Premium paid on forward contract for hedging against loan taken for capital purposes is not allowed as deduction.
Facts
Assessee1 was engaged in the business of generation of wind energy. During the concerned year, assessee paid premium towards the forward contract entered into to hedge against foreign currency rate fluctuation in respect of FCNR loan availed by it. The loan was obtained to fund one of its projects. Assessee claimed the deduction of premium amount paid by it.
Revenue
Revenue maintained that since the loan taken by the assessee was itself of capital in nature, the premium paid by the assessee was not to be allowed as deduction.
Assessee
Assessee submitted that the purpose of entering into the forward contract was to insure itself from probable currency fluctuations and was for hedging the risk, and hence ought to be allowed as a deduction.
Tribunal
Hon’ble Chennai bench of the ITAT observed that since the foreign currency loan was availed for fixed assets’ acquisition, the forward contract entered into by the assessee also partakes the same character. Tribunal by referring to the case of Sutlej Cotton Mill2 and assessee’s own case for previous years held that premium paid on forward contracts entered into to hedge against foreign exchange fluctuation cannot be allowed as revenue expenditure
1. Continuum Wind Energy (India) Pvt. Ltd. – ITA No. 1336/Chny/2018
2. [1979] 116 ITR 1 (SC)
