2018 (5) TMI 142 - AT - Income Tax

Holding loss as speculative loss - whether the transactions of forward (future) contract of sale of gold to the Bank or the MMTC are speculative transaction or not? - Held that - Object of entering into forward contract transaction has to be seen from the contract agreements and underlying assets. In the case of the assessee for claiming benefit of clause (a) of Section 43(5) of the Act, its forward contract transactions should have been corroborated one by one, with the purchases of gold and supply of jewellery manufactured. Before the Assessing Officer, the assessee failed to correlate these forward contract transactions of gold and corresponding purchases and export of jewellery. Even such details have not been filed either before the Ld. CIT(A) or before us. Thus, on this ground, the assessee cannot be allowed the benefit of proviso (a) to section 43(5) of the Act in absence of any documentary evidences to support its contention of fulfilling conditions of proviso (a) to section 43(5) of the Act. - Decided against assessee Transaction of foreign currency forward contracts as speculative by the Ld. CIT(A) - Held that - We note that the Ld. CIT(A) has decided the issue in view of the facts noted in the case of forward contract transactions of the gold and no documentary evidence in support have been referred in his findings on the issue in dispute.We feel it appropriate to restore this issue to the file of the Assessing Officer for deciding afresh after providing adequate opportunity of being heard to the assessee, with liberty to the assessee to file necessary documentary evidence in support its claim. Thus, the ground Nos. 1 to 4 of the appeal of the Revenue are accordingly allowed for statistical purposes. Addition on account of interest at the rate of 10% on the sum expended by the assessee to partners on account of interest-free advances - Held that - We find that the Ld. CIT(A) has arrived at the conclusion after verifying the capital accounts of the partners that no loans/advances have been given to the partners out of borrowed fund and no interest has been paid to the partners and thus the disallowance of notional interest was not justified.

Issues Involved:
1. Whether the loss of ?1,03,93,854/- from Gold Desk deal transactions is speculative or business loss.
2. Whether the gain of ?99,22,176/- from foreign currency forward contracts is speculative or business income.
3. The addition of ?78,400/- on account of notional interest on interest-free advances to partners.

Issue-Wise Detailed Analysis:

1. Loss from Gold Desk Deal Transactions:
The primary issue was whether the loss of ?1,03,93,854/- from Gold Desk deal transactions should be considered speculative or business loss. The assessee, engaged in trading and manufacturing gold and diamond jewelry, argued that these transactions were hedging transactions to mitigate risks associated with fluctuations in gold prices and should not be deemed speculative. The Assessing Officer (AO) disagreed, noting the lack of documentary evidence to support the claim that these were hedging transactions. The AO's stance was that the transactions were speculative as they were settled without actual delivery of gold, thus falling under the definition of speculative transactions per Section 43(5) of the Income Tax Act. The CIT(A) upheld the AO's view, stating that the assessee failed to correlate the forward contracts with specific purchases and exports of jewelry, thus not qualifying for the exception under proviso (a) to Section 43(5). The tribunal agreed with the CIT(A) and AO, dismissing the assessee's appeal on this ground.

2. Gain from Foreign Currency Forward Contracts:
The second issue was whether the gain of ?99,22,176/- from foreign currency forward contracts should be treated as speculative or business income. The assessee had initially declared this gain as business income. However, the CIT(A) reclassified it as speculative, aligning it with the treatment of the Gold Desk deal transactions. The tribunal noted that the AO had not examined these transactions for speculative nature since the assessee declared them as business income. The tribunal found merit in the Revenue's argument that the CIT(A) should have scrutinized the documentary evidence before reclassifying the gain. Consequently, the tribunal remanded the issue back to the AO for a fresh examination with the opportunity for the assessee to provide supporting evidence.

3. Addition of Notional Interest on Interest-Free Advances:
The final issue was the addition of ?78,400/- on account of notional interest on interest-free advances given to partners. The AO had disallowed this amount, arguing that interest-free advances should attract notional interest disallowance. The CIT(A) deleted the addition, noting that the partners had substantial capital balances and no interest was paid on these balances. The tribunal upheld the CIT(A)'s decision, agreeing that the advances were withdrawals from capital accounts and not linked to any borrowings, thus not warranting a notional interest disallowance.

Conclusion:
The tribunal dismissed the assessee's appeal concerning the speculative nature of the Gold Desk deal transactions and upheld the CIT(A)'s decision. The tribunal allowed the Revenue's appeal for statistical purposes, directing the AO to re-examine the nature of the foreign currency forward contracts. The tribunal upheld the CIT(A)'s deletion of the notional interest addition on interest-free advances to partners.

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