M/s. Veer Gems, Surat v. The ACIT., Circle-7,, Surat

ITA 3844/AHD/2007 | 2004-2005
Pronouncement Date: 24-12-2010 | Result: Partly Allowed

Appeal Details

RSA Number 384420514 RSA 2007
Bench Ahmedabad
Appeal Number ITA 3844/AHD/2007
Duration Of Justice 3 year(s) 2 month(s) 13 day(s)
Appellant M/s. Veer Gems, Surat
Respondent The ACIT., Circle-7,, Surat
Appeal Type Income Tax Appeal
Pronouncement Date 24-12-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 24-12-2010
Date Of Final Hearing 24-11-2010
Next Hearing Date 24-11-2010
Assessment Year 2004-2005
Appeal Filed On 11-10-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD B BENCH BEFORE SHRI G.D. AGARWAL VICE-PRESIDENT (AZ) AND SHRI MAHAVIR SINGH JUDICIAL MEMBER ITA NO.3844 & 4008/AHD/2007 [ASSTT.YEAR: 2004-05] M/S. VEER GEMS 7/2982 -VS- ASST. COMMISSIONER OF INCOME-TAX PARSI SHERI SAIYEDPUA CIRCLE-7 AAYKAR BHAVAN M AJAURA SURAT GATE SURAT PAN NO.AABFV6446L ACIT CIRCLE-7 SURAT -VS- M/S. VEER GEMS 7/2982 PARSI SHERI SAIYEDPURA SURAT (APPELLANT) (RESPONDENT) REVENUE BY : SHRI K.C. NAREDI CIT-DR ASSESSEE BY: SHRI HARDIK VORA AR O R D E R PER MAHAVIR SINGH JUDICIAL MEMBER:- THESE CROSS APPEALS BY ASSESSEE AND REVENUE ARE AR ISING OUT OF THE ORDER OF COMMISSIONER OF INCOME-TAX(APPEALS)-IV SURAT IN AP PEAL NO.CAS-IV/126/06-07 DATE 14-08-2007. THE ASSESSMENT WAS FRAMED BY ACIT CIRCLE-7 SURAT U/S143(3) OF THE INCOME-TAX ACT 1961 (HEREINAFTER REFERRED TO A S THE ACT) VIDE HER ORDER DATE 30- 12-2005 FOR ASSESSMENT YEAR 2004-05. FIRST WE WILL DEAL WITH ASSESSEES APPEAL IN ITA NO .3844/AHD/2007. 2 THE FIRST ISSUE IN THIS APPEAL OF ASSESSEE IS AG AINST THE ORDER OF CIT(A) IN CONFIRMING THE ADDITION MADE BY ASSESSING OFFICER O N ACCOUNT OF LABOUR CHARGE PAID @ RS.5/- PER CARAT. FOR THIS ASSESSEE HAS RAISED T HE FOLLOWING GROUND NO.1 :- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AS WELL AS LAW ON THE SUBJECT THE LEARNED CIT(APPEALS) HAS ERRED IN CONF IRMING THE ACTION OF THE ASSESSING OFFICER IN MAKING ADDITION OF RS.34 19 12 3/- BEING RS.5/- PER CARAT OF 6 83 824.51 CARATS FOR LABOUR CHARGES PAID. ITA NO.3844 & 4008/AHD/2007 A.Y.2004-05 M/S. VEER GEMS V. ACIT CIR-7 SURAT PAGE 2 3. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE T HAT ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS MADE DISALLOWA NCE OF LABOUR CHARGES PAID AT RS.34 19 123/-. THE ASSESSEE-COMPANY WAS ENGAGED IN MANUFACTURE AND EXPORT OF DIAMOND AND PAID LABOUR CHARGES OF RS.23 88 09 317/ - IN RESPECT OF ROUGH DIAMOND WEIGHING 6 83 824.51 CARATS AND MANUFACTURING 2 01 833 CARATS OF POLISHED DIAMOND. THE AVERAGE LABOUR CHARGES PER CARAT WORKE D OUT TO RS.349.23 AND AO OBSERVED THAT THE LABOUR CHARGES IN THE IMMEDIATELY PRECEDING YEAR WAS RS.338/- PER CARAT. THE ASSESSING OFFICER CALLED SOME OF THE LABOUR PARTIES FOR EXAMINATION AND FOUND THAT THE ASSESSEE WAS PAYING LABOUR CHARG ES RANGING FROM RS.250/- PER CARAT TO RS.700/- PER CARAT. WHEN REQUIRED TO EXPLA IN THIS VARIATION AS REGARDS TO HIGHER RATE COMPARED TO LAST YEAR THE ASSESSEE STA TED THAT IT WAS MAINTAINING PROPER RECORDS FOR PAYMENTS MADE AND INCREASE IN LABOUR CH ARGES WAS NORMAL AND WAS COMPARABLE TO CHARGES PAID BY OTHER UNITS COMPARED TO EARLIER YEARS COST OF PRODUCTION LABOUR CHARGES WERE 19.37% COMPARED TO 2 2.66% AND GROSS PROFIT RATIO FOR THE YEAR WAS ALSO BETTER AT 6.19% AGAINST 6.08% LAST YEAR. THE VARIATION OF LABOUR CHARGES WAS BECAUSE OF QUALITY OF ROUGH DIAMOND AND ALSO SKILL OF THE LABOURS. THE PARTIES HAD ALSO CONFIRMED THE PAYMENT MADE TO THEM AND THEREFORE NO DISALLOWANCE SHOULD BE MADE. THE AO WAS OF THE VIEW THAT THE ASS ESSEES CONTENTION WAS THAT THE QUALITY OF ROUGH DIAMONDS DIFFER FROM ONE LOT T O ANOTHER COULD NOT BE THE BASIS FOR INCREASE IN LABOUR CHARGES. SINCE IF THE QUALITY OF ROUGH DIAMOND WAS SUPERIOR AND THE LABOUR CHARGES WERE HIGHER THEN THE YIELD WOUL D ALSO BE HIGH IN THAT CASE. THE AO SUMMARIZED THE RESULTS OF RATE OF LABOUR AGAINST PERCENTAGE OF UNIT AND FOUND THAT WHEN THE LABOUR CHARGES PAID WERE RS.600/- PER CARAT THE YIELD WAS 31.22% WHEREAS THE RATE OF LABOUR WAS RS.250/- THE YIELD W AS MUCH BETTER AT RS.35.48%. SIMILAR WAS THE CASE WHEN THE YIELD WAS LESS BUT TH E LABOUR CHARGES PAID WERE HIGHER IN ALMOST ALL THE CASES THE AO THEREFORE CO ULD NOT ACCEPT THE EXPLANATION OF THE ASSESSEE AND DISALLOWED RS.5/- PER CARAT AS EXC ESSIVE OR UNJUSTIFIED LABOUR CHARGES PAID AND MADE THE DISALLOWANCE OF RS.34 19 125/-. THE CIT(A) ALSO CONFIRMED THE ACTION OF ASSESSING OFFICER. 4. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE SHRI HARDIK VORA FILED A COPY OF TRIBUNALS ORDER IN ASSESSEES OWN CASES IN ITA NO.4136/AHD/2008 FOR ASSESSMENT YEAR 2005-06 DATED11-06-2010 WHEREIN THE TRIBUNAL IN PARA-10 TO 12 HELD AS UNDER:- ITA NO.3844 & 4008/AHD/2007 A.Y.2004-05 M/S. VEER GEMS V. ACIT CIR-7 SURAT PAGE 3 10. CONSIDERING THE SUBMISSIONS OF THE ASSESSEE THE LEARNED CIT (A) CONFIRMED THE DISALLOWANCE MADE BY THE A O FOLLOWING HIS OWN ORDER FOR ASSESSMENT YEAR 2004-05. HIS FINDINGS ARE REPRODUCED AS UNDER: I HAVE CONSIDERED THE SUBMISSIONS. I FIND THAT THE SAME ISSUE AROSE IN A Y 2004-05 ALSO WHEREIN THE FACTS WERE EX ACTLY ALIKE. IN MY ORDER FOR THAT YEAR IN APPEAL NO.CAS-IV/126/06-0 7 14.08.2007 I HAVE HELD AS UNDER:- I HAVE CONSIDERED THE SUBMISSIONS AND HAVE GONE THR OUGH THE DETAILS. IT IS SEEN THAT THE APPELLANTS CONTEN TION THAT LABOUR PAYMENT WOULD DEPEND UPON THE QUALITY OF ROU GH DIAMONDS AND THE SKILL OF THE WORKER IS CORRECT. HO WEVER IT IS ALSO A FACT HAT IN ALL THE CASE OF LABOUR PAYMEN TS WHEN HIGHER RATES HAVE BEEN PAID THE AVERAGE YIELD OF P OLISHED DIAMONDS IS LOWER WHEREAS IT IS THE OTHER WAY ROUN D IN THE CASE OF LOWER LABOUR CHARGES PAID. THIS IS AGAINST THE ESTABLISHED PRACTICE OF BUSINESS. IF ONE PAYS HIGHE R LABOUR CHARGES IN RESPECT OF ANY ACTIVITY IT IS EXPECTED THAT THE RESULT SHOULD BE BETTER. IT IS ALSO SEEN THAT THERE IS A HUGE VARIATION IN LABOUR CHARGES PAID PER CARAT WHICH I S NOT JUSTIFIABLE BY THE QUANTITY OF ROUGH DIAMONDS OBTAI NED BY PAYING HIGHER CHARGES. THE A O HAS NOT DISBELIEVED THE PAYMENT MADE TO VARIOUS LABOUR PARTIES BUT ONLY THE JUSTIFICATION OF PAYING HIGHER LABOUR CHARGES. IT A PPEARS THAT THE INCREASED LABOUR CHARGES WERE NOT FOR EXCLUSIVE BUSINESS NECESSITY AND IS NOT MATERIAL THAT THE LAB OURERS WERE ASSESSED TO TAX ALSO. I AM OF THE VIEW THAT T HE INCREASED EXPENDITURE WAS NOT WHOLLY AND EXCLUSIVEL Y FOR BUSINESS PURPOSES AND THE DISALLOWANCE OF A PART OF THE INCREASE PER CARAT OF LABOUR CHARGES PAID COMPARED TO LAST YEAR IS IN ORDER AND ADDITION ON THIS ACCOUNT IS HE REBY CONFIRMED . SINCE THE FACTS OF THE CURRENT YEAR ARE ALSO THE SA ME DISALLOWANCE MADE BY THE A O ON THIS ACCOUNT IS HER EBY CONFIRMED . 11. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW. ON T HE OTHER HAND THE LEARNED D R RELIED UPON THE ORDER OF THE A O. 12 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDER ED THE MATERIAL AVAILABLE ON RECORD. THE A O DISALLOWED RS .10 PER CARAT LABOUR EXPENSES WOULD PROVE THAT SUBSTANTIAL EXPLAN ATION OF THE ASSESSEE HAS BEEN ACCEPTED BY THE A O. THE ASSESSEE PRODUCED ALL THE DETAILS OF THE EXPENDITURE AND BOOKS OF ACC OUNT BEFORE THE A O. THE BOOKS OF ACCOUNT OF THE ASSESSEE ARE AUDIT ED. THE G P RATE IS ADMITTEDLY BETTER IN THE ASSESSMENT YEAR UN DER APPEAL AS ITA NO.3844 & 4008/AHD/2007 A.Y.2004-05 M/S. VEER GEMS V. ACIT CIR-7 SURAT PAGE 4 COMPARED WITH THE LAST YEAR. THE ASSESSEE IS ENGAGE D IN THE BUSINESS OF PURCHASE/IMPORT OF ROUGH DIAMONDS AND MANUFACTURING OF IT AND SALE/EXPORT OF POLISHED DIA MONDS. THE LABOUR CHARGES EXPENSES ARE THE MAIN COMPONENT FOR EARNING THE SUBSTANTIAL INCOME. THE RATES PAID TO THE JOB WORKE RS RANGES DIFFERENTLY. ACCORDING TO ASSESSEE ALL THE PAYMENTS ARE MADE THROUGH ACCOUNT PAYEE CHEQUES ONLY AFTER MAKING TDS . THEREFORE CONSIDERING THE HISTORY OF THE ASSESSEE AND NATURE OF BUSINESS AND THAT PROFIT IS HIGHER AS COMPARED TO THE PRECEDING ASSESSMENT YEAR WOULD PROVE THAT ASSESSEE SPENT GE NUINE EXPENDITURE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. WE ACCORDINGLY SET ASIDE THE ORDERS OF THE AUTHORIT IES BELOW AND DELETE THE ADDITION. THIS GROUND OF APPEAL OF TH E ASSESSEE IS ALLOWED. ON THE OTHER HAND LD. CIT-DR SHRI K.C. NAREDI HA S NOT DISPUTED THAT THE TRIBUNAL HAS DELETED THE ADDITION OR NOT. AS THE ISSUE IS SQ UARELY COVERED IN ASSESSEES OWN CASE IN ITA NO.4136/AHD/2008 (SUPRA) EXACTLY ON IDENTICAL FACTS IN IMMEDIATE PRECEDING YEAR I.E. ASSESSMENT YEAR 2005-06 RESPEC TFULLY FOLLOWING THE SAME WE DELETE THE ADDITION AND ALLOW THE CLAIM OF ASSESSEE . 5. THE NEXT ISSUE IN THIS APPEAL OF ASSESSEE IS AGA INST THE ORDER OF CIT(A) IN CONFIRMING THE ADDITION MADE BY ASSESSING OFFICER O N ACCOUNT OF FOREIGN TRAVEL EXPENSES. FOR THIS ASSESSEE HAS RAISED THE FOLLOWIN G GROUND NO.2 :- 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AS WELL AS LAW ON THE SUBJECT THE LEARNED CIT(APPEALS) HAS ERRED IN CONF IRMING THE ACTION OF THE ASSESSING OFFICER IN MAKING ADDITION OF RS.5 41 715 /- ON ACCOUNT OF FOREIGN TRAVELING EXPENSES. 6. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE T HAT THE ASSESSEE HAS CLAIMED THE TOTAL FOREIGN TRAVEL EXPENSES AT RS.30 60 453/- . THE ASSESSING OFFICER MADE DISALLOWANCE OF FOREIGN TRAVEL EXPENSES AT 10% I.E. RS.5 41 715/- BY STATING THAT ASSESSEE FURNISHED ONLY NAMES OF PERSONS WHO TRAVEL ED ABROAD AND THE AMOUNT SPENT BY THEM. IT WAS FURTHER FOUND THAT AN AMOUNT OF RS.2 61 856/- WAS IN RESPECT OF TRAVEL TO BANGKOK AND AO REQUIRED TO JUSTIFY THIS E XPENDITURE. THE ASSESSEE STATED THAT ALTHOUGH IT HAD NOT DONE ANY BUSINESS IN THAT COUNTRY AND PARTNER TRAVELED FOR EXPLORING THE POSSIBILITY OF BUSINESS. THE AO DID N OT ACCEPT THE CONTENTION SINCE NO EVIDENCE WAS PRODUCED THAT THIS TOUR WAS UNDERTAKEN FOR BUSINESS PURPOSES AND AO DISALLOWED 10% OF THE BALANCE AMOUNT OF FOREIGN TRA VEL EXPENSES DUE TO NON-FILING OF BILLS OF LODGING & TRAVELING DURING FOREIGN TRIPS. THE ASSESSEE HAS NOT FILED REQUIRED ITA NO.3844 & 4008/AHD/2007 A.Y.2004-05 M/S. VEER GEMS V. ACIT CIR-7 SURAT PAGE 5 DETAILS. THE CIT(A) ALSO CONFIRMED THE ACTION OF AO BY GIVING FOLLOWING FINDING IN PAGE-3 OF HIS APPELLATE ORDER:- I HAVE CONSIDERED THE SUBMISSIONS. THE APPELLANT H AD NO BUSINESS ACTIVITY IN BANGKOK AND COULD NOT FURNISH ANY ITINERARY OF SUCH A TOUR. NO DETAILS REGARDING ANY MEETINGS WITH CLIENTS WAS FURNISHED A T THE ASSESSMENT STAGE AND IT IS A KNOWN FACT THAT BANGKOK WOULD BE THE LA ST PLACE FOR EXPORT OF DIAMONDS AS ALSO THE FACT THAT IT IS ALWAYS A PLEAS URE TRIP AND NOT A BUSINESS TRIP WHENEVER TRAVEL TO BANGKOK IS MENTIONED. THER EFORE THE AO HAS RIGHTLY DISALLOWED EXPENDITURE CLAIMED ON TRIP TO BANGKOK F OR NON-BUSINESS PURPOSES. IT IS ALSO SEEN THAT THE APPELLANT HAS NOT FILED AN Y EVIDENCE OF CLAIM OF LODGING AND BOARDING IN RESPECT OF OTHER FOREIGN TRAVELS WH ICH MEANS THAT THE CLAIM COULD BE INFLATED. THEREFORE THE AO'S ACTION IN DI SALLOWING A TOKEN AMOUNT OF10% OF THE CLAIM IS IN ORDER AND THE ADDITION IS HEREBY CONFIRMED. AT THE OUTSET LD. CIT-DR SHRI NAREDI REFERRED TO TRIBUNALS ORDER OF IMMEDIATE PRECEDING YEAR IN ASSESSEES OWN CASE IN ITA NO.4136/AHD/2008 (SUPRA) WHEREIN THIS ISSUE HAS BEEN DISMISSED VIDE PARA-16 WHICH READS AS UNDER:- 16 WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSIDE RED THE MATERIAL AVAILABLE ON RECORD. THE LEARNED CIT (A) G AVE A SPECIFIC FINDING THAT UTILIZATION OF FOREIGN EXCHANGE OF RS. 5 41 950/- TAKEN BY SHRI DILIP SHAH FROM WALL STREET INTERCHANGE PVT . LTD. HAS NOT BEEN SATISFACTORILY EXPLAINED SINCE THE ASSESSEE HA S NOT BEEN ABLE TO FURNISH ANY INFORMATION REGARDING FOREIGN T OUR BY SHRI SHAH AFTER THIS DATE. THE LEARNED CIT (A) THEREFORE CONFIRMED THE PART ADDITION OF RS.5 41 950/- WHICH IS UNDER CHALL ENGE. THE ASSESSEE HAS NOT FILED ANY EVIDENCE OR MATERIAL BEF ORE US TO CONTRADICT THE ABOVE FINDINGS OF LEANED CIT (A). IN THE ABSENCE OF ANY MATERIAL ON RECORD TO CONTRADICT THE FINDINGS O F THE LEARNED CIT (A) WE DO NOT FIND ANY JUSTIFICATION TO INTERF ERE WITH THE ORDER OF THE LEARNED CIT (A). THERE IS NO MERIT IN THIS G ROUND OF APPEAL OF THE ASSESSEE. SAME IS ACCORDINGLY DISMISSED. ON THE OTHER HAND LD COUNSEL FOR ASSESSEE SHRI VO RA STATED THAT NO DISALLOWANCE ON AD HOC BASIS CAN BE MADE BY ASSESSING OFFICER BE CAUSE ASSESSING OFFICER HAS ADMITTED THE BUSINESS PURPOSE OF THE FOREIGN TRAVEL . HE STATED THAT QUA SUM OF RS.2 61 856/- IN RESPECT OF TRAVEL TO BANGKOK ASSES SEE HAS NOT PRESSED THIS ISSUE. WE FIND THAT FROM THE ABOVE FACTS THAT THE AO HAS D ISALLOWED ON AD HOC BASIS AT 10% OF FOREIGN TRAVEL EXPENSES ON ACCOUNT OF NON-FILING OF BILLS OF LODGING AND BOARDING. THE AO HAS DOUBTED THE PURPOSES OF BUSINESS EXPENDI TURE TO VISIT BANGKOK. IT IS A FACT THAT ASSESSEE HAS INCURRED TRAVEL EXPENDITURE OF RS.2 61 856/- TO BANGKOK TRIP WHICH THE ASSESSEES COUNSEL CLEARLY ADMITTED TO HA VE ON ACCOUNT OF TRAVEL IN NATURE OF PLEASURE AND ACCORDINGLY THIS ISSUE OF ASSESSEE S APPEAL IS PARTLY ALLOWED AND WE ITA NO.3844 & 4008/AHD/2007 A.Y.2004-05 M/S. VEER GEMS V. ACIT CIR-7 SURAT PAGE 6 DIRECT THE ASSESSING OFFICER TO DISALLOW ONLY THE E XPENDITURE OF BANGKOK TRIP OF RS.2 61 856/- AND DELETE THE BALANCE. THIS ISSUE OF ASSESSEES APPEAL IS PARTLY ALLOWED. 7. THE NEXT ISSUE IN THIS APPEAL OF ASSESSEE IS AGA INST THE ORDER OF CIT(A) IN CONFIRMING THE ADDITION OF RS.7 000/- MADE BY ASSES SING OFFICER ON ACCOUNT OF CAPITAL EXPENDITURE. FOR THIS ASSESSEE HAS RAISED THE FOLLOWING GROUND NO.3 :- 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AS WELL AS LAW ON THE SUBJECT THE LEARNED CIT(APPEALS) HAS ERRED IN CONF IRMING THE ACTION OF THE ASSESSING OFFICER IN MAKING ADDITION OF RS.7000/- F OR CAPITAL EXPENDITURE. 8. AT THE OUTSET IT IS NOTED THAT THIS ISSUE WAS N OT AGITATED BEFORE CIT(A) AND HENCE NOW THE ASSESSEE CANNOT BE AGGRIEVED BY THIS ORDER AND ACCORDINGLY SAME IS DISMISSED. 9. THE NEXT ISSUE IN THIS APPEAL OF ASSESSEE IS AGA INST THE ORDER OF CIT(A) IN CONFIRMING THE ACTION OF ASSESSING OFFICER IN MAKIN G ADDITION OF 10% OF TOTAL TELEPHONE AND MOBILE EXPENSES. FOR THIS ASSESSEE H AS RAISED THE FOLLOWING GROUND NO.4 :- 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AS WELL AS LAW ON THE SUBJECT THE LEARNED CIT(APPEALS) HAS ERRED IN CONF IRMING THE ACTION OF THE ASSESSING OFFICER IN MAKING ADDITION OF RS.71 919/- BEING 10% OF THE TOTAL TELEPHONE AND MOBILE EXPENDITURE OF RS.7 19 181/-. 10. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE FACTS OF THE CASE. WE FIND THAT LOWER AUTHORITIES HAVE CONCURRED IN DE CIDING THAT THERE IS ELEMENT OF PERSONAL USER AND ON THAT BASIS 10% WAS DISALLOWED BY ASSESSING OFFICER AND CONFIRMED BY CIT(A). WE FEEL THAT THE FINDINGS OF L OWER AUTHORITIES ARE CORRECT IN HOLDING SO IN THE ABSENCE OF ANY REPLY FROM ASSESS EE THAT THERE IS NO ELEMENT OF PERSONAL USER. ACCORDINGLY THIS ISSUE OF THE ASSESS EES APPEAL IS DISMISSED. 11. THE NEXT ISSUE IN THIS APPEAL OF ASSESSEE IS AG AINST THE ORDER OF CIT(A) IN CONFIRMING THE ADDITION ON ACCOUNT OF DISALLOWANCE OF OFFICE AND OFFICE MAINTENANCE EXPENSES BY ASSESSING OFFICER. FOR THIS ASSESSEE H AS RAISED HE FOLLOWING GROUND NO.5 :- ITA NO.3844 & 4008/AHD/2007 A.Y.2004-05 M/S. VEER GEMS V. ACIT CIR-7 SURAT PAGE 7 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AS WELL AS LAW ON THE SUBJECT THE LEARNED CIT(APPEALS) HAS ERRED IN CONF IRMING THE ACTION OF THE ASSESSING OFFICER IN MAKING ADDITION OF RS.20000/- I.E. RS.10000/- EACH FOR OFFICE AND OFFICE MAINTENANCE EXPENSES. 12. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND FROM THE CONCURR ENT FINDINGS OF THE LOWER AUTHORITIES THAT SINCE THE COMPLETE DETAILS COULD N OT BE PRODUCED IN RESPECT OF OFFICE EXPENSE AND OFFICE MAINTENANCE EXPENSES BOTH THE L OWER AUTHORITIES HAVE NOT DENIED THE POSSIBILITY IN INFLATION OF THE EXPENDIT URE. THE ASSESSEE HAS ALSO NOT CONTESTED THIS ISSUE. HENCE THE DISALLOWANCE OF RS .20 000/- ON THIS ISSUE IS CONFIRMED AND THIS ISSUE OF ASSESSEES APPEAL IS DI SMISSED. 13. THE NEXT ISSUE IN THIS APPEAL OF ASSESSEE IS AG AINST THE ORDER OF CIT(A) CONFIRMING THE DISALLOWANCE OF PREVIOUS YEAR EXPENS ES. FOR THIS ASSESSEE HAS RAISED THE FOLLOWING GROUND NO.6 :- 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AS WELL AS LAW ON THE SUBJECT THE LEARNED CIT(APPEALS) HAS ERRED IN CONF IRMING THE ACTION OF THE ASSESSING OFFICER IN MAKING ADDITION OF RS.36 940/- FOR EXPENSES RELATED TO PREVIOUS YEAR. 14. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE TH ROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT LOWER A UTHORITIES HAVE RECORDED THAT THE EXPENSES WERE DEBITED TO CURRENT YEAR SINCE BILLS RELATING TO THE EXPENDITURE WERE MISPLACED. THE EXP LANATION IS NOT ACCEPTABLE SINCE THE EXPENDITURE RELATES TO EARLIE R YEAR IT IS NOT ALLOWABLE DURING THE YEAR AND THE REASONS AS NARRAT ED BY LOWER AUTHORITIES ARE HEREBY CONFIRMED. 15. THE NEXT ISSUE IN THIS APPEAL OF ASSESSEE IS AG AINST THE ORDER OF CIT(A) IN CONFIRMING THE DISALLOWANCE OF DEPRECIATI ON AT 20% OF TOTAL VEHICLE EXPENDITURE AND VEHICLE DEPRECIATION. FOR T HIS ASSESSEE HAS RAISED THE FOLLOWING GROUND NO.7 :- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AS WELL AS LAW ON THE SUBJECT THE LEARNED CIT(APPEALS)HAS ERRED I N CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN MAKING ADDIT ION OF RS.86 756/- BEING 20% OF TOTAL VEHICLE EXPENDITURE AND VEHICLE DEPRECIATION OF RS.4 32 876/-. ITA NO.3844 & 4008/AHD/2007 A.Y.2004-05 M/S. VEER GEMS V. ACIT CIR-7 SURAT PAGE 8 16. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUG H THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND FROM THE CONCURR ENT FINDINGS OF LOWER AUTHORITIES THAT THERE IS ELEMENT OF PERSONAL USER AND THIS HAS NOT BEEN DENIED BY ASSESSEE BEFORE LOWER AUTHORITIES OR BEFORE US NOW. IN THE ABSENCE OF SAME WE CONFIRM THE ORDERS OF LOWER AUTHORITIES PARTLY AS WE RESTRICT THE DISALLOWANCE AT 10% BEING REASON ABLE. ACCORDINGLY WE DIRECT THE ASSESSING OFFICER TO RE-COMPUTE THE D ISALLOWANCE. ACCORDINGLY THIS ISSUE OF ASSESSEES APPEAL IS PAR TLY ALLOWED. 17. THE NEXT ISSUE IN THIS APPEAL OF ASSESSEE IS AG AINST THE ORDER OF CIT(A) IN CONFIRMING THE DISALLOWANCE OF INTEREST O N LOANS AT RS.69 757/-. FOR THIS ASSESSEE HAS RAISED THE FOLL OWING GROUND NO.8 :- 8. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AS WELL AS LAW ON THE SUBJECT THE LEARNED CIT(APPEALS)HAS ERR ED IN CONFIRMING THE ACTION OF THE ASSESSING OFFICER IN M AKING ADDITION OF RS.69 757/- FOR INTEREST ON LOANS. 18. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE THAT ASSESSING OFFICER DISALLOWED INTEREST ON LOANS AT RS.69 757/- BY STATING THAT THE ASSESSEE HAD PAID INTEREST ON UNSECURED LOANS @ 7.2 0% BUT DID NOT CHARGE ANY INTEREST ON LOANS OF RS.9 68 850/- ADVAN CED TO SIX PARTIES. THE AO REQUIRED THE ASSESSEE TO EXPLAIN THAT THESE LOANS WERE GIVEN TO RELATIVES AND FRIENDS ON A TEMPORARY BASIS AND THAT IS WHY NO INTEREST WAS CHARGED FROM THEM. THE AO DID NOT ACCEPT THE EX PLANATION AND DISALLOWED INTEREST PAID ON UNSECURED LOANS TO THE EXTENT OF INTEREST NOT CHARGED ON THIS AMOUNT. THE CIT(A) ALSO CONFIRMED T HE ACTION OF ASSESSING OFFICER BY STATING AS UNDER:- I DO NOT SEE ANY LOGIC IN THE ARGUMENT OF THE APPE LLANT. IT IS NOT MATERIAL WHETHER DISALLOWANCE OF INTEREST WAS MADE IN EARLIER YEAR OR NOT. THE APPELLANT HA PAID INTEREST ON BORR OWED FUNDS AND HAD NO JUSTIFICATION IN NOT CHARGING INTEREST FROM RELATIVES AND FRIENDS. THE DISALLOWANCE IS HEREBY CONFIRMED. 19. BEFORE US ASSESSEE CLAIMED THAT IT HAD INTERES T FREE FUNDS AVAILABLE WITH IT AND INCOME DURING THE YEAR IS ABO UT RS.7.59 CRORES AND THIS IS A SMALL LOAN OF RS.9 68 850/-. WE FIND FORCE IN THE ARGUMENT OF THE ASSESSEE THAT IT HAD INTEREST FREE FUNDS AVA ILABLE WITH IT AS IS ITA NO.3844 & 4008/AHD/2007 A.Y.2004-05 M/S. VEER GEMS V. ACIT CIR-7 SURAT PAGE 9 SEEN FROM THE INCOME DECLARED DURING THE YEAR WHICH WAS AT RS.7.59 CRORES. ACCORDINGLY WE DELETE THE DISALLOWANCE AND THIS ISSUE OF ASSESSEES APPEAL IS ALLOWED. COMING TO REVENUES APPEAL IN ITA NO.4008/AHD/2007. 20. THE FIRST ISSUE IN THIS APPEAL OF REVENUE IS AG AINST THE ORDER OF CIT(A) IN DELETING THE DISALLOWANCE OF DEDUCTION U/ S.80HHC OF THE ACT ON FORWARD CONTRACT CANCELLATION INCOME. FOR THIS REVENUE HAS RAISED THE FOLLOWING GROUND NO.1 :- 1.ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW THE HONBLE TRIBUNAL HAS ERRED IN DIRECTING THE A.O TO ALLOW THE DEDUCTION U/S.80HHC ON THE FORWARD CONTRACT CANCELL ATION INCOME ALSO AMOUNTING TO RS.4 16 10 375/-. 21. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE STAT ED THAT ASSESSING OFFICER AS WELL AS CIT(A) HAS RELIED ON THE TRIBUNA LS ORDER IN EARLIER YEAR WHEREIN THE FACTS BEING EXACTLY IDENTICAL. HE REFERRED TO THE CIT(A)S ORDER AT PAGE-5 WHEREIN CIT(A) HAS FOLLOWED THE TRIBUNALS ORDER AS UNDER:- THE NEXT GROUND OF APPEAL IS REGARDING EXCLUSION O F FORWARD CONTRACT CANCELLATION INCOME OF RS.4 16 10 375/- AN D LOCAL SALES OF RS.49 77 674/- FOR DEDUCTION U/S.80HHC OF THE IT ACT. I FIND THAT THE ISSUE OF FORWARD CONTRACT CANCELLATION INC OME HAS BEEN DECIDED IN FAVOUR OF THE APPELLANT BY THE HONBLE I TAT AHMEDABAD IN ITA NO.775/AHD/2006 FOR AY 2003-04 IN ORDER DATED 30.11.2006. RESPECTFULLY FOLLOWING THE SAID D ECISION I HEREBY DIRECT THE AO TO INCLUDE FORWARD CONTRACT CA NCELLATION INCOME FOR CALCULATION OF DEDUCTION U/S.80HHC OF TH E IT ACT. IN RESPECT OF LOCAL SALES THE AO OBSERVED THAT THE SE SALES WERE MADE TO M/S. ELEGANT COLLECTION SITUATED IN SEPZ M UMBAI. HOWEVER AS PER DEFINITION OF EXPORT OUT OF INDIA SHALL NOT INCLUDE ANY TRANSACTION BY WAY OF SALES IN A SHOP O R ANY ESTABLISHMENT SITUATED IN INDIA NO INVOLVING CLEAR ANCE AT ANY CUSTOMS STATION AS DEFINED IN CUSTOMS ACT. THE AO H ELD THAT THE SAID SALES COULD NOT BE TREATED AS DEEMED EXPORT AN D THEREFORE WAS LOCAL SALES AND EXCLUDED THE SAME FROM THE INCO ME WHILE CALCULATING DEDUCTION U/S.80HHC OF THE IT ACT. BEFORE ME THE LD. AR SUBMITTED THAT SALES MADE TO UNITS SITUATED IN SPECIAL ECONOMIC ZONE WAS ELIGIBLE FOR DEDUCTION U/S 80HHC OF THE IT ACT FOR THE ASSESSMENT YEAR UNDER APPEAL AS PER THE PROVISIONS OF SECTION U/S.80HHC(4C) OF THE IT ACT. AS PER THE READING OF THE SECTION THE APPELLANTS CONTENTION I S FOUND CORRECT ITA NO.3844 & 4008/AHD/2007 A.Y.2004-05 M/S. VEER GEMS V. ACIT CIR-7 SURAT PAGE 10 AND THE AO IS DIRECTED TO TREAT THE SALES TO THE ES TABLISHMENT SITUATED IN THE SPECIAL ECONOMIC ZONE AS EXPORT SAL ES AND ALLOWED DEDUCTION AS PER LAW. EVEN OTHERWISE LD. COUNSEL FOR THE ASSESSEE FURTHE R STATED THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF ASSESSEE AND AGAINST THE REVENUE BY TRIBUNALS ORDER IN ASSESSEES OWN CASE IN ITA NO.4136/AHD/2008 (SUPRA) VIDE PARA-20 AS UNDER:- 20. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CONSID ERED THE MATERIAL AVAILABLE ON RECORD. IT IS NOT IN DISPUTE THAT THE ASSESSEE IS DOING BUSINESS OF IMPORT AND EXPORT OF DIAMONDS AND IT ENTERED INTO FORWARD EXCHANGE CONTRACT IN RESPECT OF IMPORT AND EXPORT TRANSACTIONS. ON CANCELLATION OF THE CONTRACT ASSES SEE IS EITHER ENTITLED TO PROFIT OR LOSS DEPENDING ON RATES CONTR ACTED AND RATES PREVAILING AT THE TIME OF CANCELLATION. THE ASSESSE E ENTERED INTO THESE FORWARD EXCHANGE CONTRACTS IN ORDER TO PROTEC T AGAINST THE FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE CURRENC Y. THE ASSESSEE IN THIS CASE MADE NET GAINS IN RESPECT OF FOREIGN EXCHANGE CONTRACT EXPORT AS THE VALUE OF THE RUPEE WAS IMPROVING AT THAT TIME. THE A O HAS ALSO CONSIDERED THE ABOVE ISSUE RELATING TO INCOME FROM CANCELLATION OF FORWARD CON TRACT. IT IS THEREFORE ADMITTED FACT THAT IT WAS A CASE OF CANC ELLATION OF FORWARD CONTRACTS ENTERED BY ASSESSEE WITH OTHERS. THE DETAILED FACTS EXPLAINED IN THE STATEMENT OF FACTS BY THE AS SESSEE HAVE NOT BEEN DISPUTED. ITAT AHMEDABAD BENCH IN THE CASE OF THE SAME ASSESSEE IN PRECEDING ASSESSMENT YEAR 2003-04 IN ITA NO.775/AHD/2007 (SUPRA) CONSIDERED THE ISSUE OF DED UCTION U/S 80 HHC OF THE IT ACT ON INCOME FROM CANCELLATION OF FORWARD EXCHANGE CONTRACT. THE LEARNED CIT (A) IN THIS CASE ALLOWED THE CLAIM OF THE ASSESSEE TREATING IT AS EXPORT PROFIT BY RELYING UPON DECISION OF MUMBAI BENCH IN THE CASE OF D. KIRHOREK UMAR AND CO. VS DCIT AND DIRECTED THE A O TO COMPUTE THE DEDUCTI ON U/S 80 HHC BY INCLUDING THE PROFIT REALIZED BY CANCELLATIO N OF FORWARD EXCHANGE CONTRACT IN THE PROFIT OF THE EXPORT BUSIN ESS. THE DEPARTMENTAL APPEAL WAS CONSIDERED BY THE TRIBUNAL AS ABOVE AND BY RELYING UPON THE DECISION IN THE CASE OF D. KISHOREKUMAR AND CO. (SUPRA) THE DEPARTMENTAL APPEAL WAS DISMISS ED. THE ORDER OF THE TRIBUNAL ABOVE WAS REFERRED IN THIS DE CISION IN WHICH IT WAS HELD THAT THE CREDIT SHOWN IN THE PROFIT/LOS S ACCOUNT AS PROFIT ON CANCELLATION OF FORWARD CONTRACT IS AS IN TEGRAL PART OF THE EXPORT BUSINESS AS PURCHASED OR IMPORT. THE COPY OF THE ORDER DATED 30 TH NOVEMBER 2006 IS FILED AT PAGE 3 OF THE PAPER BOO K. ITAT MUMBAI BENCH IN THE CASE OF VOLTAS INTERNATION AL LTD. VS ACIT (SUPRA) HELD PAYMENT BY ASSESSEE TO BANK FOR CANCELLATION OF FORWARD FOREIGN EXCHANGE CONTRACT B EING IN THE NATURE OF DAMAGES FOR NON-PERFORMANCE OF CONTRA CT IS ALLOWABLE AS BUSINESS LOSS AND IT CANNOT BE TREATED AS SPECULATIVE LOSS AS THERE IS NO SETTLEMENT OF CONTR ACT AND ITA NO.3844 & 4008/AHD/2007 A.Y.2004-05 M/S. VEER GEMS V. ACIT CIR-7 SURAT PAGE 11 SECTION 43(5) IS NOT ATTRACTIVE. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE IN THE LIGHT OF DECISIONS OF THE TRIBUNAL IN THE CASE OF THE SAME ASSESSEE FOR ASSESSMENT YEA R 2003-04 AND IN THE CASE OF VOLTAS INTERNATIONAL LTD. (SUPRA ) WE ARE OF THE VIEW THAT PROVISIONS OF SECTION 43(5) OF THE IT ACT WOULD NOT APPLY TO THE CASE OF THE ASSESSEE. THE INCOME EARNED BY A SSESSEE ON ACCOUNT OF CANCELLATION OF FORWARD EXCHANGE CONTRAC T SHOULD BE TREATED AS BUSINESS INCOME AND NOT INCOME FROM SPEC ULATION. WE ACCORDINGLY SET ASIDE THE ORDERS OF AUTHORITIES BEL OW AND DIRECT THE A O TO TREAT THE INCOME ON THIS ISSUE AS BUSINE SS INCOME. AS A RESULT THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED. 22. WE FIND THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE IN ASSESSEE OWN CASE AS REFERRED ABOVE ON IDENTICAL F ACTS RESPECTFULLY FOLLOWING THE SAME WE CONFIRM THE ORDER OF CIT(A) AND THIS ISSUE OF REVENUES APPEAL IS DISMISSED. 23. IN THE RESULT APPEAL OF ASSESSEE IS PARTLY ALLOWED AS INDICATED ABOVE AND THAT OF REVENUES APPEAL IS DISMISSED ORDER PRONOUNCED ON THIS DAY OF 24 TH DEC 2010 SD/- SD/- ( G.D.AGARWAL ) ( MAHAVIR SINGH ) (VICE PRESIDENT) (JUDICIAL MEMBER) AHMEDABAD DATED : 24/12/2010 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE ASSESSEE. 2. THE REVENUE. 3. THE CIT(APPEALS)-IV SURAT 4. THE CIT CONCERNS. 5. THE DR ITAT AHMEDABAD 6. GUARD FILE. BY ORDER /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT AHMEDABAD