2022 (11) TMI 75 - AT - Income Tax

Disallowance of hedging losses - hedging transaction is not in connected commodities and, therefore, it is a speculative transaction; whereas the reason for the CIT(A) to confirm the disallowance of hedging loss is that such transaction in palmolein oil was not in respect of the coal which was taken actual delivery of - HELD THAT - AO and CIT(A) are eluding to points No. (ii) and (i) of circular (supra) respectively, inasmuch as point (ii) refers to the transactions in connected commodities and point No. (iii) refers to the hedging transactions in respect of the raw materials or the merchandise in stock. A reading of the first appellate orders shows that even according to the information furnished by the assessee, the transaction for purchase of coal was also not intended for actual delivery in order to form it part of stock, so as to guard against the fall in its value the hedging transaction was entered. Though the case of assessee has been that they are dealing in imported and domestic commodities in vegetable oils, coal and sugar etc. neither the assessment order nor the first appellate order clarify in unequivocal terms whether or not the assessee has been dealing in edible oils also apart from the coal. In this situation, the findings of the authorities below cannot be held to be baseless without facts being first fixed. Factual determination is required to give a finding whether the edible oils are connected commodity in the context of point (ii) of the circular (supra). Further factual verification that is required is in respect of point (i) to know whether the hedging transaction in edible oils was against another hedging transaction in coal or it was to guard against the risk of merchandise in stock falling in value. In respect of the bad bebts, according to the AO, the assessee failed to furnish any evidence in support of the claim that the same was offered as income in the respective years; where as according to the CIT(A), the amount was written off as sundry balances but not accounted as bad debts. This also requires verification at the end of the AO as to whether the assessee offered such an amount in the earlier years as income or that this amount is properly written off in the books of accounts. We are, therefore, of the considered opinion that it is a fit case to set aside the impugned order on these aspects and restore the issues to the file of the AO for verification of the facts stated above in the light of proviso (a) to section 43(5) - We accordingly set aside the impugned order and restore the issues to the file of the AO for verification of the facts stated above. While doing so, AO will consider the necessity and possibility of set off of the profits arising from sale of coal against the loss incurred in the transactions of palmolein oil. Grounds are accordingly treated as allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance of hedging loss of Rs. 96,41,738/-
2. Disallowance of bad debts of Rs. 3,81,038/-

Issue-wise Detailed Analysis:

1. Disallowance of Hedging Loss of Rs. 96,41,738/-:

The assessee, a company engaged in trading edible oils and coal, filed its return of income for the assessment year 2012-13. During the assessment, the Assessing Officer (AO) noticed a discrepancy between the purchase register and the Profit and Loss Account (P&L Account), specifically an excess purchase claim of Rs. 96,41,738/-. The assessee explained that this amount represented inward expenses related to hedging transactions. The AO, however, added this amount to the income, treating it as speculative loss under section 43(5) of the Income Tax Act, 1961.

The assessee appealed, arguing that the hedging transactions were to guard against price fluctuations in commodities and should be deductible under section 37 of the Act. The assessee cited CBDT Circular No. 23 and relevant case laws to support their claim that such transactions should not be deemed speculative if they relate to the business's normal operations.

The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, noting that the transactions were without actual delivery and thus speculative. The CIT(A) found that both coal and edible oil transactions were hedging transactions without actual delivery, making them speculative.

On further appeal, the tribunal considered the arguments and the need for factual verification. The tribunal noted that the AO and CIT(A) had different reasons for disallowing the loss, focusing on whether the transactions were in "connected commodities" and whether the hedging was against merchandise in stock. The tribunal found that the facts needed further verification to determine if the transactions were genuinely hedging or speculative.

2. Disallowance of Bad Debts of Rs. 3,81,038/-:

The assessee claimed bad debts of Rs. 3,81,038/-, which the AO disallowed, stating that the assessee failed to provide evidence that these amounts were offered as income in previous years. The CIT(A) also upheld the disallowance, noting that the amounts were written off as sundry balances, not bad debts.

The tribunal found that the issue required further verification to determine if the amounts were offered as income in earlier years and properly written off in the books of accounts.

Conclusion:

The tribunal set aside the impugned order and restored the issues to the AO for verification of the facts in light of proviso (a) to section 43(5) of the Act. The AO was directed to consider the necessity and possibility of setting off the profits from the sale of coal against the loss incurred in palmolein oil transactions. The appeal was treated as allowed for statistical purposes.