In Arjav diamonds India Pvt Ltd v. ACIT, the Mumbai ITAT held that set off under the Income Tax Act can be allowed for loss arising out of cancellation of foreign exchange / forward contract, when the assessee effected such transactions in order to meet the purposes of its business.
While allowing a second appeal filed by the assessee, the ebnch clarified that if the foreign currency transactions were entered by the assessee for the purpose of meeting the requirement of business and for nothing else or for no other purpose, the same cannot be disallowed by the department.
Coming to the facts of the case, Assessee, engaged in export of diamonds, entered into forward contract with the Banker, which minimised the risk / loss in the Forex market. Later, assessee had to cancel all these agreements due to various commercial considerations and exigencies and also change in the forex market. AO denied the claim of the assessee to set off business loss which pertains to foreign currency Forward Action Contracts by treating the same as āSpeculation Lossā. The first appellate authority confirmed the order in appeal.
Citing the decisions of the Co-ordinate benches in various cases, the Tribunal observed that āforeign currency transactions were entered by the assessee for the purpose of meeting the requirement of business and for nothing else or for no other purpose. Thus, assesseeās business and sources of borrowings are effectively in foreign currency and thus the assessee is exposed to adverse movements in foreign exchange which it receives and pays as part of its business. All these transactions entered by the assessee are incidental to its business activity of import and export and to protect against adverse movements in foreign exchange in a highly volatile global market. Thus, foreign exchange fluctuation is a risk which assessee has to face and therefore, it is prudent for it to mitigate it.ā
Read the full text of the Order below.
