The division bench of the Bombay High Court, in a recent decision, held that the loss suffered on foreign exchange transactions entered into for hedging business transactions must be considered as revenue loss since they are not in the nature of speculative or notional.While upholding the orders of the lower authorities, the High Court observed that the amount of loss on the same must be deducted from the total income under section 37 of the Income Tax Act, 1961.
The assessee in the instant case,is engaged in the business of import and export of diamonds. The assessee, while filing returns for the relevant year has claimed loss on account of having entered into hedging transactions to safeguard variation in exchange rates affecting its transactions of import and export by entering into forward contracts. The assessing officer rejected the claim by holding that it is a notional loss of a contingent liability debited to Profit and Loss account.Accordingly, an order of assessment was passed against the assessee disallowing the said amount.
Both the appellate authorities, i.e, the Commissioner of Income Tax (Appeals) and the Appellate Tribunal accepted the contentions of the assessee and held that the loss incurred by the Respondent Assessee was a revenue loss and not connected with any speculation activities. Therefore, the Revenue preferred an appeal before the high court impugning these orders by relying upon the decision in S. Vinodkumar Diamonds Pvt.Ltd. vs. Addl.CIT.
Concurring with the findings of the appellate authorities, the Court noted that the impugned transactions made by the assessee were not speculative in nature. Further, the Revenue has no objection to the contention that the assessees’ activity of entering into forward contract was in the regular course of its business only to safeguard against the loss on account of foreign exchange variation. The Court found that the claim of the assessee was rejected by the officeronly on ground that it is notional.
The Court further noticed that the decision in S. Vinodkumar Diamonds Pvt.Ltd. vs. Addl. CIT was overruled by the Court in CIT vs. Badridas Gauridas (P) Ltd, in which it was held that forward contract in foreign exchange when incidental to carrying on business of cotton exporter and done to cover up losses on account of differences in foreign exchange valuations, would not be speculative activity but a business activity. In view of the above, the impugned orders were upheld.
Read the full text of the Judgment below.
