Brief of the Case
ITAT Kolkata held In the case of Shri Jayant Kr. Bhura vs. ITO that the loss arising to the assessee upon cancellation of the forward contracts was referable to and related to the assessee’s export business and arose out of the export business. The booking of forward contracts was not the assessee’s business. In the given case, the assessee in order to hedge against losses had booked foreign exchange in the forward market with the bank but the export contract entered into by the assessee for export of commodities in some cases failed, the assessee is entitled to claim for deduction of loss as a business loss.
facts of the Case
The assessee an individual is engaged in trading and export of agro products such as raw cotton, sugar, maize, sesame seeds, sorghum, bajra, groundnut, ginger seeds, etc. to foreign countries like USA, Portugal, Spain, Malayasia, Taiwan etc. for last several years under the trade name of M/s. Navjyot International. The assessee is a recognized Export House. The assessee does not have any other business and he is not a dealer in foreign exchange.
The assessee entered into forward contract in foreign exchange in order to hedge his loss on account of fluctuations in foreign exchange rates. In the course of export business assessee claimed to have incurred total loss of Rs.3,87,50,017/- consisting of Rs.3,78,44,872/- on account of cancellation of forward contracts in foreign exchange and Rs. 9,05,145/- being expenditure on account of foreign exchange difference. During the course of assessment proceedings, the assessee explained before the AO that his is a recognized export house recognized by Ministry of Commerce & Industries, Govt. of India. He also explained that forward contract in foreign exchange were entered into by the assessee through authorized bank following the procedures prescribed by RBI. According to assessee, he claimed the loss of Rs.3,87,50,017/- as hedging loss in term of proviso (a) to section 43(5) of the Act and requested for treating of the same as ordinary business loss being eligible for set off with other business income. But the AO rejected the claim of the assessee and treated the hedging loss as speculation loss.
Contention of the Assessee
The ld counsel of the assessee submitted that such forward contracts are booked in the normal and usual course of the assessee’s export business. The Reserve Bank of India permits Indian exporters to enter into forward contracts in foreign exchange with an authorised dealer category-I banks in India to hedge the exposure to exchange risk in such cases. Such forward contracts with a validity period of one year can be booked based on past performance of the average of previous three financial years’ actual export turnover or the previous year’s actual export turnover whichever is higher. It is permissible to cancel such forward contracts. For the same Ld. Counsel referred to the relevant period’s RBI’s master circular No. 6/2007-08 dated July 2, 2007. According to him, booking of forward contracts in foreign exchange is a necessary incident of the assessee’s export business.
He explained the fact that at the time of booking of the forward contracts, the assessee had export orders in hand for US$ 2,16,08,278 but booked forward contracts only for US$ 1,00,70,000. The assessee had booked the forward contracts in round sums against the confirmed export orders but not exceeding the value of the export orders. At any point of time the assessee had more export orders in hand than the forward booking amount.
He made a statement at bar that the export orders were duly submitted before the Assessing Officer but he arbitrarily ignored the same. According to Ld. Counsel for the assessee the AO as well as CIT (A), both without going into the facts of the case disallowed the claim of “hedging loss” treating the same as “speculation loss”.
Contention of the Revenue
The ld counsel of the revenue argued that the assessee was unable to prove with evidence that booking of forward contracts were hedging against export sales. According to him, assessee was required to prove the existence of export sales and that he had entered into the forward contracts only for safeguarding the loss which might have occurred due to future price fluctuation in foreign currency. But he could not prove the same with documentary evidences.
He further stated that the complete facts were discussed by AO and it was found that there was no reasonable equivalence between the periods of subsistence of two contracts i.e. forward contracts and export sales contracts and the amount involved in the two contracts. According to him, the cancellation of nine forward contracts in foreign exchange aggregating to 28,00,000 US$ resulted in a loss of Rs.2,33,23,750/- but the assessee failed to identify the corresponding export/sale contracts against which the above stated nine forward contracts were booked and thus the assessee could not prove his claim that the transactions were hedging in nature. In respect to the claim of hedging loss for remaining amount of Rs.1,45,21,122/- the assessee could come forward with some transactions but there was no reasonable equivalence of period and amounts between the two contracts.
He submitted that lower authorities have rightly treated the loss as speculative transaction as per the provisions of section 43(5) as the transaction in forward contract of foreign exchange was settled otherwise than by actual delivery. Accordingly, the lower authorities have rightly treated the loss claimed by the assessee on account hedging loss as speculation loss by virtue of provisions of section 43(5) , explanation (2) to section 28 and section 73.
Held by CIT (A)
CIT (A) confirmed the action of the AO. It was held that there is very thin line of difference to treat the nature of any transaction as to whether it is hedging or speculation. Accordingly, held that the assessee had carried on independent business of dealing in forward contract in foreign exchange and it is not linked to the export business of the assessee.
Held by ITAT
We find from records that, against the export orders for US$ 2,16,08,278, exports of US$ 41,76,126 were made during the financial year 2007-08 but during the financial year 2008-09 exports worth only US$ 57,59,208 could be made. But the balance export orders could not be executed because of world-wide slowdown, global recession and sluggish market conditions, which is a matter of public record. We observed that the Indian Government banned the export of maize in July, 2008, consequently, the pending export orders for the maize commodity had to be cancelled and no further orders could be booked. The assessee has produced the relevant details of the cancelled export orders (including for maize). Due to the sudden ban by the Government of India on the export of maize on July 3, 2008 the assessee had to cancel all the pending orders worth US$ 29,04,841 and was left with no other option but to cancel the forward booking as well.
Admittedly, the assessee had shipped part quantities against several of the export orders and the exports proceeds were converted at the forward contract rate. Since the buyers did not open the letters of credit and thus cancelled the balance quantity, the assessee had no other alternative but to cancel the forward contracts to the extent unutilised. The assessee had the option to convert the export proceeds at the rate stipulated in the forward contract or alternatively at the spot market rate. In the latter case, the forward contract had to be cancelled. As a prudent businessman, in respect of export proceeds of US$ 31,15,167.41, the assessee opted for conversion at the spot market rate instead of the rate stipulated in forward contracts of the value of US$ 28,00,000. The option exercised by the assessee resulted in higher export realisation to the extent of Rs.1,35,1l,357. Additionally, the assessee was able to obtain higher export incentives by way of drawback, OEPB, etc. with reference to the higher export realisation. Due to cancellation of the forward contracts partially or fully, the assessee had to pay the difference between the contract rate and the market rate to the bank. Such payment was a business loss incurred by the assessee in course of its export business and is an allowable deduction.
The purported findings of the AO that the assessee had not submitted the export orders or that forward contracts were booked without having export orders in hand are contrary to the record. The assessee has since obtained from the AO certified copies of the export orders filed by him in course of the assessment proceedings which bear out the assessee’s contention.
We further observed that the findings of the AO that the assessee dealt in forward contracts or that it was an independent business are without any basis. Indisputably, the assessee is in export business. The booking of forward contracts in foreign exchange is a normal and necessary incident of the export business. This position is also borne out from the RBI circular. The forward contracts were booked to hedge the assessee’s exposure to exchange risk in his export business as permitted by the RBI. The loss arising to the assessee upon cancellation of the forward contracts was referable to and related to the assessee’s export business and arose out of the export business. The booking of forward contracts was not the assessee’s business. It was not permissible for the assessee to carry on any business in forward contracts in foreign exchange. The AO also admitted that the forward contracts were made by the assessee in accordance with RBI guidelines. The AO and CIT (A) were wholly unjustified in treating the business loss as speculative in nature.
This issue is now covered by the judgment of the Hon’ble Calcutta High Court in CIT v Soorajmull Nagarmull, (1981) 129 ITR 169 (Cal) in which it was held that the assessee was not a dealer in foreign exchange and the foreign exchanges were only incidental to the assessee’s regular course of business and the loss was thus not a speculative loss but incidental to the assessee’s business and allowable as such. Facts in the present case are very similar. Further this issue is also covered by the judgment of Hon’ble Bombay High Court in CIT v Badridas Gauridu (P) Ltd., (2003) 261 JTR 256 (Bom), wherein, the judgment of the Hon’ble Calcutta High Court was followed.
In view of the above facts and circumstances of the case, we are of the view when the assessee is not a dealer in foreign exchange but an exporter of commodities and assessee had entered into forward contracts with banks in respect of foreign exchange but some of these contracts could not be honoured by the assessee for which it has to pay and which was debited to the P&L Account and claimed the same as business loss/hedging loss. In order to hedge against losses, the assessee had booked foreign exchange in the forward market with the bank but the export contract entered into by the assessee for export of commodities in some cases failed, the assessee is entitled to claim for deduction of loss as a business loss. Accordingly, respectfully following Hon’ble jurisdictional High court in the case of Soorajmull Nagarmull (1981) 129 ITR 169 (Cal), the claim of the assessee is allowed.
Accordingly, appeal of the assessee allowed.