2014 (5) TMI 1171 - AT - Income Tax

Addition u/s 40A(3) - argument of the Revenue is that when old gold purchases are made from A and new ornaments sold to B, provisions of Rule 6DD will not be applicable - Held that - The transaction considered in this case is of same person purchasing new gold ornaments from the assessee against old gold ornaments. In such a case, clause (d) of Rule 6DD clearly applies. The said clause reads that where the payment is made by way of adjustment against the amount of any liability incurred by the payee for any goods supplied or services rendered by the assessee to such payee is exempted from the operation of Section 40A(3). Therefore, in the present case, as rightly pointed out by the Commissioner of Income Tax (Appeals), the case of the assessee is protected by clause (d) of Rule 6DD. The Revenue has raised a contention in the grounds that the assessee may not raise separate bills for purchase of old gold and for sale of new gold ornaments. This view is not correct. There is levy of purchase tax by the State Government on purchase of old gold ornaments. For that matter, the assessee has to keep a separate account of old gold purchase supported by purchase invoices. Likewise, sale of new gold ornaments are again subject to sales tax for which the assessee has to maintain separate sales account supported by sales invoices. - Decided in favour of assessee Disallowance being hedging loss treated by the assessing authority as speculative loss - Held that - In the present case, the assessee has entered into a future contract to guard against the loss through future price fluctuations in gold. The assessee is in the business of manufacturing and merchanting of gold. Therefore, the future contract entered into by the assessee is straightaway covered by the first exception provided in clause (a) of Section 43(5). We find that the Commissioner of Income Tax (Appeals) is right in his decision. Unexplained cash credits - Held that - The assessee- company has passed journal entries with the concerned amounts, crediting the personal account of the Director and debiting the various expenditure to nominal accounts of the assessee-company. In fact, all the credits reflected in the personal account of the Director of the assessee-company are correspondingly very much reflected on the debit side of different expenditures and nominal accounts of the assessee-company. In that way, these cash credits are self-explaining in the books of accounts itself. There is no basis for the Assessing Officer to treat these credits as unexplained cash credits - Decided in favour of assessee.

Summary

Issues Involved:

1. Disallowance under Section 40A(3) for cash payments exceeding the exemption limit.
2. Treatment of hedging loss as speculative loss.
3. Addition of unexplained cash credits in the personal account of the Director.

Detailed Analysis:

1. Disallowance under Section 40A(3) for Cash Payments Exceeding the Exemption Limit:

The respondent-assessee, a private company engaged in manufacturing and trading gold jewelry, was scrutinized for transactions involving the purchase of old gold ornaments and the sale of new gold ornaments. The Assessing Officer (AO) concluded that the assessee violated Section 40A(3) by making cash payments exceeding Rs. 20,000 for such transactions. The AO treated the purchase and sale as separate transactions and considered the entire purchase bill amount as paid in cash, leading to a disallowance of Rs. 4,35,31,892.

The Commissioner of Income Tax (Appeals) (CIT(A)) examined Section 40A(3) and Rule 6DD and found that the transactions were protected by clause (d) of Rule 6DD, as they involved adjustments against liabilities incurred for goods supplied or services rendered. The CIT(A) relied on the judgment in CIT v. Kishan Chand Maheswari Dass and deleted the addition, noting that the transactions were exchange transactions not hit by Section 40A(3).

The Tribunal upheld the CIT(A)'s decision, emphasizing that the transactions involved the same person and were settled by paying or receiving the differential amount. The Tribunal confirmed that clause (d) of Rule 6DD applied and that the thrust of Section 40A(3) is on the "payment of cash" for incurring expenditure, which in this case related only to the differential amounts.

2. Treatment of Hedging Loss as Speculative Loss:

The AO disallowed a hedging loss of Rs. 99,23,199, treating it as a speculative loss under Section 43(5). The CIT(A) examined the issue and noted that certain contracts are not treated as speculative transactions under the proviso to Section 43(5), specifically clause (a), which covers contracts entered into by a person in the course of manufacturing or merchanting business to guard against future price fluctuations.

The CIT(A) found that the assessee's futures contract to guard against gold price fluctuations was covered by this exception, as the assessee was in the business of manufacturing and merchandising gold. The Tribunal agreed with the CIT(A)'s decision, confirming that the hedging loss was not speculative and deleting the disallowance.

3. Addition of Unexplained Cash Credits:

The AO added Rs. 4,19,97,669 as unexplained cash credits reflected in the personal account of the Director. The CIT(A) found that these credits were the result of journal entries passed to adjust the Director's personal account with the business account of the assessee-company. The credits corresponded to various expenses and payments made by the Director on behalf of the company.

The Tribunal upheld the CIT(A)'s finding that the credits were self-explaining in the books of accounts, as they were reflected on the debit side of different expenditure accounts. The Tribunal confirmed that there was no basis for treating these credits as unexplained and deleted the addition.

Conclusion:

The Tribunal dismissed the Revenue's appeal, finding no merit in the arguments presented. The disallowance under Section 40A(3), the treatment of hedging loss as speculative, and the addition of unexplained cash credits were all correctly addressed and deleted by the CIT(A). The order was pronounced on May 5, 2014, in Chennai.