VANGUARD JEWELS LTD,MUMBAI vs. DCIT (OSD) 9(1) NOW CHANGED TO DCIT CC 1(1), MUMBAI

Per Jason P. Boaz, A.M. This appeal by the assessee is directed against the order of the CIT(A)- 21, Mumbai dated 29.01.2015 for A.Y. 2009-10. 2. The facts of the case, briefly, are as under: - 2.1 The assessee, a company engaged in the business of buying, selling, cutting and polishing of diamonds and investment in unquoted shares, filed its return of income for A.Y. 2009-10 on 30.09.2009 declaring loss of (-)`51,32,320/-. The return was processed under section 143(1) of the Income Tax Act, 1961 (in short 'the Act') and the case was subsequently taken up for scrutiny. The assessment was completed under section 143(3) of the Act of the Act vide order dated 31.12.2011 wherein the income of the assessee was determined at `88,58,680/- in view of the following disallowances: - i) Excess claim of foreign exchange loss ` 85,99,187/- (ii) Under section 14A read with rule 8D ` 53,81,133/- M/s. Vanguard Jewels Ltd. 2.2 Aggrieved by the order of assessment for A.Y. 2009-10 dated 31.12.2011, the assessee preferred an appeal before the CIT(A)-21, Mumbai, which was dismissed vide impugned order dated 29.01.2005. 3. Being aggrieved by the impugned order of the learned CIT(A)-21, Mumbai dated 29.01.2015, dismissing its appeal for A.Y. 2009-10, the assessee has preferred this appeal, raising the following grounds: - “

1. The learned Commissioner of Income Tax (Appeals) had erred in allowing to learned Assessing Officer the computing and resultantly reducing the foreign exchange loss of Assessee company by Rs.85,99,187/- in respect of the outstanding Sundry creditors.

2. The learned Commissioner of Income Tax (Appeals) had erred in approving the action of learned Assessing Officer of applying wrongly the Rule 8D pursuant the provisions of section 14A to the Assessee company who is engaged in the business of “Trading in Commodities and investment in Equity Shares”.

3. The appellant craves to add or alter the grounds of appeal at the time of or before the hearing of appeal.”

4. This case was fixed for hearing on a couple of occasions, but none was present for the assessee nor was any letter filed for adjournment of hearing. Even notice for hearing issued by RPAD did not elicit any response from the assessee. When the case was called for hearing on 20.12.2016, none was present for the assessee, but the learned D.R. for Revenue was present and ready to present Revenue’s side of the case. In the circumstances, as mentioned above, we are of the opinion that the assessee is not interested in pursuing its appeal seriously and therefore proceed to decide this appeal with the assistance of the learned D.R. for Revenue and the material on record.

5. Ground No. 1 – Foreign Exchange Loss 5.1 In this ground (supra), the assessee assails the impugned order of the learned CIT(A) as erroneous in upholding the Assessing Officer’s (AO) action in reducing foreign exchange loss claimed by the company to the extent of `85,99,187/- on outstanding foreign sundry credits. 5.2 The learned D.R. supported the finding rendered by the learned CIT(A) on this issue. It is submitted that in the course of assessment proceedings, the AO had observed that the assessee had debited total foreign exchange M/s. Vanguard Jewels Ltd. loss of `5,73,30,343/- by applying the average of various rates of US$ to Rupee ranging between `48.53 to `59.29; whereas it should have been valued @ `50.64/- as on 31.03.2009. After seeking the assessee’s explanation in this regard, the AO rejected the same and computed that the assessee had claimed excess foreign exchange loss from foreign sundry creditors to the extent of `85,99,187/- (i.e. `55,36,77,255/- less `54,50,78,068/-) which was disallowed. The learned D.R. submits that on appeal the learned CIT(A) called for a remand report from the AO in this regard and after considering the AO’s report dated 24.11.2014 and the assessee’s submissions sustained the disallowance made and AO’s computation of foreign exchange loss. It is contended that no evidence has been brought on record by the assessee to controvert the finding of the authorities below and therefore this ground raised by the assessee should be rejected. 5.3.1 We have heard the learned D.R. for Revenue in the matter and perused and carefully considered the material on record. The records before us show that the AO, on observing that the assessee had computed and claimed foreign exchange loss on foreign sundry creditors at `55,36,77,255/- applying various rates of US$ to Rupee, required its explanation in the matter. The AO rejected the explanation put forth by the assessee and applying the rate as on 31.03.2009 which was `50.64 per US $ disallowed the excess foreign exchange loss of `85,99,177/- claimed (i.e. `55,36,77,255/- less `54,50,78,068/-). 5.3.2 On appeal, we find that the learned CIT(A) after calling for a remand report from the AO in the matter and considering the assessee’s submissions, dismissed the assessee’s grounds raised on this issue holding as under at paras 3.4 of the impugned order: - “3.4 I have considered the finding of the Assessing Officer as well as rival submission of the appellant through letter dated 18.04.2012 and 29.01,2015, carefully. I have also heard the various arguments of the Ld. A.R. carefully. I find that Ld. Assessing Officer has rightly calculated foreign exchange loss by adopting exchange rate as indicated by RBI as on 31.03.2009, @ `50.64 whereas, there is no justification whatsoever with the appellant to apply different exchange rate without any substantiation. Ld. Assessing Officer has rightly adopted `50.64 or rate of exchange as on 31.3.2009 against M/s. Vanguard Jewels Ltd. the rate adopted by the appellant ranging from `48.53 to `59.29. Obviously, there is no justification whatsoever with the appellant to adopt different rate or exchange for the valuation of sundry credit as on 31.3.2009. Therefore, so far as rate of exchange is concerned the finding of the Assessing Officer is sustained. As regards, contention of the appellant that there was clerical error from its side as the value of imports of M/s. Lamco Trading Company was taken at `4,76,07,249/- as against the actual value of `4,08,91,028/- whereas this import value of `4,76,07,249/- was of M/s. H. K. Impex, there is some confusion. Ld. Assessing Officer has not commented on this aspect, though appellant by letter dated 18.04.2012 had represented this fact. It is however, pertinent to mention that if there is import of goods / diamond and if there is wrong entry of import value in respect of credit as on 31.3.2009, it is not understood as to how value of goods or credit amount of `4,08,91,028/-could be of `42,075989/- in respect of Lamco Trading. Further, it is worthwhile to mention that the details of exchange difference loss submitted by the appellant to the Assessing Officer on 28.01.2011 does not reveal correct foreign exchange loss calculated on the basis of application of different rate of exchange. Infact, appellant has adopted the rate of exchange on various dates throughout the year disrespecting the basis principle of preparation of final accounts including profit and loss account. The value of closing stock or outstanding credit is to be made on last day of accounting, considering the method of accounting of such assessee. In this case, method of accounting, as admitted by the assessee is market price or cost whichever is lower. In this case, Assessing Officer has adopted rate of exchange of `50.64 being prevailing exchange rate as on 31.3.2009, hence his working in para 4 of the assessment order is tenable in the eye of law. Apparently, appellant has adopted wrong working formula and therefore has claimed excess foreign exchange loss of `85,99,187/-. Thus, the finding and calculation of foreign exchange loss by the Assessing Officer is sustained. If there is any factual mistake, as claimed by the appellant and for that rectification application u/s.154 has been filed on 10.01.2012, it is the duty of the Assessing Officer to reverify the facts and if the claim of the appellant is found correct, the quantum of disallowance has to be modified, accordingly. If however there is no factual mistakes of figure in respect of M/s. Lamco Trading company / M/s. H. K. Impex, Assessing Officer can reject the claim of the appellant while disposing the rectification application u/s.154. Further, while giving effect to this order, Assessing Officer can also clarify the facts of the case if no apparent mistake is there, Thus, no relief can be granted at this stage.” 5.3.3. After an appreciation of the orders of the authorities below and the material on record, we find that the assessee has failed to bring on record any material evidence before us to controvert the findings in the impugned order of the learned CIT(A). In this view of the matter, we find no M/s. Vanguard Jewels Ltd. requirement to interfere with or deviate from the finding recorded by the learned CIT(A) on this issue. Consequently, we dismiss ground No. 1 raised by the assessee.

6. Ground No. 2 – Disallowance under section 14A r.w. Rule 8D 6.1 In this ground, the assessee assails the finding of the learned CIT(A) in the impugned order upholding the disallowance made by the AO under section 14A read with Rule 8D. 6.2 The learned D.R. for Revenue supported the impugned order of the learned CIT(A) in upholding the disallowance under section 14A read with Rule 8D. 6.3.1 We have heard the learned D.R. for Revenue and perused and carefully considered the material on record. From the details on record it is seen that the AO noticed that the assessee had earned dividend income of `21,700/- which was exempt under section 10(34) of the Act and that no disallowance of expense incurred for earning such income was disallowed suo moto by the assessee. We find that after observing these facts, the AO sought the explanation of the assessee in the matter and brushed aside the same as not acceptable for the stated reasons that the assessee has not taken proper values of respective part of Rule 8D. In our view, from a perusal of material on record he then proceeded to summarily compute the disallowance under Rule 8D(2)(ii) and (iii) of the I.T. Rule at `53,81,133/-. 6.3.2 Section 14A of the Act is enacted in relation to non allowance of expenditure incurred in relation to income not includible in total income. Sub-section (2) thereof mandates that the AO shall determine the amount of expenditure incurred in relation to such income that does not from part of the assessee’s total income in the manner prescribed, if the AO having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee that such expenditure or as per subsection (3) of section 14A of the Act if assessee claims that no expenditure has been incurred to earn such exempt income. In our view, perusal of the order of assessment shows that the AO, except for stating that assessee’s explanation is not acceptable for the reason proper values have not been taken, has not spelt out what examination of accounts of the assessee