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2016 (10) TMI 924 - ITAT VISAKHAPATNAM

2016 (10) TMI 924 - ITAT VISAKHAPATNAM - TMI - Disallowance of 5% paddy purchases - AO made the additions for the reasons that gate passes maintained by the assessee are not giving true and correct position of purchases - Held that:- As during the course of appellate proceedings, the assessee has furnished copy of order passed by agricultural marketing committee and reconciled the quantity of paddy purchases with MSP to its books of accounts. The CIT(A) has recorded categorical finding of facts .....

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nder 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 th .....

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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 of the view that foreign exchange loss incurred by the assessee on account of entering into forward contracts with banks for the purpose of hedging loss in connection with its .....

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ent : Shri G.V.N. Hari, AR ORDER PER G. MANJUNATHA, Accountant Member: This appeal filed by the revenue is directed against order of the CIT(A), Guntur, dated 3.10.2012 and it pertains to assessment year 2009-10. 2. The brief facts of the case are that the assessee is a partnership firm carrying on business of rice mill and forward contracts, filed its return of income for the assessment year 2009-10 on 29.9.2010 declaring loss of Rs. 2,51,48,852/-. The case has been selected for scrutiny throug .....

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registers and documents have been found and impounded. The impounded books of accounts reveals that the assessee is maintaining gate passes for inward of materials purchased and on verification of the gate passes maintained by the assessee, it was noticed that the assessee is not maintaining serial number, name of the farmer from whom the paddy was purchased, village, details of goods purchased, weight in quintals, mode of transport/vehicle numbers, date of purchase and signature of receiving pe .....

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tures 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 .....

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e loss in foreign currency. The A.O. further observed that the assessee has entered into forward contracts to deal in currency, therefore, opined that forward contract entered by the assessee are in the nature of speculative transactions. Therefore, issued a show cause notice and asked to explain why the loss incurred under the head Exchange loss shall not be disallowed. 4. In response to show cause notice, the assessee submitted that it is in the business of export of agri-commodities and in th .....

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xport of rice. The assessee further submitted that the Government of India has imposed ban on export of rice in the beginning of the financial year for a period of 3 months, however, it has been further extended to the whole financial year. The assessee was on bonafide belief that the ban imposed by the Government on export of rice is temporary, once the ban is lifted, the firm can resume its operations and continue its exports. The assessee further submitted that it has entered into forward exc .....

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change loss is not allowable as a business expenditure, as it is only a notional loss, but not crystalised loss. The A.O. further observed that the assessee has entered into forward exchange contracts without there being any underlying exposure i.e. export turnover, therefore, the loss incurred 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 .....

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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 exchange .....

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5% paddy purchases, by holding that documentary evidences produced in support of paddy purchases shows that there was no inflation of purchase of paddy or suppression of the quantity of paddy purchases during the year under report. As sought to be highlighted by the assessee, no defects in the books were pointed out by the A.O. nor did the same stand rejected. Further, no defects in the form B register were mentioned and no points were raised on the purchase price paid by the appellant. The onl .....

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ive expenses and vehicle maintenance, the CIT(A) has sustained additions to the extent of Rs. 2 lakhs and balance is directed to be deleted. As regards disallowance of repairs & maintenance, processing expenses and printing & stationery, sustained additions of Rs. 4,50,000/- and balance amount is directed to be deleted. With regard to disallowance of loss on forward contracts, the CIT(A) held that the loss claimed by the assessee is not a notional loss and the loss is incurred on termina .....

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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 ga .....

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assessee has furnished copy of order passed by agricultural marketing committee and reconciled the quantity of paddy purchases with MSP to its books of accounts. The CIT(A) has recorded categorical finding of facts that the purchases recorded by the assessee and purchases as per the AMC reports are matched. The revenue failed to prove the finding of facts recorded by the CIT(A) is incorrect. Therefore, we are of the view that the CIT(A) has rightly deleted additions made towards disallowance of .....

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printing & stationery. The A.O. disallowed expenditure on the ground that the assessee has failed to substantiate expenses with necessary bills & vouchers. The A.O. observed that the assessee has maintained self-made vouchers and the vouchers maintained by the assessee are not having serial numbers, signature of the managing partner and no revenue stamps are affixed and in few vouchers, the recipient signature is not obtained, therefore, opined that the vouchers maintained by the assess .....

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revenue stamp, the firm had not been affixed revenue stamp on the vouchers. The assessee further submitted that considering its total volume of businesses, the expenditure claimed under the head freight charges and other expenses is meager in nature and also all the expenditures are covered by fringe benefit tax, therefore, there was no reason for the A.O. to doubt the genuineness of the expenditure. We find force in the arguments of the assessee for the reason that considering huge volume of b .....

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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 .....

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assessee has claimed exchange loss, however, failed to substantiate the loss with necessary underlying exposure i.e. export turnover. The A.O. further observed that during the financial year relevant to assessment year 2009-10, the assessee has achieved zero export turnover and when there is no exports, the question of hedging currency does not arise. Accordingly, opined that forward contracts entered by the assessee are in the nature of speculative transactions and hence, the loss is not allow .....

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ders on hand so as to justify the need for hedging the foreign currency. 10. It is the contention of the assessee that these forward exchange contracts are entered in the previous financial year and matured during the current financial year. The assessee further contended that during the previous financial year, it has achieved more than Rs. 80 crores export turnover, however, in the current financial year because of unexpected ban imposed by the Government of India, on export of rice, it could .....

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notional loss. 11. We have heard both the parties, perused the materials available on record and gone 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. Acc .....

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nsactions, 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 by exporters to get their export receivables hedged against adverse currency movements. Hedging is defined as to enter in to transactions to reduce the risk of adverse movement of currency. Any person ha .....

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India, in para 36, 37, 38 & 39. According to the AS-11, of ICAI, any forward exchange contracts entered to hedge the foreign currency exposure, to mitigate unexpected loss with its import/export business has to be regarded as business loss and income as the case may be. In case of such forward exchange contract is not in the nature of hedging, then such loss should be ignored. 13. Similarly, the provisions of section 43(5) of the Act defines the term speculative transactions, means a transac .....

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iness, to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him. A plain reading of sub-clause (a) of section 43(5) of the Act, makes it clear that any forward exchange contracts entered into in its business of import or export of goods to hedge the possible fluctuation in foreign currency, then such transactions are kept outside the purview of the definition of speculative transactions. Theref .....

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e 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 .....

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currency, such profit or loss would ordinarily be a trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. 15. Further in the aforesaid ruling the Apex Court also affirmed the principles laid down in the ruling of CIT vs. V.S.Dempo & .....

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atever be its cause because it would be a loss in the course of carrying on the business. Loss in respect of circulating capital is revenue loss whereas loss in respect of fixed capital is not. Loss resulting from depreciation of the foreign currency which is utilised or intended to be utilised in business and is part of the circulating capital, would be a trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be capital loss. For determining whether deva .....

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. Therefore, once loss incurred on account of fluctuation in foreign currency, then the loss suffered shall be allowed as business loss, unless it is in the nature of speculation loss. 16. Having said that, let us come to the facts of the present case. In the present case on hand, the assessee is into 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 p .....

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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 contr .....

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