The Chandigarh bench of the Income Tax Appellate Tribunal (ITAT) has ruled that, the Forex transaction to hedge foreign currency risk is not speculative and the deduction was made allowable.
The assessee was engaged in the manufacturing and export of cotton blended yarn and the manufacturing of hosiery garments. The assessee also had a wholly owned subsidiary, M/s Monte Carlo Fashions Limited, and manufactured various types of worsted yarn, textile fabric, woolen hosiery, denim fabric, and readymade garments through the process of combing, spinning, knitting, and weaving.
The assessee filed its return of income on 28/09/2011 declaring an income of Rs. 123,32,61,214/- and the assessee had claimed a deduction of Rs. 13,32,96,175/- in the P&L account and computation of income on account of the difference in foreign exchange rates.
The AO did not accept the claim of the assessee that the loss had crystallized and finally ascertained during the year and the same may be allowed as claimed in the return of income, for the reason that the loss was speculative.
It was observed that the assessee had incurred the loss in purchase and sale of foreign exchange under the agreement with ICICI Bank Ltd. therefore the loss in foreign exchange was to be treated as speculative.
It was stated that the assessee was not carrying on any trading activity of foreign exchange either in India or outside India for the assessment year and it had not carried out any trading activity of foreign exchange either in India or outside India.
It was further stated that the assessee company filed detailed submissions on the issue that Foreign Currency Transactions were made to hedge the financial liability related to the normal business of goods imported for the manufacturing and sales & export of goods.
Shri. N K Saini, VP & Shri. Sudhanshu Srivastava, JM held that “the assessee was not a dealer in foreign exchange, it had entered into a forwarding contract with ICICI Bank to hedge the loss due to fluctuation of foreign exchange while implementing the export contract therefore the foreign exchange loss incurred by the assessee was not speculative one under section 43(5) of the Act and the same was allowable.”
The Tribunal set aside the order of CIT(A) and allowed the appeal. The assessee was represented by Shri Sanjay Bansal, Shri Navdeep Sharma, and Shri Amit Parsad, and the revenue was represented by Shri Sarabjeet Singh.
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