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TMI Blog2014 (5) TMI 732X X X X Extracts X X X X X X X X Extracts X X X X ..... acts' entered into for the purpose of hedging the loss in import-export transactions, have been duly recognized and allowed by the Reserve Bank of India - in case of import/export business, where the transactions are demonetarized in the foreign currencies and for the purpose of hedging of the anticipated loss resulting from such import-export business and not otherwise, if the assessee enters into a forward contract in foreign exchange, then such forward contracts are to be treated as integral part or incidental to the business of export/import and cannot be said to be the speculative contracts attracting the provisions of section 43(5) of the Act - The loss from hedging transactions would be treated as business loss eligible to be set off against the profits and gains of business and profession. The foreign exchange loss incurred by the assessee on account of entering into forward contracts with the banks for the purpose of hedging the loss in connection with his import/export business of diamonds cannot be held to be a speculative loss rather a business loss which can be set off against profit and gains of business subject to the condition that the assessee will have to satis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst profit and gains of business but, from that of speculative transactions only. The ld. CIT(A) as per his detailed findings given in the impugned order confirmed the disallowance made by the AO. Aggrieved, the assessee has preferred the present appeal. 3. We have heard the ld. representatives of both the parties and also have gone through the records. The ld. A.R. of the assessee at the outset has submitted that the assessee entered into forward contracts with the banks to safeguard against the exchange fluctuations of export considerations/sale profits. The business of the assessee has been of import of rough diamonds and export of polished diamonds to different countries and all the transactions have been demonetarized in the foreign currency. To ensure that the risk involved due to currency fluctuation be at minimum level, it was necessary to hedge the risk by entering into forward contracts in foreign exchange with the banks. He has further relied upon an authority of the co-ordinate bench of the Tribunal in the case of London Star Diamond Company (I) (P.) Ltd. v. DCIT in ITA No.6169 (MUM) of 2012 decided on 11.10.13 and submitted that the issue is squarely covered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It may be further observed that the Hon'ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254, while dealing with the question as to whether the additional liability arising on account of fluctuation in the rate of exchange can be allowed to be adjusted pending actual payment of the varied, has observed that expenditure as used in section 37 in Income Tax Act may in the circumstances of a particular case cover an amount which is a loss even though said amount has not been given from the pocket of the assessee. 6. While dealing with the issue of the nature of forward contracts in commodity derivatives, the co-ordinate bench of the Tribunal in the case of Dy. CIT v. Kotak Mahindra Investment Ltd. [2013] 59 SOT 4/35 taxmann.com 225 (Mum. - Trib.) ( judicial member of the bench being party to that order also) has observed that such type of forward contracts are not purely contingent in nature rather loss or profit is somewhat ascertainable in such type of contracts because of constant watch on daily market rates. The quantum of profit or loss though not actually ascertainable can be anticipated in view of the trends of the market. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amond Company (I) (P.) Ltd. (supra) has held that even such the forward contracts fall in the definition of commodities . 9. It may be further observed that 'foreign exchange forward contracts' entered into for the purpose of hedging the loss in import-export transactions, have been duly recognized and allowed by the Reserve Bank of India. Vide Foreign Exchange Management (Foreign exchange derivative contracts) Regulations, 2000, Notification No. FEMA25/RB-2000, dated 3rd May 2000 Reserve Bank of India has defined the forward contract and foreign exchange derivative contract as under: 2. (iv) 'Forward contract' means a transaction involving delivery, other than Cash or Tom or Spot delivery, of foreign exchange; (v) 'Foreign exchange derivative contract' means a financial transaction or an arrangement in whatever form and by whatever name called, whose value is derived from price movement in one or more underlying assets, and includes, (a) a transaction which involves at least one foreign currency other than currency of Nepal or Bhutan, or (b) a transaction which involves at least one interest rate applicable to a foreign currency not being a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubstitution of contracts for hedging trade transactions may be permitted by an authorized dealer on being satisfied with the circumstances under which such substitution has become necessary. (Emphasis supplied) 10. We may further observe from the guidelines issued by the Reserve Bank of India relating to general principles to be observed for forward foreign exchange contracts that the banks have been permitted to enter into such contracts after thorough verification of documentary evidences etc. about the genuineness of the underlying foreign currency exposure and the need of hedging of the loss. Further the maturity of the hedge should not exceed the maturity of the underlying transaction. So in view of the underlying risk in import export business due to currency rate fluctuations, the Reserve Bank of India has not only defined but has also allowed the forward contracts relating to foreign exchange derivatives for hedging of such anticipated losses. Even in case of contracts covering export transactions, there is no restriction of rebooking and such contracts may be cancelled, rebooked or rolled over at ongoing rates. 11. In view of the above discussions, it can be safel ..... 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