2018 (5) TMI 1276 - HC - Income Tax

Loss in connection with the hedging contract - business loss or speculative loss - Held that - Similar issue was considered by this Court in case of this very assessee for earlier years 2018 (5) TMI 1240 - GUJARAT HIGH COURT as held admittedly, the assessee is not a dealer in foreign exchange. For the purpose of hedging the loss due to fluctuation in foreign exchange while implementing the export contracts, the assessee had entered into forward contract with the banks. In some cases, the export could not be executed and the assessee had to pay certain charges to the Bank and thereby incurred certain expenses. These expenses the assessee claimed by way of expenditure towards business. We do not find that the transaction can be stated to be in speculation as to cover under subsection (5) of section 43 of the Act. - Decided against revenue

Summary

Issues:
1. Whether the Appellate Tribunal was correct in deleting the addition made by the AO regarding the treatment of loss from speculation business as hedging loss?

Analysis:
The High Court of Gujarat heard an appeal by the Revenue against a decision of the Income Tax Appellate Tribunal. The main issue was whether the Tribunal was right in law to delete the addition made by the Assessing Officer (AO) concerning the treatment of a loss from speculation business as a hedging loss claimed by the assessee. The Revenue contended that a similar issue had been considered previously by the Court for the same assessee in an earlier case. The Court observed that the assessee was engaged in manufacturing and trading goods, including exports, which exposed them to foreign exchange fluctuation risks. To mitigate this risk, the assessee entered into hedging contracts with banks. The AO considered these contracts speculative and disallowed the expenditure, but the CIT (Appeals) and the Tribunal overturned this decision.

In a similar case involving Friends and Friends Shipping (P) Ltd., the Bombay High Court held that losses incurred due to failed forward contracts for foreign exchange by an exporter were not speculative in nature. The Court emphasized that the assessee was not a dealer in foreign exchange but an exporter of cotton, and the foreign exchange contracts were incidental to their regular business. Therefore, the losses were allowable as business losses. The Calcutta High Court also ruled in a similar case involving a jute import-export business that losses from forward contracts in foreign exchange were not speculative but incidental to the regular course of business and thus deductible as revenue expenditure.

The High Court found the facts of the present case similar to the aforementioned judgments. The assessee was not a dealer in foreign exchange but entered into forward contracts with banks to hedge against foreign exchange fluctuations while implementing export contracts. When some exports could not be executed, resulting in expenses paid to banks, the assessee claimed these expenses as business expenditure. The Court concluded that these transactions were not speculative under section 43(5) of the Income Tax Act and allowed the expenses as business deductions. Consequently, the Tax Appeal by the Revenue was dismissed.