2019 (5) TMI 1593 - AT - Income Tax

Disallowance of foreign currency exchange loss treating speculative - loss on account of forward contracts in US Dollar-Rupee to hedge the export receivable in USD - AO alleged that claimed expenses is for buying and selling of US Dollar and the settlement is not by way of physical delivery - CIT-A deleted the addition - HELD THAT - There was a direct and proximate nexus between the business operations of the import and export of goods and loss on forward contracts, because the hedging of foreign currency was done on the basis of confirmed orders with the customers and past export performance of the assessee which the bankers have duly verified and thereafter the forward contract were entered before the actual delivery of goods based on the purchase orders. Clearly the hedging contracts entered were incidental to the business of the assessee and were intended to guard against losses through future price fluctuations. As pointed out that in the earlier years in scrutiny proceedings such losses have been treated to be a business loss. CIT (A) has categorically noted that it was a complete party wise details of the purchase orders against which exports were made in USD during the year and also perused the copy of purchase orders exceeding USD 25,000. In fact assessee has exported goods during the year under consideration amounting to USD 19,67,954 as against availability of purchase orders amounting to USD 22,13,453. It cannot be held that the future contracts were not connected to the assessee s export and was a separate transactions de-hors the export of the assessee. Once the forward contracts for foreign currency was directly related to export and import and incidental to the business of assessee, then it cannot be held that it is in the nature of speculative transaction within the scope of ambit of section 43(5). See BADRIDAS GAURIDU (P.) LTD. 2003 (1) TMI 61 - BOMBAY HIGH COURT - decided against revenue

Summary

Issues:
1. Deletion of addition of ?1,92,50,300/- on account of disallowance of loss on foreign currency exchange treated as speculative loss.
2. Addition of ?59,839/- disallowed as deduction of other income.

Analysis:

Issue 1:
The appeal was filed by the revenue against the order dated 15.7.2015, challenging the deletion of the addition of ?1,92,50,300/- on account of disallowance of loss on foreign currency exchange treated as speculative loss. The Assessing Officer (AO) noted that the assessee claimed this amount on account of forward contracts in US Dollar-Rupee to hedge export receivables in USD. The AO considered the transaction speculative under section 43(5) as it involved buying and selling US Dollars without physical delivery. The assessee contended that the losses were directly incidental to its business operations and were not speculative in nature. The Commissioner of Income Tax (Appeals) deleted the disallowance after considering the facts, confirming the genuine business nature of the transactions and the historical data supporting the forward contracts. The Tribunal upheld the CIT(A)'s decision, emphasizing the direct nexus between the forward contracts and the export business, ruling that the losses were not speculative as per section 43(5).

Issue 2:
The second issue pertained to the addition of ?59,839/- disallowed as deduction of other income. The Tribunal did not provide a detailed analysis of this issue in the judgment, as it primarily focused on the first issue regarding the disallowance of loss on foreign currency exchange. Therefore, the decision on this matter was not explicitly discussed in the judgment.

In conclusion, the Tribunal dismissed the revenue's appeal, affirming the CIT(A)'s decision regarding the disallowance of the loss on foreign currency exchange. The judgment highlighted the genuine business nature of the transactions, the direct connection between the forward contracts and the export business, and the non-speculative nature of the losses incurred. The decision was pronounced on 13th May, 2019, in favor of the assessee.