2013 (8) TMI 35 - AT - Income Tax

Loss from foreign exchange transaction in the forward market - speculative loss v/s business loss - Held that - As in the present case assessee is not a dealer in foreign exchange & is engaged in the business of edible oils. In the course of import of vegetable oil from foreign supplier, the company entered into a contract. If the assessee in accordance with the proposed purchase booked a foreign currency forward contract with its banker in order to safeguard the company s interest from loss on account of foreign exchange fluctuation that contract cannot fall under the purview of Section 43(5) as per which speculative transaction means a transaction in which a contract for the purchase or sale of commodity settled otherwise thereby actual delivery or transfer of such commodity. If an assessee in order to hedge against the exchange fluctuation losses had booked foreign exchange transaction in the forward market with the Bank and incurred any loss, that loss cannot be considered as speculative loss and it is a business loss. As decided in CIT vs. Badridas Gauridu Pvt. Ltd. (2003 (1) TMI 61 - BOMBAY High Court) in order to hedge against the losses, the assessee had booked foreign exchange in the forward market with the bank. However, the export contracts entered into by the assessee for export of cotton in some cases failed. Thus the assessee was entitled to claim deduction in respect of payment made on account of cancellation of forward booking of foreign exchange with banks as a business loss. Also see CIT vs. Soorajmull Nagurmull (1980 (9) TMI 69 - CALCUTTA High Court). Thus AO has to see the forward contract entered by the assessee for covering risk of underlying transaction and such underlying transaction to be segregated and loss on these transactions to be considered as business losses. Loss on other transaction which are not underlying transaction has to be considered as speculative transactions. As assessee has filed a chart showing the details of speculative transaction at ₹ 19,63,702/-. The Assessing Officer is directed to exclude these contracts and decide accordingly - appeal of assessee partly allowed for statistical purposes.

Issues Involved:
1. Disallowance of loss incurred on account of settlement of foreign exchange forward cover contracts.
2. Determination of whether the transactions fall under speculative transactions as per Section 43(5) of the Income Tax Act.

Detailed Analysis:

1. Disallowance of Loss on Foreign Exchange Forward Cover Contracts:
The assessee, a company trading in edible oils, filed a return of income for the assessment year 2008-09, disclosing a total income of Rs. 3,34,74,746/-. The Assessing Officer (AO) completed the assessment, determining the total income at Rs. 6,26,45,985/- and proposed disallowance of Rs. 2,80,64,658/- incurred on settlement of foreign exchange forward cover contracts. The assessee explained that the loss was due to contracts undertaken to hedge liabilities towards the import of edible oils, which is a common practice to safeguard against foreign currency fluctuations. The assessee provided detailed statements and confirmations from bankers to support the claim that these transactions were business expenditures related to underlying supply contracts.

2. Speculative Transactions under Section 43(5):
The AO rejected the assessee's submissions, concluding that the forward contracts were speculative transactions as defined under Section 43(5) of the Income Tax Act. The AO argued that the forward contracts were independent transactions with no direct connection to the business of the assessee. Consequently, the loss was treated as speculative and not deductible from business income.

Appeal to CIT(A):
The assessee appealed to the CIT(A), who upheld the AO's decision. The CIT(A) observed discrepancies in the documentation provided by the assessee, noting that the forward contracts did not correlate with the invoices for the import of oils. The CIT(A) also noted that some contracts were for periods longer than the claimed 6 to 45 days and included sales transactions. The CIT(A) concluded that the transactions were speculative and not business hedging transactions.

Appeal to Tribunal:
The assessee further appealed to the Tribunal, arguing that the forward contracts were taken to hedge against foreign exchange fluctuations and should not be considered speculative. The assessee cited several case laws, including CIT vs. Badridas Gauridu Pvt. Ltd. and CIT vs. Soorajmull Nagurmull, to support the claim that such losses should be treated as business losses.

Tribunal's Judgment:
The Tribunal considered the arguments and case laws presented. It was noted that the assessee was not a dealer in foreign exchange but engaged in the business of edible oils. The Tribunal referred to the Bombay High Court's decision in CIT vs. Badridas Gauridu Pvt. Ltd., which held that losses from forward contracts booked to hedge against foreign exchange fluctuations should be considered business losses. Similarly, CIT vs. Soorajmull Nagurmull established that foreign exchange contracts incidental to regular business operations are not speculative.

The Tribunal concluded that the AO must segregate transactions to identify those entered to cover the risk of underlying transactions and treat losses from such contracts as business losses. Transactions not related to underlying business operations should be treated as speculative. The Tribunal directed the AO to exclude speculative transactions amounting to Rs. 19,63,702/- and decide accordingly.

Conclusion:
The appeal was partly allowed for statistical purposes, and the issue was remitted back to the AO for segregation and appropriate treatment of transactions. The order was pronounced in the open court on 31st May 2013.

← Previous Next →