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March 2023

Business deduction — Loss — Loss on forward contracts for foreign exchange — Transactions to hedge against risk of foreign exchange fluctuations falling within exceptions of proviso (a) to section 43(5) — Loss not speculative and to be allowed

By K. B. Bhujle, Advocate
Reading Time 3 mins
80 Principal CIT vs. Simon India Ltd
[2023] 450 ITR 316 (Del)
A. Y.: 2009-10
Date of order: 2nd December, 2022
Sections 37(1) and 43(5) proviso (A) of ITA 1961

Business deduction — Loss — Loss on forward contracts for foreign exchange — Transactions to hedge against risk of foreign exchange fluctuations falling within exceptions of proviso (a) to section 43(5) — Loss not speculative and to be allowed

The assessee provided engineering consultancy and related services such as engineering designing, construction and commissioning of plants and installations. For the A.Y. 2009-10, the AO was of the view that the loss on forward contracts claimed by the assessee was a speculative loss under section 43(5) and was liable to be disallowed in terms of the CBDT Instruction No. 3 of 2010, dated 23rd March, 2010. He held that since the forward contracts had not matured, the losses were required to be considered as notional losses and accordingly made a disallowance.

The Commissioner (Appeals) set aside the disallowance. The Tribunal held that the loss on account of forward contracts was allowable under section 37(1) and was covered as a hedging transaction under proviso (a) to section 43(5).

On appeal by the Department the Delhi High Court upheld the decision of the Tribunal and held as under:

“i)    In terms of the CBDT Instruction No. 3 of 2010, dated March 23, 2010 Assessing Officers
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