Loss on Forward Foreign Exchange Contracts to Be Treated as Speculative if No Nexus Established With Business | ITAT

Case Details: DCIT v. Standard Match Industries (P.) Ltd. - [2024] 161 taxmann.com 459 (Chennai - Trib.)

Judiciary and Counsel Details

• Mahavir Singh, Vice President & Manoj Kumar Aggarwal, Accountant Member
• S. Sridhar, Adv. Ld. AR for the Appellant.
• R. Clement Ramesh Kumar, CIT-Ld. DR for the Respondent.

Facts of the Case

Assessee-company engaged in the manufacturing and sale of safety matches. During the relevant assessment year, assessee decided to book options contracts based on State Bank of India (SBI) advice to hedge its foreign exchange risk.

The forward contracts were designed to protect the company from adverse market movements by allowing it to lock in an exchange rate in advance for future transactions. However, due to the depreciation of the rupee against the US Dollar and Euro, the company cancelled the forward contracts and incurred a loss of Rs. 945.43 lakhs.

During the assessment proceedings, the AO treated the loss as a speculative loss as the assessee was not able to procure export orders, and adverse market conditions led to the cancellation of export orders.

The CIT(A) reversed the order of AO and treated the loss as a business loss. Aggrieved by the order, an appeal was filed to the Chennai Tribunal.

ITAT Held

The Tribunal held that the assessee did not submit proper evidence to prove that the loss was not speculative in nature. The assessee merely stated that it was not able to procure export orders, and adverse market conditions led to the cancellation of export orders. The assessee was asked to explain the losses claimed with reference to purchase orders and invoices vis-a-vis exchange contracts with banks for specific transactions, at least on a sample basis, but it could not provide such details.

Further, the assessee referred to the proviso to section 43(5) and submitted that it had undertaken forward contract and derivative contract as hedging against any foreign exchange fluctuation to fulfil its commitments of exports.

However, the said proviso provides that a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him. The assessee’s case would not be covered by the said proviso.

As the assessee could not substantiate its case and furnish the requisite details/explanations, the matter was restored to the file of the CIT(A) for denovo adjudication.

List of Cases Reviewed

• Vinodkumar Diamonds Pvt. Ltd. (ITA No. 506/Mum/2013)
• Araska Diamond Pvt. Ltd. v. ACIT (52 taxmann.com 238)
• CIT v. MP Sugar Mills (P.) Ltd. [148 ITR 203) [Para 8] – Followed.

List of Cases Referred to

• Araska Diamond (P.) Ltd. v. Asstt. CIT [2014] 52 taxmann.com 238/[2015] 170 TTJ 634/152 ITD 203 (Mumbai) (para 2)
• Addl. CIT v. M.P. Sugar Mills (P.) Ltd. [1984] 38 CTR 112/148 ITR 203/[1983] 15 Taxman 247 (Allahabad) (para 4.4).