2015 (3) TMI 4 - AT - Income Tax

Disallowance of loss arising from the derivative transactions - whether loss speculative in nature? - as contended by the assessee, there was foreign currency exposure, as a result of conversion of rupee loans of the assessee into foreign currency loans and in order to hedge such exposure, the relevant derivative transactions were entered into by the assessee, as a measure of risk management - Held that - Going through the relevant RBI guidelines, underlying the purpose of relevant derivative transactions, as well as the relevant terms and conditions of such transactions agreed between the assessee and the Axis Bank, we find ourselves in agreement with the contention of assessee that the nature of the relevant derivative transactions was not properly appreciated either by the Assessing Officer or by the learned CIT(A) and the said transactions were treated by them as speculative transactions by referring to the provisions of S.43(5) without appreciating the correct nature of the relevant derivative transactions. Keeping in view this position, clearly emanating from the relevant documents as well as the orders of the authorities below, we are of the view that the matter should go back to the file of the Assessing Officer for deciding the same afresh, after properly appreciating and ascertaining the exact nature of the relevant derivative transactions. - Decided in favour of assessee for statistical purposes.

Summary

Issues:
Disallowance of loss from derivative transactions as speculative in nature.

Analysis:
The appeal was filed against the disallowance of a loss claimed by the assessee arising from derivative transactions, treated as speculative by the Assessing Officer and confirmed by the CIT(A). The Assessing Officer considered the derivative transactions as speculative under Section 43(5) due to no actual delivery of currency, transactions not on recognized stock exchanges, and not meeting RBI guidelines. The CIT(A) upheld this decision, stating that interest rate swaps do not satisfy conditions of an eligible transaction under Section 43(5). The assessee argued that the transactions were for hedging foreign currency exposure, supported by RBI guidelines and terms with Axis Bank. The Tribunal agreed, finding the nature of transactions misunderstood by authorities. The matter was remanded to the Assessing Officer for proper appreciation and reassessment, considering the rule of consistency and Tribunal decisions.

This judgment highlights the importance of correctly understanding the nature of derivative transactions for tax purposes. It emphasizes the need for authorities to properly assess the purpose and terms of such transactions before categorizing them as speculative. The ruling also underscores the significance of following RBI guidelines and contractual terms in determining the nature of derivative transactions. The decision to remand the matter for reassessment showcases the Tribunal's commitment to ensuring a fair and accurate evaluation of tax claims related to derivative transactions.