Vijay Textiles Limited, Hyderabad vs Department Of Income Tax

Dy. Commissioner of M/s. Vijay Textiles Limited Income Tax, Vs S.P.Road, Circle-17(2) SECUNDERABAD HYDERABAD [PAN: AAACV8195L]

(Appellant) (Respondent)

For Revenue : Shri Rajat Mitra, DR For Assessee : Shri Laxminiwas Sharma, AR

Date of Hearing : 09-04-2015 Date of Pronouncement : 17-04-2015

ORDER

PER B. RAMAKOTAIAH, A.M. :

This is a Revenue's appeal against the order of the Commissioner of Income Tax(Appeals)-II, Hyderabad dated 08-10-2014 on the issue of allowing loss of Rs.3,45,77,663/-, which was held by the Assessing Officer [AO] as speculative loss. Revenue has raised material grounds 2 & 3 on the issue.

2. Assessee is engaged in the business of manufacturing and trading of house-hold furnishings and declared income of Rs.2,63,19,334/- after I.T.A. No. 1932/Hyd/2014 :- 2 -: M/s. Vijay Textiles Ltd

claiming a loss of Rs.3,45,77,663/- on the foreign exchange transactions. AO treated such loss as loss from speculative business u/s. 43(5) of the Income Tax Act [Act] and disallowed the same. It was contended before Ld.CIT(A) that assessee has incurred the loss from transactions of derivatives in foreign exchange conducted through the Axis Bank. It filed confirmation from bank that the transaction was solely for the purpose of hedging foreign exchange exposure and not for the purpose of speculation. Ld.CIT(A) noted the facts of the case and decided as under:

"4. The information on record is carefully considered. The appellant is a leading manufacturer of house-hold furnishings. The facts of the issue are:

The appellant placed the purchase order on an Italian company namely - Sincrateia Trading for purchase of cotton printed sheeting worth US $ 6.3 million. This order was placed on 05.07.2008. On 16.07.2008 the assessee hedged the transaction by taking call option i.e., right to buy US $ 6 million. The expiry date for this option was 23.06.2009 and settlement date was 25.06.2009. As the Swiss Currency was relatively more stable, the call option was taken in US $ vs. Swiss Francs. On maturity date, the Swiss currency appreciated and this has resulted in loss as under:

US $ Strike Price Swiss Franc Date of purchase - 6,000,000 1.215 7,290,000 16.07.2008 Date of settlement 6,706,532 1.087 7,290,000 25.06.2009 Loss 706,532 = Rs.3,45,77,676/-

The foreign exchange derivatives matured during the previous year and resulted in loss of Rs.3,45,77,676/-

which was claimed by the appellant as business loss. The Assessing Officer discussed about section 43(5) of the Income-tax Act, 1961 and held that all the transactions other than four types of transactions which are specifically exempted in section 43(5) shall be considered as I.T.A. No. 1932/Hyd/2014 :- 3 -: M/s. Vijay Textiles Ltd

speculative transactions.

4.1 The provisions of section 43(5) and whether such provisions are applicable to the appellant are discussed as under:

(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:

Provided that for the purposes of this clause -

(a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing 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;

(d) an eligible transaction in respect of trading in derivatives referred to in clause of section 2 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) carried out in a recognized stock exchange

(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 Chapter VII of the Finance Act, 2013 (17 of 2013).

In the instant case the derivatives do not pertain to commodity / stock / shares. It pertains to foreign exchange and it is well settled that a foreign exchange is commodity only in the hands of banks and authorized foreign exchange dealers as only banks and foreign exchange dealers are authorized to trade in foreign exchange and not others as per RBI guidelines (Munjal Showa Ltd. Vs. DCIT I.T.A. No. 1932/Hyd/2014 :- 4 -: M/s. Vijay Textiles Ltd

94 TTJ 227 ITAT, New Delhi).

4.2 Since the appellant is not a bank and not an authorized foreign exchange dealer section 43(5) itself is not applicable. Further, the exceptions mentioned in (a) to (e) of the 43(5) are also not applicable because -

(a) The contract is not in respect of any goods or raw-

material.

(b) The appellant is not a dealer in stocks or shares.

(c) The appellant is not a member of Stock Exchange.

(d) The transaction is not carried out in the recognized Stock Exchange

(e) The appellant is not trading in commodity derivatives.

In summary, the transaction undertaken by the appellant does not fall u/s.43(5) and also does not fall under exceptions provided therein. In summary, section 43(5) is not relevant in the appellant's case.

4.3 In the instant case, the transaction of foreign exchange derivatives carried out by the appellant are closely connected to his business transaction and was primarily aimed at reducing the risk of foreign exchange fluctuation. The hedging is evident from the information on record. The hedging was well below the extent of foreign exchange exposure. It is not a case where the hedging was done for a much higher amount, than the actual foreign exchange exposure. Further, the Axis Bank in its correspondence with the appellant has specifically mentioned that hedging is for the purpose of foreign exchange exposure and not for the purpose of speculation. In ample number of cases the Courts have held that loss due to hedging against foreign exchange fluctuation with the bank cannot be considered as speculative loss.

In the case of CIT Vs. Badridas Gauridu Pvt. Ltd.(2003) 261 ITR 256 (Born) (HC) it was held that "if an assessee inorder to hedge against exchange fluctuation loss had booked foreign exchange transaction in forward market with the bank and incurred loss, such loss cannot be I.T.A. No. 1932/Hyd/2014 :- 5 -: M/s. Vijay Textiles Ltd

considered as speculative loss. More particularly, when the assessee is not a dealer in foreign exchange." Further, in the case of CIT Vs.Soorajrnull Nagurmull (1981) 129 ITR 169 it was held that "here there is no finding that entering into foreign exchange contract was the nature of business of the assessee. This was only an incidental part of the business operation for the export and import of the goods by the assessee. The assessee was not a dealer in foreign exchange contracts as such. Foreign exchange contracts were only incidental to the assessee's regular course of business. Therefore, all the arguments regarding whether it conies within the Expln.2 in our opinion, is not quite relevant because the loss was not sustained in speculative transactions which are in the nature of the business of the assessee.

4.4 Keeping in view the above discussion, the appellant carried out, the derivative transaction during its course of business and is not a dealer in foreign exchange, the provisions of section 43(5) are not relevant in appellant's case, the entire transaction was carried out to reduce its risk of foreign currency exposure and the loss incurred in such process is a business loss and therefore allowable to the appellant. Accordingly, Ground No. 2 & 3 are allowed".

3. Not only that, Ld.CIT(A) also noticed that assessee has offered gain of Rs.68,88,287/- in AY.2008-09 as 'business income' and in AY.2007- 08, foreign exchange loss of Rs.41,46,204/- was accepted as 'business loss' in scrutiny assessment. Considering the facts and also the principle of consistency, the Ld.CIT(A) accepted assessee's contention that this transaction is not a speculative transaction. In arriving at the decision, Ld.CIT(A) also considered the provisions of Section 43(5) and also the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Badridas Gauridu (P) Ltd., [261 ITR 256]. Therefore, Revenue is aggrieved.

4. After considering the rival contentions and the orders of the ITAT, in AY.2009-10, wherein similar issue was also considered, we find I.T.A. No. 1932/Hyd/2014 :- 6 -: M/s. Vijay Textiles Ltd

ourselves in agreement with the Ld.CIT(A). Ld.CIT(A) not only considered the facts of the case that assessee has only one purchase against which hedging transaction was undertaken which resulted in loss of $706,532 (US Dollars) converted to Rs.3,45,77,676/- on a transaction of US $6 million undertaken through Axiz Bank. The transaction of foreign exchange derivatives carried out by assessee is closely connected to its business transaction and was primarily for reducing the risk of foreign exchange fluctuation. The hedging is evident in the information on record.

5. Considering the facts of the case and case law relied upon by assessee before the CIT(A), we do not see any reason to interfere with the detailed order of CIT(A). Nothing was brought on record to counter the findings of CIT(A). In view of this, we uphold the order of CIT(A) and dismiss the grounds raised by Revenue.

6. In the result, appeal is dismissed.

Order pronounced in open Court on 17th April, 2015

Sd/- Sd/-

(ASHA VIJAYARAGHAVAN) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated 17th April, 2015

TNMM I.T.A. No. 1932/Hyd/2014 :- 7 -: M/s. Vijay Textiles Ltd

Copy to :

1. Dy. Commissioner of Income Tax, Circle-17(2), 6th Floor, 'B' Block, IT Towers, AC Guards, Hyderabad.

2. M/s. Vijay Textiles Ltd., Ground Floor, Surya Towers, 104, SP Road, Secunderabad.

3. CIT(Appeals)-II, Hyderabad

4. CIT-III, Hyderabad

5. D.R. ITAT, Hyderabad