Whether loss on foreign currency forward contracts by a manufacturer/ exporter is a speculation loss and not a hedging loss u/s 43(5)(a)?

Last updated: 03 November 2014

Court :
ITAT Mumbai

Brief :
Assessee-company,engaged in the business of trading of cut and polished diamonds,filed its return of income declaring loss at Rs.2,19,91,359/-.AO finalised the assessment u/s.143(3) determining the total income of Rs.78,57, 190/-. Effective ground of appeal is about disallowance of loss of Rs.2,98,48,551/- on account of cancellation of foreign currency forward contract.During the assessment proceedings, AO found that the assessee had debited loss on account of exchange rate fluctuation amounting to Rs. 2.98 Crores. He directed the assessee to furnish details on account of exchange rate difference and of forward contracts.After considering the explanation filed by the assessee, AO observed that any loss incurred by an assessee on entering into currency derivatives,due to forward contract of foreign exchange rate,had to be taken as forex derivative loss, that such loss had to be on account of dealing in forex derivatives which had actually been incurred by way of settling the difference at the end of the expiry of period of derivative contract or its termination, that assesse had to prove that currency derivative losses incurred was on account of hedging (reducing) risk and had not been undertaken as a speculative transaction to earn more profit.

Citation :
Araska Diamond Pvt. Ltd. –Appellant – Versus – ACIT – Respondent