Loss suffered by Entering into Hedging Contracts of Foreign Exchange when assessee not a Dealer in Foreign Exchange is ‘ Normal Business Loss ’: ITAT [Read Order]

The Kolkata Bench of the Income Tax Appellate Tribunal ( ITAT ) in the case of M/s ITT Shipping Pvt. Ltd. v. Pr. CIT-3, Kolkata held that when the assessee is not a dealer in foreign exchange and as a part of his normal business activity, enters into hedging contracts of foreign exchange, the loss in question is normal business loss and cannot be held a “Speculation Loss” as covered by Section 43(5) of the Income Tax Act.

Two issues arose in the present appeal. The first one being with respect to the revisional powers exercised by the Commissioner of Income Tax (CIT) and the other on merits as to whether loss suffered by entering into hedging contracts of foreign exchange was to be categorized as ‘Speculation Loss’ or ‘Normal Business Loss’.

The assessee-company is engaged in the business of shipping and provides services to foreign ships.. The forward contract in question was entered into by the assessee with Indusind Bank for hedging future foreign currency fluctuation. The Assessing Officer (AO) accepted this claiming business loss, in the order passed u/s 143(3) of the Act. The Ld. CIT initiated a proceedings u/s 263 of the Act by issuing a show cause notice to the assessee proposing to hold the “Forward Contract Loss” incurred in connects with Indusind Bank, as a speculation loss and not normal business loss, by relying on amongst others the CBDT Instruction No. 3 of 2010 dated 23.03.2010.

Relying upon a number of precedents, it was contended by the assessee that being in a business of running ships and providing services to the foreign ships, it has to conduct its business regularly in foreign exchange and hence the loss on hedging is a business loss. Further, since the AO had taken a possible view on this issue, the revision u/s 263 of the Act is bad in law on the ground that in order to exercise the powers under S. 263, the order of the AO should be erroneous and prejudicial to the interest of revenue.

The revenue, on the other hand, submitted that the AO in his order u/s 143(3) has not examined the loss in question from the angle as to whether it is a normal business loss or ‘Speculative Loss’. Further, it was submitted that when a transaction is settled, otherwise than by actual delivery or transfer of the commodity, etc., it would be considered a “Speculative Transaction”.

The Tribunal after hearing both the parties was in support of the view taken by the assessee. With regard to the procedural issue, the Tribunal held that the adjudication of the AO on the issue of ‘Loss on Forward Contract’ is neither erroneous nor prejudicial to the interest of revenue. Furthermore, with regard to the issue on merits, the tribunal was of the view that when the assessee is not a dealer in foreign exchange and as a part of his normal business activity, enters into hedging contracts of foreign exchange, the loss in question is normal business loss and cannot be held a “Speculation Loss” as covered by Section 43(5) of the Act.