TaxTMI 
TaxTMI 
2018 (1) TMI 133
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....0,829/- was incurred by the assessee due to cancellation of foreign exchange forward contracts. The assessee entered into foreign forward contract in order to hedge the currency fluctuation risk while realizing export debtors. It was also acknowledged by the assessee that it has entered into forex exchange forward contracts with the bank in order to fix the rate at which the US dollars received from the export debtors at a later date can be exchanged for Indian rupees so as to avoid the likely loss due to the exchange rate for US dollar falling below the said rate. As the loss of Rs. 62,20,829/- was incurred due to cancellation of forward contracts for settlement of the contract for sale of US dollars, the assessee requested to allow the same as business loss. The total export turnover of the assessee was Rs. 5,61,17,429/- and the total value of forward contracts booked by the assessee during the year was US $ 4,22,92,364 which was less than the export sales made during the year. The extent of forward contracts entered into by the assessee was based on the expected inflow of export sales realizations during the year. The aggregate realization of export debtors amounted to US $ 4,69....
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....see's export activity. As such, the losses and gains constituted business loss or gains, as opposed to speculation loss or gains. The fact that forward contracts were prematurely cancelled could not alter the nature of the transaction. (iii) The law does not require one-to-one correlation between the FCs and export invoices. Where total value of the FC does not exceed the total outstanding receivable in foreign exchange, the claim is sustainable as a business loss. (iv) Considering the documents/analysis of transaction put for by the company, FCs were an integral part, or incidental to, the core business of exporting diamonds. Therefore, FCs constituted 'hedging transactions' and not 'speculative contracts'. 5.1. The Ld CIT(A) observed in the assessee's that the facts clearly reveal that the forward contracts were entered to hedge against the possible losses on account of depreciation of US $ on realisation of sale proceeds. The assessee however suffered losses in respect of these forward contracts because the US $ appreciated against the rupee during the year. The contention of the assessee for entering into forward contracts is integral pa....
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....esent case, let us understand, forward contracts, speculative transactions, hedging, foreign exchange loss and treatment of loss in the books of account. A forward contract is a agreement between an enterprises and a banker to purchase or sell a particular quantity of currency for a mutually agreed price at a particular date. These forward contracts are used by exporters to get their export receivables hedged against adverse currency movements. Hedging is defined as to enter in to transactions to reduce the risk of adverse movement of currency. Any person having exposure to foreign currency may enter into hedging to fix his cost and profits at a particular level. Therefore, forward contracts means entering into agreement with bankers to hedge the currency fluctuations to mitigate the loss in the course of import/export business. Forward exchange contracts and treatment of any profit/loss arising on cancellation or renewal of such forward exchange contracts has been dealt by Accounting Standard-11 issued by the Institute of Chartered Accountants of India, in paras 36, 37, 38 & 39. According to the AS-11, of ICAI, any forward exchange contracts entered to hedge the foreign currency e....
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....d in great detail in the recent landmark ruling of Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326 where in the SC relied on the earlier judgment in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, observed that the law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be a trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature." 15. Further in the aforesaid ruling the Apex Court also affirmed the principles laid down in the ruling of CIT v. V.S. Dempo & Co. (P.) Ltd. [1994] 206 ITR 291/72 Taxman 134 (Bom.), wherein it was held that a loss arising in the process of conversion of foreign currency which is part of trading asset of the assessee is a....
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.... therefore, it can continue its exports and accordingly it has continued its forward exchange contracts with the banks. Since the ban was continued for the whole financial year and also fact that during the same period, the Indian currency had a dramatic fall in the international market, the assessee has closed forward exchange contracts and suffered loss. The assessee being a prudent business person entered foreign exchange contracts with a hope that the Indian currency may recover and it may recoup the losses. But, ultimately when things are not turned around, it has cancelled forward exchange contracts, which results into loss. Therefore, the loss suffered by the assessee cannot be considered as speculative loss within the meaning of section 43(5) of the Act. 17. Coming to the allegations of the A.O. The A.O.'s main allegation is that loss claimed by the assessee is MTM loss or notional loss as the loss is not crystallized in the books of account. The A.O. observed that only crystallized loss is allowable as deductions, but not notional loss. As the forward contracts have been entered into against currency fluctuations, there would not be any crystallization of liab....