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CIT v Friends And Friends Shipping Pvt Ltd. - Gujarat High Court

S. 43(5): Loss on foreign currency forward contracts by a manufacturer/ exporter is a “hedging loss” and not a “speculation loss”


The assessee is an exporter had entered into forward contracts with the bankers to hedge against any loss arising out of fluctuation in foreign currency. As per the contract between the assessee and the bank provided that the assessee would buy some quantity of dollars at a particular rate to cover export bill payment. The contract gave delivery option dates. The assessee had to take the delivery within the period indicated in the contract and if for some reason it was not possible to do so, the assessee had to give instructions to the bank for cancellation of the contract. Since on some occasions, the assessee was required to give instructions for cancellation of forward contract, the assessee had to pay agreed charges to the bank.


The Assessing Officer disallowed the loss holding it as speculative in nature and therefore covered under sub-section (5) of section 43 of the I.T Act. Further, the CIT(A) relied on the decision of Andhra Pradesh High Court in the case of M.G Brothers v CIT and CIT v Joseph John, held that there was no direct connection between the export contract and the booking of dollars by the assessee. Thus, the entire transaction was in the nature of speculation and hence disallowed.


1. The issue is covered by the decisions of Bombay High Court in the case of M/s. Badridas Gaurida (P) Ltd and the Calcutta High Court in the case of Soorajmull Nagarmull, wherein the court held that if for the purpose of hedging the loss due to fluctuation in foreign exchange while implementing the export contract, the assessee entered into forward contract with the banks and if in some cases, the export could not be executed and the assessee had to pay certain charges to the banks. These charges can be claimed by the assesse as expenditure towards business and the transaction could not be stated as Speculatve Transcation u/s  43(5) of the I.T Act.

2. Also, the charges that the assessee had to pay to the Bank were in the nature of the revenue expenditure, since as per the RBI guiltiness, banks would not be permitted to enter into a forward contract with respect to foreign currency unless the assessee had export contract on hand.


The HC held that though the assessee is not a dealer in foreign exchange, it entered into forward contracts with banks for the purpose of hedging the loss due to fluctuation in foreign exchange while implementing the export contracts. The transactions in foreign exchanges were incidental to the assessee’s regular course of business and the loss was thus not a speculative loss u/s 43(5) but was incidental to the assessee’s business and allowable as such.

The fact that there may have been no direct co-relation between the exchange document and the precise export contract cannot be seen in isolation if there are in fact several separate contracts with the bankers

Soorajmull Nagarmull 129 ITR 169 (Cal) & 

Badridas Gauridu 261 ITR 256 (Bom) followed;

M. G. Brothers 154 ITR 695 (AP) distinguished.


Published by

Ajay Agrawal
(CA Practice )
Category Income Tax   Report

  53 Shares   14898 Views


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