2014 (4) TMI 1239 - AT - Income Tax

Tribunal allows business loss on forward contracts in diamond trade; Revenue's appeal dismissed

Ratnadeep Impex Versus The ACIT 5 (1), Mumbai

The Tribunal allowed the assessee's appeal, deleting the sustained addition of Rs. 62,67,308 disallowed by the CIT(A) for the loss incurred on revaluing ... Disallowing loss incurred on account of revaluing the outstanding forward contract entered with Banks - Losses on account of outstanding / open foreign exchange forward contracts - Business loss or Notional loss - HELD THAT:- The assessee has demonstrated that forward contract of foreign exchange were entered into by it in regard to its activity of import and export of diamonds. If such is the position then the issue will be covered in favour of the assessee by the aforementioned decisions which have been relied upon by AR. See ACIT CIRCLE–16(3), MUMBAI VERSUS M/S. S. RAJIV & CO. [2015 (5) TMI 38 - ITAT MUMBAI]. Accordingly, we hold that CIT(A) has erred in sustaining the disallowance and the addition sustained by him is deleted. The ground raised by the assessee is allowed. Issues:Disallowance of loss incurred on revaluing outstanding forward contracts.Analysis:The appeal was filed against the order disallowing a loss of Rs. 62,67,308 incurred on revaluing outstanding forward contracts with banks. The assessee, engaged in diamond import, export, and trading, claimed the loss as a business loss due to foreign exchange fluctuations. The CIT(A) disallowed the loss, stating that the revaluation was not related to the assessee's core business and was an unascertained liability. The CIT(A) allowed only a partial benefit of Rs. 36,18,238 to the assessee. The assessee contended that all forward contracts were related to diamond import and export activities. The Tribunal noted that the issue was covered in favor of the assessee based on previous decisions, emphasizing that the loss on revaluation of pending forward contracts at year-end was an allowable business loss. The Tribunal upheld the assessee's appeal, deleting the sustained addition of Rs. 62,67,308.The Tribunal referred to previous decisions, including the case of ACIT vs. S.Rajjiv & Co., where it was held that mark-to-market loss on valuation of forward exchange contracts was allowable. The Tribunal emphasized that the loss on cancellation of matured forward contracts integral to diamond exports should be allowed as a business loss. The Tribunal also cited a Special Bench decision supporting the allowance of mark-to-market losses on forward foreign exchange contracts, highlighting the binding obligation accrued when entering into such contracts. The Tribunal upheld the CIT(A)'s decision to allow the loss incurred by the assessee on revaluing pending forward contracts at year-end as an allowable business loss, dismissing the Revenue's appeal.The Tribunal noted that no appeal was filed by the Revenue against the deletion of Rs. 36,18,238. Consequently, the appeal filed by the assessee was allowed, and the sustained addition of Rs. 62,67,308 was deleted. The order was pronounced in the open court on 19/03/2014.