ACIT, CIRCLE-5(1), HYDERABAD vs. PATEL KNR HEAVY INFRASTRUCTURES LIMITED, HYDERABAD

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ITA 2038/HYD/2025Status: DisposedITAT Hyderabad29 May 2026AY 2019-208 pages
AI SummaryRemanded

What did the Tribunal hold?

The Tribunal held that the CIT(A) erred by not providing the AO an opportunity to examine the additional evidence submitted by the assessee, violating principles of natural justice and Rule 46A(3). The issue was therefore remanded back to the AO for fresh adjudication.

What were the facts?

The assessee, engaged in contract business, incurred a foreign currency transaction loss which the Assessing Officer (AO) treated as speculation loss. The Commissioner (Appeals) allowed the claim based on additional evidence, but the Revenue appealed this decision.

What were the issues?

Whether the CIT(A) erred in allowing the foreign currency loss claim based on additional evidence without affording the AO an opportunity to examine it, and if this violated principles of natural justice.

Which sections of the Income-tax Act were involved?

Section 37(1),Section 147,Section 148,Section 143(2),Section 43(5)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, Hyderabad ‘A‘ Bench, Hyderabad

Before: Shri Vijay Pal Rao, Vice-Shri Madhusudan Sawdia

Hearing: 04/05/2026

आयकर अपील�य अ�धकरण, हैदराबाद पीठ IN THE INCOME TAX APPELLATE TRIBUNAL Hyderabad ‘A‘ Bench, Hyderabad �ी �वजय पाल राव, उपा� य� एवं �ी मधुसूदन साव�डया, लेखा सद� य के सम� । Before Shri Vijay Pal Rao, Vice-President A N D Shri Madhusudan Sawdia, Accountant Member आ.अपी.सं /ITA No. 2038/Hyd/2025 (िनधा�रण वष�/Assessment Year: 2019-20) Assistant Commissioner of Vs. Patel KNR Heavy Income Tax, Circle 5(1) Infrastructures Limited Hyderabad Hyderabad PAN: AADCP8821E (Appellant) (Respondent) िनधा�रती �ारा/Assessee by: CA Pankaj Sancheti राज� व �ारा/Revenue by: Shri B Shashi Kanth, Sr.AR सुनवाई की तारीख/Date of hearing: 04/05/2026 घोषणा की तारीख/Pronouncement: 29/05/2026 आदेश/ORDER Per Madhusudan Sawdia, A.M.:

This appeal is filed by Revenue, feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi (“Ld. CIT(A)”) dated 25.09.2025 for the A.Y.2019-20. 2. The Revenue has raised the following grounds of appeal:

3.

Brief facts of the case are that the assessee is a company engaged in contract business and filed its return of

income for Assessment Year 2019-20 under section 139 of the Income Tax Act, 1961 (“the Act”) on 05.10.2019 declaring loss of Rs.1,14,55,669/-. Subsequently, on the basis of information available with Learned Assessing Officer (“Ld. AO”), reassessment proceedings under section 147 of the Act were initiated in the case of the assessee. After passing order under section 148A(d) of the Act on 06.04.2023, the Ld. AO issued notice under section 148 of the Act to the assessee on 06.04.2023. In response to the notice issued under section 148 of the Act, the assessee furnished its return of income on 25.04.2023 declaring business loss of Rs.1,14,50,359/-. Thereafter, notice under section 143(2) of the Act was issued by the Ld. AO on 24.06.2024. During the course of assessment proceedings, considering the submissions of the assessee, the Ld. AO disallowed an amount of Rs.46,81,600/- under section 37(1) of the Act on account of sub-contract payment made by the assessee to M/s Patel KNR JV. The Ld. AO also disallowed claim of business loss of Rs.2,16,66,064/- incurred by the assessee in foreign currency transactions by treating the same as speculation loss. Accordingly, assessment under section 147 r.w.s. 144B of the Act was completed by the Ld. AO on 25.03.2025 determining total income of the assessee at Rs.1,48,97,305/-. 4. Aggrieved by the order passed by the Ld. AO, the assessee preferred appeal before the Ld. CIT(A). The Ld. CIT(A) confirmed the disallowance of Rs.46,81,600/- made under section 37(1) of the Act on account of sub-contract payment made to M/s Patel KNR JV. However, the Ld. CIT(A) allowed the claim of business loss of Rs.2,16,66,064/- incurred in foreign currency transactions.

5.

Against the relief granted by the Ld. CIT(A), the Revenue is in appeal before this Tribunal. During the course of hearing, the Learned Departmental Representative (“Ld. DR”) submitted that the only issue arising out of the grounds raised by the Revenue relates to the allowance of claim of business loss of Rs.2,16,66,064/- on account of foreign currency transactions undertaken by the assessee during the year under consideration. Inviting our attention to para no.4.5.2 of the assessment order, the Ld. DR submitted that the Ld. AO treated the aforesaid loss as speculation loss in the absence of complete documentary evidence and denied set-off of the same against business income of the assessee. It was further submitted that in the absence of complete documentary evidence, the Ld. AO was not in a position to determine whether the loss arising from foreign currency transactions was capital in nature or revenue in nature and, if revenue in nature, whether the same constituted speculation loss or otherwise. 5.1 The Ld. DR further invited our attention to para nos.6.2 and 6.2.1 of the order of the Ld. CIT(A) and submitted that the assessee had filed additional evidences before the Ld. CIT(A), and on the basis of such additional evidences, the Ld. CIT(A) allowed the claim of the assessee. It was contended that the additional evidences filed by the assessee before the Ld. CIT(A) attracted the mandatory procedure prescribed under Rule 46A(3) of the Income Tax Rules, 1962 (“the Rules”), which requires granting reasonable opportunity to the Ld. AO for examination of such evidences. However, according to the Ld. DR, the Ld. CIT(A) failed to follow the mandatory procedure prescribed under Rule 46A(3) of the Rules and thereby violated the principles of natural justice by not affording any reasonable

opportunity to the Ld. AO to examine and rebut the additional evidences furnished by the assessee. Accordingly, the Ld. DR submitted that the order passed by the Ld. CIT(A) is not in accordance with law and the issue may be restored to the file of the Ld. AO for fresh adjudication in the light of the additional evidences filed by the assessee before the Ld. CIT(A).

6.

Per contra, the Learned Authorized Representative (“Ld. AR”) submitted that after proper appreciation of the evidences and documents filed before the Ld. CIT(A), the Ld. CIT(A) has rightly allowed the claim of the assessee and, therefore, no interference is called for in the findings recorded by the Ld. CIT(A).

7.

We have heard the rival submissions and perused the material available on record. We have also gone through para no.4.5.2 of the assessment order, which is to the following effect:

“4.5.2.Speculation loss: With regard to the proposal to disallow the speculation loss of Rs.2,16,66,064/- that was adjusted against the business income in its return of income for the A.Y.2019-20, the assessee has furnished a loan agreement copy which is not signed by either party. The assessee has not provided how the fair value for hedging was arrived and also has not given any material evidence and No certificate in this regard furnished by the assessee. Therefore, the explanations of the assessee are not acceptable and hence, the speculation loss of Rs.2,16,66,064/- that was adjusted against the business income in its return of income for the A.Y.2019-20 is disallowed and added back to the total income. [Addition = Rs.2,16,66,064/-]”. 8. On a perusal of the above, we found that in the absence of complete documentary evidences, the Ld. AO did not accept the claim of the assessee regarding business loss arising out of foreign currency transactions and treated the

same as speculation loss. We have also gone through para nos.6.2 and 6.2.1 of the order passed by the Ld. CIT(A), which is to the following effect:

“6.2. Vide ground no. 2, the appellant has contended against the disallowance of Rs. 2,16,66,064/- on account of speculation loss. The appellant argued that the loss pertained to hedging contracts on ECB borrowings, which are excluded from speculative transactions under Section 43(5). Notional derivative gains (5.71 Cr) were already added back in computation; only actual hedging expenses (7.88 Cr) were claimed. The appellant submitted Loan Agreement, Hedging Agreement, MTM reports from Bank, Ind-AS disclosures etc. Reliance was placed on CIT v. Woodward Governor India Pvt. Ltd. (SC). 6.2.1. I have gone through the facts of the case and the submission made by the appellant. Section 43(5) excludes hedging of foreign exchange fluctuations in respect of borrowings for business. The appellant has submitted copy of Hedging agreement, ECB loan docs, MTM reports, audited notes in support of its claim. The AO erred in treating Ind-AS notional entries as speculative; appellant had reversed notional gains in computation. Judicial precedents (CIT v. Woodward Governor India Pvt. Ltd., ONGC v. DCIT) establish that forex/IRS hedging losses incurred to protect borrowings are revenue in nature. In view of the same, the AO is directed to delete the disallowance of Rs. 2,16,66,064/- and ground no. 2 is allowed.”

9.

It is manifest from the findings of the Ld. A.O as well as the impugned order of the Ld. CIT (A) that before the A.O, the assessee furnished the loan agreement copy but has not provided the other documentary evidence in support of the claim of hedging cost/loss including the certificate from the Bank, whereas before the Ld. CIT (A) has produced the hedging agreement and MTM reports from the Bank. Thus, it is apparent that the Ld. CIT (A) has considered the additional evidence/material furnished by the assessee while passing the impugned order. Even otherwise the claim of the assessee

being hedging cost/loss can be allowed to the extent that the hedging transactions is done to cover the original transactions of ECB loan and not beyond the ECB loan. However, from the material available on record, we find that no such opportunity was granted to the Ld. AO before allowing relief to the assessee on the basis of additional evidences. Therefore, in our considered opinion, there is violation of the mandatory procedure prescribed under Rule 46A(3) of the Rules as well as violation of the principles of natural justice. Accordingly, in the interest of justice, we deem it appropriate to set aside the issue relating to allowability of business loss of Rs.2,16,66,064/- arising from foreign currency transactions to the file of the Ld. AO for fresh adjudication. The Ld. AO is directed to examine the additional evidences furnished by the assessee before the Ld. CIT(A) and adjudicate the issue afresh in accordance with law after providing reasonable opportunity of being heard to the assessee. The assessee shall be at liberty to furnish all necessary evidences and documents in support of its claim before the Ld. AO. The assessee is also directed not to seek unnecessary adjournments during the remand proceedings. 10. In the result, the appeal of the Revenue is allowed for statistical purposes. Order pronounced in the Open Court on 29th May, 2026. Sd/- Sd/- (VIJAY PAL RAO) (MADHUSUDAN SAWDIA) VICE PRESIDENT ACCOUNTANT MEMBER Hyderabad, dated 29th May, 2026. Vinodan/sps

Copy to: S.No Addresses 1 Assistant Commissioner of Income Tax Circle 5(1) Room No.224, 2B, IT Towers, AC Guards, Masab Tank, Hyderabad 500004 2 Patel KNR Heavy Infrastructures Ltd, KNR House, Phase-I, Plot No.114, Jubilee Hills, SO Shaikpet, Hyderabad 500033 3 Pr. CIT – Hyderabad 4 DR, ITAT Hyderabad Benches 5 Guard File By Order VADREVU Digitally signed by VADREVU PRASADA PRASADA RAO Date: 2026.05.29 RAO 14:01:30 +05'30'

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