2014 (9) TMI 788 - HC - Income Tax

Claim of deduction u/s 80HHC Manufacture and trading of diamonds Rejection of rough diamonds - Held that - The Commissioner and Tribunal was rightly of the view that the nature of the transaction is not being speculative in character - once the main business is identified, if some incidental activities or transaction or dealing in foreign exchange is undertaken but that is also related to some extent to the main business activity, then, it could not be said that the assessee is in speculative business or speculative dealings is ordinarily a part of his business. The deduction of the value of the export of rough rejected diamonds from the cost of purchase of rough diamonds is held to be correct - the alternate plea that apart from reducing the import cost from the total export turnover, it shall also be reduced from the total turnover which exceeds the export income - once again the question has been considered and decided in the peculiar facts and in relation to the present assessee - No general rule has been laid down - The matter has to be decided on case to case basis - rough diamond constitutes only 0.78% of the total turnover and if those diamonds which are found to be incapable for further processing are sold in unfinished form, that conclusion cannot be termed as perverse or vitiated by any error of law apparent on the face of record Decided against revenue.

Summary

Issues:
1. Whether the transactions undertaken by the assessee firm fall within the definition of a speculative transaction under section 43(5) of the Income Tax Act, 1961?
2. Whether the rejection of rough diamonds and their re-export by the assessee is an act covered by section 80HHC of the Income Tax Act, 1961?

Issue 1 Analysis:
The Revenue appealed against the order of the Income Tax Appellate Tribunal, arguing that the assessing officer concluded the transactions as speculative, falling under section 43(5) of the Income Tax Act. The Tribunal upheld this finding, leading to the first substantial question of law. However, the Respondent contended that the transactions were not speculative but were incidental to their diamond export business, involving forward contracts to hedge against currency fluctuations. The Division Bench judgment was applied to support this argument, stating that if incidental activities are related to the main business, it does not constitute speculative dealings. The High Court found the concurrent findings of the Commissioner and Tribunal reasonable, not warranting interference in further appellate jurisdiction.

Issue 2 Analysis:
Regarding the second issue, the assessing officer rejected the main contention of the assessee under section 80HHC, but accepted the alternate plea related to the rejection and re-export of rough diamonds. The Commissioner and Tribunal upheld this alternate plea, considering it a legitimate business activity to reduce costs and maintain export turnover. The High Court noted that this issue was decided based on the peculiar facts of the case and should be assessed case by case. The Tribunal's approach was upheld, emphasizing that the turnover from rejected diamonds did not mean the turnover was from useless raw materials. The High Court dismissed the appeal, concluding that the questions raised did not present substantial legal issues and upheld the decisions of the lower authorities.

In summary, the High Court upheld the Tribunal's decision, ruling in favor of the assessee on both issues raised by the Revenue. The judgment emphasized the importance of considering the specific facts and circumstances of each case in determining tax liabilities and business activities under the Income Tax Act.