Hedging loss on foreign exchange forwards is deductible as business loss, and section 14A cannot apply without exempt income.

Hedging loss on foreign exchange forward contracts was treated as deductible business loss, not a speculative or contingent loss, because the contracts were entered to hedge export proceeds, the liability had accrued, and the year-end revaluation reflected a reasonably ascertainable obligation. The court also held that section 14A read with Rule 8D could not be applied where no exempt dividend income had been earned in the relevant year, and the contrary view in an earlier decision could not be followed to that extent. The Revenue's appeal therefore failed, and the assessee's claims were accepted.

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Issues: (i) Whether the provision for loss on foreign exchange derivative contracts and the carry forward of derivative loss were liable to be disallowed as speculative or contingent in nature; (ii) Whether disallowance under section 14A read with Rule 8D could be made for the relevant assessment year even though no exempt dividend income had been earned.

Issue (i): Whether the provision for loss on foreign exchange derivative contracts and the carry forward of derivative loss were liable to be disallowed as speculative or contingent in nature.

Analysis: The forward contracts were entered into to hedge export proceeds against foreign exchange fluctuations. The loss was revalued at year-end in accordance with accounting standards, the obligation under the contracts had already accrued, and the liability was determinable with reasonable certainty. The transaction was treated as part of the assessee's regular business and not as a speculative adventure. The court also held that the CBDT instruction relied upon by the Revenue was not applicable to the assessment years in question.

Conclusion: The disallowance was not sustainable and the issue was decided in favour of the assessee.

Issue (ii): Whether disallowance under section 14A read with Rule 8D could be made for the relevant assessment year even though no exempt dividend income had been earned.

Analysis: Section 14A is attracted only when expenditure is incurred in relation to income not forming part of total income. For the year in question, no exempt income had accrued or been earned by the assessee. The court clarified that the contrary view previously taken in an earlier decision could not stand to the extent it suggested otherwise. Circular No. 5/2014 was also held inapplicable to the assessment year involved.

Conclusion: The disallowance under section 14A was not warranted and the issue was decided in favour of the assessee.

Final Conclusion: The Revenue's appeal failed on all substantial questions and the assessment order as modified in appellate proceedings was not disturbed.

Ratio Decidendi: A hedging loss on foreign exchange forward contracts, where the obligation has accrued and the liability is reasonably ascertainable, is deductible as business loss and not a speculative loss; disallowance under section 14A cannot be made in the absence of exempt income for the relevant year.

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