2013 (8) TMI 184 - AT - Income Tax

Forward contract cancellation loss - whether be treated as business loss or speculation loss - Held that - As decided in CIT vs. Friends and Friends Shipping Pvt. Ltd 2013 (5) TMI 458 - GUJARAT HIGH COURT as relying on Badridas Gauridu (P) Ltd. 2003 (1) TMI 61 - BOMBAY High Court & Soorajmull Nagarmull case 1980 (9) TMI 69 - CALCUTTA High Court the expenditure would not be covered under section 43(5) of the Act as speculative transaction. Assessee was not a dealer in foreign exchange therefore, foreign exchange contracts were booked only as incidental to the assessee s regular course of business. Under section 43(5) speculative transaction has been defined to mean a transaction in which a contract for the purchase or sale of commodity is settled otherwise than by the actual delivery or transfer of such commodity. However, as state above, the assessee was not a dealer in foreign exchange. In order to hedge against 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 in some cases failed. Thus the assessee was entitled to claim deduction as a business loss. In favour of assessee.

Summary

Issues:
Revenue's appeal against the order of Ld. CIT(A)-II, Ahmedabad allowing forward contract cancellation loss as business loss without treating it as speculation transaction under section 43(5) of the Income-tax Act.

Analysis:
The Assessing Officer disallowed the forward contract cancellation loss as speculation loss under section 43(5) as the contracts were not utilized in business and terminated without delivering foreign exchange. However, Ld. CIT(A) deleted this addition, considering the contracts as incidental to the import and export business of diamonds, following precedents like CIT vs. Soorajmull Nagarmull and CIT vs. Badridas Gauridu (P) Ltd. The Ld. CIT(A) held that the cancellation of contracts was not speculative but a business loss, allowing it as such.

The Ld. CIT(A) observed that the appellant regularly entered into forward exchange contracts with banks to guard against losses due to fluctuations in foreign exchange rates during diamond import and export transactions. The cancellation of contracts was a strategic commercial decision to maximize profits, not speculative in nature. Citing relevant case laws, the Ld. CIT(A) upheld the business nature of the losses incurred, distinguishing them from speculative transactions under section 43(5) of the Act.

The decision of the Hon'ble jurisdictional High Court in a similar case favored the assessee, holding that losses on cancellation of forward exchange contracts for foreign exchange are to be treated as business losses. The court emphasized that such transactions were essential for hedging against fluctuations in foreign exchange rates during import and export activities, hence qualifying as business losses rather than speculative. This judicial precedent further supported the Ld. CIT(A)'s decision to allow the forward contract cancellation loss as a business loss.

In conclusion, the Tribunal upheld the Ld. CIT(A)'s order, dismissing the Revenue's appeal. The decision was based on the understanding that the cancellation of forward exchange contracts was an integral part of the import and export business of diamonds, aimed at minimizing risks associated with foreign exchange rate fluctuations. The judgment reiterated the distinction between business losses and speculative losses under the Income-tax Act, ultimately supporting the assessee's position in treating the losses as business losses.