SHETH COMMERCIAL CO.,KOLKATA vs. CIT-14 KOLKATA, KOLKATA

IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH, KOLKATA SHRI GEORGE MATHAN, JUDICIAL MEMBER SHRI LAXMI PRASAD SAHU, ACCOUNTANT MEMBER ITA No. 1406/KOL/2017 Assessment Year : 2012-13

Sheth Commercial Co., Vs. Pr. CIT-14, Kolkata, C/o D.J. Shah & Co, 3, Government Placen, Kalyan Bhavan, 2 Elgin Road, Kolkata - 700001 Kolkata – 700020 [PAN : AAKFS4209H] APPELLANT RESPONDENT

Assessee by : Shri Miraj D. Shah, AR Revenue by : Shri Sanat Kumar Raha, CIT-DR

Date of hearing : 01.04.2026 Date of Pronouncement : 11.06.2026

O R D E R PER LAXMI PRASAD SAHU, ACCOUNTANT MEMBER This is an appeal filed by the assessee against the order passed by the Ld. Principal Commissioner of Income Tax -14 Kolkata (hereinafter refer to as “the Ld. PCIT”) for the assessment year 2012-13, vide order dated 20.03.2017 directing the Assessing Officer to frame afresh assessment after setting aside the regular one framed dated 23.03.2015 in exercising revision jurisdiction vested u/s 263 of the Income Tax Act,

2 ITA No. 1406 /Kol/2017 Sheth Commercial Co. 1961 (hereinafter referred to as ‘the Act’) on the following grounds of appeal:

“1. For that the Ld Principal Commissioner of Income Tax erred in holding that the assessment order passed on 23-03-2015 qua the issue of loss of Rs.35,59,347 was erroneous and prejudicial to the interest of the revenue. The order passed u/s 263 of the IT Act 1961 was bad in law and hence be quashed or set aside. 2. For that the Ld Principal Commissioner of Income Tax erred in holding that the assessment order passed on 23-03-2015 qua the issue of loss of Rs.60.98,446 was erroneous and prejudicial to the interest of the revenue. The order passed u/s 263 of the IT Act 1961 was bad in law and hence be quashed or set aside. 3. For that the Ld Principal Commissioner of Income Tax erred in holding that the assessment order passed on 23-03-2015 qua the issue of donation of Rs.60,00,000 was erroneous and prejudicial to the interest of the revenue. The AO has already added this in the assessment order. Thus the order passed u/s 263 of the IT Act 1961 was bad in law and hence be quashed or set aside. 4. For that the assessment order dated 23-03-2015 was passed after due inquiry and after calling for explanation and therefore the order was not erroneous and prejudicial to the interest of the revenue. Thus, the order passed u/s 263 of the IT Act 1961 was bad in law and hence be quashed or set aside. 5. For that the Ld Principal Commissioner of Income Tax erred in setting aside the assessment order merely to make further inquiries. Thus the order passed u/s 263 of the IT Act 1961 was bad in law and hence be quashed or set aside. 6. The appellant craves leave to press new, additional grounds of appeal or modify, withdraw any of the above grounds at the time of hearing of the appeal.” 2. The coordinate Bench in the order dated 16.04.2019, ITA No. 1406/Kol/2017 allowed the appeal of the assessee against which the Revenue preferred appeal u/s 260A of the Act before the Hon’ble Jurisdictional High Court of Calcutta in IA No. GA/2/2021, ITAT/49/2021 order dated 08.08.2022. The Hon’ble High Court remitted the issue to the Tribunal for fresh consideration observing as under:

“We are conscious of the fact that the Assessing Officer is not expected to write a judgment but since reasons are essential when a quasi-judicial or

3 ITA No. 1406 /Kol/2017 Sheth Commercial Co. administrative authority takes a decision, the same cannot be dispensed with. Be that as it may, we note the submission of the learned Counsel for the respondent that the material which was placed before the Assessing Officer was placed before the Tribunal and the Tribunal was also satisfied that enquiry was conducted by the Assessing Officer. Though such a submission has been made, we find that the Tribunal has not mentioned anything about documents which were produced by the assessee during the hearing. All that the Tribunal has done is to note the legal position. After having noted the legal position a discussion should have been made on the factual position. Since that has not been done, we are of the view that the matter needs to be remitted back to the Tribunal for fresh consideration. For the above reasons alone, the appeal is allowed. The order passed by the Tribunal is set aside and the matter is remanded to the Tribunal to give a fresh hearing to the respondent assessee, peruse the documents which were placed in the form of paper book and thereafter proceed to pass a reasoned order on merits and in accordance with law.” 3. During the course of hearing that the assessee’s pleading challenge correctness of the Ld. PCIT’s order revising the regular assessment in issue framed by the Assessing Officer u/s 143(3) of Act by the DCIT, Circle-40 Kolkata-on 23.03.2015 with directions to frame the same afresh whilst exercising revision jurisdiction vested u/s 263 of the Act. This assessee is a firm / exporter and trader of jute / jute products and hedging in US dollar, commodities for the exported sales proceeds. It filed its return for the impugned assessment year on 24.09.2012 declaring total income of ₹81,49,9290/-. The Assessing Officer initiated u/s.1 48 proceedings by issuing his notice dated 26.02.2016. He then framed the assessment / re-assessment in the issue on 06.07.2016 accepting the taxpayer’s revised return seeking the withdraw sec. 35(1)(c) deduction of donation made to M/s Herbicure Healthcare Bio-herbal Research Foundation, Kolkata to the tune of ₹60,00,000/-

4 ITA No. 1406 /Kol/2017 Sheth Commercial Co. 4. The Ld. PCIT called the assessment records as per his power exercised u/s 263 of the Act on the above assessment / re-assessment to be erroneous causing prejudice to interest of the Revenue and exercised of revision jurisdiction u/s 263 of the Act. He issued show- cause notice dated 15.02.2017 to the following effect:-

“(i) It appears from the record that during the financial year 2011-12 relevant to the assessment year 2012-13 the assessee was engaged in the business of Exporter and Trader of Jute/Jute Products and hedging US dollar, commodities. It also appears from the record that “loss in US $ trading” amounting to Rs.35,59,347/- was claimed as business expenses by debiting the same in the Profit & Loss A/c and the same has been allowed in the assessment. The assessee had incurred loss on foreign exchange derivatives transactions due to extreme volatility in the foreign exchange market. The loss incurred by the assessee of Rs.35,59,347/- on forward foreign exchange contracts being not incidental to jute export business requires to be treated as inadmissible deduction for allowing to be set off with income of the regular business as loss in foreign exchange was speculative in nature. (ii) “Loss on dealing commodities” of Rs.60,98,446/- was claimed as business expenses by debiting the same in the Profit & Loss A/c. No separate accounts in respect of this business have been furnished by the assessee. Hence, no purchase and sales of commodities were passed through the Profit & Loss A/c. So, transaction in commodities were made by the assessee without delivery basis. since, the transactions of commodities was made ‘without delivery’ basis, loss on dealing commodities is nothing but ‘speculation loss’. Loss from speculative transactions can only be set off against speculative income. (iii) Donation of Rs.60,00,000/-had been given to Herbicure Healthcare Bio-herbal Research Foundation, Kolkata and it was allowed in the assessment. During the curse of assessment proceeding, no enquiry or verification in this regard have been made by the AO. Moreover, the approval granted to the foundation has been retrospectively withdrawn by CBDT.”

“4. A show cause letter dated 15.02.2017 was issued and case was fixed for hearing on 23.02.2017. In response, the assessee submitted letter dated 22.02.2017 seeking adjournment for 15 days. Considering his prayer date of

5 ITA No. 1406 /Kol/2017 Sheth Commercial Co. hearing was further fixed on 28.02.2017. But assessee submitted further adjournment petition on 27.02.2017 seeking date of hearing after 13.03.2017. Hearing was further refixed on 02.03.2017 but none appeared. The case was finally refixed on 08.03.2017. Shri DK Paramanandka, FCA and A/R of the assessee appeared and filed written submission on 08.03.2017. The main contention of the as is reproduced below:- i) The first issue relates to loss in US dollar trading for Rs.35,59,347/- and the second issue relates to loss in commodity for Rs.60,98,446/-. Booth the issues are arising from the same transactions i.e. the export of jute business of assessee. In view of the same a combined submission is being made with respect to the same. ii) Loss of Rs.35,59,347/- was incurred on US dollar Loss. This loss was incurred with respect to the forex hedging transactions done in order to cover the risks of US dollar movement which was arising from the export business of the assessee. The contract notes in support of the forex contract which were entered on the MCX Stock Exchange Ltd. and NESE Stock Exchange through a SEBI registered broker Ms. Sundhi Securities and Finance Ltd. is enclose herein and marked as annexure-A and B. iii) The loss of Rs.60,98,446/- was incurred on US Dollar Loss & Jute hedging with respect to the Forex/Jute Price fluctuation hedging transactions done in order to cover the risk of US dollar / Jute Price movement arising out of export business. The contract notes in support of the forex contracts which were entered on the MCX Stock Exchange and FMC Exchange through a SEBI Registered Broker Ms Mansarovar Capital Markets Private Limited and Mahakaleshwar Trade Commodities Private Limited is enclosed herein and market as annexure C & D. iv) The assessee is an exporter of jute products and during the year the assessee exported a sums of Rs.28,43,63,239/- worth of goods to various countries including Tanzania, Japan, Kenya, Spain, Uganda etc. The details of export done with name of importer, value of shipment and other details are enclosed herein marked as annexure-E. v) The assessee had participated in a tender for supply of jute products in Tanzania and the Tender participation date was 25/05/2011 and the Tender was allotted to the assessee on 20/06/2011 and 25/06/2011. The copy of the Tender and Tender allotment is enclosed herein marked as annexure F. vi) The assessee was supplying Jute products and the period of supply would take 3-9 months and during this period the value of jute and dollar were bound to fluctuate. The assessee with an intention to hedge itself from the fluctuation of the price of jute and US dollar entered into future contracts for covering the price fluctuation risks. vii) It is well settled that the transactions which were entered with an intention to hedge against price fluctuations were not to be treated as speculative transactions. Thus in principal wee object that the classification of the loss of Rs.35,59,347/- and Rs.60,98,446/- could not be classified as speculative loss. The same was for the purpose of hedging and thus the AO was correct in allowing the deduction for the same in the assessment order.

6 ITA No. 1406 /Kol/2017 Sheth Commercial Co. viii) In respect of point no 3 of the show cause notice, the AR has stated that the assessment made u/s.143(3) on 23.03.2015 for the said assessment year was reassessed u/s. 148/143(3) of the Act dated 06.07.22016 in which donation of Rs.60,00,000/- was added back.” 5. I have carefully examined the assessment record and submissions made by the assessee. The impugned assessment order dated 23.03.2015 has been passed without making relevant enquiry or verification regarding the foreign exchange loss of Rs.35,59,347/- and loss on dealing commodities of Rs.60,98,446/-. The claim of the assessee is that the foreign exchange loss is due to hedging transactions done in order to cover the risk of US dollar movement to protect the export business of the assessee. Similarly, the loss of Rs.60,98,446/- is also attributed to hedging in jute produce. However, these details have not been called for or examined by the assessing officer. The validity of the claim of the assessee has not been examined by the AO and no enquiry has been made. Since the AO failed to make necessary enquiries and allowed the claim without examination, the assessment order is erroneous and prejudicial to the interest of the revenue. Having regard to the facts and circumstances of the case the impugned assessment order for AY 2012-13 u/s 143(3) dated 23.03.2015 is deemed to be erroneous in so far as it is prejudicial to the interest of the revenue. 6. Hon'ble Delhi High Court in the case of GEE VEE Enterprise Vs. Addl. CIT reported in 99 ITR 375, 386 (Del) has held that the CIT may consider the order of the Assessing Officer to be erroneous not only if it contain some apparent error of reasoning or of law or of fact on the face of it but also because the Assessing Officer has failed to make enquiries which are called for in the circumstances of the case and it is an order which simply accepted what the assessee has stated in his return of income on the said issue. It is not necessary for the CIT to make further enquiries before cancelling the assessment order. The Commissioner can regard the order erroneous son the ground that the Assessing Officer should have made further enquiries. 7. Hon'ble Karnataka High Court in the case of Thalibai F Jain Vs. ITO 101 ITR 1, 6 (Karn) has held that where no enquiries made by the Assessing Officer on the relevant issue, assessment must be held to be prejudicial to the interest of the revenue and what is prejudicial to the interest of the revenue must be held to be erroneous though the converse may not always be true. 8. Hon'ble Supreme Court in the case of Malabar Industrial Co. (P) Ltd. Vs. CIT reported in (2000) 243 ITR 83, 87-88 (SC) affirming the Hon'ble Kerala High Court decision (198 ITR 611) has held that the phrase “prejudicial to the interests of the revenue” is of wide import and is not confined to only loss of taxes. If the AO has accepted the claim of the assessee without any enquiries then such assessment order passed by the AO was held to be erroneous. 9. The Assessing Officer failed to make relevant enquiry in this case. He has failed to examine the documents and papers relating to the assessment year 2012-13. 10. In this regard it is mentioned that mere non-enquiry would also render a particular order passed by lower authority as erroneous and prejudicial to the interest of revenue. This position has been clearly confirmed by Hon'ble Supreme Court in the case of Rampyari Devi Sarogi v. CIT (1968) 67 ITR 84 &

7 ITA No. 1406 /Kol/2017 Sheth Commercial Co. Smt. Tara Devi Aggarwal v. CIT (1973) 88 ITR 323 (SC). The reasoning for this proposition has been explained by Hon'ble Delhi High Court in the case of GEE VEE Enterprise Vs. Addl.CIT (1975) 99 ITR 375 in the following para: ‘It is not necessary for the Commissioner to make further inquires before cancelling the assessment order of the Income Tax Officer. The Commissioner can regard the order as erroneous on the ground that tin the circumstances of the case the Income Tax Officer should have made further inquiries before accepting the statements made by the assessee in his return. The reasons is obvious. The position and function of the Income Tax Officer is very different from that of civil court. The statements made in the pleading proved by the minimum amount of evidence may be adopted by a civil court in the absence of any rebuttal. The civil court is neut5ral. It simply gives decision on the basis of the pleading and evidences which come before it. The Income Tax Officer is not only an adjudicator but also an investigator. He cannot remain passive in the face of a return which is apparently in order but calls for further inquiry. It is his duty to ascertain the truth of the facts stated in the return when the circumstances of the case are such as to provoke an inquiry. It is because it is incumbent on the Income Tax Officer to further investigate the facts stated in the return when circumstances would make such an inquiry prudent that the word “erroneous” in sec. 263 includes the failure to make such an enquiry. The order becomes erroneous because such an inquiry has not be made and not because there is anything wrong with the order if all the facts stated therein are assumed to be correct.’ 11. Further to this it is noticed that there is no appeal right available to the Revenue from the order of assessment passed by Assessing Officer and i.e. why revisionary powers haves been given to the Commissioner and such power were held to be of wide amplitude by the Hon'ble Supreme Court in the case of CIT Vs. Shree Manjunathesware packing Products & Camphor Works (1998) 231 ITR 53/96 Taxman 1. Therefore, normally when Assessing Officer has not made any enquiry on a particular issue, then such order in view of the above detailed discussion has to be construed as erroneous and prejudicial to the interest of revenue and therefore, the impugned assessment order is erroneous and prejudicial to the interest of revenue as Assessing Officer has failed to make any enquiry. 12. It may be further noticed, that in order to provide clarity on the issue of ‘erroneous in so far as it is prejudicial to the interest of revenue’. A NEW Explanation has been inserted to clarify that an order passed by the Assessing Officer shall be deemed to be erroneous sin so far as it is prejudicial to the interest of revenue, if, in the opinion of the Principal Commissioner or Commissioner- a) The order is passed without making inquiries or verification which should have been made; b) The order is passed allowing any relief without inquiring into the claim; c) The order has not been made in accordance with any order, direction or instruction issue by the Board under section 119; or

8 ITA No. 1406 /Kol/2017 Sheth Commercial Co. d) The order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person. 13. Having regard to the facts and circumstances of the case and in the light of the aforesaid decisions of Hon'ble Supreme Court and Hon'ble High Courts and in accordance with the amendment made in Sec. 263 of the Act with effect from 01.06.2015, I hold that the impugned assessment order dated 23.03.2015 passed by the AO is erroneous and prejudicial to the interest of revenue. 14. In view of the above, the assessment order u/s. 143(3) dated 23.03.2015 for the assessment year 2012-13 in this case is considered as erroneous in so far as it is prejudicial to the interest of revenue with reference to the specific issues. The Assessment order u/s. 143(3) dated 23,.03.2015 made by the AO is accordingly set aside with the direction to make fresh assessment after considering the facts and submissions made by the A/R of the assessee in respect of the above specific issues raised after giving opportunity to the assessee and in accordance with law.” 6. The Ld. Counsel reiterated the submission made before the lower authorities and strongly submitted that this issue was already considered while passing the assessment/reassessment order by the AO. Therefore, there is no any lack of enquiry or inadequate enquiry entire documents were submitted, after satisfying on the documents submitted he did not make any additions. Therefore, the order passed by the AO is not erroneous and prejudicial to the interest of the revenue. In addition to the above, he furnished the written submissions which is as under:

“7. We argue that this view by the Ld PCIT is incorrect. The Learned Assessing Officer (Ld AO) has appropriately considered the case's specifics and rightfully permitted the deduction of the loss from the income calculation. The loss of Rs.35,59,347 resulted from hedging transactions intended to protect against the volatility of the US Dollar, linked to the firm's export activities. These transactions were documented through contract notes from trades executed on the MCX Stock Exchanges, facilitated by the SEBI-registered broker, Sunidhi Securities & Finance Ltd AND Sarovar Capital Markets Ltd Given the 3-9 month delivery timeframe for jute products, price fluctuations in both jute and the dollar were anticipated. The firm's future contracts aimed to hedge against these forex risks. Such hedging activities are not considered speculative under income tax laws For clarity, Section 43(5) of the Income Tax Act defines 'speculative loss, while an explanation to Section 28 provides a definition of 'speculative business.

9 ITA No. 1406 /Kol/2017 Sheth Commercial Co. Section 73 also details restrictions on offsetting speculative losses against business losses. 8. Additionally, the firm experienced a loss of Rs.60.98,446 from transactions intended to hedge against jute price volatility. With a turnover of Rs 28,43,63,239, the firm exported jute to various countries including Tanzania, Japan, Kenya, Spain, and Uganda. Operating within the jute trading sector, the firm purchases raw jute from the market for export Given the significant price variations of jute both domestically and internationally, these fluctuations can greatly impact the firm's costs and profitability. Moreover, export agreements are often established at fixed prices. To mitigate the risk of unfavorable raw jute price movements, the firm engaged in hedging transactions on the NMCEX. This strategy was aimed at stabilizing the cost of raw materials. Documentation related to these transactions is provided in the paper book, pages 104-111. 9. Jute's seasonal nature leads to price volatility aligned with its production cycles. Furthermore, fulfilling export orders can take between three to nine months. Upon receiving an order, the firm must secure its jute cost price against potential increases to maintain its predetermined selling price. Through commodity exchange hedging, the firm locks in the cost of jute, providing price certainty for its operations. These "future contracts" are directly related to the firm's jute and jute products business, aiming to reduce the risk associated with rising raw jute prices for exports priced fixedly. Despite these transactions being settled without physical delivery. they represent genuine business practices designed to hedge against the rising costs of raw jute relative to fixed-price export contracts. Such measures are standard in financial management, reflecting strategic business prudence amidst inflationary trends. These transactions, being an essential aspect of the firm's jute trading activities, should not be viewed independently from the overarching business context. Given the firm's verifiable export activities connected to these forward contracts, the resulting loss is categorized as a normal business loss rather than speculative, thereby qualifying for offsetting against other business income.” 7. On the other hand, the Ld. DR relied on the order of Ld. PCIT and he submitted that the order passed by AO is erroneous and prejudicial to the interest of the revenue which is clear from the show cause notice issued by the assessee and assessee revised its return of income and offering income of Rs. 60 lacs donation given to Herbicure Healthcare Bio-herbal Research Foundation, Kolkata which itself states that there is erroneous.

10 ITA No. 1406 /Kol/2017 Sheth Commercial Co. 8. Considering the rival submissions and perusing the assessment record and submissions made by the assessee. The impugned assessment order dated 23.03.2015 has been passed without making relevant enquiry or verification regarding the foreign exchange loss of Rs.35,59,347/- and loss on dealing commodities of Rs.60,98,446/-. The claim of the assessee is that the foreign exchange loss is due to hedging transactions done in order to cover the risk of US dollar movement to protect the export business of the assessee. Similarly, the loss of Rs.60,98,446/- is also attributed to hedging in jute produce without taking delivery. However, these details have not been called for or examined by the assessing officer. The validity of the claim of the assessee has not been examined by the AO and no enquiry has been made. Since the AO failed to make necessary enquiries and allowed the claim without examination. On going through the reassessment order passed u/s 147 r.w.s. 143(3) of the Act dated 06.07.2016 there is no any issue dealt in respect of the impugned issue raised by the Ld. PCIT as well as in the assessment order u/s 143(3) of the Act dated 23.03.2015proceedings Merely submission of the documents does not prove that the AO has examined the same and framed any opinion. Accordingly, the assessment order is erroneous and prejudicial to the interest of the revenue. Having regard to the facts and circumstances of the case the impugned assessment order for AY 2012-13 u/s 143(3) dated 23.03.2015 is deemed to be erroneous in so far as it is prejudicial

11 ITA No. 1406 /Kol/2017 Sheth Commercial Co. to the interest of the revenue. The AO is directed to pass a consequential order after considering the documents furnished.

Order pronounced on 11.06.2026

Sd/- Sd/- (George Mathan) (Laxmi Prasad Sahu) Judicial Member Accountant Member

Dated: 11.06.2026 AK, Sr. P.S. Copy of the order forwarded to: 1. Appellant 2. Respondent 3. Pr. CIT 4. CIT(A) 5. CIT(DR)

//True copy// By order

Assistant Registrar, Kolkata Benches