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TMI Blog2016 (10) TMI 924X X X X Extracts X X X X X X X X Extracts X X X X ..... der fringe benefit tax. The A.O., while assessing the fringe benefit tax has accepted the expenditure claimed by the assessee as genuine in nature. Therefore, we are of the view that once the expenditure has been accepted as genuine, there is no reason for the A.O. to doubt the same for the purpose of allowing deduction against business income. The CIT(A) after considering the relevant facts, has rightly sustained part of the additions and directed the A.O. to delete the remaining additions. Disallowance of expenditure incurred under the head ‘exchange loss’ - Held that:- We do not find merits in the findings of the A.O., for the reason that in the present case on hand, the A.O. himself has accepted that the loss claimed by the assessee are on account of cancellation/renewal of forward exchange contracts, which has been debited by the bankers. The assessee has filed details of forward exchange contracts and bank accounts. On perusal of the bank statements, we find that the losses incurred by the assessee is on account of cancellation/renewal of forward exchange contracts, which is crystallized and debited by the bankers. Considering facts and circumstances of this case, we are o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to consideration, disallowed 5% of paddy purchases which works out to Rs. 1,19,53,700/-. Similarly, the A.O. observed that the assessee has claimed various expenditures, however, failed to file bills and vouchers and other relevant details in support of expenditure claimed, therefore, disallowed 10% expenditures under the head freight charges, travelling conveyance expenses, administrative expenses, vehicle maintenance expenses, repairs maintenance, processing packing, printing stationery and added back to the total income. 3. The A.O. further observed that, during the year, the assessee firm is engaged in the business of export of Agri commodities. After the procurement of export order from the prospective buyers at a fixed rate, the firm will procure goods locally and the shipment of the goods will be dispatched to foreign countries. In its business of export of agri commodities, the assessee firm used to enter into forward contracts with their bankers to hedge the currency risk to mitigate the possible fluctuation in currency. During the year, the assessee firm has entered into forward exchange contracts with its banker. The A.O. observed that the assessee has entere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the assessee is a speculative loss which cannot be allowed as a normal business loss. The A.O. has discussed at length the term speculative loss, derivatives and forward exchange contracts and came to the conclusion that loss against currency fluctuations, crystallization of liability will not be there. The A.O. further observed that the assessee has failed to correlate the hedging of foreign currency with the necessary expenditures on merchandise for sale i.e. export obligation. In the absence of such export obligation, it can be inferred that the hedging of profits by way of forward contracts is not related to the business activity of the assessee. Though assessee claims that it had export turnover in the immediately preceding financial year, during the current financial year, it has achieved zero export turnover. The explanation of the assessee that ban on export of rice is temporary, it can continue its export once ban is lifted cannot be accepted, as the facts remains that the assessee could not do any exports and also it has purchased forward contracts even after ban was imposed by the Government. Therefore, it cannot be held that the assessee has entered into forward ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. Aggrieved by the CIT(A) order, the revenue is in appeal before us. 7. The first issue that came up for our consideration is disallowance of 5% paddy purchases. The A.O. disallowed 5% paddy purchases for the reasons that gate passes maintained by the assessee are not giving true and correct position of purchases. The A.O. was of the opinion that during the course of survey operation, impounded documents reveals that the assessee is not maintaining proper gate passes for recording purchases of paddy. According to the A.O., the assessee is not mentioning serial number and other details in the gate passes, therefore, opined that the assessee has inflated paddy purchases. It is the contention of the assessee that its paddy purchases are supported by valid bills vouchers and also it has paid agricultural marketing cess, according to which there is no difference in paddy purchases recorded in its books of accounts and order passed by the agricultural marketing committee. We find force in the arguments of the assessee for the reason that during the course of appellate proceedings, the assessee has furnished copy of order passed by agricultural marketing committee and reconciled the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee, the expenditure incurred by the assessee under freight charges and other expenditure is meager in nature. We further observed that all the expenditure is covered under fringe benefit tax. The A.O., while assessing the fringe benefit tax has accepted the expenditure claimed by the assessee as genuine in nature. Therefore, we are of the view that once the expenditure has been accepted as genuine, there is no reason for the A.O. to doubt the same for the purpose of allowing deduction against business income. The CIT(A) after considering the relevant facts, has rightly sustained part of the additions and directed the A.O. to delete the remaining additions. We do not find any error or infirmity in the order passed by the CIT(A). Hence, we inclined to uphold the CIT(A) order and reject the ground raised by the revenue. 9. The next issue that came up for our consideration is disallowance of expenditure incurred under the head exchange loss . The facts relating to the issue are that the assessee is involved in the business of export of rice and agri commodities. In the process, the assessee has entered into forward exchange contracts with its bankers to hedge the possible fl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne through the orders of the authorities below. The A.O. disallowed loss incurred on forward contracts for the reason that the loss claimed by the assessee is a notional loss. The A.O. further observed that the assessee has failed to correlate exchange loss to export turnover to hedge the currency fluctuations, therefore, opined that the loss claimed by the assessee is not allowable deduction. According to the A.O., only crystallized loss on account of closure of forward contracts is allowable as a deduction. In the present case on hand, the assessee has pre-closed forward exchange contracts because of non-availability of export turnover and hence, the loss incurred is a speculative loss within the meaning of section 43(5) of the Act and hence, it cannot be allowed as a deduction. 12. Before we, go in to the facts of the present case, let us understand, forward contracts, speculative transactions, hedging, foreign exchange loss and treatment of loss in the books of accounts. A forward contract is a agreement between an enterprises and a banker to purchase or sell a particular quantity of currency for a mutually agreed price at a particular date. These forward contracts are used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orward exchange contracts. 14. The treatment to be given to foreign currency items as per the amended AS 11 of ICAI, notified by Central Government u/s 211(3C) of Companies Act, does not make any distinction between items of capital nature and revenue nature. Both are required to be recognized in the Profit Loss Account. In view of the aforesaid amendment, there exists a divergence of views on the treatment to be meted out in the books of accounts and in the Indian Tax Laws. Further, with an increased flow of inbound / outbound transactions and their complex dynamic structuring, the tax treatment of foreign exchange gains / losses has been surrounded by huge litigation and various Courts have discussed the same in great detail. Exchange Fluctuation Difference and tax treatment of the captioned issue was discussed in great detail in the recent landmark ruling of Supreme Court in the case of CIT vs Woodward Governor India P. Ltd (312 ITR 254) where in the SC relied on the earlier judgment in the case of Sutlej Cotton Mills Ltd vs. CIT (116 ITR 1), observed that the law may, therefore, now be taken to be well settled that where profit or loss arises to an assessee on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of export of rice and other commodities. During the previous financial year, it has achieved export turnover of about Rs. 80 crores. The forward exchange contracts are entered in the previous financial year, which was not disputed by the A.O. Though there is no export turnover for the current financial year, this is because of a ban imposed by the Government of India, on export of rice and other commodities. As rightly pointed out by the Ld. A.R. for the assessee, the Government of India imposed ban on export of rice for a temporary period. Although the ban was extended for a further period i.e. up to end of financial year 2008-09, the assessee was on the bonafide belief that the ban on export is temporary and Government may review the ban, therefore, it can continue its exports and accordingly it has continued its forward exchange contracts with the banks. Since the ban was continued for the whole financial year and also fact that during the same period, the Indian currency had a dramatic fall in the international market, the assessee has closed forward exchange contracts and suffered loss. The assessee being a prudent business person entered foreign exchange contrac ..... X X X X Extracts X X X X X X X X Extracts X X X X
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