Hedging loss on forward foreign exchange contracts was held allowable as business loss before statutory inclusion.

Forward foreign exchange contracts entered into as a genuine hedge against underlying business exposures are treated as hedging transactions, not speculative transactions, and the resulting marked-to-market loss is allowable as a business loss or recognised exchange difference. The analysis notes that exchange differences should be recognised to reflect real profits and that section 43AA, introduced with effect from 1 April 2017, specifically brought forward exchange contracts within its scope. For periods before that amendment, such contracts were outside the relevant taxing provision, so disallowance of the MTM loss was not sustainable.

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Issues: Whether marked-to-market loss arising from forward foreign exchange contracts entered into to hedge underlying business exposures was deductible and could be disallowed as a speculative loss.

Analysis: The binding precedent relied upon held that forward contracts entered into to hedge foreign exchange fluctuations in respect of underlying business transactions constitute hedging transactions and fall within the proviso to the speculative transaction definition. It further noted that exchange differences are to be recognised to reflect the real profits, and that the statutory amendment introducing section 43AA of the Income-tax Act, 1961 with effect from 01 April 2017 specifically brought forward exchange contracts within its scope. On that basis, forward exchange contracts were not covered by the relevant taxing provisions for the period prior to 01 April 2017.

Conclusion: The issue was answered in favour of the assessee, and the disallowance of the MTM loss was not sustainable.

Final Conclusion: The assessment action and the appellate order were set aside, and the assessee was granted consequential relief.

Ratio Decidendi: Loss on forward foreign exchange contracts entered into as a genuine hedge against underlying business exposure is not speculative and, for periods before the statutory inclusion of such contracts, is allowable as a business loss or recognised exchange difference.

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