M&A Critique

CIT, Mumbai Vs. M/s D. Chetan & Co.


The Respondent Assessee is engaged in the business of import and export of diamonds. During the assessment proceedings, the Officer found that Respondent assessee explained that the amount of Rs.78.10lakhs claimed as the loss was on account of having entered into hedging transactions to safeguard variation in exchange rates affecting its transactions of import and export by entering into forward contracts.

The Assessing Officer by order of Assessment dated 27 December 2011 disallowed the claim on the ground that it is a notional loss of a contingent liability debited to Profit and Loss Account. Resultantly, the same was added to the Respondent assessee’s total income.

Being aggrieved, the assessee file appeal to the Commissioner of Income Tax (CIT (Appeals)) it was held that transaction of forward contract was entered into during the course of its business was not speculative in nature Thus the loss incurred as forward contract was allowed as a business loss

The same decision preferred by the tribunal.


Whether the loss arising out transaction of forward contract is a notional loss being a contingent liability?


In this case, High Court Formed its opinion based on Following Points

  1. The hedging transactions were entered into so as to cover variation in the foreign exchange rate which would impact its business of import and export of diamonds.
  2. The main concern of Revenue was not the transaction was speculative but only disallowed the loss on the ground that it was a notional loss of Contingent Liability.
  3. Before the Tribunal, we find that there was no submission recorded on behalf of the Revenue that the Respondent assessee should be called upon to explain the nature of its transactions& there are no such submissions on behalf of the revenue which proved that said a loss is a notional loss hence it should be disallowed.

In case of CIT vs. Badridas Gauridas (P) Ltd court held that forward contract in foreign exchange when incidental to carrying on business of cotton exporter and done to cover up losses on account of differences in foreign exchange valuations, would not be speculative activity but a business activity

It was held that  loss arising out of transaction of forward contract was not contingent loss and the same  cannot be considered as r speculative loss hence the appeal of the revenue is dismissed no order as to cost.


M & A Critique