[2008] 19 SOT 602 (DELHI)

IN THE ITAT DELHI BENCH ‘G’

Komal Exports

v.

Assistant Commissioner of Income-tax, Range-20, New Delhi

R.C. Sharma, Accountant Member

and N.K. Karhail, Judicial Member

IT Appeal No. 738 (Delhi) of 2004

[Assessment year 2001-02]

November 30, 2007

I. Section 43(5) of the Income-tax Act, 1961 - Speculative transactions - Assessment year 2001-02 - Whether exception to speculative transaction as contemplated under clause (c) to proviso to section 43(5) is available not only to member of stock exchange, but is also available to a member of forward market and said clause (c) excepts hedges in nature of jobbing and arbitrage entered into by a member of a forward market or stock exchange to guard against loss, which may arise in ordinary course of his business as such member - Held, yes

II. Section 80HHC of the Income-tax Act, 1961 - Deductions - Exporters - Assessment year 2001-02 - Whether deduction under section 80HHC is to be allowed on profit finally assessed by Assessing Officer - Held, yes - Whether after filing return of income, if Assessing Officer makes any addition or disallowance and business profit of an assessee-exporter who is eligible to claim deduction under section 80HHC, is accordingly enhanced, deduction claimed under section 80HHC is required to be recomputed with reference to finally assessed income as determined by Assessing Officer - Held, yes

Facts-I

The assessee-firm, predominantly engaged in the pepper export business, incurred some hedging expenses while procuring the said commodity from an organization (IPSTA), which was controlled and monitored by forward market commission, claiming that said hedging was purely done to cover future loss on account of price fluctuation in pepper, which was one of the most volatile commodities of export. The Assessing Officer, however, disallowed the same by treating said expenses as speculative loss. On appeal, the Commissioner (Appeals) upheld the action of the Assessing Officer in disallowing said expenses as losses arising out of speculative transactions.

On second appeal :

Held-I

The expression ‘speculative transaction’ as per section 43(5) 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 actual delivery or transfer of the commodity or scrips. However, the exception has been provided in clauses (a), (b) and (c) to the proviso of the said section. [Para 8]

As per materials placed on record, the case of the assessee would fall within the provisions of clause (c) to the proviso to section 43(5). According to said clause (c), a contract entered into by a member of a forward market or 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, shall not be deemed to be a speculation transaction. Thus, the exception as contemplated under said clause (c) is available not only to member of stock exchange, but is also available to a member of forward market. In order to come within the ambit of clause (c) to the proviso to section 43(5) the transaction should specifically be (a) entered into by a member of forward market or stock exchange and (b) in the nature of jobbing and arbitrage, and (c) to guard against loss which may arise in the ordinary course of his business as such member. Thus, clause (c) excepts hedges in the nature of jobbing and arbitrage entered into by a member of a forward market or stock exchange to guard against loss which may arise in the ordinary course of his business as such member. A jobber sells and buys on his own account and takes advantage of every turn of price. The difference between jobbing and arbitrage lies in this that whereas jobbing takes place between one member and an another on same stock exchange, arbitrage is done between different exchange price levels at different exchanges. Again, whereas jobbing is applied in shares and stocks, arbitrage is applied to transactions in shares and stock as well as bills of exchange. In the instant case, the assessee was mainly doing the export business of pepper to overseas buyers of different countries. The assessee was a member of IPSTA, a recognized forward market exchange, which was controlled and monitored by the forward market commission. The loss was incurred by the assessee, as a member of IPSTA, due to jobbing to guard against the loss arisen in the ordinary course of its business. The frequency of transactions which had been done by the assessee and loss incurred established that the transactions were in the nature of jobbing and loss was incurred in the course of business by a member of forward commodity market. The Assessing Officer had directly made inquiry from IPSTA and in reply it was categorically accepted that assessee had entered into transaction with it. The transactions so entered were for safeguarding its interest against the future price fluctuation. In the facts and circumstances of the case, the case of the assessee squarely fell within the purview of clause (c) of proviso to section 43(5). Hence, the loss incurred by the assessee could not be said to be speculative loss. In the result, assessee’s appeal was allowed. [Para 9]

Facts-II

The assessee-exporter filed its return declaring loss of Rs. 47,27,650, but the Assessing Officer assessed the return at a positive income of Rs. 33,37,050. Consequently, the assessee claimed deduction under section 80HHC for the first time before the Commissioner (Appeals), who, however, rejected said claim.

On second appeal :

Held-II

There is no dispute to the well-settled legal proposition that the deduction under section 80HHC is to be allowed on the profit finally assessed by the Assessing Officer. After filing the return of income, if the Assessing Officer makes any addition or disallowance and the business profit is accordingly enhanced, the deduction claimed under section 80HHC is required to be recomputed on the revised income as determined by the Assessing Officer. Even in respect of legal issue raised for the first time before Commissioner (Appeals), he is to entertain the same and decide after giving due opportunity to the assessee. [Para 10]

In the instant case, the assessee, being an exporter, was eligible to claim deduction under section 80HHC subject to the conditions stipulated in the said section. Since the deduction under Chapter VI-A is admissible only when there is positive gross total income, the assessee obviously could not have claimed deduction under section 80HHC while filing the return or before the Assessing Officer during the course of assessment proceedings. It was seen that as against the loss returned at Rs. 47,27,650, assessment had been made at positive income of Rs. 33,37,050. Therefore, the claim of the assessee regarding the deduction under section 80HHC needed to be recomputed with reference to the finally assessed income. It was to be directed accordingly. [Para 11]