2018 (5) TMI 1534 - AT - Income Tax

Tribunal allows appeal on Foreign Exchange loss & sister concern discount

The tribunal partly allowed the appeal filed by the assessee, permitting the Foreign Exchange (FE) loss and the discount given to the sister concern. The ... Disallowance of foreign exchange loss - whether the loss is speculative loss or normal business loss - loss due to forward contract cancellation - Held that:- assessee has given bill wise detail of the exchange loss suffered by it due to forward contract cancellation - since foreign exchange gains has taxed, the loss shall also be allowed - they are the part of the chain of similar transactions - activity of entering into forward contract was in the regular course of its business only to safeguard against the loss on account of foreign exchange variation - thus the transactions entered were only in regular course of business and not speculative - Decided in favor of assessee Disallowance of discount given to sister concern - Held that:- there is no bar in the Act which prohibits giving discount to sister concerns - the genuineness of the payment has not been doubted - the business need of an assessee has to be decided by him and not by the departmental officers - just because payment has been made to sister-entity, it cannot be disallowed - Decided in favor of assessee Issues Involved:1. Disallowance of Foreign Exchange (FE) loss.2. Addition on the ground of undervaluation of turnover.Issue-Wise Detailed Analysis:1. Disallowance of Foreign Exchange (FE) Loss:The assessee, engaged in the export of diamond jewellery, declared a loss of Rs. 70.86 crores in its income return. The Assessing Officer (AO) completed the assessment, determining the income at Rs. 17.34 crores. The first ground of appeal concerns the confirmation of disallowance of FE loss amounting to Rs. 59.37 crores. The AO disallowed the claim due to the lack of documentary evidence and justification for the loss. The disallowed items included Exchange Difference Import (Rs. 24.87 crores), Dollar Adjustment Account (Rs. 5.08 crores), Forward Contract Loss (Rs. 27.89 crores), and Deemed Export Exchange Difference (Rs. 1.52 crores).The First Appellate Authority (FAA) upheld the disallowance, considering the losses as speculative transactions under Instruction No. 03 of 2010 issued by the CBDT. The FAA also noted that the Dollar Adjustment Account loss was capital in nature and not eligible for claim. The assessee argued that the transactions were hedging transactions, not speculative, and provided detailed documentation to support the claim.Upon review, the tribunal found that the transactions were not speculative but hedging contracts. The tribunal noted that the AO taxed foreign exchange gains while disallowing the losses without justification. The tribunal held that the FE loss on payment to creditors and revaluation on the last date of the accounting year, aggregating to Rs. 24.87 crores, should be allowed. The tribunal also allowed the loss of Rs. 5.08 crores as revenue expenditure, as it was related to working capital facilities.Regarding the forward contract loss of Rs. 27.89 crores, the tribunal found no evidence to prove the transactions were speculative and allowed the loss as business loss, referencing the case of D. Chetan and Co. and the Hon’ble Bombay High Court judgment in Vinergy International Private Ltd. The tribunal restored the issue of FE loss of Rs. 1.52 crores to the AO for verification, directing a reasonable opportunity of hearing to the assessee.2. Addition on the Ground of Undervaluation of Turnover:The second ground of appeal pertains to the addition of Rs. 1.38 crores on the ground of undervaluation of turnover. The AO disallowed the discount on sale given by the assessee to its sister concern due to the failure to furnish details. The FAA confirmed the addition, stating that the discount was given to a sister concern and the assessee incurred a loss during the year.The tribunal found that there is no prohibition in the Act against giving discounts to sister concerns and that the genuineness of the payment was not in doubt. The business need of an assessee is to be decided by the assessee and not by the departmental officers. The tribunal reversed the order of the FAA, allowing the discount given to the sister concern.Conclusion:The appeal filed by the assessee was partly allowed. The tribunal allowed the FE loss and the discount given to the sister concern, while the issue of FE loss of Rs. 1.52 crores was restored to the AO for verification. The order was pronounced in the open court on 23 May 2018.