Income Tax Appellate Tribunal - Ahmedabad
Veer Gems, Surat vs Department Of Income Tax on 22 October, 2008
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, Vs M/s. Veer Gems,
th
Room No.622,6 floor, 7/2982, Parsi Sheri,
Aayakar Bhavan, Surat
Majuragate, Surat
PAN No. AABFV 6446L
(Appellant) (Respondent)
ITA No.4136/AHD/2008
A. Y.: 2005-06
M/s. Veer Gems, Vs The A. C. I. T., Circle-7,
7/2982, Parsi Sheri, Room No.622,6 t h floor,
Surat 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
ORDER
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 the parties, perused the findings of authorities below and considered the material available on record.
ITA No.4133/Ahd/2008 (By Department)3. Revenue has challenged deletion of addition made 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 pertaining 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 party till 24-03-2005 and the assessee was not aware till 31-03-2005 about the default from the said party. Further another sum of Rs.24,49,891/- was also received from the said party by the assessee on 20-05-2005 i.e. after the end of the financial year. As per the assessee, it received notice of Chapter VII from the U. S. Bankruptcy 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 the contention and held that Accounting Standard (AS) - 4 was not binding on Income Tax Authorities and as per section 145 (2) of the Act, the Central Government has to notify accounting standard to be followed by the 3 assessees but Accounting Standard (AS- 4) was not notified. The A O was of the view that since the assessee was following mercantile system of accounting, the income was to be computed accordingly. After going through the notice of Chapter- VII referred to above, the A O observed that it was only a notice to the creditors 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 not ascertained. Therefore, at that point of time the said concern had 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 India in circular No.3 had directed that bad debts regarding export proceeds could not be written off before one year and therefore, the claim of the assessee was not in order. Before the learned CIT (A)) it was submitted by the learned Counsel for the assessee that the assessee had made sales to M/s. Andel Jewellery Corporation, U.S.A. and the said party filed application for bankruptcy, pursuant 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 O's arguments that AS-4 was not binding on the IT Authorities cannot be a ground for the disallowance as the amount was written off in view of the provisions of section 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 the A O was also 4 revised vide Circular No.40 dated 5-12-2003 by which outstanding export dues could be written off if the same did not exceed 10% of the export proceeds.
4. The learned CIT (A) after considering the submissions deleted the addition by observing as under:
"I have considered the submissions and find that the A O has relied on RBI circular NO.3 to reject the contentions of the appellant. The latter RBI circular dated 23rd December, 2003 allows all exporters to write off outstanding export dues provided the aggregate value of such export bills written off does not exceed 10% of export proceeds due during the calendar year and such export bills are not a subject of investigation by Enforcement Directorate or any other investigating agency and the facility would be available in respect of export proceeds falling due from January 1, 2004. Further the appellant has written off the bad debts before finalization of accounts since it was in the knowledge that the dues receivable from M/s. Andel Jewellers Corporation of U.S.A. would not be realized since the entity had gone bankrupt. The bad debts were written off as per AS-4 of ICAI and the A O's argument that AS-4 was not binding on the Income-tax Authorities cannot be a ground for rejecting the appellant's claim since once the amount has been written off in the books of accounts, the same cannot be disallowed in view of clear provisions of section 36(1)(viii) of the Act and decision of Hon'ble Gujarat High Court in the case of Girish Bhagwatprasad (supra). The Hon'ble Court in that case held that under the provisions of section 36(1) (viii) of the Act as in force from April 1, 1989, all the assessee had to show was that the bad debt was written off as irrecoverable in the accounts of the appellant for the previous year. The appellant did not have to prove that debt had become bad and mere writing off the amount in the books of accounts 5 was sufficient. In view of this, the addition on this 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 has become bad. The assessee claimed that part amount is received in the next year would show that the writing off the debt as irrecoverable in the accounts was not bona fide. The assessee cannot make entry of write off the bad debts retrospectively in the books 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 directive that bad debts regarding export proceeds cannot be written off before one year from the date it becomes outstanding, whereas in the present case it was written off next date. Learned D R submitted that the assessee claimed deletion the addition of Rs.99,79,281/- before learned CIT (A) but learned CIT (A) deleted the entire 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 assessee reiterated the submissions made before authorities below. He has submitted that part payment was offered as income in the next year; therefore, part claim was made. The RBI circular is for remittances only and would not affect the accounting standard AS-4. He has submitted that the assessee has received bankruptcy notice which was 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 of the assessee by the recent judgment of Hon'ble 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 material available on record. The learned CIT (A) considered the latter circular dated 23-12-2003 of RBI copy of which is filed on record which allows all exporters to write off outstanding export dues provided aggregate value of such export bills written off does not exceed 10% of export proceeds due during the calendar year and such export bills are not subject to investigation by Enforcement Directorate or any other investigating agency and the facility would be available in respect of export proceeds falling due from 1st January, 2004. The assessee has written off bad debts before finalization of accounts since it was in the knowledge that dues receivable from M/s. Andel Jewellers Corporation, USA, would not be realised since the entity 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 which adjustments to assets and liabilities are required for event occurring after the balance sheet date that provide additional information materially 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 confirmed by the insolvency of a customer which occurs after the balance sheet date.
7In 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 clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28:- subject to the provisions of sub-section (2), the amount of any bad debt or part thereof which is written off as irrecoverable in the accounts of the assessee for the previous year".
Hon'ble 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 1st April, 1989, it is not necessary for the assessee to establish that the 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 written off in accounts of the assessee. When bad debt occurs, the bad debt account is debited and the customer's account is credited, thus, closing the account of the customer. In the case of Companies, the provision is deducted from Sundry Debtors. As stated above, the Assessing Officer has not examined whether, in fact, the bad debt or part thereof is written off in the accounts of the assessee. This exercise has not been undertaken 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 extent of the write off."
Considering the facts of the case in the light of the above decision it is clear that the assessee has complied with the provisions of section 36(1) (vii) of the IT Act in the matter and that the assessee has 8 written off the amount of bad debts as irrecoverable in its accounts for the previous year, therefore, learned CIT (A) was justified in deleting the addition. The A O was, therefore, not justified in making the addition on the ground that no proof of the debt turning 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 explained that once part of the amount has been shown as income in the next year, therefore, whole addition was unjustified. The learned CIT (A) was, therefore, justified in considering the whole addition in the assessment year under appeal. We therefore, do not find any justification to interfere with the order of the learned CIT (A). We confirm his finding and dismiss this ground of appeal of the Revenue.
7.1 As a result, the appeal of the Revenue is dismissed.
ITA No.4136/Ahd/2008 (Assessee's 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 (Appeals) has erred in confirming the action of the Assessing Officer in making addition of Rs.77,40,640/- on account of labour charges".
Regarding disallowance of Rs.77,40,640/- on account of labour charges the A O observed that the assessee had paid job charges to labour contractors at the rates ranging from Rs.250 per carat to Rs.600 per carat. He was of the 9 view that these rates were very high compared to labour charges paid by other diamond manufacturers. He cited the cases of Jodhani Exports which paid Rs.265 per carat and D. Nitin & Co., which paid Rs.160 to Rs.180 per carat. Further, it was observed by the A O that it was not possible to find out the basis for payment to the job workers. 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 could not give any details regarding their skills or possession of any sophisticated machinery or any specific precession which could give higher yield compared to other job workers. It was observed by the A O that when confronted with the statements, the assessee stated that labour charges were paid at different rates to different workers according to their skill and nature of diamond to be cut and polished. The A O was of the view that the genuineness of such expenses was not proved and considering the job 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 made through account payee cheque only after making TDS. Proper records were produced relating to labour charges and some of the labour parties produced before the A O 10 also confirmed payment in respect of work done by them. 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 to 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 ground 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 appellant's 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 the other hand, the learned D R relied upon the order of the A O. 12 We have heard the rival submissions and considered the material available on record. The A O disallowed Rs.10 per carat labour expenses would prove that substantial explanation of the assessee has been accepted by the A O. The assessee produced all the details of the expenditure and books of account before the A O. The books of account of the assessee are audited. The G P rate is admittedly better in the assessment year under appeal as compared 12 with the last year. The assessee is engaged in the business of purchase/import of rough diamonds and manufacturing 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 workers ranges differently. According to assessee all the payments are made through account payee cheques only after making TDS. Therefore, considering the history of the assessee and nature of business and that profit is higher as compared to the preceding assessment year, would prove that assessee spent genuine expenditure wholly and exclusively for the purpose of business. We accordingly set aside the orders of the authorities below and delete the addition. This ground of appeal of the assessee is allowed.
13. Ground No. 2 of the appeal of the assessee reads 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 found that one of the partners Dilip M. Shah had taken foreign 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 foreign travel in the name of 10 members of the family. The A O therefore, was of the view that visits of these family members was not for any business purpose and disallowed the expenses incurred on their foreign visit. Before the learned CIT (A) the learned Counsel for the assessee submitted that the A O erred in making the disallowance without appreciating the facts that various amounts mentioned by him in Para 7 of the order were not even claimed as deduction. It was further submitted that the assessee has debited a sum of Rs.2,71,865/- in respect of 8 family members to the account of Shri Dilip Shah, partner of the assessee firm and the same was not claimed in the profit & loss account. The foreign exchange taken on 1-05-2004 was used by the partner of the assessee firm Shri Dilip Shah for business tour and a sum of Rs.68,628/- pertaining to Mrs. Heena Shah and Rs.1,00,480/- pertaining to Shri Dilip Shah was for business purpose only. Considering the submissions of the assessee the learned CIT (A) confirmed the addition observing as under:
"I have gone through the details and find that the A O's 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 O's 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 the other hand, the learned D R relied upon the order of the learned CIT (A).
16 We have heard the rival submissions and considered the material available on record. The learned CIT (A) gave a specific finding that utilization of foreign exchange of Rs.5,41,950/- taken by Shri Dilip Shah from Wall Street Interchange Pvt. Ltd. has not been satisfactorily explained since the assessee has not been able to furnish any information regarding foreign tour by Shri Shah after 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 before 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 justification to interfere with the order of the learned CIT (A). There is no 15 merit in this ground of appeal of the assessee. Same 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 forward contract of forex against a simple letter of so called proposed order for foreign buyers and not against firm order. It was also further observed by the A O that the assessee did not file any letter of credit of contract but only a tentative letter from buyers and 90% of this contract 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 sale of any commodity including stocks and shares is periodically or ultimately settled other wise than by actual delivery or transfer of commodity or scripts. In reply, the assessee stated that it entered into the forward exchange contract to protect against fluctuation in the rate of foreign exchange 16 and the provisions of section 43(5) of the IT Act was 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 was submitted by the learned Counsel for the assessee that 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 importing rough diamonds and would export polished diamonds and therefore to make or received payments in foreign currency and had to bear the difference on account of conversion of the foreign exchange. It cancelled the various forward contracts to reduce the loss or increase the profits on account of fluctuation in rates. It was also submitted that forward exchange contract was permissible only in respect 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 amount 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 contract in respect of exports to protect loss when payment was received. However, the assessee incurred loss in foreign exchange in import orders but the same was compensated by actual exchange difference gain on payment. The gain or loss arising out of foreign exchange contract was only from 17 business. The learned Counsel for the assessee in support 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 that this issue is of academic in nature. His findings in this 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 reiterated the submissions made before the authorities below and referred to the statements of facts filed before learned CIT (A) in which it was explained that forward exchange contract 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 exchange contract can only be made by showing the import or export orders. Accordingly, assessee obtained various import order from Blue Gems BVBA and similarly assessee received various export orders from Blue Diam Co. and Blue Rays Inc. Forward exchange contract is permitted only in respect of outstanding import or export order. When forward exchange contract is canceled, order value is reduced by 18 that amount and assessee is entitled to have contracts 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 entitled to profit or bear the loss depending on the rates contracted and rates prevailing at the time of cancellation. As the value of the rupee was improving at that time, assessee mainly entered into forward exchange contract in respect of export to protect loss on exchange when payment is received. It is to be noted that the assessee actually imported rough diamonds and exported polished diamonds for which assessee had import and export orders, on the basis of which forward exchange contract were entered. Assessee incurred net loss in respect of foreign exchange in respect of import order. However the said loss is compensated 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 the value of rupee was improving at that time. The loss arose on actual receipts of sales proceeds in respect of exchange 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 bank. These conditions are that there has to be import obligation for the 19 assessee i.e. assessee should be in need of foreign exchange for making payments on account of import of goods made by it or that there had to be export bills which are pending for realization. Whenever, the forward contract is made the bank puts its endorsement behind the import order/export order & this clearly establishes the fact that the gain arising on cancellation of forward exchange contract is clearly relating to export/import of goods. Now if the contract is actually utilized i.e. if the funds are actually released then the difference in the rate of exchange will automatically go to exchange difference account and therefore on the same reasoning it is submitted that if contract is cancelled it cannot be said that gain/loss 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 Dealer's Association of India). The gain or loss arising out of foreign exchange contract is nothing but gain or loss arising in course of business contract prudently entered by the importer or exporter. So, gain or loss is result of fulfillment of conditions of contract. Rule 6 A (4) deals with the cancellation and on perusal of this rule, it can be said that the proposition canvassed by assessee holds good. Rule 6 A.4 of the FEDAI rules for cancellation holds as follows:
20i) In case of cancellation of contract at the request 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 value. This is because of the fact that the assessee was not able to meet export obligations. Assessee earned gain on account of export and loss on account of import. The 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 Officer 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 assessee, vide letter dated 13.11.2007, was appraised of t he proposal to treat the income of Rs.6,19,87,745/- earned on account of cancellation of forward contract. The assessee filed submission dated 19.12.2007 stating that assessee entered in various forward exchange contracts in order to protect against the fluctuation in the rate of foreign exchange currency. The Assessing Officer was not satisfied with assessee's 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 upon order of ITAT Ahmedabad 'C' Bench in the assessee's case for assessment year 2003-04 in ITA No.775/Ahd/2006 dated 30 t h November, 2006 (copy filed at PB-3) wherein the Tribunal even allowed deduction u/s 80 HHC on income from cancellation of forward exchange contract treating it as export profit. He has further submitted that A O has wrongly applied section 43(5) of the IT Act treating the above income as speculated income because the above provisions do not apply to forward exchange contract as the provisions apply to purchase or sale of any commodity and currency cannot be treated as commodity. However, it is not a case 22 of settlement of contract but cancellation of contract, so section 43(5) will not apply. He has relied upon order of ITAT Mumbai Bench in the case of Voltas International Ltd. Vs ACIT 126 TTJ 702 (PB-24) in which it was held loss arising out of cancellation of forward exchange contract could not be treated as speculative loss as there is no settlement of contract and section 43(5) is not attractive. 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 considered the material available on record. It is not in dispute that the assessee is doing business of import and export of diamonds and it entered into forward exchange contract in respect of import and export transactions. On cancellation of the contract assessee is either entitled to profit or loss depending on rates contracted and rates prevailing at the time of cancellation. The assessee entered into these forward exchange contracts in order to protect against the fluctuation in the rate of foreign exchange currency. 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 was a case of cancellation of forward contracts entered by assessee with others. The detailed facts explained in the statement 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 deduction u/s 80 HHC of the IT Act on income from cancellation of forward exchange contract. The learned CIT (A) in this case allowed the claim of the assessee treating it as export profit by relying upon decision of Mumbai Bench in the case of D. Kirhorekumar and Co. Vs DCIT and directed the A O to compute the deduction u/s 80 HHC by including the profit realized by cancellation of forward exchange contract in the profit of the export business. The departmental appeal 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 which it was held that the credit shown in the profit/loss account 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 t h 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 foreign 24 exchange contract being in the nature of damages for non-performance of contract is allowable as business loss and it cannot be treated as speculative loss as 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 and in the case of Voltas International Ltd. (supra), we are of the view that provisions of section 43(5) of the IT Act would not apply to the case of the assessee. The income earned by assessee on account of cancellation of forward exchange contract should be treated as business income and not income from speculation. We accordingly set aside the orders of authorities below and direct the A O to treat the income on this issue as business income. As a result, this ground of appeal of the assessee is allowed.
21. In view of the above, the appeal of the assessee is partly allowed.
22. No other point is argued or pressed.
2523. As a result, departmental appeal is dismissed and the appeal of the assessee is partly allowed.
Order pronounced in the open Court on 11-06-2010 Sd/- Sd/-
(G. D. AGARWAL) (BHAVNESH SAINI)
VICE PRESIDENT 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
ूित //True Copy//
DY.R/AR, ITAT, AHMEDABAD