2016 (5) TMI 1529 - AT - Income Tax

Scrutiny assessment t u/s.143(3) r.w.s.144 - findings of the CIT(A) that order passed u/s.144 is not tenable - HELD THAT - The grievance with the Department is justified. When CIT(A) takes decision against the Department he should have called for a remand report from the AO for which he fails to do so. Accordingly we vacate the findings of the CIT(A) on this issue. Thus this issue would go back to the file of AO for fresh consideration after giving due opportunity to the assessee. Appeal of Revenue is partly allowed for statistical purposes. Forex fluctuation loss - Claim of exchange loss on forward contracts - As per revenue assessee has hedged the export proceeds receivable much more than what is available in stock as receivables therefore falling within the ambit of speculative transactions - HELD THAT - As decided in M/S. AISHWARYA CO. P. LTD. 2015 (9) TMI 8 - ITAT CHENNAI AO has to consider the foreign exchange derivative in proportion to export turnover as regular business transaction of the assessee. If the derivative transaction undertaken by the assessee is in excess of export turnover then that loss suffered in respect of that portion of excess transaction has to be considered as speculative loss only and that excess derivative transaction has no proximity with export turnover and the AO is directed to compute accordingly. AO has to see whether there is any premature cancellation of forward contract of foreign exchange and that transaction should be taken out for the purpose of considering the business loss and only the transactions which are completed to be considered for the purpose of determining the business loss from these foreign exchange forward contract. With this observation we remand this issue to the file of the Assessing Officer for fresh consideration. Appeal of assessee is partly allowed for statistical purposes.

Summary

Issues:
1. Disallowance of exchange loss on forward contracts.
2. Tenability of order passed under section 144 of the Act.
3. Treatment of forex fluctuation loss as speculative transaction.

Issue 1: Disallowance of exchange loss on forward contracts:
The appeal addressed the disallowance of the claim of exchange loss on forward contracts. The Assessing Officer (AO) observed that the assessee had hedged export receivables through forward contracts with banks, resulting in a significant loss. The AO further noted that some forward contracts were not settled through actual delivery, leading to a portion of turnover being considered speculative. The Commissioner of Income-tax (Appeals) confirmed the AO's decision. However, the Tribunal referred to a decision by the Calcutta High Court and held that losses from derivative transactions could be set off against profits, provided they did not exceed the total export turnover. The Tribunal directed the AO to compute the loss accordingly, remanding the issue for fresh consideration.

Issue 2: Tenability of order passed under section 144 of the Act:
The Revenue's appeal contested the findings of the Commissioner of Income-tax (Appeals) that the order passed under section 144 of the Act was not tenable. The AO had framed the assessment under section 144 as exparte, but the assessee later produced relevant documents before the Commissioner. The Commissioner held that since the assessee complied with section 142(1) and provided necessary material, the order could not be deemed as passed under section 144. The Tribunal agreed with the Revenue, stating that the Commissioner should have called for a remand report from the AO before making a decision against the department. Consequently, the Tribunal vacated the Commissioner's findings and remanded the issue to the AO for fresh consideration.

Issue 3: Treatment of forex fluctuation loss as speculative transaction:
The assessee's appeal concerned the treatment of forex fluctuation loss as a speculative transaction. The Tribunal referred to previous decisions and held that the Assessing Officer should consider the foreign exchange derivative in proportion to the export turnover as a regular business transaction. Any excess derivative transaction beyond the export turnover should be treated as speculative loss. The Tribunal directed the AO to exclude prematurely cancelled forward contracts from business loss calculations and remanded the issue for fresh assessment. The Tribunal emphasized the need for the AO to differentiate between business transactions and speculative transactions in this regard.

In conclusion, the Tribunal partly allowed both the Revenue's and the assessee's appeals for statistical purposes, remanding the issues back to the respective authorities for fresh consideration in light of the legal principles discussed in the judgments cited.