TaxTMI 
TaxTMI 
2021 (12) TMI 302
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....ed off by this common order for the sake of convenience as identical issues are involved in all these appeals. 2. With the consent of both the parties, the appeal of the Revenue for A.Y.2009-10 are taken as the lead case and the decision rendered thereon would apply with equal force for other assessment years also in respect of identical facts except with variance in figures. 3. At the outset we find that there is a defect in this issue by the Registry that appeals filed by the Revenue are time barred. We find that the order of the ld. CIT(A) has been disposed off in September 2020 at which point in time Covid-19 pandemic was imposed from 24/03/2020 and by placing reliance on the Government of India of Notification No.218979 dated 31/03/2020 in Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance 2020 (No.2 of 2020) dated 31/3/2020 as per Clause 3(1)(b) extending the time limit specified in Income Tax Act which falls during the period from 20th day of March 2020 to 29th June 2020 for the purpose of filing appeal till 30/06/2020 or such other date as the Central Government by notification specify in this behalf. Subsequently, the Government vide Notification No....
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....ion 14A by applying Rule 8D in respect of Dividend income of Rs. 62,92,640/-. 2. The Ld. Commissioner of Income Tax (Appeal) has erred in considering, out of the normal business loss of Rs. 49,23,23,597/- incurred by the appellant pertaining to foreign currency forward/option contracts, (a) Rs. 40,89,46,948/- as normal business loss and (b) Rs. 833,76,649/- as speculation business loss". 3. The assessee is a Star Trading House engaged in the business of diamonds. The main activities of the assessee consists of purchase of rough and polished diamonds mainly through import from various countries, manufacturing of rough diamonds into polished diamonds and sell polished diamonds mainly by way of export to various countries. The brief facts qua the issue of disallowance under section 14A of Rs. 25,85,318/- as raised vide ground no.1 are that, the assessee has earned dividend income of Rs. 62,92,640/- which was claimed as exempt under section 10(34). The assessee had not attributed any expenses for the earning of such an exempt income and accordingly, no disallowance was offered in the computation. The AO observed that, assessee has common pool of funds and compo....
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...., it cannot be held that they were meant for earning of exempt income and secondly, only those investment which has yielded dividend or tax free during the year should only be considered for working of the disallowance under section 14A under Rule 8D(2)(iii). 6. On the other hand, Ld. DR strongly relied upon the order of the AO and CIT (A) and submitted that, disallowance has to be made in accordance with the Rule 8D, because the assessee could not substantiate its claim before the AO properly. 7. We have heard the rival submissions and also perused the relevant finding given in the impugned order and material placed on record. The disallowance under section 14A consists of disallowance of interest under Rule 8D(2)(ii) of Rs. 14,000,41/- and disallowance of indirect expenditure under Rule 8D(2)(iii) of Rs. 11,85,278/-, aggregating to Rs. 25,85,318/-. So far as the disallowance of interest is concerned, it has been submitted before us that the surplus and interest free funds available with the assessee far exceeded the investment made by the assessee. This contention of the assessee appears to be correct from the perusal of the Balance-sheet as on 31st March, 2008 ....
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.... year should only be included, no supporting decision has been placed before us by the ld. Counsel before us that only the investments which have not yielded the exempt income during the year has to be excluded. Rule 8D(2)(iii) lays down that, "an amount equal to ½% of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the Balance-sheet of the assessee ,on the first day and the last day of the previous year" shall be taken. What is required to be seen is, whether the income from the investment which "does not" or "shall not" form part of the income. The phrase "does not" conveys something done or to be done in present, that is, 'income during the year"; and "shall not" conveys something about in future, a strong assertion or intention, that is, 'not earned income in future'. Hence in our opinion, the phrase "shall not" covers a situation where income earned in future or whenever it is earned, then it shall not form part of the total income at any time. Thus, this contention of the assessee prima facie does not appears to be in correct interpretation or in line with the Rule 8D(2)(iii). Accor....
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.... of the contracts are against any specific bills; (ii) These contracts are not delivered; (iii) Assessee is not dealing in currency purchase and sale so as to say that hedging is against the outstanding in the same commodity. c. He observed that no break-up of option and contract given Position of exposure on date of contract/cancellation not furnished d. Further, the outstanding position of the foreign currency exposure has not been furnished by the assessee. e. In 'option' contract delivery is not possible and hence the transactions are not hedging in nature f. Forward/hedging contract are not against specific import/export bills g. Currency is commodity in terms of section 43(5) of the Act and therefore, section 43(5) of the Act applies to the transactions entered into by the Appellant". 11. The Ld. CIT (A) after considering the observations and finding of the AO as well as submissions made by the assessee held that, loss of Rs. 8,33,76,649/- would be considered as speculation loss and loss of Rs. 40,89,46,448/- is to be considered ....
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....cts of the case that assessee is in the business of import and export of diamonds having risks of fluctuations in foreign exchange exposure and entered into hedging contracts with clear underlying of its import or export commitments and loss arising on cancellation of such hedged contracts is nothing but part and parcel of the regular diamond business, he came to the conclusion that the said loss should be considered as normal business loss and not a speculative loss. However, out of total losses of Rs. 49,23,23,597/- incurred by the assessee, he held that, assessee has been able to substantiate the underlying exposure for the derivative contracts to the tune of loss of Rs. 40,89,46,948/- on month-wise bill to bill basis and for the balance loss of Rs. 8,33,76,649/- he observed that assessee could not substantiate with respect to its underlying risk exposure and accordingly he held that loss of Rs. 8,33,76,649/- is to be considered as speculation loss and balance loss of Rs. 40,89,46,948/- is to be considered as business loss. 13. Before us, the Ld. Counsel, Shri Vijay Mehta submitted that assessee has entered into these transactions in order to hedge against the risk of c....
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....account of hedging only. 15. We have carefully considered rival submissions and also perused the relevant findings given in the impugned orders as well as materials placed before us. The assessee imports rough diamonds which are its principle raw material for manufacturing of polished diamonds, procured mainly form Diamond Trading Company which allocates and indicates on annual basis in advance for supply of rough diamonds through 'intention to offer'. The assessee also exports finished goods (polished diamonds) to various parties on credit and credit term ranges from 90 to 150 days. It is part and parcel of the assessee's business strategy to receive foreign currency for exports and pay foreign currency for imports. The assessee also meets its working capital by way of foreign currency loan from the bankers. Thus, the assessee's receipts and payments are in the form of foreign currency and hence it is integral and inseparable part of its business. In this process, the assessee is not only exposed to the risk of adverse price movements in the goods it deals in, but also wide fluctuations in foreign exchange rates in international markets having major impact....
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....ank, then the losses incurred on foreign exchange would be considered as business loss, because the foreign exchange contract is only incidental to the assessee's regular course of the business. While coming to this conclusion, the Hon'ble High Court relied upon the decision of Hon'ble Calcutta High Court in the case of CIT v. Soorajmull Nagarmull [1981] 129 ITR 169/5 Taxman 289. That apart, Hon'ble Gujarat High Court in the case of Friends and Friends Shipping (P.) Ltd. (supra) came to the same conclusion and finding. ITAT Mumbai Bench in the case of London Star Diamond Co. (I) (P.) Ltd. (supra) had also held and relied upon aforesaid decisions and held that, if the assessee is not a dealer in foreign exchange but in regular business of import and export then fluctuation in foreign exchange during the forward contract with the banks for the export would be business transaction and for the business purpose only and will not be in the category of speculation u/s. 43(5). In the said case, the Hon'ble Tribunal after detailed discussion and relying upon various case laws, held that foreign exchange loss in the course of the business occurred due to hedging transacti....
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....ow we come to the revenue's appeal, in the grounds of appeal following ground has been raised:- "On the facts and in the circumstances of the case and in law, the Ld. CIT (A) erred in directing the Assessing Officer to treat only Rs. 83,376,349/- as speculation loss instead of Rs. 492,323,597/- without appreciating that the assessee used foreign currency derivative contract to hedge risk and ignoring that the provisions of section 43(5)(d) are not clearly attracted". Admittedly, this ground is similar to ground which has been decided above, therefore, in view or our finding given above, the revenue's ground does not survive and accordingly the same is dismissed. Resultantly, revenue's appeal stands dismissed. To sum-up: Assessee's appeal stands partly allowed and that of the revenue stands dismissed." 5.1. We find that the ld. CIT(A) had followed the aforesaid Tribunal order and granted relief to the assessee. Since the facts for the year under consideration with regard to this issue of disallowance of forward contract loss are exactly identical to the facts prevailing in A.Y.2008-09, the decision rendered hereinabove by this Tribunal f....
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....evenue for A.Y.2011-12 is with regard to disallowance made u/s.14A of the Act. 7.1. We have heard rival submissions and perused the materials available on record. We find that assessee had derived exempt income to the tune of Rs. 29,49,577/-. The assessee had made suo-moto disallowance of expenses of Rs. 612,773/- in the return of income. The ld. AO proceeded to make disallowance u/s.14A of the Act by applying the computation mechanism provided in Rule 8D(2) of the Rules, which was in excess of the exempt income derived by the assessee. The ld. CIT(A) however, restricted the disallowance u/s.14A of the Act to the exempt income. 8. Aggrieved by this order, only Revenue is in appeal before us and assessee has not filed any appeal. 9. The law is now very well settled by this Hon'ble Supreme Court in the case of Maxopp Investments reported in 402 ITR 640 that disallowance u/s.14A of the Act cannot exceed the exempt income. Hence, we do not find any infirmity in the order of the ld. CIT(A) in this regard. Accordingly, the ground No.6 raised by the Revenue for A.Y.2011-12 is dismissed. 10. In the result, all the appeals of the Revenue are dismissed. ITA No.1982/Mum/2020 - ....
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....hortage of 48.94 carats in diamond industry for cut and polished diamonds representing difference really matters and the same cannot be attributed to the weighing difference. The ld. AO applied the valuation of Rs. 23764.89 per carat on the shortage quantity of 48.94 carats and made an addition of Rs. 11,63,054/- as sales made out of books and added the same u/s.69A of the Act. This action of the ld. AO was upheld by the ld. CIT(A). We find that admittedly there was only a shortage of stock of 48.94 carats found at the time of search i.e. physical stock was less by 48.94 carats. This goes to prove that assessee could have made sales out of books. Hence, only the profit element embedded on the said sale could be brought to tax. The argument of the ld. AO could be accepted when there is excess stock found physically either at the time of search / survey wherein the purchases of excess physical stock found need to be explained. In the instant case, since, there was only shortage of physical stock to the extent of 48.94 carats, we hold that only profit element embedded in said sale transaction could be brought to tax. In this regard we find that the ld. AR placed reliance on the Co-ord....
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....ed by the search authority as stock out of books and treating the same as undisclosed income. 14.1. In response thereto, Mr. Hiten B Parikh vide reply to Question No.10 of the statement recorded during search, replied by confirming that 1849.34 carats are polished diamonds and there is a discrepancy of 180.15 carats of diamonds and sought time to explain the difference thereon. Later, the assessee had furnished the reconciliation of stock of rough rejection and rough diamonds as under:- "1. Reconciliation of stock of Rough Rejection: We have enclosed herewith the stock reconciliation statement containing the reconciliation between the physical stock of Rough Rejection and Book Stock of Rough Rejection as on 8.8.2011 asAnnexure-1. In this regard, please find enclosed: a) A copy of the stock report submitted during the course of search proceedings and which also forms part of the seized documents, reflecting the book stock-of Rough Rejection at 113,179.05 carats at the office of the at 23A, Geeta Co-op. Society, Gamdevi, Mumbai-400 007. A of the same is enclosed as Annexure-2. (Pg.Nq.107 of Annexure A-Pages 1 to 115 seized from Geeta Co. Op Soci....
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....from Geeta Co. Op Society office 5' Floor on 09.08.2011. To reconcile the same with the physical stock please find enclosed herewith: a) A copy of the valuation report issued by the Government Approved Valuer Mr. G.M.Jain dated 08.08.2011 in respect of the physical stock inventorised at the office of the assessee at 23A, Geeta Co-op. Society, Gamdevi, Mumbai-400 007, reflecting the stock of Rough Diamonds at 1,35,400.17 carats as . Annexure~3 & 7, Please refer to Serial Nos. I to 72 and also the summary of the said valuation report. b) A copy of the stock report submitted during the course of search proceedings and which also forms part of the seized documents, reflecting the book stock of Rough Rejection at 1,18,918.38 carats (i.e. 2,23,440.95 as reduced by 1,04,522.57 carats) at the office of the assessee at Navsari (Refer Annexure-9). This document was seized from the Navsari Office as Pg No. I of Annexure-S5, Thus the total physical stock as per valuation done as on 08/08/2011 was 2,54,318.45 (Geeta 135,400.17 + Navsari 1.18,918.38) The difference had arisen on account of the following: - a) Stock of Rough Diamonds issued to various Karig....
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....n at that point in time, no register showing the entry of stock received from third party (i.e. Neelam Exports) was shown to the Investigation wing. The ld. AO observed that the copy of Jangad of M/s. Neelam Exports was not found at the time of search on 08/08/2011 and the same was not stated at the time of search by the assessee, hence, he observed that certain stocks belonging to a third party appears to be an afterthought which was used only to explain the stock difference. We find that the ld. AO in para 16 of his order had also recorded the fact that summons u/s.131 of the Act was issued in the name of M/s. Neelam Exports during the course of assessment proceedings on 07/03/2014, the proprietor of M/s. Neelam Exports attended and furnished requisite details alongwith written submissions. A statement was also recorded from him wherein it was confirmed that 169.45 carats of diamonds was sent back to the assessee by M/s. Neelam Exports on 04/08/2011. This stands as a clinching evidence to accept the explanation offered by the assessee both before the search party as well as before the ld. AO during the course of assessment proceedings that stock to the tune of 169.45 carats repre....