JCIT 16(3), MUMBAI V. SHREE RAMKRISHNA EXPORT, MUMBAI

ITA 112/MUM/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 1990 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 10 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-11-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 02-03-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 03-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MANJUNATHA SWAMY
• Assessee Lawyers: DR K SHIVARAM
• Keywords: Business income; Opportunity of being heard; Principle of natural justice; Question of law; Speculation loss
• Section: 143(3); 43(5)

Judgement Text

E IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI BEFORE SHRI C.N. PRASAD, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ./ I.T.A. NO. 7311 /MUM/2012 ( / ASSESSMENT YEAR : 2009-10) M/S SHREE RAMKRISHNA EXPORTS PVT. LTD., (EARLIER SHREE RAMKRISHNA EXPORTS) EE 6011, BHARAT DIAMOND BOURSE, G BLOCK, BANDRA-KURLA COMPLEX, BANDRA EAST, MUMBAI 400 005. / V. THE JT. COMMISSIONER OF INCOME TAX 16(3), MATRU MANDIR, MUMBAI 400 007. ./ PAN : EARLIER PAN AAAFS6758D (NOW PAN AARCS2442Q) ( / APPELLANT ) .. ( / RESPONDENT ) ./ I.T.A. NO. 112 /MUM/2013 ( / ASSESSMENT YEAR : 2009-10) THE JT. COMMISSIONER OF INCOME TAX 16(3), MATRU MANDIR, 2 ND FLOOR, ROOM NO. 206, TARDEO ROAD MUMBAI 400 007. / V. M/S SHREE RAMKRISHNA EXPORTS, 214 PRASAD CHAMBERS, OPERA HOUSE, MUMBAI 400 004. ./ PAN : AAAFS6758D ( / APPELLANT ) .. ( / RESPONDENT ) ASSESSEE BY DR. K. SHIVARAM REVENUE BY : SHRI MANJUNATHA SWAMY ( CIT - D.R.) / DATE OF HEARING : 10-08-2016 / DATE OF PRONOUNCEMENT : 07-11-2016 ITA 112/MUM/2013 & ITA NO. 7311/MUM/2012 2 / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND THE REVENUE BEFORE THE INCOME-TAX APPELLATE TRIBUNAL, MUMBAI (HEREINAF TER CALLED THE TRIBUNAL). THESE CROSS APPEALS ARE HEARD TOGETHER AND ARE DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE AND BREVIT Y. THESE APPEALS ARE DIRECTED AGAINST THE APPELLATE ORDER DATED 30 TH OCTOBER, 2012 PASSED BY LEARNED COMMISSIONER OF INCOME TAX (APPEALS)- 27, M UMBAI (HEREINAFTER CALLED THE CIT(A)), FOR THE ASSESSMENT YEAR 2009- 10, THE APPELLATE PROCEEDINGS BEFORE THE LEARNED CIT(A) ARISING FROM THE ASSESSMENT ORDER DATED 26 TH DECEMBER, 2011 PASSED BY THE LEARNED ASSESSING OFF ICER (HEREINAFTER CALLED THE AO) U/S 143(3) OF THE INC OME-TAX ACT,1961 (HEREINAFTER CALLED THE ACT). 2. THE FOLLOWING GROUNDS OF APPEAL ARE RAISED BY TH E ASSESSEE IN ITA NO. 7311/MUM/2012 FOR THE ASSESSMENT YEAR 2009-10 IN TH E MEMO OF APPEAL FILED WITH TRIBUNAL WHICH READS AS UNDER:- ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LA W, THE LEARNED COMM. OF INCOME TAX (APPEALS) ERRED IN PARTLY CONFO RMING THE ACTION OF THE LEARNED ASSESSING OFFICER FOR DISALLOWANCE OF BU SINESS EXPENDITURE IN THE NATURE OF MARKED - TO - MARKET LOSS ON RESTATEMEN T 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 TH E 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 C ASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN HOLDING THAT 'MARK TO MARKET' LOSS ITA 112/MUM/2013 & ITA NO. 7311/MUM/2012 3 OF RS.22,76,84,554/- ARISING ON VALUATION OF FORWAR D 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 ASSESSE E IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND EXPORT OF CUT AND POLIS HED DIAMONDS. IT WAS OBSERVED BY THE A.O. DURING THE COURSE OF ASSESSMEN T PROCEEDINGS U/S 143(3) READ WITH SECTION 143(2) OF THE ACT FROM THE DETAI LS FURNISHED BY THE ASSESSEE THAT IT HAS ENTERED INTO FORWARD FOREIGN EXCHANGE C ONTRACTS WHICH HAVE BEEN REVALUED BY THE ASSESSEE ON THE CLOSING DAY OF THE ACCOUNTING YEAR BASED ON PREVAILING EXCHANGE RATE AS AT YEAR END . ON REVALU ATION OF FORWARD FOREIGN EXCHANGE CONTRACTS, THE ASSESSEE HAS CLAIMED MARKE D TO MARKET LOSS ON THESE OUTSTANDING FORWARD FOREIGN EXCHANGE CONTRACT S AMOUNTING TO RS. 32,69,33,306/- AND SINCE THESE CONTRACTS HAVE NOT B EEN SETTLED THE ASSESSEE WAS ASKED TO EXPLAIN WHY THIS LOSS BE NOT DISALLOWE D BEING NOTIONAL LOSS. THE ASSESSEE SUBMITTED BEFORE THE AO THAT IT IS ENGAGED IN THE BUSINESS OF IMPORT OF ROUGH DIAMONDS, CUTTING AND POLISHING THE SAME A ND EXPORT OF POLISHED DIAMONDS , WHEREBY THE ASSESSEE HAS EXPOSURE TO FOR EIGN EXCHANGE DUE TO TRANSACTIONS OF IMPORTS AND EXPORTS IN FOREIGN CURR ENCY . FURTHER, THE ASSESSEE SUBMITTED THAT IT HAD AVAILED SUBSTANTIAL BANK FINANCE IN FOREIGN CURRENCY, WHICH IS REQUIRED TO BE SETTLED IN FOREIG N CURRENCY ONLY. IN VIEW OF THE SAME, IT WAS SUBMITTED BY THE ASSESSEE THAT IT HAS SUBSTANTIAL EXPOSURE ON ACCOUNT OF FLUCTUATION IN FOREIGN CURRENCY RATES . FURTHER THE ASSESSEE SUBMITTED THAT IT HAD ENTERED INTO THE FORWARD CONT RACTS TO HEDGE AGAINST THE RISK OF FLUCTUATION IN FOREIGN CURRENCY RATES IN RE SPECT OF ITS EXPORTS AND IMPORTS TRANSACTIONS. IT WAS SUBMITTED THAT THE CON TRACT FOR PURCHASE AND SALE OF FOREIGN CURRENCY WAS ALSO MONITORED UNDER V ARIOUS REGULATIONS ISSUED BY THE RESERVE BANK OF INDIA AND THE ASSESSEE WAS P ERMITTED TO ENTER INTO FORWARD EXCHANGE CONTRACTS BECAUSE OF ITS EXPORT AC TIVITY. THE ASSESSEE SUBMITTED THAT IN THE ASSESSEES CASE, THE ASSESSEE HAS ENTERED INTO FORWARD ITA 112/MUM/2013 & ITA NO. 7311/MUM/2012 4 EXCHANGE CONTRACTS TO HEDGE AGAINST THE RISK OF FLU CTUATION IN FOREIGN CURRENCY RATES IN RESPECT OF ITS EXPORTS AND IMPORTS TRANSAC TIONS. IT WAS SUBMITTED THAT ASSESSEE IS REVALUING ALL THE MONETARY ASSETS AND L IABILITIES OUTSTANDING AT THE END OF THE YEAR BY FOLLOWING AS-11 ISSUED BY ICAI A ND RECOGNIZING PROFIT/LOSS DURING THE YEAR . IT WAS SUBMITTED THAT IT IS RECOG NIZING MARK TO MARKET GAIN OR LOSS IN RESPECT OF OUTSTANDING FORWARD FOREIGN E XCHANGE CONTRACTS BY REVALUING THESE CONTRACTS AS PER AS-11 ISSUED BY IC AI, AT YEAR END AT THE PREVAILING EXCHANGE RATES AS ON YEAR END. THE ASSES SEE SUBMITTED THAT THE ASSESSEE IS FOLLOWING THIS ACCOUNTING PRACTICE CONS ISTENTLY . THE ASSESSEE HAS RELIED UPON THE FOLLOWING DECISIONS : (I) DCIT VS. BANK OF BAHRAIN & KUWAIT 132 TTJ 505 (MUM BAI)(SB) (II) WOODWARD GOVERNOR INDIA (P) LTD. 312 ITR 254(S C) (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 WHIC H HAS BEEN VALUED BY THE ASSESSEE ON THE BASIS OF RATES APPLICABLE ON THE CL OSING 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 B UT ARE ONLY DUE TO VARIATION IN THE VALUE OF THE CONTRACTS AS ON REPOR TING DATE. IT WAS ALSO OBSERVED BY THE AO THAT THE ACTUAL LOSS OR GAIN WIL L BE DETERMINED ONLY AFTER THE EXPIRY OF PERIOD OF THE CONTRACTS OR THEIR TERM INATION AND AT THAT TIME THERE MIGHT NOT BE ANY LOSS AND SUCH LOSSES ARE NOT IONAL AND NOT ALLOWABLE. IT WAS ALSO OBSERVED THAT THESE FORWARD CONTRACTS IN F OREIGN EXCHANGE ARE ITA 112/MUM/2013 & ITA NO. 7311/MUM/2012 5 DIFFERENT FROM THE ACTUAL BUSINESS LIABILITIES AND ASSETS OF THE ASSESSEE LIKE DEBTORS AND CREDITORS, WHICH ARE ARISING FROM THE B USINESS ACTIVITIES OF THE ASSESSEE AND WHICH ARE ASCERTAINED AT THE YEAR END. SO FAR AS THE PENDING FORWARD CONTRACTS ARE CONCERNED, IT WAS OBSERVED BY THE AO THESE ARE NEITHER ASSETS NOR LIABILITIES HAVING ANY VALUE. THUS IT WA S OBSERVED BY THE AO THAT FORWARD CONTRACTS ARE NOT THE ASCERTAINED ASSET/LIA BILITY OF THE ASSESSEE AND IF VALUED AT THE REPORTING DATE OF THE FINANCIAL STATE MENTS WOULD RESULT ONLY IN AN UNASCERTAINED LIABILITY, ASSET AND RESULTING LOS S OR GAIN WOULD BE NOTIONAL AND SUCH NOTIONAL LOSS CANNOT BE ALLOWED AS DEDUCTI ON. THE A.O. FURTHER OBSERVED THAT AS PER THE ACT THERE IS NO PROVISION OR TREATMENT FOR MARK TO MARKET METHOD OF ACCOUNTING AND IS GOVERNED BY GEN ERAL PRINCIPLE OF TAXATION. IT WAS ALSO OBSERVED THAT THE ACT DOES N OT ALLOW DEDUCTION OF ANY SUCH NOTIONAL LOSS FOR WHICH THE LIABILITY HAS NOT CRYSTALLIZED AND THERE IS NO ACTUAL LOSS INCURRED/SUSTAINED BY THE ASSESSEE ON A CCOUNT OF DEALING IN FOREX DERIVATIVES UNTIL THEIR FINAL VALUES ARE KNOWN. , T HUS, THE A.O. DISALLOWED THE SAID LOSS VIDE ASSESSMENT ORDER DATED 26.12.2011 PA SSED BY THE AO U/S. 143(3) OF THE ACT. 4. AGGRIEVED BY THE ASSESSMENT ORDER DATED 26.12.20 11 PASSED BY THE A.O. U/S. 143(3) OF THE ACT, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A). 5. BEFORE THE LD. CIT(A) THE ASSESSEE SUBMITTED THA T THE ASSESSEE IS ENGAGED IN THE BUSINESS OF IMPORT AND EXPORTS OF DI AMONDS AND SUBSTANTIAL AMOUNT OF ITS TURNOVER WAS DENOMINATED IN FOREIGN C URRENCY. THE ASSESSEE SUBMITTED THAT THE WORKING CAPITAL FACILITY FROM BA NKS WERE AVAILED AND SOME OF WHICH WERE ALSO DENOMINATED IN FOREIGN CURRENCY. IT ALSO CARRIES CURRENCY RISK IN RESPECT OF ITS STOCK AS IT IS MOST LIKELY T O BE SOLD BY WAY OF EXPORTS. THE ASSESSEE SUBMITTED THAT THE FORWARD CONTRACTS ARE E NTERED INTO TO HEDGE THESE CURRENCY RISK ASSOCIATED WITH NORMAL BUSINESS TRANS ACTION AND THESE DERIVATIVE CONTRACTS WERE ENTERED WITHIN THE GUIDEL INES OF RBI & FEMA. THE ITA 112/MUM/2013 & ITA NO. 7311/MUM/2012 6 INTENT OF ENTERING INTO SUCH DERIVATIVE CONTRACTS W AS TO SAFEGUARD ITSELF AGAINST EXCHANGE FLUCTUATION RISK ON FOREIGN CURREN CY RECEIVABLES OR PAYABLES. IT WAS SUBMITTED THAT THE ASSESSEE HAS BEEN CONSIST ENTLY FOLLOWING THE ACCOUNTING METHOD WHEREIN YEAR-END RESTATEMENT OR M ARK TO MARKET GAIN OR LOSS IN RESPECT OF ALL ASSETS OR LIABILITIES DENOMI NATED 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, HOWEV ER, 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 O F ROUGH DIAMONDS, MANUFACTURING I.E. CUTTING & POLISHING OF SAME IN T O 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 RS.690.08 C RORES (US $ 161,404,740). AT THE YEAR END , THE CREDITORS FOR GOODS WERE PAYA BLE IN DOLLAR TERMS AT RS. 94.07 CRORES (US $ 43,851,415). SIMILARLY, EXPORTS RECEIVABLE ACCOUNT FOR RS. 209.76 CRORES(US $ 41,293,418) DENOMINATED IN DOLLA R TERMS. THE ASSESSEE HAD A BANK LOAN OUTSTANDING IN PCFC AND FCB ACCOUNT S OF US $ 25,959,035 AT THE YEAR END. THUS, IT WAS OBSERVED THAT THE ASS ESSEE WAS EXPOSED TO RISK ARISING OUT OF FLUCTUATION IN FOREIGN EXCHANGE RAT E 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 EXPO RT RECEIVABLES ONLY. IT WAS FURTHER NOTED THAT IN ADDITION TO THE OPENING OUTST ANDING FORWARD CONTRACTS OF 61,000,000 US DOLLARS DURING THE YEAR UNDER CONSIDE RATION , THE ASSESSEE HAS ITA 112/MUM/2013 & ITA NO. 7311/MUM/2012 7 BOOKED FORWARD CONTRACTS OF 767,000,000 US DOLLAR, UTILIZED FORWARD CONTRACTS OF 72,406,591 US DOLLAR, CANCELLED FORWARD CONTRACT S OF 6,000,000 US DOLLAR AND FINALLY HELD THE FORWARD CONTRACTS OF 59,293,40 9 US DOLLAR AT THE YEAR END. THUS, THE ASSESSEE HAS ENTERED INTO THE FORWAR D CONTRACTS DURING THE NORMAL COURSE OF BUSINESS AND UTILIZED THE SAME FOR BUSINESS BY ALLOWING THEM TO RUN UP TO THE DATE OF CONTRACT. FURTHER, TH ERE WAS A LOSS OF RS.90,000 INCURRED ON CANCELLATION OF FORWARD CONTRACTS WHICH IS MEAGER AS COMPARED TO THE VOLUME OF ASSESSEES BUSINESS, THUS FORWARD CON TRACTS WERE ENTERED AND UTILIZED FOR BUSINESS, WAS THE OBSERVATION OF LEARN ED CIT(A). THUS FROM THE NOTES TO THE ACCOUNTS IT WAS OBSERVED BY THE LEARNE D CIT(A) THAT THE ASSESSEE WAS REPORTING ALL THE MONETARY ITEMS I.E. EXPORT RE CEIVABLE , IMPORT PAYABLE AND FOREIGN CURRENCY WORKING CAPITAL LOAN APPEARING IN THE BALANCE SHEET AT CLOSING RATE AND RECOGNIZING THE EXCHANGE RATE DIFF ERENCE IN PROFIT AND LOSS ACCOUNT AS EXPENSES OR INCOME WHICH IS AS PER AS-11 ISSUED BY ICAI BEING CONSISTENTLY FOLLOWED AND THERE IS NO CHANGE IN THI S REGARD. FOR THE ASSESSMENT YEAR 2010-11, THE ASSESSEE HAS OFFERED A GAIN OF RS. 5,47,30,056/-AS INCOME ON REVALUATION OF THE PENDIN G FORWARD CONTRACTS. THUS IT WAS OBSERVED BY THE LEARNED CIT(A) THAT THE ASSESSEE IS CONSISTENTLY FOLLOWING THE ABOVE ACCOUNTING METHOD AND HENCE IT IS NOT A CASE OF USING THE ACCOUNTING PRACTICE AS A TOOL TO BOOK THE LOSSES AN D REDUCE THE TAX LIABILITY. THUS, IT WAS OBSERVED BY LEARNED CIT(A) THAT SUCH R ISK OF FOREIGN EXCHANGE FLUCTUATION RISK IS INTEGRAL PART OF THE ASSESSEES 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 HA S 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 CANCELLA TION OF SUCH CONTRACTS FORMS PART OF THE BUSINESS INCOME AND SUCH FORWARD CONTRACTS ENTERED INTO DURING THE COURSE OF BUSINESS CREATES A LEGAL LIABI LITY IRRESPECTIVE OF THE FACT WHETHER IT MATURES DURING THE ACCOUNTING PERIOD OR BEYOND THE ACCOUNTING PERIOD. THE LD. CIT(A) CONSIDERED THE JUDGMENTS O F HONBLE DELHI HIGH COURT ITA 112/MUM/2013 & ITA NO. 7311/MUM/2012 8 IN THE CASE OF WOODWORD GOVERNOR 294 ITR 451, DECIS ION OF HONBLE 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 I N THE CASE OF DCIT V. BANK OF BAHRAIN AND KUWAIT, ITA NO. 4404 & 1883/MUM/2004 AND THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ONGC V. CIT, 3 22 ITR 180 . THE LEARNED CIT(A) OBSERVED THAT AS PER DETAILS PLACED ON RECOR D AS AT 31-03-2009 , 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 OBSERVE D BY LEARNED CIT(A) THAT THE FORWARD CONTRACTS WERE ENTERED FOR AN AMOUNT HI GHER THAN THE RECEIVABLE AT THE YEAR END AND THERE APPEARS TO BE NO REASON F OR THE EXCESS EXPOSURE TAKEN BY THE ASSESSEE . THE ASSESSEE HAD SUBMITTED THAT THE EXCESS CONTRACTS WERE ENTERED INTO FOR THE EXPORT ORDERS PENDING ON HAND WHICH WERE BACKED BY THE STOCKS HELD BY THE ASSESSEE AND ACTUAL EXPOR TS HAD TAKEN PLACE IN THE SUBSEQUENT FINANCIAL YEAR. THE LEARNED CIT(A) ALLOW ED THE LOSS ON THE FOREIGN EXCHANGE FORWARD CONTRACTS TO THE TUNE OF US $ 41,2 93,417 WHICH WERE EXPORT RECEIVABLE OUTSTANDING AS AT 31-03-2009 AND THE LOS S ARISING ON FORWARD FOREIGN EXCHANGE CONTRACTS TO THE TUNE OF EXCESS AM OUNT OF US $ 17,999,992 WAS NOT ALLOWED BY LEARNED CIT(A) AS THE SAID FOREI GN EXCHANGE FORWARD CONTRACTS WERE NOT BACKED BY UNDERLYING ASSET RECEI VABLE IN FOREIGN EXCHANGE AS AT 31-03-2009 TO BACK IT UP AND HENCE IT WAS HEL D BY THE LEARNED CIT(A) THAT THE AFORESAID FORWARD CONTRACTS PENDING AS ON 31-03-2009 ARE NOT FOR THE PURPOSES OF BUSINESS AND LOSS ARISING ON REVALUATIO N OF SUCH CONTRACT IS PURELY NOTIONAL AND SPECULATIVE IN NATURE AND CANNO T BE PROVIDED ON THE PRUDENCY PRINCIPLE IN COMPUTING ASSESSEES INCOME. THUS, THE LEARNED CIT(A) CONFIRMED/SUSTAINED THE DISALLOWANCE OF LOSS ON REV ALUATION OF FORWARD CONTRACTS AMOUNTING TO RS.9,92,48,752 WHICH WERE NO T BACKED BY UNDERLYING ASSET RECEIVABLE IN FOREIGN EXCHANGE TO BACK IT UP AND THE LOSS INCURRED BY THE ASSESSEE ON RESTATEMENT OF PENDING FORWARD CONTRACT AGREEMENT AT YEAR END WAS ALLOWED BY LEARNED CIT(A) AS BUSINESS LOSS TO T HE EXTENT OF RS. ITA 112/MUM/2013 & ITA NO. 7311/MUM/2012 9 22,76,84,554/- WAS ALLOWED WHICH WERE BACKED BY UND ERLYING ASSET BEING EXPORT RECEIVABLE IN FOREIGN EXCHANGE, VIDE LEARNED CIT(A) APPELLATE ORDERS DATED 30/10/2012. 6. AGGRIEVED BY THE APPELLATE ORDER DATED 30/10/201 2 PASSED BY THE LD. CIT(A), BOTH THE ASSESSEE AND THE REVENUE ARE IN AP PEAL BEFORE THE TRIBUNAL. 7. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF IMPORT OF ROUGH DIAMONDS, CUTTIN G AND POLISHING THE SAME AND EXPORT OF POLISHED DIAMONDS. THE LD. COUNSEL SU BMITTED THAT THE ASSESSEE IMPORTS ROUGH DIAMONDS TO MANUFACTURE CUT AND POLISHED DIAMONDS AND EXPORT THE SAME. BY IMPORTING AND EXPORTING THE DIAMONDS, THE ASSESSEE IS EXPOSED TO FOREIGN CURRENCY FLUCTUATION AND TO H EDGE AGAINST THE RISK OF FOREIGN CURRENCY FLUCTUATIONS, THE ASSESSEE HAS ENT ERED INTO FOREIGN EXCHANGE FORWARD CONTRACTS. THE ASSESSEE HAS ALSO AVAILED W ORKING CAPITAL CREDIT FACILITIES FROM THE BANKS WHICH ARE DENOMINATED IN FOREIGN CURRENCY. IT IS SUBMITTED THAT FOREIGN CURRENCY FORWARD CONTRACTS W ERE EXECUTED TO HEDGE AGAINST THE POSSIBILITY OF FOREIGN EXCHANGE FLUCTUA TION LOSS. THERE WAS A MARKED TO MARKET LOSSES INCURRED IN RESPECT OF THE FORWARD FOREIGN EXCHANGE CONTRACTS DUE TO ADVERSE MOVEMENT OF FOREIGN EXCHAN GE RATES AS AT YEAR END. IT IS SUBMITTED BY THE ASSESSEES COUNSEL THAT OUTS TANDING UN-MATURED FOREIGN CURRENCY FORWARD CONTRACTS AS AT YEAR END WHICH WER E 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 ASSESSEES THAT WITH RESPECT TO THOSE UN-MATURED OU TSTANDING FORWARD FOREIGN EXCHANGE CONTRACTS AS AT YEAREND WHICH ARE NOT BACK ED BY OUTSTANDING EXPORT RECEIVABLES AS AT YEAREND ARE IN-FACT BACKED BY CON FIRMED EXPORT ORDERS AND SUPPORTED BY STOCK PURCHASED FOR EXECUTION OF THOSE CONFIRMED EXPORT ORDERS AND THESE STOCKS ARE HELD AS AT YEAREND BY THE ASSE SSEE AGAINST THOSE EXPORT ORDERS . IT IS SUBMITTED BY LEARNED COUNSEL FOR THE ASSESSEE THAT THE EXPORTS ITA 112/MUM/2013 & ITA NO. 7311/MUM/2012 10 WERE UNDERTAKEN IN THE NEXT FINANCIAL YEAR WITH RES PECT TO THESE CONFIRMED EXPORT ORDERS IN HAND AS AT YEAR END . IT IS SUBMIT TED BY LEARNED COUNSEL THAT SUCH LOSS WHICH ARE NOT BACKED WITH EXPORT RECEIVAB LES BUT BACKED WITH CONFIRMED EXPORT ORDERS AND STOCK HELD BY THE ASSES SEE AS AT YEAR END ARE NOT ALLOWED BY LEARNED CIT(A) WHICH WAS TO THE TUNE OF RS.9,92,48,752/- . IT IS SUBMITTED THAT THESE FORWARD FOREIGN EXCHANGE CONTR ACTS WERE ENTERED WITHIN THE FRAME WORK OF RELEVANT RBI & FEMA GUIDELINES AN D ARE MONITORED BY RBI. IT IS SUBMITTED THAT THE ASSESSEE IS REGULARLY FOLL OWING THIS METHOD OF ACCOUNTING WHEREBY YEAR-END RESTATEMENT OR MARKED T O MARKET GAIN OR LOSS IN RESPECT OF ALL ASSETS OR LIABILITIES DENOMINATED IN FOREIGN CURRENCY ARE RESTATED AT PREVAILING FOREIGN EXCHANGE RATES AS AT YEAR EN D . THE RESTATEMENT OF FORWARD FOREIGN CURRENCY CONTRACTS IS FOLLOWED STRI CTLY AS PER AS-11 PRESCRIBED BY ICAI. THE LD. COUNSEL HAS ALSO INVITED OUR ATTEN TION TO THE WRITTEN SUBMISSIONS AND PAPER BOOK WHEREBY ALL THE DETAILS OF FORWARD FOREIGN EXCHANGE CONTRACTS WERE SUBMITTED. OUR ATTENTION WAS DRAWN TO THE ORDERS OF AUTHORITIES BELOW.OUR ATTENTION WAS ALSO DRAWN T O THE AUDITED FINANCIAL STATEMENTS AND TAX AUDIT REPORT OF THE ASSESSEE WHI CH ARE PLACED IN PAPER BOOK FILED WITH THE TRIBUNAL (PAGE 4-67/PB). THE DE TAILS OF FOREIGN EXCHANGE DIFFERENCE LOSS/PROFIT ARE PLACED IN PAPER BOOK PAG E 136/137. IT WAS SUBMITTED THAT FOREIGN EXCHANGE GAINS EARNED ON REV ALUATION OF FORWARD FOREIGN EXCHANGE CONTRACT AS AT YEAR END WAS OFFERE D FOR TAX IN ASSESSMENT YEAR 2010-11 AND 2011-12 AND DETAILS ARE PLACED IN PAPER BOOK/PAGE 134- 149 AND DETAILS ALONG WITH ASSESSMENT ORDERS FRAMED U/S 143(3) OF THE ACT ARE PLACED IN PAPER BOOK. THE DETAILS OF OUTSTANDIN G FORWARD FOREIGN EXCHANGE CONTRACTS AS AT 31-03-2009 ARE PLACED IN PAPER BOOK /PAGE 79 AND PRAYER IS MADE THAT THE SAME MAY BE ALLOWED AS DEDUCTION . IT IS ALSO SUBMITTED THAT THE SAME METHOD IS FOLLOWED NEXT YEAR AND REVENUE I MPACT IS TAX-NEUTRAL AS NEXT YEAR SAID LOSSES WERE REVERSED AND ACTUAL LOSS /PROFIT ON COMPLETION OF THE FORWARD FOREIGN EXCHANGE CONTRACT IS DEBITED/CR EDITED TO THE PROFIT AND LOSS ACCOUNT. IT WAS SUBMITTED THAT THE DETAILS OF THESE LOSSES WERE SUBMITTED ITA 112/MUM/2013 & ITA NO. 7311/MUM/2012 11 BEFORE THE AUTHORITIES BELOW(PAGE109-110 , 115 OF P APER BOOK). THE ASSESSEE SUBMITTED THAT IN PRECEDING YEARS AS WELL SUCCEEDIN G 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 LIMI TED IN ITA NO. 76/MUM/2013 DATED 20-03-2014 D) ACIT V. S. RAJIV AND COMPANY IN ITA NO. 7095/MUM/20 12 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 1 40(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/2012 DATED 26/02/2016 L) INVENTURUS KNOWLEDGE SERVICES PRIVATE LIMITED V. IT O (2016) 156 ITD 727(MUM-TRIB.) ITA 112/MUM/2013 & ITA NO. 7311/MUM/2012 12 8. THE LD. D.R. RELIED ON THE ORDER OF THE A.O. AND ALSO THE ORDER OF THE MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF S. VINO DKUMAR DIAMONDS PVT. LTD. V. ADDL. CIT IN ITA NO. 506/MUM/2013 DATED 3 RD MAY, 2013. 9. IN THE REJOINDER, THE LD. COUNSEL FOR THE ASSESS EE SUBMITTED THAT THE DECISION OF THE TRIBUNAL IN THE CASE OF S. VINODKU MAR DIAMONDS PVT. LTD. RELIED ON BY THE LD. D.R. WAS DULY CONSIDERED IN AC IT V. VENUS JEWEL IN DECIDED ON 26/2/2016. THE LEARNED COUNSEL FOR THE A SSESSEE SUBMITTED THAT THE TRIBUNAL HAS GIVEN PART RELIEF TO THE ASSESSEE WITH RESPECT TO FORWARD FOREIGN EXCHANGE CONTRACTS WHICH ARE BACKED WITH OU TSTANDING EXPORT RECEIVABLES AS AT YEAR END. THE LD. CIT(A) DENIED THE BENEFIT OF LOSS ON ACCOUNT OF REVALUATION OF FORWARD FOREIGN EXCHANGE CONTRACTS AS AT YEAR END WHICH WERE BACKED BY CONFIRMED EXPORT ORDERS SUPPOR TED BY STOCK IN HAND HELD BY THE ASSESSEE TOWARDS THOSE EXPORT ORDERS , HENCE, THIS ISSUE MAY BE VERIFIED BY THE A.O. BY CONSIDERING THE FACTUAL MAT RIX OF THE CASE. 10. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND A LSO PERUSED THE MATERIAL AVAILABLE ON RECORD INCLUDING THE CASE LAW S RELIED UPON. WE HAVE OBSERVED THAT THE ASSESSEE IS ENGAGED IN THE BUSINE SS OF IMPORT OF ROUGH DIAMONDS, CUTTING AND POLISHING THE SAME AND EXPORT OF POLISHED DIAMONDS. THE ASSESSEE IMPORTS ROUGH DIAMONDS WHEREBY THE PAY MENTS ARE MADE IN FOREIGN CURRENCY FOR SUCH IMPORTS AND PAYABLES ARE DENOMINATED IN FOREIGN CURRENCY. THE ASSESSEE ALSO EXPORTS DIAMONDS WHERE BY PAYMENTS ARE RECEIVED IN FOREIGN CURRENCY AND RECEIVABLES ARE DE NOMINATED IN FOREIGN CURRENCY. THE ASSESSEE AVAILED WORKING CAPITAL FAC ILITY FROM BANKS , PART OF WHICH ARE DENOMINATED IN FOREIGN CURRENCY. THE ASS ESSEE IS STATED TO HAVE ENTERED INTO FORWARD FOREIGN EXCHANGE CONTRACTS TO HEDGE THE CURRENCY RISK ASSOCIATED WITH THE TRANSACTIONS OF IMPORT AND EXPO RTS OF DIAMONDS TO SAFEGUARD AGAINST THE EXCHANGE FLUCTUATION RISK ON FOREIGN CURRENCY RECEIVABLES AND PAYABLES. WE HAVE OBSERVED THAT THE ASSESSEE HAS ENTERED ITA 112/MUM/2013 & ITA NO. 7311/MUM/2012 13 INTO FORWARD FOREIGN EXCHANGE CONTRACTS WHICH HAVE REMAINED UNSETTLED / UN- MATURED AT THE YEAR END AND LOSS HAS OCCURRED ON TH E SAME DUE TO FOREIGN EXCHANGE RATE VARIATION AS AT YEAR END. THE LOSS/ GAIN ARISING ON THE SAID FLUCTUATION IN FOREIGN CURRENCY RATES PREVAILING AS AT THE YEAR END ON FORWARD FOREIGN EXCHANGE CONTRACTS WERE RECOGNIZED AND BROU GHT TO P&L ACCOUNT AND OFFERED FOR TAXATION IN THE CASE OF PROFIT , AND D EDUCTIONS WERE CLAIMED IN CASE OF LOSSES CONSISTENTLY BY THE ASSESSEE FOR SEVERAL YEARS. THIS POLICY IS CONSISTENTLY FOLLOWED BY THE ASSESSEE WHICH IS SUPP ORTED 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 AR ISING ON FLUCTUATION IN FOREIGN EXCHANGE RATES AS AT YEAR END ON THESE FORW ARD 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 ASSESS MENT 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 O F VENUS DIAMOND(SUPRA) HAS ALLOWED THE MARK TO MARKET LOSS ON OUTSTANDING UN-MATURED FORWARD FOREIGN EXCHANGE CONTRACTS AFTER CONSIDERING THE DE CISION OF VINOD KUMAR DIAMONDS PRIVATE LIMITED(SUPRA) RELIED UPON BY LEAR NED DR AND BY FOLLOWING THE DECISION OF HONBLE SUPREME COURT IN THE CASE O F CIT V. WOODWORD GOVERNOR INDIA PRIVATE LIMITED(SUPRA) . THE TRIBUNA L HELD THAT VIEW OF THE TRIBUNAL IN THE CASE OF VINOD KUMAR DIAMONDS PRIVAT E LIMITED IS CONTRARY TO THE VIEW TAKEN BY HONBLE BOMBAY HIGH COURT IN THE CASE OF BADRIDAS GAURIDU PRIVATE LIMITED IN 261 ITR 256(BOM.). THE S IMILAR VIEW HAS BEEN TAKEN BY THE CO-ORDINATE BENCH IN THE CASE OF S.JOG ANI EXPORTS PRIVATE LIMITED V. ACIT IN ITA NO. 7012/MUM/2012 VIDE ORDER S DATED 26/02/2016 WHEREIN THE MARK TO MARKET LOSSES ON UNEXPIRED/UN-M ATURED FORWARD FOREIGN EXCHANGE CONTRACTS AS AT YEAR END WERE ALLOWED KEEP ING IN VIEW PREVAILING FOREIGN EXCHANGE RATES. THE HONBLE BOMBAY HIGH C OURT IN A RECENT DECISION IN CIT V. D. CHETAN AND COMPANY IN ITA NO. 278 OF 2 014 VIDE ORDERS DATED 01-10-2016 HAS HELD THAT THE ACTIVITY OF ENTERING I NTO FOREIGN EXCHANGE ITA 112/MUM/2013 & ITA NO. 7311/MUM/2012 14 FORWARD CONTRACT TO COVER AGAINST VARIATION IN FORE IGN EXCHANGE RATE WHICH WOULD IMPACT ITS BUSINESS OF IMPORT AND EXPORT OF D IAMONDS WAS IN THE REGULAR COURSE OF BUSINESS ONLY TO SAFEGUARD AGAINST THE LOSS ON ACCOUNT OF FOREIGN EX CHANGE VARIATION AND CANNOT BE CATEGORIZED AS SPECULATIVE IN NATURE BUT IS A BUSINESS ACTIVITY. THE HONBLE BOMBAY HIGH COURT DISMISSED THE APPEAL OF T HE REVENUE IN THE CASE OF CIT V. D. CHETAN AND COMPANY(SUPRA) ON THE GROUN DS THAT NO SUBSTANTIAL QUESTION OF LAW ARISES FROM THE APPEAL AND CONSEQUE NTLY DECISION OF THE TRIBUNAL IN ALLOWING MARK TO MARKET LOSSES OF RS. 7 8,10,000/- ON FORWARD FOREIGN EXCHANGE CONTRACTS BEING NOT A NOTIONAL LOS S WAS UPHELD. THE AO HAS DISALLOWED THE ENTIRE LOSS ON THRESHOLD ON REVALUAT ION OF FORWARD FOREIGN EXCHANGE CONTRACT AS AT YEAR END BASED ON PREVAILIN G FOREIGN EXCHANGE RATES CONSIDERING THE SAME TO BE NOTIONAL LOSS AND NO ENQ UIRY TO VERIFY WHETHER THE SAME IS SUPPORTED BY EXPORT RECEIVABLE/IMPORT PAYAB LES DENOMINATED IN FOREIGN CURRENCY HAVE BEEN MADE. THE LEARNED CIT(A ) HAD MADE AN ENQUIRY AND OBSERVED THAT AS PER DETAILS PLACED ON RECORD A S AT 31-03-2009 , THE TOTAL SALE OF THE ASSESSEE WAS RS. 961.53 CRORES(US $ 217 ,708,068) WHICH WAS DENOMINATED IN FOREIGN CURRENCY. OUT OF TOTAL PURCH ASE OF RS. 791.72 CRORES , IMPORT ACCOUNTS FOR RS.690.08 CRORES (US $ 161,404, 740). AT THE YEAR END , THE CREDITORS FOR GOODS WERE PAYABLE IN DOLLAR TERM S AT RS. 94.07 CRORES (US $ 43,851,415). SIMILARLY, EXPORTS RECEIVABLE ACCOUNT FOR RS. 209.76 CRORES(US $ 41,293,418) DENOMINATED IN DOLLAR TERMS. THE ASSESS EE HAD A BANK LOAN OUTSTANDING IN PCFC AND FCB ACCOUNTS OF US $ 25,959 ,035 AT THE YEAR END. THUS, IT WAS OBSERVED BY THE LEARNED CIT(A) THAT TH E ASSESSEE WAS EXPOSED TO RISK ARISING OUT OF FLUCTUATION IN FOREIGN EXCHANG E 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 EXPO RT RECEIVABLES ONLY. IT WAS FURTHER NOTED THAT IN ADDITION TO THE OPENING OUTST ANDING FORWARD CONTRACTS OF 61,000,000 US DOLLARS DURING THE YEAR UNDER CONSIDE RATION , THE ASSESSEE HAS BOOKED FORWARD CONTRACTS OF 767,000,000 US DOLLAR, UTILIZED FORWARD CONTRACTS ITA 112/MUM/2013 & ITA NO. 7311/MUM/2012 15 OF 72,406,591 US DOLLAR, CANCELLED FORWARD CONTRACT S OF 6,000,000 US DOLLAR AND FINALLY HELD THE FORWARD CONTRACTS OF 59,293,40 9 US DOLLAR AT THE YEAR END. THUS, THE ASSESSEE HAS ENTERED INTO THE FORWAR D 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 ASSESSE E HAS RECEIVABLE OF US $ 41,293,417 AGAINST WHICH THE FORWARD CONTRACTS ENTE RED 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 FO RWARD CONTRACTS WERE ENTERED FOR AN AMOUNT HIGHER THAN THE RECEIVABLE AT THE YEAR END AND THERE APPEARS TO BE NO REASON FOR THE EXCESS EXPOSURE TAK EN BY THE ASSESSEE . THE ASSESSEE HAD SUBMITTED THAT THE EXCESS CONTRACTS WE RE ENTERED INTO FOR THE EXPORT ORDERS PENDING ON HAND WHICH WERE BACKED BY THE STOCKS HELD BY THE ASSESSEE AND ACTUAL EXPORTS HAD TAKEN PLACE IN THE SUBSEQUENT FINANCIAL YEAR. THE LEARNED CIT(A) ALLOWED THE LOSS ON THE FOREIGN EXCHANGE FORWARD CONTRACTS TO THE TUNE OF US $ 41,293,417 WHICH WERE BACKED BY EXPORT RECEIVABLE OUTSTANDING AS AT 31-03-2009 AND MARKED TO MARKET L OSS ON FORWARD FOREIGN EXCHANGE CONTRACT OF 22,76,84,554/- WAS ALLOWED BY LEARNED CIT(A) AS THE SAME WERE BACKED BY EXPORT RECEIVABLE OUTSTANDING A S ON 31-03-2009. THE LD. DR COULD NOT SHOW US ANY PERVERSITY IN THE AFORE-ST ATED FINDING OF LEARNED CIT(A). IN OUR CONSIDERED VIEW, SUCH MARKED TO MARK ET LOSSES WITH RESPECT TO THE UNSETTLED/UN-MATURED FOREIGN CURRENCY FORWARD C ONTRACTS ON ACCOUNT OF REVALUATION AT THE YEAR END ON THE BASIS OF EXCHANG E RATES PREVAILING AS AT YEAR END SHOULD BE ALLOWED TO THE ASSESSEE AS BUSIN ESS LOSS AS THE SAME IS SUPPORTED BY EXPORT RECEIVABLES OUTSTANDING AS AT Y EAR END ARISING OUT OF NORMAL TRADING ACTIVITIES OF EXPORT-IMPORT OF DIAMO NDS UNDERTAKEN BY THE ASSESSEE. IN OUR CONSIDERED VIEW , THE SAID LOSS OF RS. 22,76,84,554/- ARISING OUT OF FORWARD FOREIGN EXCHANGE CONTRACTS ENTERED I NTO TO HEDGE AGAINST EXCHANGE FLUCTUATIONS AND WHICH ARE BACKED BY THE UNDERLYING EXPOSURE IN FOREIGN CURRENCY TOWARDS EXPORTS OF DIA MONDS AGAINST ITA 112/MUM/2013 & ITA NO. 7311/MUM/2012 16 WHICH THERE ARE EXPORT RECEIVABLES OUTSTANDING AS AT YEAR END DENOMINATED IN FOREIGN CURRENCY AND BY ENTERING I NTO FORWARD CONTRACTS IN FOREIGN EXCHANGE AND AS SUCH, THE FORW ARD CONTRACTS ENTERED WERE FOR THE PURPOSE OF THE BUSINESS TO HED GE AGAINST THE FOREX LOSS AND THAT THE ASSESSEE HAS NOT ENTERED INTO THE FORWARD CONTRACTS WITH AN INTENTION TO EARN ANY GAIN DUE TO FLUCTUATI ON IN FOREIGN CURRENCY RATE BUT IT IS NECESSARY FOR IT TO ENTER INTO SUCH FORWARD CONTRACTS TO HEDGE AGAINST FOREIGN EXCHANGE RATE FLUCTUATION AND WHICH ARE INCIDENTAL TO THE EXPORT-IMPORT BUSINESS OF THE ASS ESSEE AS IN THE ABSENCE OF SUCH FORWARD CONTRACTS, THE ASSESSEE MAY SUSTAIN HUGE LOSSES AND HENCE IT BECAME ESSENTIAL FOR THE ASSESS EE TO BOOK SUCH FORWARD CONTRACTS AS A PRUDENT BUSINESS PRACTICES T O SAFEGUARD AGAINST LOSSES WHICH MAY BE SUSTAINED BY THE ASSESSEE TOWAR DS OUTSTANDING RECEIVABLES AS ON 31-03-2009 ON EXPORTS MADE BY THE ASSESSEE OUTSTANDING AS AT YEAR END. FURTHER, WE FIND THAT T HE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE OF IMPORT OF ROUGH DIAMONDS AND EXPORT OF POLISHED DIAMONDS , AND NOT IN THE B USINESS OF FOREIGN EXCHANGE. THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA P. LTD. (SUPRA) RELIED UPON BY THE A SSESSEE 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 C ATEGORIZED 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. 22,7 6,84,554/- AS DEDUCTION WHILE COMPUTING INCOME OF THE ASSESSEE BE ING ARISING OUT OF FLUCTUATION IN FORWARD FOREIGN EXCHANGE CONTRACTS D UE TO ADVERSE MOVEMENT OF FOREIGN CURRENCY EXCHANGE RATE AT YEAR END AS THE S AID FORWARD FOREIGN EXCHANGE CONTRACTS ARE BACKED BY EXPORT RECEIVABLES OUTSTANDING AS ON 31- ITA 112/MUM/2013 & ITA NO. 7311/MUM/2012 17 03-2009 AND WE DONOT FIND ANY PERVERSITY IN THE OR DER OF LEARNED CIT(A) AS LEARNED DR COULD NOT POINT ANY DEFECT/MISTAKE IN TH E FINDING OF LEARNED CIT(A) , WHICH WE CONFIRM/SUSTAIN AND THE GROUNDS RAISED IN THE REVENUE APPEAL IS DISMISSED. WITH RESPECT TO THE DEDUCTION OF RS. 9,92,48,752/- DISALLOWED BY THE LEARNED CIT(A) ARISING OUT OF FLU CTUATION IN FOREIGN CURRENCY RATES ON FORWARD FOREIGN EXCHANGE CONTRACTS WHICH A RE NOT BACKED BY THE EXPORT RECEIVABLES BUT ARE STATED TO BE BACKED WITH CONFIRMED EXPORT ORDERS AGAINST WHICH THE ASSESSEE HAD STATED TO HAVE PURCH ASED STOCK AND SUCH STOCK BEING HELD BY THE ASSESSEE AS ON 31-03-2009 W ITH RESPECT TO THE CONFIRMED EXPORT ORDERS IN HAND , AS AGAINST WHICH THE EXPORTS ARE STATED TO BE MADE IN SUBSEQUENT FINANCIAL YEAR, NEEDS VERIFIC ATION BY THE AO OF THE CONTENTIONS OF THE ASSESSEE , AND HENCE INTEREST O F JUSTICE WILL BE BEST SERVED IF THE MATTER IS SET ASIDE AND RESTORED TO THE FILE OF AO FOR VERIFICATION OF CONTENTIONS OF THE ASSESSEE AND FOR FRESH DETERMINA TION OF THE MATTER ON MERIT IN ACCORDANCE WITH OUR DIRECTIONS AS CONTAINED IN T HIS ORDER . IF AFTER VERIFICATION AND ENQUIRY IT IS FOUND BY THE AO THAT THE SAID FORWARD FOREIGN EXCHANGE CONTRACTS ARE BACKED BY STOCK PURCHASED AN D HELD BY THE ASSESSEE AS AT YEAR END WHICH ARE BACKED BY PURCHASED FOR EX ECUTING CONFIRMED EXPORT ORDERS IN HAND , WHICH EXPORT ORDERS ARE EXECUTED IN NEXT FINANCIAL YEAR , THE LOSS SHALL STAND ALLOWED AFTER SUCH VERIFICATION AN D ENQUIRY BY THE AO AS THE ASSESSEE BY HOLDING CONFIRMED EXPORT ORDERS DENOMIN ATED IN FOREIGN CURRENCY AND HOLDING STOCK FOR EXECUTION OF THOSE EXPORT ORD ERS AS AT YEAR END HAS DEFINITELY EXPOSED ITSELF TO FOREIGN CURRENCY EXCHA NGE RISK ASSOCIATED WITH FLUCTUATION IN FOREIGN EXCHANGE RATES AS AT YEAR EN D , AS THE EXPORT ORDERS IS STATED TO BE EXECUTED IN THE NEXT FINANCIAL YEAR AN D SUCH LOSS IS NEITHER NOTIONAL OR SPECULATIVE LOSS U/S 43(5) OF THE ACT A S IT IS STATED TO BE BACKED WITH STOCK HELD BY THE ASSESSEE AS AT 31-03-2009 AN D CONFIRMED EXPORT ORDERS WHICH ARE STATED TO BE EXECUTED IN SUBSEQUEN T FINANCIAL YEAR . IN ANY CASE, REVENUE IMPACT IN ALLOWING THE SAID LOSS IN T AX-NEUTRAL AS THE SAID LOSS IS STATED TO BE REVERSED BY THE ASSESSEE IN THE SUB SEQUENT FINANCIAL YEAR BY ITA 112/MUM/2013 & ITA NO. 7311/MUM/2012 18 WAY OF CREDIT TO THE PROFIT AND LOSS ACCOUNT, AND ACTUAL LOSS IS DEBITED TO PROFIT AND LOSS ACCOUNT WHEREIN NET LOSS/PROFIT IS CLAIMED IN THE SUBSEQUENT ASSESSMENT YEAR IN THE RETURN OF INCOME WHICH CONTE NTION OF THE ASSESSEE SHALL ALSO NEED TO BE VERIFIED BY THE AO BY LOOKING INTO THE RETURN OF INCOME FOR SUBSEQUENT ASSESSMENT YEAR(S) TO ENSURE THAT RE VENUE IMPACT IS TAX- NEUTRAL AND THERE IS NO LOSS TO REVENUE. THUS THE M ATTER IS SET ASIDE AND REMANDED TO THE FILE OF A.O. FOR VERIFICATION OF TH E CONTENTIONS OF THE ASSESSEE AND FOR REDETERMINATION OF THE ISSUE ON MERITS AFTE R NECESSARY VERIFICATIONS AND ENQUIRY AS DIRECTED BY US. NEEDLESS TO SAY THAT PROPER AND ADEQUATE OPPORTUNITY OF BEING HEARD SHALL BE PROVIDED BY THE AO TO THE ASSESSEE IN ACCORDANCE WITH PRINCIPLES OF NATURAL JUSTICE IN AC CORDANCE WITH LAW AND THE ASSESSEE SHALL BE ALLOWED TO PLACE ALL RELEVANT EVI DENCES AND MATERIAL ON RECORD TO SUBSTANTIATE ITS CONTENTIONS. WE ORDER AC CORDINGLY. 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IN ITA NO. 7311/MUM/2012 IS ALLOWED FOR STATISTICAL PURPOSES A ND THE APPEAL FILED BY THE REVENUE IN ITA NO. 112/MUM/2013 FOR THE ASSESSM ENT YEAR 2009-10 IS DISMISSED AS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 7 TH NOVEMBER, 2016. # $% &' 07-11-2016 ( ) SD/- SD/- (C.N. PRASAD) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER $ MUMBAI ; & DATED 07-11-2016 [ .9../ R.K. R.K. R.K. R.K. , EX. SR. PS ITA 112/MUM/2013 & ITA NO. 7311/MUM/2012 19 !'#$%&%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. : ( ) / THE CIT(A)- CONCERNED, MUMBAI 4. : / CIT- CONCERNED, MUMBAI 5. =>( 99?@ , ?@ , $ / DR, ITAT, MUMBAI E BENCH 6. (BC D / GUARD FILE. / BY ORDER, = 9 //TRUE COPY// / ( DY./ASSTT. REGISTRAR) , $ / ITAT, MUMBAI