TMI Blog2021 (12) TMI 302X X X X Extracts X X X X X X X X Extracts X X X X ..... duced by the assessee before him, no disallowance of expenses could be made on adhoc basis by placing reliance on various decisions of the Tribunals, he deleted the adhoc disallowance made by the ld. AO. We hold that the ld. CIT(A)had rightly adjudicated the issue in dispute before us. The ld. AO had not rejected the books of accounts of the assessee or the various documents produced by the assessee before him by pointing out defects. The ld. CIT(A) has also categorically recorded a finding that entire details of miscellaneous expenditure has been filed by the assessee alongwith sample invoices, which fact has not been controverted by the Revenue before us. In view of the same, the adhoc disallowance made by the ld. AO has been rightly deleted by the ld. CIT(A). Disallowance made u/s.14A - assessee had made suo-moto disallowance of expenses - CIT-A deleted the addition - HELD THAT:- The law is now very well settled by this Hon ble Supreme Court in the case of Maxopp Investments [ 2018 (3) TMI 805 - SUPREME COURT] that disallowance u/s.14A of the Act cannot exceed the exempt income. Hence, we do not find any infirmity in the order of the ld. CIT(A) in this regard. Addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of deficit of 10.7 carats. Hence, we direct the ld. AO to make an addition for 10.7 carats by applying the respective rates applicable for rough rejections and rough diamonds as the case may be, as mentioned in the Government Valuation report. This in our considered opinion, would meet the ends of justice. Accordingly, the ground No.2 raised by the assessee for A.Y.2012-13 is partly allowed. - ITA No. 127, 128, 129 And 130/Mum/2021, ITA No.1982/Mum/2020 - - - Dated:- 29-11-2021 - Shri M.Balaganesh, Accountant Member And Shri Pavan Kumar Gadale, Judicial Member For the Revenue : Shri Mahesh Akhade For the Assessee : Shri Vijay Mehta ORDER PER BENCH: These appeals in ITA Nos.127/Mum/2021 to 130/Mum/2021 1982/Mum/2020 for A.Yrs. 2009-10 to 2012-13 arise out of the order by the ld. Commissioner of Income Tax (Appeals)-48, Mumbai in appeal Nos.CIT(A)-48/IT.118/14-15, CIT(A)-48/IT.119/14-15, CIT(A)-48/IT.117/14-15, CIT(A)-48/IT.120/14-15 dated 15/09/2020, 18/09/2020 respectively (ld. CIT(A) in short) against the order of assessment passed u/s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 30/03/2014 by the ld. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y through import from various countries, manufacturing of rough diamonds into polished diamonds and sell polished diamonds mainly by way of exports to various countries. 5. At the outset, we find that both the parties mutually agreed that the ground Nos. 1-4 are covered in favour of the assessee by the order of this Tribunal in assessee s own case for A.Y.2004-05 and A.Y.2008-09 in ITA No.7319 and 7449/Mum/2011 respectively dated 25/07/2016. The ld. AR also stated that the ld. AO for the years under consideration had copied verbatim the assessment order of A.Y.2008-09 and that since the disallowance made in A.Y.2008-09 has been deleted by this Tribunal vide order dated 25/07/2016, the ground Nos.1-4 of the Revenue deserves to be dismissed. In view of this, we are inclined to reproduce the order passed by this Tribunal for A.Y.2008-09 as under:- The aforesaid cross appeals have been filed by the revenue as well as by the assessee against the impugned order dated 25.08.2011 passed by CIT (Appeals)-9, Mumbai for the quantum of assessment passed under section 143(3), for the assessment years 2008-09. 2. We will take-up assessee's appeal wherein the assessee has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n investment and income yielding products, disallowance under section 14A has to be made. Accordingly, he worked out the disallowance of interest at ₹ 14,000,41/- as per the working given at page 4 of his order. With regard to indirect expenses, he calculated the disallowance of 0.5% of the average value of investments which worked out to ₹ 11,85,278/-. Accordingly, the disallowance u/s. 14A aggregated to ₹ 25,83,318/-. 4. The Ld. CIT (A) confirmed the said disallowance by holding that, now in view of the decision of Hon'ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd, the disallowance has to be made under Rule 8D. Thus, he dismissed the assessee's ground on this point. 5. Before us, the Ld. Counsel Shri Vijay Mehta, submitted that assessee has own surplus funds of more than ₹ 190 crores and substantial interest free borrowings from the directors, which far exceeded the investment made by the assessee. Hence, no disallowance of interest should be made in the light of the decision of CIT v. Reliance Utilities Power Ltd. [2009] 313 ITR 340/178 Taxman 135 (Bom.) and CIT v. HDFC Bank [2014] 366 ITR 505/226 Taxman 132 (Mag.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of indirect expenditure, under Rule 8D(2)(iii), by taking 0.5% of the average value of investments, the contention of the assessee before us is twofold, firstly, most of the investments have been made in the subsidiary and associated companies as a strategic investment and, therefore, same should not be the part of working of the disallowance while taking the average value of investments and; secondly, the investment which has not yielded income during the year should not be included for the purpose of disallowance under Rule 8D(2)(iii). So far as contention that, assessee has made strategic investment by way of business necessity in the case of associated and subsidiary companies, we agree with the contention of the Ld. Counsel that, same should not be part of the investment for the purpose of disallowance, because the said investment cannot be said to be made for the purpose of earning the exempt income but for business and strategic compulsions which falls within the realm of 'business purpose' and this view has been upheld by the Tribunal in various decisions including that of Hon'ble Delhi High Court in the case of Cheminvest Ltd. v. CIT [2015] 378 ITR 33/234 Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of import/export/working capital borrowings in US$: ₹ 23,04,89,420/- (b) Loss on account of foreign currency forward/option hedging contract : ₹ 49,23,23,597/- Net Loss: ₹ 26,18,34,176/- AO further noted that, this loss of ₹ 49,23,23,597/- is actually suffered by the assessee on account of its forward and option contract any foreign currency which are not deliverables at first place. He further noted that, no break-up of currency forward/option contract, however, it is given by the assessee but he admitted that majority of the contracts on which this loss was suffered is of forward and option contracts . The contract-wise details of the loss as furnished by the assessee have been incorporated by the AO form pages 7 to 17 of the assessment order. After analyzing the provision of section 43(5), the AO considered the loss incurred by the assessee on foreign exchange derivative transaction as speculation loss primarily on the following grounds:- a. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions are executed in foreign currency. It also meets its working capital needs by way of borrowings in foreign currency. Thus, assessee is exposed to risks arising out of fluctuations in foreign currency exposure. In view of the regulatory guidelines and on the facts of the case he observed that the foreign currency forward/option transactions entered into by the Assessee in order to mitigate the risks form an integral and inseparable part of its diamond business and is not a separate and distinct business by itself. b. Assessing Officer himself admitted that it is not the Department's case that transactions entered by the Assessee are not legal. Assessee has entered into derivative contracts permitted as per norms mentioned in Master Circular and other guidelines of the Reserve Bank of India. c. RBI allows business entitles to manage their foreign exchange exposure by undertaking derivative products offered by Authorized Dealers for hedging group of assets and liabilities, e.g. export receivables, payments for imports, borrowings in foreign currency f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to hedge against the risk of currency fluctuation for its imports and exports. This issue had also come-up for consideration before the Tribunal in assessee's own case in the AYs 2001-02 to 2004-05, wherein Tribunal has decided this issue in favour, which now has been affirmed by the Hon'ble Bombay High Court also vide order dated 17.01.2011, following the decision of Bombay High Court in the case of CIT v. BadridasGauridu (P.) Ltd. [2003] 261 ITR 256/[2004] 134 Taxman 376. He further submitted that, transactions are carried out as per the Foreign Management Act, 1999 as well as circular issued by the RBI. So far as allegation of the AO that, break-up of option and contracts and position on date of contract and cancellation has not been provided, he submitted that it is not correct observation, because the complete details were furnished which is evident from para 1.7 page 24 of the assessment order itself, wherein, he has incorporated the reply of the assessee highlighting furnishing of details of transactions. The position of exposure on respective dates were also given before the AO vide letter dated 14.12.2010. In any case, the same where produced before the Ld. CIT (A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ency loan from the bankers. Thus, the assessee's receipts and payments are in the form of foreign currency and hence it is integral and inseparable part of its business. In this process, the assessee is not only exposed to the risk of adverse price movements in the goods it deals in, but also wide fluctuations in foreign exchange rates in international markets having major impact on its revenue, receivables and payables. It is clearly evident that, due to large import and export of diamonds, which is the main business activity of the assessee, it is exposed to high risk of foreign exchange gain or loss which is arising only because of the said business only. In other words, all its receipts, payments, receivables and payables are in foreign currency which is inseparable and inextricably linked with the diamond business carried out by the assessee and, therefore, risk associated with the fluctuation of foreign currency also forms part and parcel of same business. To mitigate the foreign currency loss, RBI introduced the regulations so that exporters and importers can hedge the same through authorized dealers, mostly Banks. The assessee had entered into hedging transaction throug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange during the forward contract with the banks for the export would be business transaction and for the business purpose only and will not be in the category of speculation u/s. 43(5). In the said case, the Hon'ble Tribunal after detailed discussion and relying upon various case laws, held that foreign exchange loss in the course of the business occurred due to hedging transactions through advance is nothing but business gain or loss. Accordingly, in view of the myriad precedence, we also hold that, here in this case the foreign exchange loss of ₹ 49,23,23,597/- is nothing but business loss which needs to be allowed. 16. So far as the CIT (A)'s contention that assessee has been unable to substantiate the underlying exposure of derivative contracts to the tune of ₹ 8,23,26,649/- and, therefore, it should be substantiated, the assessee before us, has contended that in any genuine hedging transaction where there is huge volume of purchase exposure and sales exposure, the hedging transaction keeps on fluctuating. The Ld. CIT (A) has upheld the disallowance keeping in mind the fact that in any particular month the hedging transactions were higher than foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtly allowed and that of the revenue stands dismissed. 5.1. We find that the ld. CIT(A) had followed the aforesaid Tribunal order and granted relief to the assessee. Since the facts for the year under consideration with regard to this issue of disallowance of forward contract loss are exactly identical to the facts prevailing in A.Y.2008-09, the decision rendered hereinabove by this Tribunal for A.Y.2008-09 shall apply mutatis mutandis to the years under consideration also. Accordingly, the ground Nos. 1-4 raised by the Revenue are dismissed for A.Y.2009-10, 2010-11, 2011-12 and 2012-13. 6. The ground No. 5 raised by the Revenue for A.Y.2009-10 is challenging the action of the ld. CIT(A) deleting the adhoc disallowance of miscellaneous expenses @15% made by the ld. AO. 6.1. We have heard rival submissions and perused the materials available on record. We find that the ld. AO observed that the ld. AO observed that assessee has incurred miscellaneous expenses of ₹ 61,29,186/- during the A.Y.2009-10. Out of the same, the assessee had suo-moto disallowed a sum of ₹ 10,27,563/- in the computation of income and claimed the balance amount as deduction. The ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ery well settled by this Hon ble Supreme Court in the case of Maxopp Investments reported in 402 ITR 640 that disallowance u/s.14A of the Act cannot exceed the exempt income. Hence, we do not find any infirmity in the order of the ld. CIT(A) in this regard. Accordingly, the ground No.6 raised by the Revenue for A.Y.2011-12 is dismissed. 10. In the result, all the appeals of the Revenue are dismissed. ITA No.1982/Mum/2020 Assessee Appeal (A.Y.2012-13) 11. The first issue to be decided in this appeal is as to whether the ld. CIT(A) was justified in confirming the addition of ₹ 11,63,054/- made u/s.69A of the Act in respect of difference between book stock and physical stock of polished diamonds in the facts and circumstances of the instant case. 12. We have heard rival submissions and perused the materials available on record. As stated earlier, the assessee is engaged in the business of manufacturing and trading of rough and polished diamonds. A search and seizure action u/s.132(1) of the Act was carried out in the case of the assessee on 08/08/2011. At the office premises at Pancharatna Opera House stock of cut and polished diamonds found physically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gument of the ld. AO could be accepted when there is excess stock found physically either at the time of search / survey wherein the purchases of excess physical stock found need to be explained. In the instant case, since, there was only shortage of physical stock to the extent of 48.94 carats, we hold that only profit element embedded in said sale transaction could be brought to tax. In this regard we find that the ld. AR placed reliance on the Co-ordinate Bench decision of this Tribunal in the case of sister concern of the assessee in UNI Design Jewellery Pvt. Ltd., vs DCIT, Central Circle-9 in ITA No.2578/Mum/2018 dated 30/12/2019 for A.Y. 2012-13, wherein this Tribunal had also under similar facts and circumstances pursuant to the same search action on 08/08/2011 had held that only the profit element need to be brought to tax. Hence, we direct the ld. AO to compute the gross profit portion on the said sale and tax the assessee accordingly. Accordingly, the ground No.1 raised by the assessee for A.Y.2012-13 is partly allowed. 13. The ground No.2 raised by the assessee is challenging the action of the ld. CIT(A) in confirming the addition of ₹ 5,96,192/- made by the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.8.2011 asAnnexure-1. In this regard, please find enclosed: a) A copy of the stock report submitted during the course of search proceedings and which also forms part of the seized documents, reflecting the book stock-of Rough Rejection at 113,179.05 carats at the office of the at 23A, Geeta Co-op. Society, Gamdevi, Mumbai-400 007. A of the same is enclosed as Annexure-2. (Pg.Nq.107 of Annexure A-Pages 1 to 115 seized from Geeta Co. Op Society office 5th Floor on 09.08.2011) b) A copy of the valuation report issued by the Government Approved Valuer GMJain dated 08.08.2011 in respect of the physical stock inventorised at the at the office of the assessee at 23A, Geeta Co-op Society, Gamdevi, Mumbai-400 007, reflecting the stock of Rough Rejections at 1 13, 349.82 carats as Annexure-3. Please refer to Serial Nos. 76 to 80 and also the summary of the said valuation report. The difference had arisen on account of the following:- a) Stock of third party i.e. M/s.Neelam Exports received by the assessee weighing J69.45 carats which included in the physical stock of Hough Rejection inventorised by the Valuer during the course of search proceedings, howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith: a) A copy of the valuation report issued by the Government Approved Valuer Mr. G.M.Jain dated 08.08.2011 in respect of the physical stock inventorised at the office of the assessee at 23A, Geeta Co-op. Society, Gamdevi, Mumbai-400 007, reflecting the stock of Rough Diamonds at 1,35,400.17 carats as . Annexure~3 7, Please refer to Serial Nos. I to 72 and also the summary of the said valuation report. b) A copy of the stock report submitted during the course of search proceedings and which also forms part of the seized documents, reflecting the book stock of Rough Rejection at 1,18,918.38 carats (i.e. 2,23,440.95 as reduced by 1,04,522.57 carats) at the office of the assessee at Navsari (Refer Annexure-9). This document was seized from the Navsari Office as Pg No. I of Annexure-S5, Thus the total physical stock as per valuation done as on 08/08/2011 was 2,54,318.45 (Geeta 135,400.17 + Navsari 1.18,918.38) The difference had arisen on account of the following: - a) Stock of Rough Diamonds issued to various Karigars for processing from Mumbai and the Navsari Office. In this regard, please find enclosed copy of . the documents evidencing the issue of R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gation wing. The ld. AO observed that the copy of Jangad of M/s. Neelam Exports was not found at the time of search on 08/08/2011 and the same was not stated at the time of search by the assessee, hence, he observed that certain stocks belonging to a third party appears to be an afterthought which was used only to explain the stock difference. We find that the ld. AO in para 16 of his order had also recorded the fact that summons u/s.131 of the Act was issued in the name of M/s. Neelam Exports during the course of assessment proceedings on 07/03/2014, the proprietor of M/s. Neelam Exports attended and furnished requisite details alongwith written submissions. A statement was also recorded from him wherein it was confirmed that 169.45 carats of diamonds was sent back to the assessee by M/s. Neelam Exports on 04/08/2011. This stands as a clinching evidence to accept the explanation offered by the assessee both before the search party as well as before the ld. AO during the course of assessment proceedings that stock to the tune of 169.45 carats represent diamonds received from M/s. Neelam Exports by the assessee which was included only in the physical stock, but not in the book stock ..... X X X X Extracts X X X X X X X X Extracts X X X X
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