Forex derivative hedge loss treated as business loss where contracts protected export receivables and were not speculative transactions.

Forex derivative contracts entered into by an exporter to hedge foreign exchange fluctuation risk were treated as bona fide business hedges, not independent speculative ventures. Because the contracts were integrally connected with export receivables and the regular business operations, the resulting loss was held to be a business loss allowable under the Income-tax Act. Settlement otherwise than by actual delivery did not, on these facts, convert the transactions into speculation under section 43(5). The loss was therefore eligible for set-off against business income.

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Issues: Whether the loss arising from forex derivative contracts entered into by an exporter to hedge foreign exchange fluctuation risk was a business loss allowable against business income or a speculative loss hit by the exclusion under section 43(5) of the Income-tax Act, 1961.

Analysis: The assessee was engaged in export business and had entered into forex derivative contracts through banks to hedge exposure arising from export receivables. The contracts were not independent speculative ventures but were connected with the regular business operations and were meant to mitigate currency risk. The nature of the transactions, the underlying export exposure, and the commercial purpose of hedging brought the loss within the realm of business expenditure/loss. Such derivative transactions, on the facts found, could not be treated as speculative merely because they were settled otherwise than by actual delivery. The loss was therefore allowable as a business loss under the Act.

Conclusion: The forex derivative loss was not speculative loss and had to be treated as business loss, entitling the assessee to set-off against business income.

Ratio Decidendi: Forex derivative transactions undertaken by an exporter as a bona fide hedge against foreign exchange fluctuation risk, and integrally connected with the regular business, are not speculative transactions and the resulting loss is allowable as business loss.

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