Appeal Details
Counselvise Citation
[2020] 111 COUNSELVISE.COM (IT) 4442 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
4 year(s) 2 month(s) 3 day(s)
Appellant
Respondent
Appeal Type
Cross Objection
Pronouncement Date
21-02-2020
Appeal Filed By
Assessee
Order Result
Partly Allowed
Bench Allotted
D
Next Hearing Date
28-01-2020
Assessment Year
2008-2009
Appeal Filed On
18-12-2015
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH BEFORE: SHR I RAJPAL YADAV , VICE PRESIDENT AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER THE DCIT, CIRCLE - 1(1)(1), AHMEDABAD (APPELLANT) VS M/S. ACALMAR OILS & FATS LTD. (NOW MERGED WITH ADANI WILMAR LTD.), AHMEDABAD - 380009 PAN: AADCA3673P (RESPONDENT) M/S. ACALMAR OILS & FATS LTD. (NOW MERGED WITH ADANI WILMAR LTD.), AHMEDABAD - 380009 PAN: AADCA3673P (APPELLANT) VS THE DCIT, CIRCLE - 1(1)(1), AHMEDABAD (RESPO NDENT) REVENUE BY : S H RI SANJEEV JAIN , CIT - D . R. ASSESSEE BY: SHRI S.N. SOPARKAR , SR. A.R. SHRI PARIN SHAH & SHRI DHRUNAL BHATT, ARS. DATE OF HEARING : 28 - 0 1 - 2 020 DATE OF PRONOUNCEMENT : 21 - 02 - 2 020 I T A NO S . 3069 & 3070 / A HD/20 1 5 A SS ESSMENT YEAR 2008 - 09 & 2010 - 11 CROSS OBJECTION NOS. 210 & 211/AHD/201 5 (IN ITA NO S . 3069 & 3070 /AHD/20 15) ASS ESSMENT YEAR 2008 - 09 & 2010 - 11 I.T.A. 3069 & 3070 & CO . 210 & 211 /AHD/20 1 5 A.Y. 2008 - 09 & 2010 - 11 PAGE NO DCIT VS. M/S. ACALMAR OILS & FATS LTD. (NOW MERGED WITH ADANI WILMAR LTD.) 2 / ORDER P ER : AMARJIT SINGH, ACCOUNTANT MEMBER : - THESE TWO APPEALS FILED BY REVENUE AND TWO CROSS OBJECTIONS FILED BY ASSESSEE FOR A.Y. 2008 - 09 & 2010 - 11 , ARI SE FROM ORDER OF THE CIT( A) - 10, AHMEDABAD DATED 28 - 08 - 2 015 , IN PROCEEDINGS UNDER SECTION 1 4 3(3) & 143(3) R.W.S. 92CA & 144C OF THE INCOME TAX ACT, 1961; IN SHORT THE ACT . ITA NO. 3069/AHD/2015 & CO NO. 210/AHD/2015 FILED BY REVENUE 2 . THE FACT IN BRIEF IS THAT ASSESSEE HAS F ILED RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 9 , 64 , 51 ,680/ - . THE CASE WAS SUBJECT TO SCRUTINY ASSESSMENT AND NOTICE U/S. 143(2) OF THE ACT WAS ISSUED ON 26TH AUGUST, 2012. THE ASSESSEE IS A COMP ANY ENGAGED IN THE BUSINESS OF MANUFACTURING OF V ANASP ATI AND REFINING OF EDIBLE OIL. THE ASSESSMENT U/S. 143(3) OF THE ACT WAS FINALIZED ON 10 TH OCTOBER, 2011 AND TOTAL INCOME WAS DETERMINED AT RS. 20 , 89 , 84 , 427/ - AFTER MAKING VARIOUS ADDITIONS . THE ISSUE IN THE INSTANT APPEAL IS PERTAINED TO DISALLOWANCE OF CONTINGENT LIABIL ITY TO THE AMOUNT OF R S. 6 , 55 , 33 ,334/ - CLAIMED AS LOSS ON ACCOUNT OF MARKET TO MARKET TRANSACTIONS . DURING THE COUR S E OF ASSES SMENT, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE COMPANY USED TO IMPORT ITS RAW MATERIAL I.E. CRUDE PALM OIL FROM MALASIA FOR WHICH IT HAS TO PAY IN DOLLARS. TO HEDGE THE TARIFF IN DOLLAR RATE I.E. RATE THE ASSESSEE COMPANY HAD ENTERED INTO A NUMBER OF FORWARD CONTRACTS/ OPTION CONTRACTS/ TARIFF ETC . WITH BANKS ON WHICH IT HAD BOOKED HUGE FOREIGN EXCHANGE LOS SES. THE ASSESSEE HAD BOOKED FOREIGN EXCHANGE LOSSES TO THE AMOUNT OF RS . 12 , 75 , 74 , 806/ - WHICH ALSO INCLUDED RS. 6 , 55 ,33, 334 ON ACCOUNT OF PROVISIONS MADE ON MARKET TO MARKET TRANSACTIONS ENTERED WITH THE ICICI BANK. ON QUERY , THE ASSESSEE EXPLAINED THAT IT HAD I.T.A. 3069 & 3070 & CO . 210 & 211 /AHD/20 1 5 A.Y. 2008 - 09 & 2010 - 11 PAGE NO DCIT VS. M/S. ACALMAR OILS & FATS LTD. (NOW MERGED WITH ADANI WILMAR LTD.) 3 PURCHASED CRUDE PALM OIL F R OM ONE ACALPO WILMAR PTE LTD. IN THE MONTH OF MAY, 2007 FOR A CONSIDERATION OF USD OF 36 , 74 , 476/ - VIDE INVOICE DATED 25 TH MAY, 2007 & 29 TH MAY, 2007 AND IN ORDER TO HEDGE AGAINST THE FOREIGN CURRENCY LIABILITY THE ASSES SEE ENTERED INTO A CONTRACT CALLED OPTION CONTRACT WITH ICICI BANK IN JULY, 2007 AND AS PER SAID OPTION CONTRACT THE A SSESSEE HAD SUFFERED A LOSS OF R S. 6 , 95 , 53 , 334/ - . IT WAS ALSO STATED THAT IT WAS NOT SPECULATIVE LOSS AS THE TRANSACTION WAS ENTERED THRO UGH BANKING CHANNEL. THE ASSESSING OFFICER WAS NOT SATISFIED WITH THE EXPLANATION OF THE ASSESSEE. HE WAS OF THE VIEW THAT THE LOSS BOOKED WAS ON ACCOUNT OF MARKET TO MARKET DERIVATIVE OPERATION ONLY AND IT WAS NOT IN THE NATURE OF NORMAL FOR WARD CONTRAC T AND IT WAS THE CONTINGENT LOSS. THEREFORE, AFTER TREATING T H E SAME AS CONTINGENT LIABILITY NOT YET CRYSTALIZED THE ASSESSING OFFICER HAS DISALLOWED FOREIGN EXCHANGE LOSS OF RS. 6 , 55 ,5 3 , 3 3 4/ - TOWARDS PROVISION FOR EXCHANGE LOSS AS ON FORWARD COVER PAYMEN T FOR BUYERS CREDIT. 3 . THE AGGRIEVED ASSESSEE HAS FILED APPEAL BEFORE THE LD. CIT(A). T HE LD. CIT(A) HAS ALLOWED THE APPEAL OF THE APPEAL OF THE ASSESSEEE. THE RELEVANT PAT OF THE DECISION OF LD. CIT(A) IS REPRODUCED AS UNDER: - DECISION: 7.3 I HAVE CA REFULLY CONSIDERED THE ASSESSMENT ORDER AND SUBMISSION FILED BY THE APPELLANT. THE UNDISPUTED FACTS ARE THAT APPELLANT COMPANY PURCHASED CRUDE PALM OIL FROM ACALPO WILMAR PTE LTD IN THE MONTH OF MAY 2007 FOR CONSIDERATION OF $ 3674476 AGAINST WHICH ICICI B ANK HAS PROVIDED BUYERS CREDIT OF SWISS FRANC 8000000 AND SUCH SAME WAS DUE IN MAY 2008. HOWEVER, DUE TO SUDDEN FALL IN THE VALUE OF USD V/S SWISS CURRENCY, THE COMPANY INCURRED HUGE FOREIGN EXCHANGE LOSS OF RS 8.55 CRORE. DURING THE COURSE OF ASSESSMENT P ROCEEDINGS, APPELLANT ARGUED THAT SUCH LOSS ARISING ON SWAP TRANSACTION CANNOT BE TREATED AS SPECULATIVE LOSS. HOWEVER, THE ASSESSING OFFICER REJECTED THE CONTENTION OF APPELLANT AND CONTENDED THAT SIMPLY BECAUSE AS PER RBI RULES THE COMPANIES ARE NOT EXPE CTED TO NOT TO INDULGE IN SPECULATIVE TRANSACTION, SAME CANNOT BE TREATED AS BUSINESS LOSS. THE AO FURTHER CONTENDED THAT THERE WAS NO PURCHASE OBLIGATION IN TERMS OF SWISS FRANC, THERE WAS NOT MUCH DEPRECIATION OF RUPEE V/S USD WHICH MEANS THAT LOSS ARISI NG ON ACCOUNT OF CONVERTING USD INTO SWISS FRANC IS NOTHING BUT SPECULATIVE TRANSACTION. THE ASSESSING OFFICER ALTERNATIVELY CONTENDED THAT LOSS OR GAIN OCCURS ON EXPIRY OF CONTRACT AND NOT EARLIER HENCE MARKED - TO - MARKET LOSS IN THESE TYPE OF DERIVATIVE CO NTRACTS ARE CONTINGENT LOSS. HE HAS ALSO REFERRED TO CBDT, NEW DELHI, INSTRUCTION NO I.T.A. 3069 & 3070 & CO . 210 & 211 /AHD/20 1 5 A.Y. 2008 - 09 & 2010 - 11 PAGE NO DCIT VS. M/S. ACALMAR OILS & FATS LTD. (NOW MERGED WITH ADANI WILMAR LTD.) 4 3/2010 DATED 21/03/2010 WHEREIN IT IS STATED THAT SUCH LOSS IS NOTIONAL LOSS AND CONTINGENT IN NATURE, HENCE CANNOT BE ALLOWED TO BE SET OFF AGAINST THE TAXABLE INCOME. TH E APPELLANT ARGUED THAT IT HAD ACTUALLY IMPORTED CERTAIN RAW MATERIAL AND INCURRED A FOREIGN CURRENCY LIABILITY IN US DOLLARS FOR THE SAME, THAT THIS FOREIGN CURRENCY LIABILITY TO THE FOREIGN SUPPLIER OF RAW MATERIAL HAD BEEN PAID BY THE APPELLANT BY BORR OWING A FOREIGN CURRENCY LOAN IN US DOLLARS FROM ICICI BANK LTD. FURTHER, THE APPELLANT HAD ENTERED INTO A HEDGING CONTRACT WITH THE ICICI BANK LTD. FOR THE SPECIFIC PURPOSE OF HEDGING ITS AFORESAID FOREIGN CURRENCY LOAN LIABILITY TO ICICI BANK WHICH WAS T O FALL DUE FOR REPAYMENT IN ABOUT EIGHT MONTHS. IT WAS FURTHER STATED THAT AS PER ACCOUNTING STANDARD 11 'THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES' ISSUED BY ICAI, APPELLANT HAS PROVIDED MARKED - TO - MARKET LOSS IN BOOKS OF ACCOUNT. IT WAS ALSO STATE D THAT EVEN THOUGH ACTUAL MARKED - TO - MARKET LOSS WAS OF RS 7.39 CRORE BUT ACTUAL LOSS SUFFERED BY APPELLANT WAS RS 6.55 CRORE, APPELLANT HAS CLAIMED SUCH LOSS IN CURRENT YEAR. WITH REGARDS TO ARGUMENT OF ASSESSING OFFICER THAT APPELLANT SHOULD NOT HAVE ENTE RED INTO TRANSACTION OF USD V/S SWISS FRANC, IT WAS SUBMITTED THAT IT WAS A VERY WELL SETTLED POSITION OF LAW THAT IT WAS FOR THE ASSESSEE TO DECIDE HOW HE SHOULD CARRY ON HIS BUSINESS AND THAT IT WAS NO PART OF THE ASSESSING OFFICER'S JURISDICTION TO PR ESCRIBE TO THE ASSESSEE HOW HE SHOULD CARRY ON HIS BUSINESS, THEREFORE, IF THE APPELLANT TOOK ITS OWN BUSINESS DECISION, ON THE BASIS OF ITS OWN WISDOM AND UNDERSTANDING ABOUT BUSINESS EXIGENCIES AT THE RELEVANT TIME, TO TAKE A HEDGING CONTRACT IN A DIFFERENT CURRENCY. IT SHOULD NOT BE VIEWED ADVERSELY. THE APPELLANT'S CONTENTION THAT THE RELEVANT RULES OF THE RBI DID NOT PERMIT COMPANIES TO INDULGE IN SPECULATIVE TRANSACTIONS IN FOREIGN CURRENCY HAD BEEN CLEARLY MISUNDERSTOOD BY ASSESSING OFFICER, BECAUSE AS PER THE RELEVANT RBI RULES, EVERY TRANSACTION IN FOREIGN CURRENCY HAD NECESSARILY TO BE CONDUCTED THROUGH A BANK AND THAT IT WAS JUST NOT POSSIBLE THAT A BANK WOULD PERMIT A FOREIGN CURRENCY TRANSACTION BY A COMPANY WHICH WAS SPECULATIVE IN NATU RE AND, THEREFORE, NOT PERMISSIBLE UNDER THE RBI RULES BECAUSE IF A BANK WERE TO PERMIT ANY SUCH TRANSACTION, IT WOULD ITSELF COMMIT A DEFAULT. THE APPELLANT FURTHER CONTENDED THAT, IN ANY CASE, INSTRUCTION RELIED UPON BY AO ISSUED ON 23/03/2010 CANNOT BE MADE APPLICABLE IN A.Y. 2008 - 2009, AS IT WAS NOT THERE IN THE YEAR UNDER CONSIDERATION AND IT HAS NOT MADE EFFECTIVE FROM RETROSPECTIVE DATE. IT WAS ALSO SUBMITTED THAT SUCH INSTRUCTION IS CONTRARY TO DECISION OF CIT V/S WOODWARD GOVERNOR INDIA P. LTD. (SUPRA), OIL AND NATURAL GAS CORPORATION LTD. V. CIT (SUPRA), MUMBAI ITAT SPECIAL BENCH IN THE CASE OF DCIT V. BANK OF BAHRAIN AND KUWAIT. THE APPELLANT STATED THAT DECISION OF APEX COURT CLEAR STATES THAT M2M LOSS IS NOT CONTINGENT LOSS AS O BSERVED BY AO. THE APPELLANT ALSO ARGUED THAT IT IS NOT A DEALER IN FOREIGN EXCHANGE BUT IS ENGAGED IN BUSINESS OF MANUFACTURING OF OIL AND DURING THE COURSE OF BUSINESS, IT HAS ENTERED INTO FORWARD CONTRACT TO MITIGATE RISK OF FLUCTUATION HENCE SUCH LOSS CANNOT BE TREATED AS SPECULATIVE LOSS AS HELD BY HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT V. FRIENDS AND FRIENDS SHIPPING PVT. LTD. DELIVERED ON 23.8.2011 IN TAX APPEAL NO. 251 OF 2010. (SUPRA). THE APPELLANT ALSO RELIED UPON TWO MORE DECISIONS OF AHM EDABAD ITAT IN THE CASE OF HEAVY METAL AND TUBES LTD. IN ITA NO. 1951/AHD/2011 DATED 30/06/2014(SUPRA) AND ADANI ENTERPRISE LTD. IN ITA NO.1545/AHD/2014 PRONOUNCED ON 30/01/2015(SUPRA) IN SUPPORT OF ITS ARGUMENT THAT SUCH LOSS IS NOT SPECULATIVE LOSS AS OB SERVED BY ASSESSING OFFICER. ON CAREFUL CONSIDERATION OF ENTIRE FACTS, IT IS OBSERVED THAT THE TWO ISSUES EMERGING OUT OF ABOVE DISCUSSION ARE THAT WHETHER CONVERSION OF USD INTO SWISS FRANC RESULTING INTO LOSS IS SPECULATION LOSS OR BUSINESS LOSS AND WHET HER M2M LOSS PROVIDED BY APPELLANT ON ABOVE DERIVATIVE CONTRACT IS CONTINGENT LOSS OR ACTUAL BUSINESS LOSS. SO FAR AS FIRST ISSUE IS CONCERNED, IT IS OBSERVED THAT APPELLANT HAS IMPORTED MATERIAL IN USD AND IN TERMS OF RBI GUIDELINES; IT CONVERTED ITS LIAB ILITY OF USD INTO SWISS FRANC. IT IS NOT THE CASE THAT APPELLANT HAS NOT AT ALL INCURRED ANY LIABILITY AND ENTERED INTO TRANSACTION OF BUYING USD AND SELLING SWISS FRANC DEPENDENCY OR VICE A VERSA HENCE CONVERSION OF FOREIGN CURRENCY LIABILITY IN ANOTHER F OREIGN CURRENCY LIABILITY IS HEDGING TRANSACTION NOT COVERED BY SPECULATIVE TRANSACTIONS AS DEFINED IN SECTION 43(5) OF THE ACT. IT IS PERTINENT TO NOTE THAT APPELLANT IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF OIL WHEREIN SIGNIFICANT BUSINESS ACTIVITY IS FROM IMPORT AND EXPORT OF GOODS. DURING THE YEAR UNDER CONSIDERATION, THE APPELLANT HAS SHOWN CONSUMPTION OF RAW MATERIAL OF RS. 902.22 CRORES INCLUDING CONSUMPTION OF IMPORTED MATERIAL OF RS.824.75 CRORES, WHICH CONSTITUTES 91.41 % OF TOTAL PURCHASE. THUS, IT APPEARS THAT APPELLANT COMPANY REQUIRES DEALING IN FOREIGN CURRENCY I.T.A. 3069 & 3070 & CO . 210 & 211 /AHD/20 1 5 A.Y. 2008 - 09 & 2010 - 11 PAGE NO DCIT VS. M/S. ACALMAR OILS & FATS LTD. (NOW MERGED WITH ADANI WILMAR LTD.) 5 DURING THE COURSE OF ITS BUSINESS AND TO SAFEGUARD THE FUTURE LOSS AGAINST FOREIGN EXCHANGE FLUCTUATION IT HAS ENTERED INTO HEDGING TRANSACTION WITH ICICI BANK LIMITED. CONSIDERIN G THE OVERALL BUSINESS TRANSACTIONS CARRIED OUT BY APPELLANT THE TRANSACTION IN WHICH APPELLANT HAS CONVERTED ITS DOLLAR LIABILITY TO SWISS FRANC IS A SMALL FRACTION. ON THIS VERY ISSUE, HON'BLE AHMEDABAD ITAT IN THE CASE OF HEAVY METAL AND TUBES LTD. IN I TA NO. 1951/AHD/2011 DATED 30/06/2014 DECIDED THE ISSUE IN FAVOUR OF ASSESSEE. THE FACTS OF THE SAID CASE ARE THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF MANUFACTURING OF STEEL TUBES. DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE AVAILED FOREIGN CU RRENCY LOAN FOR IMPORTING RAW MATERIAL AND IT HAD SHIFTED ITS LOAN LIABILITY IN DOLLAR TO SWISS FRAN C AND THE LOSS RESULTED DUE TO VALUE IN SWISS FRANC VIS - A - VIS DOLLAR ON THE BALANCE SHEET DATE WAS UNDERTAKEN THE MINIMIZE THE RISK OF FOREIGN EXCHANGE FLU CTUATION. THE ASSESSING OFFICER DISALLOWED LOSS CLAIMED BY ASSESSEE CONSIDERING THAT (AS DISCUSSED IN PARA 8 OF THE ORDER OF I.T.A.T.) (I) FOREX DERIVATIVE LOSS ON ACCOUNT OF SWITCHING OF DOLLAR LOAN TO SWISS FRANC LOAN WAS UNREALIZED LOSS. (II) ASSESSEE COMPANY HAS CLAIMED LOSS ON ACCOUNT OF RE - STATEMENT OF LOANS/CREDIT LIABILITY EXISTING AS ON THE DATE OF BALANCE SHEET BY SWAPPING THE LOAN FROM DOLLAR TO SWISS FRANC TO REDUCE ITS FOREX EXPOSURE RISK AND THEREFORE'THE LOSS CLAIMED BY THE ASSESSE E - WAS NOT OF REVENUE IN NATURE BUT WAS AN UNASCERTAINED AND NOTIONAL LOSS. (IV) THE LOSS CLAIMED BY THE ASSESSEE WAS SPECULATIVE IN NATURE. THUS, ENTIRE FACTS OF PRESENT CASE ARE SIMILAR TO FACTS BEFORE HON'BLE AHMEDABAD ITAT AS OBSERVED BY HON'BLE AHM EDABAD ITAT IN ABOVE CASE THAT WHEN THE MATTER BROUGHT BEFORE THE HON'BLE CIT(A), THE CIT(A) DECIDED THE ISSUE IN FAVOUR OF SSSEE BY HOLDING AS UNDER : - '8. I HAVE CAREFULLY CONSIDERED THE OBSERVATIONS AND FINDINGS OF THE A.O. AS WELL AS SUBMISSIONS OF TH E APPELLANT. THE APPELLANT COMPANY IS ENGAGED IN THE MANUFACTURING OF TUBES & PIPES. IT PURCHASES THE REQUIRED RAW MATERIALS MAINLY FROM IMPORT SOURCE. DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION, APPROX. 90% OF THE VALUE OF MA TERIALS CONSUMED IS FROM IMPORT PURCHASE. THERE ARE EXPORT SALES ALSO. THUS, IT APPEARS THAT THE APPELLANT COMPANY REQUIRES DEALING IN FOREIGN EXCHANGE IN NORMAL COURSE OF BUSINESS AND TO SAFEGUARD THE FUTURE LOSSES AGAINST FOREIGN EXCHANGE RATE FLUCTUATIO N IT ENTERS IN TO HEDGING TRANSACTION. IT HAS AVAILED THE FUND BASED AND NON - FUND BASED FINANCIAL FACILITIES FROM ITS BANKERS IN THE FORM OF LETTER OF CREDIT, BUYER'S CREDIT, CASH CREDIT LIMITS IN FOREIGN CURRENCY FOR PURCHASE OF RAW MATERIALS & PAYMENT TO OVERSEAS SUPPLIERS, AGAINST STOCK OF RAW MATERIALS & COLLECTION OF BOOK DEBTS. IT IS SUBMITTED THAT SINCE THE APPELLANT COMPANY USES THE FUND AND NON - FUND BASED FACILITIES IN FOREIGN CURRENCY, THE BANKERS HAVE ADVISED THE COMPANY TO COVER UP THE FOREIGN E XCHANGE PAYMENT LIABILITIES AGAINST THE RISK OF FLUCTUATION IN RATE OF FOREIGN EXCHANGE. THERE IS ALWAYS AN INHERENT RISK OF FLUCTUATION IN THE RATES OF FOREIGN EXCHANGE, I.E. THE RATES OF FOREIGN EXCHANGE CHANGES BETWEEN THE TIME OF PURCHASE OF RAW MATERI ALS AND ACTUAL PAYMENT TO SUPPLIERS OR BANK, WHICH DEPENDS ON (HE DEMAND AND SUPPLY POSITION OF THE FOREIGN EXCHANGE IN THE INTERNATIONAL MARKET. 8.1 DURING THE PREVIOUS YEAR, THE APPELLANT COMPANY HAS SWAP ITS WORKING CAPITAL BANK LIABILITY AGAINST PURCHA SE OF RAW - MATERIALS IN DOLLAR CURRENCY TO SWISS FRANK CURRENCY BY ENTERING INTO DERIVATIVE CONTRACTS WITH BANK. THE STATED LOGIC FOR SUCH SWAP FROM DOLLAR TO SWISS FRANK CURRENCY WAS THAT THE SWISS FRANK IS CONSIDERED AS ONE OF THE MOST STABLE CURRENCY AS COMPARED TO DOLLAR AND ACCORDINGLY, THE LOSS, IF ANY ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION CAN BE MINIMIZED. HOWEVER, THERE WAS FALL IN THE VALUE OF SWISS FRANK VIS - A - VIS DOLLAR AND ON THE BALANCE SHEET DATE I.E. 31 - 03 - 2008, THE APPELLANT COMPANY BOOK ED THE LOSS OF RS. 5,89,29,812/ - . THIS FACTS HAVE NOT BEEN DISPUTED BY THE A.O. 8.2 IT IS FURTHER SUBMITTED BY THE AUTHORIZED REPRESENTATIVE OF THE APPELLANT COMPANY THAT AS PER THE CONSISTENT PRUDENT PRACTICE AND REQUIREMENTS OF ACCOUNTING '' STANDARDS IS SUED BY THE ICAI, IT FOLLOWS ACCOUNTING OF TRANSACTIONS FOR 'PURCHASE & SALES IN FOREIGN CURRENCY AT THE PREVAILING FOREIGN EXCHANGE RATE AT THE TIME OF EXECUTING TRANSACTIONS AND DIFFERENCE IF ANY BETWEEN THE AMOUNT OF PURCHASE/SALES AND AMOUNT AT WHICH TH E I.T.A. 3069 & 3070 & CO . 210 & 211 /AHD/20 1 5 A.Y. 2008 - 09 & 2010 - 11 PAGE NO DCIT VS. M/S. ACALMAR OILS & FATS LTD. (NOW MERGED WITH ADANI WILMAR LTD.) 6 TRANSACTIONS IS ACTUALLY SETTLED BY THE PAYMENT TO/FROM SUPPLIERS/DEBTORS IS ACCOUNTED AS 'LOSS/GAIN ON FOREIGN EXCHANGE FLUCTUATION'. IN THE TRADING & PROFIT & LOSS ACCOUNT, THE PURCHASE AND SALES ARE DISCLOSED AFTER SET OFF ON ACCOUNT OF THE LOSS OR GA IN DUE TO FLUCTUATION IN RATES OF FOREIGN EXCHANGE ON ACCOUNT OF TRANSACTIONS OF IMPORT PURCHASE AND EXPORT SALES IN FOREIGN EXCHANGE. SUCH GAIN OR LOSS IN FOREIGN EXCHANGE TRANSACTIONS SETTLED DURING THE YEAR IS PART OF THE COST OF IMPORT PURCHASE OR VALU E OF EXPORT SALES. IT IS FURTHER SUBMITTED THAI AT TIMES, IT HAPPENS THAT THE FORWARD CONTRACT TO BUY/SELL FOREIGN EXCHANGE REMAINS OUTSTANDING AT THE LAST DATE OF BALANCE SHEET. AS PER THE PRUDEN T ACCOUNTING POLICY OF MERCANTIL E/ACCRUAL SYSTEM OF ACCOUNTI NG AND ACCOUNTING STANDARDS ISSUED BY THE ICAI, THE UNSETTLED OUTSTANDING FOREIGN EXCHANGE FORWARD CONTRACTS HAVE TO BE EVALUATED AT AN EXCHANGE RATE PREVAILING ON THE DATE OF BALANCE SHEET AND LOSS, IF ANY, ON EVALUATION OF SUCH UNSETTLED FORWARD CONTRACT S HAVE TO BE ACCOUNTED IN THE BOOKS. AS SUCH THERE IS NO DIFFERENCE BETWEEN THE LOSS ON ACCOUNT OF EVALUATION OF UNSETTLED OUTSTANDING FOREIGN EXCHANGE FORWARD CONTRACTS AND LOSS ON ACCOUNT OF SETTLED FOREIGN EXCHANGE FORWARD CONTRACTS DURING THE YEAR. LOS S, UNDER BOTH THE SITUATIONS, I.E. SETTLED AND UNSETTLED FORWARD CONTRACTS IN FOREIGN EXCHANGE, IS REVENUE LOSS INCURRED IN THE NORMAL COURSE OF BUSINESS TO HEDGE THE RISK OF FLUCTUATIONS IN FOREIGN EXCHANGE RATES. FURTHER, IT IS ALSO SUBMITTED THAT AS PER THE ACCOUNTING STANDARD - 11 (AS - 11) ISSUED BY THE ICAI AND RBI'S GUIDELINES, THE COMPANIES ARE REQUIRED TO REVALUE UN - MATURED CONTRACTS AS PER RATES OF EXCHANGE NOTIFIED BY FOREIGN EXCHANGE DEALER'S ASSOCIATION OF INDIA (FEDAI). 8.3 DURING THE PREVIOUS YEA R RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION, THERE WERE 2 UNSETTLED FORWARD CONTRACTS AGGREGATING TO US $ 76.00 LACS AS ON THE LAST DATE OF BALANCE SHEET I.E. 31 - 03 - 2008 TO SELL THE FOREIGN CURRENCY AT AN AGREED PRICE AT A FUTURE DATE FALLING BEYOND THE LAST DATE OF ACCOUNTING PERIOD. THE LOSS IS INCURRED BY THE APPELLANT COMPANY ON ACCOUNT OF EVALUATION OF THESE UNSETTLED OUTSTANDING FORWARD FOREIGN EXCHANGE CONTRACTS ON THE LAST DATE OF THE ACCOUNTING PERIOD I.E. BEFORE THE DATE OF MATURITY OF THE FORWARD CONTRACTS. IT WAS FURTHER SUBMITTED BY THE AUTHORIZED REPRESENTATIVE THAT THE GAIN/LOSS IN FORWARD CONTRACT FOR FOREIGN EXCHANGE TRANSACTIONS BACKED BY LIABILITY IN FOREIGN EXCHANGE ON ACCOUNT OF PURCHASE/SALES OF GOODS ARE BUSINESS LOSSES COVERED BY SECTION 28 OF THE ACT AND NOT LOSSES IN THE NATURE OF 'SPECULATION' AS DEFINED IN SECTION 43(5) OF THE ACT. 8.4 IT HAS BEEN FURTHER SUBMITTED THAT IN THE SUBSEQUENT YEAR I.E. FINANCIAL YEAR 2008 - 09 RELEVANT TO A.Y.2009 - 10 ON SETTLEMENT OF THE SAID 2 FOR WARD CONTRACTS, THER E WAS A GAIN OF RS. 1,96,26,284/ - WHICH IS CREDITED TO THE PROFIT & LOSS A/C AND SHOWN AS BUSINESS INCOME IN THE FINANCIAL YEAR 2008 - 09 RELEVANT TO A.Y.2009 - 10. HENCE, THE NET FOREIGN CURRENCY DERIVATIVE LOSS IS OF RS.3,93,03,528/ - (RS. 5,89,29,812/ - LESS RS.1,96,26,284/ - ). 8.5 THE APPELLANT COMPANY MADE THE TRANSACTIONS OF IMPORT PURCHASE OF RAW MATERIALS AND EXPORT SALES OF MANUFACTURED GOODS IN THE NORMAL COURSE OF BUSINESS. THE LIABILITY FOR PAYMENT TO SUPPLIERS FOR IMPORT PURCHASE IN FOREIGN EXCHANGE IS SUBJECT TO RISK OF LOSSES ON ACCOUNT OF FLUCTUATION IN EXCHANGE RATE OF FOREIGN CURRENCY. TO SAFE GUARD AGAINST SUCH LOSSES AND TO HEDGE AGAINST THE UNFORESEEN FUTURE LOSS DUE TO FLUCTUATION IN RATE OF FOREIGN EXCHANGE TRANSACTIONS OF P URCHASE & SALES COMPANY MAKES THE FORWARD CONTRACT IN THE NORMAL COURSE OF BUSINESS TO BUY/SELL THE FOREIGN EXCHANGE AS PER THE MARKET CONDITION AND ADVICE OF THE BANK. THUS, LOSSES INCURRED IN FORWARD CONTRACTS FOR FOREIGN EXCHANGE IN THE NORMAL COURSE OF BUSINESS ARE NOT SPECULATIVE TRANSACTIONS AND SIMILAR THE SAID TRANSACTIONS NOR REGARDED AS SPECULATIVE TRANSACTION AS PER THE PROVISO (A) BELOW THE SECTION 43(5) OF THE ACT AND IS A BUSINESS LOSS COVERED BY SECTION 28 OF THE ACT. IT IS SUBMITTED THAT AS PER THE ACCOUNTING STANDARD - 11 (AS - 11) ISSUED BY THE ICAI AND RBI'S GUIDELINES, THE COMPANIES WERE REQUIRED TO REVALUE UN - MATURED CONTRACTS AS PER RATES OF EXCHANGE NOTIFIED BY FOREIGN EXCHANGE DEALERS' ASSOCIATION OF INDIA (FEDAI). ACCORDINGLY, ON THE BAL ANCE SHEET DATE, BASED ON THE EXCHANGE RATE ON THAT DATE, PROVISION OF PROFIT/LOSS SUBSTITUTES THE FIGURES BOOKED AT THE TIME OF CONTRACT. THUS, REVALUED LOSS/PROFIT IS DEBITED TO THE PROFIT ANCF LOSS ACCOUNT. FURTHER, THIS TREATMENT IS AS I.T.A. 3069 & 3070 & CO . 210 & 211 /AHD/20 1 5 A.Y. 2008 - 09 & 2010 - 11 PAGE NO DCIT VS. M/S. ACALMAR OILS & FATS LTD. (NOW MERGED WITH ADANI WILMAR LTD.) 7 PER PRINCIPLES O F ACCOUNTING WHICH REQUIRED THE CURRENT ASSETS TO BE MARKED TO THE MARKET RATE. 8.6 THE RATIO LAID DOWN IN THE DECISION OF INCOME - TAX APPELLATE TRIBUNAL, MUMBAI BENC H - 'C' SPECIAL BENCH, MUMBAI IN THE CASE OF DCIT VS. M/S. BANK OF BAHRAIN & KUWAIT (ITA NO.4 404 & 1883/MUM72004) IS SQUARELY APPLICABLE TO THE APPELLANT COMPANY. 8.7 THE LOSS INCURRED BY THE APPELLANT COMPANY ON ACCOUNT OF EVALUATION OF CONTRACT ON THE LAST DAY OF ACCOUNTING YEAR I.E. BEFORE THE DATE OF MATURITY OF FORWARD CONTRACT BE ALLOWED AS BUSINESS LOSS FOR THE FOLLOWING REASONS I.......................... 8.8 CONSIDERING ALL THE ABOVE FACTS TOGETHER, I AM INCLINED TO AGREE WITH THE CONTENTION OF THE APPELLANT COMPANY THAT THE LOSS INCURRED BY THE APPELLANT COMPANY ON ACCOUNT OF FOREIGN EXCH ANGE HEDGING TRANSACTIONS IN FORWARD CONTRACTS WHICH IS BACKED BY THE TRADING LIABILITY OF THE APPELLANT COMPANY ON ACCOUNT OF IMPORT PURCHASES, IS A BUSINESS REVENUE LOSS AND NOT SPECULATIVE LOSS AS HELD BY THE A.O. THE CASE OF THE APPELLANT COMPANY SQUAR ELY FALLS UNDER PROVISO (A) TO SEC. 43(5) OF THE ACT AND ACCORDINGLY, THE TRANSACTIONS ENTERED INTO BY THE APPELLANT COMPANY IN RESPECT OF HEDGING OF THE PROBABLE LOSS ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE IN FORWARD CONTRACT ARE NOT SP ECULATIVE TRANSACTIONS. THE A.O. HAS FAILED TO BRING ON RECORD ANY COGENT MATERIAL EVIDENCE IS SUPPORT OF HIS FINDING THAT THE LOSS SUFFERED BY THE APPELLANT COMPANY IS SPECULATIVE LOSS. THEREFORE, THE ACTION OF THE A.O TO DISALLOW THE SAME AS SPECULATIVE LOSS IS UNJUSTIFIED ON THE FACTS OF THE CASE AND ACCORDINGLY, THE DISALLOWANCE MADE BY HIM IS DELETED. THE APPELLANT, ACCORDINGLY, GETS THE RELIEF OF RS.. 5,89,29,812/ - .' THE AHMEDABAD ITAT RELYING ON DECISION OF CIT(A) REFERRED SUPRA HAS HELD AS UNDER: '1 1. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IT IS AN UNDISPUTED FACT, THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING TUBES AND PIPES. FROM THE COPY OF THE BALANCE SHEET PLACED ON RECORD IT IS SEEN THAT THE APPR OXIMATELY 90% OF THE MATERIAL CONSUMED IS FROM IMPORT PURCHASES. IT IS ALSO A FACT THAT ASSESSEE HAS AVAILED FINANCIAL FACILITIES FROM ITS BANKERS FOR PURCHASE OF RAW MATERIAL. WE FIND THAT CIT(A)WHILE ALLOWING THE APPEAL OF THE ASSESSEE HAS GIVEN A FINDIN G THAT THE DEALING OF ASSESSEE IN FOREIGN EXCHANGE WAS IN THE NORMAL COURSE OF BUSINESS AND TO SAFEGUARD THE FUTURE LOSSES AGAINST FOREIGN EXCHANGE RATE FLUCTUATIONS IT HAD ENTERED INTO HEDGING TRANSACTION. HE HAS FURTHER NOTED THAT THE LOSS INCURRED BY THE ASSESSEE ON ACCOUNT OF FOREIGN EXCHANGE HEDGING TRANSACTIONS IN FORWARD CONTRACTS WAS BACKED BY THE TRADING LIABILITY ON ACCOUNT OF IMPORT PURCHASES AND THEREFORE THE LOSS WAS REVENUE IN NATURE AND WAS NOT A SPECULATIVE LOSS. HE IS FURTHER GIVEN A FIND ING THAT THE LOSS FALLS UNDER PROVISO(A) TO SECTION 43(5) OF THE ACT AND THEREFORE THE LOSS ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE IN FORWARD CONTRACT WAS NOT SPECULATIVE TRANSACTION BUT IS A BUSINESS LOSS COVERED BY SECTION 28 OF THE AC T. CLT(A)HAS FURTHER NOTED THAT THE A.O HAS FAILED TO BRING ANY MATERIAL EVIDENCE ON RECORD TO SUPPORT ITS STAND THAT THE LOSS SUFFERED BY THE ASSESSEE WAS SPECULATIVE LOSS. WE FURTHER FIND THAT IN THE CASE OF CIT VS. WOODWARD GOVERNOR THE HEAD NOTES OF TH E DECISION OF HON'BLE APEX COURT READS ASUNDER: - 'BUSINESS EXPENDITURE YEAR OF ALLOWABILITY ADDITIONAL LIABILITY DUE T O EXCHANGE RATE FLUCTUATION EXPRESSION 'EXPENDITURE' AS USED IN S. 37 MAY, IN THE CIRCUMSTANCES OF A PARTICULAR CASE, COVER AN AMOUNT WHIC H IS RE - ALLY A 'LOSS' EVEN THOUGH THE SAID AMOUNT HAS NOT GONE OUT FROM THE POCKET OF THE ASSESSES WORD 'PAID' IN S. 43(2) MEANS ACTUALLY PAID OR INCURRED ACCORDING TO THE METHOD OF ACCOUNTING ON THE BASIS OF WHICH PROFITS OR GAINS ARE COMPUTED UNDER S. 28 /29 SEC.37(1) HAS TO BE READ WITH SS, 28, 29 AND 145(1) THERE IS NO FINDING OF ITI
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