The Income Tax Appellate Tribunal (ITAT) held that loss caused due to currency fluctuation on the conversion of USD (US Dollar) into Swiss Franc is a capital loss for the purpose of Income Tax Act, 1961.
The appellant company, M/s. Acalmar Oils & Fats Ltd. purchased crude palm oil from Acalpo Wilmar Pte Ltd. for consideration of $ 3674476 against which ICICI Bank has provided Buyers Credit of Swiss Franc 8000000 and such. However, due to a sudden fall in the value of USD V/s Swiss currency, the company incurred a huge foreign exchange loss of Rs 8.55 crore.
During the course of assessment proceedings, the appellant argued that such loss arising on swap transactions cannot be treated as a speculative loss. However, the Assessing Officer rejected the contention of the appellant and contended that simply because as per Reserve Bank of India (RBI) rules the companies are not expected not to indulge in speculative transactions, the same cannot be treated as business loss.
The AO contended that there was no purchase obligation in terms of Swiss Franc, there was not much depreciation of rupee V/s USD which means that loss arising on account of converting USD into Swiss franc is nothing but a speculative transaction. The Assessing Officer alternatively contended that loss or gain occurs on the expiry of the contract and not earlier hence marked-to-market loss in these types of derivative contracts is a contingent loss.
The Income Tax Appellate Tribunal (ITAT) headed by the Vice President, Rajpal Yadav and an Accountant Member, Amarjeet Singh, while relying on the decision of ITAT noted that the assessing officer has disallowed the claim of deduction for loss arising from foreign exchange fluctuation in respect of a hedging contract to cover foreign exchange credit provided by ICIC Bank for payment for the purpose of imported raw material upon the accounting of the outstanding hedging contract on market to marked basis at the end of the year.
Relying on the various decision, the bench dismissed the appeal filed by the department and held that the loss caused due to conversion of USD (US Dollar) into Swiss Franc is a capital loss.
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