INCOME TAX ACT, 1961

Section 28(1)

Business loss - Allowability - Loss incurred on foreign exchange derivative -

AO disallowed assessee's claim of derivative loss by holding that the forex derivative losses were speculative losses and not business losses. CIT (A) upheld the said decision of the AO. Held: Loss incurred on foreign exchange derivative could not be disallowed holding to be a speculative loss; that the foreign exchange derivative transaction partook the character underlying the transaction of foreign exchange; and that if the transaction, in respect of which derivative transaction was undertaken, was capital in nature, even the derivative transaction would also be capital in nature. Thus, foreign exchange derivative loss in respect of capital items was certainly a capital expenditure and could not be allowed as loss whereas in respect of revenue items, it could be allowed as revenue loss. Therefore, it was needed to be examined as to whether the foreign exchange forward contract was undertaken in respect of capital items or revenue items. In instant case, the AO had not undertaken the exercise of verifying as to whether foreign exchange derivative transaction were in respect of capital items or revenue items and that there was no material record to establish the nature of transactions, therefore, the matter was remanded to the AO for the purposes of re-examining the issue.

REFERRED : CIT v. M/s. Celebrity Fashion Ltd. [TCA No. 26 of 2018, dated 21-9-2020] : 2020 TaxPub(DT) 3894 (Mad-HC).

FAVOUR : Matter remanded

A.Y. : 2009-10

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