2013 (7) TMI 736 - HC - Income Tax

Disallowance on account of of Forex Trading Loss - Tribunal confirmed disallowance - Held that - investment was made in the name of the firm. The amount invested was also from the account of the firm. The partner, therefore, cannot individually claim any deduction of such loan in the individual capacity - subject to the contract between the partners, partnership firm shall indemnify the partner in respect of the payments made and liabilities incurred by him in the ordinary and proper conduct of the business and in doing such act, in an emergency for the purpose of protecting the firm from loss, as would be done by a person of ordinary prudence, in his own case, under similar circumstances - Decided against assessee.

Summary

Issues:
1. Interpretation of Section 28 and Section 37 regarding disallowance of Forex Trading Loss in Foreign Currency Transactions.
2. Appreciation of evidence on record in confirming Forex Trading Loss.
3. Confirmation of disallowance of Forex Trading Loss in Foreign Currency Transactions incurred in the course of business.

Analysis:
1. The appellant, a partner in a diamond export business, entered into foreign currency transactions resulting in a substantial loss. The appellant claimed the loss from business income, contending it was without other partners' knowledge. The firm also claimed a deduction of the loss from its profits. The Tribunal disallowed the loss claimed by both the individual partner and the firm.

2. The Tribunal rejected the individual partner's claim, stating that there is no provision to allocate a firm's loss only to a partner. The loss, invested from the firm's funds, cannot be claimed individually by a partner. The Tribunal held that the partner cannot claim the loss in his individual capacity as the investment was made in the name of the firm, and the funds used belonged to the firm.

3. Section 13 of the Partnership Act mandates that a partnership firm indemnify partners for payments made and liabilities incurred in the ordinary conduct of business. The court agreed with the Tribunal's view that the partner cannot claim a deduction for the loss in his individual capacity when the investment and loss were related to the firm's operations. The appeal of the individual partner was dismissed, as the same claim was being examined for the firm separately.

In conclusion, the High Court upheld the Tribunal's decision, dismissing the tax appeal of the individual partner regarding the disallowance of Forex Trading Loss in Foreign Currency Transactions, emphasizing the partnership firm's responsibility for losses incurred in business transactions.