Income arising on forward exchange contracts by an assessee engaged in the business of import / export must be treated as Business income and not Speculation income

It is not in dispute that the assessee is doing business of import and export of diamonds and it entered into forward exchange contract in respect of import and export transactions. On cancellation of the contract assessee is either entitled to profit or loss depending on rates contracted and rates prevailing at the time of cancellation. The assessee entered into these forward exchange contracts in order to protect against the fluctuation in the rate of foreign exchange currency. The assessee in this case made net gains in respect of foreign exchange contract export as the value of the rupee was improving at that time.

The A O has also considered the above issue relating to income from cancellation of forward contract. It is, therefore, admitted fact that it was a case of cancellation of forward contracts entered by assessee with others. The detailed facts explained in the statement of facts by the assessee have not been disputed. ITAT Ahmedabad Bench in the case of the same assessee in preceding assessment year 2003- 04 in ITA No. 775/A hd/2007 (supra) considered the issue of deduction u/s 80 HHC of the IT Act on income from cancellation of forward exchange contract. The learned CIT (A) in this case allowed the claim of the assessee treating it as export profit by relying upon decision of Mumbai Bench in the case of D. Kirhorekumar and Co. Vs DCIT and directed the A O to compute the deduction u/s 80 HHC by including the profit realized by cancellation of forward exchange contract in the profit of the export business. The departmental appeal was considered by the Tribunal as above and by relying upon the decision in the case of D. Kishorekumar and Co. (supra) the departmental appeal was dismissed. The order of the Tribunal above was referred in this decision in which it was held that the credit shown in the profit/loss account as profit on cancellation of forward contract is as integral part of the export business as purchased or import. The copy of the order dated 30^th November, 2006 is filed at page 3 of the paper book. ITAT Mumbai Bench in the case of Voltas International Ltd. Vs ACIT (supra) held “payment by assessee to bank for cancellation of forward foreign exchange contract being in the nature of damages for non­performance of contract is allowable as business loss and it cannot be treated as speculative loss as there is no settlement of contract and section 43(5) is not attractive.” Considering the facts and circumstances of the case in the light of decisions of the Tribunal in the case of the same assessee for assessment year 2003-04 and in the case of Voltas International Ltd. (supra), we are of the view that provisions of section 43(5) of the IT Act would not apply to the case of the assessee. The income earned by assessee on account of cancellation of forward exchange contract should be treated as business income and not income from speculation. We accordingly set aside the orders of authorities below and direct the A O to treat the income on this issue as business income. As a result, this ground of appeal of the assessee is allowed.

ITAT AHMEDABAD “B” BENCH

ITA No. 2478/Ahd/2009

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