The ACIT, Circle-9, Surat V. M/s. I.P. Patel & Co., Surat

ITA 1134/AHD/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 8875 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 11 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-03-2010
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 11-02-2010
• Assessment Year: 2002-2003
• Appeal Filed On: 16-03-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: M C PANDIT
• Assessee Lawyers: HARDIK VORA AR ITA NO AHD
• Keywords: Business income; Business expenditure; Speculative transactions
• Section: 143(3); 80HHC; 201; 80HH; 147; 148; 28

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, C-BENCH, AHMEDABAD. BEFORE: SHRI T K SHARMA, JUDICIAL MEMBER, AND SHRI D.C.AGRAWAL, ACCOUNTANT MEMBER. ITA NO.1134/AHD/2007 (ASSESSMENT YEAR 2002-2003) THE ASSTT. COMMISSIONER OF INCOME TAX CIRCLE-9, SURAT. VERSUS M/S. I.P. PATEL & CO. 1 TO 8, SIDHKUTIR INDUSTRIAL ESTATE, KAPODARA, SURAT. (APPELLANT) (RESPONDENT) PAN:AAAFI 6501 Q ITA NO.1231/AHD/2007 (ASSESSMENT YEAR 2002-2003) M/S. I.P. PATEL & CO. 1 TO 8, SIDHKUTIR INDUSTRIAL ESTATE, KAPODARA, SURAT. VERSUS THE ASSTT. COMMISSIONER OF INCOME TAX CIRCLE-9, SURAT. (APPELLANT) (RESPONDENT) PAN:AAAFI 6501 Q ITA NO.1232/AHD/2007 (ASSESSMENT YEAR 2003-2004) M/S. I.P. PATEL & CO. 1 TO 8, SIDHKUTIR INDUSTRIAL ESTATE, KAPODARA, SURAT. VERSUS THE ASSTT. COMMISSIONER OF INCOME TAX CIRCLE-9, SURAT. (APPELLANT) (RESPONDENT) PAN:AAAFI 6501 Q ITA NO.1135/AHD/2007 (ASSESSMENT YEAR 2003-2004) THE ASSTT. COMMISSIONER OF INCOME TAX CIRCLE-9,SURAT. VERSUS M/S. I.P. PATEL & CO. 1 TO 8, SIDHKUTIR INDUSTRIAL ESTATE, KAPODARA, SURAT. (APPELLANT) (RESPONDENT) PAN:AAAFI 6501 Q FOR THE REVENUE: SHRI M.C. PANDIT, SR. DR FOR THE ASSESSEE: SHRI HARDIK VORA, AR 2 ITA NO.1134/AHD/2007 AND ORS. ORDER PER D C AGRAWAL (ACCOUNTANT MEMBER): THESE ARE THE TWO SETS OF CROSS APPEALS FOR THE ASSESSMENT YEAR 2002-2003 AND 2003- 2004, FILED BY THE ASSESSEE AS WELL AS BY THE REVENUE AGAINST THE ORDE RS OF THE LD. COMMISSIONER OF INCOME TAX(APPEALS). AS THEY INVOL VED COMMON ISSUES, THEY ARE TAKEN UP TOGETHER FOR THE SAKE OF CONVENIE NCE. 2. ITA NO.1231/AHD/2007 ASSESSMENT YEAR 2002-2003 THE ASSESSEE HAS RAISED FOLLOWING GROUNDS IN ITS AP PEAL. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN A SSUMING JURISDICTION U/S. 148 OF THE I.T. ACT AND THEREBY E RRED IN FRAMING ASSESSMENT U/S. 147 OF THE I.T. ACT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN T AXING INTEREST ON FIXED DEPOSIT OF RS.12,49,980/- AS INCO ME FROM OTHER SOURCES AND THEREBY ERRED IN CONFIRMING REVIS ED DEDUCTION U/S 80HHC OF THE I.T. ACT. EVEN OTHERWIS E, THE LEARNED CIT(APPEALS) HAS ERRED IN CONFIRMING EXCLUS ION OF INTEREST INCOME FROM PURVIEW OF DEDUCTION U/S. 80HH C OF THE ACT, WHEN INTEREST PAYMENT IS MORE THAN INTEREST RE CEIVED. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN D ISALLOWING RS.2,28,876/- FOR ALLEGED FOREIGN TRAVELLING EXPENS ES INCURRED FOR CUSTOMERS. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN D ISALLOWING RS.1,11,571/- BEING 10% OF TOTAL TELEPHONE, POSTAGE AND TELEGRAM EXPENSES OF RS.11,15,712/- FOR ALLEGED PER SONAL USE. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT(A) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN M AKING ADDITION OF RS.35,37,000/- ON PROTECTIVE BASIS IN R ESPECT OF LABOUR CHARGES PAID TO SHRI. JITENDRA B. SONANI. 3 ITA NO.1134/AHD/2007 AND ORS. 3. THE FACTS OF THE CASE ARE THAT THE ASSESSEE FIRM IS ENGAGED IN THE BUSINESS OF IMPORT-EXPORT AND CUTTING/POLISHING OF DIAMONDS. THE ASSESSEE IMPORTED ROUGH DIAMONDS, GOT THEM POLISHED AND EXPO RTED IN THE YEAR UNDER CONSIDERATION. THE ASSESSEE SHOWED TOTAL TUR NOVER OF RS.1,48,81,76,314/- AND CLAIMED DEDUCTION UNDER SEC TION 80HHC. THE FIRST ISSUE RAISED BY THE ASSESSEE IN ASSESSMENT YE AR 2002-2003 IS ABOUT ASSUMPTION OF JURISDICTION BY THE ASSESSING OFFICER FRAMING ASSESSMENT UNDER SECTION 147. THIS ISSUE WAS NOT PRESSED BY T HE LEARNED AUTHORISED REPRESENTATIVE AND HENCE IT IS REJECTED. THIS PART OF THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX(APPEALS) IS CONFIRMED. 4. THE NEXT ISSUE IS ABOUT DEDUCTION OF INTEREST ON FIX DEPOSITS UNDER SECTION 80HHC. IT IS CLAIMED THAT INTEREST PAYMENT IS MORE THAN INTEREST RECEIVED. THE ASSESSING OFFICER NOTED THAT ASSESSE E EARNED AN AMOUNT OF RS.12,49,980/- ON ACCOUNT OF INTEREST ON FIXED DEPO SITS LYING WITH VARIOUS BANKS. HE FOUND THAT THESE FDS ARE NOT RELATED TO THE EXPORTS OF THE ASSESSEE AND THEREFORE THEY WOULD BE EXCLUDED FROM ITS EXPORT INCOME FOR THE PURPOSE OF COMPUTATION OF DEDUCTION UNDER SECTI ON 80HHC. A SHOW CAUSE NOTICE WAS GIVEN TO THE ASSESSEE AND AFTER CO NSIDERING THE REPLY ASSESSING OFFICER HELD THAT INTEREST INCOME EARNED IS NOT PART OF ITS EXPORT INCOME. HE ACCORDINGLY MODIFIED THE CLAIM OF DEDUC TION UNDER SECTION 80HHC. 5. LD. COMMISSIONER OF INCOME TAX(APPEALS) CONFIRME D THE REASONING GIVEN BY THE ASSESSING OFFICER BY RELYING ON THE DE CISION OF THE HON'BLE SUPREME COURT IN CIT VS. PANDIAN CHEMICALS 262 ITR 278 (SC). 6. BEFORE US, LEARNED AUTHORISED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ISSUE HAS BEEN DECIDED IN EARLIE R YEARS BY THE TRIBUNAL IN FAVOUR OF THE ASSESSEE AND ALSO THE DECISION OF THE HON'BLE DELHI HIGH COURT IN SHRIRAM HONDAS CASE 289 ITR 475 (DELHI) I S IN FAVOUR OF THE 4 ITA NO.1134/AHD/2007 AND ORS. ASSESSEE. ON THE OTHER HAND LEARNED DR RELIED ON T HE ORDER OF THE AUTHORITIES BELOW. 7. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE ARE OF THE CONSIDERED VIEW THAT THERE IS NO CASE FOR INTERFERENCE IN THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX(APPEALS) ON THIS POINT. ONCE A FINDING IS GIVEN THAT INTEREST IS EARNED ON FIXED DEPOSITS AND THERE IS NO NEXUS IN THIS FIX DEPOSITS WITH THE MANUFACTURING OR EXPORT ACTIV ITIES AND FIXED DEPOSITS ARE OUT OF SURPLUS FUNDS AVAILABLE WITH THE ASSESSE E, THEN QUESTION OF HOLDING THAT INTEREST INCOME IS BUSINESS INCOME DOE S NOT ARISE. IN FACT IT IS INCOME FROM OTHER SOURCES AND THEREFORE THERE IS NO QUESTION OF ANY ADJUSTMENT EVEN WITHIN THE MEANING OF CLAUSE (BAA) TO EXPLANATION TO SECTION 80HHC. THE QUESTION OF NETTING WOULD ARISE , WHICH IS WHAT IS DIRECTED IN SHRIRAM HONDAS CASE, ONLY WHEN IT IS H ELD THAT INTEREST INCOME IS BUSINESS INCOME. ACCORDINGLY, THIS GROUND OF TH E ASSESSEE IS REJECTED. 8. NEXT GROUND IS REGARDING DISALLOWANCE OF FOREIGN TRAVELING EXPENSES INCURRED FOR CUSTOMERS. THE ASSESSING OFFICER NOTI CED THAT THE ASSESSEE HAS INCURRED A SUM OF RS.22,88,760/- ON TRAVELLING OF ITS CLIENTS. HE REQUIRED THE ASSESSEE TO JUSTIFY THE CLAIM. IT WAS SUBMITTED THAT EXPENDITURE WAS INCURRED FOR BUSINESS NECESSITY. T HE ASSESSING OFFICER REJECTED THE CLAIM AND MADE 10% DISALLOWANCE WHICH CAME TO RS.2,28,876/-. THE LD. COMMISSIONER OF INCOME TAX( APPEALS) CONFIRMED THE SAME FOR THE REASONS GIVEN BY THE ASSESSING OFF ICER. 9. BEFORE US, LEARNED AUTHORISED REPRESENTATIVE SUB MITTED THAT THIS IS A GENUINE BUSINESS EXPENDITURE INCURRED ON THE CLIENT S. THE ASSESSING OFFICER HAS NOT POINTED OUT WHICH PART OF THE EXPEN DITURE IS NOT GENUINE. THEY WERE INCURRED FOR BUSINESS PURPOSES AND THEREF ORE ALLOWABLE. 5 ITA NO.1134/AHD/2007 AND ORS. 10. ON THE OTHER HAND LEARNED DR RELIED ON THE ORDE RS OF THE AUTHORITIES BELOW. 11. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE ARE OF THE VIEW THAT THE ADDITION IS NOT CALLED FOR. IT IS BECAUSE, IT IS A N ADMITTED FACT THAT EXPENDITURE WAS INCURRED ON THE CLIENTS OF THE ASSE SSEE. THERE CANNOT BE ANY PURPOSE OTHER THAN BUSINESS PURPOSE WHEN EXPEND ITURE IS INCURRED ON THEM. NO CASE IS MADE OUT WHETHER THERE WAS ANY EX PENDITURE OF PERSONAL NATURE INCLUDED IN THIS CATEGORY. THERE IS ALSO NO CLAIM THAT EXPENDITURE WAS NOT INCURRED AT ALL OR WAS INCURRED FOR SOME OT HER PURPOSES AND WAS WRONGLY CLASSIFIED UNDER THIS HEAD. THE ASSESSING OFFICER HAS ALSO NOT POINTED OUT WHICH EXPENDITURE IS NOT ACTUALLY INCUR RED OR NOT INCURRED FOR BUSINESS PURPOSES. THE DISALLOWANCE IS ONLY AD-HOC , ON ESTIMATE BASIS, AND ON PRESUMPTION. IT WILL NOT JUSTIFY THE DISALLOWAN CE. IT IS ACCORDINGLY DELETED. THIS GROUND OF THE ASSESSEE IS ALLOWED. 12. GROUND NO.4 RELATES TO DISALLOWANCE OF 10% OF T OTAL TELEPHONE POSTAGE AND TELEGRAM EXPENSES, WHICH WORKED OUT TO RS.1,11,571/-. THE CLAIM WAS DISALLOWED ON THE GROUND THAT SOME PERSON AL ELEMENT IS INVOLVED. LD. COMMISSIONER OF INCOME TAX(APPEALS) CONFIRMED THE SAME. LEARNED AUTHORISED REPRESENTATIVE CONTENDED THAT EV EN THOUGH EXPENDITURE IS GENUINE BUT IN CASE ADDITION IS SUST AINABLE THEN DEDUCTION UNDER SECTION 80HHC SHOULD HAVE BEEN ALLOWED. THE LEARNED DR ON THE OTHER HAND SUPPORTED THE ORDER OF THE AUTHORITIES B ELOW. 13. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE ARE OF THE VIEW THAT ADDITION AS SUCH IS REASONABLE BECAUSE ASSESSEE HAS NOT BEEN ABLE TO PROVE THAT ENTIRE EXPENDITURE WAS INCURRED FOR BUSINESS P URPOSES. HOWEVER, HIS ALTERNATIVE CLAIM THAT DEDUCTION UNDER SECTION 80HH C SHOULD BE ALLOWED ON SUCH ADDITION IS ACCEPTABLE. IT IS BECAUSE BY M AKING DISALLOWANCE IT IS ONLY BUSINESS PROFIT WHICH IS INCREASED AND ACCORDI NGLY IT SHOULD BE 6 ITA NO.1134/AHD/2007 AND ORS. CONSIDERED AS PART OF BUSINESS PROFIT WHILE CALCULA TING DEDUCTION UNDER SECTION 80HHC. THE ASSESSING OFFICER WILL RECALCUL ATE THE ALLOWABLE DEDUCTION UNDER SECTION 80HHC AFTER TAKING INTO ACC OUNT THE ADDITIONS SO SUSTAINED, AS PART OF BUSINESS PROFIT. THIS GROUND OF THE ASSESSEE IS ALLOWED. 14. GROUND NO.5 RELATES TO ADDITION ON PROTECTIVE B ASIS IN RESPECT OF LABOUR CHARGES AMOUNTING TO RS.35,37,000/-. THE LE ARNED ASSESSING OFFICER FOUND THAT ASSESSEE HAS MADE TOTAL PAYMENT OF RS.1,48,78,902/- ON ACCOUNT OF LABOUR CHARGES TO ONE SHRI. JITENDRA B. SONANI FOR CARRYING OUT JOB WORK OF CUTTING AND POLISHING OF ROUGH DIAMONDS . THE ASSESSING OFFICER FURTHER FOUND THAT SHRI. JITENDRA B. SONANI HAS NOT HIMSELF CARRIED OUT JOB WORK, BUT HAS PASSED THE SAME TO SUBCONTRAC TORS AGAINST WHOM A SUM OF RS.53,16,000/- WAS OUTSTANDING. FURTHER, TH E PARTIES TO WHOM THE PAYMENTS WERE MADE BY JITENDRA B. SONANI WERE THOSE WHOSE ACCOUNTS WERE INTRODUCED BY EMPLOYEES OF THE ASSESSEE. THE PAYMENTS WERE MADE BY J.B. SONANI THROUGH BEARER CHEQUES. THESE CHEQU ES WERE DEPOSITED AND WITHDRAWN BY THE SUBCONTRACTORS ON THE SAME DAY OR NEXT DAY OF THE DEPOSITS. ON THIS BASIS ASSESSING OFFICER INFERRED THAT PAYMENTS MADE TO JITENDRA B. SONANI AMOUNTING TO RS.35,37,000/- WAS RETURNED BACK TO THE ASSESSEE COMPANY. THUS, JITENDRA B. SONANI WAS ONL Y A DUMMY FOR THE ASSESSEE. IT WAS EXPLAINED THAT JITENDRA B. SONANI IS AN INDEPENDENT ASSESSEE. PAYMENTS MADE BY IT, IS REFLECTED IN ITS BOOKS OF ACCOUNTS. THE ASSESSEE HAS NO CONCERN WITH THE WORK OF SHRI. JITE NDRA B. SONANI. THE ASSESSING OFFICER REJECTED THE CLAIM AND MADE THE A DDITION. THE LD. COMMISSIONER OF INCOME TAX(APPEALS) CONFIRMED THE O RDER OF THE ASSESSING OFFICER BY OBSERVING AS UNDER: 10.5 I HAVE PERUSED THE FACTS OF THE CASE OF THE CASE DISCUSSED BY THE ASSESSING OFFICER IN THE ASSESSMEN T ORDER AND ALSO CAREFULLY WENT THROUGH THE SUBMISSION AS MADE BY TH E A.R. ON THE BASIS OF THE ABOVE DISCUSSED FACTS, IT IS SEEN THAT THE ACCOUNTS OF THE 7 ITA NO.1134/AHD/2007 AND ORS. SUB-CONTRACTORS WERE INTRODUCED BY THE PARTNERS/EMP LOYEES OF THE APPELLANT FIRM AND ALL THE BEARER CHEQUES TO THE EX TENT OF RS.35,37,000/- ISSUED BY SHRI. SONANI TO THE SUB CO NTRACTORS WERE WITHDRAWN BY THEM ON THE SAME DAY OR THE OTHER AND THERE APPEARED TO BE A NEXUS BETWEEN THE PARTNERS/EMPLOYEES OF THE APPELLANT-FIRM AND THE SUB-CONTRACTOR. SHRI. J.B. SONANI AND IN T HIS WAY, THE POSSIBILITY OF SIPHONING OF RS.35,37,000/- BACK TO THE PARTNERS OF THE APPELLANT-FIRM COULD NOT BE RULED OUT. HAD TO THE PARTNERS OF THE APPELLANT FIRM WERE NOT HAVING ANY INTEREST IN THE PAYMENTS MADE BY SHRI. J.B. SONANI TO THE SUB-CONTRACTORS BY BEARER CHEQUE, THERE WAS NO NEED TO INTRODUCE THE ACCOUNTS OF SUB-CONTRACTOR S BY SUCH PEOPLE AND THIS PRIMA FACIE PROVES THAT THE FINDINGS OF TH E ASSESSING OFFICER THAT THE PAYMENTS TO THE EXTENT OF RS.35,37,000/- W ERE BOGUS ONE. IT IS ALSO FOUND THAT IN HIS ORDER IN THE CASE OF SHRI . J.B. SONANI, THE THEN C.I.T.(A) ALLOWED A SMALL RELIEF TO SHRI. J.B. SONANI AND HELD MAJOR PORTION OF THE LABOUR CHARGES MADE BY THE APP ELLANT TO HIM AS BOGUS ONES AND, THEREFORE, IN VIEW OF THE ABOVE DIS CUSSED FACTS HOLD THAT THE ADDITION AS MADE BY THE ASSESSING OFFICER IS LEGALLY JUSTIFIED AND HENCE THE SAME IS CONFIRMED. ACCORDINGLY, THIS GROUND OF APPEAL IS DISMISSED. 15. BEFORE US LEARNED AUTHORISED REPRESENTATIVE SUB MITTED THAT THIS ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE TRIBUNAL IN THE CASE OF SHRI. JITENDRA B. SONANI HOLDING THAT RATES OF J OB CHARGES ARE NOT EXCESSIVE OR UNREASONABLE AS THE 12 PARTIES TO WHOM THE PAYMENTS WERE MADE BY SHRI. JITENDRA B. SONANI, ARE NOT RELATED T O HIM. THE TRIBUNAL HELD AS UNDER: 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND M ATERIAL PLACED ON RECORD. THE JOB WORKERS HAVE CONFIRMED T HE PAYMENTS SUPPORTED BY THEIR BILLS AND CONFIRMATION. THE QUA NTITY DETAILS IN CARATS HAVE BEEN MAINTAINED ON THE BASIS OF WHICH J OB CHARGES ARE PAID. AGAINST THE JOB CHARGES, THERE IS CORRESPOND ING QUANTITY OF DIAMOND CUT AND POLISHED RECEIVED FROM THE JOB WORK ERS AND GIVEN TO M/S. I.P. PATEL & CO. FOR WHOM JOB WORK IS UNDER TAKEN. THE RATES OF JOB CHARGES ARE NOT EXCESSIVE AND UNREASONABLE A ND ALL THE TWELVE PARTIES ARE NOT RELATED TO ASSESSEE. THE GROSS PRO FIT RATE OF ASSESSEE IS 3.83% WHICH IS MORE THEN THE GROSS PROFIT RATE O F 3% DIRECTED TO BE ADOPTED BY THE TRIBUNAL IN CASE OF ATUL M JHAVER I HUF. IN FACT, IN SUCH CASES WHERE JOB CHARGES ARE NOT CONFIRMED, ASSESSING OFFICER MADE 10% DISALLOWANCE WHICH WERE ALSO DELET ED BY THE TRIBUNAL AS PER THE CASE OF BHARATKUMAR RAMNIKLAL M EHTA. THE 8 ITA NO.1134/AHD/2007 AND ORS. CASE OF ASSESSEE IS BETTER AS ALL THE TWELVE PARTIE S HAVE CONFIRMED THE RECEIPT OF JOB CHARGES. HOWEVER, THE DISALLOWANCE @ 20% OUT OF TOTAL ADDITION OF RS.35,37,000/- IS CONFIRMED U/S. 40A(3). SO THE GROUND NO.1 OF ASSESSEES APPEAL IS PARTLY ALLOWED AND GROUND NO.1 OF REVENUES APPEAL IS DISMISSED. 16. AGAINST THIS, LEARNED DR SUBMITTED THAT TRIBUNA L HAS NOT DECIDED THE ISSUE IN THE CASE OF THE ASSESSEE, THEREFORE THAT O RDER DOES NOT BECOME PRECEDENCE. 17. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE FIN D THAT TRIBUNAL HAS HELD THAT JOB WORKERS HAVE CONFIRMED THE PAYMENTS S UPPORTED BY THEIR BILLS AND CONFIRMATIONS. ACCORDINGLY, THESE PAYMENTS WER E HELD AS GENUINE. ONCE IT IS SO THEN PAYMENT BY ASSESSEE TO SHRI. JIT ENDRA B. SONANI CANNOT BE HELD BOGUS. WHAT WAS REQUIRED ON THE PART OF TH E ASSESSING OFFICER WAS TO SHOW THAT ALLEGED SUBCONTRACTORS DID NOT DO ANY WORK AT ALL. THEIR STATEMENTS SHOULD HAVE BEEN RECORDED AND SHRI. JITE NDRA B. SONANI AND ASSESSEE SHOULD HAVE BEEN CONFRONTED. ONCE HAVING N OT DONE SO AND NO MATERIAL IS COLLECTED TO HOLD THAT NO WORK WAS DONE BY THE SUB-CONTRACTORS, IT CANNOT BE SAID THAT PAYMENTS MADE BY THE ASSESSE E TO SHRI. JITENDRA B. SONANI WAS BOGUS OR WAS ONLY A DEVICE TO INFLATE EX PENSES. ACCORDINGLY, AND FOLLOWING THE ORDER OF THE TRIBUNAL, WE DELETE THE ADDITION. 18. AS A RESULT, APPEAL FILED BY THE ASSESSEES IS P ARTLY ALLOWED. ITA NO. 1134/AHD/2007 19. THE REVENUE HAS RAISED FOLLOWING GROUNDS IN ITS APPEAL. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN ALLOWING DEDUCTION EXCHANGE RATE DIFFERENCE RS.71,41,221/- AND INTEREST EARNED ON FD AMOUNTING TO RS.12,49,980/- CONSIDER AS PART OF EXP ORT TURNOVER AND ALLOWED DEDUCTION U/S. 80HHC OF THE I. T. ACT THEREON, DISALLOWED BY THE ASSESSING OFFICER AS PER ASSESSMENT ORDER U/S. 143(3) OF THE I.T. ACT, 1961 DATED 27.03.2006. 9 ITA NO.1134/AHD/2007 AND ORS. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) HAS ERRED IN CONSIDERING EXPORT OF REJECTED DIAMONDS OF RS.14,50,310/- AS PART OF EXPO RT TURNOVER AND ALLOWED DEDUCTION U/S. 80HHC OF THE I. T. ACT, DISALLOWED BY THE ASSESSING OFFICER AS PER ASSESSME NT ORDER U/S. 143(3) OF THE I.T. ACT, 1961 DATED 27.03.2006. 20. THE FIRST ISSUE IS ALLOWING DEDUCTION UNDER SEC TION 80HHC ON FOREIGN EXCHANGE DIFFERENCE TREATED AS INCOME. THE ASSESSING OFFICER FOUND THAT ASSESSEE HAS GAINED PROFIT THIS YEAR ON ACCOUNT OF FAVOURABLE EXCHANGE RATE VARIATION IN RESPECT OF SALES MADE IN EARLIER YEARS. HE DID NOT ALLOW THE CLAIM UNDER SECTION 80HHC, BUT LEARNE D LD. COMMISSIONER OF INCOME TAX(APPEALS) FOLLOWING THE DECISION OF HO N'BLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. AMBA IMPEX 201 CTR 409 (GUJ.) DATED 20- 12-2005 ALLOWED THE CLAIM. 21. AFTER HEARING THE PARTIES, WE ARE OF THE CONSID ERED VIEW THAT THERE IS NO CASE FOR INTERFERENCE IN THE ORDER OF THE LD. CO MMISSIONER OF INCOME TAX(APPEALS) ON THIS GROUND. THE REASONS ARE THAT ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBU NAL IN THE ASSESSMENT YEAR 2001-2002. THE TRIBUNAL HAS FOLLOWED THE DECI SION OF THE TRIBUNAL IN AMBA IMPEX VS. ACIT, ITA NO. 230/A/2004 DATED 16-07-2004. 22. WE NOTICE THAT HON'BLE GUJARAT HIGH COURT IN TH E CASE OF CIT VS. AMBA IMPEX (2006) 282 ITR 144 (GUJ.) HAS REMANDED T HE MATTER FOR FINDING OUT AS TO WHICH YEARS EXPORT EXCHANGE RATE DIFFERENCE PERTAINED. WE ACCORDINGLY RESTORE THIS MATTER TO THE FILE OF T HE ASSESSING OFFICER FOR GIVING OPPORTUNITY TO THE ASSESSEE FOR EXPLAINING T O WHICH YEAR EXCHANGE RATE DIFFERENT GAIN PERTAINED AND WHETHER NECESSARY PERMISSION WAS TAKEN FROM THE AUTHORITIES FOR EXTENDING TIME PERIOD DURI NG WHICH FOREIGN 10 ITA NO.1134/AHD/2007 AND ORS. EXCHANGE COULD BE RECEIVED. IF FOREIGN EXCHANGE GA IN WAS WITHIN EXTENDED PERIOD, THEN CLAIM UNDER SECTION 80HHC WOULD BE ALL OWED. 21. AS A RESULT, THIS GROUND OF THE REVENUE IS ALLO WED, BUT FOR STATISTICAL PURPOSE. 22. NEXT GROUND IS REGARDING DEDUCTION UNDER SECTIO N 80HHC ON SALE PROCEEDS OF REJECTED DIAMONDS. 23. WE HAVE HEARD THE LEARNED AR OF THE ASSESSEE AN D LEARNED DR AND CAREFULLY PERUSED THE MATERIAL ON RECORD. IT HAS B EEN HELD IN ASSESSMENT YEAR 2001-2002 BY THE TRIBUNAL THAT EXPORT OF REJEC TED DIAMONDS ARE PART OF EXPORT TURNOVER ACCORDINGLY ENTITLED FOR DEDUCTI ON UNDER SECTION 80HHC. IN THIS REGARD, WE REFER TO PARA 7 OF THE O RDER OF THE TRIBUNAL IN THE CASE OF THE ASSESSEE FOR THE ASSESSMENT YEAR 20 01-2002 AS UNDER: 7. AS REGARDS TO EXPORT OF REJECTED DIAMOND OF RS. 21,67,160/- IS CONCERNED, WE FIND THAT THIS IS TO BE INCLUDED AS P ART OF THE EXPORT TURNOVER IN VIEW OF THE DECISION OF THE TRIBUNAL IN THE CASE OF ITO VS. PANKAJ DIAMONDS (AHMEDABAD BENCH), ITA NO.500/A /2002 DATED 10-06-2004 IN WHICH ONE OF US, JUDICIAL MEMBE R WAS A PARTY. THE RELEVANT DISCUSSION IN PARA-6 AND 7 OF THE ORDE R ARE PRODUCED HEREIN UNDER FOR THE SAKE OF BREVITY. 6. THE LEARNED.AR OF THE ASSESSEE SUBMITTED THAT T HE FIRM EXPORTED DIAMONDS OF RS.4,86,234/- WHICH IS LOWER Q UALITY AND SEMI-PROCESSED DIAMONDS TRADITIONALLY KNOWN AS REJECTED DIAMOND IN THE DIAMOND INDUSTRY. THE AS SESSEE FIRM HAS EXPORTED SEMI-PROCESSED DIAMONDS. THE ASS ESSEE FIRM IS ENGAGED IN CUTTING AND POLISHING OF DIAMOND S OUT OF ROUGH DIAMONDS. DURING THE COURSE OF VARIOUS STAGE S OF MANUFACTURING PROCESS, THE ASSESSEE FIRM RECEIVES S EMI- PROCESSED DIAMONDS OF LOWER QUALITY AND SUCH DIAMON D OF LOWER QUALITY IS TRADITIONALLY KNOWN AS REJECTED D IAMONDS. THE LD. AR FURTHER SUBMITTED THAT THE ASSESSEE IS E LIGIBLE FOR DEDUCTION U/S 80HHC ON THIS TURNOVER BECAUSE REJECT ED DIAMONDS ARE BYE-PRODUCT (SEMI-CUT AND POLISHED) OF THE 11 ITA NO.1134/AHD/2007 AND ORS. ASSESSEE FIRM AND THE SAME ARE NOT SIMPLY ROUGH DIA MONDS. THE LD. AR IN SUPPORT OF HIS CONTENTION RELIED UPON THE DECISION OF ITAT, BANGALORE BENCH IN THE CASE OF GO D GRANITES VS. ITO, 60 TTJ (BANG.) 724 AND THE DECISI ON OF ITAT MADRAS BENCH IN THE CASE OF ACIT & VIJAY GRANI TES (P) LTD. 75 TTJ (MAD) 744. THE LD. DEPARTMENTAL REPRES ENTATIVE, ON THE OTHER HAND, SUPPORTED THE ORDERS OF THE AUTH ORITIES BELOW. 7. ON PERUSAL OF THE DECISIONS CITED BY THE LD. AUT HORISED REPRESENTATIVE WE FIND THAT IN THOSE DECISION, DEDU CTION U/S. 80HHC WAS ALLOW IN VIEW OF THE CIRCULAR NO.729 DATE D 1 ST NOVEMBER, 1995. WE ALSO FIND THAT THE FACTS OF THE CASE UNDER CONSIDERATION ARE IDENTICAL TO THE FACTS OF THE DEC ISION CITED BY THE LD. AR. IN THOSE CASES, THE ASSESSEE EXPORTING CUT AND POLISHED GRANITE BLOCKS THOUGH NOT FINALLY CUT AND POLISHED DEDUCTION U/S. 80HHC WAS ALLOWED. WE RESPECTFULLY FOLLOW THE ABOVE ORDERS OF ITAT AND IN VIEW OF THAT, ALLOW THE CLAIM OF THE ASSESSEE. THE ASSESSING OFFICER IS DIRECTED ACCORDINGLY. 8. WE RESPECTFULLY FOLLOW THE AFORESAID DECISION OF THE TRIBUNAL AND DIRECT THE ASSESSING OFFICER TO TREAT THE SALE OF EXPORT OF REJECTED DIAMOND OF RS.21,67,160/- AS PART OF EXPORT TURNOVE R WHILE COMPUTING DEDUCTION UNDER SECTION 80HHC. ACCORDINGLY, THIS GROUND OF THE REVENUE IS DISMISSE D. 24. AS A RESULT, APPEAL FILED BY THE REVENUE IS PAR TLY ALLOWED BUT FOR STATISTICAL PURPOSE. ITA NO.1232/AHD/2007; ASSESSMENT YEAR 2003-2004 25. IN THIS YEAR ASSESSEE HAS RAISED FOLLOWING GROU NDS: 1. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT (APPEALS) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN TAXING INTER EST ON FIXED DEPOSIT OF RS.2,00,167/- [CIT(A) HAS WRONGLY WRITTEN RS.12, 49,980/-] AS INCOME FROM OTHER SOURCES AND THEREBY ERRED IN CONF IRMING REVISED DEDUCTION U/S 80HHC OF THE I.T. ACT. EVEN OTHERWIS E, THE LEARNED CIT (APPEALS) HAS ERRED IN CONFIRMING EXCLUSION OF INTEREST INCOME 12 ITA NO.1134/AHD/2007 AND ORS. FROM THE PURVIEW OF DEDUCTION U/S. 80 HHC OF THE AC T, WHEN INTEREST PAYMENT IS MORE THAN INTEREST RECEIVED. 2. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT (APPEALS) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING OF RS.2,35,535/- [CIT(A) HAS WRONGLY WRITTEN RS.2,28,876/-] FOR ALLE GED FOREIGN TRAVELING EXPENSES INCURRED FOR CUSTOMER. 3. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT (APPEALS) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING RS.65,655/- BEING 10% OF TOTAL TELEPHONE EXPENSES OF RS.6,56,558/- [C IT(A) HAS WRONGLY WRITTEN RS.11,15,712/-] FOR ALLEGED PERSONA L USE OF TELEPHONE. 26. FIRST ISSUE IS REGARDING CLAIM OF DEDUCTION UND ER SECTION 80HHC ON INTEREST ON FIXED DEPOSITS AND ITS NETTING AGAINST INTEREST PAYMENT WHERE IT IS MORE THAN INTEREST RECEIVED. 27. THIS ISSUE HAS BEEN DECIDED BY US AGAINST THE A SSESSEE IN ASSESSMENT YEAR 2002-2003. RESPECTFULLY FOLLOWING THE SAME, WE DISMISS THIS GROUND. HENCE, GROUND NO.1 OF THIS APPEAL IS REJECTED. 28. NEXT GROUND IS ABOUT 10% DISALLOWANCE OF FOREIG N TRAVEL EXPENSES. SIMILAR ISSUE HAS COME UP BEFORE US IN THE ASSESSME NT YEAR 2002-2003. IT HAS BEEN ALLOWED IN FAVOUR OF THE ASSESSEE. ACCORD INGLY, THIS YEAR ALSO THE CLAIM IS ALLOWED IN FAVOUR OF THE ASSESSEE. THIS G ROUND IS ALLOWED. 29. NEXT GROUND IS ABOUT 10% OF TOTAL TELEPHONE EXP ENSES DISALLOWED BY THE ASSESSING OFFICER AND CONFIRMED BY LEARNED CIT( A). IN ASSESSMENT YEAR 2002-2003, WE HAVE ALLOWED DEDUCTION UNDER SEC TION 80HHC ON THE ADDITION UNDER THIS HEAD. ACCORDINGLY THIS YEAR AL SO WE ALLOW DEDUCTION UNDER SECTION 80HHC ON THIS ADDITION. THIS GROUND IS ALSO ALLOWED. 30. AS A RESULT, APPEAL FILED BY THE ASSESSEE IS PA RTLY ALLOWED. 13 ITA NO.1134/AHD/2007 AND ORS. ITA NO. 1135/A/2007 31. THE FIRST ISSUE IS REGARDING DEDUCTION UNDER SE CTION 80HHC ON EXCHANGE RATE DIFFERENCE PERTAINING TO EARLIER YEAR S. IN THE ASSESSMENT YEAR 2002-2003, WE HAVE RESTORED THE MATTER TO THE FILE OF THE ASSESSING OFFICER TO FIND OUT AS TO WHICH YEAR THE EXCHANGE R ATE GAIN PERTAINED I.E. IN RESPECT OF WHICH YEARS SALE, ASSESSEE HAD GOT THE BENEFIT DUE TO EXCHANGE RATE FLUCTUATION AND THEREAFTER TO ALLOW THE CLAIM UNDER SECTION 80HHC ONLY IF THE GAIN IS RECEIVED WITHIN THE EXTENDED TI ME ALLOWED BY THE APPROPRIATE AUTHORITY. ACCORDINGLY, THIS GROUND IS ALLOWED, BUT FOR STATISTICAL PURPOSES. 32. NEXT GROUND IS REGARDING DEDUCTION UNDER SECTIO N 80HHC ON FORWARDED CONTRACT CANCELLATION GAIN. THIS HAS BEE N DISCUSSED BY THE LD. COMMISSIONER OF INCOME TAX(APPEALS) IN PARA 6. THE ASSESSING OFFICER DISALLOWED THE CLAIM ON THE GROUND THAT THE GAIN AM OUNTING TO RS.25,91,106/- WAS NOT ON ACCOUNT OF REALIZATION OF SALE PROCEEDS AND HENCE IT WOULD NOT FORM PART OF EXPORT TURNOVER. W HAT HAD HAPPENED WAS THAT ASSESSEE ENTERED INTO FORWARDED CONTRACTS FOR FOREIGN EXCHANGE IN ORDER TO WARD OF THE LOSSES ARISING DUE TO ADVERSE FOREIGN EXCHANGE VARIATIONS AND TO MINIMIZE THE INCREASED COST OF IM PORT DUTIES DUE TO FALL IN THE VALUE OF RUPEES VIS--VIS FOREIGN CURRENCY. AC CORDING TO THE ASSESSEE SUCH CONTRACTS ENSURED THAT ASSESSEE FIRM HAD AVAIL ABILITY OF FOREIGN EXCHANGE PAYMENTS WHEN THEY BECOME DUE. SUCH FORWA RDED CONTRACTS WERE CANCELLED AND ASSESSEE BOOKED THE PROFITS. TH E A.O. HELD THAT SUCH GAINS ARE NOT AS A RESULT OF EXPORT OF GOODS. THE LD. COMMISSIONER OF INCOME TAX(APPEALS) HOWEVER ALLOWED THE CLAIM HOLDI NG THAT SUCH CONTRACTS ARE DURING THE COURSE OF BUSINESS. HE HE LD AS UNDER: I HAVE PERUSED THE FINDINGS OF THE A.O. AND ALSO CA REFULLY GONE THROUGH THE SUBMISSIONS AND THE JUDICIAL FINDINGS A S RELIED UPON BY THE A.R. IT IS SEEN THAT THE APPELLANT FIRM WAS AN IMPORTER OF ROUGH DIAMONDS AND EXPORTER OF CUT AND POLISHED DIAMONDS AND WITH A 14 ITA NO.1134/AHD/2007 AND ORS. VIEW TO MINIMIZE THE INCREASE IN THE COST OF IMPORT DUTY DUE TO FALL IN THE VALUE OF RUPEE VIZ-A-VIZ FOREIGN CURRENCY TO PR OTECT ITS INTEREST IN TERMS OF EXPORT RECEIPTS ON ACCOUNT OF RISE IN THE VALUE OF RUPEE, IT ENTERED INTO FORWARD CONTRACT FOR FOREIGN EXCHANGE AT A FIXED RATE ON THE DATE ON WHICH THE FOREIGN EXCHANGE PAYMENT BECA ME DUE AND FOR THAT IN THE EXISTING MARKET CONDITION OF THE FOREIG N EXCHANGE MARKET, THE APPELLANT FIRM CONSIDERED IT NECESSARY TO CANCE L THE FORWARD CONTRACT AND BOOK THE PROFIT, I.E. IT REALIZE THE D IFFERENCE BETWEEN THE AGREED FORWARD CONTRACT RATE AND THE PREVAILING MAR KET PRICE AND ON CANCELLATION OF SUCH CONTRACT OR AFTER REALIZING EH DIFFERENCE BETWEEN THE CONTRACTED PRICE OF THE FOREIGN CURRENC Y VIZ-A-VIZ EXISTING MARKET PRICE OF THE FOREIGN EXCHANGE, TO R ECEIVE THE SAID AMOUNT OF RS.25,91,106/-. 33. BEFORE US, THE LEARNED DR SUBMITTED THAT SUCH P ROFITS ARE RESULT OF AN INDIRECT ACTION WHICH COULD NOT BE TREATED AS RECEI VED FROM EXPORTS. THERE SHOULD BE DIRECT NEXUS OF THE FOREIGN EXCHANGE RECE IPTS WITH THE BUSINESS OF EXPORT OR SALES PROCEEDS REALIZATION. ON THE OT HER HAND LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THAT ISSUE IS C OVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN ACIT VS . VEER JEMS IN ITA NO.775/A/2006 IN PARA 16 AND 17 THE TRIBUNAL HELD A S UNDER: 16. AFTER CAREFUL CONSIDERATION OF THE RIVAL SU BMISSIONS AND THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE OF THE OPINION THAT SO FAR AS FACTS ARE CONCERNED, THERE IS NO DISPUTE AND , THEREFORE, THE ASSESSEES CASE HAS TO BE DECIDED ON THE BASIS OF A DMITTED FACTS AS HAVE BEEN REFERRED TO IN THIS ORDER. 17. COMING TO THE MERITS OF THE ISSUE, WE ARE OF TH E OPINION THAT THE REVENUE HAVING NOT BROUGHT TO OUR NOTICE ANY DE CISION CONTRARY TO THE DECISION OF HON'BLE ITAT BOMBAY BENCH H IN THE CASE OF D.KISHOREKUMAR & CO. VS. DCIT(SUPRA) WHICH HAS BEEN RELIED UPON BY THE CIT(APPEALS), IT IS IN THE INTEREST OF SUBST ANTIAL JUSTICE THAT WE DECIDE THE ISSUE IN THE LIGHT OF DECISION OF BOMBAY BENCH H(SUPRA). 15 ITA NO.1134/AHD/2007 AND ORS. 17.1. THE BRIEF FACTS IN THAT CASE OF D.KISHOREKUMA R & CO. BEFORE THE HON'BLE TRIBUNAL(SUPRA) AND AS HAVE BEEN REVEAL ED FROM THE DECISION PLACED BY THE ASSESSEE ON RECORD WERE THAT THE ASSESSEE, WHO WAS IN THE BUSINESS OF IMPORT MANUFACTURING AND EXPORT OF DIAMONDS HAD ENTERED INTO FORWARD CONTRACTS OF THE FOREIGN EXCHANGE, BUT THE ASSESSING OFFICER HAD REDUCED AN AMOUNT EQUAL TO 90% OF THE PREMIUM RECEIVED ON CANCELLATION OF FORW ARD CONTRACTS OF THE FOREIGN EXCHANGE, WHILE COMPUTING THE DEDUCT ION ALLOWABLE US/.80-HHC OF THE ACT WHICH WAS CONFIRMED BY THE CI T(APPEALS). 17.2. THE SECOND OBJECTION RAISED BY THE ASSE SSEE WAS AGAINST THE ORDER OF THE CIT(APPEALS) HOLDING THE EXCLUSIO N OF 90% INTEREST ON FDS FOR THE PURPOSE OF COMPUTATION OF D EDUCTION U/S.80- HHC OF THE ACT. 17.3. IT WAS, IN VIEW OF THE ABOVE FACTS AND CIRCUM STANCES OF THE CASE, THAT THE HON'BLE TRIBUNAL AFTER HEARING THE PARTIES DECIDED THE ISSUE AS PER ITS FINDINGS CONTAINED IN PARAGRAPH NO S.8 & 9, WHICH ARE IN THE FOLLOWING TERMS:- 8. WE MUST FIRST OF ALL ADDRESS OURSELVES TO THE N ATURE OF THESE FORWARD EXCHANGE CONTRACTS, AND THE QUESTION WHETHER OR NOT THESE TRANSACTIONS CAN BE CONSIDERED TO BE A N INTEGRAL PART OF THE EXPORT BUSINESS OR WHETHER OR NOT THESE TRANSACTIONS ARE TO BE CONSIDERED AS A BUSINESS BY ITSELF. AS LEARNED DEPARTMENT REPRESENTATIVE HAS VERY RIGHTLY POINTED OUT, IN CASE WE COME TO THE CONCLUSION THAT THESE F ORWARD EXCHANGE CONTRACTS, AND THEIR SETTLEMENT WITHOUT DE LIVERY, IS A SEPARATE BUSINESS BY ITSELF, THE PROFITS ON THESE T RANSACTIONS WILL HAVE TO BE TREATED AS PROFITS OF SPECULATION B USINESS DISTINCT AND SEPARATE FROM THAT OF EXPORT BUSINESS. BUT THEN, THE AUTHORITIES BELOW HAVE ONLY EXCLUDED 90% OF THE SE PROFITS, IN COMPUTING THE DEDUCTION UNDER SECTION 80HHC, WHE REAS LEARNED DRS CONTENTION BEING ACCEPTED WILL MEAN TH AT ENTIRE PROFITS ARE REQUIRED TO BE EXCLUDED. THAT WILL M EAN THAT THE ASSESSEE WILL BE WORSE OFF AS A RESULT OF HAVING CO ME UP IN THIS APPEAL BEFORE. WHILE SUCH A RESULT IS CERTAINLY NO T 16 ITA NO.1134/AHD/2007 AND ORS. PERMISSIBLE UNDER THE LAW, THIS ASPECT OF THE MATTE R, FOR THE REASONS WE SHALL NOW STATE, IS ENTIRELY ACADEMIC IN THE PRESENT CONTEXT. 9. THE DETAILS OF FORWARD EXCHANGE CONTRACT WERE FI LED BEFORE US AT PAGE 31 OF THE PAPER-BOOK. THESE DET AILS CLEARLY SHOW THAT ALL THE FORWARD EXCHANGE CONTRACTS WERE I N RESPECT OF EACH SPECIFIC IMPORT ORDER PLACED BY THE ASSESSE E. THE PURPOSE OF THESE TRANSACTIONS WAS CLEARLY TO MINIMI ZE ASSESSEES RISK ON ACCOUNT OF FALL IN VALUE OF RUP EE, BUT THE QUANTUM OF FOREIGN EXCHANGE COVERED BY THESE FORWAR D CONTRACTS WAS LIMITED TO THE EXTENT OF ASSESSEES A CTUAL EXPOSURE IN RESPECT OF IMPORT VALUE COMMITMENTS. THAT ASPECT IS NOT DISPUTED. ON THESE FACTS, EVEN THOU GH THE TRANSACTIONS HAVING BEEN SETTLED WITHOUT DELIVERY, THE CONDITIONS OF SECTION 43(5), DESCRIBING SPECULATIVE TRANSACTIONS, ARE CLEARLY FULFILLED, THE REQUIREMEN T OF EXPLANATION 2 TO SECTION 28 IS NOT FULFILLED INASMU CH AS IT CANNOT BE CONCLUDED THAT THE TRANSACTIONS ARE SUCH A NATURE AS TO CONSTITUTE A BUSINESS BY ITSELF. IN OUR UNDE RSTANDING OF THE SITUATION, THESE TRANSACTIONS ARE GENUINE BUSIN ESS TRANSACTION TO HEDGE AGAINST INCREASED COST OF PURC HASES OF ROUGH DIAMOND IMPORTS. IT IS A COMMONLY ACCEPTED PART OF THE FINANCIAL MANAGEMENT PRACTICES TODAY THAT THE R ISK ELEMENT, DUE RISE IN VALUE OF FOREIGN CURRENCY IN R ESPECT OF THE IMPORT TRANSACTIONS ENTERED IS MINIMIZED BY ENTERIN G INTO FORWARD CONTRACTS FOR PURCHASE OF THAT CURRENCY. THIS IS PARTICULARLY NECESSARY IN A MARKET IN WHICH THE VAL UE OF DOMESTIC CURRENCY IS FALLING, WHICH IS EVIDENT FROM THE FACT THAT THE ASSESSEE REALIZED PROFITS ON CANCELLATION OF THOSE CONTRACTS. THESE TRANSACTIONS ARE INTEGRAL PART O F THE EXPORT BUSINESS AND CANNOT BE CONSIDERED IN ISOLATION OF T HE EXPORT BUSINESS IN THE COURSE OF WHICH THE TRANSACTIONS HA VE BEEN ENTERED INTO. AS A MATTER OF FACT, THIS PROFIT ON CANCELLATION OF FORWARD CONTRACTS IS GENERALLY REVENUE NEUTRAL B ECAUSE THE QUESTION OF PROFIT ON CANCELLATION OF FORWARD CONTR ACTS CAN ONLY ARISE IN A SITUATION WHEN THE VALUE OF FOREIGN CURRENCY IS INCREASING VIS--VIS DOMESTIC CURRENCY, AND WHEN TH E FOREIGN EXCHANGE VALUE IS SO INCREASING THE ULTIMATE PAYMEN T MADE IN FOREIGN EXCHANGE BY THE ASSESSEE ALSO INCREASES. I N THE CASE THE VALUE OF FOREIGN CURRENCY WAS NOT TO GO UP, THE RE WOULD NOT HAVE BEEN GAINS ON CANCELLATION OF CONTRACTS BU T THEN THE ACTUAL COSTS, IN TERMS OF DOMESTIC CURRENCY, THAT T HE ASSESSEE PAYS WHEN HE HAS TO PAY FOR IMPORTS IN FOREIGN CURR ENCY DOES NOT ALSO GO UP. SINCE IT IS AN UNDISPUTED POSITIO N THAT THE 17 ITA NO.1134/AHD/2007 AND ORS. IMPORTS, IN CONNECTION WITH WHICH THE ASSESSEE HAD ENTERED INTO FORWARD CONTRACTS, ACTUALLY TOOK PLACE, THIS P ROFIT ON CANCELLATION OF FORWARD FOREIGN EXCHANGE CONTRACTS EFFECTIVELY ONLY REDUCES THE COSTS OF PURCHASES IN RESPECT OF T HOSE IMPORTS AND CANNOT BE BY ANY LOGIC, CONSTRUED AS TRANSACTIO NS INDEPENDENT OF ASSESSEES BUSINESS OF IMPORTING ROU GH DIAMONDS AND EXPORTING CUT AND POLISHED DIAMONDS. THERE IS ONE MORE ASPECT OF THE MATTER, AND THAT IS THE REAS ON AS TO WHY THE FORWARD CONTRACTS WERE CANCELLED MIDWAY AN D THE PROFITS WERE BOOKED ON THE SAME INSTEAD OF USING TH ESE CONTRACTS TO ACTUALLY MEET THE FOREIGN EXCHANGE REQ UIREMENTS AT THE TIME OF PAYING THE IMPORT BILLS. WE HAVE N OTED THAT ALL THESE CONTRACTS WERE CANCELLED ON 13 TH APRIL 1992, WHEN THE PREVAILING MARKET PRICE WAS IN THE RESULT, THE APPE AL OF THE 100 = US$ 3.235, AS AGAINST THE FORWARD CONTRACT RA TE OF IN THE RESULT, THE APPEAL OF THE 100 = US $ 3.840 AND THE RATES OF IN THE RESULT, THE APPEAL OF THE 100 = US $ 3.6 8 TO 3.7325 PREVAILING ON THE DATE OF IMPORTS. THE DUE DATES OF PAYMENT AT THAT POINT OF TIME WERE ONLY 16 DAYS TO 77 DAYS AWAY, AS EVIDENT FROM THE CHART SHOWING THE DUE DATES WHICH WAS ALSO CONTAINED IN PAGE 31 OF THE PAPER-BOOK. THE DECIS ION AS TO WHETHER FURTHER HEDGING AGAINST THE INCREASE IN FOR EIGN CURRENCY IS WARRANTED OR NOT IS ESSENTIALLY A COMME RCIAL DECISION WHICH DEPENDS ON A NUMBER OF FACTORS, MOST IMPORTANT FACTOR BEING THE TREND OF CURRENCY MARKET S AT THAT POINT OF TIME AND BUSINESSMANS PERCEPTION ABOUT FU TURE TRENDS OF THE CURRENCY MARKET. FOR EXAMPLE, WHEN A BUSINESSMAN PERCEIVES THAT THE MARKET VALUE OF FORE IGN CURRENCY VIS--VIS THE DOMESTIC CURRENCY WILL NOT G O ANY HIGHER OF WHEN THE MARKET STARTS THE DECLINING TREN D, HE MAY SEE BUSINESS EXPEDIENCY IN CANCELLATION OF CONTRACT . THE FACT OF PREMATURE CANCELLATION, THEREFORE, CANNOT ALTER THE NATURE OF TRANSACTION. FOR ALL THESE REASONS, WE ARE OF THE CONSIDERED VIEW THAT THE CREDIT SHOWN IN THE PROFIT /LOSS ACCOUNT AS PROFIT ON CANCELLATION OF FORWARD CONTR ACTS IS AS INTEGRAL PART OF THE EXPORT BUSINESS AS PURCHASES O R IMPORTS. AS IT EFFECTIVELY CONTROLS AND REDUCES THE COST OF IMPORTS, AND IS INTEGRAL PART OF THE EXPORT BUSINESS PROFITS, AN D AS, IN OUR CONSIDERED VIEW, THE EXCLUSION CLAUSE UNDER CLAUSE (BAA) OF EXPLANATION TO SECTION 80HHC CANNOT APPLY TO THESE PROFITS, THE AUTHORITIES BELOW WERE INDEED NOT JUSTIFIED IN HOLDING THAT 90% OF THESE PROFITS IS REQUIRED TO BE EXCLUDED FRO M PROFITS OF EXPORT BUSINESS. THIS AMOUNT IS NOT COVERED BY AN Y OF THE CATEGORIES WHICH ARE COVERED BY THE AFORESAID CLAUS E IN 18 ITA NO.1134/AHD/2007 AND ORS. EXPLANATION TO SECTION 80HHC. WE, THEREFORE, UPHO LD THE CONTENTION OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO RECOMPUTED THE DEDUCTION UNDER SECTION 80HHC BY, IN TER ALIA, NOT EXCLUDING 90% OF THE PROFIT REALIZED ON C ANCELLATION OF FORWARD FOREIGN EXCHANGE CONTRACTS FROM THE PROF ITS OF EXPORT BUSINESS. THE ASSESSEE SUCCEEDS ON THIS IS SUE. 18. HAVING CONSIDERED THE AFORESAID DECISION OF THE HON'BLE ITAT BOMBAY BENCH H (SUPRA) AND THE FACTS AND CIRCUMST ANCES AS WELL AS THE ISSUE INVOLVED IN APPEAL BEFORE US, WE ARE OF THE OPINION THAT THE FACTS AND CIRCUMSTANCES AS WELL AS THE ISSUE I NVOLVED IN APPEAL BEFORE US BEING SIMILAR TO THE FACTS AND CIRCUMSTAN CES AND THE ISSUE INVOLVED BEFORE THE HON'BLE ITAT BOMBAY BENCH(SUPRA ), THE ISSUE INVOLVED IN GROUND NO.2 RAISED BY THE REVENUE IS CO VERED AGAINST THE REVENUE AND IN FAVOUR OF THE ASSESSEE BY THE A FORESAID DECISION AND, THEREFORE, RESPECTFULLY FOLLOWING THE SAME AND FOR THE REASONS STATED BY THE HON'BLE BENCH AS WELL AS BY THE CIT( APPEALS), UPHOLD THE ORDER OF THE CIT(APPEALS) ON THIS POINT ALSO. RESPECTFULLY FOLLOWING ABOVE ORDER, WE ALLOW THE CL AIM OF THE ASSESSEE AND REJECT THE GROUND RAISED BY THE REVENUE. 34. AS A RESULT, APPEAL FILED BY THE REVENUE IS PAR TLY ALLOWED, BUT FOR STATISTICAL PURPOSES. THIS ORDER IS PRONOUNCED IN OPEN COURT ON DATED 5 TH MARCH, 2010. SD/- SD/- (T K SHARMA) (D.C. AGRAWAL) JUDICIAL MEMBER ACCOUNTA NT MEMBER AHMEDABAD; DATED: 05/03/2010 ANKIT* COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 19 ITA NO.1134/AHD/2007 AND ORS. 2. THE RESPONDENT 3. THE CIT(A) CONCERNED 4. THE CIT, 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, ASSTT. REGISTRAR/ DEPUTY REGISTRAR ITAT, AHMEDABAD BENCHES, AHMEDABAD.