Forex loss incurred while hedging loss in import/ export business through forward contract is business loss

 

Where assessee enters into forward contracts with banks to hedge loss for import/ export business and incurs foreign exchange loss then such loss shall be business loss and not the speculative loss. The pre- condition for the same shall be that maturity of hedge does not exceed maturity of underlying transaction. Thus, forex loss incurred while hedging loss in import/ export business through forward contract is business loss.

Case: Perfect Circle India Ltd. vs. Deputy Commissioner of Income Tax

 

Facts:

The assessee was a manufacturer and was engaged in the business of manufacturing rings and semi-finished castings. In order to hedge the risk on adverse currency fluctuation in respect of export realization, it entered into forward contracts. During the hedging, assessee incurred loss of INR 18,22,633 on mark to market.

 

During the assessment proceedings, the AO noted that the said loss was marked as business loss. However, AO held that the mark to market losses were purely notional losses. The assessee had not actually suffered any loss. As the assets were marked to market and the resultant figure was a loss figure thus, it was a notional figure and was not deductable as business loss.

 

On appeal, CIT(A) confirmed the disallowance made by the AO. Aggrieved by the order, higher appeal was made.

 

Held:

It was noted that Reserve Bank of India has defined the forward contract and foreign exchange and ‘Foreign exchange forward contracts’ entered into for the purpose of hedging the loss in import-export transactions, have been duly recognized and allowed by the RBI.

 

As per the guidelines issued, forward foreign exchange contracts that the banks have been permitted to enter into such contracts after thorough verification of documentary evidences etc. about the genuineness of the underlying foreign currency exposure and the need of hedging of the loss. Further the maturity of the hedge should not exceed the maturity of the underlying transaction.

 

Thus, in case of import/export business and for the purpose of hedging of the anticipated loss resulting from such import-export business, if the assessee enters into a forward contract in foreign exchange, then such forward contracts are to be treated as integral part of the business of export/import.

 

It was clarified that such contract shall not be considered as the speculative contracts attracting the provisions of section 43(5). Therefore, loss from such hedging transactions would be treated as business loss eligible to be set off against the profits and gains of business and profession.

 

Hence, it was held that the foreign exchange loss incurred by the assessee on account of entering into forward contracts with the banks for the purpose of hedging the loss in connection with his import/export business cannot be held to be a speculative loss. The same shall be business loss subject to the condition that the assessee will have to satisfactorily prove that the maturity of the hedge did not exceed the maturity of the underlying transaction. Forex loss incurred while hedging loss in import/ export business through forward contract is business loss.

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