sitemapHome | Registration | Job Portal for CA's | Expert Exchange | Currency Converter | Post Matrimonial Ads | Post Property Ads
News shortcuts: From the Courts | News Headlines | VAT (Value Added Tax) | Placements & Empanelment | Various Acts & Rules | Latest Circulars | New Forms | Forex | Auditing | Direct Tax | Customs and Excise | ICAI | Corporate Law | Markets | Students | General | Mergers and Acquisitions | Continuing Prof. Edu. | Budget Extravaganza | Transfer Pricing | GST - Goods and Services Tax
Latest Expert Exchange
From the Courts »
 M/s A Daga Royal Arts vs. ITO (ITAT Jaipur)
 Gagan Infraenergy Ltd vs. DCIT (ITAT Delhi)
 PCIT vs. Chawla Interbild Construction Co. Pvt. Ltd (Bombay High Court)
 All India Federation of Tax Practitioners vs. ITO (ITAT Mumbai)
  Suresh M. Jamkhindikar vs. ACIT (Bombay High Court)
  Suresh M. Jamkhindikar vs. ACIT (Bombay High Court)
 Mangammal @ Thulasi vs. T.B. Raju (Supreme Court)
 Mahabir Industries vs. PCIT (Supreme Court)
  Oriental Bank Of Commerce Vs. Additional Commissioner Of Income Tax
  Suresh M. Jamkhindikar vs. ACIT (Bombay High Court)
  Union of India vs. Pirthwi Singh (Supreme Court)

London Star Diamond Company (I) P. Ltd vs. DCIT (ITAT Mumbai)
November, 06th 2013

Loss on foreign exchange forward contracts is incidental to the exports business and not a “speculation loss“. However, if the contract is prematurely cancelled, the assessee has to justify the loss

The assessee, an exporter of diamonds, entered into forward contracts with Banks to hedge the exchange loss, if any, in respect of the outstanding receivable in foreign currency. The assessee suffered a loss of Rs. 4.69 crore on account of the maturity & premature cancellation of the said forward contracts. The AO & CIT(A) held that the forward contracts constituted a “speculative transaction” u/s 43(5) and that the loss suffered thereon was a “speculation loss” which could not be set-off against the other income. On appeal by the assessee to the Tribunal HELD:

(i) Though a forward contract for purchase or sale of foreign currency falls in the definition of “speculation transaction” u/s 43(5) as it is settled otherwise than by the actual delivery or transfer of the commodity, it cannot be regarded as constituting a “speculation business” under Explanation 2 to s. 28. A forward contract, entered into with banks for hedging losses due to foreign exchange fluctuations on the export proceeds, is in the nature of a “hedging contract” and is integral or incidental to the export activity of the assessee and cannot be considered as an independent business activity. Therefore, the losses or gains constitute business loss or gains and do not arise from speculation activities. The fact that there is a premature cancellation of the forward contract does not alter the nature of the transaction. There is also no requirement in the law that there should be a 1:1 correlation between the forward contracts and the export invoices. So long as the total value of the forward contracts does not exceed the value of the invoices, the loss has to be treated as a business loss (Sooraj Mull Magarmull 129 ITR 169 (Cal), Badridas Gauridu 261 ITR 256 (Bom), Panchamahal Steel 215 Taxman 140 (Guj) and Friends and Friends Shipping (Guj) followed; contrary view in S. Vinodkumar Diamonds (ITAT Mum) referred);

(ii) On facts, the loss arising on cancellation of matured forward contracts is allowable as it is attributable to the genuine failure of the trade debtors to comply with the credit terms and conditions. As regards the loss arising on account of premature cancellation of the forward contracts, the assessee requires to explain the reason for the premature cancellation. The explanation that the maturity of date of some of such premature cancelled forward contracts fell during the week-end and therefore they were cancelled three days prior to the due date is acceptable and the loss is allowable. The explanation that some other forward contracts were prematurely cancelled due to business reasons and to avoid higher loss requires to be examined by the AO. The correspondence with the banks and the RBI guidelines on the issue as well as the accounting treatment by the banks also requires to be examined. The assessee’s alternative argument that the said loss is “damages” payable to the banks for breach of contracts or settlement of the contracts also requires examination by the AO.

Home | About Us | Terms and Conditions | Contact Us
Copyright 2018 CAinINDIA All Right Reserved.
Designed and Developed by Binarysoft Technologies Pvt. Ltd.
Enterprise Resource Planning Solutions ERP Solutions Enterprise Resource Planning Software Solutions ERP Software Solutions Supply Chain Management Solutions SCM Solutions Supply Chain Management Software Solutions SCM Software Solutions Enterprise Resource Planning Solutions India ERP Solutions India Enterprise Resource Planning Software Solutions India ERP Software Solutions India Supply Chain Management Solutions India SCM Solutions India Supply Chain Management Software Solutions India SCM Software Solutions India

Transfer Pricing | International Taxation | Business Consulting | Corporate Compliance and Consulting | Assurance and Risk Advisory | Indirect Taxes | Direct Taxes | Transaction Advisory | Regular Compliance and Reporting | Tax Assessments | International Taxation Advisory | Capital Structuring | Withholding tax advisory | Expatriate Tax Reporting | Litigation | Badges | Club Badges | Seals | Military Insignias | Emblems | Family Crest | Software Development India | Software Development Company | SEO Company | Web Application Development | MLM Software | MLM Solutions