Indian Kanoon - Search engine for Indian Law

(i) The appellant is carrying on the business of manufacturing of yarn, grey & processed fabrics and white crystal sugar etc.

(ii) During the F.Y. 2005-06, the appellant company had raised money from investors through FCCB (Foreign Currency Convertible Bond) for company's business.

(iii) This FCCB instrument had provided the option to the investors to convert the amount covered by FCCB into equity shares of the company at a fixed price or alternately retain FCCB so as to claim the amount given under each bond after a specified period.

(viii) Bhandari Rajmal Kusalraj v. CIT (1974) 96 ITR 401 (Mys) 8.3 The Ld. CIT(A) observed that the assessee had raised the following contention in support of its claim that the loss incurred on account of foreign exchange transaction was a business loss:

(a) The transactions relating to foreign exchange were hedging transactions

(b) The transactions were entered in with the view to cover the liability under FCCB amounting to more than Rs. 200 Crores.

• M.G. Bros 154 ITR 695 (AP) • Delhi Flour Mills Company Ltd., 95 ITR 151 (Del) • M.P. Sugar Mill Pvt. Ltd., 148 ITR 203 (All) • CIT Vs. Ramkumar Venugopal & Co. (1993) 70 Taxman 30 (Bom) • Javri Subbaramaiah and Co. V. CIT (1964) 51 ITR 742 (AP) • Omkarmal Agarwal V. CIT (1968) 67 ITR 329 (AP) • Chimanlal Chhotalal V. CIT (1968) 69 ITR 129 (Guj) • Pankaj Oil Mills v. CIT (1978) 115 ITR 824 (Guj)(FB) • Kirtilal Jaisinglal & Co. v. CIT (1980) 121 ITR 779 (Bom) 8.5 As regards to the claim of the assessee that the transactions were entered into with a view to cover the liability under FCCB amounting more than Rs. 200 Crores. The Ld. CIT(A) observed that the AO had specifically pointed out that ISDA agreement revealed that the assessee had not entered into foreign exchange contracts to cover the loss of FCCB and that no evidence had been furnished by the assessee in support of its contention that the foreign exchange transactions were entered into with a view to cover the liability under FCCB. He also observed that as per the agreement the conversion of currency could not be done from Indian rupees to Swiss Frank or from U.S. Dollar to Swiss Frank etc. 8.6 As regards to the another claim of the assessee that the provisions of section 43(5) of the Act were not applicable in the assessee's case as currency was not a commodity as referred to section 43(5) of the Act for the reason that it had not been defined in the Act and currency was not a commodity. The Ld. CIT(A) observed that there was no intention of the legislature to exclude the foreign exchange transactions not involving actual delivery out of the preview of section 43(5) of the Act, a reference was made to Notification No. 46/2009 dt. 22/05/2009 vide which MCS Stock Exchange Limited had been notified as a recognized stock exchange for the purpose of clause (ii) of Explanation to clause (d) of the proviso to sub-section (5) of section 43 and that the provision of transactions in foreign exchange not involving actual delivery were covered by the section 43(5) of the Act. The reliance as placed on the following decisions of ITAT, Mumbai Bench :

12. The Ld. CIT DR accordingly submitted that the Ld. CIT(A) was fully justified in sustaining the addition made by the AO.

13. We have considered the submission of both the parties and perused the material available on the record. In the present case the assessee was in the business of manufacturing of yarn processed fabrics and sugar etc., it was not carrying on any trading activity of foreign exchange either in India or outside India since its incorporation. During the year under consideration the assessee debited Rs. 13,32,96,175/- as foreign exchange hedging loss under the head financial expenses. However the AO did not accept the claim of the assessee and made the disallowance by invoking the provisions of section 43(5) of the Act. The Ld. CIT(A) also sustained the view of the AO and held that the transactions relating to foreign exchange were not hedging transaction. In the present case the assessee on the suggestion of the ICICI Bank and to cover up the expected loss on fluctuation of foreign exchange and the liability incurred during the course of regular business hedged the liability as permitted under FEMA and RBI Act through derivative contract. The assessee obtained the approval of the Board of Directors vide resolution dt. 12/09/2006 copy of which was placed before the AO during the course of assessment proceedings and the same is placed at page no. 33 of the assessee's paper book. As per the claim of the assessee, the foreign exchange market started fluctuation in a very unusual and unexpected manner, thus the liability for hedging, the contract entered by the assessee with the ICICI Bank in the normal course of business started generating heavy liability on account of unexpected fluctuation in foreign exchange in global market and the hedging contracts were abandoned by the assessee, whatever the liability arose for the purpose of hedging, the assessee chose to pay off and the net liability for such hedging had been provided in the bank account as foreign exchange hedging loss under the head financial expenses. In the present case the assessee raise funds through FCCB (Foreign Currency Convertible Bonds) for the purpose of manufacturing and selling of goods. The transaction of derivative products as evidenced by the Board Resolution dt. 12/09/2006, copy of which is placed at page no. 33 of the assessee's paper book and the ISDA master agreement entered into between the bank and assessee company was hedged to meet the financial loss on account of fluctuation of foreign currency to cover the financial liability of the assessee company. The assessee as a matter of commercial expediency because of unexpected flucutations in foreign exchange currency was compelled to settle the derivative loss during the year under consideration and claimed the said loss as business expenditure. The intention of the assessee was to hedge the transaction for securing business loss. Such type of transaction are recognized as per law in India.