TaxTMI 
TaxTMI 
2017 (6) TMI 339
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....of appeal are reproduced as under: "Following grounds of appeal are independent of, and without prejudice, to each other: 1. That on the facts and circumstances of the case and in law, the order dated 27 January 2017 passed by the Assistant Commissioner of Income Tax, Circle 4(2), New Delhi ('Ld. AO') is bad in law being contrary to facts of Appellant's case and provisions of the Income Tax Act, 1961 ('the Act'). The Ld. AO has erred in facts and in law in making the disallowance of INR 21,80,46,325 incurred by the Appellant on re-measuring of foreign exchange forward contracts ('MTM losses') 2. That on the facts and circumstances of the case and in law, the order passed by the Ld. AO is barred by limitation as stipulated under section 153 of the Act and hence liable to be quashed. 3. Without prejudice to the above, that on facts and circumstances of the case and in law, the Dispute Resolution Panel - 1 ('Ld. DRP') erred in directing the Ld. AO to disallow the loss of INR 21,80,46,325 towards MTM losses as on balance sheet date without appreciating the order dated 14 October 2015 passed by the Hon'ble Income Tax Appellate Tribunal (TTAT') while setting aside the matter ....
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....te of the US dollar in forward market as on 31/03/2009 in respect of various maturity date of contracts varied from Rs. 50.78 to Rs. 51.49 and thus the assessee re-measured its forward contract on 31/03/2009 at prevalent forward market exchange rate and computed total loss of Rs. 21,80,46,325/-, which was debited to the profit and loss account under the head "exchange difference "and claimed in the return of income. The particulars of the forward contracts taken and the computation of "MTM" loss of Rs. 21,80,46,325/-, submitted by the assessee before the Ld. DRP, is reproduced as under: Date of Forward Contract taken Contract No. Date of Maturity Amount of Forward Contract (USD) Forward Contract Rate Amount of Forward Contract (INR) Cash Rate as on March 31, 2009 Date of Maturity Amount (INR) Gain/(Loss) (INR) (1) (2) (3) (4) (5) (6) = (4) * (5) (7) (8) (9) = (4) *(7) (10) = (6) - (9) 6-Aug-08 146164 3-Apr-09 2,900,000 42.97 124,613,000 50.78 3-Apr-09 147,247,500 (22,634,500) 6-Aug-08 146166 4-May-09 2,900,000 43.05 124,845,000 50.93 4-May-09 147,690,284 (22,845,2....
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....een taken to cover foreign exchange risk in respect of probable forecasted transactions, being the difference between the contracted rate and forward rate at the Balance Sheet date, at recognized in the profit and loss account. " 2.2 In first round of proceedings, the Assessing Officer held that the reporting of such notional losses to adhere to the accounting guidelines does not by itself tantamount to business loss deductible for income tax purposes. The provisions of Income-tax Act, 1961 do not allow deduction of any such notional loss for which the liability has not crystallized and, therefore, marked to market (MTM) losses on account of revaluation of forex derivatives are only notional and cannot be deductible as business loss under Income-tax provisions. Moreover, in this case, there was no actual outgo as the assessee was not liable to pay for such losses. Relying on the Central Board of Direct Taxes (CBDT) instruction bearing No. 17/2008 dated 26/11/2008 and 3/2010 dated 23/03/2010, the Assessing Officer disallowed the said loss. 2.3 The Ld. DRP, in first round of proceeding, upheld the finding of the Assessing Officer and also held that the forward contracts were....
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.... contracts immediately but it started using them against the sale invoices after the lapse of time of few months. The Ld. DRP further noticed that contract No. 146164 was used for first-time on 31/10/2008 for a nominal sum of USD 632 and thereafter for USD 1,44,247 in November, 2008 and balance in December 2008 four USD 27,55,121/-. Thus, according to the Ld. DRP, there was no underlying asset for this contract from 06/08/2008 till 31/10/2008. Further, the Ld. DRP observed that contract No. 146167 and 146169 were taken on 06/08/2008 but have been started to be used by the assessee from January 2009 onwards and, thus, there was no underlying assets for these contracts from 06/08/2008 to 31/12/2008. The Ld. DRP, further observed that out of the forward contract No. 146171 only a small part of US dollar 8.28 was used by 31/03/2009, while the remaining 4 (four) forward contracts were not utilized at all till 31/03/2009. Thus, according to the Ld. DRP the forward contract transactions were in the nature of speculative transactions and the loss claimed on such transactions was not allowable to be adjusted against business profit. 2.5 Before the Tribunal, in first round of proceedings,....
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....considered. The assessee has only reiterated the submissions made earlier and has failed to file necessary evidence to substantiate its claim. When the assessee has challenged the addition before the Hon'ble ITAT and the Hon'ble ITAT have set aside the matter, it was for the assessee to controvert the findings of the AO and substantiate its claim with necessary evidence. The assessee has failed to do so. In para 3.7.7 of the DRP's earlier order, the DRP have observed that the assessee failed to furnish the required information. The DRP have observed that "losses so sustained on MTM basis are not allowable as business loss u/s 28 as these FCs have not been taken for the purposes of business of the assessee on raising of the export invoices but have been taken without due exposure". Even in the present proceedings, the assessee has only reiterated its submissions made earlier and has failed to controvert the findings of the AO and DRP and substantiate its claim with necessary evidence. As the assessee has failed to furnish complete details, an adverse inference is naturally drawn. This principle has been recognised by the Hon'ble Delhi High Court in CIT v. Motor Gener....
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....ized on the balance sheet date and thus allowable on accrual basis under the Act. 4.3 The Ld. counsel placed reliance on the judgment of the Hon'ble Supreme Court in the case of CIT versus Woodward governor India private limited (2009) 312 ITR 254. 4.4 On the other hand, the Ld. CIT(DR) placed reliance on the order of the Ld. DRP and submitted that despite sufficient opportunity provided by the Ld. DRP, the assessee did not file the required details for complying the direction of the Tribunal and in such circumstances the matter need to be restored back to the file of the DRP for deciding whether the transactions in question are speculative transaction or hedging transactions, after analysis of copy of forward contracts agreements with Banks and Foreign Inward Remittance Certificates(FIRC) issued by the Banks and other documents filed by the assessee in the paper book. 4.5 We have heard the rival submission and perused the relevant material on record. The Ld. counsel has placed reliance on the judgment of the Hon'ble Supreme Court in the case of Woodward Governor Private Limited (supra). In assessment year 2008-09, the forex fluctuation loss on unexpired forward contracts ....
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....ofit and loss account. The Hon'ble Supreme Court held that the loss suffered by the assessee on revenue account, maintaining accounts regularly on Mercantile system and following accounting standards prescribed by the Institute of chartered accountant of India (ICAI), on account of fluctuation in rate of foreign exchange as on the date of balance sheet, was an item of expenditure under section 37(1) of the Act notwithstanding that the liability had not been discharged in the year in which the fluctuation in the rate of foreign currency occurred. While allowing the loss due to fluctuation in the rate of exchange on the balance sheet date, the Hon'ble Supreme Court explained the position through following example: "19. A company imports raw material worth US $ 250000 on 15th Jan., 2002 when the exchange rate was Rs. 46 per US $. The company records the transaction at that rate. The payment for the imports is made on 15th April, 2002 when the exchange rate is Rs. 49 per US $. However, on the balance sheet date, 31st March, 2002, the rate of exchange is Rs. 50 per US $. In such a case, in terms of AS- 11, the effect of the exchange difference has to be taken into P&L account. Sundry....
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....oreign currency was intended or had originally been utilized for acquisition of fixed asset, if at the time of devaluation it had changed its character and had assumed the new character of stock-in-trade or circulating capital, the loss that occurred on account of devaluation shall be a revenue loss and not a capital loss. 4.5.4 The Hon'ble Supreme Court in the above case has also held that the way in which entries are made by the assessee in the books of accounts is not determinative of the question whether the assessee has earned any profit or suffer any loss and what is necessary to be considered is the true nature of the transaction and whether in fact it has resulted in profit or loss to the assessee. 4.5.5 In the present case, the assessee exported certain services to its associated enterprise and part of those export receipts were pending on the balance sheet date i.e. 31/03/2009 and were shown as receivables of Rs. 71.64 crores in the balance sheet. The receivables in the case of the assessee are items of balance sheet and arisen due to trading transactions. In view of the ratio of the Woodward Governor's Private Limited (supra), the assessee was having option of meas....
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.... 4.5.7 But the assessee has not claimed the loss on the trading liability which was allowable following the case of Woodward Governor (supra). The assessee instead of measuring the receivables on balance sheet date at foreign exchange rate contracted, it measured the pending forward contracts on balance sheet date at a value of foreign currency in the forward market. The assessee has entered into 9 forward contracts. The first forward contract No. 146164 was entered into for sale of 29,00,000 USD at the rate of contracted rate of foreign exchange of Rs. 42.97 and the assessee has valued this forward contract on balance sheet date at foreign exchange rate of Rs. 50.78. The assessee has treated the forward contract as its liability to pay and thus according to the assessee its liability to pay to the bank has increased by an amount of rupees 29,00,000 (50.78-42.97) = 2,26,49,000/- . The assessee has claimed this liability as loss. Similarly, the assessee has claimed loss on all the forward contracts, which is amounted to Rs. 21,80,46,325/-. 4.5.8 In our opinion, the kind of loss claimed with assessee is not allowable in view of the decision of the Hon'ble Supreme Court in the ca....
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....evenue account in respect of the forward contracts. 4.5.9 The assessee to immune itself from any losses on account of fluctuation in foreign exchange rate at the time of receipt of payment against the sale invoices, entered into forward contracts with banks. The assessee entered into a contract with the bank to sale US dollar at a predetermined rate on future date. For example, according to forward contract No. 146164 dated 06/08/2008, the assessee agreed to sale 29,00,000 US dollar at the rate of Rs. 42.97 per dollar. This forward contract was having maturity date of 03/04/2009. The assessee was expecting receipt of US dollar against sale invoices amounting to USD 632 (October, 2008); USD 1,44,247 (November, 2008) and USD 27,55,121 (December, 2008) before maturity period of the forward contract. By entering into forward contract with banks at predetermined rate of Rs. 42.97 per dollar having corresponding export invoices as underlying, the assessee immuned itself from any fluctuation in the foreign exchange rate. From the foreign inward remittance certificate issued by the bank on 02/04/2009, also it is evident that amount of US dollars 29,00,000/- was received against invoices....
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....additional liability or benefit to the assessee on the settlement date. Once there is no liability or benefit on the settlement date, there is no possibility of liability or benefit to the assessee on balance sheet date also. 4.9 We find that in second round of proceedings, the Ld. DRP in absence of submission /calculation from the assessee, held the forward contract transactions as a speculative transactions and following the decision of the Tribunal in the case of Sh. Vinod Kumar Diamonds Private Limited Vs. Addl. CIT, Range-5(3), Mumbai in ITA No. 506/Mum/2013, the addition made by the AO not allowing the MTM loss, was upheld. As the issue was restored to the file of the AO/DRP for afresh adjudication after factual analysis and examination of the impugned transaction following the judgment of the Hon'ble Apex Court in the case of Woodward Governor Private Limited (supra) but no such analysis and examination of all the transactions of forward contract has been carried out by the Ld. DRP due to reasons mentioned in the order of the Ld. DRP. The assessee has filed copy of all the forward contracts before us from page 78 to 87 of the paper book. Bottom portion in all these contra....