2016 (10) TMI 924 - AT - Income Tax

Disallowance of 5% paddy purchases - AO made the additions for the reasons that gate passes maintained by the assessee are not giving true and correct position of purchases - Held that - As during the course of appellate proceedings, the assessee has furnished copy of order passed by agricultural marketing committee and reconciled the quantity of paddy purchases with MSP to its books of accounts. The CIT(A) has recorded categorical finding of facts that the purchases recorded by the assessee and purchases as per the AMC reports are matched. The revenue failed to prove the finding of facts recorded by the CIT(A) is incorrect. Therefore, we are of the view that the CIT(A) has rightly deleted additions made towards disallowance of paddy purchases. - Decided in faour of assessee. Disallowance of certain expenditure on adhoc basis - Held that - Considering huge volume of business of the assessee, the expenditure incurred by the assessee under freight charges and other expenditure is meager in nature. We further observed that all the expenditure is covered under fringe benefit tax. The A.O., while assessing the fringe benefit tax has accepted the expenditure claimed by the assessee as genuine in nature. Therefore, we are of the view that once the expenditure has been accepted as genuine, there is no reason for the A.O. to doubt the same for the purpose of allowing deduction against business income. The CIT(A) after considering the relevant facts, has rightly sustained part of the additions and directed the A.O. to delete the remaining additions. Disallowance of expenditure incurred under the head exchange loss - Held that - We do not find merits in the findings of the A.O., for the reason that in the present case on hand, the A.O. himself has accepted that the loss claimed by the assessee are on account of cancellation/renewal of forward exchange contracts, which has been debited by the bankers. The assessee has filed details of forward exchange contracts and bank accounts. On perusal of the bank statements, we find that the losses incurred by the assessee is on account of cancellation/renewal of forward exchange contracts, which is crystallized and debited by the bankers. Considering facts and circumstances of this case, we are of the view that foreign exchange loss incurred by the assessee on account of entering into forward contracts with banks for the purpose of hedging loss in connection with its import/export business has to be regarded as business loss. The CIT(A) after considering the relevant explanations rightly deleted the additions made by the A.O. We do not see any reasons to interfere with the order of CIT(A). Hence, we inclined to uphold the CIT(A) order and reject the ground raised by the revenue

Summary

Issues Involved:
1. Disallowance of 5% paddy purchases.
2. Disallowance of certain expenditures on an ad hoc basis.
3. Disallowance of expenditure incurred under the head "exchange loss."

Issue-wise Detailed Analysis:

1. Disallowance of 5% Paddy Purchases:
The Assessing Officer (A.O.) disallowed 5% of paddy purchases due to discrepancies in gate passes, suspecting inflation of purchases. The assessee argued that purchases were supported by valid bills and agricultural marketing cess payments, with no discrepancies between recorded purchases and those assessed by the Agricultural Marketing Committee (AMC). The CIT(A) found no inflation or suppression in paddy purchases, noting that the A.O. did not point out defects in the books or purchase prices. The CIT(A) deleted the disallowance, and the tribunal upheld this decision, finding no error or infirmity.

2. Disallowance of Certain Expenditures on an Ad Hoc Basis:
The A.O. disallowed 10% of expenditures under various heads, citing lack of proper bills and self-made vouchers without serial numbers or signatures. The assessee contended that due to high transaction volume, single vouchers were used, and revenue stamps were sometimes unavailable. The CIT(A) sustained part of the additions but directed the deletion of the rest, considering the expenditures meager relative to the business volume and covered by fringe benefit tax. The tribunal upheld the CIT(A)'s decision, agreeing that the expenditures were genuine and should be allowed as deductions.

3. Disallowance of Expenditure Incurred Under the Head "Exchange Loss":
The A.O. disallowed the exchange loss, deeming it speculative and notional, as the assessee had zero export turnover during the year. The assessee argued that forward contracts were entered in the previous year, anticipating the temporary nature of a government-imposed export ban. The CIT(A) found that the loss was crystallized upon contract termination and not speculative. The tribunal upheld this view, noting that the forward contracts were genuine hedging transactions entered to mitigate currency fluctuation risks in the export business. The tribunal found the loss to be a legitimate business expense, rejecting the A.O.'s classification as speculative.

Conclusion:
The tribunal dismissed the revenue's appeal, upholding the CIT(A)'s decisions on all issues. The order was pronounced in the open court on 7th October 2016.