2020 (1) TMI 1151 - HC - Income Tax

Disallowance of loss of foreign exchange - speculative loss OR business loss - HELD THAT - Assessee had entered into foreign exchange export contracts with banks to the extent of its export orders. In other words, every foreign exchange forward contract was against a specific export order. Therefore, Tribunal held that assessee did not deal in foreign exchange but had entered into foreign exchange forward contract with banks to safeguard itself against possible foreign exchange losses on account of export sale proceeds to be received. Tribunal concurred with the view taken by the Commissioner of Income Tax (Appeals) that these transactions were not speculative in nature and the resultant foreign exchange losses were consequently not speculated loss but allowable business loss. Such contracts were incidental to the assessee s business of manufacture and export of fruit pulp and allied products and therefore, did not represent speculative transactions. As referred to and relied upon by the Tribunal, this was also the view taken by this court in Badridas Gauridu case 2003 (1) TMI 61 - BOMBAY HIGH COURT This position has been again reiterated in Commissioner of Income-Tax Vs. D. Chetan and Company 2016 (10) TMI 629 - BOMBAY HIGH COURT held that forward contract in foreign exchange when incidental to carrying on business of cotton exporter and done to cover up losses on account of differences in foreign exchange valuations, would not be speculative activity but a business activity. - Decided in favour of assessee.

Summary

Issues:
- Disallowance of loss of foreign exchange as speculative loss or business loss.

Analysis:
1. The appeal was filed by the Revenue against the order of the Income Tax Appellate Tribunal regarding the disallowance of a loss of foreign exchange in the assessment year 2010-11.
2. The Assessing Officer had disallowed the loss of foreign exchange as a speculative loss, but the Commissioner of Income Tax (Appeals) accepted the contention of the assessee that it was a business loss.
3. The Tribunal, in its order, emphasized that the foreign exchange losses were not speculative but allowable business losses. It noted that the assessee entered into foreign exchange forward contracts with banks to safeguard against possible losses due to fluctuation in exchange rates.
4. The Tribunal held that the transactions were directly linked to the assessee's business of manufacturing and exporting fruit pulp and allied products, making them non-speculative in nature.
5. The Tribunal referred to a previous judgment of the Bombay High Court in a similar case, where it was held that forward contracts in foreign exchange, when incidental to the business, are not speculative activities but business activities.
6. The High Court reiterated this position in subsequent cases, emphasizing that the nature of the transactions and the purpose behind them were crucial in determining whether they were speculative or business activities.
7. The Court dismissed the Revenue's appeal, stating that no question of law arose from the Tribunal's order, and highlighted that similar points had been addressed in previous judgments where the appeals by the Revenue were also dismissed.

In conclusion, the High Court upheld the Tribunal's decision that the loss of foreign exchange was a business loss and not speculative, based on the nature of the transactions and their direct link to the assessee's business activities. The judgment emphasized the importance of considering the purpose and context of such transactions in determining their classification as speculative or business activities.