The DCIT(OSD)-1, Circle-4, Ahmedabad V. Jay Chemical Industries Ltd., Ahmedabad

ITA 1684/AHD/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 1586 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 10 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-05-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2009-2010
• Appeal Filed On: 10-06-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHAURYA SHUKLA
• Assessee Lawyers: NIMISH VAYAWALA
• Section: 37(1); 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD C BENCH (BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER & SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER) ITA. NO: 1684/AHD/2013 (ASSESSMENT YEAR: 2009-10) THE D.C.I.T., (OSD)-1, CIRCLE-4, AHMEDABAD V/S JAY CHEMICAL INDS LTD. JAY HOUSE, PANCHVATI CIRCLE, AMBCAWADI, AHMEDABAD (APPELLANT) (RESPONDENT) PAN: AAACJ7628J APPELLANT BY : SHRI SHAURYA SHUKLA, SR. D .R. RESPONDENT BY : SHRI NIMISH VAYAWALA, A.R. ( )/ ORDER DATE OF HEARING : 02 -05-20 16 DATE OF PRONOUNCEMENT : 04 -05-2016 PER N.K. BILLAIYA, ACCOUNTANT MEMBER: 1. THIS IS AN APPEAL BY THE REVENUE IS PREFERRED AGAIN ST THE ORDER OF LD. CIT(A)-VIII, AHMEDABAD DATED 07.03.2013 PERTAINING TO A.Y. 2009-10. ITA NO . 168 4/AHD/2013 . A.Y. 2009-1 0 2 2. THE SOLE GRIEVANCE OF THE REVENUE RELATES TO THE DI RECTION TO ALLOW DISALLOWANCE OF RS. 2,03,17,708/- ON ACCOUNT OF MAR KED TO MARKET LOSS IN RESPECT OF FOREIGN EXCHANGE CONTRACT. 3. BRIEFLY STATED THE FACTS OF THE CASE ARE THAT THE A SSESSEE IS MANUFACTURING AND EXPORT OF DYES, CHEMICALS AND INT ERMEDIATES. RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION W AS FILED ON 29.09.2009 DECLARING TOTAL LOSS OF RS. 59,28,500/-, BOOK PROFIT AT RS. 15,91,60,282/- AND TAXES WERE PAID U/S. 15JB OF THE ACT. 4. THE RETURN WAS SELECTED FOR SCRUTINY ASSESSMENT. DU RING THE COURSE OF THE SCRUTINY ASSESSMENT PROCEEDINGS, THE A.O FOUND THAT THE ASSESSEE HAS CLAIMED LOSS OF RS. 2,03,17,708/- AS PROVISION FOR MTM ON DERIVATIVE TRANSACTION IN THE PROFIT AND LOSS ACCOU NT. THE ASSESSEE WAS, THEREFORE, ASKED TO FURNISH THE COPY OF FORWAR D CONTRACT WITH REGARD TO PURCHASE OF RAW MATERIAL AND SALE DULY LI NKED WITH RELEVANT PURCHASE/SALE ORDER/VOUCHERS, LEDGER AND OTHER EVID ENCES. THE ASSESSEE WAS ALSO ASKED TO FURNISH ALL COPIES OF FO RWARD CONTRACTS AND TO SUBSTANTIATE THE CLAIM MADE BY IT UNDER THE HEAD MTM ON DERIVATIVE TRANSACTION. THE ASSESSEE FILED A DETAILED REPLY VI DE LETTER DATED 26.11.2011 WHICH READ AS UNDER:- 'THE COMPANY ENTERS INTO FORWARD CONTRACTS IN FOREI GN EXCHANGE TO HEDGE AGAINST EXPORT RECEIVABLE. DUE TO DIFFERENCE IN BOO KING RATE AND THE RATE AS 31 ST MARCH, 2009, THERE WAS LOSS. THIS LOSS HAS BEEN BO OKED BY THE COMPANY. THE WHOLE TRANSACTION IS ON REVENUE ACCOUNT. THE RE LEVANT ADVICE RECEIVED FROM ICICI BANK-IS ENCLOSED. WE RELY ON THE FOLLOWI NG DECISIONS IN THIS CONNECTION. M/S. BANK OF BAHRIN & KUWAIT, MUMBAI - ITA NO. 4404 /1883/MUM 2004 ITA NO . 168 4/AHD/2013 . A.Y. 2009-1 0 3 THE LIABILITY CANNOT BE CONSIDERED NOTIONAL IN VIEW OF THE ABOVE DECISION. THE DECISION OF THE COMPANY IS ALSO BACKED BY PRINCIPLE OF PRUDENCE AS WELL AS CONVERSATION WHICH ARE THE BASIC PRINCIPLES OF ACCO UNTANCY. AGAIN IN THE COMING YEARS, WHEN THE CONTRACT WAS ACTUALLY SETTLE D THE LESSER WAS LOSS WAS BOOKED OR GAIN WAS BOOKED. IT MAY BE NOTED THAT FOREIGN EXCHANGE ASSETS, I.E. DEBTORS ARE ALSO REVALUED AS AT 31 ST MARCH AND FLUCTUATION GAIN OR LOSS IS ALSO GIVEN T REATMENT IN BOOKS OF ACCOUNTS. AS-11 ISSUED ICAI ALSO RECOMMENDS SAME TREATMENT. (I) THE OBLIGATION ARISES WHEN THE CONTRACT IS ENTERED (II) THE ACTUAL LIABILITY IS THERE AS ON 31.3.2009 THOUG H QUANTIFICATION MAY BE DIFFICULT BUT CAN BE DONE WITH REASONABLE ACCURA CY. SIMPLY BECAUSE THERE IS DIFFICULTY IN ESTIMATION OF LIABILITY, IT CANNOT CONVERT THE LIABILITY INTO CONTINGENT ONE. (III) THE CONTRACTUAL OBLIGATION WAS CAPABLE OF BEING EVA LUATED AND RECOGNIZED IN THE BOOKS OF ACCOUNT: (IV) THE ACCOUNTING POLICIES ARE TO BE GOVERNED BY PRINC IPLES OF PRUDENCE. THE PRINCIPLE HAS ACCEPTED JUDICIAL RECOGNITION. (V) THE AS-11 RECOGNIZES SUCH LOSS. AS-11 IS REQUIRED TO BE FOLLOWED. (VI) THE SUPREME COURT IN CIT V/S. WOOD WAD GOVERNOR IND IA P LTD NO. 2214 OF 2009 HAS TAKEN THE SAME VIEW. 5. IN SUPPORT OF THE CONTENTION ALONG WITH THE SUBMISS ION, THE ASSESSEE FILED LETTERS OF ICICI BANK INTIMATING THE MTM TRAN SACTIONS. 6. AFTER CAREFULLY PERUSING THE SUBMISSION IN THE LIGH T OF THE LETTERS OF THE ICICI BANK, THE A.O WAS OF THE OPINION THAT THE ASS ESSEE SHOULD HAVE CLAIMED RS. 39534120.84 AS AT 31.07.2009. ACCORDING TO THE A.O, THE ASSESSEE HAS MADE CLAIM ACCORDING TO ITS SWEET WILL . THE A.O FURTHER OBSERVED THAT THE JUDICIAL PRONOUNCEMENTS RELIED UP ON BY THE ASSESSEE, THE CASE LAWS RELIED UPON BY THE ASSESSEE ARE NOT RELEVANT TO THE FACTS OF THE CASE. THE A.O FURTHER DREW SUPP ORT FROM THE ITA NO . 168 4/AHD/2013 . A.Y. 2009-1 0 4 INSTRUCTION NO. 3 OF 2010 OF THE CBDT, THE RELEVANT PORTION OF WHICH IS REPRODUCED AS UNDER:- SECTION 43(5) OF THE INCOME-TAX ACT, 1961-SPECULAT IVE TRANSACTIONS- CLARIFICATION REGARDING ALLOWING LOSSES ON ACCOUNT OF FOREX DERIVATIVES. MARKED TO MARKET LOSSES 2. MARKED TO MARKET IS IN SUBSTANCE A METHODOLOGY OF ASSIGNING VALUE TO A POSITION HELD IN A FINANCIAL INSTRUMENT BASED ON IT S MARKET PRICE ON THE CLOSING DAY OF THE ACCOUNTING OR REPORTING RECORD. ESSENTIALLY, MARKED TO MARKET IS A CONCEPT UNDER WHICH FINANCIAL INSTRUMEN TS ARE VALUED AT MARKET RATE, SO AS TO REPORT THEIR ACTUAL VALUE ON THE REP ORTING DATE. THIS IS REQUIRED FROM THE POINT OF VIEW OF TRANSPARENT ACCOUNTING PR ACTICES FOR THE BENEFIT OF THE SHAREHOLDERS OF THE COMPANY AND ITS OTHER STAKE HOLDERS. WHERE COMPANIES MAKE SUCH AN ADJUSTMENT THROUGH THEIR TRA DING OR PROFIT/LOSS ACCOUNT, THEY BOOK A CORRESPONDING LOSS (I.E. THE D IFFERENCE BETWEEN HE PURCHASE PRICE AND THE VALUE AS ON THE VALUATION DA TE) IN THEIR ACCOUNTS. THIS LOSS IS A NOTIONAL AS NO SALES/CONCLUSION/SETTLEMEN T OF CONTRACT HAS TAKEN PLACE AND THE ASSET CONTINUES TO BE OWNED BY THE CO MPANY. A MARKET TO MARKET LOSS MAY BE GIVEN DIFFERENT ACCO UNTING TREATMENT BY DIFFERENT ASSESEES. SOME MAY REFLECT SUCH LOSS AS A BALANCE SHEET ITEM WITHOUT MAKING ANY CORRESPONDING ADJUSTMENT IN THE PROFIT AND LOSS ACCOUNT. OTHER MAY BOOK THE LOSS IN THE PROFIT AND LOSS ACCO UNT WHICH MAY RESULT IN THE REDUCTION OF BOOK PROFITS, SUCH A NOTIONAL LOSS WOULD BE CONTINGENT IN NATURE AND CANNOT BE ALLOWED TO BE SET OFF AGAINST THE TAXABLE INCOME. THE SAME SHOULD THEREFORE, BE ADDED BACK FOR THE PURPOS E OF COMPUTING THE TAXABLE INCOME OF THE ASSESSEE. ' 7. THE A.O WAS OF THE FIRM BELIEF THAT SINCE NO SALE O F SETTLEMENT HAS ACTUALLY TAKEN PLACE, THEREFORE A NOTIONAL INCOME I S NOT ALLOWABLE AS PER THE PROVISIONS OF SECTION 37(1) OF THE ACT. THE LOSS WAS ACCORDINGLY DISALLOWED AND ADDED TO THE BOOK PROFIT OF THE ASSE SSEE U/S. 115JB. ITA NO . 168 4/AHD/2013 . A.Y. 2009-1 0 5 8. ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) A ND REITERATED ITS CLAIM OF LOSS. HEAVY RELIANCE WAS PLACED ON THE DEC ISION OF HONBLE SUPREME COURT IN WOODWARD GOVERNOR 312 ITR 254. 9. AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS AND THE JUDICIAL DECISIONS RELIED UPON BY THE ASSESSEE, THE LD. CIT( A) OBSERVED AS UNDER:- AFTER GOING THROUGH THE FACTS OF THE CASE, IT IS S EEN THAT THE EVENT THAT IS FALL OF INDIAN RUPEES VIS--VIS DOLLAR HAS ACTUALLY OCCU RRED AS AT 31.03.2009. THE LIABILITY OF THE ASSESSEE HAS ALREADY CRYSTALLIZED. THE SUPREME COURT IN WOODWARD GOVERNOR 312 ITR 254 (SC ) HAS TAKEN THE SAME VIEW AS UNDER. 17. HAVING COME TO THE CONCLUSION THAT VALUATION IS A PART OF THE ACCOUNTING SYSTEM AND HAVING COME TO THE CONCLUSION THAT BUSIN ESS LOSSES ARE DEDUCTIBLE UNDER SECTION 37(1) ON THE BASIS OF ORDI NARY PRINCIPLES OF COMMERCIAL ACCOUNTING AND HAVING COME TO THE CONCLU SION THAT THE CENTRAL GOVERNMENT HAS MADE ACCOUNTING STANDARD-11 MANDATOR Y, WE ARE NOW REQUIRED TO EXAMINE THE SAID ACCOUNTING STANDARD (' AS'). 18. AS-11 DEALS WITH GIVING OF ACCOUNTING TREATMENT FOR THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES. AS-11 DEALS WITH EFFECTS OF EXCHANGE DIFFERENCES. UNDER PARA 2, REPORTING CURRENCY IS DE FINED TO MEAN THE CURRENCY USED IN PRESENTING THE FINANCIAL STATEMENT S. SIMILARLY, THE WORDS 'MONETARY ITEMS' ARE DEFINED TO MEAN MONEY HELD AND ASSETS AND LIABILITIES TO BE RECEIVED OR PAID IN FIXED AMOUNTS, E.G., CASH , RECEIVABLES AND PAYABLES. THE WORD 'PAID' IS DEFINED UNDER SECTION 43(2). THI S HAS BEEN DISCUSSED EARLIER. SIMILARLY, IT IS IMPORTANT TO NOTE THAT FO REIGN CURRENCY NOTES, BALANCE IN BANK ACCOUNTS DENOMINATED IN A FOREIGN CURRENCY, AND RECEIVABLES/PAYABLES AND LOANS DENOMINATED IN A FOR EIGN CURRENCY AS WELL AS SUNDRY CREDITORS ARE ALL MONETARY ITEMS WHICH HAVE TO BE VALUED AT THE CLOSING RATE UNDER AS-11. UNDER PARA 5, A TRANSACTI ON IN A FOREIGN CURRENCY HAS TO BE RECORDED IN THE REPORTING CURRENCY BY APP LYING TO THE FOREIGN ITA NO . 168 4/AHD/2013 . A.Y. 2009-1 0 6 CURRENCY AMOUNT THE EXCHANGE RATE BETWEEN THE REPOR TING CURRENCY AND THE FOREIGN CURRENCY AT THE DATE OF THE TRANSACTION. TH IS IS KNOWN AS RECORDING OF TRANSACTION ON INITIAL RECOGNITION. PARA 7 OF AS-11 DEALS WITH REPORTING OF THE EFFECTS OF CHANGES IN EXCHANGE RATES SUBSEQUENT TO INITIAL RECOGNITION. PARA 7(A) INTER ALIA STATES THAT ON EACH BALANCE SHEET D ATE MONETARY ITEMS, ENUMERATED ABOVE, DENOMINATED IN A FOREIGN CURRENCY SHOULD BE REPORTED USING THE CLOSING RATE. IN CASE OF REVENUE ITEMS FA LLING UNDER SECTION 37(1), PARA 9 OF AS-11 WHICH DEALS WITH RECOGNITION OF EXC HANGE DIFFERENCES, NEEDS TO BE CONSIDERED. UNDER THAT PARA, EXCHANGE DIFFERE NCES ARISING ON FOREIGN CURRENCY TRANSACTIONS HAVE TO BE RECOGNIZED AS INCO ME OR AS EXPENSE IN THE PERIOD IN WHICH THEY ARISE, EXCEPT AS STATED IN PAR A 10 AND PARA 11 WHICH DEALS WITH EXCHANGE DIFFERENCES ARISING ON REPAYMEN T OF LIABILITIES INCURRED FOR THE PURPOSE OF ACQUIRING FIXED ASSETS, WHICH TO PIC FALLS UNDER SECTION 43A OF THE 1961 ACT. AT THIS STAGE, WE ARE CONCERNED ON LY WITH PARA 9 WHICH DEALS WITH REVENUE ITEMS. PARA 9 OF AS-11 RECOGNIZES EXCH ANGE DIFFERENCES AS INCOME OR EXPENSE. IN CASES WHERE, E.G., THE RATE O F DOLLAR RISES VIS-A-VIS .THE INDIAN RUPEE, THERE IS AN EXPENSE DURING THAT PERIOD. THE IMPORTANT POINT TO BE NOTED IS THAT AS-11 STIPULATES EFFECT O F CHANGES IN EXCHANGE RATE VIS-A-VIS MONETARY ITEMS DENOMINATED IN A FOREIGN C URRENCY TO BE TAKEN INTO ACCOUNT FOR GIVING ACCOUNTING TREATMENT ON THE BALA NCE SHEET DATE. THEREFORE, AN ENTERPRISE HAS TO REPORT THE OUTSTAND ING LIABILITY RELATING TO IMPORT OF RAW MATERIALS USING CLOSING RATE OF EXCHA NGE. ANY DIFFERENCE, LOSS OR GAIN, ARISING ON CONVERSION OF THE SAID LIABILIT Y AT THE CLOSING RATE, SHOULD BE RECOGNIZED IN THE P&L ACCOUNT FOR THE REPORTING PERIOD. 21. IN CONCLUSION, WE MAY STATE THAT IN ORDER TO FI ND OUT IF AN EXPENDITURE IS DEDUCTIBLE THE FOLLOWING HAVE TO BE TAKEN INTO ACCO UNT (I) WHETHER THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS MERCANTIL E SYSTEM, WHICH BRINGS INTO DEBIT THE EXPENDITURE AMOUNT FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURSED AND BRINGS INTO CRE DIT WHAT IS DUE, IMMEDIATELY IT BECOMES DUE AND BEFORE IT IS ACTUALLY RECEIVED; (II) WHETHER THE SAME SYSTEM IS FOLLOWED BY THE ASSESSEE FROM THE VERY BE GINNING AND IF THERE WAS A CHANGE IN THE SYSTEM, WHETHER THE CHANGE WAS BONA FIDE; (HI) WHETHER THE ITA NO . 168 4/AHD/2013 . A.Y. 2009-1 0 7 ASSESSEE HAS GIVEN THE SAME TREATMENT TO LOSSES CLA IMED TO HAVE ACCRUED AND TO THE GAINS THAT MAY ACCRUE TO IT; (IV) WHETHE R THE ASSESSEE HAS BEEN CONSISTENT AND DEFINITE IN MAKING ENTRIES IN THE AC COUNT BOOKS IN RESPECT OF LOSSES AND GAINS; (V) WHETHER THE METHOD ADOPTED BY THE ASSESSEE FOR MAKING ENTRIES IN THE BOOKS BOTH IN RESPECT OF LOSS ES AND GAINS IS AS PER NATIONALLY ACCEPTED ACCOUNTING STANDARDS; (VI) WHET HER THE SYSTEM ADOPTED BY THE ASSESSEE IS FAIR AND REASONABLE OR IS ADOPTE D ONLY WITH A VIEW TO REDUCING THE INCIDENCE OF TAXATION. 10. THE LD. CIT(A) FURTHER OBSERVED THAT THE HONBLE SU PREME COURT IN THE CASE OF ROTORK CONTROL LTD. AND ALSO IN META L BOX LTD. HAS HELD THAT IF THE LIABILITY IS ASCERTAINED, THE AMOUNT IS ALSO ALLOWABLE ON THE ESTIMATE BASIS. THE ASSESSEE CAN MAKE REASONABLE ES TIMATE BASED ON PAST KNOWLEDGE, GUIDANCE OF THE ACTUARY ETC. SIMPLY BECAUSE IN NORMAL SENSE IT IS DIFFICULT TO ARRIVE AT ESTIMATE, THE AM OUNT CANNOT BE DISALLOWED. THE LD. D.R. VEHEMENTLY STATED THAT THE RE IS NO BASIS NOR ANY ACTUARY VALUATION BROUGHT ON RECORD BY THE ASSE SSEE TO JUSTIFY THE CLAIM. THE CONTENTIONS OF THE LD. D.R. HAVE TO BE C ONSIDERED IN THE LIGHT OF THE FINDINGS OF THE LD. CIT(A) WHICH READ AS UNDER:- 'IN VIEW OF THE ABOVE DECISIONS AND IN VIEW OF THE DECISION OF SUPREME COURT IN WOODWARD GOVERNOR 312 ITR 254 (SC), I HOLD THAT THE FOREIGN EXCHANGE LOSS AS AT 31/3/29009 MARK TO MARKET LOSS IS IN PRINCIPLE ALLOWABLE. THE AO HAS NOT DISCUSSED THE ISSUE IN DETAIL. THE A SSESSING OFFICER IS DIRECTED TO VERIFY THE CONDITIONS AS HAS BEEN LAID OUT IN PA RA 21 (SUPRA) OF THE SUPREME COURT IN WOODWARD GOVERNOR (SUPRA) TO CHECK THE ESTIMATE OF THE LIABILITY MADE BY THE ASSESSEE AND ALLOW THE PROPER AMOUNT OF LIABILITY WHICH CAN BE WORKED OUT BASED ON PROPER CALCULATION. 11. A PERUSAL OF THE AFOREMENTIONED FINDINGS SHOW THAT THE LD. CIT(A) HIMSELF HAS DIRECTED THE A.O TO DO THE NECES SARY VERIFICATION ITA NO . 168 4/AHD/2013 . A.Y. 2009-1 0 8 WHICH DIRECTION ARE IN THE LINE OF THE CONTENTION O F THE LD. D.R. THEREFORE, NO INTERFERENCE IS CALLED FOR. 12. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS D ISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 04 - 05 - 20 16. SD/- SD/- (R.P. TOLANI) (N. K. BILLAIYA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD: TRUE COPY RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHME DABAD