Araska Diamond Pvt. Ltd vs. ACIT (ITAT Mumbai)

DATE: October 17, 2014 (Date of pronouncement)
DATE: October 20, 2014 (Date of publication)
AY: 2009-10
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S. 43(5)(a): Loss on foreign currency forward contracts by a manufacturer/ exporter is a “speculation loss” and not a “hedging loss”

Unless the assessee shows that there was some existing contract in respect of which he was likely to suffer a loss because of future price fluctuations and that it was to safeguard against such loss that he entered into the forward contracts of sale, he could not claim the benefit of clause (a) of the proviso to section 43(5).


From the principles laid down by above mentioned judgments one thing becomes clear that for hedging transaction commodity dealt should be the same. If the subject matter of the transactions is different it cannot be termed a hedging transaction.


In order that forward transactions in commodities may fall within proviso (a) to section 43(5) of the Act, it is necessary that the raw materials or merchandise in respect of which the forward transactions have been made by the assessee must have a direct connection with the goods manufactured or the merchandise sold by him. In other words raw material in respect of which the assessee has entered into forward transactions must be the same raw material which is used by him in his manufacturing business. We find that in the case under consideration assessee was not dealing in Foreign Exchange, therefore transactions entered into by it in Foreign Exchange cannot be held to be hedging transactions. As the assessee is dealing in diamonds and FC entered into only for diamonds would have been covered by the proviso (a) to the section 43(5) of the Act. (Contra view in Intergold (I) Ltd, Bombay Diamond Co. Ltd, Friends and Friends Shipping & Badridas Gauridu 261 ITR 256 (Bom) distinguished)

Note: See also S. Vinodkumar Diamonds (ITAT Mumbai) & contrast with London Star Diamond Company (ITAT Mumbai)
2 comments on “Araska Diamond Pvt. Ltd vs. ACIT (ITAT Mumbai)
  1. CA Goutam Baid says:

    With due respect and for the sack of academic discussion in my opinion the decision of the Tribunal is require reconsideration as the very basic issue raised by the appellant in the appeal was that the ‘Foreign Currency’ cannot be treated as commodity was not concretely decided by the tribunal.

    If the foreign currency cannot be treated as commodity the transaction cannot be held speculative u/s 43(5) as the transaction was not of the commodity.

    If the foreign currency is commodity the assessee was held to be engaged in such commodity regularly as by exporting the product he purchased foreign currency and sale such foreign currency to bought Indian currency. By this the forward contract of sale of foreign currency is covered by clause (a) to proviso to section 43(5).

    Here one more point to be noted that the no person is permitted to enter into contract of sale or purchase of foreign currency for the speculation earning, such transactions are specifically barred by the legislation and therefore presumption with reference to he forward contract for foreign currency entered by the assessee ought to be presumed as without any speculative intent unless there is any order by the foreign currency transaction regulator that particular transaction was of speculative nature.

    CA Goutam Baid

    • CA Manish J. Sheth says:

      Dear CA Goutam Baid ,

      My grounds of appeal before ITAT was as under,

      1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in confirming disallowance of loss of Rs.2,98,48,551/- on account of cancellation of foreign currency forward contract by treating it as speculation loss

      2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in believing that forward contracts are not relatable to any specific export bills of the assessee

      3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) ought to have considered that foreign currency is not a “Commodity”

      4. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not relying on the case of CIT vs Badridas Gauridu (P.) Ltd. 261 ITR 256 Bom, Bench: S Kapadia, J Devadhar and DCIT v. Intergold (I) Limited (2010) 1 ITR 257/ 27 SOT 239 (ITAT-MUM) which are on identical facts of the assessee

      This case I argued for almost 1.30 HRS before ITAT. ITAT has again and again reiterated that export invoices were not co-related to forward contract. In my paper book I have attached a RBI guidelines on foreign exchange derivatives and hedging price risk and freight risk oversea stating that since my client is SME , special dispensation from linking export invoices against forward contract was given to me. But ITAT order is silent on this. Further I have also given comparative table with London Star diamond ITAT Mumbai but ITAT is also silent on it. Regarding my ground no. 3 foreign exchange as commodity , the ITAT order is silent, further my argument that nobody except the exporter is allowed against the export outstanding to book the forward contract is also not mentioned. What the ITAT has done that instead of discussing my submissions , it has reproduced AOs observations. My matter was also covered by ITAT Mumbai and Mum HC decisions but was some how distinguished. At one place in ITAT order it is mentioned that my forward contract booking exceeds my export turn over. This is also not true. In my paper book I have given contract liability on daily basis and it has always remained below pending realisation.

      This is not my defence for my loosing the case but it is surprising that in one case ITAT takes one stand and in identical case the same ITAT takes different stand. There is no consistency in orders and it becomes difficult for business world to plan its affairs.

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