2011 (1) TMI 1350 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition on account of suppression of yield.
2. Deletion of addition on account of excess labor charges.
3. Treatment of loss on cancellation of forward contract as business loss.

Summary:

1. Suppression of Yield:
The first issue concerns the deletion of an addition of Rs. 29,74,132/- made by the Assessing Officer (AO) on account of suppressed yield. The AO noted that the assessee, engaged in the diamond business, showed a yield of 30.77% for polished diamonds, which was lower compared to other similar businesses. The AO estimated a suppressed yield of 1% and added Rs. 29,74,132/- to the income. The CIT(A) deleted this addition, noting that the AO did not find defects in the books of account nor invoked provisions of Section 145 of the Act. The Tribunal upheld the CIT(A)'s decision, agreeing that merely lower yield cannot justify rejection of book results.

2. Excess Labor Charges:
The second issue pertains to the deletion of an addition of Rs. 6,12,797/- made by the AO on account of labor charges. The AO found that the labor charges of Rs. 375/- per carat claimed by the assessee were higher than the industry standard of Rs. 275/- to Rs. 350/- per carat. The CIT(A) deleted the addition, noting that the assessee provided confirmations from labor parties with PAN numbers and that the increase in labor charges was justified by the higher gross profit ratio. The Tribunal confirmed the CIT(A)'s decision, stating that the AO's disallowance was not supported by evidence.

3. Loss on Cancellation of Forward Contract:
The third issue involves the treatment of a loss of Rs. 4,62,105/- on the cancellation of a forward contract. The AO treated this as a speculation loss, while the CIT(A) treated it as a business loss. The Tribunal referred to a similar case (ACIT Circle 9 Surat v. M/s. Marvin Gems) where it was held that such losses, arising from hedging transactions to protect against foreign exchange fluctuations, should be treated as business losses. The Tribunal confirmed the CIT(A)'s decision, treating the loss as a business loss.

Conclusion:
The Tribunal dismissed the Revenue's appeal on all three issues, upholding the CIT(A)'s decisions. The order was pronounced in Open Court on 13/01/2011.