S. 43(5)(a) – Hedging transaction

Future Contracts (FCs) are “commodities”. However, considering the fact that these FCs are integral part or incidental to the core business of export or the outstanding receivables of export proceeds, in principle, the impugned FCs constitute ‘hedging transaction’ and not the ‘speculative contracts’. As such, the banks do not entertain FCs of speculative nature with the customers like the assessee, the exporter. As such, the extension of FCs, in case of non-receipt of export proceeds on the due dates, is not allowed without cancelling the existing FCs. However, the onus is on the assessee to explain satisfactorily why the assessee resorted to premature cancellation of some FCs. Further, it is not the requirement that there must be 1:1 precise correlation between FC and the corresponding export invoice. So long as the total FCs does not exceed the exports of the year plus outstanding export receivable, the FCs can constitute ‘hedging transaction’. Further also, the ‘premature cancellation of FCs may not alter the above conclusions so long as the assessee has valid and acceptable explanation for such cancellations. It should not be the case, to start with, FC can be a ‘hedging transaction’ but the ending of such FC is ‘speculation’ - London Star Diamond Company (I) (P.) Ltd. vs. DCIT 38 taxmann.com 338 (Mumbai - Trib.)