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M/s Nalini Jewellers, 16/2646-49, Bank Street, Karol Bagh, New Delhi. Vs. The Assistant Commissioner of Income Tax, Circle-33(1), New Delhi.
December, 05th 2019

Referred Sections:
Section 43(5)
Section 43(5) of the Income Tax Act, 1961
Sections 28 to 41
Section 2
Section 260A of Income Tax Act, 1961

 

                                                                      ITA No.- 4463/Del/2014
                                                                              Nalini Jewellers.

             IN THE INCOME TAX APPELLATE TRIBUNAL
                  (DELHI BENCH: `E': NEW DELHI)

        BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER
                           AND
     SHRI ANADEE NATH MISSHRA, ACCOUNTANT MEMBER

                           ITA No: 4463/Del/2014
                         (Assessment Year: 2010-11)

M/s Nalini Jewellers,                          The Assistant Commissioner
16/2646-49, Bank Street,                Vs     of Income Tax,
Karol Bagh, New Delhi.                         Circle-33(1),
                                               New Delhi.

PAN No: AAEFN2292D
        APPELLANT                                 RESPONDENT

             Assessee by            :     Shri Nishant Datta, Adv.
             Revenue by             :     Ms. Rakhi Vimal, Sr. DR

                                        ORDER


Per Anadee Nath Misshra, AM


(A) This appeal by Assessee is filed against the order of the Learned Commissioner of

Income Tax (Appeals)-XXVI, New Delhi, ["Ld. CIT(A)" for short], dated 23.05.2014, for

Assessment Year ("A.Y.", for short) 2010-11, on the following grounds:

      "1.    That Learned ACIT and CIT(A) has erred in law and on facts while
             treating Rs. 1,03,93,854/- being the "loss of gold desk account" as
             speculative loss.
      2.     That the learned CIT(A) has not appreciated the facts of the case,
             explanation offered & proceeded to hold the loss of Rs. 1,03,93,854/- as
             speculative loss.



                                        Page 1 of 11
                                                                         ITA No.- 4463/Del/2014
                                                                                 Nalini Jewellers.

      3.     That the learned CIT(A) has further erred in law and on facts while
             holding that proviso (a) to section 43(5) is not applicable to the facts of
             the appellant's case.
      4.     That the appellant requests for leave to add or amend the grounds of
             appeal before the appeal is heard and disposed off.

             Accordingly, it is submitted that relief as prayed above may kindly be
             granted."




(B)   At the outset, Ld. Counsel for assessee brought to our notice that identical issues

were decided by Co-ordinate Bench of Income Tax Appellate Tribunal ("ITAT", for short) in

assessee's own case by Co-ordinate Bench of ITAT, Delhi, vide order dated 27.04.2018 in

ITA No.- 4463/Del/2014 for Assessment Year 2010-11 wherein the assessee's appeal was

dismissed and revenue's appeal was partly allowed for statistical purposes; and it was held

as under:

       "4.9 We have heard the rival submission and perused the relevant material on
       record. The facts in respect of the transaction brought on record by the Ld. CIT(A)
       have not been disputed by the Ld. counsel of the assessee. The assessee is
       contesting that forward contract transaction of Gold are hedging transactions,
       whereas according to the Assessing Officer, no supporting documents have been
       filed. The hedging transactions can be illustrated as under:

             "For example, imagine an exporter has got an export order of jewellery, say
             1000 grams on 01/04/2008, which has to be supplied within 3 months, say by
             30/6/2008. The price of pure gold per 10 gms as on 01/04/2008 is say Rs.
             30,000/-. The exporter purchases the gold and start manufacturing of the
             jewellery. The exporter apprehends that the prices of gold may go up or may
             go down as on the date of jewellery finally exported to the buyer i.e.
             30/06/2008. In case, the price of gold goes up, the exporter get more value of
             the jewellery due to rise in the price of the gold, however, if the price, goes
             down the exporter will get less value f the jewellery as compared to the value
             of the date of purchase. In order to eliminate the risk of loss on sale of
             jewellery, if any due to fall in price of gold on the date of booking of sales as
             compared to prices on the date of purchase, the exporter enters into a
             forward contract with bank or any authorized person on 01.04.2008 for sale of
             gold on the future date (which may be around the date of supply of jewellery
             to the buyer, say 30.06.2008), on the same price on which, the exporter has


                                         Page 2 of 11
                                                              ITA No.- 4463/Del/2014
                                                                      Nalini Jewellers.

purchased the gold i.e. Rs. 30,000/- per 10 gms. Now, in case the price of the
gold on the date of supply of jewellery goes up, say Rs. 40,000/- per 10 gms,
then there will be a loss of Rs. 10,000 per gram to the exporter, at the time of
settlement of this forward contract transaction, however there will be a gain
of Rs. 10,000 per gram in export order supplied. Thus, when both the forward
contract transaction and actual supply of the jewellery, are seen in combined
manner, there is no loss to the exporter, but when forward contract
transaction is seen isolated & accounted separately, there will be a loss of Rs:
10,000 per 10 gms. Similarly, In case the price of the gold goes down say to
Rs.20,000/- per 10 gms, in that case at the time of settlement of the forward
contract on 30/06/2008, the exporter will gain Rs. 10,000 per 10 gms,
whereas in the export order supplied, value of the jewellery will be reduced by
Rs. 10,000 per 10 gms and which will be a loss on the export order. But,
when we see, both the forward contract transaction and export order in
combined manner, there will be no loss to the exporter. In this manner, the
exporter has hedged its losses from fluctuation of the gold prices in the
market".

4.9.1    In the above example, the forward contract transactions have been
        settled otherwise than by actual delivery of gold and therefore these
        transactions will fall in the nature of speculative transactions subject to
        the exceptions provided in proviso (a) to (e) to the section 43(5) of the
        Act.

4.9.2    In the facts of the instant case, the issue in dispute is whether the
        transactions of forward (future) contract of sale of gold to the Bank or
        the MMTC are speculative transaction or not. For ready reference, the
        relevant section 43(5) of the Act, defining the speculative transaction
        is reproduced as under:

        "Definitions of certain terms relevant to income from profits and gains
        of business or profession.

        43. In sections 28 to 41 and in this section, unless the context
        otherwise requires--
        (1) ...................
        (2) .................
        (3) ...............
        (4) ..................
        (5) "speculative transaction" means a transaction in which a contract
        for the purchase or sale of any commodity, including stocks and
        shares, is periodically or ultimately settled otherwise than by the actual
        delivery or transfer of the commodity or scrips:
        Provided that for the purposes of this clause--

        (a) a contract in respect of raw materials or merchandise entered into


                             Page 3 of 11
                                                             ITA No.- 4463/Del/2014
                                                                     Nalini Jewellers.
           by a person in the course of his manufacturing or merchanting
           business to guard against loss through future price fluctuations in
           respect of his contracts for actual delivery of goods manufactured
           by him or merchandise sold by him; or

        (b) a contract in respect of stocks and shares entered into by a dealer
            or investor therein to guard against loss in his holdings of stocks
            and shares through price fluctuation; or

        (c) a contract entered into by a member of a forward market or a
            stock exchange in the course of any transaction in the nature of
            jobbing or arbitrage to guard against loss which may arise in the
            ordinary course of his business as such member; [or]

        (d) an eligible transaction in respect of trading in derivatives referred
            to in clause (ac) of section 2 of the Securities Contracts
            (Regulation) Act, 1956 (42 of 1956) carried out in a recognised
            stock exchange; [or]

        (e) an eligible transaction in respect of trading in. commodity
            derivatives carried out in a recognised association, which is
            chargeable to commodities transaction tax under Chapter VII of
            the Finance Act, 2013 (17 of 2013), shall not be deemed to be a
            speculative transaction."






4.9.3    Thus, according to the section any transactions of contract for
        purchase and sale of commodities (here in this case Gold), which is
        settled periodically, otherwise than by way of actual delivery or
        transfer of that commodity, the transaction would fall under
        speculative transaction. However, there are exceptional situations from
        sub-clause (a) to (e), where these transactions would not be
        speculative transaction.

4.9.4    In the instant case, there is no dispute that the contracts of sale of
        gold to MMTC are settled periodically without actual delivery and on
        the date of settlement of the contract, only difference In market price
        and the contract price is paid or received by the assessee. Thus under
        the main definition of the subsection, the transactions are speculative
        transaction, but the assessee has claimed that its case is covered by
        proviso (a) and of the said subsection.

4.9.5    The proviso (a) speaks about contract in respect of raw material to
        guard against any loss in price fluctuation against contract of sale of
        manufactured goods.

4.9.6    The Ld. CIT(A) has noted that proviso (a) to section 43(5) is not
        attracted in the case of the assessee as there is no element of loss
        embedded in respect of the contract for actual delivery of jewellery
        manufactured and exported by the assessee, which required to be
        guarded by entering into a contract in respect of the raw material.
        According to the Ld. CIT(A), the assessee has entered into forward
        contract with bank to guard the loss through future price fluctuation in
        respect of the purchase of pure gold.

4.9.7   In our opinion, object of entering into forward contract transaction has
        to be seen from the contract agreements and underlying assets. In the
        case of the assessee for claiming benefit of clause (a) of Section 43(5)
        of the Act, its forward contract transactions should have been
        corroborated one by one, with the purchases of gold an supply of
        jewellery manufactured. Before the Assessing Officer, the assessee
        failed to correlate these forward contractor transactions of gold and


                            Page 4 of 11
                                                                  ITA No.- 4463/Del/2014
                                                                          Nalini Jewellers.
           corresponding purchases and export of jewellery. Even such details
           have not been filed either before the Ld. CIT(A) or before us. Thus, n
           this ground, the assessee cannot be allowed the benefit of proviso (a)
           to section 43(5) of the Act in absence of any documentary evidences
           to support its contention of fulfilling conditions of proviso (a) to section
           43(5) of the Act. .

4.9.8      Further, the Ld. CIT(A) has distinguished the facts of the case with the
           facts of the case of London Star Diamond company. In the said case
           forward contracts were entered into with banks for hedging foreign
           exchange loss on outstanding receivables in foreign currency. In the
           said case there was one to one correlation between the forward
           contracts and the export invoices but in the instant case the assessee
           has failed to correlate underlying asset with the forward contracts
           entered into by the assessee. We agree with the finding of the Ld.
           CIT(A) that the facts of the case of London Star Diamond company are
           distinguishable from the facts of the assessee and accordingly ratio of
           the said decision is not applicable over the facts of the instant case.

4.9.9       The Ld. CIT(A) has also relied on the rule of consistency as laid down
           by the Hon'bie Supreme Court in the case of Radhasami Stasang 193
           ITR 321 in view of the loss treated by the assessee as speculative loss
           in the preceding assessment year.

4.9.10      In view of the above discussion, we uphold the decision of the Ld.
           CIT(A) on the issue in dispute. The grounds of the appeal of the
           assessee are accordingly dismissed.

5.    The ground Nos. 1 to 4 of the appeal of the revenue relates to holding
     the transaction of foreign currency forward contracts amounting to
     Rs.99,22,176/-as speculative by the Ld. CIT(A).

     5.1    Before us the Ld. DR submitted that this amount was declared by the
           assessee itself as business profit in the return of income filed and
           therefore the Assessing Officer did not look Into whether the
           transactions could be in the nature of speculative or not. According to
           him, the Ld. CIT(A) on the basis of his finding in respect of forward
           contract transaction of Gold, treated the gain from foreign currency
           forward contract transaction as speculation gain without looking into
           the documentary evidences of such transactions, which were already
           admitted by the assessee as business transaction. According to him,
           whether these transactions could be considered as speculative
           transaction, need to be examined in the light of supporting contract
           agreements and documentary evidences.

     5.2 The Ld. AR, on the other hand, relied on the order of the Ld. CIT(A).
     5.3 We have heard the rival submission and perused the relevant material
           on record. We note that the gain of Rs. 99,22,176/-from foreign
           currency forward contracts was offered to tax by the assessee as
           business gain and, therefore,, the Assessing Officer did not feel to go
           into examining, whether it was speculative in nature. We also find that
           the Ld. CIT(A) has held the transactions as speculative in nature with
           following finding:

            "5.3 I have carefully considered the submission of the appellant and
            perused the record. I am of the considered view that the Assessing
            Officer has erred in holding the gains arisen from forward contracts
            in respect of ` Foreign Currency 1 as business income thought he has
            placed reliance on the decision in the case f K Mohan & Company
            (Export) (P) Ltd. (2010) 130 TTJ 719. However, the nature of


                                Page 5 of 11
                                                                         ITA No.- 4463/Del/2014
                                                                                 Nalini Jewellers.
                      forward contracts in respect of `Foreign Currency' as mentioned
                      above is speculation. Thus, both types of transaction; forward
                      contracts in respect of `pure gold' and forward contracts in respect of
                      `foreign currency' being similar hs to be treated on the same
                      footings. Thus, it is hereby held that the profit of Rs. 99,21,176/-
                      derived on account of forward contracts in respect of 'Foreign
                      Currency' as mentioned above is speculative profit/gains and not the
                      business income as held by the AO. Accordingly, it is held that the
                      profit of Rs. 99,22,176/- derived on account of Forward contracts in
                      respect of 'Foreign Currency' being speculative profit has to be set-
                      off of against the loss of Rs. 1,03,93,854/- debited in gold desk
                      account. Consequentially,' the addition of Rs. 1,03,93,854/- is
                      restricted to Rs.4,71,678/-. The AO shall give consequential relief."
                 5.4 On perusal of the above finding, we note that the Ld. CIT(A) has
                     decided the issue in view of the facts noted in the case of forward
                     contract transactions of the gold and no documentary evidence in
                     support have been referred in his findings on the issue in dispute.
                 5.5 In view of the aforesaid facts, we feel it appropriate to restore this
                    issue to the file of the Assessing Officer for deciding afresh after
                    providing adequate opportunity of being heard to the assessee, with
                    liberty to the assessee to file necessary documentary evidence in
                    support its claim. Thus, the ground Nos. 1 to 4 of the appeal of the
                    Revenue are accordingly allowed for statistical purposes."



(B.1) The assessee carried the matter in Hon'ble Delhi High Court and filed appeal under

Section 260A of Income Tax Act, 1961 ("I.T. Act", for short) for Assessment Year 2010-11.

Vide order dated 29.04.2019, the Hon'ble Delhi High Court held as under:




      "4.We have heard counsel for the parties. The limited relief that the assessee seeks
      is that even while directing the remand for reconsideration at the behest of the
      Revenue in its appeal, ITAT failed to appreciate the assessee's contention with
      respect to the contracts which it claimed were not forward contracts by virtue of
      proviso clauses (a) & (b) to Section 43 (5) of the Act. The contention was declined
      on the ground that no correlation between the forward contract transactions of gold
      and corresponding purchases and export of jewellery was `established to satisfy the
      requirements of law. This Court is of the opinion that the assessee's contention has
      some merit - the earlier portion of the main impugned order specifically noticed the
      compilation of documents produced during the proceedings, which contained specific
      contracts and the transactions which the Revenue alleged were speculative.

      5.      In these circumstances, given that the Revenue's appeal has been remitted,
      the ITAT's approach in our opinion was not correct. Accordingly, the assessee's
      question with respect to the verification of the transactions and the correlation with
      specific contracts shall be examined having regard to the assessee's contentions as


                                         Page 6 of 11
                                                                       ITA No.- 4463/Del/2014
                                                                               Nalini Jewellers.

      well. ITA 430/2019 and W.P. (C) 4468/2019 are partly allowed in the above terms.
      The ITAT's impugned order is hereby set aside."




(B.2) Identical issues came up before ITAT in assessee's own case for Assessment Year

2011-12 also.   Vide order dated 28.05.2019 for Assessment Year 2011-12 in ITA No.

4531/Del/2015 and 4181/Del/2015; and the issues were set aside to the file of the

Assessing Officer to decide, in accordance with decision taken in Assessment Year 2010-11,

by following the directions of the Hon'ble High Court. The relevant portion of the aforesaid

order dated 28.05.2019 is reproduced as under:

      "7.    At the very outset, it is brought to our notice by the Ld. Authorized
      Representatives of the parties to the appeals that identical issues were decided by
      the coordinate Bench of the Tribunal in assessee's own case in IT A
      Nos,4487/Del/2014 & 4463/Del/2014 order-dated 27.04.2018 by dismissing
      the appeal filed by the assessee and by partly allowing the appeal filed by the
      Revenue for statistical purposes. Then, the assessee carried the matter before the
      Hon'ble Delhi High^ourt- who has passed the order dated 29.04.2019 in WP (C)
      4468/2019 and ITA 430/2019 by setting aside the matter to the AO to examine
      the issue with respect to verification of transactions and correlation with specific
      contracts by returning following findings

             "4. We have heard counsel for the parties. The limited relief that the
             assessee seeks is that even while directing the remand for
             reconsideration at the behest of the Revenue in its appeal, IT AT
             failed to appreciate the assessee''s contention with respect to the
             contracts which it claimed were not forward contracts by virtue of
             proviso clauses (a) & (b) to Section43 (5) of the Act The contention
             was declined on the ground that no correlation between the forward
             contract transactions of gold and corresponding purchases and
             export of jewellery was established to satisfy the requirements of
             law. This Court is of the opinion that the assessee's contention has
             some merit - the earlier portion of the main impugned order
             specifically noticed the compilation of documents produced during
             the proceedings, which contained specific contracts and the
             transactions which the Revenue alleged were speculative.

             5. In these circumstances, given that the Revenue's appeal has been
             remitted, the ITAT's approach in our opinion was not correct.


                                        Page 7 of 11
                                                                       ITA No.- 4463/Del/2014
                                                                               Nalini Jewellers.

             Accordingly, the assessee'S question with respect to the verification
             of the transactions and the correlation with specific contracts shall
             be examined having regard to the assessee's contentions as well,
             ITA 430/2019 and W.P.(C) 4468/2019 are partly allowed in the
             above terms. The ITAT's impugned order is hereby set aside. "

      8.      We are of the considered view that since the identical issues for AY 2010-11
      are already pending adjudication by the AO having been remanded by the Hon'ble
      Delhi High Court, the same issues qua for the year under assessment are also
      required to be remanded back to the AO to decide in accordance with the order
      passed by the Hon'ble High Court. Consequently, both the appeals are set aside to
      the AO to decide in accordance with the decision taken in AY 2010-11 by following
      the directions by the Hon'ble High Court. Consequently, both the appeals filed by the
      assessee as well as Revenue are allowed for statistical purposes."




(B.3) Similarly, identical issues once again came up before ITAT for Assessment Year

2012-13 in assessee's appeal. Vide order dated 11.07.2019 in ITA No.- 2178/Del/2016;

Co-ordinate Bench of ITAT, Delhi, remanded the matter back to the file of the Assessing

Officer; holding as under:

      "6. During the hearing for the assessment year 2012-13 ,both the representatives
      have argued that the matter be remanded back to the file of the AO to examine the
      issue afresh in the light of judgment of the Hon'ble High Court for the assessment
      year 2010-11. Hence, we hereby direct the AO to verify the transactions and
      correlate the same with the specific contracts. The AO is also directed to consider
      the order off the Hon'ble High Court of Delhi at New Delhi vide W.P.(C) 4469/2019
      CM APPL. 19848/19 and to consider the forward contracts with relation to the
      provision to Clause (a) and (b) to Section 43(5) of the Income Tax Act, 1961 in
      accordance with the provisions of the Income Tax Act."









                                        Page 8 of 11
                                                                     ITA No.- 4463/Del/2014
                                                                             Nalini Jewellers.

(C)   At the time of hearing before us, the Ld. Counsel for assessee submitted that the

issue in dispute being identical in the present appeal; be also remanded back to the file of

the Assessing Officer for fresh order in accordance with aforesaid order dated 28.05.2019

of Hon'ble Delhi High Court; by following the precedents in assessee's own case in

aforesaid orders dated 28.05.2019 and 11.07.2019 passed by Co-ordinate Benches of

ITAT, Delhi. The Ld. Counsel for assessee submitted that facts and circumstances for this

year i.e. Assessment Year 2010-11 are identical to the facts and circumstances for

Assessment Years 2010-11 , 2011-12 and 2012-13 to which the aforesaid orders dated

29.04.2019, 28.05.2019 and 11.07.2019. The Ld. Departmental Representative ("Ld. DR",

for short) agreed with the submissions of the assessee.



(D)   We have heard both sides. We have perused the materials available on record. We

have also considered the precedents which were brought to our attention, at the time of

hearing. It is not in dispute that on identical issues in dispute, the facts and circumstances

for this year are identical to facts and circumstances for Assessment Years 2011-12 and

2012-13 to which the aforesaid orders dated 29.04.2019, 28.05.2019 and 11.07.2019

pertain. No distinguishing facts and circumstances have been brought to our attention by

either side to persuade us to take a view different from view taken by Co-ordinate Bench of

ITAT, Delhi in aforesaid orders dated 28.05.2019 and 11.07.2019 for Assessment Years

201-12 and 2012-13 respectively. In view of the foregoing, and as both sides have agreed

to this at the time of hearing before us, we set aside the order of the Ld. CIT(A) and

restore the issue in dispute in the present appeal before us to the file of the Assessing


                                       Page 9 of 11
                                                                        ITA No.- 4463/Del/2014
                                                                                Nalini Jewellers.

Officer with the direction to pass fresh order given by in accordance with direction Hon'ble

Delhi High Court for Assessment Year 2010-11 vide aforesaid order dated 29.04.2019.



(E)    In the result, appeal filed by assessee is partly allowed.



                Order pronounced in the Open Court on 04/12/2019.

         Sd/-                                                Sd/-
  (H.S. SIDHU)                                   (ANADEE NATH MISSHRA)
JUDICIAL MEMBER                                    ACCOUNTANT MEMBER

Dated: 04/12/2019
Pooja/

Copy   forwarded to:
1.      Appellant
2.      Respondent
3.      CIT
4.      CIT(Appeals)
5.      DR: ITAT

                                                                    ASSISTANT REGISTRAR
                                                                     ITAT NEW DELHI




                                        Page 10 of 11
                                                 ITA No.- 4463/Del/2014
                                                         Nalini Jewellers.


Date of dictation

Date on which the typed draft is placed before
the dictating Member
Date on which the typed draft is placed before
the Other Member

Date on which the approved draft comes to the
Sr. PS/PS

Date on which the fair order is placed before
the Dictating Member for pronouncement

Date on which the fair order comes back to the
Sr. PS/PS
Date on which the final order is uploaded on
the website of ITAT

Date on which the file goes to the Bench Clerk

Date on which the file goes to the Head Clerk

The date on which the file goes to the
Assistant Registrar for signature on the order

Date of dispatch of the Order




                            Page 11 of 11

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