Hedging loss on forward forex contracts and explained demonetisation cash deposits were accepted; PF/ESI disallowance stood.
Employees' contribution to PF/ESI deposited after the prescribed due date remained disallowable under Checkmate Services, so the disallowance was sustained. Marked-to-market loss on forward foreign exchange contracts entered to hedge genuine business exposure was treated as allowable business loss, and it was recognised for the related book profit computation. Cash deposits during the demonetisation period, claimed as scrap-sale receipts, were accepted because the assessee produced party-wise details and confirmations and the addition under section 68 was deleted. The deduction claim under section 35(2AB) was remitted for verification after DSIR approval, with relief granted for statistical purposes.
Issues: (i) Whether employees' contribution towards PF/ESI was disallowable; (ii) whether marked to market loss on forward foreign exchange contracts was allowable as a business loss and for book profit computation; (iii) whether the cash deposit/addition under section 68 was sustainable in respect of demonetisation period receipts claimed as scrap sales; and (iv) whether the claim for deduction under section 35(2AB) required verification and remand.
Issue (i): Whether employees' contribution towards PF/ESI was disallowable.
Analysis: The issue was controlled by the binding Supreme Court ruling in Checkmate Services Pvt. Ltd., under which employees' contribution deposited beyond the prescribed due date is not allowable.
Conclusion: The disallowance was upheld and the issue was decided against the assessee.
Issue (ii): Whether marked to market loss on forward foreign exchange contracts was allowable as a business loss and for book profit computation.
Analysis: The contracts were entered into to hedge foreign exchange exposure arising from underlying business transactions. Following the binding Delhi High Court decisions, such forward contracts were held to be hedging transactions falling within the exception to speculative treatment. The loss was therefore required to be recognised in computing real business profits and could not be treated as a contingent or speculative loss merely because it arose on valuation at the reporting date.
Conclusion: The claim was allowed in favour of the assessee for both normal computation and the related book profit issue.
Issue (iii): Whether the cash deposit/addition under section 68 was sustainable in respect of demonetisation period receipts claimed as scrap sales.
Analysis: The assessee furnished party-wise details and confirmations for the alleged scrap sales source of the cash deposits. The addition was made without further independent verification from the parties or effective cross-checking of the material produced. On the facts, the evidentiary material furnished by the assessee was found sufficient to require acceptance of the explained source.
Conclusion: The addition was deleted and the issue was decided in favour of the assessee.
Issue (iv): Whether the claim for deduction under section 35(2AB) required verification and remand.
Analysis: The deduction was first claimed during assessment after receipt of DSIR approval. The claim was considered capable of verification on merits, and no objection was taken to sending it back for examination in accordance with law.
Conclusion: The issue was remitted for verification and allowed for statistical purposes.
Final Conclusion: The appeals were disposed of with relief on the marked to market loss, the cash deposit addition and the remanded deduction claim, while the PF/ESI disallowance was sustained.
Ratio Decidendi: Forward contracts entered into to hedge genuine foreign exchange exposure are hedging transactions whose loss is allowable in computing real business income, and an addition based on unexplained cash deposits cannot be sustained when the assessee has furnished credible supporting particulars that call for proper verification.
TaxTMI 
AI Drafter ✕
TaxTMI 
