Loss from Currency Derivatives Held as Speculative Transaction, Not Business: ITAT Upholds ₹4.05 Cr Foreign Exchange Loss and Brokerage Disallowance [Read Order]

The Delhi Bench of the Income Tax AppellateTribunal (ITAT) has confirmed the disallowance of foreign exchange losses amounting to ₹4,05,61,649 and ruled that the loss incurred on currency derivatives was speculative and could not be considered part of the core business activity or 'speculation business' for set-off purposes.

PCL Foods Private Limited (assessee), a rice trading company, entered into currency derivative transactions (forward exchange contracts) with the stated purpose of safeguarding its export/import transactions against future currency exchange risk, a process commonly known as hedging.

The amount in question comprised a foreign exchange loss of ₹3,69,12,311 though the assessee claimed a lower figure of ₹3,50,17,947 and brokerage and commission expenses of ₹36,49,338 paid to a stock exchange member.

The assessee argued that these were integral and incidental to the core business of rice export and constituted genuine hedging transactions eligible for allowance under Section 43(5) of the IncomeTax Act.

The Assessing Officer (AO) and the DisputeResolution Panel (DRP) rejected the assessee's claim and held that currency derivatives, being exchange-based futures and options, did not qualify as "eligible transactions" under the specific provisos to Section 43(5) of the Act, which primarily cover transactions in securities.

The DRP noted that currency derivatives were not "securities" under the Securities Contract (Regulation) Act, 1956. The lower authorities also observed that the transactions were not covered by the exceptions, they were deemed speculative transactions.

The loss was treated as a speculative loss, and the related brokerage and commission were disallowed as normal business expenses. Aggrieved by the AO and DRP’s order, the assessee filed an appeal before the ITAT.

The two-member bench comprising Madhumita Roy(Judicial Member) and Brajesh Kumar Singh (Accountant Member) agreed with the findings of the DRP and the AO.

The bench observed that if the loss was speculative, it should at least be allowed to be carried forward for set-off against future speculative gains under Section 73 of the Income Tax Act.

The tribunal observed the DRP’s argument that merely incurring a 'speculative transaction' as defined in Section 43(5) did not automatically constitute a 'speculation business' as referred to in Section 28 and Section 73 of the Income Tax Act.

The tribunal also observed the difference between speculation (seeking profit from price change) and hedging (reducing risk) and concluded that hedging, in general, lacks the "element of profit making" required to constitute a business activity.

In conclusion, the Tribunal upheld the disallowance and observed that currency derivative losses outside the statutory exceptions were speculative and not allowable as part of the normal business cycle. The appeal of the assessee in this ground was dismissed.

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