2020 (2) TMI 144 - AT - Income Tax

Expenses on account of fluctuation in exchange rates - AO disallowed expenses by observing that the said sum was spent on the premium for the forex cover and such hedging expenses are not allowable - HELD THAT - As per proviso (a) to sub-section 5 of section 43 of the Act, the legitimate contract entered to guard against the loss that may arise through future price fluctuations cannot be treated as speculative transactions and are to be treated as regular business expense. Since the bankers act as an advisory agent to the assessee in order to protect them from foreign exchange exposure by using their expertise and these services cannot be obtained by the assessee in the stock exchange where their scope of service is very limited, the Tribunal has consistently allowing the transactions carried out through recognized bank. In the present case, it is also not clear from the orders of authorities below as to whether the assessee has transacted through recognized bank or not. However, no details such as, number of contracts, nature of the contract, details of forward contract entered into, banker details, currency details, another party willing to take a reverse position, which is a pre-requisite of a forward contract, etc. are brought on record while making the disallowance by the Assessing Officer or any relevant detail exists in the appellate order while the ld. CIT(A) held that the disallowance is liable to be deleted. Accordingly, we set aside the order of the ld. CIT(A) and direct the Assessing Officer to pass detailed speaking order by giving all details and valid reason for treating the hedging expenses as a non-allowable expense by affording an opportunity of being heard to the assessee. Appeal filed by the Revenue is allowed for statistical purposes.

Summary

Issues:
Appeal against deletion of hedging expenditure addition.

Analysis:
1. The appeal was against the deletion of an addition made towards hedging expenditure of ?3,52,72,000 while releasing premium for forex cover for the assessment year 2012-13.
2. The case involved the assessee filing a return declaring a loss, subsequent scrutiny by the Assessing Officer, and completion of assessment under section 143(3) of the Act.
3. The Assessing Officer disallowed the hedging expenditure as not allowable, which was appealed by the assessee citing the Tribunal's decision in SCM Garments (P) Ltd. v. DCIT [2015] 59 taxmann.com 395.
4. The Revenue contended that the transactions were speculative and not eligible under section 43(5) of the Act, urging the reversal of the CIT(A)'s decision.
5. The assessee argued that the forex derivative transactions were normal business transactions to hedge against currency depreciation, complying with RBI regulations and not speculative under section 43(5)(a) of the Act.
6. The CIT(A) held in favor of the assessee, noting that the disallowance was not justified, and the Tribunal directed the Assessing Officer to provide detailed reasoning for treating the hedging expenses as non-allowable.
7. The judgment highlighted the importance of hedging to protect against foreign currency fluctuations and the lack of clarity on the derivative used by the assessee and the reason for disallowance by the Assessing Officer.
8. The CBDT's instructions recognized forex derivative losses as allowable business losses but directed examination under section 43(5)(d) of the Act, indicating a need to differentiate speculative and non-speculative transactions.
9. The Tribunal emphasized the necessity for detailed records and valid reasons for treating hedging expenses as non-allowable, urging a comprehensive assessment with all relevant details provided.
10. Ultimately, the appeal by the Revenue was allowed for statistical purposes, emphasizing the need for a detailed speaking order by the Assessing Officer.

This comprehensive analysis of the judgment covers the issues, arguments, decisions, and directives involved in the case regarding the deletion of hedging expenditure addition for the assessment year 2012-13.