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.
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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
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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
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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
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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
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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
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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.
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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."
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(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
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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
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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
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