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2017 (1) TMI 447 - AT - Income TaxForeign exchange rate loss on account of outstanding transactions (marked to market) being unsettled forward foreign exchange contracts and loss being exchange rate difference relating to marked to market losses on unsettled forward foreign exchange contracts - assessee is engaged in the business of tiles and sanitary ware and also as a part of business does import of raw material for manufacture of tiles and sanitary wares - Held that:- We have observed that the assessee has entered into forward foreign exchange contracts which have remained unsettled at the year end and loss has occurred on the same due to foreign exchange rate variation as at year end. The revenue has disallowed the same at threshold on the ground that the same is a notional loss . No finding of fact is recorded that the said foreign exchange forward contracts were entered into by the assessee to hedge against its business activity of import of raw material for manufacturing of tiles and sanitary wares and these forward foreign exchange contracts are backed with foreign exchange exposure of the assessee towards foreign currency liability outstanding as at year end towards import payables dues for import of tiles and sanitary wares. In our considered view , the matter needs to be set aside and restored to the file of the AO for denovo determination of the issue on merits after satisfying that the assessee has hedge the underlying exposure in foreign currency towards import of raw material payable outstandings at year end by entering into forward contracts in foreign exchange and as such, the forward contracts entered were for the purpose of the business to hedge against the forex loss and that the assessee has not entered into the forward contracts with an intention to earn any gain due to fluctuation in foreign currency rate but it is necessary for it to enter into such forward contracts to hedge against foreign exchange rate fluctuation i.e. to verify that this is an integral part of the business undertaken by the assessee and incidental to the import business of the assessee as in the absence of such forward contracts, the assessee may sustain huge losses and hence it became essential for the assessee to book such forward contracts as a prudent business practices to safeguard against losses which may be sustained by the assessee towards import obligation in foreign currency outstanding as at year end. Matter restored before the AO for reconsideration.
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