Loss on cancellation of Forward Contract
This query is : Resolved
05 June 2009
The assessee an exporter had entered into a Forward Contract for hedging the risks associated with Foreign Currency Fluctuations.
However, due to depreciation of Rupee, the Assessee had to cancel the Forward Contract. The Bank Debited the Assessee for Difference in Exchange rate prevailing on cancellation date and Contracted rate.
Whether loss that assessee had to bear due to such cancellation is allowable under the Income Tax Act??
However, due to depreciation of Rupee, the Assessee had to cancel the Forward Contract. The Bank Debited the Assessee for Difference in Exchange rate prevailing on cancellation date and Contracted rate.
Whether loss that assessee had to bear due to such cancellation is allowable under the Income Tax Act??
05 June 2009
Yes, this will treated as good as difference in exchange rate. This was not gain the income from the contract, it was enter to reduce the business risk & losses on account of exchange rate difference.
05 June 2009
The amount debited by Bank towards Cancellation of the Forward Contract will definitely be allowed as the Forward Contract was entered into for mitigating Foreign Exchange Fluctuation Risk arising out of transactions in the normal course of the business. As such it will be allowed u/s 37(1).
However, U will have to term it as Forward Contract Cancellation charges and not Loss.
However, U will have to term it as Forward Contract Cancellation charges and not Loss.
05 June 2009
The one doubt that i have is Section 43(5) of Income Tax Act, 1961 which deals with Speculative Transactions. As the Contract was settled otherwise than delivery of Foreign Exchange, will the loss on this account be of Speculative nature???
As the contract was of sale of Foreign Exchange to the bank, and this contract was settled otherwise than delivery, i m afraid that this could be Speculative.
Please clearify??
As the contract was of sale of Foreign Exchange to the bank, and this contract was settled otherwise than delivery, i m afraid that this could be Speculative.
Please clearify??
05 June 2009
Thnx for ur replies
05 June 2009
your fulltime business is not to earn income from forward contracts, hence this will be not considered as speculation income.
05 June 2009
A loss is considered to be speculative loss under section 43 (5), if contracted transaction is in respect of any commodity including stocks and shares. Transaction in respect of foreign currency will not be covered by section.
An increase or reduction in the liability at the time of payment,when compared with the time of acquisition of asset is required to be capitalized under section 43A.
Loss arising due to cancellation of foreign exchange contract can not be capitalized. Since booking of forward contract is for the purpose of business, it shall be permitted as expenditure under section 37 (1).
An increase or reduction in the liability at the time of payment,when compared with the time of acquisition of asset is required to be capitalized under section 43A.
Loss arising due to cancellation of foreign exchange contract can not be capitalized. Since booking of forward contract is for the purpose of business, it shall be permitted as expenditure under section 37 (1).
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