TOUCHSTONE FINE JEWELLERY ,MUMBAI vs. INCOMET TAX OFFICER WARD 33(1)(1), MUMBAI

Since the issues involved in both appeals are common and identical and pertain to the same assessee, they have been clubbed, heard together, and are being disposed of by this consolidated order for the sake of convenience and brevity. Firstly, we shall take ITA No. 9052/Mum/2025 as the lead case, as the facts therein are identical.

Ground No. 1 raised by the assessee relates to challenging the order of the Ld. CIT(A) in confirming the addition of Rs. 38,74,262 made by the AO on account of unexplained purchases made by the assessee.

In this regard, we have heard the counsels for both the parties, perused the material placed on record, the judgments cited before us, and the orders passed by the Revenue Authorities.

Before we proceed further, it is necessary to evaluate the decision of the Ld. CIT(A) while adjudicating these grounds, the operative portion of which is contained in Paras 4.4 and 4.4.1 and the same is reproduce herein below:

After going through the facts, we noticed that the Ld. CIT(A) dismissed the grounds raised by the assessee by holding that the assessee had made purchases from five specific parties and that these parties had either not filed ITRs for the relevant years or had filed NIL returns, thereby casting doubt on the genuineness of the transactions. The investigation conducted by the AO also revealed a disturbing pattern to the effect that the alleged suppliers had no compliance history (no ITRs filed for AY 2021-22 and AY 2022-23) commensurate with the sales made by the assessee. In these circumstances, it created a strong presumption that these were paper transactions designed to inflate expenses. Apart from this, the assessee had failed to produce the parties for verification or provide their PANs. Thus, while relying on the decision in the case of CIT vs. N.R. Portfolio Pvt. Ltd., the claim of the assessee was dismissed, as the assessee failed to establish the capacity of the sellers to supply the goods.

Whereas, on the contrary, the assessee has categorically argued that documentary evidence substantiated the expenditure of Rs. 17,59,109 representing salary paid to three employees and, in this regard, ledger statements and Form-16 were produced (PB Pages 39-82) to establish that the expenditure was in the nature of salary payments.

Apart from this, the sum of Rs. 10,65,593 pertains to the purchase of machinery. In this regard, invoice copies substantiating the purchases were furnished during the course of proceedings (PB Page 83).

Also, with regard to the sum of Rs. 10,49,560, it was submitted that it related to creditors' translation adjustment. In this regard, the restatement of outstanding liabilities in foreign currency relating to purchases denominated in US dollars was specifically submitted before the AO.

Be that as it may, after hearing both the parties, we find that the arguments advanced before us at the Bar and the documents referred to were not even looked into by the Ld. CIT(A) and were not adjudicated specifically.

Moreover, we are of the view that mere possession of invoices and payment proofs is not sufficient to discharge the onus of proving genuineness under the Act, as mere documentation is not enough if the surrounding circumstances indicate a cover-up. Thus, in these circumstances, we are of the view that this issue needs to be restored to the file of the Ld. CIT(A) to verify the claim of the assessee and adjudicate this issue afresh after providing an opportunity of hearing to the assessee.

Thus, this ground raised by the assessee stands allowed for statistical purposes.

Ground No. 2 raised by the assessee relates to challenging the order of the Ld. CIT(A) in confirming the disallowance of Rs. 62,67,781 being foreign exchange fluctuation loss related to dollar-denominated packing and post-shipment working capital loans utilized for export-related activities.

Before we proceed to adjudicate this ground, it is necessary to evaluate the order of the Ld. CIT(A) while adjudicating this ground, and the same is contained in Paras 4.3 and 4.3.1 and the same is reproduce herein below:

After considering the submissions and going through the facts, we find that the assessee had claimed financial expenditure of Rs. 62,67,781 as exchange difference on foreign currency borrowings. As per the assessee, these were PCFC/PSFL loans obtained for export facilitation and the loss was revenue in nature. However, the Revenue Authorities disallowed the claim, holding that the assessee failed to provide authentic documentary evidence regarding the specific utilization of the loan, thereby enabling a determination as to whether the underlying liability was on capital account or revenue account.

The assessee submitted that it is engaged in the business of diamond- studded gold jewellery and that the primary receipts from sales are in US dollars. The raw material primarily comprises diamonds and gold, which are used for manufacturing jewellery. The assessee also provided details in this respect, including sanction letters and extracts of bank statements showing disbursement of loans for the purchase of gold from MMTC for manufacturing jewellery for export, as well as the reasons for the exchange difference, in its written submissions and the same is reproduced herein below:

Apart from this, the assessee has referred to examples at Pages 8 and 15 of the Paper Book, which were explained to the AO and the Ld. CIT(A) and details of which are reproduced herein below:

The assessee had also submitted that it had business receipts in US dollars which were substantially higher than the borrowings, and therefore there existed a natural hedge. In most cases, any loss was compensated by gains on the realization of export proceeds, details of which are reproduced herein below:

After considering the details referred to by the assessee, we find that the fundamental principle regarding the taxability/deductibility of foreign exchange fluctuations turns on whether the underlying loan is on capital account or revenue account. Though the assessee had argued that the loans were working capital loans, the onus was heavily upon the assessee to prove the utilization of the funds. The AO has specifically observed that the assessee had not furnished documentary evidence establishing that the loan was used specifically for circulating capital. Thus, a direct nexus between the loan and the day-to-day trading operations could not be proved, leading to the presumption that the borrowing related to the capital structure of the firm. Consequently, the loss arising from fluctuation was also treated as capital in nature, and the ground of the assessee was rejected.

Be that as it may, we noticed that the documents relied upon by the assessee at PB Pages 8 and 15 were not specifically considered by the Revenue Authorities while adjudicating this ground. Thus, in our view, this ground also needs to be restored to the file of the Ld. CIT(A) for fresh adjudication.

Therefore, this ground raised by the assessee also stands allowed for statistical purposes.

This ground raised by the assessee relates to challenging the order of the Ld. CIT(A) in confirming the addition of Rs. 75,00,000 as unexplained cash credit.

In this regard, we have heard the counsels for both the parties, perused the material placed on record, the judgments cited before us, and the orders passed by the Revenue Authorities. Before we proceed further, it is necessary to evaluate the order of the Ld. CIT(A) wherein this ground has been adjudicated. The operative portion of the order of the Ld. CIT(A) is contained in Para 4.5 and the same is reproduced herein below:

We noticed that, as per the assessee, he had received Rs. 75 lakhs from Satish J. Kothari (HUF) and explained this receipt as a repayment of a loan previously given by Satish J. Kothari (HUF) to M/s. Satish & Co. However, the Revenue Authorities rejected the explanation after analysing the balance sheet of the lender. In this eventuality, it was the onus of the assessee to prove the identity, creditworthiness, and genuineness of the transaction.

The balance sheet of Satish J. Kothari (HUF) showed a reduction in loans to M/s. Satish & Co. of only Rs. 16,50,000, whereas the assessee claimed a transaction of Rs. 75 lakhs. Thus, the lender's balance sheet contradicted the stand of the assessee. Hence, in these circumstances, the genuineness of the transaction could not be specifically proved.

Whereas, the assessee specifically submitted that, during the course of assessment proceedings, he had duly explained the said transaction. In this regard, the assessee drew our attention to the identity of the parties and the source of the loan given by Satish J. Kothari (HUF), details of which are reproduced herein below:

Be that as it may, we noticed that the documents relied upon by the assessee were not specifically considered by the Revenue Authorities while adjudicating this ground. Thus, in our view, this ground also needs to be restored to the file of the Ld. CIT(A) for fresh adjudication.

Thus, in these circumstances, we are of the view that this issue needs to be restored to the file of the Ld. CIT(A) to verify the claim of the assessee and adjudicate this issue afresh after providing an opportunity of hearing to the assessee.

Thus, this ground raised by the assessee stands allowed for statistical purposes.

Thus, in the result, the appeal filed by the assessee stands allowed for statistical purposes.