2017 (11) TMI 195 - AT - Income Tax

Disallowance of Foreign Exchange Fluctuation loss as speculation loss u/s 43(5) - Held that - In the assessee s case, the assessee is an exporter of granite and because of the assessee s business of export of granite, the assessee could enter into contract with the ICICI Bank for hedging the cross currency transactions to insulate the revenue and to mitigate the loss. The Reserve Bank of India vide circular 22/2007-08 dated 02.07.2007 permitted a person, resident of India to enter into foreign contract with an authorized dealer to hedge an export to exchange risk in respect of transactions for which sale and purchase of foreign exchange is permitted under the Act. It means, authorized dealer can hedge the business receivables so as to enable the parties to avoid exchange value differences. The authorized dealer i.e. bank can do this only for hedging not for speculation. The Reserve Bank of India in July 2006 had issued a master circular consolidating all notifications, guidelines and circulars on the forward and derivative contracts in foreign exchange. In the decision relied by the assessee in the case of London Star Diamond company Ltd. (2013 (11) TMI 424 - ITAT MUMBAI), the Coordinate Bench held that hedging need not be 1 1 basis. The coordinate bench of ITAT, Visakhapatnam in the case of Assistant Commissioner of Income-tax, Circle-1, Rajahmundry .v.Sri Ramalingeswara Rice & Oil Mill 2016 (10) TMI 924 - ITAT VISAKHAPATNAM held that held that no disallowance of loss under forward contract just because assessee had Nil export turnover due to ban on export. In the instant case the assesshad made export turnover of ₹ 40.00 crores and the AO had not made out a case that the total turnover from the derivative transactions was more than the export turnover. Therefore, we hold that the assessee s case is squarely covered by the case laws relied upon by the assessee and the decision of the London Star Diamond Co. Ltd. (supra) and the decision of this tribunal cited. Hence, the transactions entered by the assessee cannot be held as speculation loss and required to be allowed as business loss. Accordingly, we uphold the order of the Ld.CIT(A) on this issue and allow the appeal of the assessee. Year of allowability - crytalisation of loss - Held that - As on 31.03.2009, there was an amount of ₹ 18,53,21,184/- under the Master Agreement due and payable to the bank inclusive of interest. The said amount was disputed by the assessee by filing O.S. in the City Civil Court, Hyderabad and the ICICI Bank has filed O.A.No.3181/2009 before Debts Recovery Tribunal-III, Mumbai. Since the liability is in dispute and the same was not crystalised and the assessee did not claim the deduction. Both the assessee and the bank reached an agreement for full and final settlement of ₹ 9,10,00,000/- This is evidenced by a letter of ICICI Bank dated 30.12.2009 relevant to the assessment year 2010-11. Therefore, the loss was crystallized in the year under consideration though incurred in the earlier year, due to pending litigation. Therefore, we do not find any infirmity in the order of the Ld.CIT(A) and the same is upheld.

Summary

Issues Involved:
1. Disallowance of Foreign Exchange Fluctuation loss as speculation loss under Section 43(5) of the Income Tax Act.
2. Year of allowability of deduction.

Issue-Wise Detailed Analysis:

1. Disallowance of Foreign Exchange Fluctuation Loss as Speculation Loss under Section 43(5) of the Income Tax Act:

The revenue challenged the deletion of ?10,34,23,949/- disallowed by the assessing officer as a speculation loss. The assessing officer argued that the assessee's transactions in foreign exchange derivatives with ICICI Bank, which were settled without taking possession of the foreign exchange, constituted speculative transactions under Section 43(5) of the Income Tax Act. The assessee contended that these transactions were entered into to hedge against foreign exchange fluctuations and were not speculative in nature. The CIT(A) ruled in favor of the assessee, holding that the transactions were business expenditures under Section 37(1) of the Income Tax Act and not speculative, as the assessee was an exporter of granite blocks and not a dealer in foreign exchange.

The Tribunal upheld the CIT(A)’s decision, referencing multiple judicial precedents, including the ITAT Mumbai Bench's decision in the case of London Star Diamond Company (I) P Ltd. Vs. DCIT, which held that foreign contracts entered into by an exporter with banks are business transactions and not speculative. The Tribunal also noted that the Reserve Bank of India permits such hedging transactions to mitigate foreign exchange risks, and these transactions were integral to the assessee's export business.

2. Year of Allowability of Deduction:

The second issue concerned the year in which the loss should be allowed. The assessing officer questioned why the loss incurred in earlier years was claimed in the year under consideration. The assessee explained that the loss was crystallized in the financial year 2009-10, relevant to the assessment year 2010-11, due to ongoing litigation with ICICI Bank, which was settled in December 2009 for ?9,10,00,000/- against an original claim of ?18,53,21,184/-.

The Tribunal agreed with the CIT(A) that the loss was crystallized in the year under consideration due to the settlement reached with ICICI Bank, making it allowable for that year. The Tribunal found no infirmity in the CIT(A)'s order and upheld it.

Conclusion:

The Tribunal dismissed the revenue's appeal and allowed the cross-objection filed by the assessee, supporting the CIT(A)'s decision to treat the foreign exchange fluctuation loss as a business expenditure and to allow the deduction in the assessment year 2010-11 when the loss was crystallized.