TaxTMI 
TaxTMI 
TaxTMI 
2015 (5) TMI 606
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....de by AO after having the following observations :- 5. I have carefully considered the contents of the assessment order and the appellant's submissions thereof. 5.1 At the outset, appellant is predominantly engaged in the business of import of rough diamonds, manufacturing i.e. cutting & polishing of same in to polished diamonds and exporting the said diamonds. In total sale of Rs. 413.99Cr, sale denominated in foreign currency is RS.384.85 Cr. Similarly, out of total purchases of RS.325.11 Crs, purchase denominated in US $ is of RS.302.50 Cr and almost all of the trade creditors of RS.53.74 Crs are payable in dollar terms. Further, out of receivables for goods of RS.67.65 Cr., US $ receivable account for RS.67.62 Crs. Thus it is evident that appellant is exposed to risk arising out of fluctuation in Exchange rate and as a prudent businessmen likely to hedge its risk. Appellant has booked all the forward contracts in respect of export receivables only. 5.2 From Notes to the accounts under the heading "Significant Accounting policy followed & its disclosure", it is evident that appellant is reporting all monetary items i.e. Export Receivable, lmport Payable and ....
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....mount of 10000 US dollars at the spot rate of Rs. 48 and the maturity of contract falls on 5th May i.e., beyond the accounting year. In this situation a legally enforceable contract was entered and a liability was created against the appellant to sell 10000 US dollars at the rate of Rs. 48 per dollar, notwithstanding the fact that the maturity of contract falls beyond the accounting year. Further, appellant could enter into the aforesaid contract only based on the fact that he has receivables of 20000 US dollars on 5th May i.e., the maturity date. I n other words receivables of appellant to the extent of 10000 US dollars are locked up as underlying asset to the aforesaid forward contract and only on the strength of such asset appellant was allowed to enter into the contract with bank. Now, appellant has to revalue his foreign debtors/ creditors on 31st March for the purpose of closing his books and as a matter of prudence he has to provide for the income or loss arising out of his transactions in foreign currency. The closing foreign exchange rate is RS.50 per dollar. Appellant has valued his debtors of 20000 US dollars at the rate of RS.50 per dollar and recognized a gain of Rs. 1....
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....ndly, the issue of notional loss is likely to arise in the context of appellant's exposure to forward contracts exceeding the underlying assets/liabilities, which may be in case of lumpsum forward contracts. Appellant's AR has explained that whenever a lumpsum forward contract was entered, it was immediately covered by the value of subsequent exports and the sum of such forward contracts never exceeded the value of the underlying debtors at any point of time during the year. Appellant has placed on record the month wise position of debtor's vis-a-vis the forward contracts in dollar terms to demonstrate the above position. Further, to reiterate, appellant has been consistently following the mercantile system of accounting and has been valuing the year-end outstanding foreign exchange transactions in terms the Accounting Standard AS-11. 5.7 In the case of Woodward Governor Hon. Delhi High Court has Observed as under (294 ITR 451). "In the instant cases, on the other hand, the liability arises out of already concluded contracts. The liability already stands accrued the minute the contract was entered into. The mere postponement of the payment to different date cannot exti....
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....od of accounting followed by the Appellant cannot be disregarded. The Appellant has consistently followed the same method of accounting in regard to recognition of profit or loss both, in respect of forward foreign exchange contract as per the rate prevailing on March, 31. (iii) A liability is said to have crystallized when a pending obligation on the balance sheet date is determinable with reasonable certainty. (iv) As per AS-11, when the transaction is not settled in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting period. (v) In view of the decision of the Supreme Court in the case of Woodward Governor India (I) P. Ltd., the Appellant's claim is allowable. (vi) In the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit. 5.10 In the case of ONGC Vs CIT 322 ITR 180, Supreme Court has reiterated the principles laid down above while answering the question that when the assessee maintained their accounts on mercantile system of accounting and there was no finding by the Assessing Officer on the correctness or completeness of the account ....
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..../3/2011 for AY 2006-07 and the said loss was allowed as business loss and the issue was held to be covered by special bench decision in the case of DCIT Vs. Bank of Bahrain. Therefore, in my considered opinion the facts of the appellant's case are fully covered by the above cited decisions of the Hon. Supreme Court and the ITA T Mumbai bench. Accordingly I hold that the loss incurred by the appellant on restatement of pending forward contract agreements at the year-end is an allowable business loss. Appellant succeeds on this ground." 4. Against the above order of CIT(A), the Revenue is in appeal before us. 5. We have considered rival contentions and carefully gone through the orders of the authorities below. From the record we found that the assessee is engaged in the business of import and exports of diamonds. Substantial amount of its purchases and sales were denominated in foreign currency. It enjoys working capital facility from banks some of which are also denominated in foreign currency. It also carries currency risk in respect of its stock as it is most likely to be sold by way of exports. So, forward contracts in the instant case are entered into to hedge these....
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....as been valuing the year end outstanding foreign exchange transactions in terms of accounting standard AS-11. 7. The Hon'ble Supreme Court in the case of Woodward Governor India Pvt. Ltd., 312 ITR 254, observed that in order to find out if the expenditure is deductible the following have to be taken into account (I) whether the system of accounting followed by the assessee is mercantile system, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due and before it is actually received; (ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bona fide; (iii ) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains; (v) whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is' as per nationally accepted accounting....