Losses on account of Exchange Fluctuation on Forward Contracts are allowable as Deduction: ITAT [Read Order]

The Income Tax Appellate Tribunal (ITAT), Bangalore Bench held that losses on account of exchange fluctuation on forward contracts are allowable as a deduction.

The assessee, ABB Global Industries and Services Pvt. Ltd. is a company engaged in the business of software development services. In the course of assessment proceedings, the AO noticed that the assessee had claimed a sum of Rs.1,82,04,000 as exchange loss on forward covered contracts. On appeal by the assessee, the CIT(Appeals) confirmed the order of AO.

The AO referred to CBDT Instructions wherein the CBDT took the view that the ‘marked to market’ losses is in substance a concept required from the point of view of transparent accounting practices. These losses are notional losses and can be allowed as a deduction only if there is an actual settlement that has taken place. The Board therefore opined that such losses would be contingent in nature and cannot be allowed to be set off against taxable income.

The coram consisting of Vice President N.V.Vasudevan in the view of ACIT v. Bank of Bahrain clarified that a forward contract entered into by the assessee to sell foreign currency at an agreed price on a future date falling beyond the last date of account period, i.e., before the date of maturity of forward contract, such loss has to be allowed as a deduction.

The ITAT further placed the reliance was also placed by him on the decision of the Bombay High Court in the case of CIT v. D. Chetan wherein the assessee entered into a forward contract for the purpose of hedging in the course of normal business activities of import and export to cover up losses on account of differences in foreign exchange valuation. The Court held that losses on account of differences would not be a speculative activity, but a business activity and deduction claimed should be allowed.

Therefore, the tribunal while remanding the matter bach to the AO  held that the forward contracts entered into for the purpose of protecting against loss and which has a nexus to the business of the assessee and which are on revenue account have to be allowed as a deduction.

Support our journalism by subscribing to Taxscan AdFree. We welcome your comments at info@taxscan.in