2024 (5) TMI 342 - AT - Income Tax

Loss on valuation of foreign exchange contract on M2M basis - addition has been made with regard to loss in the forward contract for foreign currency due to the fall in value on the date of balance sheet i.e. 31/03/2009 - AO while making the addition observed that claim of deduction on account of losses computed on Mark to Market basis cannot be allowed as the losses have not crystallized - CIT(A) deleted the above said disallowance - HELD THAT - In the case of VS Dempo Co. Pvt. Ltd 1993 (7) TMI 63 - BOMBAY HIGH COURT held that loss arising in the process of conversion of foreign currency is a trading loss. As the case of the assessee before the authorities that the assessee booked forward contracts to hedge against the foreign currency fluctuation risk to business transaction viz export orders undertaken by the assessee and hence the taking of the aforesaid hedge cover was incidental to the business. Forward contracts were related to the exports proceeds expected to be received in the course of the business and not for acquisition for any capital asset and hence the loss is arising on revenue account thus the same is allowable. Contracts entered by the assessee are binding and enforceable in law and hence the loss incurred on the date of balance sheet due to the adverse exchange fluctuations would be allowable under the mercantile system of accounting entered that the same had not been actually paid thus the same cannot be termed as notional loss in view of the decisions of Woodward Governor 2009 (4) TMI 4 - SUPREME COURT Thus we find no error in the order of the CIT(A) in deleting the subject addition and find no merit in the Ground No. 1 of the Revenue. Loss on forward contracts - As per the assessee the losses suffered by the assessee are normal business losses and therefore deductable - speculative loss - - AO made addition on the ground that since the transaction entered into Forex Directive by the assessee Company do not fall in the exclusionary clauses of Section 43(5) - CIT(A) deleted addition - HELD THAT - The assessee is not a dealer of Foreign Exchange and contract in foreign exchange were to safeguard the business interest of the assessee and conducted in regular course of business therefore it cannot be termed as speculative in nature as no motive or action in this regard is in exist. It is not in dispute that there has been no delivery of foreign exchange but the Forex Company being not a traded commodity as held in the case of Munjal Showa Ltd. 2003 (6) TMI 188 - ITAT DELHI-E and Soorajmull Nagarmull 1980 (9) TMI 69 - CALCUTTA HIGH COURT - CIT(A) while deleting the addition has relied on the above judicial precedents. In the absence of any contrary facts or the ratio brought to the notice of the Bench we find no error or infirmity in the order of the Ld. CIT(A) in deleting the addition accordingly we dismiss the Ground No. 2 of the Revenue. Deduction under the forward premium account which represents the amortized loss computed as the difference between the forward rate and the spot rate at the date of the inspection of the forward exchange contract - A.O. disallowed the same holding that expenditure claimed by the assessee is speculative in nature and hence not allowable as business expenditure - HELD THAT - We have already dealt with the issue in Ground No. 2 and held that the CIT(A) has committed no error in deleting the addition observing that the forward mark contracts on foreign currency is incurred during the normal course of business and the losses incurred are the part and parcel of the business activity of the assessee which are allowable as business expenditure and not speculative in nature thus any expenditure incurred for such premium account computed as difference between the forward rate and the spot rate in such contract is also to be treated as business expenditure incurred in the course of business by the assessee. We find no error in the order of the Ld. CIT(A) in deleting the addition.

Summary

Issues Involved:
1. Deletion of addition of Rs. 55,62,952/- on valuation of forward foreign exchange contract on M2M basis.
2. Deletion of addition of Rs. 4,18,22,913/- as speculative loss.
3. Deletion of addition of Rs. 18,44,736/- as speculative loss but treated as business loss.

Summary:

Issue 1: Deletion of addition of Rs. 55,62,952/- on valuation of forward foreign exchange contract on M2M basis

The Ld. CIT(A) deleted the addition of Rs. 55,62,952/- made by the A.O., holding it as an allowable business loss. The A.O. had disallowed the loss on the grounds that M2M losses are not crystallized and are merely notional. The Ld. CIT(A) referenced the Supreme Court ruling in CIT vs. Woodward Governor India P. Ltd. 312 ITR 254, which allowed such losses as expenditure u/s 37(1) of the Act. The Tribunal upheld the Ld. CIT(A)'s decision, noting that the assessee followed the mercantile system of accounting and the losses were incurred due to business expediency.

Issue 2: Deletion of addition of Rs. 4,18,22,913/- as speculative loss

The Ld. CIT(A) deleted the addition of Rs. 4,18,22,913/- made by the A.O., which was treated as speculative loss u/s 43(5) of the Act. The CIT(A) found that the foreign exchange contracts were not speculative as they were entered into for hedging business risks and not for speculative purposes. The Tribunal upheld the Ld. CIT(A)'s decision, referencing the ITAT Delhi ruling in Munjal Showa Ltd. vs. DCIT 94 TTJ 227, which held that foreign currency is not a commodity for the purposes of section 43(5) and thus such transactions cannot be considered speculative.

Issue 3: Deletion of addition of Rs. 18,44,736/- as speculative loss but treated as business loss

The Ld. CIT(A) deleted the addition of Rs. 18,44,736/- made by the A.O., treating the loss as business expenditure. The A.O. had disallowed it, considering it speculative. The Tribunal agreed with the Ld. CIT(A), stating that the forward contracts were part of normal business operations and the losses incurred were business losses, not speculative. The Tribunal emphasized that the losses were allowable as business expenditure.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the Ld. CIT(A)'s decision on all grounds, and pronounced the order in the open court on 30th April, 2024.