The Delhi Bench of the Income Tax Appellate Tribunal (ITAT), held that Hedging transactions to safeguard loss arising out of fluctuation in foreign currency are not speculative in nature.
The assessee, PCL Foods Pvt. Ltd is engaged in the business of purchasing paddy, removing husk and bran layers there from, extracting rice from the purchased paddy and polishing and grading the extracted rice. Thus, the assessee can be said to be engaged in ‘Rice milling activity’. The case of the assessee was picked up for assessment under Section 143(3) of the Income Tax Act, 1961.
The Assessing Officer treated the foreign exchange fluctuation loss of Rs. 89 lakhs as speculated loss under Section 43(5) read with Section 28 of Income Tax Act. The CIT(A) held that that transactions done in currency derivatives do not fall in proviso to section 43(5) and hence nothing but speculative transactions. The CIT(A) held that loss incurred in respect of currency derivatives is treated as speculation loss governed by Section 73.
Thus, the main contention of the revenue was that the currency derivatives as referred in Section 2 of the Securities Act, 1956 and hence the contract for differences are part of derivatives and hence the derivatives loss cannot be treated as a trading loss.
The Counsel for the assessee contended that the Currency Derivatives are being taken by Assessee to hedge their Foreign Currency Exposure- created out of Export Sales Invoices being raised in Foreign Currency (USD) during the relevant previous year and base currency being INR (Indian Rupee). These Currency derivatives are undertaken to hedge, mitigate & minimize the Currency Exchange risk due to volatile movement in USD/INR.
A Coram comprising of Dr B R R Kumar, Accountant Member and Yogesh Kumar US, Judicial Member relied on the judgment in LGW Ltd. vs. ITO wherein the Tribunal held that “Where forward contract in question was purely hedging transactions entered into by assessee to safeguard against loss arising out of fluctuation in foreign currency, loss on such transactions could not be held as speculative transactions felling within ambit of section 43(5).”
“Hence, we hereby allow the derivatives loss arises out of hedging and also the associated brokerage and commission expenses paid” the Tribunal noted.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
