2010 (6) TMI 771 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition made by the AO on account of bad debts amounting to Rs. 1,24,29,262.
2. Disallowance of Rs. 77,40,640 on account of labor charges.
3. Partial confirmation of disallowance of Rs. 5,41,950 out of total disallowance of Rs. 9,82,823 on account of foreign traveling expenses.
4. Treatment of income from foreign exchange forward contract of Rs. 6,19,87,745 as speculative income.

Issue-Wise Detailed Analysis:

1. Deletion of Addition on Account of Bad Debts:
The Revenue challenged the deletion of an addition made by the AO on account of bad debts amounting to Rs. 1,24,29,262. The AO observed that the assessee claimed this amount as bad debts pertaining to M/s. Andel Jewellery Corporation, U.S.A., and the last export was cleared on 31-03-2005. The AO did not accept the assessee's contention based on Accounting Standard (AS) - 4 and held that it was not binding on Income Tax Authorities. The AO also noted that the Reserve Bank of India (RBI) directed that bad debts regarding export proceeds could not be written off before one year. The CIT (A) deleted the addition, observing that the RBI's latter circular dated 23-12-2003 allowed exporters to write off outstanding export dues not exceeding 10% of export proceeds. The CIT (A) also noted that the bad debts were written off as per AS-4 of ICAI and that mere writing off the amount in the books of accounts was sufficient as per section 36(1)(vii) of the IT Act. The Tribunal confirmed the CIT (A)'s findings, referencing the Supreme Court's decision in T.R.F. Limited Vs CIT, which held that post-1st April 1989, it is not necessary for the assessee to establish that the debt has become irrecoverable; it is enough if the bad debt is written off as irrecoverable in the accounts.

2. Disallowance of Rs. 77,40,640 on Account of Labor Charges:
The AO disallowed Rs. 77,40,640 on account of labor charges, observing that the rates paid by the assessee were higher compared to other diamond manufacturers. The AO recorded statements of some job workers who could not justify the higher rates. The CIT (A) confirmed the disallowance, following his own order for the previous assessment year, stating that the increased expenditure was not wholly and exclusively for business purposes. The Tribunal, however, found that the assessee produced all details of the expenditure and that the GP ratio was better in the assessment year under appeal compared to the previous year. The Tribunal set aside the orders of the authorities below and deleted the addition, allowing the assessee's ground of appeal.

3. Partial Confirmation of Disallowance of Rs. 5,41,950 on Account of Foreign Traveling Expenses:
The AO disallowed Rs. 5,41,950 on account of foreign traveling expenses, suspecting that the expenses were not for business purposes. The CIT (A) confirmed the disallowance, noting that the utilization of foreign exchange taken by Shri Dilip Shah was not satisfactorily explained. The Tribunal upheld the CIT (A)'s decision, finding no material to contradict the CIT (A)'s findings and dismissed this ground of appeal of the assessee.

4. Treatment of Income from Foreign Exchange Forward Contract as Speculative Income:
The AO treated the income from the cancellation of forward exchange contracts as speculative income under section 43(5) of the IT Act. The CIT (A) considered the issue academic, stating that treating the income as speculative or business income would not have any tax effect for the year under consideration. The Tribunal, however, found that the forward exchange contracts were entered into to protect against foreign exchange rate fluctuations and were related to the assessee's business of import and export of diamonds. The Tribunal referenced its own decision in the assessee's case for the previous assessment year and the decision in Voltas International Ltd. Vs ACIT, concluding that section 43(5) does not apply to forward exchange contracts. The Tribunal directed the AO to treat the income from the cancellation of forward exchange contracts as business income, allowing this ground of appeal of the assessee.

Conclusion:
The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's appeal, confirming the deletion of the addition on account of bad debts, allowing the disallowance of labor charges, upholding the partial disallowance of foreign traveling expenses, and directing the AO to treat the income from the cancellation of forward exchange contracts as business income.