Foreign exchange forward contract losses on mark-to-market basis allowed as business deduction, not speculative

ITAT Delhi upheld CIT(A)'s decision allowing deduction of foreign exchange forward contract losses on mark-to-market basis. Revenue challenged the allowance of forex losses claiming they were notional/speculative. Tribunal held that forward contracts entered for hedging export proceeds were business transactions, not speculative. Losses on currency conversion constitute trading losses allowable under mercantile accounting. Forward contracts being binding and enforceable, losses due to adverse exchange fluctuations on balance sheet date were deductible. Premium account expenditure representing difference between forward and spot rates also allowed as business expenditure.

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Issues Involved:
1. Deletion of addition of Rs. 55,62,952/- on valuation of forward foreign exchange contract on M2M basis.
2. Deletion of addition of Rs. 4,18,22,913/- as speculative loss.
3. Deletion of addition of Rs. 18,44,736/- as speculative loss but treated as business loss.

Summary:

Issue 1: Deletion of addition of Rs. 55,62,952/- on valuation of forward foreign exchange contract on M2M basis

The Ld. CIT(A) deleted the addition of Rs. 55,62,952/- made by the A.O., holding it as an allowable business loss. The A.O. had disallowed the loss on the grounds that M2M losses are not crystallized and are merely notional. The Ld. CIT(A) referenced the Supreme Court ruling in CIT vs. Woodward Governor India P. Ltd. 312 ITR 254, which allowed such losses as expenditure u/s 37(1) of the Act. The Tribunal upheld the Ld. CIT(A)'s decision, noting that the assessee followed the mercantile system of accounting and the losses were incurred due to business expediency.

Issue 2: Deletion of addition of Rs. 4,18,22,913/- as speculative loss

The Ld. CIT(A) deleted the addition of Rs. 4,18,22,913/- made by the A.O., which was treated as speculative loss u/s 43(5) of the Act. The CIT(A) found that the foreign exchange contracts were not speculative as they were entered into for hedging business risks and not for speculative purposes. The Tribunal upheld the Ld. CIT(A)'s decision, referencing the ITAT Delhi ruling in Munjal Showa Ltd. vs. DCIT 94 TTJ 227, which held that foreign currency is not a commodity for the purposes of section 43(5) and thus such transactions cannot be considered speculative.

Issue 3: Deletion of addition of Rs. 18,44,736/- as speculative loss but treated as business loss

The Ld. CIT(A) deleted the addition of Rs. 18,44,736/- made by the A.O., treating the loss as business expenditure. The A.O. had disallowed it, considering it speculative. The Tribunal agreed with the Ld. CIT(A), stating that the forward contracts were part of normal business operations and the losses incurred were business losses, not speculative. The Tribunal emphasized that the losses were allowable as business expenditure.

Conclusion:

The Tribunal dismissed the Revenue's appeal, upholding the Ld. CIT(A)'s decision on all grounds, and pronounced the order in the open court on 30th April, 2024.

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