Loss on Forward Exchange Contracts of export business are business loss, not speculative loss  u/s 43(5) of Income Tax Act: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT) Chennai bench held that loss on forward exchange contracts of the export business are business losses not speculative losses under Section 43(5) of the Income Tax Act, 1961.

Assessee, GImpex House, is a resident corporate who  is engaged in the manufacturing/export of mineral ores. It was discovered during assessment proceedings that the assessee had lost money on forward exchange contracts.

According to the AO, since these transactions were finally completed in a way other than by actual delivery and that means any loss would be speculative, they fall under the purview of Section 43(5)(a) of Income Tax Act.

Despite the fact that the contracts were made to protect against potential losses due to future foreign exchange fluctuations, the assessee is required to settle the contract by actually delivering the foreign currency that is owed from export revenues, which was not the case in the past.

After the assessment the AO held that ince the loss was on account of cancellation of contracts, the same would be speculative in nature and therefore, the deduction of the same would not be allowed to the assessee.

Therefore the assessee incurred loss on such contracts which was disallowed by AO.

Aggrieved by the order, the assessee filed an appeal  before the commissioner of Income Tax (Appeals) [(CIT(A)], who allowed the appeal. Thereafter the revenue filed another appeal before the tribunal.

Before the bench, D. Anand, counsel for the assessee submitted that the assessee had entered into a forward contract with the aim to safeguard against the foreign exchange fluctuation on its revenue receipts from foreign parties.

Further, the transaction being hedging transactions, it would fall under the exempted category of speculative transactions under Section 43(5)(a) Income Tax Act. Thus the loss incurred under the contract is business loss not speculative loss, the counsel added.

R. Mohan Reddy, Counsel for the revenue,  supported the decision of the lower authorities.

The tribunal during the proceedings, observed that to protect against currency fluctuations on its income receipts from overseas parties, the assessee has entered into a forward contract. Due to their hedging nature, these transactions would fall under the exempted category of speculative transactions under Section 43(5)(a) Income Tax Act.

After considering the facts submitted by both parties, the two member bench of Manoj Kumar Aggarwal (Accountant Member) and  Manomohan Das (Judicial Member) relied upon the decision of  Madras High Court in the case of CIT Vs. Celebrity Fashions Ltd. wherein it was held that Loss on Forward Exchange Contracts of export business are business losses.

Therefore the bench upheld the decision of the CIT(A).

To Read the full text of the Order CLICK HERE

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