INCOME TAX ACT, 1961

Section 28

Business loss - Foreign currency exchange loss - Loss on account of cancellation of forward contract -

Assessee-company was engaged in business of manufacture and export of jewellery. It claimed loss on account of cancellation of foreign currency forward contract. In response to the query raised by AO, the assessee submitted that since it entered into foreign currency forward contracts to hedge against the fluctuation in price of foreign currency towards payable and receivables against imports and exports, the loss arising on cancellation of foreign currency forward contract was allowable as business loss. However, the AO observed that the assessee failed to furnish any evidence to establish one-to-one linkage between the foreign currency forward contracts and the underlying import or export transaction. Thus, he treated the loss arising from cancellation of foreign currency forward contract as speculation loss under section 43(5) and disallowed claim of set-off against business profit. Held: It was evident that the foreign currency forward contracts held by the assessee were far lesser than the underlying exposure on account of imports and exports. Further, in view of decision of the jurisdictional High Court in the case of CIT v. D. Chetan & Co. (2017) 380 ITR 36 (Bom.): 2016 TaxPub(DT) 4887 (Bom-HC), hedging transaction entered in regular course of business activity could not be treated as speculative transaction. Further, in view of decision the Co-ordinate Bench in the case of Dy. CIT v. Mahendra Brothers Exports Pvt. Ltd. (2016) 161 ITD 772 (Mum.): 2016 TaxPub(DT) 3860 (Mum-Trib), it was not required by the assessee to establish a one-to-one linkage between the forward contracts and the export/import transaction. Moreover, Tribunal in assessee's own case for earlier assessment years had consistently, allowed its claim of loss resulting from cancellation of forward contract in foreign exchange by treating it as genuine business loss. Accordingly, the assessee's claim of loss arising on cancellation of foreign currency forward contracts was allowed.

Relied:CIT v D. Chetan & Co. [(2017) 380 ITR 36 (Bom.): 2016 TaxPub(DT) 4887 (Bom-HC)] Dy. CIT v. Mahendra Brothers Exports Pvt. Ltd. (2016) 161 ITD 772 (Mum.): 2016 TaxPub(DT) 3860 (Mum-Trib)

REFERRED :

FAVOUR : In assessee's favour.

A.Y. :

INCOME TAX ACT, 1961

Sections 69A & 69B

SUBSCRIBE FOR FULL CONTENT