Bhojal Gems, Surat V. The ACIT.,Circle-9, Surat

ITA 3840/AHD/2008

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6569 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 5 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-05-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 26-04-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 25-11-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: H P MEENA
• Assessee Lawyers: R N VEPARI
• Keywords: Opportunity of being heard; Speculation loss
• Section: 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH AHMEDABAD (BEFORE S/SHRI G. D. AGARWAL, VP AND BHAVNESH SAINI , JM) ITA NO.3840/AHD/2008 A. Y.: 2005-06 M/S. BHOJAL GEMS, 11-12, GREEN PARK SOCIETY, B/H TAPSHEEL SOCIETY, VARACHHA ROAD, SURAT VS THE A. C. I. T., CIRCLE-9, AAYAKAR BHAVAN, ROOM NO.423, NR. NEW CIVIL HOSPITAL, MAJURA GATE, SURAT PA NO. AACFB 6118 Q (APPELLANT) (RESPONDENT) ITA NO.4007/AHD/2008 A.Y.: 2005-06 THE A. C. I. T., CIRCLE-9, AAYAKAR BHAVAN, ROOM NO.423, NR. NEW CIVIL HOSPITAL, MAJURA GATE, SURAT VS M/S. BHOJAL GEMS, 11-12, GREEN PARK SOCIETY, B/H TAPSHEEL SOCIETY, VARACHHA ROAD, SURAT PA NO. AACFB 6118 Q (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI R. N. VEPARI, AR DEPARTMENT BY SHRI H. P. MEENA, SR. DR O R D E R PER BHAVNESH SAINI: BOTH THE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER OF THE LEARNED CIT(A)-V, SURAT DA TED 29-09-2008 FOR ASSESSMENT YEAR 2005-06. 2. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOT H THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIES BELOW AND H AVE GONE THROUGH ITA NO.3840 AND 4007/AHD/2008 M/S. BHOJAL GEMS, SURAT 2 THE MATERIALS AVAILABLE ON RECORD. BOTH THE CROSS A PPEALS ARE DECIDED AS UNDER. ITA NO.3840/AHD/2008 (ASSESSEES APPEAL) 3. THE ASSESSEE IN ITS APPEAL CHALLENGED THE ADDITI ON OF RS.68,63,289/- ON ACCOUNT OF UNDISCLOSED AND SUPPRE SSED YIELD. THE FACTS OF THE CASE ARE THAT THE ASSESSEE IS A TRADER , MANUFACTURER, IMPORTER AND EXPORTER OF DIAMONDS. DURING THE RELEV ANT ACCOUNTING YEAR THE APPELLANT HAS SHOWN THE GROSS PROFIT OF RS .2,97,81,998/- I.E., @ 9.89% ON TOTAL TURNOVER OF RS.30,11,32,688/- AS C OMPARED TO THE G.P OF RS.2,94,39,323/- I.E., @ 10.97% ON -TOTAL TU RNOVER OF RS.26,83,43,460/-. THE MODUS OPERANDI OF THE BUSINE SS AS DISCUSSED BY THE AO IN PARA 5 IS LIKE THIS. THE ASSESSEE USED TO IMPORT ROUGH DIAMONDS IN LOTS THE PRICE OF EACH LOT DEPENDS UPON THE QUALITY OF ROUGH DIAMONDS CONTAINED IN THE LOT. THEREAFTER, TH E ASSESSEE SEGREGATED THE ROUGH DIAMONDS IN TWO PARTS I.E., TH E ROUGH DIAMONDS FROM WHICH THE POLISHED DIAMONDS CAN BE MADE AND OT HERS FROM WHICH NO POLISHED DIAMONDS OR DIAMONDS OF LOWER QUA LITY CAN BE MADE. THE SEGREGATED ROUGH DIAMONDS ARE GIVEN TO TH E LABOURERS IN PACKETS FOR FURTHER PROCESSING CLEAVING AND POLISHI NG. NORMALLY, THE QUANTITY OF ROUGH DIAMONDS RANGES FROM 1 TO 50. THE AO WAS OF THE VIEW THAT FOR A PRUDENT BUSINESS MAN IT BECOMES NEC ESSARY TO HAVE A RECORD FOR BOTH THE QUANTITIES IN TERMS OF CARAT AS WELL AS QUALITY OF ROUGH DIAMONDS GIVEN TO EACH LABOURERS. THE LABORER S/ CONTRACTORS RETURN THE POLISHED DIAMONDS ALONG WITH THE RESIDUA L TO THE ASSESSEE. THE ASSESSEE AFTER SEGREGATING THEM QUALITY WISE, F IX THE SALE PRICE. THE AO WAS, THEREFORE, OF THE VIEW THAT THE ASSESSE E WAS IN FULL ITA NO.3840 AND 4007/AHD/2008 M/S. BHOJAL GEMS, SURAT 3 KNOWLEDGE OF THE QUALITY OF EACH AND EVERY DIAMOND MANUFACTURED OUT OF ROUGH DIAMOND. IT WAS ALSO STATED BY THE AO THAT VALUE OF POLISHED DIAMOND VARIES FROM RS.1000/- PER CARAT TO RS.1,00,000/- PER CARAT, OR EVEN MORE. IN PARA 6 OF THE ASSESSMEN T ORDER, THE AO HAS MENTIONED THE YIELD, G.P AND N.P WHICH IS REPRO DUCED AS UNDER: AY AVG.COST OR ROUGH PURCHASE/ CT AVG.COST OF POLISHED DIAMONDS SALE/CT LABOUR EXP. PER CARAT YIELD MAKE- ABLE ROUGH YIELD ON GROSS ROUGH G.P.% N.P. % 2002-03 617.80 10202.07 300 27.58 8.88 13.68 5.94 2003-04 1130.74 9957.03 300 30.44 13.51 11.31 4.47 2004-05 1162.79 9430.94 300 28.23 13.24 10.98 3.99 2005-06 1327.87 9657.49 300 27.67 12.78 9.93 1.94 THE AO HAS OBSERVED THAT FROM THE ANALYSIS OF THE A BOVE TABULAR INFORMATION IT IS CLEAR THAT EVEN THOUGH THE ASSESS EE WAS USING THE SAME KIND OF ROUGH DIAMOND AS IN THE EARLIER YEARS I. E, AY 2004-05, THE YIELD PERCENTAGE IS LOW. IN CASE OF YIELD OF MA KEABLE ROUGH DIAMOND AND YIELD OF GROSS ROUGH DIAMONDS THE AO HA S CITED THE COMPARABLE CASES OF R. MITESH KUMAR & CO. AND PALAD IYA EXPORTS, JAY IMPEX, WHICH ARE SHOWING YIELD OF NEARLY 30%. T HE AO HAS STATED THAT THE ASSESSEE WAS USING MODERN EQUIPMENT LIKE LASER MACHINE AND PLANNING SYSTEM AND DIAMOND POWDER IMPO RTED FROM CHINA, AND THEREFORE; THE ASSESSEE SHOULD GET MORE YIELD FROM THE ROUGH DIAMONDS. THE AO HAS GIVEN SHOW CAUSE NOTICE TO THE ASSESSEE. IN REPLY TO THE SHOW CAUSE NOTICE THE ASS ESSEE HAS STATED THAT IT WAS MAINTAINING COMPLETE QUANTITY TALLY. LO T WISE DETAILS OF ITA NO.3840 AND 4007/AHD/2008 M/S. BHOJAL GEMS, SURAT 4 PRODUCTION WERE ALREADY ON RECORD SHOWING DETAILS O F LOT ISSUED, POLISHED DIAMONDS RECEIVED ETC. FURTHER THE YIELD O F EACH LOT VARIES FROM 24.99% TO 38.94%. IT WAS FURTHER STATED BY THE ASSESSEE THAT YIELD OF LOT DEPENDS ON ARTISAN OR THE LABOURERS AN D IT COULD NOT BE SAID THAT IT REMAINS THE SAME AS SHOWN IN THE PREVI OUS YEARS. THE YIELD ALSO DEPENDS UPON THE QUALITY OF ROUGH DIAMON DS AND THE PRICE OF ROUGH DIAMONDS IN THE INTERNATIONAL MARKET. THE ASSESSEE CONTENDED THAT IT IS NOT POSSIBLE TO MAINTAIN SAME PERCENTAGE OF YIELD. AS PER PARA 6.1 OF THE ASSESSMENT ORDER THE AO HAS NOTICED THAT EVEN THOUGH THE ASSESSEE HAS PURCHASED THE ROU GH DIAMOND OF GOOD QUALITY I.E., AT AVERAGE COST OF RS.1200/- AND ABOVE. THE YIELD IS 27.67% ONLY ON MAKEBLE ROUGH DIAMONDS WHICH IS SIGN IFICANTLY LOWER THAN THE YIELD OBTAINED BY OTHER SIMILAR CONCERNS. BESIDES, THE WASTAGE PERCENTAGE FROM THE GROSS ROUGH DIAMOND IS ALSO HIGHER. THE AO CAME TO THE CONCLUSION THAT THE ASSESSEE WAS NOT REPRESENTING THE COMPLETE YIELD IN HIS BOOKS OF ACC OUNTS. THE CONTENTION OF THE ASSESSEE THAT DIAMONDS ARE NOT MA CHINE MADE HENCE DIFFERENT PEOPLE DID NOT GET THE SAME YIELD, WAS ALSO NOT ACCEPTED BY THE AO. ACCORDING TO HIM MORE THAN 50% OF PRODUCTION IS THROUGH MACHINES ONLY AND PERSON SKILL INVOLVES ALONG WITH MACHINE OPERATION AND ASSESSEE WAS NOT NEW TO THIS JOB AND HAS ESTABLISHED INFRASTRUCTURE AND KARIGARS. THE AO HAS ALSO ASKED FOR THE EXPLANATION FOR FALL IN G.P. IN THIS CONNECTION THE ASSESSEE HAS REPLIED THAT THERE IS INCREASE, IN COST OF PRODUCTI ON 8.54% AS COMPARED TO PREVIOUS YEAR BUT THE REALIZATION PER C ARAT INCREASED ONLY TO THE EXTENT OF 2.40%. THERE WAS INCREASE IN THE EXPENSES TO THE EXTENT OF 4.53%. THE ASSESSEE HAS GIVEN FURTHER REASONS THAT THE ITA NO.3840 AND 4007/AHD/2008 M/S. BHOJAL GEMS, SURAT 5 VALUE OF RUPEE WAS INCREASED IN FY 2004-05 AGAINST THE US DOLLAR. THE MARGINAL FELL OF ABOUT 1% IS A NORMAL PHENOMENO N. AS PER PARA 7.1 OF THE ASSESSMENT ORDER THE AO HAS OBSERVED THA T, THE ASSESSEES ARGUMENT IS REGARD THE APPRECIATION OF T HE VALUE OF RUPEE AGAINST US DOLLAR IS NOT ACCEPTABLE AS IT AFFECTS B OTH THE EXPORTS AND IMPORTS EQUALLY. IN THIS PARA THE AO HAS WORKED OUT THE DIFFERENCE IN YIELD SHOWN BY ASSESSEE AT 1% FROM 64850.53 CARATS WHICH COMES TO 648.50 CARATS. THE AO HAS ALSO WORKED OUT THE COST PER CARAT OF POLISHED DIAMOND MANUFACTURED WHICH COMES TO RS.105 83.33. THE TOTAL COST OF SUPPRESSED YIELD OF 648.50 CARATS @RS . 10583.33 COMES TO RS.68,63,289/- WHICH IS ADDED BY THE ASSESSING O FFICER. 4. THE LEARNED CIT(A) CONSIDERING THE SUBMISSION OF THE ASSESSEE BEFORE AO CONFIRMED THE ADDITION AND DISMISSED THE APPEAL OF THE ASSESSEE. HIS FINDINGS ARE REPRODUCED AS UNDER: I HAVE GONE THROUGH THE ASSESSMENT ORDER AND ALSO T HE SUBMISSIONS OF THE APPELLANT INCORPORATED BY THE AO IN HIS ORDER. FROM THE CHART GIVEN IN PARA 6 OF THE ASSESSMENT ORDER IT IS SEEN THAT NOT ONLY THE YIELD ON MAKEABLE ROUGH DIAMONDS AND YIELD ON GROSS ROUGH DIAMONDS IS ALSO INCREASED, THERE IS ALSO FALL IN G .P BY 1.05% COMPARED TO THE EARLIER ASSESSMENT YEAR I.E A Y 2004-05 THE AVERAGE OF THE G.P FOR THE LAST THREE Y EARS FROM THE AY 2002-03 TO AY 2004-05 COMES TO 11.99%. THEREFORE THE G.P SHOWN IN AY 2005-06 IS 2.06% LESS AS COMPARED TO THE AVERAGE GROSS PROFIT OF EARLIER YEA RS. IT IS ALSO SEEN FROM THE CHART THAT THERE IS FALL IN N.P BY 1.15% AS COMPARED TO AY 2004-05. IF WE TAKE THE AVERAGE O F EARLIER THREE YEAR I.E. FROM THE AY 2002-03 TO AY 2 004-05 COMES TO 4.5%. THE APPELLANT HAS SHOWN NET PROFIT @ 1.94% ONLY, WHICH IS LESS BY 2.56% AS COMPARED TO T HE N.P. OF EARLIER YEARS. IF WE TAKE THE AVERAGE NET P ROFIT ' OF ITA NO.3840 AND 4007/AHD/2008 M/S. BHOJAL GEMS, SURAT 6 EARLIER THREE YEARS AND WORK OUT THE NET PROFIT OF AY 2005- 06 THE ADDITION ON ACCOUNT OF LOW NET PROFIT AT 2.5 6% ON TOTAL TURNOVER OF RS. 301132688, IT COMES TO RS. 7708996/-. I FIND THAT, THE AO HAS METICULOUSLY WORKED OUT THE COST PER CARAT OF POLISHED DIAMOND MANUFACTURED AT RS. 10583.33. THE DIFFERENCE IN YIE LD AS WORKED OUT BY THE AO IS 648.50 CARAT. I HAVE GONE THROUGH THE SUBMISSIONS MADE BY THE APPELLANT BEFORE THE AO AND THERE IS NOT MUCH FORCE IN IT EVEN IF SO ME WEIGHTAGE IS GIVEN TO THE INCREASED EXPENSES AS DISCUSSED BY THE AO IN PARA 7.1 OF THE ASSESSMENT O RDER I AM OF THE VIEW THAT THE ADDITION MADE BY THE AO A T RS.68,63,289/-- ON ACCOUNT OF LOW YIELD IS JUSTIFIE D AS COMPARED TO THE FALL IN N.P AT RS. 7708996/- KEEPIN G IN VIEW THE RESULTS OF EARLIER THREE YEARS. CONSIDERIN G THE FACTS OF THE CASE I HOLD THAT THE AO HAS RIGHTLY RE JECTED THE BOOK RESULTS AND THEREFORE THE ADDITION OF RS.68,63 ,289/- MADE BY THE AO ON ACCOUNT OF LOW YIELD GIVING COGEN T REASONS IS CONFIRMED. 5. ON CONSIDERATION OF THE RIVAL SUBMISSIONS, WE AR E OF THE VIEW THAT THE MATTER REQUIRES RECONSIDERATION AT THE LEV EL OF THE LEARNED CIT(A). THE LEARNED COUNSEL FOR THE ASSESSEE DURING THE COURSE OF ARGUMENTS POINTED OUT THAT THE ENTIRE WORK WAS DONE BY THE ASSESSEE ON JOB CHARGES AND THAT EVERY ITEM IS SUPPORTED BY BILLS AND VOUCHERS. HE HAS REFERRED TO PB-8 AND 9 TO SHOW THE NAMES AND ADDRESSES OF THE CONTRACTORS WITH THEIR PAN TO SHOW THE QUANTITY OF ROUGH DIAMONDS ISSUED IN CARATS, ROUGH DIAMONDS REJ ECTION RECEIVED IN CARATS, POLISHED DIAMONDS IN CARATS, JOB CHARGES PAID AND THE MODE OF PAYMENT. HE HAS SUBMITTED THAT ALL THE ROUG H DIAMONDS POLISHED THROUGH THE LABOURERS AND GENUINE PAYMENTS HAVE BEEN MADE AND COMPLETE DETAILS ARE MAINTAINED WITH REGAR D TO ROUGH DIAMONDS ISSUED AND THE PRODUCTION COPY OF WHICH IS FILED AT PB-10 TO ITA NO.3840 AND 4007/AHD/2008 M/S. BHOJAL GEMS, SURAT 7 12 OF THE PAPER BOOK. HE HAS ALSO REFERRED TO PB-13 ONWARDS WHICH ARE THE DETAILS OF THE LABOUR PAYMENTS AND TDS DEDU CTED ON MAKING PAYMENTS TO THEM. COMPLETE DETAILS ARE ALSO FILED T O SHOW THE STATEMENT SHOWING MANUFACTURE OF POLISHED DIAMONDS OF EACH LOT (PB-16 ONWARDS). PB-20 IS THE QUANTITATIVE DETAILS OF ROUGH DIAMONDS, MANUFACTURED DIAMONDS AND REJECTION OF DI AMONDS. THE LEARNED COUNSEL FOR THE ASSESSEE, THEREFORE, SUBMIT TED THAT THE ASSESSEE MAINTAINED COMPLETE DETAILS AND NO SPECIFI C DEFECTS HAVE BEEN POINTED OUT IN THE MAINTENANCE OF BOOKS OF ACC OUNTS. THEREFORE, THE AUTHORITIES BELOW SHOULD NOT HAVE MADE THE ADDI TION. THE LEARNED DR HOWEVER, RELIED UPON THE ORDERS OF THE AUTHORITI ES BELOW AND SUBMITTED THAT NOT ONLY YIELD IS LOW, BUT GP AND NP RATE IS ALSO LOW IN THE ASSESSMENT YEAR UNDER APPEAL AS COMPARED TO EAR LIER YEARS, THEREFORE, THE ADDITION IS JUSTIFIED. 5.1 ON CONSIDERATION OF THE FACTS IN THE LIGHT OF T HE SUBMISSIONS OF THE PARTIES, IT IS CLEAR THAT THOUGH THE ASSESSEE M AINTAINED CERTAIN DETAILS WITH REGARD TO THE ROUGH DIAMONDS AND THE P RODUCTION AND QUANTITATIVE DETAILS ARE ALSO MAINTAINED ALONG WITH LABOUR PAYMENTS MADE ON WHICH TDS WAS DEDUCTED, BUT THE ASSESSEE CH OOSE NOT TO APPEAR BEFORE THE LEARNED CIT(A) DESPITE SEVERAL AD JOURNMENTS, NOTHING WAS BROUGHT TO THE NOTICE OF THE LEARNED CI T(A) FOR INTERFERENCE IN THE MATTER. IT WOULD, THEREFORE, SH OW THAT THE DETAILS NOW FILED IN THE PAPER BOOK AND POINTED OUT DURING THE COURSE OF ARGUMENTS BEFORE THE TRIBUNAL, WERE NOT FILED OR DI SCUSSED BEFORE THE LEARNED CIT(A). THE DETAILS FILED IN THE PAPER BOOK MAY SUPPORT THE CLAIM OF THE ASSESSEE THAT IN THE ABSENCE OF ANY SP ECIFIC DEFECTS THE ITA NO.3840 AND 4007/AHD/2008 M/S. BHOJAL GEMS, SURAT 8 ADDITION MAY NOT BE JUSTIFIED BUT THE ASSESSEE SHAL L HAVE TO PROVE ITS CASE BEFORE THE FIRST APPELLATE AUTHORITY ON THE BA SIS OF THE EVIDENCES AND MATERIAL AVAILABLE WITH IT. THE ASSESSEE HOWEVE R, DID NOT APPEAR BEFORE THE LEARNED CIT(A) DESPITE HAVING COMPLETE D ETAILS AVAILABLE WITH IT ON THE MATTER IN ISSUE. THEREFORE, INTERES T OF JUSTICE REQUIRES THAT THE ASSESSEE MAY BE GIVEN ONE MORE OPPORTUNITY TO EXPLAIN THE ABOVE ISSUE BEFORE THE LEARNED CIT(A). CONSIDERING THE DETAILS FILED IN THE PAPER BOOK AND POINTED OUT DURING THE COURSE OF ARGUMENTS, WE FIND IT REASONABLE AND APPROPRIATE TO RESTORE THIS ISSUE TO THE FILE OF THE LEARNED CIT(A) FOR RECONSIDERATION. WE ACCORDIN GLY, SET ASIDE THE ORDER OF THE LEARNED CIT(A) AND RESTORE THIS ISSUE TO HIS FILED WITH DIRECTION TO RE-DECIDE THIS ISSUE BY GIVING REASONA BLE SUFFICIENT OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE ASS ESSEE IS DIRECTED TO COOPERATE WITH THE LEARNED CIT(A) AND SHALL FURN ISH COMPLETE DETAILS BEFORE THE LEARNED CIT(A) FOR PROPER ADJUDI CATION OF THE MATTER IN ISSUE. IN CASE, THE ASSESSEE SHALL NOT COOPERATE WITH THE LEARNED CIT(A), HE IS FREE TO PASS APPROPRIATE ORDER IN ACC ORDANCE WITH LAW. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSES. ITA NO. 4007/AHD/2008(DEPARTMENTAL APPEAL) 7. THE REVENUE HAS CHALLENGED THE ORDER OF THE LEAR NED CIT(A) IN TREATING THE LOSS OF RS.15,39,137/- AS BUSINESS LOS S AS AGAINST SPECULATION LOSS TREATED BY THE AO. THE AO DISALLOW ED FORWARD CONTRACT CANCELLATION LOSS OF RS.15,39,137/-. THE A SSESSEE HAS DEDUCTED RS.15,39,137/- UNDER THE HEAD 'INTEREST AND FINANCIAL ITA NO.3840 AND 4007/AHD/2008 M/S. BHOJAL GEMS, SURAT 9 CHARGES' THE ASSESSING OFFICER HAS GIVEN SHOW CAUSE NOTICE TREATING THAT WHY THE CANCELLATION LOSS ON FORWARD CONTRACT SHOULD NOT BE CONSIDERED AS SPECULATION LOSS U/S 43(5) OF THE I.T . ACT. IN REPLY TO THE SHOW CAUSE NOTICE THE APPELLANT HAS REPLIED THAT, T HE FORWARD CONTRACT WHEREVER CANCELLED WERE EXCLUSIVELY TO HEDGE THE SU NDRY DEBTORS AND IMPACT OF FLUCTUATION OF BUSINESS. IT HAS ENTERED A LL FORWARD CONTRACTS WITH AN AIM TO MANAGE THE RISK OF EXCHANGE FLUCTUAT ION. IT WAS FURTHER CONTENTED THAT ALL THE FORWARD CONTRACTS ENTERED BY THE ASSESSEE WERE WITH BANKS, WHICH HAVE GRANTED VARIOUS FACILITIES P ERTAINED TO A SPECIFIC PERIOD AND, IF REALIZATION OF DEBTORS ARE NOT FLOWING THAT SPAN THEY WILL STAND CANCELLED AND THE INCIDENTAL LOSSES AND GAINS HAVE OCCURRED. THE CONTRACTS WERE FOR THE SPECIFIC PERIO D AND SPECIFIED QUANTUM AND FOR THE DEBTORS THAT WOULD BE EXISTENT AND REALIZABLE AT THAT POINT OF TIME. THERE WAS NO ELEMENT OF MARGIN MONEY. BEFORE THE AO, IN SHORT THE ASSESSEE HAD VEHEMENTLY ARGUED THA T THE TRANSACTIONS WERE HEDGING TRANSACTIONS AND NOT THE SPECULATIVE TRANSACTIONS. THE AO HAS CONSIDERED THE ARGUMENTS OF THE ASSESSEE IN PARA 8.1 PAGE 9 OF THE ASSESSMENT ORDER. THE AO HAS ALSO REPRODUCED THE PROVISIONS OF SECTION 43(5) OF THE I .T. ACT, WHICH HAS DISCUSSED THE MEANING OF SPECULATIVE TRANSACTION IN DETAIL. THE AO HAS NOT ACCEPTED THE ASSESSEES CONTENTION AS THE A SSESSEE HAS MADE A SPECULATION TO PROTECT ITSELF FROM PRICE FLU CTUATION THAT HAPPENS DUE TO INCREASE AND DECREASE IN DOLLAR PRIC E, BUT THE ASSESSEE HAS NOT COMPLETED THE SAID CONTRACT AND IN BETWEEN IN ANTICIPATION OF LOSS HE HAS CANCELLED THE CONTRACT. THE AO HAS FURTHER STATED THAT THE OBJECTIVE OF MAKING FORWARD CONTRAC T ITSELF IS GETTING DEFEATED HERE. THE AO IS ALSO OF THE VIEW THAT, AS IN SECTION 43(5) (A) ITA NO.3840 AND 4007/AHD/2008 M/S. BHOJAL GEMS, SURAT 10 OF THE IT ACT, IF THE ASSESSEE HAS TAKEN FOR ACTUAL DELIVERY OF GOODS MANUFACTURED AND COMPLETED THE CONTRACT, THAT DOES NOT FALL UNDER SPECULATIVE TRANSACTION. HE HAS THEREFORE, HELD THA T, IN VIEW OF THE CANCELLATION OF FORWARD CONTRACT DONE BY THE ASSESS EE PREMATURELY WAS A SPECULATION LOSS AND CANNOT BE CONSIDERED AS BUSINESS LOSS. THE AO THEREFORE CONSIDERED THE LOSS OF RS.15,39,13 7/- AS A SPECULATION LOSS AND DISALLOWED THE SAME AS BUSINES S LOSS AND ADDED TO THE INCOME OF THE ASSESSEE. 8. THE LEARNED CIT(A) CONSIDERING THE SUBMISSIONS O F THE ASSESSEE DELETED THE ADDITION. HIS FINDINGS ARE REP RODUCED AS UNDER: I HAVE GONE THROUGH THE ASSESSMENT ORDER CAREFULLY AND I HAVE ALSO GONE THROUGH SUBMISSIONS MADE BEFORE TH E AO (AS REPRODUCED BY THE AO IN THE ASSESSMENT ORDER ). THE SPECULATIVE TRANSACTION IS VERY WELL DEFINED IN 43(5) OF THE I.T. ACT. THE APPELLANT'S MAIN FORCE IN HIS CON TENTION IS THAT THE FORWARD CONTRACT TRANSACTIONS ENTERED INTO BY IT ARE THE HEDGING TRANSACTIONS WHICH ARE NOT COVERED IN THE DEFINITION OF THE SPECULATIVE TRANSACTION AND THERE FORE IT IS A BUSINESS LOSS. BEFORE ME NOBODY HAS APPEARED NOR HAVE ANY SUBMISSIONS BEEN FILED. HOWEVER SINCE THE UNDERSIGNED HAS HAD AN OPPORTUNITY OF ADJUDICATE TH IS ISSUE IN SIMILARLY PLACED CASES WITH IDENTICAL FACT S, MY DECISION ON THIS ISSUE AS BELOW. THE CONTRACTS ENTERED INTO BY ASSESSEE ARE IN THE N ATURE OF HEDGING TRANSACTIONS' AS THE SAME ARE ENTERED I NTO TO SAFEGUARD THE BUSINESS INTEREST AGAINST FLUCTUATION IN RATE OF FOREIGN EXCHANGE. IT IS UNDERSTOOD THAT ASSESSEE IS ALLOWED TO BOOK FORWARD EXCHANGE CONTRACTS ONLY ON SATISFACTION OF CERTAIN CONDITIONS LAID DOWN BY RBI IN THIS REGARD. THE MAIN CONDITION IS THAT FORWARD CONTRACT S CAN BE BOOKED ON THE BASIS OF AN EXPOSURE BASED ON PAST PERFORMANCE UP TO THE AVERAGE OF THE PREVIOUS 3 FINANCIAL ITA NO.3840 AND 4007/AHD/2008 M/S. BHOJAL GEMS, SURAT 11 YEARS ACTUAL IMPORT / EXPORT TURNOVER OR THE PREVIO US YEARS ACTUAL IMPORT/EXPORT TURNOVER, WHICHEVER- IS HIGHER . THE BOOKING OF FORWARD CONTRACT IS THEREAFTER ALLOWED O N VARIOUS OTHER CONDITIONS & IT IS THEREFORE CONTENDE D THAT BANKS WILL ALLOW ASSESSEE TO ENTER IN TO FORWARD CO NTRACTS ONLY IF IT IS SATISFIED ABOUT THE GENUINENESS OF RE QUIREMENT OF ASSESSEE. IT IS THEREFORE DEAR THAT BANK (AUTHOR IZED DEALER) WILL NOT SHOW ASSESSEE TO BOOK FORWARD CONT RACTS FOR SPECULATION PURPOSE. TRADING IN FOREIGN CURRENCY IS PERMITTED WITH BANKS . HOWEVER WHERE AN ASSESSEE ENTERS INTO A FORWARD CONTRACT WITH BANKS IN FOREIGN EXCHANGE, WHEN HE IS NOT A DEALER IN FOREIGN EXCHANGE, BUT DOES SO IN ORDER TO HEDGE AGAINST LOSS IN RESPECT OF HIS EXPORT BUSINESS OF S OME OTHER ITEM, SUCH LOSS CAN NOT BE TREATED AS LOSS FR OM SPECULATION, SO AS TO BE DISALLOWED AS HELD IN CIT V/S. BADRIDAS GAURIDU (P) LTD (2003) 261 FTR 256 (BOM) FOLLOWING CIT V. SOORAJMULL NAGARRNULL (129) ITR 16 9 (CAL). FURTHER I HAVE ALSO GONE THROUGH THE RULES FRAMED B Y RB IN THIS REGARD FORWARD CONTRACTS ARE ALLOWED TO BE BOOKED ONLY UPON SATISFACTION OF VARIOUS CONDITIONS. THE P ERUSAL OR RULES FRAMED IN THIS REGARD CLEARLY REVEALS THAT BANK (AUTHORIZED DEALER) WILL ALLOW ASSESSEE TO BOOK FOR WARD CONTRACTS ONLY AFTER IT IS SATISFIED RELATING TO GE NUINE REQUIREMENTS OF ASSESSEE. AS SUCH IT CANNOT BE SAID THAT ASSESSEE HAS ENTERED INTO FORWARD CONTRACTS WITH A VIEW TO DO SPECULATIVE ACTIVITY. IN THE INSTANT CASE, TH E CONTRACTS WERE REQUIRED TO BE CANCELLED AS THE SAME CANNOT BE USED WITHIN THE SPECIFIED TIME LIMIT WHEN EVER ASSESSEE ENTERS INTO FORWARD CONTRACT, THE BANK PRESCRIBES SPECIFIC TIME LIMIT WITHIN WHICH THE UTI LIZATION SHOULD TAKE PLACE OTHERWISE ON THE MATURITY DATE TH E CONTRACT IS TREATED AS CANCELLED. RULE 6 OF FEDAI R ULES DEALS WITH THE CANCELLATION OF CONTRACT & AS PER TH E SAME, THE CONTRACTS HAVE BEEN CANCELLED AT THE SPOT T.T. SELLING RATE/BUYING RATE AS THE CASE MAY BE. AS REGARDS ITA NO.3840 AND 4007/AHD/2008 M/S. BHOJAL GEMS, SURAT 12 REFERENCE TO SECTION 43(5) OF THE ACT, I AM OF THE- OPINION THAT THE IMPUGNED CANCELLATION OF CONTRACT DOES NOT GET COVERED BY THIS SECTION AS CONTRACTS ARE ENTERED VERY MUCH IN THE NORMAL COURSE BUSINESS & IS VERY MUCH I N THE NATURE OF 'HEDGING TRANSACTION'. ACCORDINGLY, LOSS ARISING ON CANCELLATION OF FORWARD EXCHANGE CONTRACT IS ALL OWED AS BUSINESS LOSS' & HENCE, THIS GROUND OF APPEAL I S ALLOWED. 9. ON CONSIDERATION OF THE RIVAL SUBMISSIONS WE DO NOT FIND ANY MERIT IN THE DEPARTMENTAL APPEAL. THE LEARNED DR SU BMITTED THAT IT WAS PRE-MATURE CANCELLATION OF THE CONTRACT; THEREF ORE, IT WAS SPECULATIVE IN NATURE. THE LEARNED DR REFERRED TO T HE STATEMENT OF FACT AND SUBMITTED THAT SPECULATIVE LOSS ATTRIBU TABLE TO THE ASSESSEE, THEREFORE, THE LEARNED CIT(A) SHOULD NOT HAVE DELETED THE ADDITION. ON THE OTHER HAND, THE LEARNED COUNSEL FO R THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORIT IES BELOW AND SUBMITTED THAT THE TRANSACTION WAS BUSINESS TRANSAC TION WHICH WAS ENTERED INTO TO SAFEGUARD THE BUSINESS INTEREST AGA INST FLUCTUATION IN RATE OF FOREIGN EXCHANGE. HE HAS SUBMITTED THAT THE CASE OF THE ASSESSEE FALLS IN THE PROVISO TO SECTION 43(5) OF T HE IT ACT BECAUSE THE FORWARD CONTRACT TRANSACTION ENTERED INTO BY TH E ASSESSEE ARE THE HEDGING TRANSACTIONS. THE DETAILS ARE FILED AT PB-3 3 TO 38 OF THE PAPER BOOK WHICH ARE SUPPORTED BY EVIDENCES. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO DEMONSTRATED THAT SPECULATION IN FORE IGN CURRENCY WOULD NOT BE ALLOWED BY THE BANK AND THAT AMOUNT IS PAID TO THE BANK, THEREFORE, IT WAS A GENUINE BUSINESS TRANSACT ION. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON THE DECISION O F THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS BADRIDAS G AURIDU (P) LTD. 261 ITR 256 IN WHICH IT WAS HELD THAT THE ASSESSEE WAS AN ITA NO.3840 AND 4007/AHD/2008 M/S. BHOJAL GEMS, SURAT 13 EXPORTER OF COTTON. THE ASSESSEE HAD ENTERED INTO F ORWARD CONTRACTS WITH THE BANKS IN RESPECT OF FOREIGN EXCH ANGE. SOME OF THESE CONTRACTS COULD NOT BE HONOURED BY THE ASS ESSEE FOR WHICH IT HAD TO PAY RS.13.50 LAKHS, WHICH WAS DEBIT ED TO THE PROFIT AND LOSS ACCOUNT. THE ASSESSEE CLAIMED THE S AME AS BUSINESS LOSS. THE ASSESSING OFFICER HELD THAT THE LOSS WAS NOT DEDUCTIBLE AS A BUSINESS LOSS AS IT WAS INCURRED IN A SPECULATIVE TRANSACTION. THE TRIBUNAL HELD THAT IT WAS A BUSINE SS LOSS. ON FURTHER APPEAL TO THE HIGH COURT: HELD, DISMISSING THE APPEAL, THAT THE ASSESSEE WAS NOT A DEALER IN FOREIGN EXCHANGE. THE ASSESSEE WAS AN EXP ORTER OF COTTON. IN ORDER TO HEDGE AGAINST LOSSES, THE ASSES SEE HAD BOOKED FOREIGN EXCHANGE IN THE FORWARD MARKET WITH THE BANK. HOWEVER, THE EXPORT CONTRACTS ENTERED INTO BY THE A SSESSEE FOR EXPORT OF COTTON IN SOME CASES FAILED. IN THE CIRCU MSTANCES, THE ASSESSEE WAS ENTITLED TO CLAIM DEDUCTION IN RESPECT OF RS.13.50 LAKHS AS A BUSINESS LOSS. HE HAS ALSO RELIED UPON THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS SOORAJMULL NAGARMULL 129 ITR 169 IN WHICH IT WAS HELD THAT HELD, (I) THAT THE ASSESSEE WAS NOT A DEALER IN FOREIGN EXCHANGE. FORE IGN EXCHANGE CONTRACTS WERE ONLY INCIDENTAL TO THE ASSE SSEES REGULAR COURSE OF BUSINESS. THE AAC HAD MADE A CATE GORICAL FINDING TO THIS EFFECT WHICH HAD BEEN UPHELD BY THE TRIBUNAL. THE LOSS WAS NOT A SPECULATIVE LOSS BUT WAS INCIDENTAL TO THE ASSESSEES BUSINESS AND ALLOWABLE AS SUCH. ITA NO.3840 AND 4007/AHD/2008 M/S. BHOJAL GEMS, SURAT 14 9.1 CONSIDERING THE FACTS OF THE CASE IN THE LIGHT OF THE ABOVE DECISIONS, WE DO NOT FIND ANY INFIRMITY IN THE ORDE R OF THE LEARNED CIT(A) IN DELETING THE ADDITION. THE LEARNED CIT(A) ON PROPER APPRECIATION OF THE FACTS AND MATERIAL ON RECORD RI GHTLY NOTED THAT THE CASE OF THE ASSESSEE FALLS IN THE PROVISO TO SECTIO N 43(5) OF THE IT ACT BECAUSE THE FORWARD CONTRACT ENTERED INTO BY THE AS SESSEE WAS HEDGING TRANSACTION AND WOULD NOT BE COVERED BY THE DEFINITION OF SPECULATIVE TRANSACTION. THE ASSESSEE ENTERED INTO THE TRANSACTION TO SAFEGUARD THE BUSINESS INTEREST AGAINST FLUCTUATION IN RATES OF FOREIGN EXCHANGE. NOTHING IS BROUGHT ON RECORD IF THE ASSES SEE HAS VIOLATED ANY NORMS ISSUED BY RESERVE BANK OF INDIA. THE LEAR NED CIT(A), THEREFORE, RIGHTLY HELD THAT THE BANK BEING AUTHORI ZED DEALER WILL NOT ALLOW THE ASSESSEE TO BOOK FORWARD CONTRACTS FOR SP ECULATION PURPOSES. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO FILED THE DETAILS OF NAMES OF THE BANK OF THE FORWARD CONTRACT TO SHO W CANCELLATION DATE AND THE GAIN/LOSS WHICH SUPPORT THE FINDINGS O F THE LEARNED CIT(A) THAT ASSESSEES TRANSACTION THROUGH BANK WAS A GENUINE BUSINESS TRANSACTION , THEREFORE, LOSS SHALL HAVE T O BE ALLOWED IN THE CASE OF THE ASSESSEE. CONSIDERING THE FACTS AND CIR CUMSTANCES AND THE FINDING OF THE LEARNED CIT(A) IN THE LIGHT OF T HE DECISIONS OF THE HONBLE BOMBAY HIGH COURT AND THE HONBLE CALCUTTA HIGH COURT (SUPRA), WE DO NOT FIND ANY MERIT IN THE DEPARTMENT AL APPEAL ON THIS ISSUE. WE CONFIRM THE FINDINGS OF THE LEARNED CIT(A ) AND DISMISS THE DEPARTMENTAL APPEAL. 10. IN THE RESULT, THE DEPARTMENTAL APPEAL IS DISMI SSED. ITA NO.3840 AND 4007/AHD/2008 M/S. BHOJAL GEMS, SURAT 15 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED FOR STATISTICAL PURPOSES AND THE DEPARTMENTAL APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 20-05-2011 SD/- SD/- (G. D. AGARWAL) VICE PRESIDENT (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 20-05-2011 LAKSHMIKANT/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER D Y. REGISTRAR, ITAT, AHMEDABAD