In a recent ruling of Delhi High Court (HC) of Justice Vibhu Bakhru and Justice Purushaindra Kumar Kaurav held that the loss on Foreign Exchange fluctuations on forward contracts are deductible under section 37(1) of the Income Tax Act, 1961.
The Revenue has filed the present appeal under Section 260A of the Income Tax Act, impugned order passed by the Income Tax Appellate Tribunal (ITAT) in an appeal preferred by the Revenue against the order passed by the learned Commissioner of Income Tax (Appeals) [(CIT(A)].
The succinct fact is that the assessee had entered into a contract with Saudi Basic Industries Corporation, Kingdom of Saudi Arabia.The total contract value was 114 million USD and the contract was required to be completed within a period of twenty-seven months. The Forward Contracts were entered into to protect against foreign exchange fluctuations.
The Assessee claimed a sum of ₹9,20,62,226/- as loss against a Forward Contract, entered into to hedge the risk against foreign exchange fluctuations to cover the exports and imports.
The Assessing Officer (AO) held that the loss on Forward Contracts was a speculative loss and was liable to be disallowed in terms of the instructions of the Central Board of Direct Taxes (CBDT).
Aggrieved by the order of the AO, the petitioner filed an appeal before CIT(A) where it was found that the AO had erred in disallowing the loss on account of forward cover against foreign exchange fluctuations on the basis that it was a speculative loss.
The appellate order (CIT(A)) records that out of the amount of ₹9,20,62,226/- booked as losses, Forward Contracts for a sum of ₹2,08,11,934 (₹51,20,000 +₹1,56,91,934) had closed before the due date. The loss of ₹7,12,50,292 related to unmatured Forward Contracts.
Zoheb Hossain, counsel appearing for the Revenue, submitted that the loss on Forward Contracts was booked on a ‘Mark to Market’ basis and therefore was merely a notional loss in the relevant assessment year. And, it was not permissible for the Assessee to book such notional loss.
Further the revenue contends that the said loss is required to be disallowed as a speculative loss in terms of the CBDT Instruction no.3/2010.
The Assessee has declared his income by using the foreign currency rate in effect on the due date, the court noted. It is well established that, in the instant case, the CBDT Circulars and Instructions that are against the law are not enforceable.
The division bench determined that the AO erred in disallowing the loss resulting from Forward Contracts and that there is no fault with the order of the CIT(A) as well as the Tribunal in finding that the loss cannot be considered to be speculative and has to be deductible under Section 37(1) of the Income Tax Act.
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