2013 (2) TMI 720 - AT - Income Tax

Disallowance of foreign currency derivative loss by treating it as speculation loss - Held that - Forex contracts entered into by the assessee will not fall under the definition of speculative transaction . Decided in favour of assessee. Excluding duty draw back for the purpose of computing relief under sec.80IB confirmed.

Issues Involved:
1. Disallowance of foreign currency derivative loss as speculation loss.
2. Exclusion of duty drawback from eligible profits while computing deduction under Section 80IB of the Income Tax Act.

Issue-Wise Detailed Analysis:

1. Disallowance of Foreign Currency Derivative Loss as Speculation Loss:

The assessee, a private limited company engaged in the manufacture and export of ready-made hosiery garments, filed an appeal against the order of the Commissioner of Income Tax (Appeals) confirming the disallowance of a foreign currency derivative loss of Rs. 73,39,500/- by treating it as speculation loss. The Assessing Officer (AO) had treated the foreign exchange contracts entered into by the assessee as speculative transactions under Section 43(5) of the Income Tax Act and did not allow the set-off against normal business income.

The assessee argued that the forward exchange contracts were entered into to hedge against foreign currency fluctuations related to its export business and were governed by RBI regulations. The Counsel for the Assessee cited various judgments, including the Hon'ble Supreme Court's decision in Elcon Engineering Co. Ltd. and the Hon'ble Bombay High Court's decision in CIT v. Badridas Gauridu (P) Ltd., to support the claim that such contracts should not be considered speculative.

The Departmental Representative contended that the forex derivative transactions were speculative in nature as they were not settled by actual delivery but by the difference in agreed prices. The representative argued that these transactions increased the risk to the assessee rather than reducing it.

Upon hearing both sides, the Tribunal held that the assessee's forex transactions were carried out in the course of its business and not as a separate business. The Tribunal relied on the Hon'ble Bombay High Court's decision in CIT v. Badridas Gauridu (P) Ltd., which held that forward contracts entered into by an exporter are not speculative transactions and any loss incurred is deductible as business loss. The Tribunal also referred to the Delhi Bench of the Tribunal's decision in Munjal Showa Ltd. v. DCIT, which stated that foreign currency is neither a commodity nor shares and thus not subject to Section 43(5) of the Act.

2. Exclusion of Duty Drawback from Eligible Profits While Computing Deduction Under Section 80IB:

The second issue involved the exclusion of duty drawback from the profits derived from the industrial undertaking while computing the deduction under Section 80IB of the Income Tax Act. The AO had restricted the relief under Section 80IB by excluding duty drawback from the profits, which was upheld by the Commissioner of Income Tax (Appeals).

The Commissioner of Income Tax (Appeals) relied on the Hon'ble Supreme Court's decision in Liberty India v. CIT, which held that duty drawback and DEPB benefits are incentives and not profits derived from the eligible business under Section 80IB. These incentives belong to the category of ancillary profits and are not part of the net profits of the eligible industrial undertaking for the purpose of Section 80-I/80-IA/80-IB.

The Tribunal, upon reviewing the order, found no reason to interfere with the Commissioner of Income Tax (Appeals)'s decision, as it was based on the Supreme Court's ruling. Consequently, the grounds raised by the assessee on this issue were rejected.

Conclusion:

The appeal of the assessee was partly allowed, with the Tribunal ruling in favor of the assessee on the issue of foreign currency derivative loss but against the assessee on the issue of duty drawback exclusion. The order was pronounced on February 21, 2013, at Chennai.

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