DCIT Vs Fiem Industries Ltd (ITAT Delhi)
Hedging losses not speculative – ITAT Delhi upholds ₹ 18.6 Cr business loss on forward contracts- Only genuine hedging, not gambling – ITAT Delhi reaffirms s. 43(5) protection for exporters
Revenue filed appeal against the order of CIT(A) deleting additions of ₹ 17.70 crore & ₹ 0.89 crore made by AO on account of loss on settlement of target-redemption forward contracts & exchange-difference derivatives respectively.
Assessee, a manufacturer of automotive lighting, mirrors & sheet-metal components supplied to OEMs such as HMSI, TVS & Suzuki, had entered into forward contracts with Standard Chartered Bank & Citibank to hedge export receivables denominated in Japanese Yen & USD. These contracts were entered against confirmed export orders from Ichikoh Industries Ltd., Japan, under long-term technical & supply agreements. AO disallowed losses of ₹ 17.70 crore (JPY contracts) & ₹ 0.89 crore (USD contracts) holding them to be speculative u/s 43(5), arguing that the contracts lacked direct nexus with actual exports & were akin to bets on currency movement.
CIT(A) found that the contracts were duly backed by export commitments, approved under RBI guidelines & executed on ISDA-standard documentation. He held that the losses crystallised only on final maturity & were therefore real & business-linked. Detailed reliance was placed on decisions including CIT v. Badridas Gauridu (P) Ltd. (261 ITR 256 Bom), CIT v. Soorajmal Nagarmull (129 ITR 169 Cal), CIT v. Friend & Friends Shipping Pvt Ltd. (Guj HC), & Ramchandar Shivnarayan v. CIT (111 ITR 263 SC), holding that if there exists a direct & proximate nexus between business operations & loss, such loss is deductible as trading loss. He accordingly treated the losses as normal business losses.
