2015 (10) TMI 2777 - AT - Income Tax

Disallowance of loss claimed on cancellation of forward exchange contracts - HELD THAT - On a perusal of the list of forward contract and related transactions it is noticed that all such contracts were cancelled after maturity. Only in respect of two contracts, dated 11th April 2007 and 26th April 2007, which are for export of goods, the contracts were cancelled before maturity but the assessee has booked profit. Forward contract dated 23rd August 2007, for import was also cancelled before maturity but the assessee has again booked profit. Thus, from the aforesaid fact, it is very much clear that forward contracts, except the above referred three contracts were cancelled after maturity. Therefore, the allegation of the Department that forward contracts were cancelled prematurely is without any basis. That being the case, the principle laid down by the Hon'ble Jurisdictional High Court in Badridas Gauridu India Ltd. 2003 (1) TMI 61 - BOMBAY HIGH COURT clearly applies. Therefore, factually as well as by applying the principle of law, we are of the view that the loss claimed by the assessee cannot be treated as speculative loss and as a consequence it has to be allowed

Summary

Issues:
1. Disallowance under section 14A of the Act.
2. Disallowance of loss claimed on cancellation of forward exchange contracts.

Issue 1: Disallowance under section 14A of the Act
The appellant did not press ground no.1 related to disallowance under section 14A. Hence, ground no.1 was dismissed as "not pressed."

Issue 2: Disallowance of loss claimed on cancellation of forward exchange contracts
The appellant, a company engaged in export manufacturing and trading of diamonds, filed its return of income for the assessment year 2008-09. The Assessing Officer disallowed a loss of Rs. 1,50,54,490 claimed on cancellation of forward exchange contracts, considering them speculative under section 43(5). The appellant contended that the loss was incurred in the regular course of business. The Assessing Officer found no merit in the appellant's submissions as the contracts were not linked to specific orders. The learned Commissioner (Appeals) upheld the disallowance, stating that no actual delivery was made against the forward contracts. The appellant argued that most contracts were cancelled after maturity, except for three, which resulted in profits. The Tribunal noted that the contracts were cancelled after maturity, except for three specific ones related to export and import, where profits were earned. Relying on judicial precedents and the appellant's past case, the Tribunal held that the loss claimed was not speculative and allowed the appeal partially.

In conclusion, the Tribunal found that the loss claimed on cancellation of forward exchange contracts was not speculative and should be allowed. The appeal was partly allowed, and the order was pronounced on 30.10.2015.