DY CIT, CC--1(2), MUMBAI V. M/S MAHENDRA BROTHERS EXPORTS P. LTD., MUMBAI

ITA 127/MUM/2021

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 7320 (ITAT-MUMBAI)
• Duration Of Justice: 9 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-11-2021
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 10-02-2021
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Unexplained investment; Document seized; Earning of tax free income; Speculation loss; Valuation report; Assessment record; Documents seized; Rule 8D
• Section: 14A; 43(5); 72; 153

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, ‘B‘ BENCH MUMBAI BEFORE: SHRI M.BALAGANESH, ACCOUNTANT MEMBER & SHRI PAVAN KUMAR GADALE, JUDICIAL MEMBER ITA No.127/Mum/2021 (Asse ssment Year :2010-11) ITA No.128/Mum/2021 (Asse ssment Year :2011-12) ITA No.129/Mum/2021 (Asse ssment Year :2009-10) & ITA No.130/Mum/2021 (Asse ssment Year :2012-13) Dy. Commissioner of Income-Tax Central Circle 1(2) Mumbai 906, 9 th Floor, Pratishtha Bhavan, Old CGO Building (Annexe), M.K.Road Mumbai – 400 020 Vs. M/s. Mahendra Brothers Exports Pvt. Ltd., CE 7011-15, 8 th Floor Bharat Diamond Bourse Bandra (E) Mumbai – 400 051 PAN/GIR No. AAFCM0246E (Appellant) .. (Respondent) ITA No.1982/Mum/2020 (Asse ssment Year :2012-13) M/s. Mahendra Brothers Exports Pvt. Ltd., CE 7011-15, 8 th Floor Bharat Diamond Bourse Bandra (E) Mumbai – 400 051 Vs. Dy. Commissioner of Income- Tax Central Circle 1(2) Mumbai 906, 9 th Floor, Pratishtha Bhavan, Old CGO Building (Annexe), M.K.Road Mumbai – 400 020 PAN/GIR No. AAFCM0246E (Appellant) .. (Respondent) ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 2 Revenue by Shri Mahesh Akhade Assessee by Shri Vijay Mehta Date of Hearing 18/11/2021 Date of Pronouncement 29/11/2021 आदेश / O R D E R PER BENCH: These appeals in ITA Nos.127/Mum/2021 to 130/Mum/2021 & 1982/Mum/2020 for A.Yrs.2009-10 to 2012-13 arise out of the order by the ld. Commissioner of Income Tax (Appeals)-48, Mumbai in appeal Nos.CIT(A)-48/IT.118/14-15, CIT(A)-48/IT.119/14-15, CIT(A)- 48/IT.117/14-15, CIT(A)-48/IT.120/14-15 dated 15/09/2020, 18/09/2020 respectively (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 30/03/2014 by the ld. Dy. Commissioner of Income Tax, Central Circle-9, Mumbai (hereinafter referred to as ld. AO). All these appeals are taken up together and disposed 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. ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 3 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 20 th day of March 2020 to 29 th 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.35/2020 dated 24/06/2020, has extended the said time limit up to 31/03/2021. In view of the aforesaid ordinance and notification issued by the Government of India, we hold that there is no delay in filing of appeals of the Revenue. This fact is also evident from the reply given by the Revenue in column No.11 of Form No.36 wherein the appellant i.e. the Revenue had categorically stated that there is no delay in filing of these appeals before this Tribunal. Hence, there is no question of condonation of delay that would arise in the appeals filed by the Revenue before us. 4. The ground Nos. 1-4 raised by the Revenue are challenging the action of the ld. CIT(A) in deleting the disallowance of forward contract loss which was treated as speculative loss by the ld. AO. 4.1. We have heard the rival submissions and perused the materials available on record. We find that 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 ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 4 import from various countries, manufacturing of rough diamonds into polished diamonds and sell polished diamonds mainly by way of exports to various countries. 5. At the outset, we find that both the parties mutually agreed that the ground Nos. 1-4 are covered in favour of the assessee by the order of this Tribunal in assessee’s own case for A.Y.2004-05 and A.Y.2008-09 in ITA No.7319 and 7449/Mum/2011 respectively dated 25/07/2016. The ld. AR also stated that the ld. AO for the years under consideration had copied verbatim the assessment order of A.Y.2008-09 and that since the disallowance made in A.Y.2008-09 has been deleted by this Tribunal vide order dated 25/07/2016, the ground Nos.1-4 of the Revenue deserves to be dismissed. In view of this, we are inclined to reproduce the order passed by this Tribunal for A.Y.2008-09 as under:- “The aforesaid cross appeals have been filed by the revenue as well as by the assessee against the impugned order dated 25.08.2011 passed by CIT (Appeals)-9, Mumbai for the quantum of assessment passed under section 143(3), for the assessment years 2008-09. 2. We will take-up assessee's appeal wherein the assessee has raised following two grounds:— "1. The Ld. Commissioner of Income Tax (Appeals)-9 erred in disallowing a sum of Rs. 25,85,318/- under section 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 ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 5 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 composite books of accounts from where it is not possible to exactly identify the expenses attributable to earning of this exempt income. In response to the show cause notice as to why the disallowance under section 14A should not be made as per Rule 8D, the assessee submitted that, all the loans taken were utilized for the business purpose and also gave the details of payment of interest on various kinds of loans. Thus, the entire interest payment was stated to be for the various business purposes including that of export. The Ld. AO, did not accept completely the assessee's contention and held that only the interest on packaging credit, post shipment credit, specific overdraft and bill discounting should be excluded from the calculation of disallowance of interest under Rule 8D. He also held that, since assessee was unable to produce any fund flow statement or bank statement proving the nexus between investment and income yielding products, disallowance under section 14A has to be made. Accordingly, he worked out the disallowance of interest at Rs. 14,000,41/- as per the working given at page 4 of his order. With regard to indirect expenses, he calculated the disallowance of 0.5% of the average value of investments which worked out to Rs. 11,85,278/-. Accordingly, the disallowance u/s. 14A aggregated to Rs. 25,83,318/-. 4. The Ld. CIT (A) confirmed the said disallowance by holding that, now in view of the decision of Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd, the disallowance has to be made under Rule 8D. Thus, he dismissed the assessee's ground on this point. 5. Before us, the Ld. Counsel Shri Vijay Mehta, submitted that assessee has own surplus funds of more than Rs. 190 crores and substantial interest free borrowings from the directors, which far exceeded the investment made by the assessee. Hence, no disallowance of interest should be made in the light of the decision of CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340/178 Taxman 135 (Bom.) and CIT v. HDFC Bank [2014] 366 ITR 505/226 Taxman 132 (Mag.)/49 taxmann.com 335 (Bom.). Regarding disallowance of indirect expenditure of Rs. 11,85,278/- worked in accordance with Rule 8D(2)(iii), he submitted that, firstly, the most of the investments were made by way of 'strategic investment' in subsidiaries and associated companies and, therefore, 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. ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 6 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 from where it is evident that, the share capital and reserve & surplus itself was at Rs. 183,33,70,726/- whereas, the investment which has been made are at Rs. 48,29,02,642/-. Thus, it can be safely be presumed that investments have been made from surplus/interest free funds. This proposition has been upheld by the Hon'ble Bombay High Court in various other Courts several times including that of Reliance Utilities and HDFC Bank (supra), that when assessee has surplus funds and interest bearing funds, then presumption is that assessee must have made the investments from surplus/interest free funds . Thus, respectfully following the ratio and principle laid down by the Hon'ble jurisdictional High Court, we hold that no disallowance of interest under Rule 8D(2)(ii) can be made and accordingly, the same is directed to be deleted. 8. So far as the disallowance of indirect expenditure, under Rule 8D(2)(iii), by taking 0.5% of the average value of investments, the contention of the assessee before us is twofold, firstly, most of the investments have been made in the subsidiary and associated companies as a strategic investment and, therefore, same should not be the part of working of the disallowance while taking the average value of investments and; secondly, the investment which has not yielded income during the year should not be included for the purpose of disallowance under Rule 8D(2)(iii). So far as contention that, assessee has made strategic investment by way of business necessity in the case of associated and subsidiary companies, we agree with the contention of the Ld. Counsel that, same should not be part of the investment for the purpose of disallowance, because the said investment cannot be said to be made for the purpose of earning the exempt income but for business and strategic compulsions which falls within the realm of 'business purpose' and this view has been upheld by the Tribunal in various decisions including that of Hon'ble Delhi High Court in the case of Cheminvest Ltd. v. CIT [2015] 378 ITR 33/234 Taxman 761/61 taxmann.com 118. Thus, we direct the AO to exclude the strategic investment made in subsidiary companies for the purpose of working the disallowance of value of the investment. 9. However, so far as other contention that the investments which has not yielded dividend or tax free income during the 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 ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 7 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). Accordingly, we direct the AO to remove the strategic investments only from the working and from the balance, he should work out the disallowance as per Rule 8D (2)(iii). With this direction, ground No.1 is treated as partly allowed. 10. The brief facts qua the second ground are that, the assessee had debited a sum of Rs. 26,18,34,176/- on account of foreign exchange rate difference (net) under the head "raw materials consumed/trading goods utilized". The break- up of this head was given in Schedul-17 to the audited account. On the perusal of the exchange difference, it was found that the assessee has reduced the sum of Rs. 49,23,25,597/- pertaining to loss on account of foreign currency forward/option contracts. The computation of this net figure was given by the assessee in the following manner:— (a) Exchange difference gain on account of import/export/working capital borrowings in US$: Rs. 23,04,89,420/- (b) Loss on account of foreign currency forward/option hedging contract : Rs. 49,23,23,597/- Net Loss: Rs. 26,18,34,176/- AO further noted that, this loss of Rs. 49,23,23,597/- is actually suffered by the assessee on account of its forward and option contract any foreign currency which are not deliverables at first place. He further noted that, no break-up of currency forward/option contract, however, it is given by the assessee but he admitted that majority of the contracts on which this loss was suffered is of "forward and option contracts". The contract-wise details of the loss as furnished by the assessee have been incorporated by the AO form pages 7 to 17 of the assessment order. After analyzing the provision of section 43(5), the AO considered the loss incurred by the assessee on foreign exchange derivative transaction as speculation loss primarily on the following grounds:— a. Assessee has carried out as many as 56 transactions during the previous year i.e. the assessee has entered into 56 contracts in the Futures & Options segment of the currency market during the previous year. Assessee's transactions in foreign exchange derivative contracts constitute a separate and systematic business. Assessee deals in diamonds and contract are of foreign currency. ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 8 b. The transactions entered into by the assessee are not of hedging transactions as: (i) None 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 as business loss. The sum and substance of assessee's submissions before CIT (A) are as under:— a. Assessee is in the business of import and export Diamonds which transactions are executed in foreign currency. It also meets its working capital needs by way of borrowings in foreign currency. Thus, assessee is exposed to risks arising out of fluctuations in foreign currency exposure. In view of the regulatory guidelines and on the facts of the case he observed that the foreign currency forward/option transactions entered into by the Assessee in order to mitigate the risks form an integral and inseparable part of its diamond business and is not a separate and distinct business by itself. b. Assessing Officer himself admitted that it is not the Department's case that transactions entered by the Assessee are not legal. Assessee has entered into derivative contracts permitted as per norms mentioned ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 9 in Master Circular and other guidelines of the Reserve Bank of India. c. RBI allows business entitles to manage their foreign exchange exposure by undertaking derivative products offered by Authorized Dealers for hedging group of assets and liabilities, e.g. export receivables, payments for imports, borrowings in foreign currency for imports and exports. Thus, from the above, it was contended that there is no stipulation for undertaking hedging transactions on one to one or bill to bill basis. d. Before the CIT (A), the assessee has contended that as per provisions of section 43(5) of the Act it is very clear that no where Income Tax Act puts a condition that hedging transactions must be on a bill to bill basis. e. It was further stated that from the regulations of the RBI that, exporters/importers are permitted to hedge their exposure based on expected levels of business and the RBI does not require such business entities to hedge their exposures on a bill to bill (or one to one basis). Section 43(5) of the Act and also no other provision of the Income Tax Act requires establishing the hedging relationship on bill to bill basis. Non delivery of the foreign exchange under these contracts will not attract the provisions of section 43(5). 12. After considering the submissions of the assessee, the Ld. CIT (A) held that foreign currency is not a commodity and appreciating the facts 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 currency fluctuation for its imports and exports. This issue had also come-up for consideration before the Tribunal in assessee's own case in the AYs 2001-02 ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 10 to 2004-05, wherein Tribunal has decided this issue in favour, which now has been affirmed by the Hon'ble Bombay High Court also vide order dated 17.01.2011, following the decision of Bombay High Court in the case of CIT v. BadridasGauridu (P.) Ltd. [2003] 261 ITR 256/[2004] 134 Taxman 376. He further submitted that, transactions are carried out as per the Foreign Management Act, 1999 as well as circular issued by the RBI. So far as allegation of the AO that, break-up of option and contracts and position on date of contract and cancellation has not been provided, he submitted that it is not correct observation, because the complete details were furnished which is evident from para 1.7 page 24 of the assessment order itself, wherein, he has incorporated the reply of the assessee highlighting furnishing of details of transactions. The position of exposure on respective dates were also given before the AO vide letter dated 14.12.2010. In any case, the same where produced before the Ld. CIT (A) also. The assessee is in the business of diamonds and not in the business of currency sales and, therefore, the hedging cannot be done in the currency. In support, reliance was placed on the decision of Bombay High Court in the case of BadridasGauridu (supra). The hedging of value of diamond which is subject to variation in foreign exchange, thus, hedging of currency is nothing but hedging in the value of diamond, because it is connected with the commodities. In support of his contention he relied upon the following decisions:— Sr. N. Case Law Citation a CIT v. Friends & Friends Shipping (P.) Ltd. [2013] 35 taxmann.com 553/217 Taxman 267 (Guj.) b CIT v. Panchmahal Steel Ltd. [2013] 215 taxmann.com 10/215 Taxman 140 (Guj.) c London Star Diamond Co. (I.) (P.) Ltd. v. Jt. CIT [2015] 153 ITD 585/[2013] 38 taxmann.com 338 (Mum. - Trib.) d Jaimin Jewellery Exports (P.) Ltd. v. Asstt. CIT [2014] 151 ITD 357/43 taxmann.com 380 (Mum. - 0Trib.) e ITO v. KALP Diamonds [IT Appeal No. 2670 (Mum.) of 2013, dated 9- 7-2014] 14. Ld. DR on the other hand, strongly relied upon the order of the AO and submitted that, ultimately, the gain or loss to the assessee is on account of hedging only. ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 11 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 on its revenue, receivables and payables. It is clearly evident that, due to large import and export of diamonds, which is the main business activity of the assessee, it is exposed to high risk of foreign exchange gain or loss which is arising only because of the said business only. In other words, all its receipts, payments, receivables and payables are in foreign currency which is inseparable and inextricably linked with the diamond business carried out by the assessee and, therefore, risk associated with the fluctuation of foreign currency also forms part and parcel of same business. To mitigate the foreign currency loss, RBI introduced the regulations so that exporters and importers can hedge the same through authorized dealers, mostly Banks. The assessee had entered into hedging transaction through banks and the amount for which the hedging transactions are entered are within the amount of the underlying transactions of imports and exports. There is no independent transaction of foreign exchange on standalone basis. The details of transaction on which the assessee has made profit and loss on various foreign exchange contracts has already been discussed in the impugned orders along with the copy of the contract entered with the banks. Thus, such a loss cannot be in any manner equated with hedging of foreign currency alone, but ceases to fall within the realm of 'speculation' albeit it is inextricable linked with the business of the assessee. This matter had already been decided by the Tribunal in the assessee's own case in the earlier years which has been upheld by the Hon'ble Bombay High Court following the ratio and principle laid down in the case of BadridasGauridu (supra). We find that this issue is no longer res integra, because in various decisions as relied upon by Ld. Counsel before us, it has been consistently held that, if the assessee is not dealing in foreign exchange per se but has hedged against the foreign exchange loss in the forward market with the bank, then any loss or gain thereto is to be treated as business loss or business gain only. The Hon'ble Bombay High Court in the case of BadridasGauridu (supra), held that, if the assessee is not dealer in foreign exchange but an exporter and has hedged against the foreign exchange losses and for that purpose it had booked foreign exchange in the forward market with the bank, 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 ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 12 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 transactions through advance is nothing but business gain or loss. Accordingly, in view of the myriad precedence, we also hold that, here in this case the foreign exchange loss of Rs. 49,23,23,597/- is nothing but business loss which needs to be allowed. 16. So far as the CIT (A)'s contention that assessee has been unable to substantiate the underlying exposure of derivative contracts to the tune of Rs. 8,23,26,649/- and, therefore, it should be substantiated, the assessee before us, has contended that in any genuine hedging transaction where there is huge volume of purchase exposure and sales exposure, the hedging transaction keeps on fluctuating. The Ld. CIT (A) has upheld the disallowance keeping in mind the fact that in any particular month the hedging transactions were higher than foreign exchange exposure, the excess cannot be accepted as for the purpose of business transaction. We find that such an observation in general may not prevail in every case, because in normal business practice the hedging is often done based on actual estimated exposure looking to the past transactions undertaken and based on that, hedging is done in respect of transaction yet to be done in the near future. Bill to bill or one to one basis exposure of hedging cannot be done in a continuum business and nothing has been brought on record that RBI puts such kind of condition or bar for hedging of foreign currency based on actual bill to bill exposure. Hedging contracts need not succeed the contract for sale and actual goods manufactured but may get settled within a reasonable time. Quantity and timing may not be relevant for a short period in a continuous transaction as long as transaction construed is based on genuine hedging and finally it coincides with the actual exposure undertaken. It is only at the year end that one can still reconcile the hedging transactions with the actual exposure or delivery and come to a conclusion whether hedging contract exceeded the actual exposure or not but certainly not on week to week or month to month basis. Thus, the disallowance of loss sustained by the Ld. CIT (A) of Rs. 8,23,26,649/- cannot be upheld simply on the ground that the exposure do not tally with the month-wise transaction. In view of our above conclusion, we allow the claim of Rs. 8,23,26,649/- and accordingly, the grounds raised by the assessee is allowed. 17. Now we come to the revenue's appeal, in the grounds of appeal following ground has been raised:— ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 13 "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 for A.Y.2008-09 shall apply mutatis mutandis to the years under consideration also. Accordingly, the ground Nos. 1-4 raised by the Revenue are dismissed for A.Y.2009-10, 2010-11, 2011-12 and 2012-13. 6. The ground No. 5 raised by the Revenue for A.Y.2009-10 is challenging the action of the ld. CIT(A) deleting the adhoc disallowance of miscellaneous expenses @15% made by the ld. AO. 6.1. We have heard rival submissions and perused the materials available on record. We find that the ld. AO observed that the ld. AO observed that assessee has incurred miscellaneous expenses of Rs.61,29,186/- during the A.Y.2009-10. Out of the same, the assessee had suo-moto disallowed a sum of Rs.10,27,563/- in the computation of income and claimed the balance amount as deduction. The ld. AO observed that bills were not produced properly by the assessee for the remaining expenditure and accordingly, proceeded to disallow on an ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 14 adhoc basis @15% of the remaining expenditure while completing the assessment. The ld. CIT(A) observed that assessee had submitted detailed composition of the expenditure on account of miscellaneous expenses alongwith invoices on a sample basis to substantiate the same. He had also gone through the assessment records from where he found that assessee had filed complete details of the miscellaneous expenses before the ld. AO during the course of assessment proceedings. Since, no defects were pointed out by the ld. AO in the books of accounts / documents produced by the assessee before him, no disallowance of expenses could be made on adhoc basis by placing reliance on various decisions of the Tribunals, he deleted the adhoc disallowance made by the ld. AO. We hold that the ld. CIT(A)had rightly adjudicated the issue in dispute before us. The ld. AO had not rejected the books of accounts of the assessee or the various documents produced by the assessee before him by pointing out defects. The ld. CIT(A) has also categorically recorded a finding that entire details of miscellaneous expenditure has been filed by the assessee alongwith sample invoices, which fact has not been controverted by the Revenue before us. In view of the same, the adhoc disallowance made by the ld. AO has been rightly deleted by the ld. CIT(A). 6.2. Similar grounds raised by the revenue for A.Yrs. 2010-11, 2011-12 and 2012-13 are dismissed. 7. The ground No.6 raised by the Revenue 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 ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 15 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 – Assessee Appeal (A.Y.2012-13) 11. The first issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in confirming the addition of Rs.11,63,054/- made u/s.69A of the Act in respect of difference between book stock and physical stock of polished diamonds in the facts and circumstances of the instant case. 12. We have heard rival submissions and perused the materials available on record. As stated earlier, the assessee is engaged in the business of manufacturing and trading of rough and polished diamonds. A ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 16 search and seizure action u/s.132(1) of the Act was carried out in the case of the assessee on 08/08/2011. At the office premises at Pancharatna Opera House stock of cut and polished diamonds found physically at the time of search was valued by the Government approved valuer. The re-conciliation between the book stock of polished diamonds (including Jangad) and the physical stock of polished diamonds was submitted before the ld. AO. The stock of cut and polished diamonds as per the stock register was 117016.98 carats. This was also submitted to the search party at the time of search by the assessee. Physical stock of cut and polished diamonds was 116968.04 carats. Ultimately there was a difference of 48.94 carats representing shortage which was explained by the assessee as weighing difference. The assessee submitted that in the light of huge volume of diamonds dealt by the assessee, this weighing difference of 48.94 carats is very miniscule and hence, it was pleaded that no addition need to be made on account of the said shortage. The ld. AO observed that assessee deals in diamond manufacturing and in this business, fineness and accuracy is maintained at micro level through very high precision instruments and equipments. The ld. AO observed further that assessee takes care of every cent of diamond as it is evident from the manner in which the stock register is maintained by it. He pointed out that in any of the audited accounts, no such weighing difference as pleaded by the assessee was noted at any stage of import, manufacturing, export or storage throughout the years. The ld. AO also observed that the valuation of cut and polished diamonds were carried out by the authorised valuer in the presence of the assessee. The ld. AO observed that in view of the accurate manner in which the stocks are maintained by the assessee, the shortage 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. ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 17 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-ordinate Bench decision of this Tribunal in the case of sister concern of the assessee in UNI Design Jewellery Pvt. Ltd., vs DCIT, Central Circle-9 in ITA No.2578/Mum/2018 dated 30/12/2019 for A.Y. 2012-13, wherein this Tribunal had also under similar facts and circumstances pursuant to the same search action on 08/08/2011 had held that only the profit element need to be brought to tax. Hence, we direct the ld. AO to compute the gross profit portion on the said sale and tax the assessee accordingly. Accordingly, the ground No.1 raised by the assessee for A.Y.2012-13 is partly allowed. 13. The ground No.2 raised by the assessee is challenging the action of the ld. CIT(A) in confirming the addition of Rs.5,96,192/- made by the ld. AO u/s.69B of the Act by treating the difference between physical stock and book stock of rough diamonds as unexplained investment. ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 18 14. We have heard rival submissions and perused the materials available on record. During the course of search proceedings of the office premises of the assessee company, stock of rough diamonds was taken and the same was valued by the Government valuer Shri Ganpatlal M Jain. The physical stock of rough diamonds available was 250599.23 carats as against book stock of 248569.74 carats leading to difference of 2029.49 carats. During the course of search, a statement of Shri Hiten B Parikh was recorded and the aforesaid difference in carats was confronted on him. Shri Hiten B Parikh in response to Question No.9 thereon responded that the stock of rough diamonds as per books of accounts on 08/08/2011(being the date of search) was 248569.74 carats and the difference had arose because of inclusion of polished stock, i.e. a temporary receipt which is yet to be entered into the polished stock register maintained at the sales office i.e. Pancharatna and their main corporate office i.e BKC. It was also pointed out that this polished stock is received from karigars which is after quality check and dispatched to their main office. After the said explanation of Mr. Hiten B Parikh, the search authority further looking through box files mentioned in Document No.73,74 & 75 which are classified as polished loose diamonds totalling to 1849.34 carats, observed that after reducing the same from the overall difference of 2029.49 carats, still the difference of 180.15 carats remain unexplained. This was sought to be treated 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 ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 19 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 Society office 5 th Floor on 09.08.2011) b) A copy of the valuation report issued by the Government Approved Valuer GMJain dated 08.08.2011 in respect of the physical stock inventorised at the at the office of the assessee at 23A, Geeta Co-op Society, Gamdevi, Mumbai-400 007, reflecting the stock of Rough Rejections at 1 13, 349.82 carats as Annexure-3. Please refer to Serial Nos. 76 to 80 and also the summary of the said valuation report. The difference had arisen on account of the following:- a) Stock of third party i.e. M/s.Neelam Exports received by the assessee weighing J69.45 carats which included in the physical stock of Hough Rejection inventorised by the Valuer during the course of search proceedings, however not included in our book stock as it did not belong to us. This fact was brought to the attention during the post search proceedings and a copy of the jangad was submitted to the conducting DDIT Unit IX (3), Mumbai on 02/12/2011. Copy of the letter filed is enclosed herewith as Annexure 5. A copy of the Jangad (Memo) ofM/s. Neelam Exports, evidencing the same is enclosed as Annexure~4. b) The balance difference of 1.32 carats is on account of weighing difference. It is submitted that the entire stock was valued by the Govt. Valuers at different locations in a period of only 36 hours starting from 8/8/201} to 9/8/2011. The measurements of carats differ from scale to scale. The difference of 1.32 carats amounts to 0.001% of my total stock which can, be considered as a weighing difference and therefore stands explained. 2. Reconciliation of stock of Rough Diamonds: ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 20 We have enclosed herewith the 'stock reconciliation statement containing the reconciliation between the physical stock of Rough Diamonds and Book Stock of Rough Diamonds as Annexure-6. The Book Stock of Rough Diamonds as on 08.08.2011 was 5,19,066,22 Carats. . The same was submitted to the search team on 08/08/2011 as under: Sr.No. PgNos Anne xure * Carats Remarks Annexure 1 114 to 115 A 1,35,390.69 Geeta Office 7 2 101 to 106 A 1,60,234.55 Karigars 8 3 101 to 106 A 1,67,169.15 Navsari 8 4 101 to 106 A 56,271.80 Navsari 8 \ 5,19,066.19 Annexure A refers Pages I to 115 seized 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 Karigars for processing from Mumbai and the Navsari Office. In this regard, please find enclosed copy of . the documents evidencing the issue of Rough Diamonds to the ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 21 Karigars from the Navsari office totaling to 1,04 1 522.57 carats (Refer Annexure-9) and which also form part of the documents seized during the course of the search proceedings. Also enclosed copy of the statements reflecting the Rough Diamonds issued to various Karigars from the Mumbai Office as Annexure-8 and which also forms part of the seized documents. b) The balance difference of 9.38 carats is on account of weighing difference. It is submitted that the entire stock was valued by the Govt. Valuers at different locations in a period of only 36 hours starting from 8/8/2011 to 9/8/2011. The measurements of carats differ from scale to scale. The difference of 9.38 carats amounts to 0.001% of my . total stock which can be considered as a weighing difference and therefore stands explained," 14.2. The ld. AO disregarded the aforesaid explanations of the assessee and proceeded to apply the rate applicable to rough diamonds even for the difference in stock for rough rejections and arrived at the addition of Rs.5,96,192/- and made an addition u/s.69B of the Act in the assessment. This action of the ld. AO was upheld by the ld. CIT(A). 14.3. We find from the detailed explanation given by the assessee submitting the re-conciliation of stock of rough rejections and stock of rough diamonds as reproduced herein supra, the assessee had explained that 169.45 carats belongs to third party i.e. M/s. Neelam Exports which was received by the assessee and included in the rough rejections stock by the valuer during the course of search proceedings, which was not included in the book stock of the assessee as it did not belong to assessee. This fact was also brought to the attention by the assessee before the DDIT(Investigation) Unit IX(3) Mumbai on 02/12/2011, i.e. post search investigation proceedings. The assessee had also produced the copy of the Jangad (Memo of Neelam Exports) evidencing the same before the DDIT Investigation Wing. The ld. AO however, observed that the goods if at all received from third parties had to be registered in the some register. The ld. AO placed reliance on the statement recorded ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 22 from Mr. Hiten B Parikh on 18/08/2011 which was 10 days after date of search and even 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 represent diamonds received from M/s. Neelam Exports by the assessee which was included only in the physical stock, but not in the book stock maintained by the assessee. Hence, we are inclined to accept to the contentions of the assessee and direct the ld. AO not to make any addition for the value of 169.45 carats of diamonds as it stands properly explained. 14.4. Now as far as the remaining difference of 10.7 carats (180.15 – 169.45 carats) is concerned, the assessee explained that the same had arose due to weighing difference. We have already disregarded this contention of the assessee while adjudicating ground No.1 supra for A.Y.2012-13, in view of high level of precision and accuracy with which ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 23 books and stocks are maintained by the assessee. However, we find the ld. AR made arguments that ld. AO had applied the rate applicable to “rough diamonds” for the difference in stocks found in “rough rejections. In order to put an end to protracted litigation, the ld. AR pleaded for adoption of the rates applicable to rough rejections as valued by the Government valuer is applied for the stock difference arising in rough rejections and the rate applicable to rough diamonds is applied for the stock difference arising in rough diamonds. 14.5. Per contra, the ld. DR vehemently objected to the same as in his opinion, this valuation aspect was never raised by the assessee before the lower authorities. We find that the ld. AR has made this argument only in order to put an end to the litigation. We also find that out of 180.15 carats of stock difference, 169.45 carats was properly explained and the difference of 10.7 carats need to be sustained in the form of addition. Now, for the purpose of arriving at the value of addition for 10.7 carats, the ld. AR has brought this alternative argument. Hence, we hold that this is only an argument advanced by the ld. AR and there is absolutely no fresh facts which requires verification in this regard. Either way this aspect deserves to be remanded back to the file of the ld. AO for arriving at the value for making addition in respect of deficit of 10.7 carats. Hence, we direct the ld. AO to make an addition for 10.7 carats by applying the respective rates applicable for “rough rejections” and “rough diamonds” as the case may be, as mentioned in the Government Valuation report. This in our considered opinion, would meet the ends of justice. Accordingly, the ground No.2 raised by the assessee for A.Y.2012- 13 is partly allowed. ITA No.127/Mum/2021 and other appeals M/s. Mahendra Brothers Exports Pvt. Ltd., 24 15. In the result, appeals of the Revenue is dismissed and appeal of the assessee is partly allowed. Order pronounced on 29/11/2021 by way of proper mentioning in the notice board. Sd/- (PAVAN KUMAR GADALE) Sd/- (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 29/11/2021 KARUNA, sr.ps Copy of the Order forwarded to : BY ORDER, (Asstt. Registrar) ITAT, Mumbai 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy//