TaxTMI 
TaxTMI 
2017 (1) TMI 673
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....u/s 143(3) of the Income-tax Act,1961 (Hereinafter called "the Act"). 2. The following grounds of appeal are raised by the assessee in ITA No. 7311/Mum/2012 for the assessment year 2009-10 in the memo of appeal filed with Tribunal which reads as under:- "On the facts and circumstances of the case and in law, the learned Comm. of Income Tax (Appeals) erred in partly conforming the action of the learned Assessing Officer for disallowance of business expenditure in the nature of marked - to - market loss on restatement of outstanding forward contracts to the extent of Rs. 9,92,48,752/- by considering the loss as notional and speculative in nature." 3. The following grounds of appeal are raised by the Revenue in ITA No. 112/Mum/2013 for the assessment year 2009-10 in the memo of appeal filed with Tribunal which reads as under:- "1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that 'Mark to Market' loss of Rs. 22,76,84,554/- arising on valuation of forward exchange contracts on the closing date of accounting year is not a notional loss and, therefore, allowable." 3. The Brief facts of the case are that the assessee is en....
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....issued by ICAI, at year end at the prevailing exchange rates as on year end. The assessee submitted that the assessee is following this accounting practice consistently . The assessee has relied upon the following decisions : (i) DCIT vs. Bank of Bahrain & Kuwait 132 TTJ 505 (Mumbai)(SB) (ii) Woodward Governor India (P) Ltd. 312 ITR 254(SC) (iii) ONGC 322 ITR 180(SC) (iv) Badridas Gauridu (P) Ltd. 261 ITR 256 (v) Soorajmul Nagarmull 129 ITR 169 (Cal.) The A.O. considered the submissions of the assessee and observed that the assessee has entered into forward foreign exchange contracts , which are outstanding as at the end of the previous year which has been valued by the assessee on the basis of rates applicable on the closing day of the previous year , though the contracts were still outstanding and accordingly, such unrealized losses are recorded by the assessee. It was observed by the AO that these losses have not been actually incurred but are only due to variation in the value of the contracts as on reporting date. It was also observed by the AO that the actual loss or gain will be determined only after the expiry of period of the contracts or their termination and at tha....
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....hat the assessee has been consistently following the accounting method wherein year-end restatement or mark to market gain or loss in respect of all assets or liabilities denominated in foreign currency i.e. debtors, creditors and forward contracts , is being recognized as gain or loss in profit & loss account which is mandatory as per AS 11 issued by ICAI for depicting the effect of currency fluctuations while finalizing the financial results of the assessee as prescribed by ICAI. The assessee submitted that it has recognized gain of Rs. 11,61,52,808/- during the year under consideration by restating the receivables at closing rate, however, this gain was not actually realized. The actual gain may be different amount depending on the rate prevalent when it was actually realized. The ld. CIT(A) after considering the submissions of the assessee observed that the assessee is 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. The total sale of Rs. 961.53 crores(US $ 217,708,068) was denominated in foreign currency. Out of total purchase of Rs. 791.72 crores , import accounts for ....
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....gral part of the assessee's business and is associated with such business. Thus the ld. CIT (A) observed that the risk which the assessee has hedged by way of a forward contract has an underlying asset or a liability , by way of debtors or creditors. The profit and loss arising out of forward contracts either on maturity or on cancellation of such contracts forms part of the business income and such forward contracts entered into during the course of business creates a legal liability irrespective of the fact whether it matures during the accounting period or beyond the accounting period. The ld. CIT(A) considered the judgments' of Hon'ble Delhi High Court in the case of Woodword Governor 294 ITR 451, decision of Hon'ble Supreme Court in the case of CIT v. Woodward Governor India P. Ltd., 312 ITR 254 and the decision of the Special Bench of the Tribunal in the case of DCIT v. Bank of Bahrain and Kuwait, ITA No. 4404 & 1883/Mum/2004 and the decision of Hon'ble Supreme Court in the case of ONGC v. CIT, 322 ITR 180 . The learned CIT(A) observed that as per details placed on record as at 31-03-2009 , the assessee has receivable of US $ 41,293,417 against which the forward contracts ent....
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....sed to foreign currency fluctuation and to hedge against the risk of foreign currency fluctuations, the assessee has entered into foreign exchange forward contracts. The assessee has also availed working capital credit facilities from the banks which are denominated in foreign currency. It is submitted that foreign currency forward contracts were executed to hedge against the possibility of foreign exchange fluctuation loss. There was a marked to market losses incurred in respect of the forward foreign exchange contracts due to adverse movement of foreign exchange rates as at year end. It is submitted by the assessee's counsel that outstanding un-matured foreign currency forward contracts as at year end which were backed by outstanding export receivables as at yearend , the learned CIT(A) allowed the said loss which was to the tune of Rs. 22,76,84,554/-. It is also submitted by the assessee's that with respect to those un-matured outstanding forward foreign exchange contracts as at yearend which are not backed by outstanding export receivables as at yearend are in-fact backed by confirmed export orders and supported by stock purchased for execution of those confirmed export orders ....
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....ed before the authorities below(page109-110 , 115 of paper book). The assessee submitted that in preceding years as well succeeding years the assessee consistently followed the said method of accounting , and the Revenue has accepted the said method of accounting followed by the assessee except for the impugned assessment year. The assessee placed reliance on following decisions:- a) London Star Diamond v. DCIT in ITA no. 6169/M/2012 vide orders dated 11/10/2013 b) Jaimin Jewellary Exports Private Limited v. ACIT in (2014) 43 taxmann.com 380(Mum-Trib.) c) Adll. CIT v. Daksh Mineral and Marines Private Limited in ITA no. 76/Mum/2013 dated 20-03-2014 d) ACIT v. S. Rajiv and Company in ITA no. 7095/Mum/2012 dated 12-02-2014 e) ACIT v. Monarch Gems in ITA no. 2613/Mum/2013 f) ACIT v. Vimal Export in ITA no. 6610/Mum/2010 g) The Paper Products Limited v. Addl. CIT in ITA no. 7761/Mum/2012 h) CIT v. Friends and Friends Shipping Private Limited (2013) 217 Taxman 267 (Guj. HC) i) CIT v. Panchmahal Steel Limited (2013) 215 Taxman 140(Guj. HC) j) ACIT v. Venus Jewel in ITA No. 7328 & 7329/Mum/2013 dated 31/07/2015 k) S. Jogani Exports Private Limited v. ACIT in ITA No. 7012/Mum/20....
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....the year end on forward foreign exchange contracts were recognized and brought to P&L account and offered for taxation in the case of profit , and deductions were claimed in case of losses consistently by the assessee for several years. This policy is consistently followed by the assessee which is supported by AS-11 issued by ICAI and accepted by the Revenue except during the impugned assessment year. The revenue has brought to tax, the income arising on fluctuation in foreign exchange rates as at year end on these forward foreign exchange contracts for the assessment year 2010-11 and 2011-12 as was offered for taxation by the assessee of its own and the assessment orders framed u/s 143(3) of the Act is placed on record in paper book filed with the tribunal. . The co-ordinate Bench of the tribunal in the case of Venus Diamond(supra) has allowed the mark to market loss on outstanding un-matured forward foreign exchange contracts after considering the decision of Vinod Kumar diamonds Private Limited(supra) relied upon by learned DR and by following the decision of Hon'ble Supreme Court in the case of CIT v. Woodword Governor India Private Limited(supra) . The tribunal held that view ....
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.... end. Thus, it was observed by the learned CIT(A) that the assessee was exposed to risk arising out of fluctuation in foreign exchange rate and as a prudent businessmen likely to hedge its risk. The ld. CIT(A) noted that assessee has booked all the forward contracts in respect of export receivables only. It was further noted that in addition to the opening outstanding forward contracts of 61,000,000 US dollars during the year under consideration , the assessee has booked forward contracts of 767,000,000 US dollar, utilized forward contracts of 72,406,591 US dollar, cancelled forward contracts of 6,000,000 US dollar and finally held the forward contracts of 59,293,409 US dollar at the year end. Thus, the assessee has entered into the forward contracts during the normal course of business and utilized the same for business by allowing them to run up to the date of contract. The assessee has receivable of US $ 41,293,417 against which the forward contracts entered for sale of foreign currency and pending as on date were for an amount of US $ 59,293,409 . Thus, it was observed by learned CIT(A) that the forward contracts were entered for an amount higher than the receivable at the year....
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....rts made by the assessee outstanding as at year end. Further, we find that the assessee is engaged in the business of manufacture of import of rough diamonds and export of polished diamonds , and not in the business of foreign exchange. The decision of Hon'ble Supreme Court in the case of Woodward Governor India P. Ltd. (supra) relied upon by the assessee will be applicable as the losses are towards hedging against export receivable in foreign currency outstanding as at year end towards export of polished diamonds undertaken by the assessee and cannot be categorized as notional loss or speculative loss as per provisions of Section 43(5) of the Act. The learned CIT(A) has allowed the loss of Rs. 22,76,84,554/- as deduction while computing income of the assessee being arising out of fluctuation in forward foreign exchange contracts due to adverse movement of foreign currency exchange rate at year end as the said forward foreign exchange contracts are backed by export receivables outstanding as on 31- 03-2009 and we donot find any perversity in the order of learned CIT(A) as learned DR could not point any defect/mistake in the finding of learned CIT(A) , which we confirm/sustain and t....