2015 (10) TMI 2771 - AT - Income Tax

Disallowance of business loss treating the same as speculation loss arising out of foreign exchange contracts - HELD THAT - We are of the view when the assessee is not a dealer in foreign exchange but an exporter of commodities and assessee had entered into forward contracts with banks in respect of foreign exchange but some of these contracts could not be honoured by the assessee for which it has to pay and which was debited to the P L Account and claimed the same as business loss/hedging loss. In order to hedge against losses the assessee had booked foreign exchange in the forward market with the bank but the export contract entered into by the assessee for export of commodities in some cases failed the assessee is entitled to claim for deduction of loss as a business loss. Accordingly respectfully following Hon ble jurisdictional High court in the case of Soorajmull Nagarmull 1980 (9) TMI 69 - CALCUTTA HIGH COURT we allow the claim of the assessee. This issue of assessee s appeal is allowed.

Summary

Issues Involved:
1. Treatment of business loss as speculation loss arising from foreign exchange contracts.
2. Determination of whether the transactions were hedging or speculative in nature.
3. Evaluation of evidence supporting the claim of business loss.
4. Applicability of provisions under section 43(5) of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

1. Treatment of Business Loss as Speculation Loss:
The primary issue in this appeal was whether the business loss of Rs. 3,78,44,872 incurred by the assessee on account of cancellation of forward contracts in foreign exchange should be treated as a speculation loss. The assessee contended that this loss was a business loss incurred in the ordinary course of its export business and should be allowed as such. The CIT(A) confirmed the AO's decision to treat the loss as speculative, arguing that the assessee had carried on independent business of dealing in forward contracts in foreign exchange, which was not linked to its export business.

2. Determination of whether the Transactions were Hedging or Speculative:
The CIT(A) observed that there was a thin line of difference between hedging and speculative transactions. The CIT(A) held that the assessee failed to prove that the forward contracts were linked to specific export orders and were thus hedging transactions. The CIT(A) concluded that the transactions were speculative in nature, as the forward contracts were settled otherwise than by actual delivery and the assessee could not produce sufficient evidence to substantiate the hedging nature of the transactions.

3. Evaluation of Evidence Supporting the Claim of Business Loss:
The assessee argued that the forward contracts were entered into as a hedge against foreign exchange fluctuations in its export business. The assessee provided details of export orders and forward contracts, explaining that the contracts were booked based on past performance and existing export orders. However, due to global recession and a ban on maize exports, many export orders were canceled, necessitating the cancellation of forward contracts. The AO and CIT(A) found that the assessee could not provide sufficient documentary evidence to link the forward contracts to specific export orders, thus treating the transactions as speculative.

4. Applicability of Provisions under Section 43(5) of the Income Tax Act, 1961:
The Tribunal examined whether the transactions fell under the definition of speculative transactions as per section 43(5) of the Income Tax Act. The Tribunal found that the assessee was not a dealer in foreign exchange but an exporter of commodities. The forward contracts were entered into to hedge against losses from exchange rate fluctuations in the export business. The Tribunal noted that the assessee had provided evidence of export orders and the necessity of forward contracts for hedging purposes. The Tribunal referred to the judgments of the Hon'ble Calcutta High Court in CIT v Soorajmull Nagarmull and the Hon'ble Bombay High Court in CIT v Badridas Gauridu (P) Ltd., which supported the assessee's claim that such losses should be treated as business losses and not speculative losses.

Conclusion:
The Tribunal concluded that the assessee's transactions in forward contracts were hedging transactions incidental to its export business and not speculative transactions. Therefore, the loss incurred on cancellation of forward contracts should be allowed as a business loss. The appeal of the assessee was allowed, and the order of the CIT(A) was set aside.

Order Pronouncement:
The appeal was allowed, and the order was pronounced in the open court on 29.10.2015.