2019 (7) TMI 1542 - AT - Income Tax

High Court directs reassessment of transactions & classification under Income-tax Act

M/s Nalini Jewellers Versus Asstt. Commissioner of Income Tax, Circle-51 (1), New Delhi

The High Court directed the ITAT to re-examine the transactions and their correlation with specific contracts, considering the assessee's contentions. ... Treating the “loss of gold desk account” as speculative loss - HELD THAT:- During the hearing for the assessment year 2012-13 ,both the representatives have argued that the matter be remanded back to the file of the AO to examine the issue afresh in the light of judgment of the Hon’ble High Court for the assessment year 2010-11 [2019 (7) TMI 669 - DELHI HIGH COURT] . Hence, we hereby direct the AO to verify the transactions and correlate the same with the specific contracts. The AO is also directed to consider the order off the Hon’ble High Court of Delhi and to consider the forward contracts with relation to the provision to Clause (a) and (b) to Section 43(5) of the Income Tax Act, 1961 in accordance with the provisions of the Income Tax Act. Issues Involved:1. Treatment of 'loss of gold desk account' as speculative loss.2. Treatment of gain on forward contracts of foreign currency as speculative gain.Detailed Analysis:1. Treatment of 'loss of gold desk account' as speculative loss:The assessee, engaged in the business of trading and manufacturing gold and diamond jewelry, filed a return of income declaring a total income of Rs. 132,82,202/- for the relevant year. During scrutiny, the Assessing Officer (AO) observed a loss of Rs. 154,29,231/- on gold desk deals, which the assessee claimed were hedging transactions against underlying stock of gold and not speculative. However, the AO disallowed this claim, treating the transactions as speculative under Section 43(5) of the Income-tax Act, 1961, due to a lack of evidence supporting the transactions as hedging under proviso (a) to Section 43(5). The AO also noted a similar treatment of loss in the preceding assessment year.The CIT(A) upheld the AO's decision, confirming the loss as speculative and allowing set-off against speculative gain from forward contracts of foreign currency, resulting in a net speculative loss of Rs. 91,35,231/-. The ITAT, referencing a similar issue adjudicated in the assessment year 2010-11, upheld the CIT(A)'s decision, emphasizing the need for correlation between forward contract transactions and the actual delivery of jewelry. The assessee failed to provide documentary evidence to support the claim under proviso (a) to Section 43(5).2. Treatment of gain on forward contracts of foreign currency as speculative gain:The AO initially treated the gain of Rs. 99,22,176/- from foreign currency forward contracts as business income, as declared by the assessee. However, the CIT(A) reclassified this gain as speculative, drawing parallels with the gold forward contracts and noting the lack of documentary evidence to support the transactions as non-speculative. The ITAT remanded this issue back to the AO for fresh examination, directing the AO to provide the assessee an opportunity to submit necessary documentary evidence.Subsequent Developments:The assessee appealed to the Hon’ble High Court of Delhi, which found merit in the assessee’s contention regarding the correlation of transactions with specific contracts. The High Court directed the ITAT to re-examine the transactions and their correlation with specific contracts, considering the assessee’s contentions.Final Direction:Both parties agreed to remand the matter back to the AO for fresh examination in light of the High Court’s judgment. The AO was directed to verify the transactions and correlate them with specific contracts, considering the provisions of Section 43(5) and the High Court's order.Conclusion:The appeal of the assessee was allowed, with the AO directed to re-examine the transactions and their classification as speculative or non-speculative, in accordance with the provisions of the Income-tax Act and the High Court’s directives.