Tribunal confirms business loss allowance and remands verification issue to AO.

The Tribunal dismissed the Revenue's appeal, confirming the allowance of Rs. 22,76,84,554/- as business loss. It allowed the assessee's appeal for statistical purposes, remanding the issue of Rs. 9,92,48,752/- to the AO for verification. The Tribunal emphasized that the loss should be allowed if it is backed by stock for confirmed export orders, ensuring the revenue impact is tax-neutral. The appeal filed by the assessee was allowed for statistical purposes, and the appeal filed by the Revenue was dismissed.

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Issues Involved:
1. Disallowance of business expenditure in the nature of mark-to-market loss on restatement of outstanding forward contracts.
2. Whether the 'Mark to Market' loss on valuation of forward exchange contracts is notional and speculative.

Issue-Wise Detailed Analysis:

1. Disallowance of Business Expenditure in the Nature of Mark-to-Market Loss on Restatement of Outstanding Forward Contracts:
The assessee, engaged in the manufacture and export of cut and polished diamonds, entered into forward foreign exchange contracts to hedge against currency fluctuations. The assessee claimed a mark-to-market loss of Rs. 32,69,33,306/- on these contracts, revalued at the year-end exchange rate. The AO disallowed this loss, considering it notional and speculative since the contracts were not settled. The AO argued that such losses are unrealized and only due to valuation changes, not actual transactions.

The CIT(A) partially allowed the assessee's claim, permitting the loss to the extent of Rs. 22,76,84,554/- backed by outstanding export receivables. However, the CIT(A) disallowed Rs. 9,92,48,752/- as it was not backed by receivables but by confirmed export orders and stock held for future exports, deeming it speculative.

2. Whether the 'Mark to Market' Loss on Valuation of Forward Exchange Contracts is Notional and Speculative:
The Tribunal examined whether the mark-to-market loss on unsettled forward contracts should be considered notional and speculative. The assessee argued that the contracts were entered into as a business necessity to hedge against foreign exchange risks and were consistently accounted for as per AS-11 issued by ICAI. The assessee cited several judicial precedents supporting the recognition of such losses.

The Tribunal noted that the assessee's method of accounting for foreign exchange contracts was consistent and accepted by the Revenue in other years. It referred to the Supreme Court's decision in Woodward Governor India P. Ltd., which supports recognizing such losses if they are part of regular business activities. The Tribunal also considered the Bombay High Court's decision in CIT v. D. Chetan and Company, which upheld the allowance of such losses as business expenses.

The Tribunal found no perversity in the CIT(A)'s decision to allow the loss backed by export receivables. However, it remanded the issue of the disallowed loss of Rs. 9,92,48,752/- to the AO for verification. The AO was directed to verify if these contracts were backed by stock held for confirmed export orders and to allow the loss if substantiated.

Conclusion:
The Tribunal dismissed the Revenue's appeal, confirming the allowance of Rs. 22,76,84,554/- as business loss. It allowed the assessee's appeal for statistical purposes, remanding the issue of Rs. 9,92,48,752/- to the AO for verification. The Tribunal emphasized that the loss should be allowed if it is backed by stock for confirmed export orders, ensuring the revenue impact is tax-neutral.

Order Pronounced:
The appeal filed by the assessee is allowed for statistical purposes, and the appeal filed by the Revenue is dismissed. Order pronounced in the open court on 7th November 2016.

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