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2021 (7) TMI 624 - AT - Income TaxForex loss - allowable business loss u/s 37(1) or not? - Whether forex loss claimed by the assessee is not allowable as the said transaction is purely speculative in nature? - As submitted by the assessee, the AO allowed the assessee s claim of forex losses in AYs 2006-07 and 2007-08 - HELD THAT - In the AY 2008-09, the coordinate bench of this Tribunal dismissed the appeal of the revenue on low tax effect. We find substance on the submissions of the ld. AR. As is evident from the orders of authorities below, facts of the assessee s case are similar with the AY 2008-09 wherein the assessee has entered into a master agreement (ISDA) with four banks and availed forex limits with these banks and claimed that these limits were utilized for hedging forex exposure in connection with import and export of raw sugar/white sugar. The assessee company has entered into transactions of buying and selling of forex and incurred a loss on the cancellation of the said contract and claimed the same as business loss and debited to P L A/c as forex loss under the head manufacturing administration expenditure . Therefore, since the facts in AYs 2009-10 and 2010-11 are similar to the AY 2008-09. As per accounting standard AS-11, the assessee has rightly, claimed the forex loss as business loss u/s 37(1) - The losses claimed by the assessee are not speculative loss as alleged by the AO Assessment u/s 153A - incriminating documents were found during the course of search or not? - HELD THAT - On perusal of the assessment order nowhere any seized material has been referred by the AO for computing the assessment and made addition only on the basis of the financial statements. Since no incriminating documents found during the course of search u/s 153A, no addition can be made.
Issues Involved:
1. Deletion of disallowance of Forex loss. 2. Classification of Forex loss as business loss versus speculation loss. 3. Requirement for a speaking order on Forex loss. 4. Jurisdiction of AO under section 153A without incriminating documents. Detailed Analysis: 1. Deletion of Disallowance of Forex Loss The Revenue's appeal contested the CIT(A)'s decision to delete the disallowance of Forex loss amounting to ?9,63,74,685 for AYs 2009-10 and 2010-11. The CIT(A) had previously allowed the Forex loss as a business loss based on the assessee's consistent practice and previous rulings in similar cases. 2. Classification of Forex Loss as Business Loss Versus Speculation Loss The CIT(A) held that Forex losses should be considered as business losses and not speculative losses. This decision was based on the assessee's practice of entering into forward contracts to hedge against currency fluctuations related to its business of importing and exporting sugar. The CIT(A) noted that these transactions were incidental to the assessee's business and were conducted with the permission of the Reserve Bank of India. The ITAT upheld this view, stating that the Forex losses were real and not notional, arising directly from the business operations. The Tribunal referred to accounting standard AS-11 and various judicial precedents, including the Supreme Court's decision in Sutlej Cotton Mills, which outlined conditions for considering a loss as a business loss under section 28 of the IT Act. 3. Requirement for a Speaking Order on Forex Loss The Revenue argued that the CIT(A) did not pass a speaking order on the Forex loss. However, the Tribunal found that the CIT(A) had provided sufficient reasoning, following precedents and the assessee's consistent practice of claiming Forex losses in earlier years, which were accepted by the AO. 4. Jurisdiction of AO under Section 153A without Incriminating Documents The Tribunal addressed the legal issue raised by the assessee regarding the jurisdiction of the AO to make additions under section 153A in the absence of incriminating documents found during the search. For AY 2009-10, the Tribunal noted that no incriminating documents were found, and thus, no additions could be made. This was supported by the decision in Kabul Chawla, which held that completed assessments could only be interfered with based on incriminating material found during the search. For AY 2010-11, the Tribunal noted that the assessment was abated, giving the AO jurisdiction to pass the order under section 143(3) rws 153A without referring to any seized material. Conclusion: The ITAT dismissed the Revenue's appeals, upholding the CIT(A)'s decision to allow the Forex losses as business losses. The Tribunal also partly allowed the assessee's cross-objections for AY 2009-10, holding that no additions could be made in the absence of incriminating documents. For AY 2010-11, the cross-objections were dismissed as the assessment was abated, allowing the AO to pass the order under section 143(3) rws 153A.
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