FOREX DERIVATIES |
Business income ID - (JBC-011) |
Applicability of explanation to S. 37(1) :
“Explanation — For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.”
There is a view that the forex derivative contracts entered into in excess of the underlying foreign exchange exposure of the assessee are in violation of the guidelines of RBI and FEMA and therefore are hit by Explanation to S. 37(1).
The Supreme Court in Dr. T. A. Quereshi v. CIT, (287 ITR 547) has categorically held as under :
“Explanation to S. 37 has really nothing to do with the present case as it is not a case of a business expenditure, but of business loss. Business losses are allowable on ordinary commercial principles in computing profits. Once it is found that the heroin seized formed part of the stock-in-trade of the assessee, it follows that the seizure and confiscation of such stock-in-trade has to be allowed as a business loss. Loss of stock-in-trade has to be considered as a trading loss vide CIT v. S.N.A.S.A. Annamalai Chettiar, 1973 CTR (SC) 233: AIR 1973 SC 1032.”
Hence, the provisions of explanation to S. 37(1) are not applicable to the facts of our case as loss from forex derivatives is not business expenditure but a business loss.
To sum up :
Loss from forex derivatives is a business loss and not a business expenditure and accordingly allowable u/s.28;
MTM losses provided for in the books in compliance with AS-30 may be disallowed pursuant to specific instruction from the CBDT. However, the Special Bench of ITAT in the case of DCIT v. Bank of Bahrain and Kuwait, has held that these losses are allowable.
Crystallised losses on account of forex derivative contracts are not speculative in nature within the meaning of S. 43(5) as the definition for speculative transaction is an exhaustive one and the term ‘commodity’ does not include currency;
They cannot be termed as speculative simply because few assessees have challenged the validity of these contracts on the ground that they are wager in nature.
Explanation to S. 37(1) is not applicable in view of the categorical finding of the Supreme Court in the case of Dr. T. A. Quereshi (supra) that the said Explanation is applicable only to business expenditure and not for business loss.