2020 (7) TMI 246 - AT - Income Tax

Loss on forward booking of foreign exchange - Claim disallowed as regular business loss u/s 28 - whether CIT(A) is wrong treating the loss as speculative loss without considering that for payment of import purchases the assessee (importer) is required to make prior booking of foreign exchanges? - HELD THAT - A plain reading of section 43(5)(a) makes it clear that the impugned loss cannot be regarded as speculation. The Act clearly excludes hedging foreign currency transactions for the definition of speculative transaction. Actions of AO in considering the loss on hedging foreign currency exposure as speculative is not justified. For that we rely on the judgment in case of CIT vs. Soarajmull Nagarmull 1980 (9) TMI 69 - CALCUTTA HIGH COURT herein the court observed that where assessee enters into forward contracts in foreign exchange in order to cover the loss arising due to difference in foreign exchange rate and/or valuation, is not of speculative in nature and was incidental to the assessee's regular course of business. As such it was allowable as a trade loss - disallowance on the ground of speculative transaction requires to be deleted hence we delete the disallowance.- Decided in favour of assessee. Disallowance of prior period expenses - Addition towards ESI payment - AO held that the expenditure is not related for this assessment year, therefore, the entire expense under the head prior period expense was disallowed - HELD THAT - During the earlier year i.e. prior to the A.Y 2014-15, the assessee company was unaware to the ESI provision and its applicability to the organization. Hence, on becoming aware of the provisions and its applicability to the organization, the assessee deposited the entire sum as required under the ESI Act which included payments for the AY 2013-14. - provisions of Section 43B of the Act which provides that certain expenditure / payments which are otherwise eligible for deduction under the Act shall be allowed as a deduction only in the year of actual payment irrespective of the year of accrual of such expenditure. Since the assessee made payments relating to AY 2013-14 during the relevant assessment year 2014-15, applying the provisions of section 43B of the Act, the same is allowable expenditure. Ad hoc disallowance of travelling and conveyance expenses - HELD THAT - AO has passed the order u/s 143(3) of the Act but the assessee has failed to submit few bills and vouchers relating to travelling expenses/conveyance expenses before the AO for his verification, therefore we disallow ₹ 50,000/- out of ₹ 1,78,912/- to fill the gap of small anomalies done by the assessee. It is made clear that instant adjudication shall not be treated as a precedent in any preceding or succeeding assessment year. Therefore, we direct the Assessing Officer to delete the balance amount - Decided partly in favour of assessee.

Issues:
1. Disallowance of loss on forward booking of foreign exchange
2. Disallowance of prior period expenses
3. Ad hoc disallowance of travelling and conveyance expenses

Issue 1: Disallowance of loss on forward booking of foreign exchange

The appeal pertains to the disallowance of a loss on forward booking of foreign exchange by the Assessing Officer, treating it as speculative in nature. The assessee, being an importer, entered into forward contracts with banks to hedge foreign currency exposure. The Assessing Officer considered the transaction speculative, leading to the disallowance. The CIT(A) upheld the disallowance stating the expenses did not pertain to the relevant year. However, the ITAT Kolkata noted that as per Section 43(5)(a) of the Income Tax Act, forward contracts for hedging foreign currency exposure are not speculative transactions. Relying on precedent, the ITAT allowed the appeal, deleting the disallowance of the loss on forward booking of foreign exchange.

Issue 2: Disallowance of prior period expenses

The second issue involves the disallowance of prior period expenses related to ESI payment by the Assessing Officer. The expenses were debited by the assessee company, claiming it was for ESI payment of the previous year. The Assessing Officer disallowed the expense, stating it was not related to the current assessment year. The CIT(A) upheld this decision. However, the ITAT noted that the assessee made the ESI payment for the previous year during the relevant assessment year. Applying Section 43B of the Act, the ITAT allowed the expenditure, deleting the disallowance of the prior period expenses.

Issue 3: Ad hoc disallowance of travelling and conveyance expenses

The third issue concerns the ad hoc disallowance of travelling and conveyance expenses by the Assessing Officer. The assessee failed to submit some bills and vouchers, leading to the ad hoc disallowance. The ITAT acknowledged the failure to submit documentation but noted that the Assessing Officer's order was passed under section 143(3) of the Act. The ITAT partially allowed the appeal, disallowing only a portion of the expenses to fill the gap of anomalies. The ITAT directed the Assessing Officer to delete the balance amount of the disallowance, partly allowing the assessee's appeal.

In conclusion, the ITAT Kolkata partially allowed the appeal of the assessee, overturning the disallowances related to the loss on forward booking of foreign exchange and prior period expenses, while partially allowing the appeal concerning ad hoc disallowance of travelling and conveyance expenses.

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