Income Tax Appellate Tribunal - Chennai
Kanishk Gold Pvt.Ltd., , Chennai vs Department Of Income Tax on 30 April, 2014
आयकर अपील य अ धकरण, 'सी' यायपीठ, चे नई
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" BENCH, CHENNAI
डॉ.ओ.के. नारायणन, उपा य एवं ी वकास अव थी, या यक सद य केसम
BEFORE Dr. O.K.NARAYANAN, VICE-PRESIDENTAND SHRI VIKAS AWASTHY, JUDICIAL MEMBER आयकर अपील सं./ITA No. 1323/Mds/2012 नधारण वष /Assessment Year : 2009-10 The Assistant Commissioner of M/s Kanishk Gold Pvt. Ltd., Income Tax, v. 43, Usman Road, T. Nagar, Company Circle - II(4), Chennai - 600 034.
Chennai - 600 034.
PAN : AADCK 1598 B
(अपीलाथ /Appellant) ( यथ /Respondent)
अपीलाथ क ओर से/Appellant by : Shri Vasanth Kumar, IRS, CIT
यथ क ओर से/Respondent by : Shri T. Banusekar, FCA सन ु वाई क तार ख/Date of Hearing : 30th April, 2014 घोषणा क तार ख/Date of Pronouncement : 5th May, 2014 आदे श /O R D E R PER Dr.O.K.NARAYANAN, VICE-PRESIDENT This appeal filed by the Revenue relates to the assessment year 2009-10. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-III at Chennai, dated 12.3.2012 and arises out of the assessment completed under Section 143(3) of the Income-tax Act, 1961.
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2. The respondent-assessee is a private company engaged in the business of manufacturing of and trading in gold jewellery. The assessee filed its return of income for the impugned assessment year on a taxable income of ` 2,03,76,208/-. Initially, the return was processed under Section 143(1). Thereafter, the assessment was completed under Section 143(3), after issuing a notice under Section 143(2).
3. In the course of verifying the modus operandi of the business carried on by the assessee-company, books of accounts and other details, the Assessing Officer came to a conclusion that the assessee has violated the provisions of law stated in Section 40A(3) for making cash payments against purchase of old gold ornaments exceeding the exemption limit. The assessee-company is purchasing old gold ornaments from the customers and new gold ornaments are sold to those customers. In the process of that transaction, the assessee is issuing purchase invoices against the purchase of old gold ornaments and issuing sales bills for the sale of new gold ornaments.
4. But, regarding the payment side, the transaction is closed by making the payment of the differential amount. If a customer purchases new gold ornaments of more value than that of old gold 3 I.T.A. No. 1323/Mds/12 ornaments exchanged by him, the customer makes cash payments to the assessee, of the differential amount. Likewise, when the old gold purchase value is more than the value of the corresponding sale of new gold ornaments, the assessee-company makes payments only of the differential amount to the customer. Wherever such payments made in cash by the assessee-company, were in excess of the exemption limit of ` 20,000/-, the assessee-company themselves have treated those payments hit by Section 40A(3).
5. But, the Assessing Officer held that the purchase of old gold ornaments and the corresponding sale of new gold ornaments are separate and independent transactions as documented by the assessee-company itself. Therefore, the differential amount between the purchase and sale alone cannot be treated as the full purchase and full sale value. The Assessing Officer held that even though the payments are made on differential basis, wherever the assessee-company is making payments to the customers, the entire purchase bill amount has to be taken into consideration and when the differential cash payment is made by the assessee-company, it is necessary to treat the entire purchase bill amount having been made in cash. The Assessing Officer held accordingly that in the majority instances of purchase of old gold, the payments had been 4 I.T.A. No. 1323/Mds/12 made in cash and therefore, violated the provisions of Section 40A(3). On the basis of the above proposition, the Assessing Officer computed such amount liable to be disallowed, to the extent of ` 4,35,31,892/-. This amount was added in the assessment.
6. The assessing authority also found that the assessee has claimed a hedging loss of ` 99,23,199/- and the Assessing Officer treated this hedging loss as speculative loss and disallowed the said loss in computing the taxable income of the assessee-company. This has resulted in an addition of ` 99,23,199/-.
7. The Assessing Officer further observed that the credits reflected in the personal account of the Director of the assessee- company showed cash credits of ` 4,19,97,669/- and those credits were not explained by the assessee. Accordingly, he made another addition of ` 4,19,97,669/- as unexplained cash credits. With these three additions, the Assessing Officer determined a taxable income of ` 11,58,18,970/- as against an income of ` 2,03,76,208/- returned by the assessee-company.
8. These three additions were taken in first appeal. The Commissioner of Income Tax (Appeals) examined Section 40A(3) and Rule 6DD. He found that the operation of Section 40A(3) is 5 I.T.A. No. 1323/Mds/12 excused where the payment made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee. This exclusion is provided in clause (d) to Rule 6DD. The Commissioner of Income Tax (Appeals), relying on the judgment of the Hon'ble Punjab and Haryana High Court rendered in the case of CIT v. Kishan Chand Maheswari Dass (121 ITR 232), held that such exchange transactions are not hit by provisions of Section 40A(3). Accordingly, the Commissioner of Income Tax (Appeals) deleted the said addition of ` 4,35,21,892/-. Regarding the hedging loss of ` 99,23,199/-, the Commissioner of Income Tax (Appeals) examined the issue in a detailed manner, particularly, in the light of the law stated in Sections 43(5) and 73 of the Income-tax Act, 1961. He observed that what constitutes speculation has become a matter of controversy notwithstanding the definition of same provisions in Section 43(5), being a transaction periodically and ultimately settled otherwise than by actual delivery. The Commissioner of Income Tax (Appeals) observed that certain categories of contracts are not treated as speculative transactions by virtue of the proviso to Section 43(5) and particularly provided in clauses (a) and (d) of that proviso. Clause (a) provides that a contract in respect of raw materials or merchandise entered into by a person in the course of 6 I.T.A. No. 1323/Mds/12 his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him should not be deemed to be as speculative transaction. The Commissioner of Income Tax (Appeals) found that the assessee- company had entered into the futures contract to guard against the loss through future price fluctuations in gold. When the assessee is in the business of manufacturing and merchandising in gold, the futures contract entered into by him would be covered by the exception provided in clause (a) of Section 43(5). On the basis of this principal proposition, the Commissioner of Income Tax (Appeals) held that the disallowance made by the Assessing Officer is not justified. Accordingly, the said disallowance was set aside and the addition of ` 99,23,199/- was deleted. Regarding the cash credit addition of ` 4,19,97,669/-, the Commissioner of Income Tax (Appeals) found that those credits related to the journal entries passed on closing of accounts on 31.3.2009 by appropriating the debits and credits on the basis of the transactions the Director had with the assessee-company. The Commissioner of Income Tax (Appeals) found that the credits reflected in the personal account of the Director, have been equally debited in various other accounts relating to the expenses, payments and other obligations. 7 I.T.A. No. 1323/Mds/12 Wherever the Director has spent money for the business of the assessee-company, the Director has to be given credit thereon and for that purpose, the assessee-company had passed closing journal entries and the Assessing Officer has come to the conclusion of unexplained cash credits without examining the corresponding debit entries passed by the assessee-company. Accordingly, the said addition is also deleted. The Revenue is aggrieved and therefore, the second appeal before the Tribunal.
9. We heard Shri Vasanth Kumar, the learned Commissioner of Income Tax appearing for the Revenue and Shri T. Banusekar, the learned Chartered Accountant appearing for the assessee.
10. In respect of the issue of disallowance made under Section 40A(3), the argument of the Revenue is that when old gold purchases are made from A and new ornaments sold to B, provisions of Rule 6DD will not be applicable. It is the case of the Revenue that no jeweler will prepare separate bill for purchase of old gold and sale of new ornaments when the transaction was in exchange of old gold with a new ornament. Detailed arguments have been made on this issue.
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11. The contention of the Revenue is that Rule 6DD is not applicable in a case where purchase is made from A and sale is made to B. The contention is really against the facts of the case. We are not considering a case where the assessee is purchasing old gold ornaments from person A and selling new gold ornaments to another person B. In such circumstances, those sales are entirely different and independent both by nature and both by the parties involved. In such a case, settlement of account by receiving and paying the differential amounts does not arise at all. In the present case, that is not the issue pointed out by the assessing authority and replied by the assessee. The issue arises where the assessee-company purchases old gold ornaments from a person and sells new gold ornaments to the same person. It is in such circumstances, the final settlement of the transactions is made by paying and receiving the amount of differential value.
12. The transaction considered in this case is of same person purchasing new gold ornaments from the assessee against old gold ornaments. In such a case, clause (d) of Rule 6DD clearly applies. The said clause reads that where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to 9 I.T.A. No. 1323/Mds/12 such payee is exempted from the operation of Section 40A(3). Therefore, in the present case, as rightly pointed out by the Commissioner of Income Tax (Appeals), the case of the assessee is protected by clause (d) of Rule 6DD.
13. Further, in Section 40A(3), the thrust is on "payment of cash"
for incurring expenditure. Where the payment for purchase exceeded ` 20,000/- and the payment is made in cash, such payment shall be disallowed partly under Section 40A(3). The thrust of Section 40A(3) is not dependent on the value of purchase bill and sales bill. It is not concerned with the setting off of purchase value and sale value mutually. Section 40A(3) is confined only to the actual payment of amount in cash. In the present case, the differential amounts are received and paid by the assessee in cash. The question of payment in cash relates only to the differential amount payable by the assessee.
14. The Revenue has raised a contention in the grounds that the assessee may not raise separate bills for purchase of old gold and for sale of new gold ornaments. This view is not correct. There is levy of purchase tax by the State Government on purchase of old gold ornaments. For that matter, the assessee has to keep a separate account of old gold purchase supported by purchase 10 I.T.A. No. 1323/Mds/12 invoices. Likewise, sale of new gold ornaments are again subject to sales tax for which the assessee has to maintain separate sales account supported by sales invoices.
15. Interestingly, this ground is otherwise contrary to the argument raised by the Revenue. The whole argument of the Revenue is that the amount for the purchase bill of the old gold ornaments should be treated as paid in cash by itself, by the assessee, on the presumption that the purchase and sales are two different transactions.
16. Anyhow, the Revenue has taken this issue here and there without understanding the true nature of the transaction. We agree with the Commissioner of Income Tax (Appeals) with his finding on this issue and confirm the deletion of ` 4,35,21,892/-.
17. The second issue is disallowance of ` 99,23,199/- being hedging loss treated by the assessing authority as speculative loss.
18. Section 43(5) describes what is a speculative transaction. Accordingly, a speculative transaction means a transaction in which a contract for purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transaction of the commodity or scrips. But, there 11 I.T.A. No. 1323/Mds/12 are two exceptions to the above. One of the exceptions is that the above definition of speculative transaction will not apply to a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him. In the present case, the assessee has entered into a future contract to guard against the loss through future price fluctuations in gold. The assessee is in the business of manufacturing and merchanting of gold. Therefore, the future contract entered into by the assessee is straightaway covered by the first exception provided in clause (a) of Section 43(5). We find that the Commissioner of Income Tax (Appeals) is right in his decision.
19. The third issue is regarding the addition of ` 4,19,97,669/- as unexplained cash credits. These credits are reflected in the personal account of the Director of the assessee-company as a result of closing entry passed by the assessee-company at the end of the previous year as on 31.3.2009, by passing journal entries. These journal entries are passed to make adjustments between the personal account of the Director and business account of the 12 I.T.A. No. 1323/Mds/12 assessee-company. As and when exigencies arose, the Director of the assessee-company had made payments towards expenses, towards purchase, towards services, etc. As these payments were made by the Director, he has to be given credit for the outgoings. As those outgoings related to various expenditure incurred by the assessee-company, such outgoings should be debited in different account of the assessee-company. Therefore, the assessee- company has passed journal entries with the concerned amounts, crediting the personal account of the Director and debiting the various expenditure to nominal accounts of the assessee-company. In fact, all the credits reflected in the personal account of the Director of the assessee-company are correspondingly very much reflected on the debit side of different expenditures and nominal accounts of the assessee-company. In that way, these cash credits are self-explaining in the books of accounts itself. There is no basis for the Assessing Officer to treat these credits as unexplained cash credits. The Commissioner of Income Tax (Appeals) has rightly deleted the addition.
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20. In result, we find that this appeal filed by the Revenue is without any merit. It is accordingly dismissed.
Order pronounced on Monday, the 5th of May, 2014 at Chennai.
sd/- sd/-
(Vikas Awasthy) (Dr. O.K.Narayanan)
( वकास अव थी) (डॉ.ओ.के. नारायणन)
या यक सद य/Judicial Member उपा य /Vice-President
चे नई/Chennai,
th
दनांक/Dated, the 5 May, 2014.
Kri.
आदे श क त ल प अ े षत/Copy to:
1. अपीलाथ /Appellant
2. यथ /Respondent
3. आयकर आयु त (अपील)/CIT(A)-III, Chennai
4. आयकर आयु त/CIT, Chennai-I, Chennai
5. वभागीय त न ध/DR
6. गाड फाईल/GF.