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2019 (6) TMI 1527 - AT - Income TaxDisallowance on Loss on Forex Derivatives - Whether foreign exchange is a commodity as envisaged u/s 43(5)(d)? - speculative transaction or not? - HELD THAT - Foreign exchange derivate loss in respect of capital items is certainly capital expenditure and cannot be allowed as loss whereas in respect of revenue items it can be allowed as revenue loss. In the present case the AO had not undertaken the exercise of verifying whether foreign exchange derivate transaction are in respect of capital items or revenue item there is no material on record to establish the nature of transactions. We remand this issue back to the file of the AO for limited purpose for examining the issue. Appeal of the assessee is partly allowed for statistical purpose.
Issues Involved:
1. Disallowance on Loss on Forex Derivatives. 2. Confirmation of disallowance by the Commissioner of Income Tax (Appeals) [CIT(A)]. 3. Nature of the forex derivative transactions (speculative or non-speculative). 4. Applicability of Section 43(5) of the Income Tax Act, 1961. 5. Jurisdictional Tribunal decisions and their consideration. Issue-wise Detailed Analysis: 1. Disallowance on Loss on Forex Derivatives: The primary issue in this appeal is whether the loss arising from foreign exchange derivatives is allowable. The Assessee contended that the transactions were undertaken to hedge against currency exposure risk and should not be considered speculative. The Assessing Officer (AO) disallowed the claim, categorizing the loss as speculative under Section 43(5) of the Income Tax Act, 1961. 2. Confirmation of Disallowance by CIT(A): The CIT(A) confirmed the AO's order, disallowing the forex derivatives loss. The CIT(A) held that foreign exchange is a commodity as envisaged under Section 43(5)(d) of the Act and that the transactions were speculative. The CIT(A) relied on decisions from the Calcutta Tribunal and the Honorable Bombay High Court to support this view. 3. Nature of the Forex Derivative Transactions: The Assessee argued that the transactions were not speculative but were undertaken to hedge against currency exposure risk. The CIT(A) disagreed, stating that the transactions in shares alone were non-speculative and that forex derivatives are commodities in business parlance. The CIT(A) further noted that there was no underlying exposure in respect of the derivative contracts entered into by the Assessee, thus confirming the speculative nature of the transactions. 4. Applicability of Section 43(5) of the Income Tax Act, 1961: Section 43(5) defines a speculative transaction as one where a contract for the purchase or sale of any commodity, including stocks and shares, is settled otherwise than by actual delivery. The Assessee cited the Special Bench decision in Deputy CIT vs. Bank of Bahrain and Kuwait, where it was held that forward contracts entered during the course of business are not speculative but business losses. The Bombay High Court in CIT vs. Badridas Gauridu P. Ltd and CIT vs. D. Chetan and Co. supported this view. The Tribunal acknowledged that foreign exchange derivative transactions partake the character of the underlying transaction. If the underlying transaction is capital in nature, the derivative transaction would also be capital. Conversely, if it is revenue in nature, the derivative transaction would be revenue. 5. Jurisdictional Tribunal Decisions: The Assessee cited favorable decisions from the Jurisdictional Tribunal, which were not considered by the CIT(A). The Tribunal emphasized the need to examine whether the foreign exchange forward contracts were undertaken in respect of capital or revenue items. The case law from the Hon’ble Supreme Court in Sutlej Cotton Mills Ltd vs CIT was referenced, which distinguishes between trading assets and capital assets in determining the nature of profit or loss from foreign exchange transactions. Conclusion: The Tribunal remanded the issue back to the AO to verify whether the foreign exchange derivative transactions were in respect of capital or revenue items. The AO is directed to examine this based on the principles laid down in the judgment. The appeal of the Assessee is partly allowed for statistical purposes. Order Pronouncement: The order was pronounced on the 11th day of June, 2019, at Chennai.
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