ASST CIT 14(1), MUMBAI V. MILAN JEWELLERS, MUMBAI

ITA 6351/MUM/2014

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 9808 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 5 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-03-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 14-03-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 14-10-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUMAN KUMAR
• Assessee Lawyers: REEPAL TRAISHAWALA
• Keywords: Speculation loss; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH B, MU MBAI BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NO. 6351/MUM/2014 (ASSESSMENT YEAR-2010-2011) ACIT 14 (1), 2 ND FLOOR, EARNEST HOUSE, NARIMAN POINT, MUMBAI-400021. VS. M/S MILAN JEWELLERS 1002, 10 TH FLOOR, PANCHARTNA, OPERA HOUSE, MUMBAI- 400004. PAN: AAAFM7721J (APPELLANT) (RESPONDENT) REVENUE BY : SHRI SUMAN KUMAR (DR) ASSESSEE BY : SHRI REEPAL TRAISHAWALA (AR) DATE OF HEARING : 09.03.2018 DATE OF PRONOUNCEMENT : 23.03.2018 ORDER UNDER SECTION 254(1) OF INCOME TAX ACT PER PAWAN SINGH, JUDICIAL MEMBER: 1. THIS APPEAL BY REVENUE UNDER SECTION 253 OF THE INC OME-TAX ACT (THE ACT) IS DIRECTED AGAINST THE ORDER LD. CIT(A)-39, MUMBAI DATED 22.07.2014 FOR ASSESSMENT YEAR (AY) 2010-11. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: '1. ON THE FACTS AND IN THE CIRCUMSTANCES, THE CIT (A) HAS ERRED IN DELETING THE ADDITION MADE BY THE AO OF RS. 40,77,8 11/- U/S 36(1)(III) RELATED TO OUTSTANDING BALANCE OF M/S. ETERNITY JEW ELS BY HOLDING THAT THE TRANSACTION WITH THE RELATED PARTY WERE IN THE NORM AL COURSE OF THE BUSINESS AND PROPELLED BY PRINCIPLES OF COMMERCIAL EXPEDIENCY. THE CIT (A) HAS FAILED TO APPRECIATE THAT:- ITA NO. 6351/ M/2014- M/S MILAN JEWELLERS 2 A) M/S ETERNITY JEWELS IS A RELATED PARTY OF THE AS SESSEE AND THERE WAS HUGE OUTSTANDING DEBIT BALANCES YEAR AFTER YEAR. B) SINCE THE ASSESSEE HAS CONTINUOUSLY INCREASED IT S STAKE WITHOUT CORRESPONDING VOLUME OF TRANSACTION OR BENEFIT IN T HE NATURE OF INTEREST CHARGED, IT IS NOTHING BUT THE DIVERSION OF BUSINES S FUNDS OF THE ASSESSEE. C) THE ASSESSEE, AT ONE HAND, IS CLAIMING DEDUCTION OF INTEREST PAID IN ITS BOOKS, AND ON THE OTHER HAND, IS NOT CHARGING ANY I NTEREST ON DEBIT BALANCE OF M/S. ETERNITY JEWELS. 2. ON THE FACTS AND IN THE CIRCUMSTANCES, THE CIT ( A) HAS ERRED IN DELETING THE ADDITION ON ACCOUNT OF BUSINESS LOSS OF RS. 5,7 9,54,450/- AND THE LOSS CLAIMED ON FORWARD CONTRACTS OF RS. 1,12,50,614/-, AGGREGATING TO RS. 6,92,05,064/-. THE CIT(A) HAS FAILED TO APPRECIATE THAT:- A) THE ASSESSEE, DURING THE COURSE OF THE ASSESSMEN T PROCEEDINGS, FAILED TO PROVE THAT THE VARIOUS DEBITS MADE IN THE SAID GROU P SUMMARY ARE EXCLUSIVELY ON ACCOUNT OF DEBTORS/CREDITORS AND ALS O THE ASSESSEE FAILED TO SPECIFY THE IDENTITY OF SUCH DEBTORS TO PROVE THE G ENUINITY OF THE SAID ADJUSTMENTS. B) THE ASSESSEE, DURING THE COURSE OF THE ASSESSMEN T PROCEEDINGS, FAILED TO EXPLAIN THE DEBIT ENTRY AS ON 1.4.2009 FOR RS. 5 ,79,54,450/- WITH PARTICULARS AS EXCHANGE DIFFERENCE (DEBTORS) C) THE BUSINESS LOSS CLAIMED BY THE ASSESSEE IS ACT UALLY A SPECULATION LOSS. BY PERUSING THE GROUP SUMMARY OF EXCHANGE DIFFERENC E, THE AO HAS FOUND THAT THE ASSESSEE HAS SHOWN LOSS ON FORWARD C ONTRACTS OF RS. 1,12,50,614/- AND ON PERUSAL OF CORRESPONDING LEDGE R ACCOUNT, IT WAS FOUND THAT THERE ARE ONLY RECEIPT PAYMENT ENTRIES R EFLECTED IN THE ACCOUNT, WHICH DO NOT PROVE THAT THE SAID FORWARD CONTRACTS ARE ENTERED ON ACCOUNT OF DEBTORS/CREDITORS. 3. FOR THE ABOVE MENTIONED REASON AND ANY OTHER REA SONS THAT MAY BE URGED AT THE TIME OF HEARING, IT IS REQUESTED THAT THE ORDER OF THE CIT(A) BE QUASHED AND THAT OF THE A. O. BE RESTORED. ITA NO. 6351/ M/2014- M/S MILAN JEWELLERS 3 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE-COMPA NY IS ENGAGED IN THE BUSINESS OF MANUFACTURER AND EXPORTER OF CUT AND PO LISHED DIAMONDS, FILED ITS RETURN OF INCOME FOR ASSESSMENT YEAR 2010-11 ON 24 TH SEPTEMBER 2010 DECLARING TAXABLE INCOME OF RS. 6,29,073/-. THE ASS ESSMENT WAS COMPLETED ON 27 TH FEBRUARY 2013 UNDER SECTION 143(3). THE ASSESSING O FFICER WHILE PASSING ASSESSMENT ORDER, BESIDES THE OTHER ADDITIO NS AND DISALLOWANCES MADE DISALLOWANCE UNDER SECTION 36(1)(III) FOR RS.4 0,77,811/- AND ADDITION ON ACCOUNT OF FOREIGN EXCHANGE DIFFERENCE OF RS. 6, 92,05,064/- OUT OF WHICH RS.1,12,50,614/- WAS TREATED AS SPECULATION LOSS AN D WAS ALLOWED TO CARRY FORWARD FOR SET OFF IN SUBSEQUENT YEARS. ON APPEAL BEFORE CIT(A)THE DISALLOWANCES UNDER SECTION 36(1)(III) AND ADDITION S OF ADDITION ON ACCOUNT OF FOREIGN EXCHANGE DIFFERENCE OF RS. 6,92,05,064/- WAS DELETED. HENCE, AGGRIEVED BY THE ORDER OF CIT(A)THE REVENUE HAS FIL ED PRESENT APPEAL BEFORE US. 3. WE HAVE HEARD LEARNED DEPARTMENTAL REPRESENTATIVE ( DR) FOR THE REVENUE AND THE LEARNED AUTHORIZED REPRESENTATIVE (AR) OF T HE ASSESSEE AND PERUSED THE MATERIAL AVAILABLE ON RECORD. GROUND NO .1 RELATES TO THE DELETION OF DISALLOWANCE UNDER SECTION 36(1)(III). THE LEARNED DR FOR THE REVENUE SUBMITS THAT M/S ETERNITY JEWELS IS RELATED PARTY OF THE ASSESSEE, TO WHICH THE ASSESSEE ALLOWED TO CONTINUE ITS DEBTS FR OM LAST FOUR YEARS. THE DEBTS WERE INCREASED YEAR AFTER THE YEAR AND NO BY STRETCH OF IMAGINATION, THE AFORESAID CONNECTION MAY BE CONSIDERED AS REGUL AR COURSE OF BUSINESS. ITA NO. 6351/ M/2014- M/S MILAN JEWELLERS 4 THE ARRANGEMENT BETWEEN THE ASSESSEE AND M/S ETERNI TY JEWELS IS NOT IN THE NATURE OF NORMAL COURSE OF BUSINESS TRANSACTION. TH E ASSESSEE IS CLAIMING DEDUCTION OF INTEREST PAID IN ITS BOOKS, AND ON THE OTHER HAND, IS NOT CHARGING AN INTEREST ON DEBT LIABILITY FORM M/S ETE RNITY JEWELS, ITS RELATED PARTIES. THE ASSESSEE WAS MAINTAINING A CONSOLIDATE D ACCOUNT IN RESPECT OF ALL ITS FUNDS. THE ASSESSEE HAS NOT PROVED THE BUSI NESS EXPEDIENCY; HOWEVER, THE LEARNED CIT(A)TREATED IT FOR BUSINESS CONSIDERATION. ON THE OTHER HAND, LEARNED AR OF THE ASSESSEE SUPPORTED TH E ORDER OF LD. CIT(A). THE LD. AR FOR ASSESSEE SUBMITS THAT THE ASSESSEE H AS RECOVERED MORE THAN 70% OF DEBT TILL MARCH 2012. THE LD. AR OF ASSESSEE FURTHER SUBMITS THAT THE ASSESSEE REGULARLY SUPPLIES DIAMOND TO THE M/S ETERNITY JEWELS, THESE TRANSACTIONS ARE LIKE OTHER TRANSACTION WITH OTHER UNRELATED PARTIES IN THE REGULAR COURSE OF BUSINESS. THE MERE DELAY IN REALI SATION OF DEBTS IS NOTHING AND SAME CANNOT BE CONSIDERED AS A LOAN TRANSACTION . THE TRANSACTIONS WITH M/S ETERNITY JEWELS ARE IN THE NATURE OF SALE OF CU T AND POLISHED DIAMONDS AND HAVE BEEN OFFERED FOR TAXATION IN RESPECTIVE YE ARS. THE ASSESSEE IS NOT IN THE BUSINESS FOR FINANCING. THE ASSESSEE OWNED SUFFICIENT OWN FUNDS IN THE FORM OF PARTNERS CAPITAL ACCOUNT, APPROXIMATELY FOR MORE THAN RS. 12.50 CRORES AND IT CANNOT BE PRESUMED THAT PARTNER S FUND ARE BLOCKED IN SUCH GROUP FOR LONG PERIOD. 4. WE HAVE CONSIDERED THE RIVAL SUBMISSION OF THE PART IES AND PERUSED THE ORDERS OF AUTHORITIES BELOW. DURING THE ASSESSMENT PROCEEDING, THE ITA NO. 6351/ M/2014- M/S MILAN JEWELLERS 5 ASSESSING OFFICER NOTED THAT THERE WERE CERTAIN LAR GE DEBIT BALANCE OUTSTANDING AGAINST SEVERAL PARTIES AND ONE OF THE PARTIES M/S ETERNITY JEWELS IS RELATED PARTY, THEREFORE, THE ASSESSEE WA S ASKED TO EXPLAIN THE LARGE DEBIT BALANCES. THE ASSESSEE FILED ITS EXPLAN ATION VIDE REPLY DATED 5 TH FEB 2013 AND CONTENDED THAT ASSESSEE IS REGULARLY S UPPLYING DIAMOND TO M/S ETERNITY JEWELS AND THESE TRANSACTIONS ARE JUST LIKE ANY OTHER TRANSACTION WITH UNRELATED PARTY DURING THE COURSE OF BUSINESS. THE ASSESSEE CONCEDED THAT THERE WAS SOME DELAY IN REALISATION O F DEBT AND NOTHING ELSE AND SAME CANNOT BE CONSIDERED AS LOAN TRANSACTION. THE ASSESSEE ALSO CONTENDED THAT THE CONNECTION WITH M/S ETERNITY JEW ELS ARE IN THE NATURE OF SALE OF CUT AND POLISHED DIAMONDS AND THE SAME HAVE BEEN OFFERED FOR TAXATION. THE ASSESSEE ALSO CONTENDED THAT ASSESSEE IS HAVING SUFFICIENT INTEREST FREE FUNDS IN THE FORM OF PARTNERS CAPITA L ACCOUNT FOR MORE THAN RS. 12.50 CRORE. THE ASSESSEE ALSO CONTENDED THAT THEY HAVE RECOVERED MORE THAN 70% OF THE DEBTS TILL MARCH 2012. THE CONTENTI ON OF THE ASSESSEE WAS NOT ACCEPTED BY ASSESSING OFFICER. THE ASSESSING OF FICER CONCLUDED THAT ETERNITY JEWELS IS RELATED PARTY OF THE ASSESSEE. T HE ASSESSING OFFICER SUMMARIZED THE TRANSACTION ENTERED BY THE ASSESSEE WITH ETERNITY JEWELS AND OTHER PARTIES. THE ASSESSING OFFICER ON THE BAS IS OF SUMMARIZED TRANSACTIONS FURTHER NOTED THAT THE DEBITS HAVE BEE N INCREASED AFTER YEAR AFTER THE YEAR. THE SAID TRANSACTION CANNOT BE CONS IDERED AS BEING IN THE REGULAR COURSE OF BUSINESS. ETERNITY JEWELS HAS LAR GE BROUGHT FORWARD LOSSES ITA NO. 6351/ M/2014- M/S MILAN JEWELLERS 6 IN ITS BOOKS, THEREFORE, IT IS A COLOURABLE DEVICE IS TO CLAIM THE INTEREST: FROM THE BOOKS OF THE ASSESSEE. ON THE BASIS OF HIS OBSE RVATION THE ASSESSING OFFICER CONCLUDED THAT ASSESSEE HAS DIVERTED BORROW ED FUND TO RELATED PARTY AND THEREFORE DISALLOWANCE ON ACCOUNT OF INTEREST U NDER SECTION 36(1)(III) WAS MADE. THE ASSESSING OFFICER COMPUTED DISALLOWAN CE OF INTEREST AT RS. 40,77,811/-. THE ASSESSEE MADE THE SIMILAR CONTENTI ON BEFORE THE LD. COMMISSIONER (APPEALS). THE LD. CIT(A) SUMMARIZED T HAT THE DISALLOWANCE UNDER SECTION 36(1)(III) HAS BEEN MADE MAINLY BY TW O REGIONS. FIRSTLY, THAT THE RELATED PARTY M/S ETERNITY JEWELS HAS BEEN ACCO RDED UNDUE EXTENDED CREDIT FACILITY BY NOT CHARGING AND INTEREST ON THE DEBIT BALANCE. SECONDLY, IT APPEARS TO BE A COLOURABLE DEVICE TO REDUCE THE TAX BURDEN OF THE ASSESSEE BY USING ITS FUND IN THE BUSINESS OF RELATED PARTY WHICH DOES NOT HAVE ANY TAXABLE INCOME DUE TO BROUGHT FORWARD LOSSES. FOR F IRST REASON, THE LD. CIT(A)WAS OF THE VIEW THAT THE PRIMARY CONDITION FO R ALLOWABILITY OF INTEREST ON BORROWED CAPITAL IS THAT CAPITAL SHOULD HAVE BEEN BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION. AND ON THE B ASIS OF HONBLE APEX COURT DECISION IN SA BUILDERS VS CIT [2007] 288 ITR 1(SC) CONCLUDED THAT ETERNITY JEWELS IS A GROUP CONCERN TO WHOM THE ASSESSEE MADE SUPPLIES DIAMONDS AND THUS THERE IS A BUSINESS CONNECTION BE TWEEN TWO ENTITY. THEREFORE, THE TRANSACTION BETWEEN THE RELATED PART IES HAS TO BE EXAMINED FROM THE PROSPECTIVE OF PRINCIPLE OF ORDINARY COMME RCIAL TRADING. THE LD. CIT(A) ALSO EXAMINED THE ACCOUNT OF ETERNITY JEWELS FOR FINANCIAL YEAR ITA NO. 6351/ M/2014- M/S MILAN JEWELLERS 7 2006-07 TILL 2013-14 AND CONCLUDED THAT OPENING OUT STANDING IN FINANCIAL YEAR 2013-14 WAS RS. 9.16 CRORE AND CLOSING OUTSTAN DING WAS RS. 2.52 CRORE. THE SALES OF ETERNITY JEWELS WAS ALSO EXAMIN ED BY LD. CIT(A) FOR ASSESSMENT YEAR 2007-08 TILL 2010-11. THE LD. CIT(A ) CONCLUDED THAT OUT OF TOTAL SALE OF ASSESSEE, THE SAME MADE TO RELATED PARTY IS 1% TO 4% COMPARED TO NON-RELATIVE PARTIES. THE LD. CIT(A) A LSO EXAMINED THE PARTNERS CAPITAL, INVESTMENT AND THE AVAILABLE WORK ING CAPITAL AND CONCLUDED THAT INTEREST BEARING FUNDS HAVE NOT BEEN PART WITH RELATED PARTY. THE LD. CIT(A) IS ON THE BASIS OF HIS OBSERVATION C ONCLUDED THAT THE TRANSACTION WITH THE RELATED PARTIES ARE IN THE COU RSE OF NORMAL BUSINESS TRANSACTION FOR COMMERCIAL EXPEDIENCY AND DELETED T HE DISALLOWANCE UNDER SECTION 36(1)(III). WE HAVE NOTED THAT THE LD. CIT( A) EXAMINED BUSINESS EXPEDIENCIES, VOLUME OF SALE WITH RELATED VIS-A-VIS UNRELATED PARTIES, AVAILABILITY OF INTEREST FREE FUND IN THE CAPITAL A CCOUNT OF PARTNERS AND PROGRESS OF RECOVERY OF THE DEBT FROM THE RELATED P ARTIES AND DELETED THE DISALLOWANCE UNDER SECTION 36(1)(III). THE LD. DR H AS NOT SHOWN ANY CONTRARY MATERIAL OR ANY LAW TO ARRIVE ON DIFFERENT CONCLUSION. IN OUR VIEW, THE FINDING OF LD. CIT(A) DOES NOT REQUIRE ANY FURT HER INTERFERENCE. IN THE RESULT, GROUND NO.1 OF THE APPEAL RAISED BY THE REV ENUE IS DISMISSED. 5. GROUND NO.2 RELATES TO DELETING THE ADDITION ON ACC OUNT OF BUSINESS LOSS OF RS. 6,92,05,064/-. THE LD. AR OF THE ASSESSEE SUBMI TS THAT DURING THE COURSE OF ASSESSMENT PROCEEDING THE ASSESSEE FAILED TO PRO VE THAT VARIOUS DEBITS ITA NO. 6351/ M/2014- M/S MILAN JEWELLERS 8 MADE IN THE GROUP SUMMARY ARE EXCLUSIVELY ON ACCOUN T OF DEBTORS AND CREDITORS AND THAT ASSESSEE FAILED SPECIFY THE IDEN TIFY OF SUCH DEBTORS TO PROVE THE GENUINITY OF THE ADJUSTMENTS. THE BUSINES S LOSS CLAIMED BY ASSESSEE IS ACTUALLY SPECULATION LOSS. THE ASSESSIN G OFFICER RIGHTLY IDENTIFIED THE SPECULATION LOSS AND ALLOWED TO CARR Y FORWARD IN SUBSEQUENT ASSESSMENT YEARS. ON THE OTHER HAND, THE LD. AR OF THE ASSESSEE SUPPORTED THE ORDER OF LD. CIT(A). THE LD. AR SUBMITS THAT TH E ASSESSEE IS CONSISTENTLY FOLLOWING THE ACCOUNTING STANDARD-11 (AS-11) AS A P ART OF GENERAL ACCOUNTING POLICY. THE ASSESSEE HAS BEEN REVALUING ITS MONETARY AND NON- MONETARY ITEM DENOMINATED IN FOREIGN CURRENCY AT TH E END OF YEAR. FOLLOWING THE SAME PRACTICE, THE ASSESSEE HAS A NET INCOME OF RS. 11314284/- ON ACCOUNT OF EXCHANGE DIFFERENCE IN THE BOOKS OF ASSESSEE- FIRM. THE ASSESSEE FURNISHED ALL NECESSARY INFORMAT ION AND EXPLANATION WITH COPY OF LEDGER ACCOUNT AND A SUMMARY OF THE GAIN/LO SS UNDER EACH TYPE OF TRANSACTION OF FOREIGN CURRENCY. THE ASSESSING OFFI CER WITHOUT ASKING ANY EXPLANATION ABOUT ACCOUNTING TREATMENT BEGUN WITH A NALYSIS OF EACH AND EVERY ENTRY IN THE LEDGER ACCOUNT, THE ASSESSING OF FICER ASSUMED THAT THE FORWARD CONTRACT ENTERED BY THE ASSESSEE TO HAS ITS FOREIGN CURRENCY RISK AGAINST ITS OUTSTANDING DEBTORS. THE ENTRY FOR LOSS IN THE EXCHANGE DIFFERENCE ACCOUNT WAS CONSIDERED IN ISOLATION WITH OUT CO-RELATIVE WITH OTHER FINANCIAL YEAR OF THE BALANCE-SHEET AND CONCL UDED THE LOSS ON FORWARD ACCOUNT OF RS. 1,12,50,614/- HAS SPECULATIO N LOSS SETTLED DURING THE ITA NO. 6351/ M/2014- M/S MILAN JEWELLERS 9 YEAR ON REVERSAL ENTRY OF OUTSTANDING DEBTORS AS ON 01.04.2009 FOR RS. 5,79,54,450/- CONSIDERING IT AS UNEXPLAINED. THE LD . AR FURTHER SUBMITS THAT DETAILS OF EXCHANGE DIFFERENCE IS FILED VIDE PAGE N O. 71 OF PAPER BOOK, DETAILS OF GAIN/LOSS ON EXPORT EXCHANGE RATE DIFFER ENCE IS FILED ON PAGE NO. 72 OF PAPER BOOK AND TRADING PROFIT & LOSS FOR YEAR ENDED MARCH 2009 IS FILED AT PAGE NO. 81 OF PAPER BOOK. IN SUPPORT OF H IS SUBMISSION, THE LD. AR OF THE ASSESSEE RELIED UPON THE DECISION OF CO-ORDI NATE BENCH IN DHARMANANDAN DIAMONDS PVT. LTD. VS. ACIT (ITA NO. 3 860/M/214 DATED 17.03.2017) AND SUBMITS THAT THE BENCH HELD THAT TH ERE IS NO REQUIREMENT TO ESTABLISH ONE TO ONE CORRELATION BETWEEN FORWARD CO NTRACT AND CORRESPONDING EXPORT IMPORT SO LONG AS THE TOTAL FO RWARD CONTRARY DO NOT EXCEED TO EXPORT PLUS OUTSTANDING RECEIVABLE. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSION OF THE PART IES AND HAVE PERUSED THE ORDER OF AUTHORITIES BELOW. THE AO MADE THE DIS ALLOWANCE OF LOSS ON ACCOUNT OF FLUCTUATION IN FOREIGN CURRENCY OF DEBTO RS FOR RS. 57954450/- AND TREATED THE LOSS INCURRED ON CANCELLATION/MATUR ITY OF FORWARD CONTRACT DURING THE YEAR OF RS. 1,12,50,614/- AS SPECULATION LOSS. DURING THE ASSESSMENT, THE AO NOTED THAT ASSESSEE HAS SHOWN IN COME ON ACCOUNT OF FOREIGN EXCHANGE DIFFERENCE OF RS. 11314284/- IN IT S PROFIT & LOSS ACCOUNT. THE ASSESSEE HAS ALSO SHOWN EXCHANGE DIFFE RENCE AMOUNTS IN THE LIST OF DEBTORS AND CREDITORS. THE ASSESSEE WAS ASK ED TO SUBMIT THE DETAILS AND NATURE OF EXCHANGE DIFFERENCE. THE ASSESSEE VID E REPLY DATED ITA NO. 6351/ M/2014- M/S MILAN JEWELLERS 10 30.11.2012 CONTENDED THAT THE ACCOUNTING POLICY QUA EXCHANGE RATE TRANSACTION ARE IN CONSONANCE WITH AS-11. THE ASSES SEE FURTHER CONTENDED THAT ASSESSEE-FIRM IS MAINLY ENGAGED IN EXPORT BUSI NESS AND TO SAFEGUARD THE BUSINESS INTEREST AND SPECIALLY FOR RECOVERY FROM D EBTORS, AS A PRUDENT BUSINESSMAN, THE ASSESSEE ENTERED INTO FORWARD CONT RACT. THE CONTRACT IS ENTERED AGAINST OUTSTANDING BALANCE OF DEBTORS, TO HEDGE THE FOREIGN CURRENCY RISK. THE ASSESSEE ALSO CONTENDED THAT DUR ING THE YEAR THERE IS GAIN OF RS. 99.73 LAKHS IN RESPECT OF CONVERSION OF OUTS TANDING FORWARD CONTRACT AS ON 31.03.2010. THE AMOUNT OF RS. 113.14 LAKHS IS IN RESPECT OF EXCHANGE RATE DIFFERENCE ON CONVERSION OF FORWARD C ONTRACT AND LOAN LIABILITIES (SECURED LOAN), CREDITORS FOR GOODS, PR EMIUM ON FORWARD CONTRACT AND GAIN/LOSS ON FORWARD CONTRACT EXCHANGE RATE DIF FERENCE ON EXPORT REALIZATION AND YEAR AND CONVERSION OF OUTSTANDING DEBTORS. THE ASSESSEE ALSO FURNISHED THE CALCULATION SHEET SHOWING THE DE TAILED WORKING OF EXCHANGE DIFFERENCE. THE ASSESSEE ON 15.01.2013 WAS AGAIN ASKED ABOUT THE PROVISION FOR LOSS IN OUTSTANDING FUTURE CONTRACT F OR RS. 634 LAKHS MADE IN ASSESSMENT YEAR 2009-10. THE ASSESSEE FILED ITS REP LY ON 05.02.2013 AND CONTENDED THAT THE AMOUNT OF RS. 634 LAKHS IS REFLE CTED IN ACCOUNT EXCHANGE RATE DIFFERENCE ON FORWARD CONTRACT WHICH CONSIST OF ENTRY OF RS. 53420177/- WHICH IS IN RESPECT OF REVERSAL OF LOSS RECOGNIZED AS ON 31.03.2009 IN RESPECT OF FORWARD CONTRACT OUTSTANDI NG AS ON BACK DATE AND THE SAME IS INCONSONANCE WITH AS-11, ENTRY OF RS. 9 973440/- (GAIN) WAS ITA NO. 6351/ M/2014- M/S MILAN JEWELLERS 11 PASSED IN RESPECT OF FORWARD CONTRACT OUTSTANDING A S ON 31.03.2010. THE CONTENTION OF ASSESSEE WAS NOT ACCEPTED BY ASSESSIN G OFFICER WITH THE FOLLOWING REASONS: I) THE ASSESSEE HAS ACCEPTED THAT IT HAD BOOKED LOS S ON FORWARD CONTRACTS OF RS. 534.20 LAKHS IN A.Y. 2009-10, WHICH ENTRY WA S REVERSED AS ON 01.04.2009. FURTHER THERE IS A GAIN OF RS. 99.73 LA KHS ON FORWARD CONTRACTS IN CURRENT ASSESSMENT YEAR. HENCE, IT SHO ULD HAVE SHOWN PROFIT OF RS. 633.93 LAKHS APPROX. IN THE CURRENT ASSESSME NT YEAR, HOWEVER IT HAS SHOWN PROFIT OF RS. 113.14 LAKHS ONLY IN ITS P& L ACCOUNT. II) ON PERUSAL OF EXCHANGE DIFFERENCE - GROUP SUMMA RY SUBMITTED BY THE ASSESSEE AS REPRODUCED ABOVE, IT APPEARS THAT T HE ASSESSEE HAS CREDITED THE SAID AMOUNT OF RS. 633.94 LAKHS, BUT A LSO DEBITED/ CREDITED MANY OTHER ITEMS TO ARRIVE AT THE NET PROFIT FIGURE OF RS. 113.14 LAKHS. THE ENTRIES MADE IN CORRESPONDING LEDGER ACCOUNTS O F SAID ITEMS ARE NOT SELF EXPLANATORY AND THE ASSESSEE HAS FAILED TO SUB MIT ANY EXPLANATION GIVING EXACT NATURE OF EACH ITEM. III) THE ASSESSEE HAS FAILED TO PROVE THAT THE VARI OUS DEBITS MADE IN THE SAID GROUP SUMMARY ARE EXCLUSIVELY ON ACCOUNT OF DE BTORS/ CREDITORS AND ALSO FAILED TO SPECIFY THE IDENTITY OF SUCH DEBTORS TO PROVE THE GENUINITY OF SAID ADJUSTMENTS. IV) ON PERUSAL OF LEDGER IN RESPECT OF GAIN/ LOSS O N EXPORT EXCHANGE RATE DIFF. OF RS. 7,74,84,278, IT APPEARS THEREIN T HAT THERE IS A DEBIT ENTRY AS ON 1-4-2009 FOR RS. 5,79,54,450/- WITH PARTICULA RS AS 'EXCHANGE DIFFERENCE (DEBTORS)'. THE SAID AMOUNT IS COMPLETED UNEXPLAINED AS NEITHER THE ASSESSEE HAS MADE REFERENCE OF SAID AMO UNT IN ANY OF ITS CORRESPONDENCE AS ABOVE, NOR SUBMITTED ANY EXPLANAT ION OR CALCULATION OR CO-RELATION WITH DEBTORS OF SAID AMOUNT. FURTHER TH E ASSESSEE HAS SEPARATELY REVERSED THE ENTRY IN RESPECT OF EXCHANG E LOSS OF LAST YEAR AT RS. 5,34,20,177/- AS REFERRED ABOVE AND HENCE THIS DEBIT AMOUNT OF RS. ITA NO. 6351/ M/2014- M/S MILAN JEWELLERS 12 5,79,54,450/- IS COMPLETED UNEXPLAINED. HENCE THE S AID AMOUNT OF RS. 5,79,54,450/- IS ADDED TO THE TOTAL INCOME OF THE A SSESSEE. V) IN THE GROUP SUMMARY OF EXCHANGE DIFFERENCE, THE ASSESSEE HAS SHOWN LOSS ON FORWARD CONTRACTS OF RS. 1,12,50,614/ -. ON PERUSAL OF CORRESPONDING LEDGER ACCOUNT, IT APPEARS THAT THERE ARE ONLY RECEIPT/ PAYMENT ENTRIES REFLECTED IN THE ACCOUNT, WHICH DO NOT PROVE THAT THE SAID FORWARD CONTRACTS ARE ENTERED ON ACCOUNT OF DEBTORS /CREDITORS. THE ASSESSEE HAS FAILED TO SUBMIT ANY SEPARATE DETAILS SHOWING CO-RELATION OF SAID LOSS WITH THE DEBTORS/ CREDITORS. HENCE, THE S AID LOSS IS DISALLOWED AS BUSINESS LOSS AND TREATED AS SPECULATION LOSS OF TH E ASSESSEE. 7. ON THE BASIS OF HIS OBSERVATION, THE ASSESSING OFFI CER DISALLOWED LOSS OF RS. 5,79,54,450/- AND RS. 1,12,50,614/-, THUS TOTAL OF RS. 6,92,05,064/-. OUT OF WHICH RS. 1,12,50,614/- WAS TREATED AS SPECULATI ON LOSS AND ALLOWED TO BE CARRY FORWARD FOR SET OFF IN SUBSEQUENT ASSESSME NT YEARS. 8. BEFORE THE LD. CIT(A), THE ASSESSEE EXPLAINED THAT ENTRY OF RS. 5,79,84,278/- IS FOR REVERSAL OF IMMEDIATE EARLIER YEARS DEBTORS RESTATED AT THE BALANCE- SHEET DATED AS ON 31.03.2009 WHICH IS IN CONSONANCE WITH AS-11. THE SAME HAD EMERGED AS A LOSS IN THE CONCERNED ASSESSMENT Y EARS, THERE WAS A BOOKING OF CORRESPONDING INCOME IN IMMEDIATELY PREC EDING ASSESSMENT YEARS. IN VIEW OF THE ACCOUNTING PRACTICE MANDATED BY AS-11. IN CASE, THE ASSESSING OFFICER HAS ANY DOUBT, HE SHOULD HAVE CAL LED DATA OR TO HAVE GONE THROUGH THE PREVIOUS YEARS ASSESSMENT FILE. FOR LO SS OF FORWARD CONTRACT OF RS. 1,12,50,614/-, THE ASSESSEE EXPLAINED THAT LOSS ON SETTLEMENT OF ALL FORWARD CONTRACT ENTERED DURING THE RELEVANT ASSESS MENT YEAR. THE FORWARD CONTRACT, BY ITS VERY NATURE, IS GRANTED AGAINST DE BTOR/CREDITOR AND THE ITA NO. 6351/ M/2014- M/S MILAN JEWELLERS 13 OBSERVATION OF ASSESSING OFFICER IS WITHOUT ANY LOG IC. THE ASSESSEE HAD OFFERED AGGREGATE INCOME OF RS. 1,13,14,284/- WHICH COVERS EXCHANGE RATE DIFFERENCE ON REALIZATION, PROVISION ON DEBTORS, CR EDITORS, FORWARD CONTRACTS AND WORKING CAPITAL LOANS. THIS EXCHANGE RATE DIFFE RENCE, THOUGH SHOWN IN SEPARATE ACCOUNT IS ALL INTERLINKED AND HENCE, THE PICKING UP THE DEBIT ENTRY THAT IS LOSS OF DISALLOWANCE WAS NOT WARRANTED. THE SUBMISSION/EXPLANATION OF ASSESSEE WAS FORWARDED TO ASSESSING OFFICER FOR HIS REMAND REPORT. THE ASSESSING OFFICER FURNISHED HIS REMAND REPORT DATED 26.06.2014 WHICH IS EXTRACTED BELOW: IN THIS CASE, THE A.O. MADE AN ADDITION OF RS.6,92, 05,064/- ON ACCOUNT OF EXCHANGE RATE DIFFERENCE ON FORWARD CONTRACTS. THE ADDITION OF THE SAID AMOUNT ON EXCHANGE RATE DIFFERENCE IS MADE ON (A) ON ACCOUNT OF DEBIT ENTRY OF RS.5,79,54,450/- A PPEARING IN BOOKS ON ACCOUNT OF EXCHANGE DIFFERENCE(DEBTORS) AS ON 01.04 .2009. THE ASSESSEE EXPLAINED THAT THIS ENTRY IS NOTHING BUT A REMOVAL OF OUTSTANDING DEBTORS AS ON 31.03.2009. PARA 36 OF AS-11 INTERALIA PROVID ES THAT EXCHANGE DIFFERENCES ON SUCH A CONTRACT SHOULD BE RECOGNIZED IN THE STATEMENT OF PROFIT AND LOSS IN REPORTING PERIOD WITH EXCHANGE R ATE CHANGES TAKEN INTO ACCOUNT. THUS, EXCHANGE DIFFERENCE ON FORWARD EXCHANGE CONTRACT ENTERED INTO FOR HEDGING PURPOSE SHOULD BE RECOGNIZ ED IN P&L ACCOUNT IN REPORTING PERIOD IN WITH EXCHANGE RATE CHARGES. AS PARA 36 CLEARLY STATES THAT THIS IS JUST FOR HED GING PURPOSE, HOWEVER THERE IS NOTHING ON FILE TO PROVE THAT THIS WAS NOT SPECULATION TRADING. THERE WAS NO DAY TO DAY STATUS OF CREDITORS AND DEB TORS AND OUTSTANDING EXPOSURE IN FOREIGN CURRENCY. SO, IT IS DIFFICULT T O SAY WHETHER THE TRANSACTION MADE WAS FOR HEDGING OR SPECULATION. ITA NO. 6351/ M/2014- M/S MILAN JEWELLERS 14 ALSO, THERE ARE NO FORWARD CONTRACT NOTES SUBMITTED BEFORE THE AO DURING ASSESSMENT PROCEEDINGS FOR HIM TO VERIFY. ALSO, THERE IS NOTHING ON RECORD TO VERIFY THE RATE AT WHICH THE FORWARD CONTRACT WAS BOOKED AND WHAT WAS THE PREVAILING EXC HANGE RATE AND AT WHAT RATE THE CONVERSION WAS MADE ON 31.03.2009. (B) WITH REGARD TO DURING THE YEAR LOSS OF RS.1,12, 50,614/- AGAIN THERE IS INSUFFICIENT INFORMATION ON RECORD TO VERIFY THE NATURE OF LOSS, WHETHER THE SAME WAS SPECULATION OR BUSINESS LOSS A S THERE IS NO DAY TO DAY OUTSTANDING POSITION OF DEBTOR/CREDITOR AND FOR EIGN CURRENCY EXPOSURE AND ALSO NO FORWARD CONTRACT NOTES. THUS, A.O. RIGHTLY ADDED THE AMOUNT OF RS.6.92 ON T HE ENTRIES MADE WHICH WAS NOT COMPLETELY EXPLAINED.' 9. THE LD CIT(A) REQUIRED THE ASSESSEE TO FURNISH HIS COMMENT ON THE REMAND REPORT OF THE ASSESSING OFFICER. IN THE REPLY TO TH E REMAND REPORT FURNISHED BY ASSESSING OFFICER, THE ASSESSEE CONTENDED THAT T HE ASSESSING OFFICER DID NOT CALL FOR ANY INFORMATION OR EXPLANATION FROM TH E ASSESSEE. DURING THE REMAND PERIOD, THE ASSESSEE FOLLOWED UP THE MATTER WITH THE ASSESSING OFFICER. THE ASSESSEE WAS ORALLY ASKED ABOUT THE DE TAILS OF DEBTORS AND CREDITORS VIS--VIS FORWARD CONTRACT IN A TABULAR F ORM. THE ASSESSEE PROVIDED THE STATEMENT SHOWING OPENING BALANCE OF FORWARD CO NTRACT, ADDITION MADE DURING THE MONTH, CONTRACT CANCELLED DURING THE MON TH AND CLOSING BALANCE OF FORWARD CONTRACT VIS--VIS DEBTORS/CREDITORS. CO PY OF THOSE STATEMENT WAS ALSO FILED BEFORE THE LD. CIT(A). THE LD. CIT(A) AF TER PERUSING THE REMAND REPORT, COMMENTS OF THE ASSESSEE OBSERVED THAT ASSE SSING OFFICER HAS NOT MADE ANY COMMENT WITH REGARD TO THE MERIT OF ISSUE AT STAKE. THOUGH THE ITA NO. 6351/ M/2014- M/S MILAN JEWELLERS 15 COPY OF SUBMISSION OF THE ASSESSEE AND CONCERNED LE DGER WERE FORWARD TO THE ASSESSING OFFICER, NO COMMENTS WAS MADE ON ACCO UNTING ENTRIES, THE ASSESSING OFFICER HAS ONLY REITERATED THE SAME POSI TION AS RECORDED IN ASSESSMENT ORDER. THE ASSESSING OFFICER HAS NOT GIV EN ANY DISAGREEMENT WITH THE RELEVANT DETAILS FURNISHED BY ASSESSEE. TH ERE IS NO COMMENT OF ASSESSING OFFICER ON THE MATERIAL REMANDED FOR HIS SPECIFIC COMMENT, THUS THE LD. CIT(A) DEEM IT APPROPRIATE TO EXAMINE THE M ATTER INDEPENDENTLY OF HIS OWN AND CONCLUDED AS UNDER: THE APPELLANT HAD FURNISHED THE COPIES OF THE RELE VANT LEDGER ACCOUNT TO SUBSTANTIATE ITS CLAIM AND WHICH HAD BEEN FORWARDED TO THE ASSESSING OFFICER IN THE COURSE OF THE REMAND PROCEEDINGS. FR OM THE PERUSAL OF THE DETAILS AS SUBMITTED BY THE APPELLANT IT IS OBSERVE D THAT THE SAID ENTRY PERTAINS TO THE CON VERSION OF OUTSTANDING DEBTORS AS AT THE YEAR ENDED 31.3.2009 AND THUS IN NET ANALYSIS, HAD BEEN OFFERE D FOR TAXATION IN THE SAID YEAR I.E. A.Y. 2009-10. THE SAID ENTRY IS IN F ACT PASSED FOR CONVERSION OF OUTSTANDING DEBTORS AS AT THE YEAR EN D AS PER THE MANDATE OF AS-LL. SINCE THIS IS AN ADJUSTMENT ENTRY WHICH I S PASSED TO MEET THE REQUIREMENT OF THE AS 11, THE SAME CANNOT BE TREATE D AS UNEXPLAINED. THE SAID ENTRY IS PASSED AT THE YEAR END TO REFLECT THE AMOUNT OF DEBTORS, DENOMINATED IN FOREIGN CURRENCY, THAT CAN BE RECOVE RED AT THE YEAR END AND CORRESPONDING GAINS/LOSS ON ITS CONVERSION IN I NDIAN RUPEES. SINCE IT IS AN ADJUSTMENT ENTRY, IT IS INVARIABLY REVERSED O N THE FIRST DAY OF THE NEXT FINANCIAL YEAR, WHICH TREATMENT IS PRESCRIBED BY AS 11. FURTHER, THE STATEMENT OF MONTHLY FORWARD CONTRACTS VIS-A-VIS OU TSTANDING DEBTORS/ CREDITORS SUFFICIENTLY PROVES THAT THE APPELLANT AL WAYS HAD FAR MORE EXPOSURE M THE FORM OF OUTSTANDING DEBTORS/CREDITOR S (IN USD)COMPARED TO THE VALUE OF FORWARD CONTRACTS, WHICH IMPLIES TH AT ENTERING INTO FORWARD CONTRACT TRANSACTIONS WAS WITH THE INTENTIO N TO HEDGE ITS ITA NO. 6351/ M/2014- M/S MILAN JEWELLERS 16 OUTSTANDING POSITION IN DEBTORS/CREDITORS. THE FACT THAT THE APPELLANT HAD BEEN CONSISTENTLY FOLLOWING THE AS-11 YEAR AFTER YE AR AS WELL AS THE FACT THAT THE CORRESPONDING GAIN RELATING TO THE CONVERS ION OF OUTSTANDING DEBTORS AS ON 31.3.2009 HAD BEEN OFFERED TO TAX AND ASSESSED AS SUCH, CANNOT BE LOST SIGHT OF. IT IS ALSO TO BE MENTIONED HERE THAT THE CLAIM OF THE APPELLANT IS COVERED BY THE DECISION OF THE HON 'B1E SUPREME COURT IN THE CASE OF CIT VS. WOODWORD GOVERNER LTD. (2009) 1 79 TAXMAN 326(SC). IN VIEW OF THE SAID FACTS AND CIRCUMSTANCE S AND THE PREVAILING LAW ON THE SUBJECT, I AM UNABLE TO ACCEDE TO THE FI NDING OF THE ASSESSING OFFICER THAT THE AMOUNT IS UNEXPLAINED. THE ADDITIO N OF RS. 5,79,54,450/- IS DIRECTED TO BE DELETED. 7.13 WITH REGARD TO THE CLAIM OF LOSS ON FORWARD CO NTRACT CANCELLATION/MATURITY OF RS. 1,12,50,614/-, THE ASS ESSING OFFICER IS OF THE OPINION THAT THE SAID TRANSACTIONS WERE OF RECEIPTS AND PAYMENTS AND THAT THE TRANSACTIONS BY THEMSELVES DO NOT PROVE' THAT T HE FORWARD CONTRACTS WERE ENTERED INTO ON ACCOUNT OF DEBTORS/CREDITORS A ND THAT IN THE ABSENCE OF ANY CO-RELATION OF THE LOSS WITH DEBTORS/ CREDIT ORS, THE SAME HAS TO BE DISALLOWED AS SPECULATION LOSS. ON THE OTHER HAND, ON A PERUSAL OF THE DETAILS AND EXPLANATION AS SUBMITTED BY THE APPELLA NT IN THE COURSE OF THE APPELLATE PROCEEDINGS, IT IS OBSERVED THAT THE LOSS IS INCURRED ON ACCOUNT OF CANCELLATION OF FORWARD CONTRACTS AND ARE ACTUAL LY BANK TRANSACTIONS. A PERUSAL OF THE LEDGER ACCOUNT AS WELL AS THE STATEM ENT OF MONTH-WISE POSITION OF OUTSTANDING DEBTORS/ CREDITORS VIS-A-VI S EXPOSURE OF FORWARD CONTRACTS BRINGS OUT THE FACT THAT IT WAS NOT AN EX ERCISE IN SPECULATION SINCE THE VALUE OF THE UNDERLYING ASSET WAS FAR IN EXCESS OF THE EXPOSURE IN FORWARD CONTRACTS. THE RECEIPT AND PAYMENT TRANS ACTIONS ARE ON ACCOUNT OF ACTUAL GAIN/LOSS ON THE CANCELLATION/MAT URITY OF THE FORWARD CONTRACTS AT THE RESPECTIVE DATES AND THE SAID LOSS /GAIN ON THE CANCELLATION OF THE FORWARD CONTRACTS IS A BUSINESS LOSS/ GAIN. IN THE SAID VIEW OF THE MATTER, I AM UNABLE TO ACCEPT THE ACTION OF THE ASS ESSING OFFICER AND ITA NO. 6351/ M/2014- M/S MILAN JEWELLERS 17 DIRECT THAT THE ADDITION IN RESPECT TO THE CLAIM OF LOSS OF RS. 1,12,50,614/- BY TREATING THE SAME AS SPECULATION LOSS BE DELETED . 10. THE CO-ORDINATE BENCH OF TRIBUNAL IN DHARMANANDAN D IAMONDS PVT. LTD. VS. ACIT (SUPRA) HELD THAT THE FORWARD CONTRACT CON STITUTE HEDGING TRANSACTION AND NOT SPECULATION TRANSACTION. THERE IS NO REQUIREMENT TO ESTABLISH ONE TO ONE CO-RELATION BETWEEN FORWARD CO NTRACT AND CORRESPONDING EXPORT/IMPORT SO LONG AS TOTAL FORWAR D CONTRACT DO NOT EXCEED THE EXPORT PLUS OUTSTANDING RECEIVABLE. THE REVENUE HAS FAILED TO BRING ANY CONTRARY MATERIAL OR LAW TO TAKE CONTRARY DECISION ON THE FACTS OF THE PRESENT CASE. HENCE, WE DO NOT FIND ANY REASON TO INTERFERE IN THE FINDING OF LD. CIT(A). IN THE RESULT, GROUND NO.2 RAISED BY REVEN UE IS DISMISSED. 11. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD DAY OF MARCH 2018. SD/- SD/- (G.S. PANNU) (PAW AN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI; DATED 23/03/2018 S.K.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/