2014 (7) TMI 853 - AT - Income Tax

Claims of Exemption u/s 10A - Transfer of stock Held that - FIFO method has to be applied - the profits for the under valuation is required to be disallowed CIT (A) observed that the assessee followed the FIFO method on the transfer of 200kgs of gold bars is fair and reasonable and it does not call for any interference - considering the low value plant and machinery worth of only ₹ 16 lakhs, the extent of the electricity consumption noted in the books of accounts, in the absence of any adverse material in possession of the revenue to conclusively prove about the absence of manufacturing activity of medallions, presence of documents to support of fact of export activity of the medallions, the argument of the revenue cannot be accepted that the assessee has not manufactured the medallions - there is need for denying the exemption to the extent of ₹ 3,12,71,400 - Regarding the allowing of exemption in respect of the profits attributable to the export of the 109 kgs of the gold medallions, the same needs to be disallowed for want of discharge of onus by the assessee - this part of the disallowance is no way connected to the absence/doubting of manufacturing activity of making of medallions - AO is directed to quantify the proportionate disallowance after granting opportunity of being heard to the assessee Decided partly in favour of Assessee. Addition u/s 68/69C Transfer of funds - Held that - The documents filed are not adequate enough to hold that the assessee has discharged the onus successfully - there is adequate cash balance in the books of the branches and the cash payments are actually made towards the customs duty, the onus is strictly on the assessee to demonstrate the transportation of cash physically by road from all the outstations - the assessee does not have appropriate or convincing answers - it is not only the distance factor that the assessee failed to explain but also the other logical issues relating to mode and method of transportation of cash physically across the interstate borders - the order of the CIT (A) is fair and reasonable and it does not call for any interference Decided against Assessee. Addition u/s 68 Amount received from debtors Held that - Mr. desai furnished promised information in the tapals to the AO - AO has in fact did not doubt the identity of the creditor - it is the CIT(A), who raised the issue of identity - it is unfortunate that the revenue held that the identity is only partly proved - CIT(A) is proper in coming to the said conclusion - The sum of ₹ 131.25 cr was paid by the Josh Bullion Gems and Jewellery P Ltd (JBGJPL) and the same was received by the assessee - m/s JBGJPL has the ability to pay the amount to asssessee - Valid transfer of the actionable claims qua the assignment deeds are also upheld there was no reason to invoke the provisions of section 68 of the Act - the CBI has not included the assessee while booking the scamsters there was no fault with the assessee in effecting recoveries of the eligible debts from the debtors by all means, either direct as well as the indirect methods - the transaction of payment should be considered as genuine transaction for the purpose of section 68 of the Act. The AO made additions by rejecting assessee s arguments based on the assignment agreements and failed to find the business sense in the payments made by the M/s JBGJPL - Other deficiencies include absence of consent of the debtors to the scheme of assignment, the absence of signatures of the witnesses on the documents, failure to serve the notices u/s 131 on a debtor and the express de-recognition of the debtors to the scheme of assignment - the validity of the scheme of assignment is upheld considering the express legal provisions under various Acts - the dissatisfaction of the AO is misplaced. Sources of the Sources/Origin of the origin Held that - The revenue already reopened the assessment of JBGJPL for the relevant AY 2009-10 - the assessee filed the copy of the letter to the AO dt 5.12.13 referring to issuance of notice u/s 148 of the Act - it is the case of revenue attempting to area of sources of sources or origin of origin which is not permitted in law - the addition is not justified u/s 68 of the Act. The bipartite agreement constitutes a valid one considering the provisions of section 130 of the TP Act - the service of notice on M/s Space PPL cannot alone be the ground to come to the inference adverse to the assessee - AO ought to have seen the fact that the debtor has made lots of purchases, exports, banking transactions, investigation and finalizing charge sheet by the CBI on the said debtor etc. Regarding M/s Bond Gems Pvt. Ltd, the AO s objection is not sustainable legally Decided in favour of Assessee. Sale of unaccounted stock Held that - There are no transactions from 24.10.2008 to 31.10.2008 - there is no discrepancy so far as the quantum of stock is concerned as on 31.3.2009 - AO does not have any incriminating material to suggest that the assessee has sold the material received from the labourers on 24.10.2008 - the arguments of the assessee about the double addition are dismissed by the CIT(A) giving flimsy reasons - the tallying of the stock register is considered and in the absence of the discrepancies, the decision of the CIT (A) is set aside Decided in favour of Assessee. Loss incurred on diamond trade disallowed Held that - The study of the transactions reveals that the real intention of the assessee was to earn the interest arbitrage difference in rates of interest - The moment the export sales are received, assessee deposited the same with the bank and earned the bank interest @ 8 to 9% - no law is violated by the assessee by these arbitrage transactions and the same is a common practice - the special auditors, on the issue of diamond trading and profit, have found no infirmity in transaction except that there are no purchase orders for purchases - the special auditors have analyzed around 50 transactions and has not given any adverse comments Relying upon Abbas Wazir (P.) Ltd. v. Commissioner of Income-tax 2003 (9) TMI 50 - ALLAHABAD High Court - the transaction is genuine as the same have been done to earn arbitrage income and the export/import has been done through due customs clearance - the authorities are not justified in making/confirming the impugned disallowance/addition on this count and the same is deleted Decided in favour of Assessee. Interest payment made u/s 40A(2) Held that - The assessee paid interest on the excess margin money to a couple of its clients the differentiation clearly attracts the provisions of section 40(A)(2)(b) of the Act - This is a commonsensical approach that if the excess margin money of both the parties have found the way into the FDs of the banks, the disallowance to the extent of amount exceeding 4% should be considered as excessive and unreasonable - The explanation given by the assessee that the sister concern is a HNI is not to be considered favourable to the assessee considering the provisions of section 40A(2)(b) of the Act, which does not provide for any exemption, as attempted to be made out by the assessee - the AO should calculate the excess interest over and above 4% and that should be treated as unreasonable and excessive Decided partly in favour of Assessee. Net forward contract loss treated as speculation loss Held that - The loss amounts to hedging loss and constitutes business loss - Following the decision in Commissioner of Income-Tax Versus Badridas Gauridu (P.) Ltd. 2003 (1) TMI 61 - BOMBAY High Court - CIT(A) has analysed the issue from the perspective of speculation loss and has rightly held that the loss amounts to hedging loss and a speculation loss there was no reason to interfere with the decision of the CIT(A) - the benefits of section 43(5) of the Act are to be granted to the assessee Decided against Revenue.

Summary

Issues Involved:
1. Exemption of income under Section 10A.
2. Addition under Section 68 for transfer of funds.
3. Addition under Section 68 for amounts received from debtors.
4. Addition for unaccounted stock sold.
5. Disallowance of commission payments.
6. Disallowance of loss in diamond trade.
7. Disallowance under Section 40(a)(ia) for short deduction of tax.
8. Disallowance under Section 40A(2) for interest paid to sister concern.
9. Deletion of addition for cash transfer.
10. Deletion of disallowance of interest expenses.
11. Deletion of forward contract loss.

Detailed Analysis:

1. Exemption of Income under Section 10A:
The assessee claimed an exemption of Rs. 6,42,90,319/- under Section 10A for manufacturing and exporting gold medallions from a Special Economic Zone (SEZ). The AO denied the exemption due to discrepancies in electricity consumption, undervaluation of stock, and lack of evidence for labor charges. The CIT(A) upheld the denial but noted an undervaluation of Rs. 3,12,71,400/- based on FIFO method. The Tribunal found the electricity consumption discrepancy inconclusive and upheld the exemption but denied it for profits attributable to 109 kgs of medallions due to lack of evidence for labor charges.

2. Addition under Section 68 for Transfer of Funds:
The AO added Rs. 2.33 crores under Section 68 for unexplained cash transfers from branches to Ahmedabad. The CIT(A) confirmed this addition but deleted another addition of Rs. 4,23,56,727/- for customs duty payments. The Tribunal upheld the CIT(A)'s decision, noting the difficulty in proving the transportation of such large amounts of cash.

3. Addition under Section 68 for Amounts Received from Debtors:
The AO added Rs. 141,24,75,896/- under Section 68 for amounts received from Joshi Bullion Gems & Jewelry P Ltd (JBGJPL) on behalf of other debtors. The CIT(A) confirmed the addition, doubting the genuineness of the transactions and the lack of tripartite agreements. The Tribunal found the assignment agreements valid and the payments genuine, thus deleting the addition.

4. Addition for Unaccounted Stock Sold:
The AO added Rs. 9,43,68,687/- for unaccounted stock sold to K.A. Malle Pharmaceuticals P. Ltd. The CIT(A) upheld the addition due to discrepancies in the stock register. The Tribunal found no incriminating evidence and noted the stock quantity was accurate, thus deleting the addition.

5. Disallowance of Commission Payments:
The AO disallowed Rs. 1,28,75,553/- for commission payments due to lack of evidence. The CIT(A) confirmed the disallowance. The Tribunal remanded the issue to the AO for further examination, allowing the assessee to provide additional evidence.

6. Disallowance of Loss in Diamond Trade:
The AO disallowed Rs. 49,73,46,618/- for losses in diamond trade, suspecting non-genuine transactions. The CIT(A) upheld the disallowance. The Tribunal found the transactions genuine, noting the arbitrage income from interest differences, and deleted the disallowance.

7. Disallowance under Section 40(a)(ia) for Short Deduction of Tax:
The AO disallowed payments for short deduction of TDS. The Tribunal, relying on the Calcutta High Court judgment in CIT vs. M/s. S.K. Tikeriwal, found that short deduction does not attract Section 40(a)(ia) and allowed the assessee's claim.

8. Disallowance under Section 40A(2) for Interest Paid to Sister Concern:
The AO disallowed Rs. 57,56,233/- for excessive interest paid to RSBL Commodities P. Ltd. The CIT(A) confirmed the disallowance. The Tribunal found the interest rate reasonable compared to other clients and partially allowed the assessee's claim.

9. Deletion of Addition for Cash Transfer:
The CIT(A) deleted the addition of Rs. 4,23,56,727/- for cash payments of customs duty. The Tribunal upheld the deletion, finding the cash available in the books and no evidence of unaccounted income.

10. Deletion of Disallowance of Interest Expenses:
The CIT(A) deleted the disallowance of Rs. 93,19,850/- for interest expenses, relying on the Bombay High Court judgment in Reliance Utilities & Power Ltd. The Tribunal upheld the deletion, finding the interest-free funds sufficient to cover the advances.

11. Deletion of Forward Contract Loss:
The AO disallowed Rs. 7,96,32,697/- for forward contract losses, treating them as speculation losses. The CIT(A) deleted the addition, finding the transactions genuine hedging losses. The Tribunal upheld the deletion, noting the transactions were integral to the assessee's business.

Conclusion:
The Tribunal provided a detailed analysis of each issue, allowing some claims, remanding others for further examination, and upholding the CIT(A)'s decisions where appropriate. The judgment reflects a thorough consideration of the facts, legal principles, and evidence presented.