INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Foreign exchange fluctuation - Expenses on account of fluctuation in exchange rates -

AO completed the assessment under section 143(3) by determining the loss after making various disallowances. AO noticed that assessee had hedged their outstanding forex liability. The difference between the purchase and hedging rate was booked as exchange fluctuation. AO observed that assessee hedged the fluctuation by fixing the price of its receivables, payments and ECB loan repayments. Since expenditure on hedging was not allowable expenditure, AO disallowed the same and brought to tax. CIT(A) held that disallowance was liable to be deleted. Held: Legitimate contract entered to guard against the loss that may arise through future price fluctuations cannot be treated as speculative transactions and are to be treated as regular business expense. No details such as, number of contracts, nature of the contract, details of forward contract entered into, banker details, currency details, another party willing to take a reverse position, which is a pre-requisite of a forward contract, etc. were brought on record while making the disallowance by AO. Accordingly, AO was directed to pass detailed speaking order by giving all details and valid reason for treating the hedging expenses as a non-allowable expense by affording an opportunity of being heard to the assessee.

REFERRED : CIT v. Woodward Governor India Pvt. Ltd. (2009) 312 ITR 254 (SC) : 2009 TaxPub(DT) 1628 (SC) M/s. SCM Garments (P) Ltd v. DCIT (2015) 59 taxmann.com 395 (Chen) : 2015 TaxPub(DT) 3561 (Chen-Trib)

FAVOUR : Matter remanded

A.Y. : 2012-13

INCOME TAX ACT, 1961

Section 271(1)(c)

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