Back
2025 Supreme(Online)(ITAT) 21567
INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH)
Vikas Awasthy, Judicial Member, M. Balaganesh, Accountant Member
DCIT – Appellant
Versus
Fiem Industries Ltd – Respondent
ITA No. 3696/Del/2015
For the Appellants/Petitioners: Ms. Namita Khurana
For the Respondents: Shri Shailesh Gupta
Losses from forward currency contracts entered into by an exporter to hedge against foreign exchange risks linked to underlying export orders are considered business losses and not speculative transactions under Section 43(5) of the Income Tax Act, provided the activity is incidental to the primary business.
Headnote:(A) Income Tax Act, 1961 - Section 43(5) - Speculative transaction - Forward contracts for foreign exchange hedging - Whether loss arising from forward contracts entered for hedging export receivables is speculative or business loss - Assessee entered into forward contracts with banks to hedge against currency fluctuations in foreign export receivables - Assessing Officer treated losses as speculative on grounds that contracts were complex derivatives, lacked direct nexus, and were independent of underlying export orders - Tribunal held that forward contracts were incidental to core export business and served to protect against price risks - Proviso to Section 43(5)(a) exempts contracts for hedging or safeguarding against price risk in the course of manufacturing or merchandising - Loss incurred is a regular business loss and deductible. (Paras 4, 8, 9, 12, 13)
(B) Appellate Jurisdiction - Scope of review - Appellate authority to evaluate business nexus - Finding that hedging transactions are integral to the commercial operations of an exporter is a factual determination - Where transactions are backed by underlying export documents and consistent with standard commercial risk management, they cannot be branded as speculative betting. (Paras 9, 12)
Facts of the case:
The assessee, a manufacturer and exporter of auto components, entered into derivative contracts with financial institutions to hedge foreign currency receivables. The tax authorities during assessment disallowed the losses arising from these contracts, characterizing them as speculative transactions under Section 43(5) of the Act, arguing that they were not properly correlated with export revenue and amounted to betting on exchange rate movements. The appellate authority reversed this decision, finding that the contracts were legitimate hedging instruments linked to verified export orders and were affected by global economic turbulence.
Findings of Court:
The Appellate Tribunal found that the assessee was not a dealer in foreign exchange and that the transactions were bona fide hedging activity. The record substantiated that the derivative contracts were entered into to protect against exchange rate volatility associated with export business. Consequently, the losses were held to be business losses eligible for set-off against ordinary taxable income.
Issues: The main issues were whether forward exchange contracts constituted speculative transactions under the Act and whether the losses therefrom were deductible as business losses when such contracts were intended to hedge against export currency risks.
Ratio Decidendi: Losses arising from derivative contracts entered into by an exporter to hedge against foreign exchange fluctuations in the ordinary course of business, which are supported by underlying trade agreements, are incidental to business operations. Such transactions do not fall within the definition of speculative transactions under Section 43(5) of the Act as they satisfy the requirement of bona fide hedging against price risks.
Result: Appeal of the revenue dismissed.
| Table of Content |
|---|
| 1. establishing the factual background of the business operations, export activities, and the execution of forward contracts for hedging purposes. (Para 1 , 3 , 4 , 5 , 6 , 7) |
| 2. the assessing officer's contention that hedging contracts were speculative betting and the revenue's challenge regarding the volume of contracts versus business turnover. (Para 8 , 11) |
| 3. analysis of whether forward contracts are incidental to core business activities and protected under hedging principles, specifically rejecting the speculative classification. (Para 9 , 10 , 12) |
| 4. final determination that losses from hedging contracts with a nexus to export activity are allowable business losses. (Para 13 , 14) |
O R D E R
PER M. BALAGANESH, A. M.:
1. The appeal in ITA No.3696/Del/2015 for AY 2011-12, arises out of the ld. Commissioner of Income Tax (Appeals)-3, New Delhi [hereinafter referred to as „ld. CIT(A)‟, in short] in Appeal No. 393/2013-14 dated 10.03.2015 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as „the Act‟) dated 11.02.2014 by the Assessing Officer, Addl. CIT, Range-11, New Delhi (hereinafter referred to as „ld. AO‟).
2. The first issue to be decided in this appeal is as to whether the Learned CITA was justified in deleting the addition of Rs 17,70,51,673/- made by the Learned AO on account of settlement of forward contracts. The inter connected issue involved thereon is challenging the deletion of addition of Rs 88,83,314/- by the Learned CITA on account of Exchange Difference Derivatives.
3. We have heard the rival submissions and perused the materials available on record. The assessee is primarily engaged in the business of manufacturing of auto components, mainly automotive lighting and signaling equipments, rear view mirrors, sheet metal parts to be supplied to various domestic and overseas customers who manufacture two wheelers and four wheelers viz. scooters, motorcycles, mopeds, trucks, tractors, etc. The return of income for the assessment year 2011-12 was filed by the assessee company on 29-11-2011 declaring total income of Rs 4,54,80,370/-. The assessment was completed under section 143(3) of the Act determining total income at Rs 23,14,43,240/- after making addition of Rs 17,70,51,673/- against the claim of expense on account of “loss on settlement of target redemption forward contracts” and Rs 88,83,314/- against the claim of expense on account of “Exchange difference – derivatives” and Rs 24,880/- against the claim of deduction under section 80IC of the Act from its undertaking situated at Nalagarh. The claim of deduction under section 80IC of the Act is not in dispute in the impugned appeal before us.
4. The assessee being a manufacturer of automotive lightings and mirrors supplies its goods to domestic Original Equipment Manufacturers (OEMs) viz. HMSI, TVS, Suzuki motorcycles etc and also undertakes exports to various customers located in Japan, Europe, Indonesia etc. In order to hedge its export receivables in foreign currency, the assessee entered into sophisticated forward contracts with its bankers to hedge the exchange loss, if any, arising through future price fluctuations. It incurred loss during the year on account of settlement of the forward contracts to safeguard the outstanding receivables denominated in Japanese yen amounting to Rs 17,70,51,673/-. It also incurred loss on account of the settlement of the forward contracts to safeguard the outstanding receivables denominated in USD amounting to Rs 88,83,314/-. The Learned AO sought to treat both the losses as arising from speculative transactions under the provisions of section 43(5) of the Act and accordingly did not allow set off against the profits of the business.
5. It was submitted that the loss on settlement of the target redemption forward contract to the extent of Rs 17,70,51,673/- has been made on the final maturity date as specified in the contracts and thereby it is a
