K. PANKAJKUMAR & CO., MUMBAI V. ITO 16(3)(2), MUMBAI

CO 130/MUM/2014

• Counselvise Citation: [2014] 122 COUNSELVISE.COM (IT) 9720 (ITAT-MUMBAI)
• Duration Of Justice: 13 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 09-07-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2009-2010
• Appeal Filed On: 26-06-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: VIKASH AGARWAL
• Assessee Lawyers: NIRAV S SHAH
• Keywords: Business income
• Section: 37(1); 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'A' BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER ITA NO. 2669/MUM/2013 (ASSESSMENT YEAR: 2009-10) INCOME TAX OFFICER - 16(3)(2) M/S. K. PANKAJKUMAR & CO. MATRU MANDIR MUMBAI VS. SHOP NO. 18, SHREEJI ARCADE SHREEJI CHAMBERS, TATA ROAD NO. 1&2, MUMBAI 400008 PAN - AAAFK3852C APPELLANT RESPONDENT CO NO. 130/MUM/2014 (ASSESSMENT YEAR: 2009-10) M/S. K. PANKAJKUMAR & CO. INCOME TAX OFFICER - 16(3 )(2) SHOP NO. 18, SHREEJI ARCADE SHREEJI CHAMBERS, TATA ROAD NO. 1&2, MUMBAI 400008 VS. MATRU MANDIR MUMBAI PAN - AAAFK3852C CROSS OBJECTOR APPELLANT IN APPEAL REVENUE BY: SHRI VIKASH AGARWAL ASSESSEE BY: SHRI NIRAV S. SHAH DATE OF HEARING: 09.07.2014 DATE OF PRONOUNCEMENT: 09.07.2014 O R D E R PER D. MANMOHAN, V.P. THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 16.01.2013 PASSED BY THE CIT(A)-27, MUMBAI AND IT P ERTAINS TO A.Y. 2009-10. 2. THE ONLY GROUND URGED BEFORE US READS AS UNDER: - THAT THE LEARNED CIT(A) HAS ERRED IN ALLOWING THE LOSS OF RS.88,13,515/- ON ACCOUNT OF FOREIGN EXCHANGE FLUCT UATION HOLDING THAT THE SAME IS NOT NOTIONAL OR CONTINGENT IN NATURE. 3. FACTS NECESSARY FOR DISPOSAL OF THE APPEAL ARE STAT ED IN BRIEF. THE ASSESSEE, A PARTNERSHIP FIRM, IS ENGAGED IN THE BUS INESS OF EXPORT OF POLISHED DIAMONDS. IN THE P & L ACCOUNT THE ASSESSEE DEBITED A SUM OF ` 88,13,515/- ITA NO. 2669& C0 130/MUM/2013 M/S. K. PANKAJKUMAR & CO. 2 REFERABLE TO FORWARD CONTRACT LOSS; IN THE OPINION OF THE ASSESSEE IT IS ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATIONS IN THE NAT URE OF HEDGING AND/OR SAFEGUARD TO THE BUSINESS OF EXPORTS AND HENCE FALL S OUTSIDE THE AMBIT OF SECTION 43(5) OF THE INCOME TAX ACT. EXPLAINING FUR THER IT WAS STATED THAT EXPORT PROCEEDS ARE REALISED IN FOREIGN CURRENCY, W HICH IS ALWAYS SUBJECT TO FLUCTUATIONS DEPENDING UPON THE INTERNAL BUSINESS S CENARIO AND HENCE IT IS ABSOLUTELY NECESSARY FOR THE ASSESSEE TO HEDGE AGAI NST SUCH FLUCTUATIONS/ VARIATIONS IN THE EXCHANGE RATES BY ENTERING INTO F ORWARD CONTRACTS. IN THIS YEAR SUCH LOSS WORKS OUT TO ` 88,13,515/- WHICH HAS TO BE ALLOWED AS BUSINESS LOSS OR TO BE TREATED AS EXPENDITURE AGAIN ST THE BUSINESS INCOME FROM EXPORTS. 4. THE AO REJECTED THE CONTENTION OF THE ASSESSEE. HE OBSERVED THAT THE PROVISIONS SHOWN FOR OUTSTANDING FORWARD CONTRACT D O NOT MERIT PLACE IN THE BALANCE SHEET AND THE NOTIONAL LOSS WORKED OUT ON T HEIR ESTIMATED MAGNITUDE ON 31.03.2009 DOES NOT MERIT A RECKONING TO ARRIVE AT THE TRUE AND FAIR ASSESSMENT OF THE ASSESSEES INCOME FOR 2009-10. TH E AO, MOREOVER, OBSERVED THAT THERE ARE NO SPECIAL PROVISIONS FOR T REATMENT OF MARK-TO-MARKET METHOD OF ACCOUNTING; THERE IS NO ACTUAL LOSS ON AC COUNT OF DEALING IN FOREX DERIVATIVES UNTIL THEIR FINAL VALUES ARE KNOWN. MAR K-TO-MARKET LOSSES ARE ONLY NOTIONAL LOSSES AND THEREFORE HE REFUSED TO ALLOW D EDUCTION OF THE SAME. 5. AGGRIEVED, ASSESSEE CONTENDED BEFORE THE FIRST APPE LLATE AUTHORITY THAT THE DEBTORS OUTSTANDING AS ON 01.04.2008 WERE TO TH E TUNE OF ` 3.53 CRORES FOR ALL THE SALES MADE BY THE ASSESSEE OUT OF WHICH IT PREFERRED TO HEDGE SOME OF THE EXPORT SALE PROCEEDS SALES MADE TO M/ S. DIASONS GEM INCOME AND THAMINA DIAMONDS, DUBAI. THE AMOUNT HEDG ED WAS BACKED BY THE AMOUNT OF SALES AND UNDERLYING ASSETS. THE D ETAILS OF EXPORT SALES MADE FOR WHICH NO PAYMENTS WERE RECEIVED, AND EXPOR T MADE FOR THE CURRENT YEAR AGAINST WHICH NO PAYMENTS WERE RECEIVED, AND O THER RELATED INFORMATION WERE FURNISHED TO HIGHLIGHT THAT IT IS ONLY HEDGING TRANSACTION, I.E. TO HEDGE THE RISK AGAINST CURRENCY FLUCTUATION S. 6. HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE THE LEARNED CIT(A) SET ASIDE THE DISALLOWANCE BY OBSERVING AS UNDER: - ITA NO. 2669& C0 130/MUM/2013 M/S. K. PANKAJKUMAR & CO. 3 5. I HAVE CAREFULLY CONSIDERED THE CONTENT OF THE ASSESSMENT ORDER, APPELLANTS SUBMISSIONS AND THE MATERIALS PLACED ON RECORD. I NOTE THAT THE LOSS DEBITED TO THE PROFIT AND LOSS ACCOUNT IS ON ACCOUNT OF ACTUAL CANCELLATION OF FORWARD CONTRACTS DURING THE YEAR U NDER CONSIDERATION AND IN FACT THERE WERE NO OUTSTANDING FORWARD CONTR ACTS AS ON 31-03- 2009. THEREFORE, THE A.O. IS FACTUALLY INCORRECT IN STATING THAT THE LOSS DEBITED TO THE PROFIT AND LOSS ACCOUNT IS ON ACCOUN T OF REVALUATION OF THE PENDING FORWARD CONTRACTS. SECONDLY, FROM THE D ETAILS PLACED ON RECORD BY THE APPELLANT, IT IS NOTED THAT THE FORWA RD CONTRACTS WERE ENTERED INTO TO HEDGE AGAINST THE FLUCTUATION IN FO REIGN EXCHANGE RATE IN RESPECT OF THE OUTSTANDING DEBTORS AS ON THE DATE O F TRANSACTIONS. IT IS ALSO NOTED THAT THE VALUE FOR WHICH FORWARD CONTRAC TS ARE ENTERED INTO WAS LESS THAN THAT OF THE VALUE OF DEBTORS PENDING FOR REALIZATION ON THE RESPECTIVE DATES WHICH GOES TO SHOW THAT THE FORWAR D CONTRACTS WERE DULY SUPPORTED BY THE UNDERLYING ASSETS. THUS, THER E IS NO ELEMENT OF SPECULATION INVOLVED IN THESE TRANSACTIONS. IN SUCH CIRCUMSTANCES, THE LOSS INCURRED BY THE APPELLANT IS NOT A NOTIONAL LO SS BUT IT IS AN ACTUAL LOSS SUFFERED BY THE APPELLANT. THEREFORE, SUCH LOS S IS TO BE ALLOWED AS BUSINESS LOSS U/S. 37(1) OF THE ACT IN TERMS OF DEC ISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. BADRIDAS G AURIDU PVT. LTD. 261 ITR 256. ACCORDINGLY, I DIRECT THE A.O. TO ALLO W THE AFORESAID LOSS CLAIMED BY THE APPELLANT. THE APPELLANT SUCCEEDS ON THIS ISSUE. AGGRIEVED, REVENUE IS IN APPEAL BEFORE US. 7. THE ASSESSEE SUPPORTED THE VIEW TAKEN BY THE CIT(A) BY FILING A CROSS OBJECTION WHEREIN IT WAS CONTENDED THAT THE AO ERRE D IN IGNORING THE FACT THAT THE LOSS INCURRED BY THE ASSESSEE WAS ACTUAL LOSS S UFFERED BY THE ASSESSEE ON CANCELLATION OF FORWARD CONTRACT AND NOT A NOTIONAL OR MARK-TO-MARKET LOSS AND HENCE THE SAME IS FULLY ALLOWABLE UNDER SECTION 37(1) OF THE ACT. 8. WE HAVE HEARD THE LEARNED D.R. AS WELL AS THE LEARN ED COUNSEL IN THIS REGARD AND CAREFULLY PERUSED THE RECORD. 9. THE ORDER OF THE LEARNED CIT(A) IS ADMITTEDLY BASED ON FACTS, I.E. FORWARD CONTRACTS WERE ENTERED INTO TO HEDGE AGAINS T THE FLUCTUATIONS IN FOREIGN EXCHANGE RATES IN RESPECT OF THE OUTSTANDIN G DEBTORS AS ON THE DATE OF TRANSACTIONS AND THEY WERE DULY SUPPORTED BY UND ERLYING ASSETS. IT IS ALSO NOT DISPUTED THAT THERE IS NO ELEMENT OF SPECULATIO N INVOLVED IN THIS TRANSACTION. IN THE LIGHT OF THE UNDISPUTED FACTS W E ARE OF THE VIEW THAT THE LEARNED CIT(A) WAS JUSTIFIED IN HOLDING THAT THE LO SS INCURRED BY THE ASSESSEE CANNOT BE TREATED AS NOTIONAL LOSS. IN OTHER WORDS, IT IS AN ACTUAL LOSS SUFFERED WHICH IS ALLOWABLE AS BUSINESS LOSS IN THE LIGHT OF THE RATIO LAID ITA NO. 2669& C0 130/MUM/2013 M/S. K. PANKAJKUMAR & CO. 4 DOWN BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE O F CIT VS. BADRIDAS GAURIDU PVT. LTD. 261 ITR 256. SINCE THE DECISIONS IS ESSENTIALLY BASED ON THE FACTS AND THE LAW LAID DOWN BY THE HON'BLE JURI SDICTIONAL HIGH COURT, WE DO NOT FIND ANY INFIRMITY IN THE ORDER PASSED BY TH E CIT(A). THEREFORE THE APPEAL FILED BY THE REVENUE IS DISMISSED AND THE CR OSS OBJECTION FILED BY THE ASSESSEE IS DISMISSED AS INFRUCTUOUS. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH JULY, 2014. SD/- SD/- (N.K. BILLAIYA) (D. MANMOHAN) ACCOUNTANT MEMBER VICE PRESIDENT MUMBAI, DATED: 9 TH JULY, 2014 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 27, MUMBAI 4. THE CIT 16, MUMBAI CITY 5. THE DR, A BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.