Tribunal overturns CIT(A)'s decision on bogus loss claim from derivative transactions

The Tribunal allowed the Revenue's appeal against the deletion of disallowance of a bogus loss claimed by the assessee from currency derivative transactions. The CIT(A)'s decision was overturned as it failed to adequately address critical observations by the AO, indicating the loss was not genuine. The Tribunal emphasized the need to scrutinize apparent transactions for their reality and remanded the case back to the CIT(A) for re-evaluation. As a result, the appeal was allowed for statistical purposes.

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Issues Involved:
1. Deletion of disallowance of bogus loss from currency derivative transaction of Rs. 6,96,69,731/-.

Summary:

Issue 1: Deletion of disallowance of bogus loss from currency derivative transaction of Rs. 6,96,69,731/-

The Revenue filed an appeal against the order of the CIT(A) which deleted the disallowance of a bogus loss claimed by the assessee from currency derivative transactions amounting to Rs. 6,96,69,731/-. The AO had observed that the assessee, engaged in civil construction, reported a substantial loss from currency derivatives within a short period, using a broker based in Calcutta who had no office in Ahmedabad. The AO deemed the transactions as accommodation entries, supported by statements from the broker's director admitting to providing bogus entries in exchange for commissions.

In appeal, the CIT(A) ruled in favor of the assessee on several grounds: the broker's statements did not specifically implicate the assessee, the transactions were settled through account payee cheques, and there was no evidence of accommodation entries. The CIT(A) also noted that the assessee was denied the opportunity to cross-examine the broker.

The Department contended that the CIT(A) failed to address critical observations made by the AO, including the improbability of a civil contractor incurring such a loss in currency derivatives and the lack of explanation on how the assessee engaged the Calcutta-based broker. The Tribunal found that the CIT(A) did not adequately consider these issues or the surrounding circumstances, which suggested that the loss was not genuine. It cited the Supreme Court's decision in Sumati Dayal vs. CIT, emphasizing that apparent transactions must be scrutinized for their reality.

Consequently, the Tribunal set aside the CIT(A)'s order and remanded the case back to the CIT(A) to re-evaluate the issues raised by the AO and pass a fresh order.

In the result, the appeal of the Revenue is allowed for statistical purposes.

This Order pronounced in Open Court on 26/04/2023

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