TMI Blog2010 (6) TMI 771X X X X Extracts X X X X X X X X Extracts X X X X ..... de 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 ₹ 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 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 Octobe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. In this case, the bad debts were written off as per AS -4 of ICAI. Section 36(1) (vii) of the IT Act provides: The deductions provided for in the following 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the subject, the learned CIT (Appeals) has erred in confirming the action of the Assessing Officer in making addition of ₹ 77,40,640/- on account of labour charges . Regarding disallowance of ₹ 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 ₹ 250 per carat to ₹ 600 per carat. He was of the 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 ₹ 265 per carat and D. Nitin Co., which paid ₹ 160 to ₹ 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 stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abour 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and ₹ 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 utilizat ion of foreign exchange of ₹ 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 ₹ 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that assessee has booked forward contract of $28,17,16,478 which on average price of one dollar at ₹ 45/- comes to ₹ 1267.72 crores whereas assessee s turnover during the year is ₹ 160.49 crores. The assessee, vide letter dated 13.11.2007, was appraised of t he proposal to treat the income of ₹ 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 ₹ 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 30th 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 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 30th 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 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 Intern ..... X X X X Extracts X X X X X X X X Extracts X X X X
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