2014 (7) TMI 1212 - AT - Income Tax

Loss on account of foreign exchange fluctuation - neither notional nor speculative - allowable business expenditure - Held that - It is not in dispute that the assessee is exposed to fluctuations in foreign exchange given its scale of operations and hedging of such transactions is the need of the business. It is also not in dispute that except being profit booked by MTM valuation, the entire loss claimed by the assessee was actual loss incurred on cancellation of the forward contracts. It is not the case of the Revenue that at a given point of time all the receivables and all the payables can be adjusted each other. There may be a position that the payments for imports may not be due as on a particular date and vice versa. Having regard to the overall circumstances the learned CIT(A) applied the ratio of the Hon ble jurisdictional High Court decision in the case of CIT vs. Badridas Gauridu Pvt. Ltd. 2003 (1) TMI 61 - BOMBAY High Court to hold that the loss incurred by the assessee cannot be treated as a notional loss but an actual loss which is allowable as deduction.

Summary

Issues:
1. Allowability of loss on account of foreign exchange fluctuation.
2. Treatment of loss on forward contract cancellation.

Issue 1: Allowability of loss on account of foreign exchange fluctuation:
The appellant, engaged in diamond import, manufacture, and export, declared a total income for the relevant assessment year. The Assessing Officer (AO) questioned the deduction claimed for a loss on forward contract cancellation amounting to Rs. 2,31,56,475. The AO contended that the loss was notional as it did not crystallize on the reporting date. However, the CIT(A) ruled in favor of the appellant, stating that the loss was an actual business loss, not speculative. The CIT(A) highlighted that the forward contracts were entered to hedge receivables due to different payment cycles for debtors and creditors. The CIT(A) emphasized that the loss was not speculative but a genuine business loss incurred due to foreign exchange fluctuations. The CIT(A) relied on the decision of the Hon'ble Bombay High Court in CIT Vs. Badridas Gauridu Pvt. Ltd. 261 ITR 256 to allow the claimed loss as a business deduction under section 37(1) of the Act.

Issue 2: Treatment of loss on forward contract cancellation:
The Revenue appealed against the CIT(A)'s order, arguing that the loss should not be allowed as a deduction. The Tribunal noted that the appellant's operations necessitated hedging against foreign exchange fluctuations. It acknowledged that the loss claimed, except for a minor profit, was a genuine loss from forward contract cancellation. The Tribunal concurred with the CIT(A)'s decision, emphasizing that the loss was actual and not speculative. The Tribunal upheld the CIT(A)'s order based on factual circumstances and the application of the precedent set by the Hon'ble Bombay High Court. The Revenue failed to provide sufficient grounds to challenge the CIT(A)'s ruling, leading the Tribunal to dismiss the Revenue's appeal and affirm the CIT(A)'s order.

In conclusion, the Appellate Tribunal upheld the CIT(A)'s decision, allowing the appellant's claimed loss on forward contract cancellation as a business deduction due to genuine business reasons and in line with legal precedents. The Tribunal emphasized the non-speculative nature of the loss and the necessity for hedging in the appellant's business operations.