The Income Tax Appellate Tribunal (ITAT), Bangalore Bench while granting the relief to Lifestyle International ruled that the Foreign Currency is not a ‘commodity’ to invoke provisions relating to Speculative Transactions.
The assessee, Lifestyle International had imported certain trade merchandise from parties located outside India. Payments to such foreign vendors are required to be made in the future on specified dates in foreign currency. The assessee had also obtained foreign currency working capital loans and repayment needs to be made on future specified dates in foreign currency. The assessee in order to secure itself from adverse foreign exchange movements, i.e,, making payments at a higher rate than the rate at which expense was booked has entered into currency hedging contracts with State Bank of India (SBI) and Indian Overseas Bank (IOB) as per FEMA Guidelines. The banker’s levy premium for entering into such forward contracts. The assessee during the relevant assessment years had incurred expenses on the premium on forwarding cover.
The Assessing Officer for Assessment Years 2008-2009 and 2010-2011 disallowed the same under section 43(5) read with section 73 by stating that it is in the nature of speculation transaction under section 43(5) considering that the settlement is happening on the currencies and not on the goods in which the assessee is trading, and the transaction does not fall within any of the exclusive provisos under section 43(5) of the Income Tax Act.
The forward contracts were entered into mainly to hedge the import payments and working capital loan repayment which is in the ordinary course of trade or business of the assessee. The hedging contracts are in the nature of foreign exchange contracts to purchase foreign exchange on a specified future date at a predetermined date. The bankers levied a premium for entering into such a forward contract. These are in the nature of actual charges levied by the bankers. It is nothing but bank charges which are purely revenue in nature. The said expenditure is incurred to secure the assessee’s business from foreign exchange fluctuation risk.
The coram of B.R.Baskaran and George George K ruled that foreign currency does not fall within the purview of the term “commodity” and hence this characteristic of a speculative transaction is not satisfied. Since, the definition of the speculative transaction itself is not applicable to the assessee’s case as all the conditions were not satisfied, treating the transaction as speculative in nature is not sustainable in law.
Therefore, the ITAT held that the CIT(A) is correct in deleting the disallowance of premium on forwarding contract and no interference is called for.
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