2014 (7) TMI 1212

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....hence was allowable. 2. That the Learned CIT(A) failed to appreciate that the assessee had entered into forward contracts on an exceptionally higher side compared to net exposure of foreign currency." 3. The assessee is an importer, manufacturer and exporter of diamonds. For the year under consideration the assessee declared a total income of `3,57,890/-. During the scrutiny proceedings the AO called upon the assessee to explain as to why the loss on forward contract cancellation, to the tune of `2,31,56,475/-, debited to the P & L Account should not be disallowed. The assessee contended that the contracts were exclusively booked only to hedge receivables and hence the same is allowable as deduction. However, the AO rejected the....

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....s and creditors depending on the terms of the transaction. Even though appellant has certain receivables and certain payables recorded in the books, based on the invoices, on a particular date, nevertheless amount included in each invoice has a different duration for payment. Therefore, it is not the case that at a given point of time all the receivables and all payables can be adjusted against each other. There may be a position that the for imports may not be due as on the date of receiving the export proceeds and vice-versa. In such case, appellant has to plan for the cash flow in n currency depending upon the time line of expected receipts and payments which may result in a situation that there can be some idle funds of foreign currency....

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....In the above background, having accepted that the appellant is exposed to fluctuation in foreign exchange given its scale of operations and hedging of such transactions is the need of the business, in my considered opinion the loss or profit arising out of such transactions should also be treated as business loss/income. Thus, there is no element of speculation involved in these transactions. In such circumstances, the loss incurred by the appellant is not a notional loss but it is an actual loss suffered. Therefore, such loss is to be allowed as business loss u/s. 37(1) of the Act in terms of decision of Hon'ble Bombay High Court in the case of CIT Vs. Badridas Gauridu Pvt. Ltd. 261 ITR 256. Accordingly, I direct the A.O. to allow the ....