2018 (6) TMI 170 - AT - Income Tax

Tribunal rules 'Forward Contract Loss' as business loss, overturns Assessing Officer's decision

The Tribunal held that the Assessing Officer's order was not erroneous or prejudicial to revenue. It found that the initiation of proceedings under ... Revision u/s 263 - allowability of Forward Contract Loss - Held that:- AO in his order passed u/s 143(3) has not held that the “Forward Contract Loss” claimed by the assessee is to be treated as Speculative loss. The AO accepted the expenditure of the assessee. Under these circumstances, it cannot be said that there was non-application of mind by the assessing officer to this issue or that the order was passed without making adequate enquiries or verification which should have been made or that the order was passed allowing relief without enquiring into the claim. It is also not a case where the AO has not examined this issue in the manner it has to be examined. Thus the order in question passed by the assessing officer u/s 143(3) on 24.02.2015, on this issue of ‘Loss on Forward Contract’ is neither erroneous nor prejudicial to the interest of revenue. Whether transaction in question can be called a speculative transaction? - Held that:- As decided in BADRIDAS GAURIDU (P.) LTD. [2003 (1) TMI 61 - BOMBAY HIGH COURT] when the assessee is not dealer in foreign exchange and as a part of his normal business activity, enters into hedging contracts of foreign exchange, the loss in question is normal business loss and cannot be held a “Speculation Loss” as covered by Section 43(5) - The loss in question is allowable as a normal business loss during the year and this loss is not “Speculation Loss”. In view of the above discussion we allow this appeal of the assessee Issues Involved:1. Initiation of proceedings under Section 263 of the Income Tax Act.2. Classification of 'Forward Contract Loss' as business loss or speculative loss.3. Adequacy of inquiry and verification by the Assessing Officer (AO).4. Application of legal precedents and CBDT instructions.Issue-wise Detailed Analysis:1. Initiation of Proceedings under Section 263:The appeal was filed against the order of the Principal Commissioner of Income Tax (Pr. CIT) who revised the AO's order under Section 143(3) by exercising jurisdiction under Section 263. The Pr. CIT initiated proceedings under Section 263, proposing to reclassify the 'Forward Contract Loss' as a speculative loss instead of a business loss. The assessee contended that the AO had already examined this issue during the assessment proceedings, and hence, the initiation of proceedings under Section 263 was erroneous.2. Classification of 'Forward Contract Loss':The assessee, a shipping company, claimed a 'Forward Contract Loss' of Rs. 2,34,10,636 as a business loss, which the AO accepted. The Pr. CIT, however, proposed to treat this loss as a speculative loss, relying on CBDT Instruction No. 3 of 2010. The assessee argued that the loss was incurred in the regular course of business and should not be classified as speculative under Section 43(5) of the Act. The Tribunal noted that the AO had considered the relevant documents and explanations provided by the assessee, including the nature of the forward contracts with Indusind Bank.3. Adequacy of Inquiry and Verification by the AO:The Tribunal examined whether the AO had made adequate inquiries into the 'Forward Contract Loss'. It was found that the AO had requested details and received explanations and supporting documents from the assessee during the assessment proceedings. The Tribunal concluded that the AO had applied his mind and conducted sufficient inquiries, thereby making the order neither erroneous nor prejudicial to the interest of revenue.4. Application of Legal Precedents and CBDT Instructions:The Tribunal referred to several judgments to support the assessee's claim that the forward contract loss should be treated as a business loss. Key judgments included:- CIT vs. Badridas Gauridu Pvt. Ltd.: The Bombay High Court held that foreign exchange contracts incidental to the regular course of business do not constitute speculative transactions.- CIT vs. Friends and Friends Shipping Pvt. Ltd.: The Gujarat High Court ruled similarly, emphasizing that such contracts are part of normal business activities.- CIT vs. Soorajmull Nagarmull: The Calcutta High Court held that losses from foreign exchange contracts incidental to business are allowable as business losses.The Tribunal also considered the CBDT Instruction No. 3 of 2010, which pertains to 'Marked to Market Losses' and speculative transactions under Section 43(5). It concluded that the instruction did not apply to the assessee's case as the forward contracts were part of normal business operations.Conclusion:The Tribunal held that the AO's order was neither erroneous nor prejudicial to the interest of revenue. It was determined that the AO had made adequate inquiries and correctly classified the 'Forward Contract Loss' as a business loss. The Tribunal allowed the appeal, setting aside the Pr. CIT's order under Section 263. The loss was confirmed as a normal business loss, not a speculative loss, following the legal precedents and the nature of the assessee's business activities.