallowed by holding it to be a 'notional loss'.
9. Applying the propositions of law laid down in the above case case-law, law, to the facts of the case on hand, we have no hesitation in holding that the ld. Pr. CIT was wrong in coming to the conclusion that th thee loss on foreign currency transactions is not no eligible to be treated as a business loss under the provisions of the Act. The ld. Pr. CIT has not considered the legal position on this issue as laid down by various Tribunals and Hon'ble High Courts. The cir circulars of the CBDT has been ignored. Thus, this direction of the ld. Pr. CIT in his order u/s 263 of the Act is hereby reversed as bad in law, on this issue.
10. Coming to the issue as to whether the Assessing Officer has applied his mind to the facts of the case, we find that the Assessing Officer has called for explanation from the assessee on this issue on five occasions and the assessee has submitted detailed replies. He has also produced ledgers along with supporting sample contract notes 17 ITA No. 651/Kol/2018 Assessment Year: 2013-14 Rampuria Industries & Investments Ltd.
Ltd before the Assessing ssessing Officer, during the assessment proceedings as is clear from the entries in the order sheet. Thus, this is not a case of non non-application application of mind. Non-
Non mentioning of the fact of verification o of an issue in the assessment order, cannot be held against the assessee as the manner in which the assessment order is drafted, is not in control of the assessee.
10.1. A number of High Courts have considered similar issues and held as follows ::-
Narayan Tatu Rane vs. ITO (2016) 70 taxmann.com 227 (Mum) As per explanation 2 below sec. 263 263,, proceedings can be initiated where an order is passed without making inquiries or verification which should have been made; Held, this provision does not authorize or give u unfetterd nfetterd power to the commissioner to revise each and every order, if in his opinion, same has been passed without making enquiries or verification which should have been made.
Gabriel India Ltd. (Bom) 203 ITR 108 Section 263 of the Income Income-tax Act, 1961 - Revision - Of orders prejudicial to interests of revenue - Assessment year 1973-74 - Assessee claimed a sum of Rs. 99,326 describeded 'as plant relay out expenses' as revenue expenditure and ITO, after making enquiries in regard to nature of said expenditure and considering explanation furnished by assessee in that regard, allowed assessee's claim - Subsequently, Commissioner, exercis exercising ing powers under section 263, cancelled order of ITO observing that order of ITO did not contain discussion in regard to allow ability of claim for deduction which indicated non non-application application of mind and that claim of assessee required examination as to whet whether her expenditure in question was a revenue or capital expenditure and directed ITO to make a fresh assessment on lines indicated by him - Whether under section 263 substitution of judgment of Commissioner for that of ITO is permissible - Held, no - Whether ITO's conclusion can be termed as erroneous simply because Commissioner does not agree with his conclusion - Held, no - Whether ITO's order could be held to be 'erroneous' simply because in his order he did not make an elaborate discussion - Held, no - Whether ther provisions of section 263 were applicable to instant case and Commissioner was justified in setting aside assessment order - Held, no Malabar Co. Ltd. vs. CIT (SC) (2000) 243 ITR 83 "The The phrase 'prejudicial to the interests of the revenue' has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of the Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an ITO adopts one oof the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the ITO has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the he revenue unless the view taken by the ITO is unsustainable in law.
law."18 ITA No. 651/Kol/2018
Assessment Year: 2013-14 Rampuria Industries & Investments Ltd.
Ltd
11. Applying the propositions of law laid down in the above referred case case-law to the facts of the case on hand, we hold that the order passed u/ u/ss 263 of the Act, is bad in law as the Assessing Officer in this case considered the issue, examined the facts and had taken a legally possible view.
12. In the result, appeal of the assessee is allowed.
Kolkata, the 26th day of February, 2020
20.
Sd/- Sd/-
[S.S. Godara] [J.
J. Sudhakar Reddy]
Reddy
Judicial Member Accountant Member
Dated : 26.02.2020
{SC SPS}
Copy of the order forwarded to:
1. Rampuria Industries & Investments Ltd
C/o. Subash Agarwal & Associates
Siddha Gibson
1, Gibson Lane
2nd Floor
Suite-213
Kolkata - 700 069
2. Pr. Commissioner of Income Tax, Central (1), Kolkata
3.CIT(A)-
4. CIT- ,
5. CIT(DR), Kolkata Benches, Kolkata.
True copy By order Assistant Registrar ITAT, Kolkata Benches