2017 (11) TMI 195 - AT - Income Tax

Tribunal rules in favor of assessee on foreign exchange loss as business expenditure

M/s Southern Rocks & Minerals (P) Ltd., Ongole Versus The ACIT, Circle-1 Guntur

M/s Southern Rocks & Minerals (P) Ltd., Ongole Versus The ACIT, Circle-1 Guntur - Tmi Issues Involved:1. Disallowance of Foreign Exchange Fluctuation loss as speculation loss under Section 43(5) of the Income Tax Act.2. Year of allowability of deduction.Issue-Wise Detailed Analysis:1. Disallowance of Foreign Exchange Fluctuation Loss as Speculation Loss under Section 43(5) of the Income Tax Act:The revenue challenged the deletion of Rs. 10,34,23,949/- disallowed by the assessing officer as a speculation loss. The assessing officer argued that the assessee's transactions in foreign exchange derivatives with ICICI Bank, which were settled without taking possession of the foreign exchange, constituted speculative transactions under Section 43(5) of the Income Tax Act. The assessee contended that these transactions were entered into to hedge against foreign exchange fluctuations and were not speculative in nature. The CIT(A) ruled in favor of the assessee, holding that the transactions were business expenditures under Section 37(1) of the Income Tax Act and not speculative, as the assessee was an exporter of granite blocks and not a dealer in foreign exchange.The Tribunal upheld the CIT(A)’s decision, referencing multiple judicial precedents, including the ITAT Mumbai Bench's decision in the case of London Star Diamond Company (I) P Ltd. Vs. DCIT, which held that foreign contracts entered into by an exporter with banks are business transactions and not speculative. The Tribunal also noted that the Reserve Bank of India permits such hedging transactions to mitigate foreign exchange risks, and these transactions were integral to the assessee's export business.2. Year of Allowability of Deduction:The second issue concerned the year in which the loss should be allowed. The assessing officer questioned why the loss incurred in earlier years was claimed in the year under consideration. The assessee explained that the loss was crystallized in the financial year 2009-10, relevant to the assessment year 2010-11, due to ongoing litigation with ICICI Bank, which was settled in December 2009 for Rs. 9,10,00,000/- against an original claim of Rs. 18,53,21,184/-.The Tribunal agreed with the CIT(A) that the loss was crystallized in the year under consideration due to the settlement reached with ICICI Bank, making it allowable for that year. The Tribunal found no infirmity in the CIT(A)'s order and upheld it.Conclusion:The Tribunal dismissed the revenue's appeal and allowed the cross-objection filed by the assessee, supporting the CIT(A)'s decision to treat the foreign exchange fluctuation loss as a business expenditure and to allow the deduction in the assessment year 2010-11 when the loss was crystallized.