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2013 (8) TMI 963 - AT - Income TaxNature of expenditure - Held that - Expenditure incurred after allowing depreciation at 10% by the AO cannot be categorized as capital in nature. Addition on speculative loss - Held that - For the purpose of hedging the loss due to fluctuation in foreign exchange while implementing the export contracts, the assessee had entered into forward contract with banks. In some cases, the export could not be executed and the assessee had to pay certain charges to the bank and thereby incurred certain expenses. These expenses, the assessee claimed by way of expenditure towards business. We do not find that the transaction can be stated to be in speculation as to cover under sub-section (5) of section 43 of the Act
Issues Involved:
1. Whether the claim of expenditure of Rs. 32,17,578/- incurred for relaying of the floor with marble is capital or revenue? 2. Whether the expenditure on cancellation of forward contract amounting to Rs. 65,17,187/- should be treated as a 'speculation loss' or a business loss? Issue-wise Detailed Analysis: I. ITA No.1112/B/12 - By the Revenue: 1. Capital vs. Revenue Expenditure: The primary issue is whether the expenditure of Rs. 32,17,578/- incurred for relaying the floor with marble should be classified as capital or revenue expenditure. The assessee firm, engaged in the export of silk fabrics, claimed this expenditure as revenue, arguing it was for protecting the silk fabrics and did not enhance the building's value. The Assessing Officer (AO) rejected this, treating the expenditure as capital, since it provided an enduring benefit by replacing the old flooring with marble. The Commissioner of Income Tax (Appeals) [CIT(A)], however, allowed the expenditure as revenue, citing judicial precedents that such repairs are revenue in nature as they do not create a new asset. The Tribunal upheld the CIT(A)'s decision, agreeing that the expenditure was for repairs and maintenance, not for creating a new asset, and thus should be treated as revenue expenditure. II. ITA No.1320/B/12 - By the Assessee: 2. Speculation Loss vs. Business Loss: The second issue pertains to the treatment of Rs. 65,17,187/- incurred due to the cancellation of forward contracts in foreign exchange. The AO treated this as a speculative loss under Section 43(5) of the Income Tax Act, arguing that the contracts were settled without actual delivery, thus falling under speculative transactions. The CIT(A) upheld this view, stating that the transactions were speculative and constituted a separate speculation business. The assessee contended that these contracts were meant to hedge against foreign exchange fluctuations in their export business and should be treated as business losses. The Tribunal agreed with the assessee, noting that the forward contracts were directly linked to the business of export and were not speculative in nature. The Tribunal cited judgments from the Bombay and Gujarat High Courts, which supported the view that losses from such contracts, when entered into for hedging purposes, are business losses and not speculative losses. Conclusion: The Tribunal dismissed the Revenue's appeal, confirming that the expenditure on relaying the floor with marble was revenue in nature. It allowed the assessee's appeal, holding that the loss from the cancellation of forward contracts was a business loss, not a speculative loss. Order Pronouncement: The order was pronounced at the end of the hearing on 23rd August 2013.
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