Income Tax Appellate Tribunal - Ahmedabad
Bhojal Gems, Surat vs Assessee on 29 September, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL
'D' BENCH - AHMEDABAD
(BEFORE S/SHRI G. D. AGARWAL, VP AND BHAVNESH SAINI, JM)
ITA No.3840/Ahd/2008
A. Y.: 2005-06
M/s. Bhojal Gems, Vs The A. C. I. T., Circle-9,
11-12, Green Park Society, Aayakar Bhavan, Room No.423,
B/h Tapsheel Society, Nr. New Civil Hospital,
Varachha Road, Surat Majura Gate, Surat
PA No. AACFB 6118 Q
(Appellant) (Respondent)
ITA No.4007/Ahd/2008
A.Y.: 2005-06
The A. C. I. T., Circle-9, Vs M/s. Bhojal Gems,
Aayakar Bhavan, Room No.423, 11-12, Green Park Society,
Nr. New Civil Hospital, B/h Tapsheel Society,
Majura Gate, Surat Varachha Road, Surat
PA No. AACFB 6118 Q
(Appellant) (Respondent)
Assessee by Shri R. N. VEpari, AR
Department by Shri H. P. Meena, Sr. DR
ORDER
PER BHAVNESH SAINI: Both the cross appeals are directed against the order of the learned CIT(A)-V, Surat dated 29-09-2008 for assessment year 2005-06.
2. We have heard the learned representatives of both the parties, perused the findings of the authorities below and have gone through ITA No.3840 and 4007/Ahd/2008 2 M/s. Bhojal Gems, Surat the materials available on record. Both the cross appeals are decided as under.
ITA No.3840/Ahd/2008 (Assessee's appeal)3. The assessee in its appeal challenged the addition of Rs.68,63,289/- on account of undisclosed and suppressed yield. The facts of the case are that the assessee is a trader, manufacturer, importer and exporter of diamonds. During the relevant accounting year the appellant has shown the gross profit of Rs.2,97,81,998/- i.e., @ 9.89% on total turnover of Rs.30,11,32,688/- as compared to the G.P of Rs.2,94,39,323/- i.e., @ 10.97% on -total turnover of Rs.26,83,43,460/-. The modus operandi of the business as discussed by the AO in Para 5 is like this. The assessee used to import rough diamonds in lots the price of each lot depends upon the quality of rough diamonds contained in the lot. Thereafter, the assessee segregated the rough diamonds in two parts i.e., the rough diamonds from which the polished diamonds can be made and others from which no polished diamonds or diamonds of lower quality can be made. The segregated rough diamonds are given to the labourers in packets for further processing cleaving and polishing. Normally, the quantity of rough diamonds ranges from 1 to 50. The AO was of the view that for a prudent business man it becomes necessary to have a record for both the quantities in terms of carat as well as quality of rough diamonds given to each labourers. The laborers/ contractors return the polished diamonds along with the residual to the assessee. The assessee after segregating them quality wise, fix the sale price. The AO was, therefore, of the view that the assessee was in full ITA No.3840 and 4007/Ahd/2008 3 M/s. Bhojal Gems, Surat knowledge of the quality of each and every diamond manufactured out of rough diamond. It was also stated by the AO that value of polished diamond varies from Rs.1000/- per carat to Rs.1,00,000/- per carat, or even more. In Para 6 of the assessment order, the AO has mentioned the yield, G.P and N.P which is reproduced as under:
AY Avg.cost Avg.Cost Labour Yield make- Yield G.P.% N.P. or Of Exp. Per able rough On gross % rough polished carat rough purchase/ diamonds CT sale/CT 2002-03 617.80 10202.07 300 27.58 8.88 13.68 5.94 2003-04 1130.74 9957.03 300 30.44 13.51 11.31 4.47 2004-05 1162.79 9430.94 300 28.23 13.24 10.98 3.99 2005-06 1327.87 9657.49 300 27.67 12.78 9.93 1.94 The AO has observed that from the analysis of the above tabular information it is clear that even though the assessee was using the same kind of rough diamond as in the earlier years i. e, AY 2004-05, the yield percentage is low. In case of yield of makeable rough diamond and yield of gross rough diamonds the AO has cited the comparable cases of R. Mitesh Kumar & Co. and Paladiya Exports, Jay Impex, which are showing yield of nearly 30%. The AO has stated that the assessee was using modern equipment like laser machine and planning system and diamond powder imported from china, and therefore; the assessee should get more yield from the rough diamonds. The AO has given show cause notice to the assessee. In reply to the show cause notice the assessee has stated that it was maintaining complete quantity tally. Lot wise details of ITA No.3840 and 4007/Ahd/2008 4 M/s. Bhojal Gems, Surat production were already on record showing details of lot issued, polished diamonds received etc. Further the yield of each lot varies from 24.99% to 38.94%. It was further stated by the assessee that yield of lot depends on artisan or the labourers and it could not be said that it remains the same as shown in the previous years. The yield also depends upon the quality of rough diamonds and the price of rough diamonds in the International Market. The assessee contended that it is not possible to maintain same percentage of yield. As per Para 6.1 of the Assessment Order the AO has noticed that even though the assessee has purchased the rough diamond of good quality i.e., at average cost of Rs.1200/- and above. The yield is 27.67% only on makeble rough diamonds which is significantly lower than the yield obtained by other similar concerns. Besides, the wastage percentage from the gross rough diamond is also higher.
The AO came to the conclusion that the assessee was not representing the complete yield in his books of accounts. The contention of the assessee that diamonds are not machine made hence different people did not get the same yield, was also not accepted by the AO. According to him more than 50% of production is through machines only and person skill involves along with machine operation and assessee was not new to this job and has established infrastructure and karigars. The AO has also asked for the explanation for fall in G.P. In this connection the assessee has replied that there is increase, in cost of production 8.54% as compared to previous year but the realization per carat increased only to the extent of 2.40%. There was increase in the expenses to the extent of 4.53%. The assessee has given further reasons that the ITA No.3840 and 4007/Ahd/2008 5 M/s. Bhojal Gems, Surat value of Rupee was increased in FY 2004-05 against the US Dollar. The marginal fell of about 1% is a normal phenomenon. As per Para 7.1 of the Assessment Order the AO has observed that, the assessee's argument is regard the appreciation of the value of Rupee against US dollar is not acceptable as it affects both the exports and imports equally. In this Para the AO has worked out the difference in yield shown by assessee at 1% from 64850.53 carats which comes to 648.50 carats. The AO has also worked out the cost per carat of polished diamond manufactured which comes to Rs.10583.33. The total cost of suppressed yield of 648.50 carats @Rs. 10583.33 comes to Rs.68,63,289/- which is added by the Assessing Officer.
4. The learned CIT(A) considering the submission of the assessee before AO confirmed the addition and dismissed the appeal of the assessee. His findings are reproduced as under:
"I have gone through the assessment Order and also the submissions of the appellant incorporated by the AO in his order. From the chart given in para 6 of the Assessment Order it is seen that not only the yield on makeable rough diamonds and yield on gross rough diamonds is also increased, there is also fall in G.P by 1.05% compared to the earlier assessment year i.e AY 2004-05 The average of the G.P for the last three years from the AY 2002-03 to AY 2004-05 comes to 11.99%. Therefore the G.P shown in AY 2005-06 is 2.06% less as compared to the average gross profit of earlier years. It is also seen from the chart that there is fall in N.P by 1.15% as compared to AY 2004-05. If we take the average of earlier three year i.e. from the AY 2002-03 to AY 2004-05 comes to 4.5%. The appellant has shown net profit @ 1.94% only, which is less by 2.56% as compared to the N.P. of earlier years. If we take the average net profit" of ITA No.3840 and 4007/Ahd/2008 6 M/s. Bhojal Gems, Surat earlier three years and work out the net profit of AY 2005- 06 the addition on account of low net profit at 2.56% on total turnover of Rs. 301132688, it comes to Rs. 7708996/-. I find that, the AO has meticulously worked out the cost per carat of polished diamond manufactured at Rs. 10583.33. The difference in yield as worked out by the AO is 648.50 carat. I have gone through the submissions made by the appellant before the AO and there is not much force in it Even if some weightage is given to the increased expenses as discussed by the AO in para 7.1 of the Assessment Order I am of the view that the addition made by the AO at Rs.68,63,289/-- on account of low yield is justified as compared to the fall in N.P at Rs. 7708996/- keeping in view the results of earlier three years. Considering the facts of the case I hold that the AO has rightly rejected the book results and therefore the addition of Rs.68,63,289/- made by the AO on account of low yield giving cogent reasons is confirmed."
5. On consideration of the rival submissions, we are of the view that the matter requires reconsideration at the level of the learned CIT(A). The learned Counsel for the assessee during the course of arguments pointed out that the entire work was done by the assessee on job charges and that every item is supported by bills and vouchers. He has referred to PB-8 and 9 to show the names and addresses of the contractors with their PAN to show the quantity of rough diamonds issued in carats, rough diamonds rejection received in carats, polished diamonds in carats, job charges paid and the mode of payment. He has submitted that all the rough diamonds polished through the labourers and genuine payments have been made and complete details are maintained with regard to rough diamonds issued and the production copy of which is filed at PB-10 to ITA No.3840 and 4007/Ahd/2008 7 M/s. Bhojal Gems, Surat 12 of the paper book. He has also referred to PB-13 onwards which are the details of the labour payments and TDS deducted on making payments to them. Complete details are also filed to show the statement showing manufacture of polished diamonds of each lot (PB-16 onwards). PB-20 is the quantitative details of rough diamonds, manufactured diamonds and rejection of diamonds. The learned Counsel for the assessee, therefore, submitted that the assessee maintained complete details and no specific defects have been pointed out in the maintenance of books of accounts. Therefore, the authorities below should not have made the addition. The learned DR however, relied upon the orders of the authorities below and submitted that not only yield is low, but GP and NP rate is also low in the assessment year under appeal as compared to earlier years, therefore, the addition is justified.
5.1 On consideration of the facts in the light of the submissions of the parties, it is clear that though the assessee maintained certain details with regard to the rough diamonds and the production and quantitative details are also maintained along with labour payments made on which TDS was deducted, but the assessee choose not to appear before the learned CIT(A) despite several adjournments, nothing was brought to the notice of the learned CIT(A) for interference in the matter. It would, therefore, show that the details now filed in the paper book and pointed out during the course of arguments before the Tribunal, were not filed or discussed before the learned CIT(A). The details filed in the paper book may support the claim of the assessee that in the absence of any specific defects the ITA No.3840 and 4007/Ahd/2008 8 M/s. Bhojal Gems, Surat addition may not be justified but the assessee shall have to prove its case before the first appellate authority on the basis of the evidences and material available with it. The assessee however, did not appear before the learned CIT(A) despite having complete details available with it on the matter in issue. Therefore, interest of justice requires that the assessee may be given one more opportunity to explain the above issue before the learned CIT(A). Considering the details filed in the paper book and pointed out during the course of arguments, we find it reasonable and appropriate to restore this issue to the file of the learned CIT(A) for reconsideration. We accordingly, set aside the order of the learned CIT(A) and restore this issue to his filed with direction to re-decide this issue by giving reasonable sufficient opportunity of being heard to the assessee. The assessee is directed to cooperate with the learned CIT(A) and shall furnish complete details before the learned CIT(A) for proper adjudication of the matter in issue. In case, the assessee shall not cooperate with the learned CIT(A), he is free to pass appropriate order in accordance with law.
6. In the result, the appeal of the assessee is allowed for statistical purposes.
ITA No. 4007/Ahd/2008(Departmental appeal)7. The revenue has challenged the order of the learned CIT(A) in treating the loss of Rs.15,39,137/- as business loss as against speculation loss treated by the AO. The AO disallowed forward contract cancellation loss of Rs.15,39,137/-. The assessee has deducted Rs.15,39,137/- under the head "interest and financial ITA No.3840 and 4007/Ahd/2008 9 M/s. Bhojal Gems, Surat charges" the assessing officer has given show cause notice treating that why the cancellation loss on forward contract should not be considered as speculation loss u/s 43(5) of the I.T. Act. In reply to the show cause notice the appellant has replied that, the forward contract wherever cancelled were exclusively to hedge the sundry debtors and impact of fluctuation of business. It has entered all forward contracts with an aim to manage the risk of exchange fluctuation. It was further contented that all the forward contracts entered by the assessee were with banks, which have granted various facilities pertained to a specific period and, if realization of debtors are not flowing that span they will stand cancelled and the incidental losses and gains have occurred. The contracts were for the specific period and specified quantum and for the debtors that would be existent and realizable at that point of time. There was no element of margin money. Before the AO, in short the assessee had vehemently argued that the transactions were hedging transactions and not the speculative transactions. The AO has considered the arguments of the assessee in Para 8.1 page 9 of the Assessment Order. The AO has also reproduced the provisions of section 43(5) of the I.T. Act, which has discussed the meaning of speculative transaction in detail. The AO has not accepted the assessee's contention as the assessee has made a speculation to protect itself from price fluctuation that happens due to increase and decrease in dollar price, but the assessee has not completed the said contract and in between in anticipation of loss he has cancelled the contract. The AO has further stated that the objective of making forward contract itself is getting defeated here. The AO is also of the view that, as in section 43(5) (a) ITA No.3840 and 4007/Ahd/2008 10 M/s. Bhojal Gems, Surat of the IT Act, if the assessee has taken for actual delivery of goods manufactured and completed the contract, that does not fall under speculative transaction. He has therefore, held that, in view of the cancellation of Forward Contract done by the assessee prematurely was a speculation loss and cannot be considered as business loss. The AO therefore considered the loss of Rs.15,39,137/- as a speculation loss and disallowed the same as business loss and added to the income of the assessee.
8. The learned CIT(A) considering the submissions of the assessee deleted the addition. His findings are reproduced as under:
"I have gone through the Assessment order carefully and I have also gone through submissions made before the AO (as reproduced by the AO in the Assessment Order). The speculative transaction is very well defined in 43(5) of the I.T. Act. The appellant's main force in his contention is that the forward contract transactions entered into by it are the hedging transactions which are not covered in the definition of the speculative transaction and therefore it is a business loss. Before me nobody has appeared nor have any submissions been filed. However since the undersigned has had an opportunity of adjudicate this issue in similarly placed cases with identical facts, my decision on this issue as below.
The contracts entered into by assessee are in the nature of 'hedging transactions' as the same are entered into to safeguard the business interest against fluctuation in rate of foreign exchange. It is understood that assessee is allowed to book forward exchange contracts only on satisfaction of certain conditions laid down by RBI in this regard. The main condition is that forward contracts can be booked on the basis of an exposure based on past performance up to the average of the previous 3 financial ITA No.3840 and 4007/Ahd/2008 11 M/s. Bhojal Gems, Surat years actual import / export turnover or the previous years actual import/export turnover, whichever- is higher. The booking of forward contract is thereafter allowed on various other conditions & it is therefore contended that banks will allow assessee to enter in to forward contracts only if it is satisfied about the genuineness of requirement of assessee. It is therefore dear that bank (authorized dealer) will not show assessee to book forward contracts for speculation purpose.
Trading in foreign currency is permitted with banks. However where an assessee enters into a forward contract with banks in foreign exchange, when he is not a dealer in foreign exchange, but does so in order to hedge against loss in respect of his export business of some other item, such loss can not be treated as loss from speculation, so as to be disallowed as held in CIT v/s. Badridas Gauridu (P) Ltd (2003) 261 FTR 256 (Bom) following CIT v. Soorajmull Nagarrnull (129) ITR 169 (CAL).
Further I have also gone through the rules framed by RB in this regard Forward contracts are allowed to be booked only upon satisfaction of various conditions. The perusal or rules framed in this regard clearly reveals that bank (authorized Dealer) will allow assessee to book forward contracts only after it is satisfied relating to genuine requirements of assessee. As such it cannot be said that assessee has entered into forward contracts with a view to do speculative activity. In the instant case, the contracts were required to be cancelled as the same cannot be used within the specified time limit whenever assessee enters into forward contract, the bank prescribes specific time limit within which the utilization should take place otherwise on the maturity date the contract is treated as cancelled. Rule 6 of FEDAI rules deals with the cancellation of contract & as per the same, the contracts have been cancelled at the spot T.T. selling rate/buying rate as the case may be. As regards ITA No.3840 and 4007/Ahd/2008 12 M/s. Bhojal Gems, Surat reference to section 43(5) of the Act, I am of the-opinion that the impugned cancellation of contract does not get covered by this section as contracts are entered very much in the normal course business & is very much in the nature of 'hedging transaction'. Accordingly, loss arising on cancellation of forward exchange contract is allowed as 'Business Loss' & hence, this ground of appeal is allowed."
9. On consideration of the rival submissions we do not find any merit in the departmental appeal. The learned DR submitted that it was pre-mature cancellation of the contract; therefore, it was speculative in nature. The learned DR referred to the statement of fact and submitted that speculative loss attributable to the assessee, therefore, the learned CIT(A) should not have deleted the addition. On the other hand, the learned Counsel for the assessee reiterated the submissions made before the authorities below and submitted that the transaction was business transaction which was entered into to safeguard the business interest against fluctuation in rate of foreign exchange. He has submitted that the case of the assessee falls in the proviso to section 43(5) of the IT Act because the forward contract transaction entered into by the assessee are the hedging transactions. The details are filed at PB-33 to 38 of the paper book which are supported by evidences. The learned Counsel for the assessee also demonstrated that speculation in foreign currency would not be allowed by the bank and that amount is paid to the bank, therefore, it was a genuine business transaction. The learned Counsel for the assessee relied upon the decision of the Hon'ble Bombay High Court in the case of CIT Vs Badridas Gauridu (P) Ltd. 261 ITR 256 in which it was held that "The assessee was an ITA No.3840 and 4007/Ahd/2008 13 M/s. Bhojal Gems, Surat exporter of cotton. The assessee had entered into forward contracts with the banks in respect of foreign exchange. Some of these contracts could not be honoured by the assessee for which it had to pay Rs.13.50 lakhs, which was debited to the profit and loss account. The assessee claimed the same as business loss. The Assessing Officer held that the loss was not deductible as a business loss as it was incurred in a speculative transaction. The Tribunal held that it was a business loss. On further appeal to the High Court:
Held, dismissing the appeal, that the assessee was not a dealer in foreign exchange. The assessee was an exporter of cotton. In order to hedge against losses, the assessee had booked foreign exchange in the forward market with the bank. However, the export contracts entered into by the assessee for export of cotton in some cases failed. In the circumstances, the assessee was entitled to claim deduction in respect of Rs.13.50 lakhs as a business loss." He has also relied upon the decision of the Hon'ble Calcutta High Court in the case of CIT Vs Soorajmull Nagarmull 129 ITR 169 in which it was held that "Held, (i) that the assessee was not a dealer in foreign exchange. Foreign exchange contracts were only incidental to the assessee's regular course of business. The AAC had made a categorical finding to this effect which had been upheld by the Tribunal. The loss was not a speculative loss but was incidental to the assessee's business and allowable as such."ITA No.3840 and 4007/Ahd/2008 14
M/s. Bhojal Gems, Surat 9.1 Considering the facts of the case in the light of the above decisions, we do not find any infirmity in the order of the learned CIT(A) in deleting the addition. The learned CIT(A) on proper appreciation of the facts and material on record rightly noted that the case of the assessee falls in the proviso to section 43(5) of the IT Act because the forward contract entered into by the assessee was hedging transaction and would not be covered by the definition of speculative transaction. The assessee entered into the transaction to safeguard the business interest against fluctuation in rates of foreign exchange. Nothing is brought on record if the assessee has violated any norms issued by Reserve Bank of India. The learned CIT(A), therefore, rightly held that the bank being authorized dealer will not allow the assessee to book forward contracts for speculation purposes. The learned Counsel for the assessee also filed the details of names of the bank of the forward contract to show cancellation date and the gain/loss which support the findings of the learned CIT(A) that assessee's transaction through bank was a genuine business transaction , therefore, loss shall have to be allowed in the case of the assessee. Considering the facts and circumstances and the finding of the learned CIT(A) in the light of the decisions of the Hon'ble Bombay High Court and the Hon'ble Calcutta High Court (supra), we do not find any merit in the departmental appeal on this issue. We confirm the findings of the learned CIT(A) and dismiss the departmental appeal.
10. In the result, the departmental appeal is dismissed.ITA No.3840 and 4007/Ahd/2008 15
M/s. Bhojal Gems, Surat
11. In the result, the appeal of the assessee is allowed for statistical purposes and the departmental appeal is dismissed.
Order pronounced in the open Court on 20-05-2011 Sd/- Sd/-
(G. D. AGARWAL) (BHAVNESH SAINI)
VICE PRESIDENT JUDICIAL MEMBER
Date : 20-05-2011
Lakshmikant/-
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT, Ahmedabad
6. Guard File
BY ORDER
Dy. Registrar, ITAT, Ahmedabad