2016 (9) TMI 1608 - AT - Income Tax

Tribunal Upholds CIT (A)'s Decisions on Mark to Market Loss and Additional Depreciation Claim

The Asst. Commissioner of Income Tax -16 (3), Mumbai Versus M/s KP Sanghvi and Sons

The Asst. Commissioner of Income Tax -16 (3), Mumbai Versus M/s KP Sanghvi and Sons - TMI Issues Involved:1. Disallowance of 'Mark to Market' loss on revaluation of forward exchange contracts.2. Disallowance of additional depreciation claim.Issue-wise Detailed Analysis:1. Disallowance of 'Mark to Market' Loss on Revaluation of Forward Exchange Contracts:The Revenue appealed against the CIT (A)'s decision to delete the disallowance made by the AO of 'Mark to Market' loss on revaluation of forward exchange contracts, which was treated as notional loss. The AO had disallowed the loss, arguing it was not crystallized and hence notional. The assessee, engaged in the export of cut and polished diamonds, argued that the loss was claimed as per Accounting Standard-11 (AS-11) guidelines issued by ICAI, which requires revaluation of forward contracts at the balance sheet date. The CIT (A) accepted the assessee's argument, noting that the loss was real and quantifiable, and in line with AS-11 and various judicial precedents, including the Supreme Court's decision in CIT v. Woodward Governor India (P.) Ltd. The Tribunal upheld the CIT (A)'s decision, emphasizing that the forward contracts were integral to the assessee's business of hedging against foreign exchange fluctuations, and the resultant losses were real and allowable as per AS-11 and consistent judicial decisions.2. Disallowance of Additional Depreciation Claim:The Revenue also contested the CIT (A)'s decision to allow the assessee's claim for additional depreciation on the ground that diamond cutting and polishing does not constitute manufacturing or production of an article or thing. The CIT (A) relied on the Supreme Court's decision in Arihant Tiles & Marble Pvt. Ltd., which held that such activities do qualify as manufacturing. The Tribunal, referencing the case of Flawless Diamond India Ltd. and other judicial precedents, confirmed that the process of cutting and polishing diamonds results in a distinct product and thus qualifies as manufacturing or production. Consequently, the Tribunal upheld the CIT (A)'s decision to allow the additional depreciation claim.Conclusion:The Tribunal dismissed the Revenue's appeal on both issues, affirming the CIT (A)'s decisions to allow the 'Mark to Market' loss on forward exchange contracts and the additional depreciation claim, based on consistent application of accounting standards and judicial precedents.