DCIT, Circle - 5(1) , Kolkata V. M/s. Kesoram Industries Ltd., , Kolkata

ITA 1776/KOL/2019

• Counselvise Citation: [2020] 110 COUNSELVISE.COM (IT) 4524 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 2 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-10-2020
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 07-10-2020
• Assessment Year: 2011-2012
• Appeal Filed On: 29-07-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: DHRUBAJOTI RAY JCITSRDR
• Assessee Lawyers: AKKAL DHUDEWADIA
• Keywords: Earning of tax free income; Question of law; Rule 8D; Set aside
• Section: 143(3); 14A; 115JB; 43(5); 13; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH VIRTUAL COURT-A KOLKATA BEFORE SHRIP.M.JAGTAP, VICE-PRESIDENT AND SHRI S.S.GODARA, JUDICIAL MEMBER ITA NO.1195 & 1776/KOL/2019 ASSESSMENT YEAR: 2011-12 KESORAM INDUSTRIES LTD., 9/1 R.N.MUKHERJE ROAD, KOLKATA-700001 [ PAN NO.AABCK 2417 P ] DY. COMMISSIONER OF INCOME TAX, CIRCLE-5(1), AAYKARBHAWAN, P-7, CHOWRRINGHEE SQUARE, KOLKATA-69 / V/S . DY. COMMISSIONER OF INCOME TAX, CIRCLE-5(1), AAYKARBHAWAN, P-7, CHOWRINGHEE SQUARE, KOLKATA-700 069 M/S KESORAM INDUSTRIES LTD., BIRLA BUILDING, 8 TH FLOOR, 9/1, R.N.MUKHERJEE ROAD, KOLKATA-700 001 /APPELLANT .. /RESPONDENT /BY ASSESSEE SHRI AKKAL DHUDEWADIA, AR /BY REVENUE SHRI DHRUBAJOTI RAY, JCIT-SR-DR /DATE OF HEARING 07-10-2020 /DATE OF PRONOUNCEMENT 21-10-2020 /O R D E R PER P.M.JAGTAP, VICE PRESIDENT:- THESE TWO APPEALS, ONE FILED BY THE ASSESSEE BEING ITA NO.1195/KOL/2019 AND THE OTHER FILED BY THE REVENUE BEING ITA NO.1776/KOL/2019, ARE CROSS-APPEALS WHICH ARE DIRECTED AGAINST THE COMMON ORDER OF COMMISSION ER OF INCOME-TAX (APPEALS)-7, KOLKATA DATED 29.03.2019. ITA NO.1195 & 1776/KOL/2019 ASSESSMENT YE AR: 2011-12 KESORAM INDUSTRIES LTD. VS. DCIT, CIR-5(1),KOL. PAGE 2 2. THE SOLITARY ISSUE INVOLVED IN THE APPEAL OF TH E ASSESSEE RELATES TO BE DISALLOWANCE MADE BY THE ASSESSING OFFICER ASSESSIN G OFFICER U/S 14A OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ) READ WITH RULE 8D OF INCOME TAX RULES,1962 WHICH IS PARTLY SUSTAINED BY THE LD.CIT( A). 3. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY WH ICH IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF CEMENT, TYRE, VISCOSE FILAMENT, RAYON YARN, TRANSPARENT PAPER, CAST IRON SPUN PIPE AND CERTAIN CHEMICALS. T HE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED BY THE ASSESSEE ON 30 .09.2011 DECLARING A LOSS OF 369,67,31,212/- UNDER THE NORMAL PROVISION OF THE A CT AND BOOK LOSS OF 96,00,77,348/- U/S 115JB OF THE ACT. IN THE SAID RE TURN, TOTAL INCOME OF 5,32,68,132/- RECEIVED FROM DIVIDEND ON THE SHARES DURING THE YEAR UNDER CONSIDERATION WAS CLAIMED TO BE EXEMPT BY THE ASSES SEE-COMPANY U/S 10(34) OF THE ACT. A DISALLOWANCE OF 1.20 LAKHS WAS ALSO OFFERED BY THE ASSESSEE ON ACCO UNT OF EXPENSES INCURRED IN RELATION TO EARNING OF THE SAI D EXEMPT INCOME AS REQUIRED BY THE PROVISION OF U/S 14A OF THE ACT. NOT SATISFIED WITH THE SAID DISALLOWANCE OFFERED BY THE ASSESSEE ON ESTIMATED BASIS, THE ASSESSING OFFI CER INVOKED RULE 8D OF THE INCOME TAX RULES, 1962 AND WORKED OUT THE DISALLOWANCE TO BE MADE U/S 14A OF THE ACT AT 2,80,64,837/-AS UNDER:- AS PER RULE 8D(2)(I) OF THE INCOME TAX RULE, 1962 E XPENDITURE DIRECTLY RELATED TO EARNING OF EXEMPT INCOME OF 6,873/-. AS PER RULE 8D(2)(II) INTEREST EXPENDITURE ATTRIBUT ABLE TO THE EARNING OF EXEMPT INCOME 2,51,26,736/- AS PER RULE 8D(2)(III) 0.5% OF AVERAGE VALUE OF INV ESTMENT RS.29,31,228/- TOTAL 2,80,64,837/- SINCE THE ASSESSEE-COMPANY HAD ALREADY OFFERED A DI SALLOWANCE OF 1.20 LAKH SUO MOTU , A FURTHER DISALLOWANCE TO 2,79,44,837/- WAS MADE BY THE ASSESSING OFFICER U/S 14A R.W.R. 8D IN THE ASSESSMENT COMPLET ED U/S 143(3) ON 28.03.2014. ITA NO.1195 & 1776/KOL/2019 ASSESSMENT YE AR: 2011-12 KESORAM INDUSTRIES LTD. VS. DCIT, CIR-5(1),KOL. PAGE 3 4. THE DISALLOWANCE MADE BY THE AO U/S 14A R/W.R 8D WAS CHALLENGED BY THE ASSESSEE IN THE GROUND FILED BEFORE LD. CIT(A) AND AFTER CONSIDERING THE SUBMISSION MADE ON BEHALF OF THE ASSESSEE-COMPANY AND PERUSING THE RELEVANT MATERIALS ON RECORD, THE LD. CIT(A) DELETED THE DISALLOWANCE MAD E BY THE ASSESSING OFFICER ON ACCOUNT OF INTEREST EXPENDITURE AMOUNTING TO RS.2,5 1,26,736/-, AS PER RULE 8D(2)(II) ON THE GROUND THAT THE ASSESSEE-COMPANY AT THE RELE VANT TIME HAD SUFFICIENT FUNDS OF ITS OWN AND THERE WAS A PRESUMPTION THAT THE SAID F UNDS WERE UTILIZED BY THE ASSESSEE- COMPANY FOR MAKING INVESTMENTS IN THE CORRESPONDING SHARES, AS HELD BY THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. RASULT (IT NO.09/416 DATED 15.02.2017). AS REGARDS DISALLOWANCE OF RS.29,31,280 MADE BY THE ASSESSING OFFICER U/S 14A AS PER RULE 8D(2)(III), LD. CIT(A) FOLLOWED THE DECISI ON OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEARS 2008-09 AND 2009-10 R ENDERED BY ITS ORDER DATED 26.04.2018 PASSED IN ITA NO.1722/KOL/2012 & OTHERS AND DIRECTED THE ASSESSING OFFICER TO RE-COMPUTE THE SAID DISALLOWANCE AS PER RULE 8D(2)(II) BY TAKING INTO CONSIDERATION ONLY THOSE INVESTMENTS WHICH ACTUALLY HAD YIELDED THE EXEMPT DIVIDEND INCOME TO THE ASSESSEE-COMPANY DURING THE YEAR UNDE R CONSIDERATION. 5. STILL AGGRIEVED BY THE ASSESSEE LD. CIT(A) ON TH IS ISSUE, THE ASSESSEE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUNAL ON THE FO LLOWING GROUNDS:- 1 .FOR THAT ON THE FACTS AND IN RESPECT TO THE CIRCUM STANCES OF THE CASE, THE AO ERRED IN LAW BY MECHANICALLY INVOKING RULE 8D WITHOUT POI NTING OUT ANY DEFECT OR INFIRMITY IN THE CLAIM OF THE ASSESSEE AND IN THAT VIEW OF TH E MATTER THE DISALLOWANCE MADE U/S 14A WAS BAD IN LAW AND DESERVES TO BE STRUCK DOWN. 2 . FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED ON FACTS AND IN LAW IN PARTIALLY CONFIRMING THE DISALL OWANCE COMPUTED BY THE AO UNDER SECTION 14A IN TERMS OF RULE 8D(2)(III) WITHOUT EST ABLISHING ANY PROXIMATE CAUSE BETWEEN THE EXPENDITURE DISALLOWED AND THE EARNING OF EXEMPT INCOME.\ 3 . FOR THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE ORDER OF THE LD. CIT(A) WITHOUT DEALING WITH THE GROUNDS OF APPEAL R ELATING TO DISALLOWANCE U/S 14A ON MERITS BE HELD UNSUSTAINABLE AND BE THEREFORE CA NCELLED AND/OR SET ASIDE. 6. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. AS ARGUED BY THE LD. REPRESENTATIVES OF BOTH THE SIDES, THIS ISSUE IS SQUARELY COVERED BY THE ORDER OF THE TRIBUNAL DATED 26.04.2010 (SUPRA) ITA NO.1195 & 1776/KOL/2019 ASSESSMENT YE AR: 2011-12 KESORAM INDUSTRIES LTD. VS. DCIT, CIR-5(1),KOL. PAGE 4 PASSED IN ASSESSEES OWN CASE FOR AYS. 2008-09 & 20 09-10 WHEREIN THE SIMILAR ISSUE WAS DECIDED BY THE TRIBUNAL VIDE PARAGRAPH 10 TO 12 AS UNDER:- 10 . NOW COMING TO THE DISALLOWANCE OF RS. 19,17,487/- MADE UNDER RULE 8D(2)(III), WE FIND FORCE IN THE ALTERNATE ARGUMENT OF LEARNED AR THAT ONLY DIVIDEND BEARING INVESTMENT OF SCRIPS ARE TO BE CONSIDERED FOR MAKIN G DISALLOWANCE UNDER SECTION 14A OF THE ACT. IN THIS REGARD, RELIANCE WAS PLACED BY THE LEARNED AR ON THE DECISION OF THE TRIBUNAL IN THE CASE REI AGRO LTD. REPORTED IN 143 ITD 141 KOLKATA WHICH WE NOTE IS VERY WELL FOUNDED WHEREIN IT WAS HELD : (8.1) THUS, NOT ALL INVESTMENTS BECOME THE SUBJECT-MATTE R OF CONSIDERATION WHEN COMPUTING DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D. THE DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D IS TO BE IN RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME AND THIS CAN BE DONE ONLY BY TAKING INTO CONSIDERATION THE INVESTMENT WHICH H AS GIVEN RISE TO THIS INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME . UNDER THE CIRCUMSTANCES, THE COMPUTATION OF THE DISALLOWANCES UNDER SECTION 14A READ WITH RULE 8D(2)(III), WHICH IS ISSUE IN THE ASSESSE ES APPEAL, IS RESTORED IN THE FILE OF THE A.O. FOR RECOMPUTATION IN LINE WITH THE DIRECTION GIVEN ABOVE. NO DISALLOWANCE UNDER SECTION 14A READ WITH RULE 8D(2) (I) AND (II) CAN BE MADE IN THIS CASE. 11 . IN VIEW OF THE AFORESAID FINDINGS AND RESPECTIVEL Y FOLLOWING THE DECISION OF THE COORDINATE BENCH OF THIS TRIBUNAL, WE REMAND THIS I SSUE TO THE FILE OF A.O. WITH THE DIRECTION TO CONSIDER ONLY THE INVESTMENT WHICH YIE LDED DIVIDEND INCOME TO THE ASSESSEE FOR COMPUTING THE DISALLOWANCE UNDER SECTI ON 14A OF THE ACT READ WITH RULE 8D(2)(II) OF THE RULES. 12 . WE FURTHER DIRECT THAT AFTER RE-WORKING THE GROSS DISALLOWANCE OF RULE 8D IN TERMS OF THE DISCUSSION AND DIRECTION GIVEN ABOVE, THE A. O. SHALL REDUCE THE SUM OF RS. 10,00,000/- ALREADY SUO-MOTO DISALLOWED BY THE ASSE SSEE UNDER SECTION 14A AND THE NET SUM SO COMPUTED ALONE SHALL BE ADDED BACK TO TH E TOTAL INCOME. HOWEVER, IN CASE THE REVISED DISALLOWANCE UNDER SECTION 14A WORK OUT AT A SUM LOWER THAN THE AMOUNT OF RS.10,00,000/- SUO-MOTO DISALLOWED BY THE ASSESS EE, THEN THE A.O. SHALL RESTRICT THE DISALLOWANCE UNDER SECTION 14A TO RS.10,00,000/-. T HEREFORE, GROUNDS RAISED BY ASSESSEES APPEAL ARE PARTLY ALLOWED FOR STATISTICAL PURPOSES . AS THE ISSUE INVOLVED IN THE YEAR UNDER CONSIDERATI ON AS WELL AS ALL THE MATERIAL FACTS RELATING THEREIN ARE SIMILAR TO THAT OF AYS 2008-09 AND 2009-10, WE RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL FOR AYS 2008-0 9 AND AY 2009-10 AND UPHOLD THE IMPUGNED ORDER OF LD. CIT(A) ON THIS ISSUE. THIS AP PEAL OF THE ASSESSEE IS ACCORDINGLY DISMISSED . 7. AT THE OUTSET, IT IS NOTED THAT THERE IS A DELAY OF 51 DAYS ON THE PART OF THE REVENUE IN FILING THIS APPEAL BEFORE THE TRIBUNAL. IN THIS REGARD, THE REVENUE HAS ITA NO.1195 & 1776/KOL/2019 ASSESSMENT YE AR: 2011-12 KESORAM INDUSTRIES LTD. VS. DCIT, CIR-5(1),KOL. PAGE 5 MOVED AN APPLICATION SEEKING CONDONATION OF THE SAI D DELAY AND KEEPING IN VIEW THE REASON GIVEN THEREIN, WE ARE SATISFIED THAT THERE W AS A SUFFICIENT CAUSE FOR THE DELAY OF 51 DAYS ON THE PART OF THE REVENUE IN FILING THIS A PPEAL BEFORE THE TRIBUNAL. EVEN THE LEARNED COUNSEL FOR THE ASSESSEE HAS NOT RAISED ANY OBJECTION IN THIS REGARD. THE DELAY OF 51 DAYS ON THE PART OF THE REVENUE IN FILING THI S APPEAL BEFORE THE TRIBUNAL IS ACCORDINGLY CONDONED. THE CASE IS NOW TAKEN UP FOR ADJUDICATION ON MERITS. 8. NOW WE SHALL TAKE UP THE APPEAL OF THE REVENUE W HICH INVOLVES A SOLITARY ISSUE RELATING TO THE DELETION BY THE LD. CIT(A) OF THE A DDITION MADE BY THE ASSESSING OFFICER BY DISALLOWING THE ASSESSEES CLAIM FOR DED UCTION ON ACCOUNT OF PROVISION FOR FUTURE LOSS ON DERIVATIVE DUE TO FOREIGN EXCHANGE F LUCTUATION. 9. IN THE PROFIT AND LOSS FILED ALONGWITH THE RETUR N OF INCOME, A SUM OF 3,67,22,220/- WAS DEBITED BY THE ASSESSEE ON ACCOUN T OF DERIVATIVE LOSS UNDER THE HEAD MISCELLANEOUS EXPENSES. IN THIS REGARD, IT WAS EXPLAINED ON BEHALF OF THE ASSESSEE-COMPANY BEFORE THE ASSESSING OFFICER THAT THE MARKET TO MARKET LOSS HAD BEEN BOOKED ON NET BASIS ON FOREIGN EXCHANGE FLUCTU ATION AT THE YEAR-END ON MERCANTILE ACCOUNTING BASIS AND THE SAME WAS THEREF ORE ALLOWEABLE. THIS EXPLANATION OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE BY THE ASS ESSING OFFICER. ACCORDING TO HIM, THE ASSESSEE-COMPANY HAD UNDERGONE HEDGING AND LOSS FOR THE ENTIRE FUTURE PERIOD FOR WHICH THE PAYMENT WAS STILL BE MADE HAD BEEN DEBITE D AS THE PROVISION WHICH WAS NOT ALLOWABLE AS DEDUCTION AS CLARIFIED IN THE INSTRUCT ION NO. 3/2010 DATE 23.03.2010 ISSUED BY THE CBDT. HE ACCORDINGLY DISALLOWED THE C LAIM OF THE ASSESSEE FOR DEDUCTION OF 3,67,22,220/- BEING PROVISION FOR FUTURE LOSS ON D ERIVATIVES DUE TO FOREIGN EXCHANGE FLUCTUATION AND ADDED BACK THE SAM E TO THE TOTAL INCOME OF THE ASSESSEE. 10. THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON ACCOUNT OF ITS CLAIM FOR LOSS ON DERIVATIVE TRADING WAS CHALLENGED BY THE AS SESSEE IN THE APPEAL FILED BEFORE THE LD. CIT(A) AND AFTER CONSIDERING THE SUBMISSION MAD E ON BEHALF OF THE ASSESSEE AND ITA NO.1195 & 1776/KOL/2019 ASSESSMENT YE AR: 2011-12 KESORAM INDUSTRIES LTD. VS. DCIT, CIR-5(1),KOL. PAGE 6 THE MATERIAL AVAILABLE ON RECORD, THE LD. CIT(A) DE LETED THE SAID DISALLOWANCE FOR THE FOLLOWING REASONS GIVEN IN PARAGRAPH NO.5.2 TO 5.10 OF HIS IMPUGNED ORDER:- 5.2 I HAVE CAREFULLY CONSIDERED THE ACTION OF THE AO A S ALSO THE REASONS RECORDED TOR SUCH ACTION AS WELL AS THE ARGUMENTS ADVANCED BY TH E APPELLANT I HAVE CAREFULLY PERUSED TILE JUDICIAL DECISIONS ON WHICH THE RELIAN CE WAS PLACED BY THE APPELLANT- COMPANY F RAM THE DETAILS OF FOREIGN EXCHANGE LOSS FURNISHED BY THE APPELLANT, THE AO HAD NOTED THAT IT COMPRISED OF UNREALIZED FOREIG N EXCHANGE LOSS OF 3,67 22.2201- RECOGNIZED WITH REFERENCE TO THE OPEN FORWARD CONTR ACTS AT THE YEAR-END. UPON BEING QUESTIONED BY THE AO, THE APPELLANT EXPLAINED THAT SUCH LOSS WAS RECOGNIZED BY MARKING TO MARKET ( MTM ') THE UNREALIZED AND OPEN FORWARD CONTRACTS AT THE EXCHANGE RATES PREVAILING ON THE LAST DATE OF THE F INANCIAL YEAR. THE APPELLANT WAS THEREAFTER ASKED BY THE AO AS TO WHY THE UNREALIZED LOSS OF 3,67,22,220/- SHOULD NOT BE DISALLOWED. ALTHOUGH THE ASSESSEE HAD RELIED ON THE DECISIONS OF THE HON'BLE APEX COURT IN THE CASE OF WOODWARD GOVERNOR PVT. LTD (31 2 ITR 254) AND ONGC VS CIT ( 322 ITR 180 ), THE AO HAS ATTEMPTED TO DISTINGUISH THE APPELLAN T'S FACTUAL SITUATION, WITHOUT ACTUALLY BRINGING FORTH THE DISTINCTION. AC CORDING TO THE AO, THE CASE DECIDED BY THE HON'BLE APEX COURT WAS PRIOR TO THE AMENDMEN T MADE IN SECTION 43A OF THE ACT. IN THE CONSIDERED OPINION OF THE AO, SUCH LOSS WAS NOTHING BUT NOTIONAL AND THEREFORE THE SAME WAS NOT ALLOWABLE TO BE DEDUCTED IN ARRIVING AT THE TOTAL INCOME IN SUPPORT OF HIS CONCLUSION THE AO RELIED ON THE INST RUCTION NO 3 OF 2010 DATED 23/03/2010 ISSUED-BY THE CBDT, WHEREIN MARKED TO MA RKET LOSS IN RESPECT OF UNREALISED FORWARD DERIVATIVES ENTERED INTO IN THE COURSE OF TRADING WAS DIRECTED TO BE CONSIDERED AS A NOTIONAL LOSS. 5.3 ON THE OTHER HAND THE APPELLANT HAS PLACED ON RECO RD SUFFICIENT MATERIAL TO SUBSTANTIATE THE ARGUMENT THAT THE LOSS WHICH THE A PPELLANT ACCOUNTED IN ITS BOOKS WAS QUANTIFIED IN A SCIENTIFIC MANNER. THE SAME CANNOT BE CALLED A NOTIONAL LOSS AS ALLEGED BY THE AO THE APPELLANT RELIED ON ACCOUNTING STANDA RD-11 ISSUED BY THE ICAI IN TERMS OF WHICH THE APPELLANT WAS MANDATORILY REQUIR ED TO ACCOUNT FOR THE OUTSTANDING FOREIGN CURRENCY FORWARD CONTRACTS AT THE PREVAILIN G EXCHANGE RATE AT THE TIME OF DRAWING ANNUAL FINANCIAL STATEMENTS, REFERRING TO S ECTION 211(3) OF THE COMPANIES ACT, 1956 IT WAS SUBMITTED THAT FOLLOWING OF AS-11 WAS MANDATORY FOR THE APPELLANT THE AR OF THE APPELLANT FURTHER POINTED OUT THAT IN TERMS OF SECTION 145 OF THE ACT, THE CENTRAL GOVERNMENT HAD TO PRESCRIBE THAT ANY OT HER ACCOUNTING STANDARD FOR INCOME COMPUTATION WHICH WAS CONTRARY TO AS-11 PRES CRIBED BY THE ICAI, IN TERMS OF WHICH MTM LOSS WAS ACCOUNTED FOR BY THE APPELLANT I N ITS BOOKS, REFERRING TO AS-11, IT WAS SUBMITTED THAT THE SAID STANDARD MANDATED TH AT ALL TRANSACTIONS EXPRESSED IN FOREIGN CURRENCY WHETHER RELATING TO REVENUE OR CAP ITAL FIELD WERE REQUIRED TO BE RESTATED IN THE FINANCIAL ACCOUNTS AT THE EXCHANGE RATES PREVAILING ON THE BALANCE SHEET DATE. AS-11 ALSO PRESCRIBED THE ACCOUNTING ME THOD TO BE ADOPTED FOR ACCOUNTING OF THE LOSSES OR GAINS ARISING AND/OR ACCRUING FROM RE-STATEMENT OF THE ASSETS AND LIABILITIES IN FOREIGN CURRENCY REFERRING TO THE JU DGEMENT OF THE HON'BLE APEX COURT IN THE CASE OF WOODWARD GOVERNOR INDIA LTD (SUPRA) & ONGC (SUPRA) THE AR POINTED OUT THAT IN THESE DECISIONS ALTHOUGH THE HO N'BLE COURT WAS NOT DIRECTLY CONCERNED WITH THE LOSSES IN RELATION TO UNSETTLED FORWARD CONTRACTS YET THE COURT HAD HELD THAT MTM LOSSES DETERMINED AT THE YEAR-END ON THE BASIS OF PREVAILING EXCHANGE RATES REPRESENTED REAL LOSS AND WERE ADMISSIBLE FOR TAX PURPOSES, WHERE AN ASSESSEE FOLLOWED MERCANTILE SYSTEM OF ACCOUNTING. IN PARTIC ULAR, THE HON'BLE COURT OBSERVED THAT WHERE THE OUTSTANDING FOREIGN CURRENCY TRANSAC TIONS RELATED TO REVENUE FIELD, THEN ITA NO.1195 & 1776/KOL/2019 ASSESSMENT YE AR: 2011-12 KESORAM INDUSTRIES LTD. VS. DCIT, CIR-5(1),KOL. PAGE 7 THE GAINS OR LOSSES INCURRED ON RESTATEMENT OF OUTS TANDING FOREIGN CURRENCY TRANSACTIONS WOULD BE CONSIDERED AS INCOME OR LOSS IN REAL SENSE AND CANNOT BE TERMED AS NOTIONAL GAIN OR NOTIONAL LOSS, IT WAS FURTHER E XPLAINED THAT THE BOARD INSTRUCTION NO. 3 OF 2010 WAS NOT APPLICABLE IN AS MUCH AS IT W AS RENDERED IN THE CONTEXT OF DEALERS IN FOREIGN EXCHANGE DERIVATIVES WHEREAS IN THE GIVEN FACTS OF THE CASE THE ASSESSEE HAD ENTERED INTO THE FOREIGN EXCHANGE FORW ARD CONTRACTS TO HEDGE ITS FOREIGN CURRENCY PAYABLES & RECEIVABLES. 5.4 AFTER GIVING A THOUGHTFUL CONSIDERATION TO THE FAC TS OF THE PRESENT CASE, IT IS NOTED THAT ALTHOUGH THE FACTUAL MATRIX IS WHICH THE SUPRE ME COURT RENDERED ITS JUDGEMENT IN THE CASE OF WOODWARD GOVERNOR INDIA LTD (SUPRA) WAS NOT IDENTICAL WITH THE APPELLANT'S CASE, HOWEVER, IN MY CONSIDERED VIEW OF THE MATTER, IT IS NECESSARY TO BEAR IN MIND THAT THE RATIO DECIDENDI IN THE JUDGEMENT O F THE HON'OLE APEX COURT IS OF THE RELEVANCE IN DECIDING THE ISSUE. THE FACTS OF ANY T WO DECIDED CASES MAY NOT BE IDENTICAL AND EXACTLY THE SAME, BUT THAT WOULD NOT BE A GOOD OR ADEQUATE REASON TO IGNORE THE RATIO DECIDENDI LAID DOWN BY THE HON'BLE COURT. 5.5 IT IS OBSERVED THAT FOR THE MATTER AT HAND, THERE WAS NO DISPUTE WITH REGARD TO THE FACT THAT THE ASSESSEE-COMPANY HAD ENTERED INTO FOR EIGN CURRENCY FORWARD CONTRACTS IN ORDER TO PROTECT AGAINST EXCHANGE FLUCTUATION RISKS INVOLVED IN FOREIGN CURRENCY TRANSACTIONS INVOLVING IMPORT OF RAW MATERIALS. THE AO HAS NOT DISPUTED THE APPELLANT'S CONTENTION THAT IT WAS CARRYING ON SUBS TANTIAL TRANSACTIONS INVOLVING IMPORT OF MATERIALS AND EXPORT OF GOODS AND THESE TRANSACT IONS WERE CONDUCTED IN FOREIGN CURRENCY IN RELATION TO THE INTERNATIONAL TRANSACTI ONS INVOLVING IMPORT AND EXPORT OF GOODS THE APPELLANT HAD SUBSTANTIAL EXPOSURE TO FOR EIGN CURRENCY TRANSACTIONS AND CONSEQUENTLY THE APPELLANT WAS EXPOSED TO FOREIGN C URRENCY EXCHANGE LOSSES/GAINS. IN ORDER TO MITIGATE ITS EXPOSURE TO FOREIGN CURRENCY FLUCTUATIONS, THE APPELLANT HAD UNDERTAKEN FORWARD CONTRACTS IN FOREIGN EXCHANGE TO GUARD ITSELF AGAINST ANTICIPATED LOSSES. THAT THE APPELLANT ENTERED INTO FORWARD CON TRACTS DURING THE RELEVANT YEAR WITH REGARD TO ITS FOREIGN CURRENCY TRANSACTIONS AGAINST PURCHASE AND/OR EXPORT OF GOODS HAS NOT BEEN DENIED OR DOUBTED BY THE AO IN THE EMERGEN T CIRCUMSTANCES. I FIND THAT THE UNDERLYING TRANSACTIONS WITH REFERENCE TO WHICH FOR WARD CONTRACTS IN FOREIGN CURRENCY WERE EXECUTED RELATED TO REVENUE OPERATIONS OF THE ASSESSEE THE FORWARD CONTRACTS WERE THUS ENTERED INTO BY THE ASSESSEE-COMPANY TO G UARD AGAINST THE LOSSES THAT COULD HAVE ARISEN IN THE COURSE OF CARRYING ON ITS BUSINE SS TRANSACTIONS ENTERED INTO ORDINARY COURSE OF BUSINESS THE FORWARD CONTRACTS DID NOT PE RTAIN TO TRANSACTIONS IN THE CAPITAL FIELD BUT PERTAINED TO REVENUE FIELD IT IS ALSO PER TINENT TO NOTE THAT THE ASSESSEE REGULARLY FOLLOWED MERCANTILE SYSTEM OF ACCOUNTING AND THEREFORE ANY LOSSES KNOWN TO THE ASSESSEE -AND WHICH ACCRUED OR CRYSTALLIZED DUR ING THE PREVIOUS YEAR DURING THE RELEVANT 2011-12 WERE REQUIRED TO BE ACCOUNTED IN T HE APPELLANT'S BOOKS FOR THE RELEVANT YEAR. 5.6 IN THE CASES DECIDED BY THE HON'BLE SUPREME COURT I.E, WOODWARD GOVERNOR INDIA LTD (SUPRA) & ONGC (SUPRA), THE APPELLANT HAD RESTATED ITS OUTSTANDIN G FOREIGN CURRENCY LIABILITIES IN RESPECT OF IMPORT O F MATERIALS AT THE EXCHANGE RATE PREVAILING THE BALANCE SHEET DATE. ON ACCOUNT OF RE -STATEMENT OF THE OUTSTANDING FOREIGN CURRENCY LIABILITY, THERE WAS ENHANCEMENT O F THE LIABILITY AND ACCORDINGLY THE DIFFERENTIAL SUM WAS DEBITED IN THE P &L A/C AS AN ITEM OF EXPENSE. ADMITTEDLY, THE ADDITIONAL LIABILITY DEBITED IN THE P&L A/C WAS NOT ACTUALLY PAID BY THE ASSESSEE DURING THE RELEVANT YEAR AND THE APPELLANT'S CLAIM WAS DISALLOWED. ONE OF THE GROUND ITA NO.1195 & 1776/KOL/2019 ASSESSMENT YE AR: 2011-12 KESORAM INDUSTRIES LTD. VS. DCIT, CIR-5(1),KOL. PAGE 8 ON WHICH THE LOSS INCURRED WAS DISALLOWED BY THE AO WAS THAT SUCH LOSS WAS A NOTIONAL ONE BECAUSE DURING THE RELEVANT YEAR THE A SSESSEE HAD NOT ACTUALLY PAID THE ADDITIONAL LIABILITY ARISING FROM EXCHANGE RATE FLU CTUATION. THEREFORE, THE ONLY DIFFERENCE IN THE DECIDED CASE AND THE GIVEN FACTS OF THE PRESENT CASE IS THAT THE LOSS AROSE ON ACCOUNT OF RESTATEMENT OF THE FORWARD CONT RACTS ENTERED INTO BY THE ASSESSEE- COMPANY TO GUARD AGAINST FOREIGN EXCHANGE EXPOSURE IN RESPECT OF IMPORT/EXPORT OBLIGATIONS AS OPPOSED TO THE DECIDED CASE WHERE TH E LOSS AROSE ON ACCOUNT OF RESTATEMENT OF LIABILITY IN RELATION TO GOODS IMPOR TED PRIOR TO BALANCE SHEET DATE. IN MY CONSIDERED OPINION, THE DISTINCTION BETWEEN THESE T WO FACTS DID NOT MATERIALLY ALTER OR AFFECT THE FACT THAT IN EITHER CASE THE LIABILITY E XPRESSED IN FOREIGN CURRENCY RELATED TO TRANSACTIONS WHICH WERE ENTERED IN THE ORDINARY COU RSE OF BUSINESS AND THE UNDERLYING OF THE FORWARD CONTRACTS WAS ULTIMATELY THE FOREIGN CURRENCY DENOMINATED TRADE RECEIVABLES & TRADE PAYABLES. IN MY CONSIDERED OPIN ION, THEREFORE THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN THE CASES OF WOODWARD GOVERNOR INDIA LTD (SUPRA) & ONGC (SUPRA) ARE EQUALLY APPLICABLE TO APPELLANT'S CASE AS WELL. 5.7 I ALSO DO NOT FIND ANY FORCE IN THE AO'S RELIANCE ON THE BOARD INSTRUCTION NO. 3/2010 DATED 23.3.2010. FROM PERUSAL OF THE SAID IN STRUCTION, IT IS NOTED THAT THIS INSTRUCTION WAS ISSUED IN RESPECT OF LOSS ON ACCOUN T OF TRADING IN FOREIGN EXCHANGE DERIVATIVES. IN THE PRESENT CASE HOWEVER THE ASSESS EE HAD ENTERED INTO DERIVATIVE CONTRACTS IN ORDER TO HEDGE ITS EXCHANGE RISK IN RE SPECT OF EXPORT PROCEEDS RECEIVABLE BY IT IN FOREIGN EXCHANGE. THE FORWARD CONTRACTS EN TERED INTO BY THE ASSESSEE WERE NOT BY WAY OF TRADING PER SE IN FOREIGN EXCHANGE DERIVA TIVES IN MY CONSIDERED VIEW THEREFORE INSTRUCTION NO, 3/2010 HAD NO RELEVANCE I N THE FACTS OF THE INSTANT CASE 5.8 THE FACTS ON RECORD DEMONSTRATE THAT THE FOREIGN E XCHANGE FORWARD CONTRACTS WERE ENTERED INTO BY THE APPELLANT WITH REFERENCE TO UND ERLYING WHICH WERE IMPORT/EXPORT BILLS IN THE ORDINARY COURSE OF ITS BUSINESS, IN MY CONSIDERED VIEW THEREFORE ANY GAIN OR LOSS ARISING ON RESTATEMENT OF SUCH FOREIGN EXCH ANGE FORWARD CONTRACTS ALSO AROSE IN THE ORDINARY COURSE OF ASSESSEE'S BUSINESS. APPLYIN G THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT I.E, WOODWARD GOVERNOR INDIA LTD. (SUPRA) & ONGC (SUPRA) TO THE, FACTS OF THE PRESENT CASE, IN MY CO NSIDERED VIEW SINCE THE UNDERLYING OF THE DERIVATIVE CONTRACTS ENTERED INTO BY THE ASSESS EE WERE TRADE PAYABLES & RECEIVABLES, THE GAIN/LOSS ARISING ON ITS RESTATEME NT AS ON 31 ST MARCH WAS REAL IN NATURE AND IN THE REVENUE FIELD. 5.9 I FIND THAT THE DECISION OF THE HON'BLE BOMBAY HIG H COURT IN THE CASE OF CIT VS D CHETAN & CO ( 390 ITR 36 ) IS SQUARELY APPLICABLE TO THE FACTS INVOLVED IN T HE PRESENT CASE. IN THE DECIDED CASE THE QUESTION RAISED BEFOR E THE HON'BLE BOMBAY HIGH COURT AND THE DECISION RENDERED THEREON IS AS UNDER:- THE REVENUE HAS URGED THE FOLLOWING QUESTION OF LAW FOR OUR CONSIDERATION:-, WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE TRIBUNAL WAS JUSTIFIED IN DELETING THE ADDITION OF MARK TO MARKET LOSS OF RS. 78, 10,000/- MADE BY THE ASSESSING OFFI CER ON ACCOUNT OF DISALLOWANCE OF LOSS ON FOREIGN EXCHANGE FORWARD CO NTRACT LOSS AND NOT APPRECIATING THE FACT THAT THE SAID LOSS WAS A NOTI ONAL LOSS AND HENCE CANNOT BE ALLOWED?' ITA NO.1195 & 1776/KOL/2019 ASSESSMENT YE AR: 2011-12 KESORAM INDUSTRIES LTD. VS. DCIT, CIR-5(1),KOL. PAGE 9 7. THE IMPUGNED ORDER OF THE TRIBUNAL HAS, WHILE UPHO LDING THE FINDING OF THE CIT (APPEALS) INDEPENDENTLY COME TO THE CONCLUSION THAT THE TRANSACTION ENTERED INTO BY THE RESPONDENT ASSESSEE IS NOT IN T HE NATURE-OF SPECULATIVE ACTIVITIES. FURTHER THE HEDGING TRANSACTIONS WERE E NTERED INTO SO AS TO COVER VARIATION FOREIGN EXCHANGE RATE WHICH WOULD IMPACT ITS BUSINESS OF IMPORT AND EXPORT OF DIAMONDS. THESE CONCURRENT FINDING OF FAC TS AM NOT SHOWN TO BE PERVERSE IN ANY MANNER. IN FACT, THE ASSESSING OFFI CER ALSO IN THE ASSESSMENT ORDER DOES NOT FIND THAT THE TRANSACTION ENTERED IN TO BY THE RESPONDENT ASSESSEE WAS SPECULATIVE IN NATURE. IT FURTHER HOLD S THAT AT NO POINT OF TIME DID REVENUE CHALLENGE THE ASSERTION OF THE RESPONDENT ASSESSEE THAT THE ACTIVITY OF ENTERING INTO FORWARD CONNECT WAS IN THE REGULAR COURSE OF ITS BUSINESS ONLY TO SAFEGUARD AGAINST THE LOSS ON ACCOUNT OF FOREIG N EXCHANGE VARIATION. EVEN BEFORE THE TRIBUNAL, WE FIND THAT THERE WAS NO SUBM ISSION RECORDED ON BEHALF OF THE REVENUE THAT THE RESPONDENT ASSESSEE SHOULD BE CALLED UPON TO EXPLAIN THE NATURE OF ITS TRANSACTIONS. THUS, THE SUBMISSI ON NOW BEING MADE IS WITHOUT ANY FOUNDATION AS THE STAND OF THE ASSESSEE ON FACE S WAS NEVER DISPUTED. SO FAR AS THE RELIANCE ON ACCOUNTING STANDARD-11 IS CONCER NED, IT WOULD NOT BY ITSELF DETERMINE WHETHER THE ACTIVITY WAS THE RESPONDENT-A SSESSEE'S REGULAR BUSINESS TRANSACTION OR IT WAS A SPECULATIVE TRANSACTION. ON PRESENT FACTS, IT WAS NEVER THE REVENUE'S CONTENTION THAT THE TRANSACTION WAS S PECULATIVE BUT ONLY DISALLOWED ON THE GROUND THAT IT WAS NOTIONAL. LAST LY, THE RELIANCE PLACED ON THE DECISION IN S VINOD KUMAR DIAMONDS (P) LTD . (SUPRA) IN THE REVENUE'S FAVOUR WOULD NOT BY ITSELF GOVERN THE ISSUES ARISIN G HEREIN. THIS IS SO AS EVERY DECISION IS RENDERED IN THE OF THE FACTS WHICH ARIS E BEFORE THE AUTHORITY FOR ADJUDICATION. MERE CONCLUSION IN FAVOUR OF THE REVE NUE IN ANOTHER CASE BY ITSELF WOULD NOT ENTITLE A PARTY TO HAVE AN IDENTIC AL RELIEF CASE IN FACT, IF THE REVENUE WAS OF THE VIEW THAT THE FACTS IN S VINOD KUMAR (SUPRA) ARE IDENTICAL/SIMILAR TO THE PRESENT FACTS, THEN RELIAN CE WOULD HAVE BEEN PLACED BY THE REVENUE UPON IT AT THE HEARING BEFORE THE TRIBU NAL THE IMPUGNED ORDER DOES NOT INDICATE ANY SUCH RELIANCE. IT APPEARS THA T IN S VINOD KUMAR DIAMONDS (P) LTD. (SUPRA), THE TRIBUNAL HELD THE FORWARD CONTRACT ON FACTS BEFORE IT TO BE SPECULATIVE IN NATURE IN VIEW OF SE CTION 43(5) OF THE ACT HOWEVER. IT APPEARS THAT THE DECISION OF THIS COURT M CIT V BADRIDAS GAURIDU (P) LTD. [2003] 261 ITR 256/ [2004] 134 TAXMAN 376 (MUM) WAS NOT BROUGHT TO THE NOTICE OF THE TRIBUNAL WHEN IT RENDERED ITS DECISION IN S VINOD KUMAR DIAMONDS (P) LTD (SUPRA). IN THE ABOVE CASE, THIS COURT HAS HELD TH AT FORWARD CONTRACT IN FOREIGN EXCHANGE WHEN INCIDENTAL TO CAR RYING ON BUSINESS OF COTTON EXPORTER AND DONE TO COVER UP LOSSES ON ACCOUNT OF DIFFERENCES IN FOOREIGN EXCHANGE VALUATIONS, WOULD NOT BE SPECULATIVE ACTIV ITY BUT A BUSINESS ACTIVITY. 8. IN THE ABOVE VIEW, THE QUESTION OF LAW, AS FORMULA TED BY THE REVENUE, DOES NOT GIVE RISE TO ANY SUBSTANTIAL OF LAW. THUS, NOT ENTERTAINED. 5.10 THE DECISION OF THE HON'BLE ITAT. DELHI IN THE CAS E OF BECHTEL INDIA PVT. LTD. VS. ADDL. CIT ( 146 ITO 733 ) IS ALSO OF MUCH RELEVANCE WHEREIN THE HONBLE TRIB UNAL AFTER CONSIDERING THE INSTRUCTION NO 3/2010 HELD AS FOLLOWS :- '8 COMING TO THE CORPORATE ADDITIONS I.E DISALLOWAN CE OF LOSS, IT CLEARLY EMERGES FROM THE RECORD THAT THE ASSESSEE IN RESPEC T OF FOREIGN EXCHANGE REALIZATION FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING AND NOT CASH SYSTEM OF ITA NO.1195 & 1776/KOL/2019 ASSESSMENT YE AR: 2011-12 KESORAM INDUSTRIES LTD. VS. DCIT, CIR-5(1),KOL. PAGE 10 ACCOUNTING THE LOSS HAS BEEN INCURRED FOR HEDGING O F FOREIGN CURRENCY FLUCTUATION INVOLVED IN SALES INVOICES ON THE BASIS OF FORWARD CONTRACTS, WHICH IS A BUSINESS DECISION TO SAFEGUARD ITS INTEREST. T HE LOSS HAS BEEN INCURRED ON THE BASIS OF SCIENTIFIC METHOD IN THE ORDINARY COUR SE OF BUSINESS. THE LOSS BEING BASED ON A SCIENTIFIC METHOD, ON THE BASIS OF CONTRACTUAL LIABILITY WITH BANKS AND ON MERCANTILE SYSTEM HAS TO BE ALLOWED TO THE ASSESSEE FOLLOWING HON'BLE SUPREME COURT JUDGMENT IN THE CASE OF WOODWARD GOVERNOR INDIA (P) LTD. (SUPRA). OUR VIEW IS FURTHER FORTIFIED BY THE FACT THAT DRP IN ITS OWN ORDER IN SUBSEQUENT YEAR HAS ITSELF HELD THAT THE I SSUE ABOUT THE LOSS ON MERCANTILE SYSTEM IS PENDING DISPUTE IN AY 2008-09. THEREFORE. THE ALLOWABILITY OF THE LOSS ON ACTUAL PAYMENT IN AY 2009-10 HAS BEEN MADE SUBJECT TO THE ALLOWABILITY OF THE LOSS FOR AY 2008 -09. THUS STAND OF THE DRP ITSELF NEGATES THE OBSERVATIONS OF ASSESSING OFFICE R THAT IT IS A NOTIONAL LOSS AND ESTABLISHES THAT IT IS A BUSINESS LOSS INCURRED BY THE ASSESSEE ON MERCANTILE SYSTEM WHICH METHOD IS CONSISTENTLY FOLLOWED BY THE ASSESSEE. UNDER THESE CIRCUMSTANCES, WE ARE INCLINED TO ALLOW THE FOREIGN EXCHANGE FLUCTUATION LOSS TO ASSESSEE ,IN THIS YEAR. THIS GROUND OF THE ASSES SEE IS ALLOWED . 5.11 FOR THIS REASONS SET OUT ABOVE AND RESPECTFULLY FO LLOWING THE DECISIONS OF THE HON'BLE SUPREME COURT. HON'BLE BOMBAY HIGH COURT AN D THE HON'BLE ITAT, DELHI, THE MTM LOSS OF 3,67,22,220/- RECOGNIZED AT THE YEAR-END WITH REFER ENCE TO UNREALIZED FORWARD CONTRACTS IS HELD TO BE IN THE N ATURE OF REAL LOSS AND THEREFORE ALLOWABLE AS DEDUCTION FROM THE PROFITS OF THE BUSI NESS. THE AO IS THEREFORE DIRECTED TO DELETE THE DISALLOWANCE OF 3,67,22,220/-. GROUND NO.2 THEREFORE STANDS ALLOWED . AGGRIEVED BY THE RELIEF GIVEN BY THE LD. CIT(A) TO THE ASSESSEE ON THIS ISSUE, THE REVENUE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUN AL. 11. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDE A ND ALSO PERUSED THE RELEVANT MATERIALS AVAILABLE ON RECORD. THE LD. DR HAS MAINL Y RELIED ON THE ORDER OF THE ASSESSING OFFICER IN SUPPORT OF THE REVENUES CASE ON THIS ISSUE. THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HAND, HAS SUBMITTED THAT THIS ISSUE INVOLVED IN THE REVENUES APPEAL IS SQUARELY COVERED, BESIDES THE JUDICIAL PR ONOUNCEMENTS/REFERRED TO AND RELIED UPON BY THE LD. CIT(A) IN HIS IMPUGNED ORDER, BY TH E VARIOUS DECISIONS OF THE CO- ORDINATE BENCHES OF THIS TRIBUNAL. IN ONE OF SUCH D ECISIONS RENDERED IN THE CASE OF HINDUSTAN GUM & CHEMICAL LTD. VS. DCIT,CIRCLE-12 KO LKATA VIDE ITS ORDER DATED 08.03.2017 PASSED IN ITA NO.462/KO/2014 , A SIMILAR DECISION WAS DECIDED BY THE TRIBUNAL VIDE PARAGRAPH NO.7.5 TO 7.5.3 AS UNDER:- 7.5 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED T HE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE LD AO HAD PLACED HEAVY REL IANCE ON INSTRUCTION NO. 3/2010 DATED 23.3.2010. FROM THE PERUSAL OF THE SAID INSTR UCTION, WE FIND THAT THE SAME WAS ITA NO.1195 & 1776/KOL/2019 ASSESSMENT YE AR: 2011-12 KESORAM INDUSTRIES LTD. VS. DCIT, CIR-5(1),KOL. PAGE 11 ISSUED IN RESPECT OF LOSS ON ACCOUNT OF TRADING IN FOREIGN EXCHANGE DERIVATIVES. THE ASSESSEE HAD ENTERED INTO FORWARD CONTRACTS IN ORDE R TO HEDGE ITS EXCHANGE RISK IN RESPECT OF EXPORT PROCEEDS RECEIVABLE BY IT IN FORE IGN EXCHANGE. THE ASSESSEES FORWARD CONTRACTS WERE NOT BY WAY OF TRADING AS SUC H IN FOREIGN EXCHANGE DERIVATIVES. HENCE, INSTRUCTION NO. 3/2010 CANNOT BE MADE APPLIC ABLE TO THE FACTS OF THE INSTANT CASE. WE FIND THAT THE DECISION RELIED UPON BY THE LD AR ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT SUPRA IS IN FAVOUR OF THE ASSESSEE WHEREIN THE QUESTION RAISED BEFORE THE HONBLE COURT AND THE DECISION RE NDERED THEREON IS AS UNDER:- THE REVENUE HAS URGED THE FOLLOWING QUESTION OF LA W FOR OUR CONSIDERATION:- WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF T HE CASE AND IN LAW, THE TRIBUNAL WAS JUSTIFIED IN DELETING THE ADDITION OF MARK TO MARKET LOSS OF RS.78,10,000/- MADE BY THE ASSESSING OFFI CER ON ACCOUNT OF DISALLOWANCE OF LOSS ON FOREIGN EXCHANGE FORWARD CONTRACT LOSS AND NOT APPRECIATING THE FACT THAT THE SAID LO SS WAS A NOTIONAL LOSS AND HENCE CANNOT BE ALLOWED? 7 . THE IMPUGNED ORDER OF THE TRIBUNAL HAS, WHILE UPH OLDING THE FINDING OF THE CIT (APPEALS), INDEPENDENTLY, COME TO THE CONCLUSIO N THAT THE TRANSACTION ENTERED INTO BY THE RESPONDENT ASSESSEE IS NOT IN T HE NATURE-OF SPECULATIVE ACTIVITIES. FURTHER THE HEDGING TRANSACTIONS WERE E NTERED INTO SO AS TO COVER VARIATION IN FOREIGN EXCHANGE RATE WHICH WOULD IMPA CT ITS BUSINESS OF IMPORT AND EXPORT OF DIAMONDS. THESE CONCURRENT FINDING OF FACTS ARE NOT SHOWN TO BE PERVERSE IN ANY MANNER. IN FACT, THE ASSESSING OFFI CER ALSO IN THE ASSESSMENT ORDER DOES NOT FIND THAT THE TRANSACTION ENTERED IN TO BY THE RESPONDENT ASSESSEE WAS SPECULATIVE IN NATURE. IT FURTHER HOLD S THAT AT NO POINT OF TIME DID REVENUE CHALLENGE THE ASSERTION OF THE RESPONDENT A SSESSEE THAT THE ACTIVITY OF ENTERING INTO FORWARD CONTRACT WAS IN THE REGULAR C OURSE OF ITS BUSINESS ONLY TO SAFE GUARD AGAINST THE LOSS ON ACCOUNT OF FOREIGN E XCHANGE VARIATION. EVEN BEFORE THE TRIBUNAL, WE FIND THAT THERE WAS NO SUBM ISSION RECORDED ON BEHALF OF THE REVENUE THAT THE RESPONDENT ASSESSEE SHOULD BE CALLED UPON TO EXPLAIN THE NATURE OF ITS TRANSACTIONS. THUS, THE SUBMISSIO N NOW BEING MADE IS WITHOUT ANY FOUNDATION AS THE STAND OF THE ASSESSEE ON FACT S WAS NEVER DISPUTED. SO FAR AS THE RELIANCE ON ACCOUNTING STANDARD-II IS CONCER NED, IT WOULD NOT BY ITSELF DETERMINE WHETHER THE ACTIVITY WAS A PART OF THE RE SPONDENT-ASSESSEE'S REGULAR BUSINESS TRANSACTION OR IT WAS A SPECULATIVE TRANSA CTION. ON PRESENT FACTS, IT WAS NEVER THE REVENUE'S CONTENTION THAT THE TRANSAC TION WAS SPECULATIVE BUT ONLY DISALLOWED ON THE GROUND THAT IT WAS NOTIONAL. LASTLY, THE RELIANCE PLACED ON THE DECISION IN S. VINODKUMAR DIAMONDS (P) LTD. (SUPRA) IN THE REVENUE'S FAVOUR WOULD NOT BY ITSELF GOVERN THE ISSUES ARISIN G HEREIN. THIS IS SO AS EVERY DECISION IS RENDERED IN THE CONTEXT OF THE FACTS WH ICH ARISE BEFORE THE AUTHORITY FOR ADJUDICATION. MERE CONCLUSION IN FAVOUR OF THE REVENUE IN ANOTHER CASE BY ITSELF WOULD NOT ENTITLE A PARTY TO HAVE AN IDENTIC AL RELIEF IN THIS CASE. IN FACT, IF THE REVENUE WAS OF THE VIEW THAT THE FACTS IN S. VI NODKUMAR (SUPRA) ARE IDENTICAL/SIMILAR TO THE PRESENT FACTS, THEN RELIAN CE WOULD HAVE BEEN PLACED BY THE REVENUE UPON IT AT THE HEARING BEFORE THE TRIBU NAL. THE IMPUGNED ORDER DOES NOT INDICATE ANY SUCH RELIANCE. IT APPEARS THA T IN S. VINODKUMAR DIAMONDS (P.) LTD. (SUPRA), THE TRIBUNAL HELD THE F ORWARD CONTRACT ON FACTS BEFORE IT TO BE SPECULATIVE IN NATURE IN VIEW OF SE CTION 43(5) OF THE ACT. ITA NO.1195 & 1776/KOL/2019 ASSESSMENT YE AR: 2011-12 KESORAM INDUSTRIES LTD. VS. DCIT, CIR-5(1),KOL. PAGE 12 HOWEVER, IT APPEARS THAT THE DECISION OF THIS COURT IN CIT V. BADRIDAS GAURIDU (P.) LTD. [2003] 261 ITR 256/[2004] 134 TAXMAN 376 (MUM.) WAS NOT BROUGHT TO THE NOTICE OF THE TRIBUNAL WHEN IT RENDE RED ITS DECISION IN S. VINODKUMAR DIAMONDS (P.) LTD. (SUPRA). IN THE ABOVE CASE, THIS COURT HAS HELD THAT FORWARD CONTRACT IN FOREIGN EXCHANGE WHEN INCI DENTAL TO CARRYING ON BUSINESS OF COTTON EXPORTER AND DONE TO COVER UP LO SSES ON ACCOUNT OF DIFFERENCES IN FOREIGN EXCHANGE VALUATIONS, WOULD N OT BE SPECULATIVE ACTIVITY BUT A BUSINESS ACTIVITY. 8 . IN THE ABOVE VIEW, THE QUESTION OF LAW, AS FORMUL ATED BY THE REVENUE, DOES NOT GIVE RISE TO ANY SUBSTANTIAL OF LAW. THUS, NOT ENTERTAINED. 7.5.1. WE FIND THAT THE CO-ORDINATE BENCH OF MUMBAI TRIBUNAL SUPRA HAD ALSO DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE WHEREIN IT WAS HELD THAT:- 8 . WE HAVE CAREFULLY CONSIDERED THE ORDER OF LD. COM MISSIONER OF INCOME TAX AND THE SUBMISSIONS OF LD. REPRESENTATIVES OF T HE PARTIES. WE HAVE ALSO CAREFULLY CONSIDERED THE CASES CITED BEFORE US (SUP RA). IT IS RELEVANT TO STATE THAT IN THE CASE OF WOODWARD GOVERNOR INDIA (P.) LTD. (S UPRA), THE HON'BLE APEX COURT OBSERVED AND HELD THAT THE ASSESSEE DEBITED T O ITS PROFIT AND LOSS ACCOUNT CERTAIN UNREALIZED LOSS DUE TO FOREIGN EXCHANGE FLU CTUATION IN FOREIGN CURRENCY TRANSACTIONS TOWARDS REVENUE ITEMS AS ON THE LAST D AY OF THE ACCOUNTING YEAR. THE A.O. HELD THAT THE LIABILITY AS ON THE LAST DAT E OF THE PREVIOUS YEAR WAS NOT AN ASCERTAINED BUT A CONTINGENT LIABILITY. RESULTAN TLY, THE SAME WAS ADDED BACK TO THE TOTAL INCOME. THE CIT(A) ECHOED THE ASSESSME NT ORDER. HOWEVER, THE TRIBUNAL HELD THAT THE CLAIM OF THE ASSESSEE FOR DE DUCTION OF UNREALIZED LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION AS ON THE LAST DATE OF THE PREVIOUS YEAR WAS DEDUCTIBLE. THE SAID ORDER OF THE TRIBUNAL WAS UPHE LD BY THE HON'BLE HIGH COURT. ON FURTHER APPEAL BY THE DEPARTMENT, THE HON 'BLE SUPREME COURT HELD THAT THE LOSS SUFFERED BY THE ASSESSEE IS ON REVENU E ACCOUNT TOWARDS FOREIGN EXCHANGE DIFFERENCE AS ON THE DATE OF BALANCE SHEET AND IS AN ITEM OF EXPENDITURE DEDUCTIBLE U/S 37(1). IT FURTHER OBSERV ED THAN AN ENTERPRISE HAS TO REPORT OUTSTANDING LIABILITY RELATING TO IMPORT OF RAW MATERIAL USING CLOSING RATE OF FOREIGN EXCHANGE AND ANY DIFFERENCE, LOSS OR GAI N, ARISING ON CONVERSION OF SAID LIABILITY AT CLOSING RATE SHOULD BE RECOGNIZED IN PROFIT AND LOSS ACCOUNT FOR REPORTING PERIOD. FROM THE JUDGMENT OF THE HON'BLE SUPREME COURT IT CAN BE CLEARLY DEDUCED THAT UNREALIZED LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION IN FOREIGN CURRENCY TRANSACTIONS ON REVENUE ITEM AS ON THE LAST THE ACCOUNTING YEAR IS DEDUCTIBLE. 7.5.2. WE ALSO FIND THAT THE CO-ORDINATE BENCH OF D ELHI TRIBUNAL SUPRA HAD RENDERED A DECISION IN FAVOUR OF THE ASSESSEE ON AN IDENTICAL ISSUE AFTER CONSIDERING THE INSTRUCTION NO. 3/2010 WHEREIN IT WAS HELD THAT :- 8 . COMING TO THE CORPORATE ADDITIONS I.E. DISALLOWAN CE OF LOSS, IT CLEARLY EMERGES FROM THE RECORD THAT THE ASSESSEE IN RESPEC T OF FOREIGN EXCHANGE REALIZATION FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING AND NOT CASH SYSTEM OF ACCOUNTING. THE LOSS HAS BEEN INCURRED FOR HEDGING OF FOREIGN CURRENCY FLUCTUATION INVOLVED IN SALES INVOICES ON THE BASIS OF FORWARD CONTRACTS, WHICH IS A BUSINESS DECISION TO SAFEGUARD ITS INTEREST. T HE LOSS HAS BEEN INCURRED ON ITA NO.1195 & 1776/KOL/2019 ASSESSMENT YE AR: 2011-12 KESORAM INDUSTRIES LTD. VS. DCIT, CIR-5(1),KOL. PAGE 13 THE BASIS OF SCIENTIFIC METHOD IN THE ORDINARY COUR SE OF BUSINESS. THE LOSS BEING BASED ON A SCIENTIFIC METHOD, ON THE BASIS OF CONTRACTUAL LIABILITY WITH BANKS AND ON MERCANTILE SYSTEM HAS TO BE ALLOWED TO THE ASSESSEE FOLLOWING HONBLE SUPREME COURT JUDGMENT IN THE CASE OF WOODW ARD GOVERNOR INDIA (P) LTD. (SUPRA). OUR VIEW IS FURTHER FORTIFIED BY THE FACT THAT DRP IN ITS OWN ORDER IN SUBSEQUENT YEAR HAS ITSELF HELD THAT THE I SSUE ABOUT THE LOSS ON MERCANTILE SYSTEM IS PENDING DISPUTE IN AY 2008-09. THEREFORE, THE ALLOWABILITY OF THE LOSS ON ACTUAL PAYMENT IN AY 20 09-10 HAS BEEN MADE SUBJECT TO THE ALLOWABILITY OF THE LOSS FOR AY 2008 -09. THIS STAND OF THE DRP ITSELF NEGATES THE OBSERVATIONS OF ASSESSING OFFICE R THAT IT IS A NOTIONAL LOSS AND ESTABLISHES THAT IT IS A BUSINESS LOSS INCURRED BY THE ASSESSEE ON MERCANTILE SYSTEM WHICH METHOD IS CONSISTENTLY FOLLOWED BY THE ASSESSEE. UNDER THESE CIRCUMSTANCES, WE ARE INCLINED TO ALLOW THE FOREIGN EXCHANGE FLUCTUATION LOSS TO ASSESSEE IN THIS YEAR. THIS GROUND OF THE ASSESS EE IS ALLOWED . 7.5.3. RESPECTFULLY FOLLOWING THE AFORESAID DECISIO NS AND IN VIEW OF THE FACTS AND CIRCUMSTANCES, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD CITA IN THIS REGARD. HENCE THE GROUND NO. 3 RAISED BY THE REVENUE IS DISMISSED . 12. A SIMILAR VIEW WAS ALSO TAKEN BY THIS TRIBUNAL WHILE DECIDING AN IDENTICAL ISSUE IN THE CASE OF DCIT, CENTRAL CIRCLE-XVI, KOLKATA VS . SOUTH ASIAN PETROCHEM LTD., IN ITA NO.1222/KOL/2014 VIDE PARAGRAPH NOS 18 TO 20 OF ITS ORDER DATED 03. 05.2017 WHICH READ AS UNDER:- 18 . WE HAVE HEARD RIVAL CONTENTIONS AND PERUSED THE M ATERIALS AVAILABLE ON RECORD. FROM THE AFORESAID DISCUSSION, WE FIND THAT THE AO TREATED T HE LOSS ARISING ON ACCOUNT OF FORWARD CONTRACTS IN FOREIGN CURRENCY WHICH HAS NOT BEEN SE TTLED IN THE YEAR UNDER CONSIDERATION AS NOTIONAL LOSS. HOWEVER THE LD. CIT(A) ALLOWED SUCH LOSS HAVING RELIANCE ON JUDGMENT OF THE HONBLE DELHI HIGH COURT IN THE CASE CIT VS WOODWARD GOVERNOR INDIA LTD. REPORTED IN 294 ITR 451. IN REJOINDER LD. DR STATED THAT THE SAID J UDGMENT OF THE HON'BLE DELHI HIGH COURT WAS DELIVERED MUCH EARLIER WHEREAS THE INSTRUCTION NO. 3/2010 WAS ISSUED DATED 23.03.2010. THUS THE INSTRUCTION ISSUED BY THE CBDT WAS NOT CON SIDERED BY THE HON'BLE DELHI HIGH COURT. HOWEVER, WE FIND THAT THE INSTRUCTIONS ISSUE D BY THE CBDT ARE NOT BINDING ON THE COURTS. SO THERE IS NO VALUE IN THE ARGUMENT OF THE LD. DR. HOWEVER, WE DISAGREE WITH THE VIEW OF THE AO ON THE GROUND THAT THE ADJUSTMENT WA S MADE BY THE ASSESSEE IN TERMS OF AS 11 ISSUED BY ICAI AND IN PURSUANCE OF MERCANTILE SYSTE M OF ACCOUNTING AS NOTIFIED U/S 145 OF THE ACT. THE RELEVANT EXTRACT OF ACCOUNTING STANDARD 11 IS REPRODUCED BELOW:- 3.6 THE ACCOUNTING STANDARDS (A) 11, THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES (REVISED 2003), ISSUED BY THE COUNCIL OF THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, COMES INTO EFFECT IN RESPECT OF ACCOUNTIN G PERIODS COMMENCING ON OR AFTER 1- 4-2004. RELEVANT EXTRACT OF THE ACCOUNTING STANDARD IS REPRODUCED AS FOLLOWS:- 9. A FOREIGN CURRENCY TRANSACTIONS SHOULD BE RECOR DED ON INITIAL RECOGNITION IN THE REPORTING CURRENCY, BY APPLYING TO THE FOREI GN CURRENCY AMOUNT THE EXCHANGE RATE BETWEEN THE REPORTING CURRENCY AND TH E FOREIGN CURRENCY AT THE DATE OF THE TRANSACTIONS. 10 ITA NO.1195 & 1776/KOL/2019 ASSESSMENT YE AR: 2011-12 KESORAM INDUSTRIES LTD. VS. DCIT, CIR-5(1),KOL. PAGE 14 11 (A) AT EACH BALANCE SHEET DATE FOREIGN CURRENCY MONETARY ITEMS SHOULD BE REPORTED USING THE CLOSING RATE. HOWEVER, IN CERTAI N CIRCUMSTANCES, THE CLOSING RATE MAY NOT REFLECT WITH REASONABLE ACCURA CY THE AMOUNT IN REPORTING CURRENCY THAT IS LIKELY TO BE REALIZED FR OM, OR REQUIRED TO DISBURSE, A FOREIGN CURRENCY MONETARY ITEM AT THE BALANCE SHE ET DATE, E.G. WHERE THERE ARE RESTRICTIONS ON REMITTANCES OR WHERE THE CLOSIN G RATE IS UNREALISTIC AND IT IS NOT POSSIBLE TO EFFECT AN EXCHANGE OF CURRENCIES AT THAT RATE AT THE BALANCE SHEET DATE. IN SUCH CIRCUMSTANCES, THE RELEVANT MON ETARY ITEM SHOULD BE REPORTED IN THE REPORTING CURRENCY AT THE AMOUNT WH ICH IS LIKELY TO BE REALIZED FROM, OR REQUIRED TO DISBURSE, SUCH ITEM AT THE BAL ANCE SHEET DATE: 11(B). 11(C) 12. CASH RECEIVABLES AND PAYABLES ARE EXAMPLES OF M ONETARY ITEMS. 13. EXCHANGE DIFFERENCES ARISING ON THE SETTLEMENT OF MONETARY ITEMS OR ON REPORTING AN ENTERPRISES MONETARY ITEMS AT RATES D IFFERENT FROM THOSE AT WHICH THEY WERE INITIALLY RECORDED DURING THE PERIO D, OR REPORTED IN PREVIOUS FINANCIAL STATEMENTS, SHOULD BE RECOGNIZED AS INCOM E OR AS EXPENSES IN THE PERIOD IN WHICH THEY ARISE 19 . AT THIS JUNCTURE WE ALSO WISH TO REPRODUCE THE PR OVISIONS OF SECTION 145 OF THE ACT WHICH READS AS UNDER:- 3.4 AS PER SECTION 145 OF THE ACT, (1) INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION OR INCOME FROM OTHER SOURCES SHALL, SUBJECT TO TH E PROVISIONS OF SUB-SECTION (2), BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTI LE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. (2) THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICI AL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. (3) WHERE THE ASSESSING OFFICER IS NOT SATISFIED AB OUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, OR WHERE THE METHO D OF ACCOUNTING PROVIDED IN SUB- SECTION (1) OR ACCOUNTING STANDARDS AS NOTIFIED UND ER SUB-SECTION (2), HAVE NOT BEEN REGULARLY FOLLOWED BY THE ASSESSEE, THE ASSESSING O FFICER MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SECTION 144. 20 . WE ALSO FIND SUPPORT FROM THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS WOODWARD GOVERNOR INDIA PRIVATE LIMITED [2007] 294 ITR 451 (DEL) WHERE IT WAS HELD THAT:- WE AFFIRM THE DECISION OF THE INCOME-TAX APPELLATE TRIBUNAL IN OIL AND NATURAL GAS CORPORATION LTD. V. DEPUTY CIT (ASSTT.) [2003] 261 ITR (AT) 1 (DELHI) WHICH RIGHTLY FOLLOWS THE SETTLED POSITION AS EXPLAINED IN THE JU DGMENT OF THE HON'BLE SUPREME COURT WHICH WE HAVE REFERRED TO. WE, THEREFORE, REJ ECT THE SUBMISSION OF THE APPELLANT IN THESE APPEALS THAT THE INCREASE IN LIA BILITY ON ACCOUNT OF THE FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE REMAINING ON THE LA ST DAY OF THE FINANCIAL YEAR IS NOTIONAL OR CONTINGENT AND, THEREFORE, CANNOT BE AL LOWED AS A DEDUCTION. ITA NO.1195 & 1776/KOL/2019 ASSESSMENT YE AR: 2011-12 KESORAM INDUSTRIES LTD. VS. DCIT, CIR-5(1),KOL. PAGE 15 FROM THE AFORESAID DISCUSSION WE FIND NO REASON TO INTERFERE IN THE ORDER OF LD CIT(A) AND ACCORDINGLY WE UPHOLD. HENCE THIS GROUND OF REVENUE S APPEAL IS DISMISSED . 13. IT IS THUS CLEAR THAT THE SOLITARY ISSUE INVOLV ED IN THIS APPEAL OF THE REVENUE IS SQUARELY COVERED BY THE VARIOUS JUDICIAL PRONOUNCEM ENTS REFERRED TO AND RELIED UPON BY THE LD. CIT(A) IN HIS IMPUGNED ORDER AS WELL AS THE ORDERS OF THIS TRIBUNAL AS DISCUSSED ABOVE, AND RESPECTFULLY FOLLOWING THE SAM E, WE UPHOLD THE IMPUGNED ORDER OF LD. CIT(A) ALLOWING THE CLAIM OF THE ASSESSEE FO R LOSS ON DERIVATIVE TRADING. THE APPEAL OF THE REVENUE IS DISMISSED. 14. IN THE RESULT, THE APPEAL OF REVENUE AS WELL THAT O F ASSESSEE BOTH ARE DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 21/10/2020 SD/- SD/- (S.S.GODARA) (P.M.JAGTAP) ( #$ ) (()) J UDICIAL MEMBER VICE PRESIDENT *DKP-SR.PS * - 21/10/2020 / KOLKATA / COPY OF ORDER FORWARDED TO:- 1. /ASSESSEE-M/S KESORAM INDUSTRIES LTD., BIRLA BUILDI NG, 8 TH FLOOR, 9/1 R.N.MUKHERJEE ROAD, KOLKATA-700 001 2. /REVENUE-DCIT, CIR-5(1), AAYKAR BHAWAN, P-7, CHOWRI NGHEE SQ. KOL-69 3. - / / CONCERNED CIT 4. / - / CIT (A) 5. 0 $$- , - / DR, ITAT, KOLKATA 6. 4 / GUARD FILE. B Y ORDER/ , /TRUE COPY/ -,