In M/s Essel Propack Ltd v. ACIT, a division bench of the Mumbai ITAT, while allowing the loss suffered on cancellation of forward contracts held that the same amounts to business loss.
The bench also clarified that a currency cannot be termed as a commodity for the purpose of the provisions of Section 43(5) of the Income Tax Act which defines the term ‘speculative transactions’.
Assessee debited a sum of Rs.1,40,84,283/- in respect of the loss on account of cancellation of the forward contract. On enquiry, assessee explained that it is a multinational company and 50% raw materials are imported and 10% sales are exports. The foreign exchange risks are hedged using forward contracts on the basis of underlying purchases, sale contracts. According to them, the definition of speculative transactions under section 43(5) is an exhaustive one and the term does not include currency.
The Assessing Officer, however, rejected the contention and completed assessment by treating the loss on cancellation of the forward contract as loss arising from speculation activities.
The bench noted that as per the definition given in sub-section (5) the transaction entered into cannot be treated to a speculative transaction. Accepting the contentions of the assessee, it observed that the definition of speculative transactions under section 43(5) is an exhaustive one and the term ‘commodity’ including shares and stocks but does not include currency.
Citing a plethora of decisions, the bench ruled that the loss suffered by assessee on cancellation of such forward contracts is not speculative and loss is deductible as business loss.
Read the full text of the Order below.
