DIAMOND STAR, MUMBAI V. CIT (A) -27, MUMBAI

ITA 1239/MUM/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92707 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-06-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2009-2010
• Appeal Filed On: 25-02-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AKHILENDRA P YADAV
• Assessee Lawyers: BHARAT D DAMODAR; SNEHA P OAK
• Keywords: Opportunity of being heard; Speculation loss

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI BEFORE S/SHRI B.R.BASKARAN (AM) AND AMIT SHUKLA, (JM) . . , , ./ I. T.A. NO. 282 / MUM/20 1 4 ( / ASSESSMENT YEAR : 20 09 - 10 ) ASS TT. COMMISSIONER OF INCOME TAX,16(3), 2 ND FLOOR, ROOM NO.206, MATRU MANDIR, TARDEO ROAD, MUMBAI - 400007 / VS. M/S DIAMOND STAR, 804, PANCHRATNA, OPERA HOUSE, MUMBAI - 400004, ( / APPELLANT ) .. ( / RESPONDENT ) ./ I.T.A. NO. 346 /MUM/20 14 ( / ASSESSMENT YEAR : 2009 - 10 ) M/S DIAMOND STAR, 804, PANCHRATNA, OPERA HOUSE, MUMBAI - 400004, / VS. A SSTT. COMMISSIONER OF IN COME TAX,16(3), 2 ND FLOOR,ROOM NO.206, MATRU MANDIR,TARDEO ROAD, MUMBAI - 400007 ( / APPELLANT ) .. ( / RESPONDENT ) ./ I.T.A. NO. 1239 /MUM/20 14 ( / ASSESSMENT YEAR : 2009 - 10 ) M/S DIAMOND STAR, 804, PANCHRATNA, OPERA HOUSE, MUMBAI - 400004 . / VS. A SSTT. COMMISSIONER OF INCOME TAX,16(3), MATRU MANDIR,TARDEO ROAD, MUMBAI - 400007 ( / APPELLANT ) .. ( / RESPONDENT ) ./ ./PAN/GIR NO. : AACFD6531D ITA NO.1239/M/2014, 346/M/2014 AND 282/M/2014 2 / REVENUE BY SHRI AKHILE NDRA P YADAV / ASSESSEE BY S/SHRI BHARAT D DAMODAR AND MS.SNEHA P OAK / DATE OF HEARING : 2 6 . 3 . 201 5 / DATE OF PRONOUNCEMEN T : 5 . 6 . 201 5 / O R D E R PER B.R. BASKARAN (AM) BOTH THE PARTIES HAVE FILED APPEALS CHALLENGING THE ORDER DATED 01 - 10 - 2013 PASSED BY LD CIT(A) - 27, MUMBAI FOR ASSESSMENT YEAR 2009 - 10 AGAINST THE QUANTUM ASSESSMENT ORDER. THE ASSESSEE H AS ALSO FILED APPEAL CHALLENGING THE ORDER DATED 13.01.2014 PASSED BY LD CIT(A) - 27, MUMBAI IMPOSING PENALTY U/S 271(1)(C) OF THE ACT FOR ASSESSMENT YEAR 2009 - 10. 2. WE HEARD THE PARTIES AND PERUSED THE RECORD. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORTING OF CUT AND POLISHED DIAMONDS AND JEWELLERY. IT FILED ITS RETURN OF INCOME DECLARING A TOTAL INCOME OF RS.92.46 LAKHS. THE AO REJECTED THE BOOK RESULTS AND ESTIMATED THE GROSS PROFIT @ 6% AND ACCORDINGLY COMPUTED THE NET PROFIT OF THE ASSESSEE. IN ADDITION, THE AO ALSO DISALLOWED CLAIM OF RS.63.22 LAKHS PERTAINING TO LOSSES ARISING ON OUTSTANDING/OPEN FOREIGN EXCHANGE FORWARD CONTRACTS UPON REVALUATION OF THEM ON 31.3.2011 (MARK TO MARKET REVALUATION). 3. IN THE APPELLATE PROCE EDINGS, THE LD CIT(A) HELD THAT THE REJECTION OF BOOKS WAS NOT CORRECT AND ACCORDINGLY THE ESTIMATED ADDITION OF GROSS PROFIT WAS DELETED. HE ALSO ALLOWED THE CLAIM OF MARK TO MARKET REVALUATION OF OUTSTANDING FOREIGN EXCHANGE FORWARD CONTRACTS BY FOLLOWIN G THE DECISION OF HONBLE SUPREME COURT RENDERED IN THE CASE OF WOODWARD ITA NO.1239/M/2014, 346/M/2014 AND 282/M/2014 3 GOVERNOR INDIA (P) LTD (312 ITR 254) . HOWEVER, THE LD CIT(A) NOTICED THAT THE ASSESSEE HAD CLAIMED DEDUCTION OF RS.2,00,60,098/ - AS FORWARD CONTRACT CANCELLATION CHARGES, WHICH INCL UDED THE MARK TO MARKET REVALUATION CLAIM OF RS.63.22 LAKHS. THE REMAINING AMOUNT OF RS.1,37,48,098/ - WAS CONSIDERED BY LD CIT(A) AS SPECULATION LOSS. ACCORDINGLY THE LD CIT(A) ISSUED ENHANCEMENT NOTICE TO THE ASSESSEE AND DISALLOWED THE CLAIM OF RS.1,37 ,48,098/ - REFERRED ABOVE. AGGRIEVED, BOTH THE PARTIES ARE IN APPEAL BEFORE US. 4. IN THE APPEAL FILED BY THE REVENUE, ONLY ISSUE URGED RELATES TO THE DELETION OF MARK TO MARKET REVALUATION OF OUTSTANDING FOREIGN EXCHANGE CONTRACTS. WE HAVE ALREADY NOT ICED THAT THE LD CIT(A) HAS ALLOWED THE CLAIM BY FOLLOWING THE DECISION RENDERED BY HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA (P) LTD (SUPRA). BEFORE US, THE REVENUE COULD NOT SHOW THAT THE ABOVE SAID DECISION OF HONBLE SUPREME COURT I S NOT APPLICABLE TO THE FACTS OF THE PRESENT CLAIM. HENCE, WE DO NOT FIND ANY REASON TO INTERFERE WITH HIS DECISION ON THIS ISSUE. 5. WE SHALL NOW TAKE UP THE APPEAL FILED BY THE ASSESSEE IN THE QUANTUM ASSESSMENT PROCEEDINGS. ACCORDING TO LD CIT(A), THE ASSESSEE COULD NOT LINK THE FORWARD CONTRACTS WITH ANY SPECIFIC ORDER AND FURTHER THE ASSESSEE COULD NOT FURNISH PROPER EXPLANATIONS FOR CANCELLATION OF FORWARD CONTRACTS. THUS, ACCORDING TO LD CIT(A), THE ASSESSEE HAS DEALT IN FOREIGN EXCHANGE INDEP ENDENTLY, I.E., INDEPENDENT OF HIS BUSINESS TRANSACTIONS. ACCORDINGLY THE LD CIT(A) HAS TAKEN THE VIEW THAT THE ASSESSEE HAS CARRIED OUT TRANSACTION IN FORWARD CONTRACTS IN FOREIGN EXCHANGE AS AN INDEPENDENT ACTIVITY UNCONNECTED WITH HIS BUSINESS TRANSACT ION AND HENCE THE LOSS ARISING THERE FROM SHOULD BE CONSIDERED AS SPECULATION LOSS. ITA NO.1239/M/2014, 346/M/2014 AND 282/M/2014 4 6. BEFORE US, THE LD A.R SUBMITTED THAT THE ASSESSEE THAT THE ASSESSEE HAD EARNED FOREIGN EXCHANGE GAIN OF RS.3.74 CRORES DURING THE YEAR UNDER CONSIDERATION. AFTER SET TING OFF OF LOSS ON CANCELLATION FOREIGN EXCHANGE FORWARD CONTRACT AND MARK TO MARKET REVALUATION BOTH AGGREGATING TO RS.2.00 CRORES, THE ASSESSEE HAD OFFERED NET GAIN OF RS.1.74 CRORES. THUS, ACCORDING TO LD A.R, THE LD CIT(A) WAS NOT JUSTIFIED IN SINGLI NG OUT THE LOSS COMPONENT ALONE IGNORING THE FOREIGN EXCHANGE GAIN DECLARED BY THE ASSESSEE ON CANCELLATION OF FORWARD CONTRACTS. 7. ON MERITS, THE LD A.R SUBMITTED THAT THE ASSESSEE HAD ALWAYS HAD HUGE OUTSTANDING BALANCE OF EXPORT RECEIVABLES WHICH ARE SUSCEPTIBLE TO FOREIGN EXCHANGE FLUCTUATIONS. EVEN THOUGH THE ASSESSEE COULD NOT MAKE ONE TO ONE LINK OF THE FORWARD CONTRACT WITH THE RECEIVABLES, YET THE OUTSTANDING FORWARD CONTRACT BALANCE WAS ALWAYS LESS THAN THE AMOUNT OF EXPORT RECEIVABLES, ME ANING THEREBY, THE ASSESSEE HAS ENTERED INTO FORWARD CONTRACT ONLY TO HEDGE AGAINST THE POSSIBLE LOSS THAT MAY ARISE AGAINST EXPORT RECEIVABLES DUE TO FOREIGN EXCHANGE FLUCTUATIONS. THE LD A.R FURNISHED A STATEMENT DISCLOSING THE FORWARD CONTRACT VIS - - VI S THE OUTSTANDING EXPORT RECEIVABLES. THE LD A.R ALSO PLACED RELIANCE ON A NUMBER OF CASE LAWS TO SUPPORT THE CASE OF THE ASSESSEE. 8. WE HEARD LD D.R ON THIS ISSUE AND PERUSED THE RECORD. THE ARGUMENTS ADVANCED BY LD A.R WOULD SHOW THAT THE LD CIT(A) HAS SINGLED OUT THE LOSS COMPONENT ONLY AND ACCORDINGLY DECIDED THE SAME AGAINST THE ASSESSEE, THUS IGNORING THE GAIN MADE BY THE ASSESSEE. ADMITTEDLY THE APPROACH ADOPTED BY THE LD CIT(A) DOES NOT APPEAR TO BE CORRECT, SINCE CONSIDERATION OF ONLY PART OF TRANSACTIONS WOULD GIVE MISLEADING RESULT. FURTHER, THE ASSESSEE HAS CONTENDED THAT THE FORWARD CONTRACTS HAVE BEEN ENTERED INTO ONLY TO HEDGE AGAINST THE OUTSTANDING EXPORT RECEIVABLES. THIS FACTUAL ASPECT HAS ALSO NOT BEEN EXAMINED BY THE TAX AUTHORITI ES. ITA NO.1239/M/2014, 346/M/2014 AND 282/M/2014 5 UNDER THESE SET OF FACTS, WE ARE OF THE VIEW THAT THIS ISSUE REQUIRES FRESH EXAMINATION AT THE END OF THE ASSESSING OFFICER, SINCE THE SAME INVOLVES VERIFICATION OF CERTAIN FACTUAL ASPECTS. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT(A) ON THIS ISS UE AND RESTORE THE SAME TO THE FILE OF THE AO WITH THE DIRECTION TO EXAMINE THIS ISSUE AFRESH AND TAKE APPROPRIATE DECISION IN ACCORDANCE WITH THE LAW, AFTER AFFORDING NECESSARY OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 9. BEFORE US, THE ASSESSEE HAS ALSO RAISED A GROUND CHALLENGING THE ENHANCEMENT NOTICE GIVEN BY LD CIT(A). ON EXAMINATION OF FACTS, WE NOTICE THAT THE NOTICE GIVEN BY LD CIT(A) WAS NOT PERTAINING TO ANY FRESH SOURCE OF INCOME, BUT RELATED TO FOREIGN EXCHANGE LOSS THAT WAS ALREADY CONSI DERED BY THE AO. HENCE, WE DO NOT FIND ANY MERIT IN THE CONTENTIONS OF THE ASSESSEE. 10. THE ASSESSEE HAS ALSO FILED APPEAL AGAINST THE PENALTY LEVIED BY LD CIT(A) U/S 271(1)(C) OF THE ACT. WE HAVE EARLIER NOTICED THAT THE LD CIT(A) ENHANCED THE ASSESS MENT BY DISALLOWING FORWARD CONTRACT LOSS OF RS.1.37 CRORES CLAIMED BY THE ASSESSEE. THE LD CIT(A) ALSO IMPOSED A PENALTY OF RS.46,72,978/ - ON THE ABOVE CITED ENHANCEMENT. AGGRIEVED, THE ASSESSEE HAS FILED THIS APPEAL BEFORE US. 11. IN THE EARLIER PARAGRAPHS, WE HAVE RESTORED THE ABOVE SAID ISSUE TO THE FILE OF THE ASSESSING OFFICER. HENCE, THE IMPUGNED PENALTY ORDER DOES NOT HAVE INDEPENDENT LEGS TO STAND ON ITS OWN. ACCORDINGLY, THE AO MAY CONSIDER IMPOSING PENALTY IN THE SET ASID E PROCEEDINGS, IF FOUND NECESSARY. ITA NO.1239/M/2014, 346/M/2014 AND 282/M/2014 6 12. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. BOTH THE APPEALS FILED BY THE ASSESSEE ARE TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 5TH JUNE , 2015 SD SD ( / AMIT SHUKLA ) ( . . / B.R. BASKARAN) / JUDICIAL MEMBE R / ACCOUNTANT MEMBER MUMBAI: 5TH JUNE ,2015 . . . ./ SRL , SR. PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - CONCERNED 4. / CIT CONCERNED 5. , , / DR, ITAT, MUMBAI CONCERNED 6. / GUARD FILE. / BY ORDER, TRUE COPY (ASSTT. REGISTRAR) , /ITAT, MUMBAI