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2014 (5) TMI 732 - AT - Income TaxDisallowance of loss on foreign currency fluctuation - Assessee contended that the revenue disregarded the fact that the assessee needs to enter into forward contract in order to Hedge risk as the amount involved is high and significant – Held that:- Following London Star Diamond Company (I) (P.) Ltd Versus Deputy Commissioner of Income-tax [2013 (11) TMI 424 - ITAT MUMBAI] - the forward contracts fall in the definition of "commodities" - Such forward contracts which are integral part or incidental to the core business of export of diamonds or the outstanding receivables of export proceeds constitute hedging transactions and not the speculative contracts - If the definition of "commodity derivative" as was provided in the Finance Bill 2013 is correlated with as provided u/s 43 of the I.T. Act, it is wide enough not only to include forward contracts in derivatives relating to goods, services and rights such as warehousing and freight but also with reference to weather and similar events and activities having a bearing on the commodity sector. Foreign exchange forward contracts' entered into for the purpose of hedging the loss in import-export transactions, have been duly recognized and allowed by the Reserve Bank of India - in case of import/export business, where the transactions are demonetarized in the foreign currencies and for the purpose of hedging of the anticipated loss resulting from such import-export business and not otherwise, if the assessee enters into a forward contract in foreign exchange, then such forward contracts are to be treated as integral part or incidental to the business of export/import and cannot be said to be the speculative contracts attracting the provisions of section 43(5) of the Act - The loss from hedging transactions would be treated as business loss eligible to be set off against the profits and gains of business and profession. The foreign exchange loss incurred by the assessee on account of entering into forward contracts with the banks for the purpose of hedging the loss in connection with his import/export business of diamonds cannot be held to be a speculative loss rather a business loss which can be set off against profit and gains of business subject to the condition that the assessee will have to satisfactorily prove that the maturity of the hedge did not exceed the maturity of the underlying transaction and further to explain the requirement/necessity for premature cancellation of such forward contracts or that such cancellations or re-bookings were done to minimize the anticipated future losses from transactions – thus, the order of the CIT(A) is set aside and the matter is remitted back to the AO for fresh adjudication – Decided in favour of Assesee.
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