2021 (12) TMI 302 - AT - Income Tax

Disallowance of forward contract loss as treated as speculative loss by AO - assessee is a star trading house engaged in the business of diamond purchasing rough and polished diamonds mainly through import from various countries, manufacturing of rough diamonds into polished diamonds and sell polished diamonds mainly by way of exports to various countries - HELD THAT - 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 2016 (8) TMI 1094 - ITAT MUMBAI , 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. Adhoc disallowance of miscellaneous expenses @15% made by the ld. AO - CIT-A deleted the addition - HELD THAT - Since, no defects were pointed out by the ld. AO in the books of accounts / documents produced 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 u/s.69A - difference between book stock and physical stock of polished diamonds - HELD THAT - Only the profit element embedded on the said sale could be brought to tax. The argument 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., 2020 (1) TMI 18 - ITAT MUMBAI 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. Addition u/s.69B - treating the difference between physical stock and book stock of rough diamonds as unexplained investment - HELD THAT - As 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 maintained by the assessee. Hence, we are inclined to accept to the contentions of the assessee and direct the ld. AO not to make any addition for the value of 169.45 carats of diamonds as it stands properly explained. For remaining difference out of 180.15 carats of stock difference, 169.45 carats was properly explained and the difference of 10.7 carats need to be sustained in the form of addition. Now, for the purpose of arriving at the value of addition for 10.7 carats, the ld. AR has brought this alternative argument. Hence, we hold that this is only an argument advanced by the ld. AR and there is absolutely no fresh facts which requires verification in this regard. Either way this aspect deserves to be remanded back to the file of the ld. AO for arriving at the value for making addition in respect 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.

Summary

Issues Involved:
1. Timeliness of appeals filed by the Revenue.
2. Deletion of disallowance of forward contract loss treated as speculative loss.
3. Deletion of adhoc disallowance of miscellaneous expenses.
4. Disallowance under Section 14A of the Income Tax Act.
5. Addition under Section 69A for difference between book stock and physical stock of polished diamonds.
6. Addition under Section 69B for difference between book stock and physical stock of rough diamonds.

Detailed Analysis:

1. Timeliness of Appeals Filed by the Revenue:
The Tribunal addressed the issue of whether the appeals filed by the Revenue were time-barred. It was found that the order of the CIT(A) was disposed of in September 2020 during the Covid-19 pandemic. The Government of India had extended the time limit for filing appeals until 31/03/2021 through Notification No. 35/2020 dated 24/06/2020. The Tribunal concluded that there was no delay in filing the appeals, as confirmed by the Revenue in Form No. 36.

2. Deletion of Disallowance of Forward Contract Loss Treated as Speculative Loss:
The Tribunal examined the deletion of disallowance of forward contract loss treated as speculative loss by the AO. The assessee, a star trading house in the diamond business, had its forward contract loss disallowed as speculative. The Tribunal noted that this issue was already decided in favor of the assessee in its own case for A.Y. 2004-05 and A.Y. 2008-09. The Tribunal reiterated that the loss on foreign currency forward/option contracts should be treated as a business loss, not speculative, as the transactions were integral to the assessee's diamond business. Consequently, the Tribunal dismissed the Revenue's grounds for A.Y. 2009-10 to 2012-13.

3. Deletion of Adhoc Disallowance of Miscellaneous Expenses:
The Tribunal reviewed the deletion of adhoc disallowance of miscellaneous expenses by the AO. The AO had disallowed 15% of the remaining expenses after the assessee's suo-moto disallowance. The CIT(A) found that the assessee had submitted detailed invoices and no defects were pointed out by the AO. The Tribunal upheld the CIT(A)'s decision, noting that the AO had not rejected the books of accounts or pointed out any defects. The adhoc disallowance was rightly deleted for A.Y. 2009-10 to 2012-13.

4. Disallowance Under Section 14A of the Income Tax Act:
The Tribunal addressed the disallowance under Section 14A for A.Y. 2011-12. The AO had made a disallowance exceeding the exempt income derived by the assessee. The CIT(A) restricted the disallowance to the exempt income. The Tribunal upheld the CIT(A)'s decision, citing the Supreme Court's ruling in Maxopp Investments that disallowance under Section 14A cannot exceed the exempt income. The Revenue's ground was dismissed.

5. Addition Under Section 69A for Difference Between Book Stock and Physical Stock of Polished Diamonds:
The Tribunal examined the addition under Section 69A for the difference between book stock and physical stock of polished diamonds for A.Y. 2012-13. The AO had added the value of the shortage of 48.94 carats as sales made out of books. The Tribunal held that only the profit element embedded in the sale could be brought to tax, not the entire value. The Tribunal directed the AO to compute the gross profit portion on the said sale and tax the assessee accordingly, partly allowing the assessee's ground.

6. Addition Under Section 69B for Difference Between Book Stock and Physical Stock of Rough Diamonds:
The Tribunal reviewed the addition under Section 69B for the difference between book stock and physical stock of rough diamonds for A.Y. 2012-13. The AO had added the value of the excess stock as unexplained investment. The Tribunal accepted the assessee's explanation that 169.45 carats belonged to a third party and directed the AO not to make any addition for this portion. For the remaining difference of 10.7 carats, the Tribunal directed the AO to apply the respective rates for "rough rejections" and "rough diamonds" as per the Government Valuation report, partly allowing the assessee's ground.

Conclusion:
The Tribunal dismissed all the appeals of the Revenue and partly allowed the appeal of the assessee for A.Y. 2012-13, providing detailed reasoning for each issue based on the facts and precedents.