Income Tax Appellate Tribunal - Chandigarh
M/S Sunshine Foods, Ludhiana vs Addl. Cit, Ludhiana on 21 September, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH, CHANDIGARH
BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER
AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER
ITA No.460/Chd/2016
(Assessment Year : 2009-10)
M/s Sunshine Foods, Vs. The Addl.CIT,
B-XXXIII/324,G.T. Road(West), Range-VI,
Jalandhar Bye Pass, Ludhiana. Ludhiana.
PAN: ABJFS6374D
(Appellant) (Respondent)
Appellant by : Shri Ashish Aggarwal, CA
Respondent by : Smt.Meenakshi Vohra, Sr.DR
Date of hearing : 04.09.2017
Date of Pronouncement : 21.09.2017
O R D E R
PER ANNAPURNA GUPTA, A.M. :
Thi s appeal h a s b e e n f i l ed b y t he a s s e s s e e a g a i n st t h e o r de r of L d. CI T( A p p e a l s ) - 3, L u d h i an a d at ed 8 . 2 . 20 1 6 r e l a t i n g t o a s se ss m e n t y e ar 2 0 0 9- 1 0 .
2. A t t h e o ut s e t the i t m a y b e s ta te d t h a t th e a p pe a l o f t h e a s s e s se e w as i n i t i a l l y d i s m i s s e d f o r n o n- p ro s e c u t i o n v i d e o r de r d a te d 1 5 . 0 9 . 2 01 6 b u t w a s l a t e r re c al l e d o n a M i s c e l l a ne o u s Ap p l i c a t i on f i l e d b y t h e a s s e s s e e , v i d e o r d e r d a t e d 1 5 .0 7 . 2 0 17 i n M . A. N o . 1 06/ C h d / 2 0 1 6. In pursuance o f t h e s am e t h e ca s e w a s f i x e d f o r h e a r i n g .
3. Th e only issue in the pr e s e nt appeal pertains to d i s a l l o w an c e of l o s s o n f o r ei g n e x c h a n g e f o r w ard c o n t r ac t 2 amounting to R s . 1 0 , 7 7 , 36 9 /- treating t he same as speculative loss and grounds of appeal r a i s ed by the a s s e s s e e r e a d as u n d e r :
"1. That the learned CIT(A)-3 has erred in confirming action of the AO in t r e a t i n g t h e l o s s o n f o r e i g n e x c h a n g e f o r wa r d c o n t r a c t o f Rs.10,77,369/- as a speculative loss ignoring the submissions of the appellant.
2. That in any case the CIT(A)'s order is against the law and facts of the case.
3. The Appellant craves leave for permission to add, amend or alter any ground of appeal at the time of hearing."
4. Brief facts re l ev a n t to the i ss u e are that du r i n g a s s e s s m e nt p r o ce e d i n g s i t wa s n o t i c e d t h at t h e a s s e s s e e had claimed forward c o n tr ac t c a n c e l l a ti o n loss of R s . 1 0 , 7 7 ,3 6 9 / - . I t wa s e x p l a i n e d b y t h e a s s e s s ee b e f o r e t h e A s s e s s i n g O f f i c e r t h a t si n c e th e as s e s s e e w a s i n bu s i n e s s o f e x p o r t , th e r e w as v a r i a t i o n i n am o u n t o f sa l e b oo k e d a t t he t i m e o f e x po r t an d t h e a m o un t re a l i z e d . I t w a s st a t e d t h a t there was o v e ra l l profit on ac c o u n t of e x c ha n g e rate f l u c t u a t i o n a m ou n t i n g t o R s . 30 , 9 8 , 8 2 9 /- a n d t h e a m o u n t o f R s . 1 0 ,7 7 , 3 6 9 h a d b e e n de b i t e d u n d e r t he h e a d ' E x c h a n ge R a t e F l u c t u a ti o n A c c o u n t ' . Th e a s s e s s e e e x p l ai n ed t h a t the l o s s w as i n c u r re d on a cc o u n t o f c an c e l l at i o n o f f o r wa rd c o n t r a c t o f US $ b o o k e d b y t h e as s e s s e e f o r sa l e o f f o r e i gn exchange a g a i ns t exports p r oc e e d s r e c e i va b l e by the a s s e s s e e . Th e co p y o f c o r r e sp on d e n c e wi t h ban k i n th i s r e g a r d al o n g w i th c o p y o f s ta t em e n t o f b a n k wa s e n c l os e d f o r t h e r e f e re n ce o f t h e A s s e s s i n g O f f i c e r . Th e a s s e s s ee s t a t e d t h a t t h i s w a s n o t a s p e c u l a t i v e t r an s a ct i o n . Th e 3 A s s e s s i n g O f f i cer h e l d t ha t si n ce t h e a s se s s e e ha d e n t e r ed into f o r w a rd co n t r a c t t h ro u g h banks but n ot through r e c o g n i z ed s to ck e x c h an g e , as per the requirements of s e c t i o n 4 3 ( 5 ) ( d) o f t he I nc o m e Ta x A c t , 1 9 6 1 ( i n s h o r t 't h e Act'), th e r e f or e , it was d e e me d to be a sp e c u l a t i ve transaction. Th e forward co n tr a c t c a n c el l a t i on loss of R s . 1 0 , 7 7 ,3 6 9 / - w a s t h e r e f o r e tr e a t e d a s s p e c u l a t i o n l o s s a n d a d d e d t o t he i n c o m e of t h e a ss e s s e e .
5. Th e matter was carried in appeal b e f o re the L d . CI T( A p p e a l s ) where the assessee c on t e s t e d t he d i s a l l o w an c e m ad e s t a ti n g th a t t h e A s s es s i n g Of f i c e r h a d completely m i su n d e r s t o od the modus o p e r an d i of the f o r e i g n e x c h an g e t r a n s a c t i o n a n d h a d w r o n g l y t re a t e d a n d c o m p a r e d t he fo r e i g n e x ch a n g e t r a n s a c t i o n d on e b y t h e a s s e s s e e w i t h th e f o r e x de r i v a ti v e s . Th e a s s es s e e s t a ted t h a t w h i l e f o re i gn e x c h a n g e d e r i v a t i v e s a r e d on e t h r o u g h a r e c o g n i z ed s t o ck exchange w hi c h is MCX in I n di a , the f o r e i g n e x c h a n g e f o r w a r d c o n t r a ct s a r e d o ne t h r ou g h b a nks a u t h o r i z ed b y R B I a n d s u ch c o nt r a c t s a r e n o t a l l o w e d t o b e e n t e r e d i n t o u nl e s s t h e y a r e s u pp o r t e d b y a c t u al i m p o r t o r export t ra n s a c ti o n . Th e L d .C I T( A p p e al s ) r e je c t e d the c o n t e n t i on s of th e a s s es s e e a n d u p h e l d t h e d i sa l l o w a n c e m a d e h o l d i n g t ha t t h e c a n c e l l a t i o n o f f o r w a r d c on t r a c t s by t h e a s s es s e e wa s m e r el y o n th e b a s i s o f t r en d s i n t h e f o r e i g n e x c h a ng e r a t e s w h i c h e s ta b l i s h e d t h a t t he a s s e s se e was e n t e r i ng into s p e c u l at i v e t r a n s a c t i on s which were i n d e p e n d en t f r om t h e e x p o rt b us i n e s s o f th e a s se s s e e . Th e 4 r e l e v a n t p a r a 4 of t h e L d .CI T( A p pe a l s ) ' s or d e r ar e a s u n d e r :
" 4... ... ... ... ... ... ...... ... ... ... ... ... ... ... ...... ... ... ... ... ... ... . .
(i) It is noticed that the forward contracts were entered by the assessee for duration of less than a month i.e for 28 days, 30days.f '29 days and 29 days only.
(ii) Though the assessee claimed that forward contracts were entered into by it to hedge against any loss on account of foreign exchange at the time of receiving any export order, however, it is observed that on 14.05.2008 the assessee has booked a forward contract of 1,00,000 US $ even though no export sales were made by the assessee during the months of May 08 and June 08. The forward contracts have been booked for Lump sum amts without any connection whatsoever with the export sales made.
(iii) The forward contracts were allegedly entered into by the appellant to hedge against the loss of foreign exchange on export contracts received by the appellant. The assessee has later on Cancelled these contacts without any reason just Keeping in view the foreign exchange rates. It is not the case of the assessee that export could not be executed or export sales order was cancelled.
The cancellation of the Forward Contracts by the assesses just on the basis of trends in the foreign exchange rates establishes that the appellant was entering into speculative transactions which were independent of 'the export business of the appellant.
................................................................................ The appellant has neither co related the amounts of forward contracts taken with the exports made nor brought on record any explanation for cancellation these contracts. The contracts entered for fluctuation of foreign exchange entered by the assessment proceedings are independent of the exports being made by him. The appellant is taking decision of canceling these contracts keeping in view only the foreign exchange rate. Due to volatile position of US $ the appellant has entered into forward contract and loss incurred thereon has been rightly treated as speculation loss by the assessing officer."
5
6. Aggrieved by t he same, the a ss e s s e e f i l ed p r es e n t a p p e a l b e f o r e u s. Th e L d . c o u ns e l f o r a s s es s e e r e i t e ra t ed t h e c o nt e n t i on s m a d e b ef o r e t h e l o w e r a u t ho r i t i es . Th e L d. c o u n s e l fo r a s se ss e e p r i m ar i l y r a i s e d t w o co n t e n ti o n s ;
i ) t h a t t h e l o s s o n a c c o u n t o f f o r e i g n e x c h an ge w a s i n c u r r e d i n t h e c o u r s e o f c a r r y i n g o n t h e bu s i ne s s of the a s s es s e e since the f o r w ard e x c h a ng e c o nt r a c t s w e r e e n t e re d i n to t o h e d g e a ga i ns t a n y l o s s on a cc o u n t o f f o r e i g n e x c ha ng e e a r n e d o n a cco u n t o f e x p o r t s;
ii) that the a ss e s s e e h ad e a rn e d o v e r al l p r of i t on account of e x ch a n g e rate f l u ct u a t i o n a m o un t i n g to R s . 3 0 , 9 8 ,8 3 9 / - a n d h a v i n g a c cep t e d t h e p r o f i t ea r n e d o n a c c o u nt o f for e i g n e x ch a n g e f l u c t u a t i o n a n d tre a t e d t h e s a m e a s no r m a l b u s i n es s p r o f i t , t h e r e w a s n o reason to ho l d only the loss on a c c oun t of c a n c e l l a ti o n o f f o r w a r d c o nt r ac t o f f o r e i gn e xc h a n g e f l u c t u a t i o n a s s pe c u l a t i v e i n n at ur e .
7. I n s u p p or t o f h i s c o n t e n ti o n t ha t t h e l o s s w a s i n cu r r e d o n a c c o u n t o f f o r w a r d c o n tr a c t s en t e r e d i nt o w i t h t h e b a n ks f o r s a l e o f f o r e i gn e x c h a n g e a g a i n s t e x p o r t p r o f i ts , t h e L d . c o u n s e l fo r a s ses s e e p o i nt e d o ut t h a t t h e f a c t t ha t t h e l os s w a s i n c u rr e d o n c a n c e l l at i o n o f f o r w a r d co n t r a ct, h a s n o t b e e n d i s p u t ed by t h e L d . CI T( A pp e a l s ) a n d t h e on l y r e a s o n f o r h o l d i n g t h e sa m e a s s p e cu l a t i v e a n d n o t f o r t he p u r p os e o f b u s i n e s s w a s t h a t t h e d u r a t i o n o f t h e f o r w a rd c o n t r a ct w a s f o r l e s s t h an a m o n t h , t h e f o r w a r d c o n t ra c ts w e r e n o t backed by e x po r t sales made during the period the 6 contracts were booked and that the c on t ra c t s w e re cancelled wi t h ou t any reason and keeping in view the foreign e x c h a n ge rates. Th e Ld. c o u n se l for a s s e s s ee explained that the a s s es s e e wa s an e xp o r t e r and was r e g u l a r l y e n t e ri n g i n t o t he f o r w a r d e x c ha n g e c o n t r a c t s t o h e d g e a g ai n s t any f l u c t u at i o n i n t h e f o r ei g n e x cha n g e . Th e L d . c o u ns e l fo r a s s e s s e e f u r t he r e x p l a i ne d t ha t th e f o r w ar d contracts were e n t e r e d i n t o o n t h e b a s i s o f s al e s o r d e rs r e c e i v e d i n a p ar t i c u l a r pe r i o d an d w e r e e n t er e d i n t o f o r a specified period. Th u s , t h e L d . c o u n s e l f o r a ss es s e e s t at e d t h a t a l l f o r w a rd e x c h a n g e c o n t ra c t s w e r e g e n e ra l l y b a c ke d b y s a l es o r de r s re c e i v e d b y i t . Th e L d . c o u n se l fo r a s s es s e e s t a t e d t h a t wh en t h e f o r e i g n cu r r e n c y w a s n ot r e c e i v ed w i t h i n s p e ci f i e d p e r i o d o f c o n tra c t i n l i e u o f th o s e s a l es orders the f o r w a r d c on t r a c t go t c a n ce l e d a u to m a t i c a l l y . Th e L d C o u n s e l f o r t h e a s s e ss e e p l a c e d b e f o re us a c h a r t g i v i n g d et a i l s o f t h e F o r w ar d C o nt r a c t s c an c e l l ed d u r i n g t he y e a r a s un d e r :
Sunshine Foods Detail of Forward Contract Cancelled during F.Y. 2008-09 Booking Forward US Dollars Booking Rate Amount Due Date Date Contract No. Booked (Rs.) 14/05/08 042P080178 100,000 42.60 4,260,000 30/06/08 12/08/08 042P080243 200,000 42.96 8,592,000 31/12/08 18/08/08 042P080257 200,000 43.73 8.746.000 30/01/09 24/12/08 042P080469 44,565 43.73 1.948,827 30/01/09 Total 544,565 23,546,827 Dollars Utilisation Date Dollars Cancellation Cancellation Cancellation Utilisation Cancelled Date Rate Amount 64,554 24/06/08 35,446 09/07/08 43.16 19,938 155,435 10/12/08 44,565 24/12/08 43.73 34,315 44.565 05/12/08 155,435 27/01/09 48.85 795,140 7 44,565 27/01/09 48.85 227,976 264,554 280,011 1,077,369
8. Th u s t h e L d . c ou n s e l f o r t h e a ss e s s e e e xp l a i n e d t h at t h e f i n d i ng s o f th e L d . CI T( A p p e a l s ) t o h o l d t h e l o ss i n c u r r ed b y t h e a s se s s e e d u r i n g t he y e a r o n a c c o u n t o f ca n c e l l a t i on o f f o r w a rd c o n tr a c t o f fo r e i g n e x c h a n g e w a s sp e c u l a t i ve, w a s o n a t o t a l mi s - a p p r e ci a t i o n of t h e f ac t s .
9. F u r t h e r t h e L d . c o u n s e l f o r a s s es s e e a l s o st a t e d t h at d u r i n g t h e i m p ug n e d y ea r i t h ad e a r n e d a n o v e r al l p r of i t o n account of e xc h a n g e rate fluctuation a mou n t i n g to R s . 3 8 , 9 9 ,8 2 9 / - which i n c l ud e d the impugned losses of R s . 1 0 , 7 7 ,3 6 9 / - . Th e L d . c o u n s e l f o r a s s e s s e e po i n t e d o u t t h a t h a v i ng a c c ep t e d t h e p ro f i t ea r n e d o n f or e i g n e x c h a n ge a s b u s i n e ss o f t he a s s e s s e e, t h e r e w a s n o r e a so n to h o l d t he loss on f o r w ar d c o n tr a c t s of f o r ei g n e x ch a n g e as speculative. A l t e r n a t i v el y , t h e L d . c o u n s e l f or a s s e s s ee s t a t e d t h a t i f t he l o s s o n f o r e i g n e x c h a n g e i s s p ec u l a t i v e i n n a t u r e , t h e g ai n o n t h e s a m e s ho u l d a l s o b e c h ar a c t e r i z ed a s s p e c u l a t i v e an d n e t p r o f i t e ar n e d b e s u b j e c te d t o t a x w h i c h th e a ss e ss e e h a d i n a n y c a s e o ff e r e d t o ta x a s s u ch a n d t h e r e w a s no r h y m e o r r e a so n t o e x c l u d e o nl y t h e l o s s e a r n e d on f or e i gn e x c h a ng e fl u c tu a t i o n an d di s a l l o w e d th e same.
10. Th e L d . D R , o n t h e o t h e r h a n d , r e l i e d u p o n t h e o r d e r o f t h e L d . CI T( A pp e a l s ) a n d st a t ed t h a t t h e c l e a r -c u t f i n d i ng o f t h e L d . CI T( Ap p e a l s ) c a te g o r i c a l l y p o i n te d ou t t h a t t h e a s s e s s e e h ad e nt e r e d i n t o th e s e c o n t r a c t s n ot fo r h e d g i n g 8 t h e f o r e i g n e x cha n g e r e c e i v ed i n t h e c o u r s e o f i ts b u s i n e s s and the same had b e en c a nc el l e d k ee p i n g in view the f o r e i g n e x c h a ng e r a t e s a n d , t h e ref o r e , ha d b ee n ri g h t l y he l d as speculative in nature.
11. W e h a v e h e a r d c o n t e n t i on s o f bo t h t h e p a r t i es . Th e i s s u e b e f or e u s p e r t a i n s to t r e a tm e n t o f t h e l o s s o n f o r e i g n exchange f o r w ard c o n t ra c t am ou n t i n g to R s. 10 , 7 7 , 3 6 9 /- w h i c h t h e a s s e s se e h a s c l a i m e d a s a n o r m a l b u s i n e s s l o s s, while the R e ve n u e has c har a c t e r i z ed the same as s p e c u l a t i v e i n na t u r e a n d d i s a l l o w e d s e t o f f o f t h e s a me a g a i n s t no r m a l bu s i n e s s of t h e a ss e s s e e .
12. Th i s i s s u e , w e f i n d , w a s d e a l t w i t h b y t h e Ho n ' b l e G u j a r a t Hi g h C ou r t i n t h e ca s e of CI T V s . F r i e n ds S h i p p i n g P v t . L t d . , 2 1 7 Ta x m a n n . c o m 2 6 7 a n d a l s o i n t h e c a s e o f C I T V s . P a n c h a ma h a l S t e e l L t d . , 21 5 Ta x m a n n . c o m 1 40 , h o l d i n g t h a t s u c h l o s se s c o u l d n o t b e r eg a r d e d a s s p e cul a t i v e u / s 4 3 ( 5 ) o f t h e I n co m e Ta x A c t , 1 9 6 1 . Th e r e a f t e r t he M u m b ai B e n c h o f t h e I . T. A . T. i n t h e c a se o f L o n d o n S t ar D i a m o n d C o m p a n y ( I ) P . L t d . V s . D CI T i n I TA N o .6 1 6 9 /2 0 1 2 d e a lt e x h a u s t i ve l y with the i s s u e. Th e C o o r d i na t e Bench e x a m i n e d t he i s su e i n t h e l i g h t o f t h e p r o v i s i o n s o f s e c t i on 4 3 ( 5 ) o f t h e Ac t w h i c h de f i n e s th e e x p r e ss i o n 'sp e c u l a t i ve transaction' and after r e f e rr i ng to v ar i o u s Hi g h C o u rt judgments in the case of CIT vs Sooraj Mull N a g a r m u l l , ( 1 9 8 1) 1 2 9 I TR 1 6 9 ( C a l ) a n d CI T V s. B a d r i d a s G a u r i d u P v t. L td . , 2 6 1 I TR 2 5 6 , h e l d t h a t t he f o r w a rd contracts ar e co m m o d i t i es . Ho we v e r , at t h e s a me t i m e , i t 9 h e l d t h at s i nc e th e f o r w ar d c o nt ra c t s w e re i n te g ra l p a r t o r i n c i d e n t al t o t he c o r e b u s i n e s s o f e x p o r t of t he a s s e s s e e, t h e s a i d wo u l d c o n s t i t u te h e dg i n g t r a n sa c t i o ns a n d n ot s p e c u l a t i v e c on tr a c t s . Re l y i n g up o n t h e G u j a ra t H i g h C ou r t d e c i s i o n s c i t e d a b o v e i t w a s al so h e l d t ha t i t wa s n o t t he r e q u i r e m en t t h at there must be one-to-one c o r r e l a ti o n b e t w e e n t he f o r w a r d c o n t ra c t s a n d c o r r e sp o n d i n g e x p o rt invoice. I t w a s h e l d th a t so l o n g a s t h e to t al f o r w ar d c o n t r a c t s d i d no t e x c ee d th e e x p o r t of t he a s se s s e e pl us o u t s t a n d i n g e x po r t r e c e i va b l e , th e s a m e w o u l d c o n s t i t u te hedging t r a n s ac t i o n s an d f u rt h e r may not alter t he a f o r e s a i d c o n cl us i o n a s l o n g t he a s s e ss e e ha d v a l i d an d a c c e p t a b l e e x pl an a t i o n fo r s uc h c a n c e l l a ti o n . Th e I . T. A . T. t h e r e a f t er w e nt to h o l d t h a t t h e l o s s a r i s i n g o n c an c e l l a t i on o f m a t ur e d fo r wa r d c o nt r a c t s wa s a l l o w a b l e a s d e d u c ti o n a n d i n c a s e of pr e - m a t u r e c a n ce l l a t i o n of f o r w a r d c o n t r a ct s i t h e l d t h at t h e sa m e w o u l d be a l l o w e d a f t e r c o n s i d e r i n g t h e s p e c i f i c e x p l an at i o n o f t h e a s s es s e e i n t h i s r e ga r d . Th e r e l e v a n t fi n d i n gs o f t h e I TA T a t p a r a 3 4 - 3 6 of i t s o r d e r i s a s under:
"34.From the above analysis and summary of judgments, it is safely concluded that the impugned FCs are "commodities".
However, considering the fact that these FCs are integral part or incidental to the core business of export of diamonds or the outstanding receivables of export proceeds, in principle, the impugned FCs constitute "hedging transaction" and not the "speculative contracts". As such, the banks do not entertain FCs of speculative nature with the customers like the assessee, the exporter. As such, the extension of FCs, in case of non-receipt of export proceeds on the due dates, is not allowed without cancelling the existing FCs. However, the onus is on the assessee to explain satisfactorily why the assessee resorted to premature cancellation of some FCs. Further, it is not the requirement that there must be 1:1 10 precise correlation between FC and the corresponding export invoice. So long as the total FCs does not exceed the exports of the year plus outstanding export receivable, the FCs can constitute "hedging transaction'. Further also, the "premature cancellation of FCs may not alter the above conclusions so long as the assessee has valid and acceptable explanation for such cancellations. It should not be the case, to start with, FC can be a "hedging transaction' but the ending of such FC is "speculation'. In the light of this synopsis of our views in the matter, we shall not deliberate on the impugned losses.
35. The subdivisions of the loss of Rs. 4,69,42,680/-: we have already tabulated above the three subdivisions of the impugned losses based on the timing of the cancellation of the FCs. Broadly the loss is divided into two types and the adjudication of the each subdivision of loss is given as under:
(a) Loss on Cancellation of Matured FCs amounting to Rs 4,14,88,805/- relates to the FCs cancelled or terminated on or after the due date. In other words, the FCs booked as integral part of the export invoices lived its booking period in full and they were either terminated by the Bank on or after due date of maturity date of the contract as the actual realization were not received in time. These are not premature cancellations by the assessee and therefore, in our considered view, the said loss of Rs 4,14,88,805/-, being related to the FCs which are integral or incidental to the exports of the diamonds, should be allowed as business loss in view of the binding High Court or Tribunal decisions/judgments in the case of D Kishore kumar and Co (supra), Badridas Gauridu Pvt Ltd (supra), Sooraj Muill Magarmull, (supra) etc. Thus, loss arising from cancellation of the matured contracts is allowed in favour of the assessee. Thus, this part of the ground of the assessee is allowed.
(b) (i) Loss on Cancellation of Pre-matured FCs is the other segment of loss relates to the FCs cancelled prior to the date of maturity. The question to be answered by the assessee relates to the acceptability of the explanation for such premature cancellation of the FCs before the due date of maturity of the contract. It is a settled issue that the assessee has to discharge the onus on why he had to resort to premature cancellation. In this case, the explanation of the assessee revolves around the fact that the maturity of date of some of such premature cancelled FCs fell during the week-
end days and therefore, the assessee cancelled such FCs three days prior to the due date. Related loss is quantified at Rs 42,18,940/-. In our opinion, the explanation of the assessee is acceptable and the AO is directed to allow the claim and of course, after due verification of the factum of week-ends. Thus, this part of the ground of the assessee is allowed as above without going into the alternate arguments relating to "damages".
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(ii) The other shade of loss of premature cancellation of FCs relates to the FCs cancelled prior to longer than three days constitutes another fraction of the loss and the assessee's explanation in this regard revolves around the general explanation of reduction of losses. Relevant loss is worked out at Rs 18,92,078/-. This segment of losses relates to premature cancellations of the FCs and the explanation of the assessee is very general. As such, premature cancellations should also be allowed as business loss in view of the decisions discussed in the preceding paragraphs, so long as the related FCs are integral part of the exports. However, there is something called for is the assessee's explanation and its credibility and acceptability by the AO. In our opinion, these explanations were not examined by the lower authorities of the Revenue. Assessee needs to answer as to why it went for premature termination and the onus is on the assessee as per the ratio of the SC judgment in the case of Josef John (supra). Further, during the proceedings before us, on this issue, Ld Counsel for the assessee put forwarded various new arguments describing the impugned loss as "damages' payable to the Banks for breach of contracts or settlement of the contracts. These aspects are not emanating from the orders of the lower authorities. One needs to study the correspondence with the Banks and the RBI guidelines on the issue whether such payments to bank should be treated as damages for breach of contract. One needs to examine who the bank treats the same and relevant accounting principles. In this regard, Ld Counsel also filed written submission too. In principle, this part of the losses relating to premature cancellations of FCs amounting to Rs 18,92,078/- should be remanded to the file of the AO for want of speaking order on this issue after considering the cited judgments like Shantilal (P) Ltd (1983) 144 ITR 57 (SC) and others on this issue. AO is directed to disallow this loss in the absence of specific explanation, if any. As such, impugned order is deficient on these aspects of the issue. Thus, this part of the ground is allowed pro-tanto.
36. In the result, the appeal of the assessee is partly allowed."
13. I n t h e p re s e n t ca s e i t i s a n u ndi s p u t e d fa c t t hat t h e a s s e s s e e i s an e x p o r t e r a n d th e i m p u g n e d l o s s w as i n c u r re d o n c a n c e l l a t i o n of f o u r f o r w a r d c on t r a c t s o f f o r e i gn c u r r e n c y a m o u n t i n g i n a l l t o 5 , 4 4 ,5 6 5 US $ w h i c h i n Ru p e e t e r ms a m o u n t e d t o R s. 2 , 3 5 , 4 6 ,8 2 7 / - . Th e r e a so n fo r ho l d i n g t h e s a i d t r an s a c t i ons a s s p ec u l a t i v e b y t h e R e v e n ue , w e fi n d a r e a s u nd e r :
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1) Th a t t h e y w e r e e n t e r e d i n t o f or d u r a t i o n o f l e ss t h a n a m on t h .
2) Th a t t h e f o r w a r d c o n t r a c t s w e r e b o o k e d f o r l u m p sum a m o un t without a ny c o nne c t i o n wi t h the e x p o r t s al e s m ade .
3) Th a t t h e s a i d co n t r a c t s we r e ca n c e l l e d wi t h o u t a n y r e a s on .
14. W e f i n d t h a t t h e f a c t t h a t t h e f o r w a r d c o n t r a ct s h a v e b e e n b o o ke d f or l u m p s um w i tho u t a n y c o r r e l a ti o n t o t h e e x p o r t s a l es m ad e h a s a l r e a d y b e e n h e l d n o t to b e a v a l i d r e a s o n f o r h o l d i n g t h e t r a ns a c t i o n s p e cu l a t i ve by t h e I TA T Mumbai Bench in the case of London Star Diamond C o m p a n y ( I ) P . L t d . ( s u pr a ) a n d t h e G u j ar a t H i gh C o u r t in t h e c a s e o f F ri en d s & F ri e n d s Sh i p p i n g ( P ) L td . ( s u p r a ) a nd P a n c h m a h al S t ee l L t d . ( s u p ra ) . Th e a s s e s s e e h a s a l l a l o n g c o n t e n d e d t ha t th e f o r w a r d c o nt ra c t s w e r e e n t er ed t o h e d g e t h e f o r e i gn e x c ha n g e r e c e i v e d a ga i n s t e x p or t p r oc e e d s a nd copy of c o r r esp o n d e n c e with bank a l o n g w i th copy of statement o f ba n k w a s a l so f i l e d . Th e r ev e n ue h a s n ot d i s p u t e d th e s am e . A s l o ng a s i t i s n o t di s p u t ed t h a t t h e assessee was an exporter wh o entered i n to f o r w a rd contracts to h ed g e his f o re i g n c u r r e nc y re c e i v a b l e on a c c o u n t o f h i s e x p o r t b u s i ne s s , t h e t r a n s a c t i on i s t o b e held to be in c o n n e c ti o n wi t h its b u s i n es s and n ot speculative.
15. A s f o r t he f i n di n g s o f t he L d . CI T( A ) t h a t t h e con t r a c t period was never more than a month, which was based on a 13 d e t a i l fi l e d b y t he a s s e s s ee b e f ore t h e CI T( A ) r ep ro d u c e d a t p a r a 4 o f t h e o r de r o f t h e CI T( A ) , w e f i n d t h a t t h e d e t a i l n o w s u b m i t t e d b e f or e u s i s c o n tr a d i ct o r y t o t h e ab o v e f i n d i n gs . A s p e r t h e s a i d d e t a i l t h e c on t r a c t s w e r e f or a p e r i o d e x c e e d i n g a m on t h a n d w e r e al s o p a rt l y ut i l i ze d b y t h e a s s e s s e e o n re c ei p t o f f o r e i g n e x ch a n g e d ur i n g t h e p e n d e n c y o f t h e c o n t ra c t a n d i t w a s o n l y v i s a v i s b a l anc e a m o u nt t h a t t h e c on t r a ct w a s c a n c el l e d j u s t a f e w da y s b e f o r e t h e m a t u r i t y o f t h e c o n t r a c t . F ur t h er w e f i n d t h a t t he a s s e s s e e h a s f u r n i s h e d no r e a s o n fo r t h e p r e m a t u re c a n ce l l a t i o n of t h e c o n t r a c ts . I n v i e w o f t h e c o nt r a d i c t o r y f a c t s r e l a t i n g t o t h e p e r i o d o f t h e c o n t r a c t fi l e d b ef o r e u s a n d th a t b e f o r e t h e L d . CI T( A ) w e c on s i d e r i t fi t to r e s t o r e t h e m a t te r to t h e C I T( A ) to d e t e rmi n e t h e co r r e c t fa c t s r e l at i n g to t h e i s s u e c o n s i d e r i n g t h e d e t a i l s a n d ev i de n c e s f i l e d by t he a s s e s s e e and a l so to se e k e x pl a n a t i o n for the p re m a t u re c a n c e l l a ti o n o f th e c o n tr a c t s . We d i r e ct t h at t he i s s u e be t h e r e a f t er d e c i de d i n a c c o r d a nce w i t h l a w a f t er a f f o r d i n g t h e a s s e ss e e d ue o p p o r t u ni t y o f he a r i n g .
16. As for the c on t e n t i o n of th e Ld.Counsel for the assessee that th e a s s e s se e ha d also e ar n e d gains on f o r e i g n e xc h a n g e f l u c t u a t i o n a n d t h e i m p u g ne d l o s s s h o u l d be set of f a ga i n s t the same ,we find no m eri t in th i s argument. Admittedly th e g ai ns have be e n ea r n e d on a c c o u n t o f f l u ctu a t i o n i n f o r e i gn e x c h a n g e . I t w a s n o t t h e case of L d . co u ns e l for the as se s s e e that the gain also p e r t a i n e d t o fo r w a r d c o n tr a c t s of f o r e i gn c u r re n c y n o r w as 14 the same d em on s t r a t e d ei t h e r before us or the lower a u t h o r i t i e s . Th er e f o r e t he r e c a nn o t b e a n y p a r i t y b e t w e en t h e t w o s o a s t o a l l o w t he s a m e tr e a t m e n t t o b o th.
17. I n t h e r e s u l t , th e a p p e al o f t he a s s e ss e e , t h e re f o r e, s t a n d s a l l o w e d fo r s t a t i s t i c a l p u rp o s e s .
O r d e r p r on o u n c ed i n t h e o p e n cou r t .
Sd/- Sd/-
(SANJAY GARG) ( ANNAPURNA GUPTA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 21 s t September, 2017
*Rati*
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A)
4. The CIT
5. The DR
Assistant Registrar,
ITAT, Chandigarh
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