Foreign exchange forward contract incidental to export business held not speculative activity

Foreign exchange forward contract incidental to export business to cover up losses due to foreign exchange rate variation not speculative activity – SC dismissed SLP of the Revenue

ABCAUS Case Law Citation:
ABCAUS 3279 (2020) (03) SC

Important case law relied upon by the parties:
Bhavani Gems vs. ACIT
CIT vs. Bank of Bahrain   and   Kuwait

In this case SLP was filed by the Income Tax Department (Revenue) against the judgment of the Hon’ble High Court which held the question of law in favour of the assessee.

The question framed by the Revenue was as to whether the Tribunal was justified in law in deleting the addition of ‘Mark to Market’ Loss made by the   Assessing Officer (AO) on   account   of disallowance of loss on foreign exchange forward contract loss being a notional loss and hence not allowable.

The Hon’ble High Court noted that in a similar case involving similar question this issue stood concluded against the Revenue and in the favour of the Assesse.

In the said case, the assessee was engaged in the business of import and export of diamonds. The assessee had claimed loss on account   of having entered into hedging transactions to safeguard variation in exchange rates affecting its transactions of import and export by entering into forward contracts.

The Assessing Officer had however disallowed   the   claim   on ground that it was a notional loss of a contingent liability.

The Tribunal found that the transaction of forward contract was entered into during the course of its business. It was held that the transaction entered into by the assessee was not in the nature of speculative activities. Further the hedging   transactions were entered into so as to cover variation in foreign exchange rate which would impact its business   of   import and export.

The Hon’ble High Court while upholding the ITAT order had held that forward contract in foreign exchange when incidental to carrying on business of exporter and done to cover up losses on account of differences in foreign exchange valuations would   not be speculative activity but a business activity.

In view of the its own decision as above, the Hon’ble High Court had dismissed the appeal holding that the question proposed did not give rise to any substantial question of law.

Not satisfied with the judgment of the Hon’ble High Court the Revenue had filed a Petition for Special Leave before the Hon’ble Supreme Court which had been dismissed.

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