2020 (1) TMI 18 - AT - Income Tax

Disallowance of loss of foreign currency forward contract - HELD THAT - Foreign currency forward contracts held by the assessee are far lesser than the underlying exposure on account of imports and exports. The Hon ble Jurisdictional High Court in CIT v/s D. Chetan Co. 2016 (10) TMI 629 - BOMBAY HIGH COURT has held that hedging transaction entered in regular course of business activity cannot be treated as speculative transaction. The Co ordinate Bench in Mahendra Brothers (2016 (8) TMI 1094 - ITAT MUMBAI) has held that it is not required by the assessee to establish a one to one linkage between the forward contracts and the export/import transaction. What is required to look at is whether the amount of hedging transaction is within the amount of underlying transaction of imports and export. In fact CBDT circular no. 23D (xxxix) dated 12th September 1960 also says that hedging transaction can be taken to be genuine if the total of such transaction does not exceed the total cost of raw material or merchandise in hand. In assessee s own case for the assessment year 2003 04 has allowed assessee s claim of loss resulting from cancellation of forward contract in foreign exchange by treating it as genuine business loss. In assessee s own case in the assessment year 2009 10 would reveal that the reasoning on the basis of which learned Commissioner (Appeals) has disallowed assessee s claim of business loss arising out of foreign currency forward contract is identical to the reasoning of learned Commissioner (Appeals) while disallowing assessee s claim of loss in respect of hedging contract in the impugned assessment. Therefore we hold that loss arising on cancellation of foreign currency forward contracts cannot be treated as speculative loss under section 43(5) of the Act. Accordingly we allow assessee s claim of loss. Disallowance u/s 69A and 69B - HELD THAT - Assessee was unable to reconcile the difference between the physical stock and the stock as per books of account with valid reasoning. Therefore to that extent the facts are established. However we find merit in the alternative plea of the assessee for restricting the addition to the gross profit. The Assessing Officer is directed to compute the disallowance accordingly. Grounds are partly allowed.

Summary

Issues:
1. Disallowance of loss of foreign currency forward contract.
2. Additions/disallowances made under sections 69A and 69B of the Income Tax Act.

Issue 1: Disallowance of Loss of Foreign Currency Forward Contract:

The appeal challenged the disallowance of a loss of &8377; 39,02,500 from a foreign currency forward contract. The Assessing Officer and the Commissioner (Appeals) disallowed the claim as speculative loss under section 43(5) of the Act due to the failure to establish a one-to-one linkage between the forward contracts and import/export transactions. The Commissioner observed that the contracts did not qualify as hedges against future price fluctuations. The appellant argued that the contracts were for hedging against currency fluctuation losses in import/export transactions, citing precedents. The Tribunal noted that the contracts were significantly less than the underlying exposure, supporting the hedging nature. Referring to relevant case law and a CBDT circular, the Tribunal allowed the claim, citing consistent favorable decisions in the appellant's previous assessments.

Issue 2: Additions/Disallowances under Sections 69A and 69B:

During a search operation, variances between physical stock and book records were found, leading to additions under sections 69A and 69B. The Assessing Officer made additions for unexplained investment and out-of-book sales based on the discrepancies. The appellant argued that the differences were minor and could be due to weighing discrepancies or allowed losses. The Tribunal found that the appellant failed to reconcile the differences adequately but directed the Assessing Officer to compute the disallowance based on gross profit, partially allowing the appeal.

In conclusion, the Tribunal allowed the appeal regarding the disallowance of the loss from the foreign currency forward contract, citing the hedging nature of the contracts. For the additions/disallowances under sections 69A and 69B, the Tribunal upheld the discrepancies but directed a computation based on gross profit. The overall appeal was partly allowed by the Tribunal.