Case Law Details

Case Name : M/s. Majestic Exports Vs JCIT (ITAT Chennai)
Appeal Number : I.T.A. Nos. 1336 & 3072/Mds/2014
Date of Judgement/Order : 24/07/2015
Related Assessment Year : 2009-2010 & 2010-2011

Brief of the case:

In the case of M/s. Majestic Exports vs. JCIT, ITAT Chennai held that the loss in the transactions of the forex derivatives contracts will be considered to be the business loss and the same can be set off against the business income.

Facts of the case:

The assessee company is engaged in the business of manufacturing and exporting of hosiery garments and to save the loss from the fluctuations in the dollar movement ,it entered into forex derivative contract in which the assessee incurred a loss of Rs 4,30,44,915/- which the asseesee set off the against the above business income of hosiery garments which AO disallowed the same by adding the above amount in the income of the assessee treating the above loss as a speculative loss and the same could not be set off against the business income .

Aggrieved by the order of AO, assessee filed an appeal with the CIT(A) who also confirmed the order of AO against which the assessee filed an appeal with ITAT .

Contention of the assessee:

As per the assessee trading in future and options is not a speculative transactions as per the proviso to sec 43(5) inserted by the finance act ,2005 .Moreover it had entered into the above forex derivative contracts so that it can hedge itself from the loss occurred form the fluctuation the currency movement. So the same should be treated as a business loss and should be allowed to set off against the business income of hosiery garments.

The assesse gave the supporting of the case of Munjal Showa Ltd vs. DCIT ,94 TTJ 227, dated 26th June, 2003 where in it was held that Profit incurred in the cancellation of forward contract which was taken to safeguard against the unfavorable currency movement is not a speculative profit .

Contention of the Revenue:

Revenue argued that the assessee had taken the forex contracts covering Dollar- Japanese Yen currency movement but the assessee had not any export turnover in Japanese yen in the past 4 years, so entering into such type of contracts was only having a bet on the currency movement between US Dollars and Japanese Yen.

Moreover the forex derivative transactions were not settled by the actual delivery of foreign exchange but only cash settlement is there i.e the difference between the agreed price and price at the maturity date had been credited or debited to the account of assessee.

Held by Respective court:

ITAT held that as per clause (d) of sec 43(5) profit/Loss from all the share delivery transactions and derivative transactions is a business profit /loss but that profit & Loss should not be more than the total export turnover of the assessee for the assessment year under consideration and if the derivative transactions is in excess of the export turnover then that loss suffered in the respect of excess transactions to be considered as speculative business transactions and loss generated from the same can not be set off against the regular business profit.

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