The Bangalore bench of the Income Tax Appellate Tribunal ( ITAT ) has held that foreign currency is not a “commodity” and that addition based on the speculative transaction is not permissible.
Lifestyle International Pvt. Ltd, the Assessee is a private limited company engaged in the business of retail trade of apparel and accessories, toys, baby basics, footwear, leather products, furniture and household, and other accessories. It operates stores across India under the brand name “Lifestyle” and “Max”.
During the year, Splash, a division of the Assessee which was engaged in retailing apparel to the youth segment was moved to a separate legal entity i.e, Splash Fashions India Private Limited (“Splash India”) w.e.f. 01.10.2012. This transfer of the business of the assessee carried under the “Splash” brand as a going concern was on a ‘slump sale’ basis to Splash India.
It was submitted that the assessee had taken variable interest foreign currency loans during the financial year 2011-12 in pursuance of an agreement entered with banks. Since the assessee was exposed to the foreign currency fluctuation risks concerning payment of interest as well as principal, it entered into cross currency interest rate swap agreement (“derivative contract”) with respective banks to effectively convert the said foreign loan into fixed interest Indian Rupee loan (“fixed Indian loan”).
It was submitted that the derivative contract mitigates foreign currency fluctuations risk and interest rate risk. the CBDT Instruction No. 17/2008 dated 26/11/2008 and disallowed the MTM losses by holding it to be speculation u/s. 43(5) of the Income Tax Act.
The foreign exchange losses arising on account of the reinstatement of foreign currency assets and liabilities wereby the requirements of AS-30. It was submitted that the financial statements of the assessee were accepted and certified by the statutory auditors.
As per section 43(5) of the Income Tax Act, a speculative transaction means a transaction in which the contract for the purchase or sale of any commodity including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.
In the Delhi Bench of ITAT in the case of Munjal Showa Ltd. v. DCIT, it was held that “Foreign currency or any currency is neither commodity nor shares. “
A Coram comprising of Smt Beena Pillai, Judicial Member and Shri Laxmi Prasad Sahu, Accountant member held that foreign currency does not fall within the purview of the term “commodity” and cannot be characterised as a speculative transaction. Further held that as a requirement of the conditions specified under section 43(5) of the Income Tax Act,1961 does not stand fulfilled and the addition made by the AO cannot be sustained. The appeal for the revenue was dismissed.
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