M/s. Veer Gems, Surat V. The ACIT., Circle-7, Surat

ITA 4136/AHD/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 5975 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 5 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-06-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 12-05-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 26-12-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B S SANDHU
• Assessee Lawyers: RASESH B SHAH
• Keywords: Business income; Speculation loss; Bad and doubtful debts; Tax effect; TDS; Set aside
• Section: 43(5); 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, AHMEDABAD D BENCH, BEFORE SHRI G. D. AGARWAL, VP AND BHAVNESH SAINI, J .M. ITA NO.4133/AHD/2008 A. Y.: 2005-06 THE A. C. I. T., CIRCLE-7, ROOM NO.622,6 TH FLOOR, AAYAKAR BHAVAN, MAJURAGATE, SURAT VS M/S. VEER GEMS, 7/2982, PARSI SHERI, SURAT PAN NO. AABFV 6446L (APPELLANT) (RESPONDENT) ITA NO.4136/AHD/2008 A. Y.: 2005-06 M/S. VEER GEMS, 7/2982, PARSI SHERI, SURAT VS THE A. C. I. T., CIRCLE-7, ROOM NO.622,6 TH FLOOR, AAYAKAR BHAVAN, MAJURAGATE, SURAT PAN NO. AABFV 6446L (APPELLANT) (RESPONDENT) FOR ASSESSEE: SHRI RASESH B. SHAH AND HARDIK VORA, AR FOR DEPARTMENT: SHRI B. S. SANDHU, D R O R D E R PER SHRI BHAVNESH SAINI, J.M . BOTH THE CROSS APPEALS ARE DIRECTED AGAINST ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-IV, SURAT DATED 22-10-2008 FOR ASSESSMENT YEAR 2 2005-06.BOTH THE APPEALS ARE DISPOSED OF SEPARATELY THROUGH THIS COMMON ORDER. 2. WE HAVE HEARD LEARNED REPRESENTATIVES OF BOTH TH E PARTIES, PERUSED THE FINDINGS OF AUTHORITIES BELOW AND CONSI DERED THE MATERIAL AVAILABLE ON RECORD. ITA NO.4133/AHD/2008 (BY DEPARTMENT) 3. REVENUE HAS CHALLENGED DELETION OF ADDITION MAD E BY THE A O ON ACCOUNT OF BAD DEBTS AMOUNTING TO RS.1,24,29,262 /-. 3.1 THE ASSESSEE CHALLENGED THE DISALLOWANCE OF RS. 99,79,281/- ON ACCOUNT OF BAD DEBTS. THE A O HAS OBSERVED THAT THE ASSESSEE CLAIMED A SUM OF RS.1,24,29,262/- AS BAD DEBTS PERT AINING TO M/S. ANDEL JEWELLERY CORPORATION, U.S.A. TO WHOM EXPORTS WERE MADE AND THE LAST EXPORT WAS CLEARED ON 31-03-2005. THE A O OBSERVED THAT THE ASSESSEE WAS RECEIVING PAYMENT FROM THE SAID PA RTY TILL 24-03-2005 AND THE ASSESSEE WAS NOT AWARE TILL 31-0 3-2005 ABOUT THE DEFAULT FROM THE SAID PARTY. FURTHER ANOTHER SU M OF RS.24,49,891/- WAS ALSO RECEIVED FROM THE SAID PARTY BY THE ASSESS EE ON 20-05-2005 I.E. AFTER THE END OF THE FINANCIAL YEAR. AS PER TH E ASSESSEE, IT RECEIVED NOTICE OF CHAPTER VII FROM THE U. S. BANKR UPTCY COURT ON OCTOBER, 2005 ON THE BASIS OF WHICH AND AS PER AS - 4 THE AMOUNT WAS TREATED AS BAD DEBTS. THE A O DID NOT ACCEPT TH E CONTENTION AND HELD THAT ACCOUNTING STANDARD (AS) - 4 WAS NOT BIND ING ON INCOME TAX AUTHORITIES AND AS PER SECTION 145 (2) OF THE A CT, THE CENTRAL GOVERNMENT HAS TO NOTIFY ACCOUNTING STANDARD TO BE FOLLOWED BY THE 3 ASSESSEES BUT ACCOUNTING STANDARD (AS- 4) WAS NOT N OTIFIED. THE A O WAS OF THE VIEW THAT SINCE THE ASSESSEE WAS FOL LOWING MERCANTILE SYSTEM OF ACCOUNTING, THE INCOME WAS TO BE COMPUTED ACCORDINGLY. AFTER GOING THROUGH THE NOTICE OF CHAPTER- VII REFE RRED TO ABOVE, THE A O OBSERVED THAT IT WAS ONLY A NOTICE TO THE CREDI TORS GIVING DEAD LINE FOR FILING PROOF OF CLAIM TILL 17.01.2006 AND IN OCTOBER, 2005 EVEN THE LIABILITY AND ASSETS OF THE SAID CONCERN WERE N OT ASCERTAINED. THEREFORE, AT THAT POINT OF TIME THE SAID CONCERN H AD NOT DECLARED BANKRUPT AND IT COULD NOT BE SAID THAT NOTHING WAS RECOVERABLE FROM IT. THE A O FURTHER OBSERVED THAT THE RESERVE BANK OF I NDIA IN CIRCULAR NO.3 HAD DIRECTED THAT BAD DEBTS REGARDING EXPORT P ROCEEDS COULD NOT BE WRITTEN OFF BEFORE ONE YEAR AND THEREFORE, THE C LAIM OF THE ASSESSEE WAS NOT IN ORDER. BEFORE THE LEARNED CIT ( A)) IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE T HAT THE ASSESSEE HAD MADE SALES TO M/S. ANDEL JEWELLERY CORPORATION, U.S.A. AND THE SAID PARTY FILED APPLICATION FOR BANKRUPTCY, PURSUA NT TO WHICH PROCEEDINGS WERE INITIATED AND INTIMATION WAS GIVEN TO ALL THE CREDITORS WHICH WAS A CLEAR INDICATION OF THE FACT THAT THE AMOUNT WAS NOT RECOVERABLE. THE AMOUNT RECEIVED FROM THE SAID PARTY IN MAY, 2005 WAS SHOWN AS INCOME IN THE SUCCEEDING YEAR BUT SUBSEQUENTLY WHEN THE ASSESSEE CAME TO KNOW ABOUT THE BANKRUPTCY OF THE PARTY IN U.S.A., THE TOTAL AMOUNT WAS WRITTEN OFF AS PER AS- 4. IT WAS FURTHER SUBMITTED THAT THE A OS ARGUMENTS THAT AS-4 WAS NO T BINDING ON THE IT AUTHORITIES CANNOT BE A GROUND FOR THE DISALLOWA NCE AS THE AMOUNT WAS WRITTEN OFF IN VIEW OF THE PROVISIONS OF SECTIO N 36(1)(VII) OF THE IT ACT. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT CIRCULAR NO.3 OF THE RESERVED BANK OF INDIA RELIED UPON BY T HE A O WAS ALSO 4 REVISED VIDE CIRCULAR NO.40 DATED 5-12-2003 BY WHIC H OUTSTANDING EXPORT DUES COULD BE WRITTEN OFF IF THE SAME DID NO T EXCEED 10% OF THE EXPORT PROCEEDS. 4. THE LEARNED CIT (A) AFTER CONSIDERING THE SUBMIS SIONS DELETED THE ADDITION BY OBSERVING AS UNDER: I HAVE CONSIDERED THE SUBMISSIONS AND FIND THAT TH E A O HAS RELIED ON RBI CIRCULAR NO.3 TO REJECT THE CONTE NTIONS OF THE APPELLANT. THE LATTER RBI CIRCULAR DATED 23 RD DECEMBER, 2003 ALLOWS ALL EXPORTERS TO WRITE OFF OUTSTANDING EXPORT DUES PROVIDED THE AGGREGATE VALU E OF SUCH EXPORT BILLS WRITTEN OFF DOES NOT EXCEED 10% O F EXPORT PROCEEDS DUE DURING THE CALENDAR YEAR AND SU CH EXPORT BILLS ARE NOT A SUBJECT OF INVESTIGATION BY ENFORCEMENT DIRECTORATE OR ANY OTHER INVESTIGATING AGENCY AND THE FACILITY WOULD BE AVAILABLE IN RESPE CT OF EXPORT PROCEEDS FALLING DUE FROM JANUARY 1, 2004. F URTHER THE APPELLANT HAS WRITTEN OFF THE BAD DEBTS BEFORE FINALIZATION OF ACCOUNTS SINCE IT WAS IN THE KNOWLE DGE THAT THE DUES RECEIVABLE FROM M/S. ANDEL JEWELLERS CORPORATION OF U.S.A. WOULD NOT BE REALIZED SINCE T HE ENTITY HAD GONE BANKRUPT. THE BAD DEBTS WERE WRITTE N OFF AS PER AS-4 OF ICAI AND THE A OS ARGUMENT THAT AS- 4 WAS NOT BINDING ON THE INCOME-TAX AUTHORITIES CANNO T BE A GROUND FOR REJECTING THE APPELLANTS CLAIM SINCE ONCE THE AMOUNT HAS BEEN WRITTEN OFF IN THE BOOKS OF ACCOUNT S, THE SAME CANNOT BE DISALLOWED IN VIEW OF CLEAR PROVISIO NS OF SECTION 36(1)(VIII) OF THE ACT AND DECISION OF HON BLE GUJARAT HIGH COURT IN THE CASE OF GIRISH BHAGWATPRA SAD (SUPRA). THE HONBLE COURT IN THAT CASE HELD THAT U NDER THE PROVISIONS OF SECTION 36(1) (VIII) OF THE ACT A S IN FORCE FROM APRIL 1, 1989, ALL THE ASSESSEE HAD TO SHOW WA S THAT THE BAD DEBT WAS WRITTEN OFF AS IRRECOVERABLE IN TH E ACCOUNTS OF THE APPELLANT FOR THE PREVIOUS YEAR. TH E APPELLANT DID NOT HAVE TO PROVE THAT DEBT HAD BECOM E BAD AND MERE WRITING OFF THE AMOUNT IN THE BOOKS OF ACC OUNTS 5 WAS SUFFICIENT. IN VIEW OF THIS, THE ADDITION ON TH IS ACCOUNT IS DIRECTED TO BE DELETED. 5. LEARNED DEPARTMENTAL REPRESENTATIVE RELIED UPON ORDER OF THE A O AND SUBMITTED THAT ASSESSEE FOLLOWED MERCANTILE SYSTEM OF ACCOUNTING. NO PROOF HAS BEEN FILED THAT THE DEBT H AS BECOME BAD. THE ASSESSEE CLAIMED THAT PART AMOUNT IS RECEIVED I N THE NEXT YEAR WOULD SHOW THAT THE WRITING OFF THE DEBT AS IRRECOV ERABLE IN THE ACCOUNTS WAS NOT BONA FIDE. THE ASSESSEE CANNOT MAK E ENTRY OF WRITE OFF THE BAD DEBTS RETROSPECTIVELY IN THE BOOK S OF ACCOUNT. NO CAUSE OF ACTION AROSE IN THE YEAR UNDER APPEAL. THE A O AT PAGE 11 OF THE ASSESSMENT ORDER HAS CONSIDERED THE RBI DIRE CTIVE THAT BAD DEBTS REGARDING EXPORT PROCEEDS CANNOT BE WRITTEN O FF BEFORE ONE YEAR FROM THE DATE IT BECOMES OUTSTANDING, WHEREAS IN THE PRESENT CASE IT WAS WRITTEN OFF NEXT DATE. LEARNED D R SUBM ITTED THAT THE ASSESSEE CLAIMED DELETION THE ADDITION OF RS.99,79, 281/- BEFORE LEARNED CIT (A) BUT LEARNED CIT (A) DELETED THE ENT IRE ADDITION IN FULL. LEARNED D R FURTHER SUBMITTED THAT WRITING OFF THE DEBT CANNOT BE MADE IN THIS YEAR. 6. ON THE OTHER HAND, LEARNED COUNSEL FOR THE ASSES SEE REITERATED THE SUBMISSIONS MADE BEFORE AUTHORITIES BELOW. HE H AS SUBMITTED THAT PART PAYMENT WAS OFFERED AS INCOME IN THE NEXT YEAR; THEREFORE, PART CLAIM WAS MADE. THE RBI CIRCULAR IS FOR REMITT ANCES ONLY AND WOULD NOT AFFECT THE ACCOUNTING STANDARD AS-4. HE H AS SUBMITTED THAT THE ASSESSEE HAS RECEIVED BANKRUPTCY NOTICE WHICH W AS CLEAR INDICATION THAT THE AMOUNT WOULD NOT BE RECOVERABLE . THEREFORE, BAD DEBT WAS WRITTEN OFF AS PER ACCOUNTING STANDARD AS- 4. COPY OF THE 6 ACCOUNTING STANDARD AS-4 AND RBI CIRCULAR ARE FILED . HE HAS SUBMITTED THAT THE ISSUE IS NOW COVERED IN FAVOUR O F THE ASSESSEE BY THE RECENT JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF T. R. F. LIMITED VS CIT (CIVIL APPEAL NO.5293/2003) DATED 09 -02-2010. COPY FILED. 7. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND MATERIA L AVAILABLE ON RECORD. THE LEARNED CIT (A) CONSIDERED THE LATT ER CIRCULAR DATED 23-12-2003 OF RBI COPY OF WHICH IS FILED ON RECORD WHICH ALLOWS ALL EXPORTERS TO WRITE OFF OUTSTANDING EXPORT DUES PROV IDED AGGREGATE VALUE OF SUCH EXPORT BILLS WRITTEN OFF DOES NOT EXC EED 10% OF EXPORT PROCEEDS DUE DURING THE CALENDAR YEAR AND SUCH EXPO RT BILLS ARE NOT SUBJECT TO INVESTIGATION BY ENFORCEMENT DIRECTORATE OR ANY OTHER INVESTIGATING AGENCY AND THE FACILITY WOULD BE AVAI LABLE IN RESPECT OF EXPORT PROCEEDS FALLING DUE FROM 1 ST JANUARY, 2004. THE ASSESSEE HAS WRITTEN OFF BAD DEBTS BEFORE FINALIZATION OF AC COUNTS SINCE IT WAS IN THE KNOWLEDGE THAT DUES RECEIVABLE FROM M/S. AND EL JEWELLERS CORPORATION, USA, WOULD NOT BE REALISED SINCE THE E NTITY HAS GONE BANKRUPT. THE A O CONSIDERED THE BANKRUPTCY NOTICE IN THE ASSESSMENT ORDER. LEARNED COUNSEL FOR THE ASSESSEE FILED COPY OF THE ACCOUNTING STANDARD (AS) 4, ACCORDING TO WHIC H ADJUSTMENTS TO ASSETS AND LIABILITIES ARE REQUIRED FOR EVENT OCCUR RING AFTER THE BALANCE SHEET DATE THAT PROVIDE ADDITIONAL INFORMATION MATE RIALLY AFFECTING THE DETERMINATION OF THE AMOUNTS RELATING TO CONDITIONS EXISTING AT THE BALANCE SHEET DATE. FOR EXAMPLE, AN ADJUSTMENT MAY BE MADE FOR A LOSS ON A TRADE RECEIVABLE ACCOUNT WHICH IS CONFIRM ED BY THE INSOLVENCY OF A CUSTOMER WHICH OCCURS AFTER THE BAL ANCE SHEET DATE. 7 IN THIS CASE, THE BAD DEBTS WERE WRITTEN OFF AS PER AS -4 OF ICAI. SECTION 36(1) (VII) OF THE IT ACT PROVIDES: THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUS ES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WI TH THEREIN, IN COMPUTING THE INCOME REFERRED TO IN SECTION 28:- SUBJECT TO THE PROVISIONS OF SUB-SECTI ON (2), THE AMOUNT OF ANY BAD DEBT OR PART THEREOF WHI CH IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE FOR THE PREVIOUS YEAR. HONBLE SUPREME COURT IN THE RECENT CASE OF T. R. F . LIMITED VS CIT (SUPRA) CONSIDERING THE ABOVE PROVISIONS U/S 36(1) (VII) OF THE IT ACT HELD AS UNDER: THIS POSITION IN LAW IS WELL-SETTLED. AFTER 1 ST APRIL, 1989, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT TH E DEBT, IN FACT, HAS BECOME IRRECOVERABLE. IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. HOWEVER, IN THE PRESENT CASE, THE ASSESSING OFFICER HAS NOT EXAMINED WHETHER THE DEBT HAS, IN FACT, BEEN WRITTE N OFF IN ACCOUNTS OF THE ASSESSEE. WHEN BAD DEBT OCCURS, THE BAD DEBT ACCOUNT IS DEBITED AND THE CUSTOMERS ACCOUNT IS CR EDITED, THUS, CLOSING THE ACCOUNT OF THE CUSTOMER. IN THE C ASE OF COMPANIES, THE PROVISION IS DEDUCTED FROM SUNDRY DE BTORS. AS STATED ABOVE, THE ASSESSING OFFICER HAS NOT EXAMINE D WHETHER, IN FACT, THE BAD DEBT OR PART THEREOF IS WRITTEN OF F IN THE ACCOUNTS OF THE ASSESSEE. THIS EXERCISE HAS NOT BEEN UNDERTA KEN BY THE ASSESSING OFFICER. HENCE, THE MATTER IS REMITTED TO THE ASSESSING OFFICER FOR DE NOVO CONSIDERATION OF THE ABOVE- MENTIONED ASPECT ONLY AND THAT TOO ONLY TO THE EXTE NT OF THE WRITE OFF. CONSIDERING THE FACTS OF THE CASE IN THE LIGHT OF T HE ABOVE DECISION IT IS CLEAR THAT THE ASSESSEE HAS COMPLIED WITH THE PR OVISIONS OF SECTION 36(1) (VII) OF THE IT ACT IN THE MATTER AND THAT TH E ASSESSEE HAS 8 WRITTEN OFF THE AMOUNT OF BAD DEBTS AS IRRECOVERABL E IN ITS ACCOUNTS FOR THE PREVIOUS YEAR, THEREFORE, LEARNED CIT (A) WAS J USTIFIED IN DELETING THE ADDITION. THE A O WAS, THEREFORE, NOT JUSTIFIED IN MAKING THE ADDITION ON THE GROUND THAT NO PROOF OF THE DEBT TU RNING BAD HAS BEEN FILED. THE A O DISALLOWED RS.1,24,29,262/- AND THE ASSESSEE ALSO CLAIMED BAD DEBT OF THE SAME AMOUNT IN THE PROFIT & LOSS ACCOUNT. HOWEVER, THE ASSESSEE IN THE STATEMENT OF FACT EXPL AINED THAT ONCE PART OF THE AMOUNT HAS BEEN SHOWN AS INCOME IN THE NEXT YEAR, THEREFORE, WHOLE ADDITION WAS UNJUSTIFIED. THE LEAR NED CIT (A) WAS, THEREFORE, JUSTIFIED IN CONSIDERING THE WHOLE ADDIT ION IN THE ASSESSMENT YEAR UNDER APPEAL. WE THEREFORE, DO NOT FIND ANY JUSTIFICATION TO INTERFERE WITH THE ORDER OF THE LE ARNED CIT (A). WE CONFIRM HIS FINDING AND DISMISS THIS GROUND OF APPE AL OF THE REVENUE. 7.1 AS A RESULT, THE APPEAL OF THE REVENUE IS DISMI SSED. ITA NO.4136/AHD/2008 (ASSESSEES APPEAL) 8. GROUND NO.1 OF THE APPEAL OF THE ASSESSEE READS AS UNDER: 1. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT (APPEAL S) HAS ERRED IN CONFIRMING THE ACTION OF THE ASSESSING OFF ICER IN MAKING ADDITION OF RS.77,40,640/- ON ACCOUNT OF LAB OUR CHARGES. REGARDING DISALLOWANCE OF RS.77,40,640/- ON ACCOUNT OF LABOUR CHARGES THE A O OBSERVED THAT THE ASSESSEE H AD PAID JOB CHARGES TO LABOUR CONTRACTORS AT THE RATES RANGING FROM RS.250 PER CARAT TO RS.600 PER CARAT. HE WAS O F THE 9 VIEW THAT THESE RATES WERE VERY HIGH COMPARED TO LA BOUR CHARGES PAID BY OTHER DIAMOND MANUFACTURERS. HE CIT ED THE CASES OF JODHANI EXPORTS WHICH PAID RS.265 PER CARA T AND D. NITIN & CO., WHICH PAID RS.160 TO RS.180 PER CAR AT. FURTHER, IT WAS OBSERVED BY THE A O THAT IT WAS NOT POSSIBLE TO FIND OUT THE BASIS FOR PAYMENT TO THE JOB WORKER S. THE A O ALSO RECORDED THE STATEMENTS OF SOME OF THE JOB WORKERS VIZ ATUL MEHTA, KANUBHAI PATEL, HASMUKHLAL WADECHA AND BABUBHAI GODHANI AND FOUND THAT THEY CO ULD NOT GIVE ANY DETAILS REGARDING THEIR SKILLS OR POSS ESSION OF ANY SOPHISTICATED MACHINERY OR ANY SPECIFIC PRECESS ION WHICH COULD GIVE HIGHER YIELD COMPARED TO OTHER JOB WORKERS. IT WAS OBSERVED BY THE A O THAT WHEN CONFR ONTED WITH THE STATEMENTS, THE ASSESSEE STATED THAT LABOU R CHARGES WERE PAID AT DIFFERENT RATES TO DIFFERENT W ORKERS ACCORDING TO THEIR SKILL AND NATURE OF DIAMOND TO B E CUT AND POLISHED. THE A O WAS OF THE VIEW THAT THE GENUINEN ESS OF SUCH EXPENSES WAS NOT PROVED AND CONSIDERING THE JO B WORK CHARGE ON A HIGHER SIDE, DISALLOWED RS.10 PER CARAT OF LABOUR EXPENSES. 9. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED BEFORE THE LEARNED CIT (A) THAT LABOUR CHARGES WERE SUPPORTED BY COMPLETE BILLS AND THE PAYMENT WAS MAD E THROUGH ACCOUNT PAYEE CHEQUE ONLY AFTER MAKING TDS. PROPER RECORDS WERE PRODUCED RELATING TO LABOUR CHA RGES AND SOME OF THE LABOUR PARTIES PRODUCED BEFORE THE A O 10 ALSO CONFIRMED PAYMENT IN RESPECT OF WORK DONE BY T HEM. IT WAS FURTHER SUBMITTED THAT GP RATIO AFTER EXCLUDING THE EXCHANGE RATE DIFFERENCE INCREASED TO 6.35% AGAINST 3.55% LAST YEAR. THE LABOUR CHARGES WOULD VARY FROM LOT T O LOT AND DEPENDED ON QUALITY OF ROUGH DIAMONDS AND ALSO THE SKILL OF THE WORKERS. HE FURTHER SUBMITTED THAT THE A O WAS NOT JUSTIFIED IN DRAWING ADVERSE INFERENCE ON THE GROUN D THAT THE RATES PAID WERE HIGH COMPARED TO OTHER DIAMOND MANUFACTURERS. 10. CONSIDERING THE SUBMISSIONS OF THE ASSESSEE THE LEARNED CIT (A) CONFIRMED THE DISALLOWANCE MADE BY THE A O FOLLOWING HIS OWN ORDER FOR ASSESSMENT YEAR 2004- 05. HIS FINDINGS ARE REPRODUCED AS UNDER: I HAVE CONSIDERED THE SUBMISSIONS. I FIND THAT THE SAME ISSUE AROSE IN A Y 2004-05 ALSO WHEREIN THE FACTS WERE EXACTLY ALIKE. IN MY ORDER FOR THAT YEAR IN APPEAL NO.CAS-IV/126/06-07, 14.08.2007, I HAVE HELD AS UNDER:- I HAVE CONSIDERED THE SUBMISSIONS AND HAVE GONE THROUGH THE DETAILS. IT IS SEEN THAT THE APPELLANTS CONTENTION THAT LABOUR PAYMENT WOULD DEPEND UPON THE QUALITY OF ROUGH DIAMONDS AND THE SKILL OF THE WORKER IS CORRECT. HOWEVER, IT IS ALSO A FACT HAT IN ALL THE CASE OF LABOUR PAYMENTS, WHEN HIGHER RATES HAVE BEEN PAID, THE AVERAGE YIELD OF POLISHED DIAMONDS IS LOWER, WHEREAS IT IS THE OTHER WAY ROUND IN THE CASE OF LOWER LABOUR CHARGES PAID. THIS IS AGAINST THE ESTABLISHED PRACTICE OF BUSINESS. IF ONE PAYS HIGHER LABOUR CHARGES IN RESPECT OF ANY ACTIVITY, IT IS EXPECTED 11 THAT THE RESULT SHOULD BE BETTER. IT IS ALSO SEEN THAT THERE IS A HUGE VARIATION IN LABOUR CHARGES PAID PER CARAT, WHICH IS NOT JUSTIFIABLE BY THE QUANTITY OF ROUGH DIAMONDS OBTAINED BY PAYING HIGHER CHARGES. THE A O HAS NOT DISBELIEVED THE PAYMENT MADE TO VARIOUS LABOUR PARTIES BUT ONLY THE JUSTIFICATION OF PAYING HIGHER LABOUR CHARGES. IT APPEARS THAT THE INCREASED LABOUR CHARGES WERE NOT FOR EXCLUSIVE BUSINESS NECESSITY AND IS NOT MATERIAL THAT THE LABOURERS WERE ASSESSED TO TAX ALSO. I AM OF THE VIEW, THAT THE INCREASED EXPENDITURE WAS NOT WHOLLY AND EXCLUSIVELY FOR BUSINESS PURPOSES AND THE DISALLOWANCE OF A PART OF THE INCREASE PER CARAT OF LABOUR CHARGES PAID COMPARED TO LAST YEAR IS IN ORDER AND ADDITION ON THIS ACCOUNT IS HEREBY CONFIRMED. SINCE THE FACTS OF THE CURRENT YEAR ARE ALSO THE SAME, DISALLOWANCE MADE BY THE A O ON THIS ACCOUNT IS HEREBY CONFIRMED. 11. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW. ON T HE OTHER HAND, THE LEARNED D R RELIED UPON THE ORDER O F THE A O. 12 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDER ED THE MATERIAL AVAILABLE ON RECORD. THE A O DISALLOWE D RS.10 PER CARAT LABOUR EXPENSES WOULD PROVE THAT SUBSTANT IAL EXPLANATION OF THE ASSESSEE HAS BEEN ACCEPTED BY TH E A O. THE ASSESSEE PRODUCED ALL THE DETAILS OF THE EXPEND ITURE AND BOOKS OF ACCOUNT BEFORE THE A O. THE BOOKS OF A CCOUNT OF THE ASSESSEE ARE AUDITED. THE G P RATE IS ADMITT EDLY BETTER IN THE ASSESSMENT YEAR UNDER APPEAL AS COMPA RED 12 WITH THE LAST YEAR. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PURCHASE/IMPORT OF ROUGH DIAMONDS AND MANUFACTUR ING OF IT AND SALE/EXPORT OF POLISHED DIAMONDS. THE LABOUR CHARGES EXPENSES ARE THE MAIN COMPONENT FOR EARNING THE SUBSTANTIAL INCOME. THE RATES PAID TO THE JOB WORKE RS RANGES DIFFERENTLY. ACCORDING TO ASSESSEE ALL THE P AYMENTS ARE MADE THROUGH ACCOUNT PAYEE CHEQUES ONLY AFTER M AKING TDS. THEREFORE, CONSIDERING THE HISTORY OF THE ASSE SSEE AND NATURE OF BUSINESS AND THAT PROFIT IS HIGHER AS COMPARED TO THE PRECEDING ASSESSMENT YEAR, WOULD P ROVE THAT ASSESSEE SPENT GENUINE EXPENDITURE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. WE ACCORDI NGLY SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND DELET E THE ADDITION. THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 13. GROUND NO. 2 OF THE APPEAL OF THE ASSESSEE REA DS AS UNDER: 2. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AS WELL AS LAW ON THE SUBJECT, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HAS ERRED IN PARTLY CONFIRMING THE DISALLOWANCE OF RS.5,41,950/- OUT OF TOTAL DISALLOWANCE OF RS.9,82,823/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF FOREIGN TRAVELING EXPENSES. 14. THE A O OBSERVED THAT THE ASSESSEE HAS CLAIMED RS.32,73,537/- FOR FOREIGN TRAVELING EXPENSES AND F OUND THAT ONE OF THE PARTNERS DILIP M. SHAH HAD TAKEN FO REIGN EXCHANGE OF RS.5,41,950/- ON 1-05-2004 I.E. ONE DAY BEFORE 13 THAT ON 30-04-2004 THE TICKETS WERE BOOKED FOR FORE IGN TRAVEL IN THE NAME OF 10 MEMBERS OF THE FAMILY. THE A O THEREFORE, WAS OF THE VIEW THAT VISITS OF THESE FAM ILY MEMBERS WAS NOT FOR ANY BUSINESS PURPOSE AND DISALL OWED THE EXPENSES INCURRED ON THEIR FOREIGN VISIT. BEFO RE THE LEARNED CIT (A) THE LEARNED COUNSEL FOR THE ASSESSE E SUBMITTED THAT THE A O ERRED IN MAKING THE DISALLOW ANCE WITHOUT APPRECIATING THE FACTS THAT VARIOUS AMOUNTS MENTIONED BY HIM IN PARA 7 OF THE ORDER WERE NOT EV EN CLAIMED AS DEDUCTION. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAS DEBITED A SUM OF RS.2,71,865/- IN RESP ECT OF 8 FAMILY MEMBERS TO THE ACCOUNT OF SHRI DILIP SHAH, P ARTNER OF THE ASSESSEE FIRM AND THE SAME WAS NOT CLAIMED IN T HE PROFIT & LOSS ACCOUNT. THE FOREIGN EXCHANGE TAKEN O N 1-05-2004 WAS USED BY THE PARTNER OF THE ASSESSEE F IRM SHRI DILIP SHAH FOR BUSINESS TOUR AND A SUM OF RS.6 8,628/- PERTAINING TO MRS. HEENA SHAH AND RS.1,00,480/- PER TAINING TO SHRI DILIP SHAH WAS FOR BUSINESS PURPOSE ONLY. CONSIDERING THE SUBMISSIONS OF THE ASSESSEE THE LEA RNED CIT (A) CONFIRMED THE ADDITION OBSERVING AS UNDER: I HAVE GONE THROUGH THE DETAILS AND FIND THAT THE A OS OBSERVATION THAT EXPENDITURE ON FOREIGN TRAVEL OF FAMILY MEMBERS WAS OUT OF FOREIGN EXCHANGE TAKEN BY SHRI DILIP SHAH IS NOT CORRECT. THE EXPENDITURE ON TRAVEL BY THE FAMILY MEMBERS HAS NOT BEEN DEBITED TO THE ACCOUNTS OF THE APPELLANT FIRM AND THEREFORE, THERE IS NO QUESTION OF MAKING ANY DISALLOWANCE ON THIS ACCOUNT. HOWEVER, THE UTILIZATION OF FOREIGN EXCHANGE OF 14 RS.541950/- TAKEN BY SHRI DILIP SHAH FROM WALL STREET INTERCHANGE (P) LTD. HAS NOT BEEN SATISFACTORY EXPLAINED SINCE THE APPELLANT HAS NOT BEEN ABLE TO FURNISH ANY INFORMATION REGARDING FOREIGN TOUR BY SHRI SHAH AFTER THIS DATE. THEREFORE, THE ADDITION OF RS.541950/- IS HEREBY CONFIRMED BUT THE BALANCE AMOUNT OF ADDITION MADE ON ACCOUNT OF A OS OBSERVATION THAT EXPENDITURE ON FOREIGN TOUR OF FAMILY MEMBERS WAS INCURRED BY THE FIRM IS HEREBY DELETED. 15. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW. ON T HE OTHER HAND, THE LEARNED D R RELIED UPON THE ORDER O F THE LEARNED CIT (A). 16 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDER ED THE MATERIAL AVAILABLE ON RECORD. THE LEARNED CIT ( A) GAVE A SPECIFIC FINDING THAT UTILIZATION OF FOREIGN EXCH ANGE OF RS.5,41,950/- TAKEN BY SHRI DILIP SHAH FROM WALL ST REET INTERCHANGE PVT. LTD. HAS NOT BEEN SATISFACTORILY E XPLAINED SINCE THE ASSESSEE HAS NOT BEEN ABLE TO FURNISH ANY INFORMATION REGARDING FOREIGN TOUR BY SHRI SHAH AFT ER THIS DATE. THE LEARNED CIT (A) THEREFORE, CONFIRMED THE PART ADDITION OF RS.5,41,950/- WHICH IS UNDER CHALLENGE. THE ASSESSEE HAS NOT FILED ANY EVIDENCE OR MATERIAL BEF ORE US TO CONTRADICT THE ABOVE FINDINGS OF LEANED CIT (A). IN THE ABSENCE OF ANY MATERIAL ON RECORD TO CONTRADICT THE FINDINGS OF THE LEARNED CIT (A), WE DO NOT FIND ANY JUSTIFIC ATION TO INTERFERE WITH THE ORDER OF THE LEARNED CIT (A). TH ERE IS NO 15 MERIT IN THIS GROUND OF APPEAL OF THE ASSESSEE. SAM E IS ACCORDINGLY DISMISSED. 17. GROUND NO.3 OF THE APPEAL OF THE ASSESSEE READS AS UNDER: 3. ON THE FACTS AND IN CIRCUMSTANCES OF THE CASE AS WELL AS LAW ON THE SUBJECT, THE LEARNED CIT (APPEALS) HAS ERRED IN NOT ADJUDICATING THE GROUND REGARDING TREATMENT TO BE GIVEN TO INCOME FROM FOREIGN EXCHANGE FORWARD CONTRACT OF RS.6,19,87,745/- AS SPECULATIVE INCOME AS DECIDED BY THE ASSESSING OFFICER. THE A O OBSERVED THAT THE ASSESSEE HAD BOOKED FORWA RD CONTRACT OF FOREX AGAINST A SIMPLE LETTER OF SO CAL LED PROPOSED ORDER FOR FOREIGN BUYERS AND NOT AGAINST F IRM ORDER. IT WAS ALSO FURTHER OBSERVED BY THE A O THAT THE ASSESSEE DID NOT FILE ANY LETTER OF CREDIT OF CONTR ACT BUT ONLY A TENTATIVE LETTER FROM BUYERS AND 90% OF THIS CONT RACT WAS CANCELLED WITHOUT UTILIZING THE SAME AND THE TOTAL FORWARD CONTRACT BOOKING WAS OF RS.1200 CRORES AGAINST TURN OVER OF RS.160 CRORES ONLY. THE A O REFERRED TO SECTION 43( 5) OF THE IT ACT WHICH DEFINES SPECULATIVE TRANSACTION AS A TRANSACTION IN WHICH A CONTRACT FOR PURCHASE OR SAL E OF ANY COMMODITY INCLUDING STOCKS AND SHARES IS PERIODICAL LY OR ULTIMATELY SETTLED OTHER WISE THAN BY ACTUAL DELIVE RY OR TRANSFER OF COMMODITY OR SCRIPTS. IN REPLY, THE ASS ESSEE STATED THAT IT ENTERED INTO THE FORWARD EXCHANGE CO NTRACT TO PROTECT AGAINST FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE 16 AND THE PROVISIONS OF SECTION 43(5) OF THE IT ACT W AS NOT APPLICABLE AS IT WAS NOT A CONTRACT FOR PURCHASE OR SALE OF ANY COMMODITY. THE A O REJECTED THE EXPLANATION OF THE ASSESSEE AND TREATED THE INCOME OF THE ASSESSEE AS SPECULATIVE INCOME. BEFORE THE LEARNED CIT (A) IT W AS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE T HAT THE FORWARD EXCHANGE CONTRACT WAS MADE WITH AUTHORIZED DEALER OF FOREIGN EXCHANGE TO PROTECT AGAINST FLUCTUATION IN RATES. HE FURTHER SUBMITTED THAT THE ASSESSEE WAS IMPORTIN G ROUGH DIAMONDS AND WOULD EXPORT POLISHED DIAMONDS AND THEREFORE TO MAKE OR RECEIVED PAYMENTS IN FOREIGN C URRENCY AND HAD TO BEAR THE DIFFERENCE ON ACCOUNT OF CONVER SION OF THE FOREIGN EXCHANGE. IT CANCELLED THE VARIOUS FORW ARD CONTRACTS TO REDUCE THE LOSS OR INCREASE THE PROFIT S ON ACCOUNT OF FLUCTUATION IN RATES. IT WAS ALSO SUBMIT TED THAT FORWARD EXCHANGE CONTRACT WAS PERMISSIBLE ONLY IN R ESPECT OF IMPORT AND EXPORT TRANSACTIONS AND COULD BE MADE BY SHOWING IMPORT AND EXPORT ORDERS AND WHEN IT WAS CANCELLED, THE ORDER VALUE WAS REDUCED BY THAT AMOU NT AND THE ASSESSEE WAS ENTITLED TO HAVE CONTRACTS ONLY IN RESPECT OF OUTSTANDING BALANCE OF THE ORDERS. AS THE VALUE OF RUPEE WAS IMPROVING THE ASSESSEE MAINLY ENTERED INTO CONT RACT IN RESPECT OF EXPORTS TO PROTECT LOSS WHEN PAYMENT WAS RECEIVED. HOWEVER, THE ASSESSEE INCURRED LOSS IN FO REIGN EXCHANGE IN IMPORT ORDERS BUT THE SAME WAS COMPENSA TED BY ACTUAL EXCHANGE DIFFERENCE GAIN ON PAYMENT. THE GAIN OR LOSS ARISING OUT OF FOREIGN EXCHANGE CONTRACT WAS O NLY FROM 17 BUSINESS. THE LEARNED COUNSEL FOR THE ASSESSEE IN S UPPORT OF HIS SUBMISSION RELIED ON RULE 5 AND 6 OF FOREIGN EXCHANGE DEALERS ASSOCIATION OF INDIA. THE LEARNED CIT (A) CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HELD TH AT THIS ISSUE IS OF ACADEMIC IN NATURE. HIS FINDINGS IN THI S REGARD ARE REPRODUCED AS UNDER: I HAVE GONE THROUGH THE DETAILS AND I FIND THAT THIS GROUND OF APPEAL IS ONLY ACADEMIC IN NATURE SINCE TREATING THE INCOME AS SPECULATIVE INCOME OR BUSINESS INCOME WOULD NOT HAVE ANY TAX EFFECT FOR THE YEAR UNDER CONSIDERATION. THEREFORE, THIS GROUND OF APPEAL IS NOT ADJUDICATED. 18. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATE D THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND R EFERRED TO THE STATEMENTS OF FACTS FILED BEFORE LEARNED CIT (A) IN WHICH IT WAS EXPLAINED THAT FORWARD EXCHANGE CONTRA CT IS PERMISSIBLE ONLY IN RESPECT OF IMPORT AND EXPORT TRANSACTIONS. AS THE ASSESSEE IS DOING BOTH IMPORT AND EXPORT IT ENTERED INTO FORWARD EXCHANGE CONTRACT IN RESPECT OF IMPORT AND EXPORT TRANSACTION. THE FOREIGN EXCHA NGE CONTRACT CAN ONLY BE MADE BY SHOWING THE IMPORT OR EXPORT ORDERS. ACCORDINGLY, ASSESSEE OBTAINED VARIOUS IMPO RT ORDER FROM BLUE GEMS BVBA AND SIMILARLY ASSESSEE RECEIVED VARIOUS EXPORT ORDERS FROM BLUE DIAM CO. AND BLUE R AYS INC. FORWARD EXCHANGE CONTRACT IS PERMITTED ONLY IN RESPECT OF OUTSTANDING IMPORT OR EXPORT ORDER. WHEN FORWARD EXCHANGE CONTRACT IS CANCELED, ORDER VALUE IS REDUC ED BY 18 THAT AMOUNT AND ASSESSEE IS ENTITLED TO HAVE CONTRA CTS ONLY IN RESPECT OF THE OUTSTANDING BALANCE OF ORDERS ON HAND. THE NECESSARY ENDORSEMENTS ARE MADE ON OVERLEAF OF IMPORT OR EXPORT ORDERS ON CANCELLATION OF FORWARD EXCHANGE CONTRACTS. ON CANCELLATION ASSESSEE IS EITHER ENTIT LED TO PROFIT OR BEAR THE LOSS DEPENDING ON THE RATES CONT RACTED AND RATES PREVAILING AT THE TIME OF CANCELLATION. A S THE VALUE OF THE RUPEE WAS IMPROVING AT THAT TIME, ASSESSEE M AINLY ENTERED INTO FORWARD EXCHANGE CONTRACT IN RESPECT O F EXPORT TO PROTECT LOSS ON EXCHANGE WHEN PAYMENT IS RECEIVE D. IT IS TO BE NOTED THAT THE ASSESSEE ACTUALLY IMPORTED ROU GH DIAMONDS AND EXPORTED POLISHED DIAMONDS FOR WHICH ASSESSEE HAD IMPORT AND EXPORT ORDERS, ON THE BASIS OF WHICH FORWARD EXCHANGE CONTRACT WERE ENTERED. ASSES SEE INCURRED NET LOSS IN RESPECT OF FOREIGN EXCHANGE IN RESPECT OF IMPORT ORDER. HOWEVER THE SAID LOSS IS COMPENSAT ED BY ACTUAL EXCHANGE DIFFERENCE GAIN ON PAYMENT AS VALUE OF THE RUPEE WAS IMPROVING AT THAT TIME. ASSESSEE MADE NET GAIN IN RESPECT OF FOREIGN EXCHANGE CONTRACT EXPORT AS T HE VALUE OF RUPEE WAS IMPROVING AT THAT TIME. THE LOSS AROSE ON ACTUAL RECEIPTS OF SALES PROCEEDS IN RESPECT OF EXC HANGE DIFFERENCE TO THAT EXTENT WAS COMPENSATED. 18.1 IT IS PERTINENT TO MENTION HERE THAT ASSESSEE GETS THE FORWARD EXCHANGE COVER FROM THE BANK ONLY ON SATISFACTION OF THE CONDITIONS PRESCRIBED BY THE BA NK. THESE CONDITIONS ARE THAT THERE HAS TO BE IMPORT OBLIGATI ON FOR THE 19 ASSESSEE I.E. ASSESSEE SHOULD BE IN NEED OF FOREIGN EXCHANGE FOR MAKING PAYMENTS ON ACCOUNT OF IMPORT O F GOODS MADE BY IT OR THAT THERE HAD TO BE EXPORT BIL LS WHICH ARE PENDING FOR REALIZATION. WHENEVER, THE FORWARD CONTRACT IS MADE THE BANK PUTS ITS ENDORSEMENT BEHIND THE IM PORT ORDER/EXPORT ORDER & THIS CLEARLY ESTABLISHES THE F ACT THAT THE GAIN ARISING ON CANCELLATION OF FORWARD EXCHANG E CONTRACT IS CLEARLY RELATING TO EXPORT/IMPORT OF GO ODS. NOW IF THE CONTRACT IS ACTUALLY UTILIZED I.E. IF THE FUNDS ARE ACTUALLY RELEASED THEN THE DIFFERENCE IN THE RATE OF EXCHANG E WILL AUTOMATICALLY GO TO EXCHANGE DIFFERENCE ACCOUNT AND THEREFORE ON THE SAME REASONING IT IS SUBMITTED THA T IF CONTRACT IS CANCELLED IT CANNOT BE SAID THAT GAIN/L OSS ARISING THERE FROM IS NOT ON ACCOUNT OF EXCHANGE DIFFERENCE . 18.2 THE TERMS AND CONDITIONS FOR FORWARD EXCHANGE CONTRACT ARE GOVERNED BY RULE 5 AND 6 OF THE FEDAI (FOREIGN EXCHANGE DEALERS ASSOCIATION OF INDIA). T HE GAIN OR LOSS ARISING OUT OF FOREIGN EXCHANGE CONTRACT IS NOTHING BUT GAIN OR LOSS ARISING IN COURSE OF BUSINESS CONT RACT PRUDENTLY ENTERED BY THE IMPORTER OR EXPORTER. SO, GAIN OR LOSS IS RESULT OF FULFILLMENT OF CONDITIONS OF CONT RACT. RULE 6 A (4) DEALS WITH THE CANCELLATION AND ON PERUSAL OF THIS RULE, IT CAN BE SAID THAT THE PROPOSITION CANVASSED BY AS SESSEE HOLDS GOOD. RULE 6 A.4 OF THE FEDAI RULES FOR CANCE LLATION HOLDS AS FOLLOWS: 20 I) IN CASE OF CANCELLATION OF CONTRACT AT THE REQUE ST OF THE CUSTOMER, (THE REQUEST SHALL BE MADE ON OR BEFORE THE MATURITY DATE) THE AUTHORISED DEALER SHALL RECOVER/PAY, AS THE CASE MAY BE, THE DIFFERENCE BETWEEN THE CONTRACTED RATE AND THE RATE AT WHICH THE CANCELLATION IS EFFECTED. THE RECOVERY/PAYMENT OF THE EXCHANGE DIFFERENCE ON CANCELLATION OF FORWARD CONTRACTS BEFORE THE MATURITY DATES MAY BE EITHER UPFRONT OR BACK ENDED IN THE DISCRETION OF BANKS. II) RATE AT WHICH CANCELLATION IS TO BE EFFECTED: A). PURCHASE CONTRACTS SHALL BE CANCELLED AT T HE CONTRACTING AUTHORISED DEALERS SPOT T. T. SELLING RATE CURRENT ON THE DATE OF CANCELLATION. B) SALE CONTRACTS SHALL BE CANCELLED AT THE CONTRACTING AUTHORISED DEALERS SPOT T. T. BUYING RATE CURRENT ON THE DATE OF CANCELLATION. C) WHERE THE CONTRACT IS CANCELLED BEFORE MATURITY, THE APPROPRIATE FORWARD T. T. RATE SHALL BE APPLIED. 18.3 ASSESSEE HAS MADE SALES TO BLUE DIAM CO. OF RS.41,43,24,359/- AND BLUE RAYS INC. OF RS.33,69,57 ,825/- .THE CONTRACTS FOR FORWARD EXCHANGE WERE OF MORE VA LUE. THIS IS BECAUSE OF THE FACT THAT THE ASSESSEE WAS N OT ABLE TO MEET EXPORT OBLIGATIONS. ASSESSEE EARNED GAIN ON ACCOUNT OF EXPORT AND LOSS ON ACCOUNT OF IMPORT. TH E GAIN WAS EARNED ON CANCELLATION OF CONTRACT AS ASSESSEE WAS NOT ABLE TO MET THE EXPORT OBLIGATION ON ORDERS PLACED BY BLUE DIAM CO. AND BLUE RAYS INC. HOWEVER, ASSESSING OFFI CER 21 OBSERVED THAT ASSESSEE HAS BOOKED FORWARD CONTRACT OF $28,17,16,478 WHICH ON AVERAGE PRICE OF ONE DOLLAR AT RS.45/- COMES TO RS.1267.72 CRORES WHEREAS ASSESSEE S TURNOVER DURING THE YEAR IS RS.160.49 CRORES. THE A SSESSEE, VIDE LETTER DATED 13.11.2007, WAS APPRAISED OF T HE PROPOSAL TO TREAT THE INCOME OF RS.6,19,87,745/- EA RNED ON ACCOUNT OF CANCELLATION OF FORWARD CONTRACT. THE AS SESSEE FILED SUBMISSION DATED 19.12.2007 STATING THAT ASSE SSEE ENTERED IN VARIOUS FORWARD EXCHANGE CONTRACTS IN OR DER TO PROTECT AGAINST THE FLUCTUATION IN THE RATE OF FORE IGN EXCHANGE CURRENCY. THE ASSESSING OFFICER WAS NOT SA TISFIED WITH ASSESSEES REPLY AND TREATED INCOME OF RS.6,19,87,745/- AS SPECULATIVE INCOME. 18.4 LEARNED COUNSEL FOR THE ASSESSEE APART FROM REFERRING TO THE STATEMENT OF FACTS ABOVE RELIED UP ON ORDER OF ITAT AHMEDABAD C BENCH IN THE ASSESSEES CASE FOR ASSESSMENT YEAR 2003-04 IN ITA NO.775/AHD/2006 DATE D 30 TH NOVEMBER, 2006 (COPY FILED AT PB-3) WHEREIN THE TRIBUNAL EVEN ALLOWED DEDUCTION U/S 80 HHC ON INCOM E FROM CANCELLATION OF FORWARD EXCHANGE CONTRACT TREA TING IT AS EXPORT PROFIT. HE HAS FURTHER SUBMITTED THAT A O HA S WRONGLY APPLIED SECTION 43(5) OF THE IT ACT TREATING THE AB OVE INCOME AS SPECULATED INCOME BECAUSE THE ABOVE PROVI SIONS DO NOT APPLY TO FORWARD EXCHANGE CONTRACT AS THE PR OVISIONS APPLY TO PURCHASE OR SALE OF ANY COMMODITY AND CURR ENCY CANNOT BE TREATED AS COMMODITY. HOWEVER, IT IS NOT A CASE 22 OF SETTLEMENT OF CONTRACT BUT CANCELLATION OF CONTR ACT, SO SECTION 43(5) WILL NOT APPLY. HE HAS RELIED UPON OR DER OF ITAT MUMBAI BENCH IN THE CASE OF VOLTAS INTERNATION AL LTD. VS ACIT 126 TTJ 702 (PB-24) IN WHICH IT WAS HELD LO SS ARISING OUT OF CANCELLATION OF FORWARD EXCHANGE CON TRACT COULD NOT BE TREATED AS SPECULATIVE LOSS AS THERE I S NO SETTLEMENT OF CONTRACT AND SECTION 43(5) IS NOT ATT RACTIVE. IT IS, THEREFORE PRAYED THAT INCOME ON CANCELLATION OF FORWARD EXCHANGE CONTRACT BE TREATED AS BUSINESS INCOME AND NOT INCOME FROM SPECULATION. 19. ON THE OTHER HAND, THE LEARNED D R RELIED UPON THE ORDERS OF AUTHORITIES BELOW. 20. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDE RED THE MATERIAL AVAILABLE ON RECORD. IT IS NOT IN DISP UTE THAT THE ASSESSEE IS DOING BUSINESS OF IMPORT AND EXPORT OF DIAMONDS AND IT ENTERED INTO FORWARD EXCHANGE CONTR ACT IN RESPECT OF IMPORT AND EXPORT TRANSACTIONS. ON CANCE LLATION OF THE CONTRACT ASSESSEE IS EITHER ENTITLED TO PROF IT OR LOSS DEPENDING ON RATES CONTRACTED AND RATES PREVAILING AT THE TIME OF CANCELLATION. THE ASSESSEE ENTERED INTO THE SE FORWARD EXCHANGE CONTRACTS IN ORDER TO PROTECT AGAI NST THE FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE CURRENC Y. THE ASSESSEE IN THIS CASE MADE NET GAINS IN RESPECT OF FOREIGN EXCHANGE CONTRACT EXPORT AS THE VALUE OF THE RUPEE WAS IMPROVING AT THAT TIME. THE A O HAS ALSO CONSIDERED THE 23 ABOVE ISSUE RELATING TO INCOME FROM CANCELLATION OF FORWARD CONTRACT. IT IS, THEREFORE, ADMITTED FACT THAT IT W AS A CASE OF CANCELLATION OF FORWARD CONTRACTS ENTERED BY ASSESS EE WITH OTHERS. THE DETAILED FACTS EXPLAINED IN THE STATEME NT OF FACTS BY THE ASSESSEE HAVE NOT BEEN DISPUTED. ITAT AHMEDABAD BENCH IN THE CASE OF THE SAME ASSESSEE IN PRECEDING ASSESSMENT YEAR 2003-04 IN ITA NO.775/AHD/2007 (SUPRA) CONSIDERED THE ISSUE OF DED UCTION U/S 80 HHC OF THE IT ACT ON INCOME FROM CANCELLATIO N OF FORWARD EXCHANGE CONTRACT. THE LEARNED CIT (A) IN T HIS CASE ALLOWED THE CLAIM OF THE ASSESSEE TREATING IT AS EX PORT PROFIT BY RELYING UPON DECISION OF MUMBAI BENCH IN THE CAS E OF D. KIRHOREKUMAR AND CO. VS DCIT AND DIRECTED THE A O T O COMPUTE THE DEDUCTION U/S 80 HHC BY INCLUDING THE P ROFIT REALIZED BY CANCELLATION OF FORWARD EXCHANGE CONTRA CT IN THE PROFIT OF THE EXPORT BUSINESS. THE DEPARTMENTAL APP EAL WAS CONSIDERED BY THE TRIBUNAL AS ABOVE AND BY RELYING UPON THE DECISION IN THE CASE OF D. KISHOREKUMAR AND CO. (SUPRA) THE DEPARTMENTAL APPEAL WAS DISMISSED. THE ORDER OF THE TRIBUNAL ABOVE WAS REFERRED IN THIS DECISION IN WHI CH IT WAS HELD THAT THE CREDIT SHOWN IN THE PROFIT/LOSS ACCOU NT AS PROFIT ON CANCELLATION OF FORWARD CONTRACT IS AS INTEGRAL PART OF THE EXPORT BUSINESS AS PURCHASED OR IMPORT. THE COPY OF THE ORDER DATED 30 TH NOVEMBER, 2006 IS FILED AT PAGE 3 OF THE PAPER BOOK. ITAT MUMBAI BENCH IN THE CASE OF VOLTAS INTERNATIONAL LTD. VS ACIT (SUPRA) HELD PAYMENT BY ASSESSEE TO BANK FOR CANCELLATION OF FORWARD FOREIG N 24 EXCHANGE CONTRACT BEING IN THE NATURE OF DAMAGES FO R NON-PERFORMANCE OF CONTRACT IS ALLOWABLE AS BUSINES S LOSS AND IT CANNOT BE TREATED AS SPECULATIVE LOSS A S THERE IS NO SETTLEMENT OF CONTRACT AND SECTION 43(5 ) IS NOT ATTRACTIVE. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE IN THE LIGHT OF DECISIONS OF THE TRIBUNAL IN THE CASE OF THE SAME ASSESSEE FOR ASSESSMENT YEAR 2003-04 AN D IN THE CASE OF VOLTAS INTERNATIONAL LTD. (SUPRA), WE A RE OF THE VIEW THAT PROVISIONS OF SECTION 43(5) OF THE IT ACT WOULD NOT APPLY TO THE CASE OF THE ASSESSEE. THE INCOME EARNE D BY ASSESSEE ON ACCOUNT OF CANCELLATION OF FORWARD EXCH ANGE CONTRACT SHOULD BE TREATED AS BUSINESS INCOME AND N OT INCOME FROM SPECULATION. WE ACCORDINGLY SET ASIDE T HE ORDERS OF AUTHORITIES BELOW AND DIRECT THE A O TO T REAT THE INCOME ON THIS ISSUE AS BUSINESS INCOME. AS A RESUL T, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 21. IN VIEW OF THE ABOVE, THE APPEAL OF THE ASSESSE E IS PARTLY ALLOWED. 22. NO OTHER POINT IS ARGUED OR PRESSED. 25 23. AS A RESULT, DEPARTMENTAL APPEAL IS DISMISSED A ND THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 11-06-2010 SD/- SD/- (G. D. AGARWAL) VICE PRESIDENT (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 11 /06/2010 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, 6. GUARD FILE BY ORDER //TRUE COPY// DY.R/AR, I TAT, AHMEDABAD