2007 (11) TMI 437 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of hedging expenses as speculative loss.
2. Admission of additional ground and deduction u/s 80HHC.
3. Addition of loans and admission of additional evidence.

Summary:

1. Disallowance of Hedging Expenses as Speculative Loss:
The assessee, an exporter and dealer of spice, claimed hedging expenses of Rs. 66,28,672 to mitigate price fluctuation risks in the pepper market. The Assessing Officer (AO) treated these expenses as speculative loss, disallowing them. The AO's decision was based on a response from the Indian Pepper & Sales Trade Association (IPSTA), which did not distinguish between hedging and speculative transactions. The CIT(A) upheld the AO's decision, stating that the assessee did not fall under the exceptions in clauses (a), (b), and (c) of section 43(5) of the Income-tax Act, 1961. However, the Tribunal found that the assessee's transactions fell within the purview of clause (c) of the proviso to section 43(5), as they were in the nature of jobbing and arbitrage to guard against loss in the ordinary course of business. Therefore, the loss incurred by the assessee was not speculative and the appeal on this ground was allowed.

2. Admission of Additional Ground and Deduction u/s 80HHC:
The assessee contended that the CIT(A) should have admitted an additional ground regarding the allowability of deduction u/s 80HHC. The Tribunal noted that the deduction u/s 80HHC should be allowed on the profit finally assessed by the AO, and any additions or disallowances made should be considered in recomputing the deduction. The Tribunal directed that the claim for deduction u/s 80HHC be recomputed with reference to the finally assessed income, allowing this ground of appeal.

3. Addition of Loans and Admission of Additional Evidence:
The assessee challenged the addition of Rs. 13,21,090 on account of loans from Jagdish Trading Co. and Singhal Oversears Agencies, which were proprietorship concerns of partners in the assessee-firm. The CIT(A) did not admit additional evidence submitted by the assessee to prove the genuineness of the loans. The Tribunal found that the CIT(A) had not provided plausible reasons for not admitting the additional evidence and that adequate opportunity of hearing was not granted. Consequently, the issue was set aside and restored to the AO for reconsideration, allowing the appeal on this ground.

Conclusion:
The appeal of the assessee was partly allowed, with the Tribunal ruling in favor of the assessee on the issues of hedging expenses and deduction u/s 80HHC, and remanding the issue of loan addition back to the AO for further examination.