The ACIT, Circle-4, Ahmedabad V. Heavy Metal & Tubes Ltd., Ahmedabad

ITA 1951/AHD/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 76891 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 10 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-06-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 26-06-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 05-08-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D S KALYAN
• Keywords: Business income; Depreciation; Business expenditure; Additional depreciation; Speculation loss
• Section: 143(3); 37(1); 43(5); 37; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD (BEFORE SHRI ANIL CHATURVEDI, A.M.& SHRI KUL BHARAT , J.M.) I.T. A. NO. 1951/AHD/2011 & CO. NO. 232/AHD/2011 (ASSESSMENT YEAR: 2 008-09) THE ACIT, CIRCLE-4, AHMEDABAD V/S HEAVY METAL AND TUBES LTD. HEAVY METAL HOUSE, 1, VIJAY VIHAR, NR. VIJAY CROSS ROAD, AHMEDABAD (APPELLANT) (RESPONDENT) HEAVY METAL AND TUBES LTD. HEAVY METAL HOUSE, 1, VIJAY VIHAR, NR. VIJAY CROSS ROAD, AHMEDABAD V/S THE ACIT, CIRCLE-4, AHMEDABAD (APPELLANT) (RESPONDENT) PAN: AAACH 3882 Q APPELLANT BY : SHRI D.S. KALYAN, CIT D.R. RESPONDENT BY : SHRI DHIREN SHAH A.R. ( )/ ORDER DATE OF HEARING : 26-06-201 4 DATE OF PRONOUNCEMENT : 30 -06-2014 PER SHRI ANIL CHATURVEDI,A.M. 1. THIS APPEAL OF THE REVENUE AND THE C.O OF THE AS SESSEE ARE AGAINST THE ORDER OF CIT(A)-VIII, AHMEDABAD DATED 19-05-2011 FO R A.Y. 2008-09. 2. THE FACTS AS CULLED OUT FROM THE MATERIAL ON REC ORD ARE AS UNDER. 3. ASSESSEE IS A COMPANY STATED TO BE ENGAGED IN TH E BUSINESS OF MANUFACTURING OF M.S & S.S STEEL TUBES. ASSESSEE FI LED ITS RETURN OF INCOME ITA NO 1951/A/2011 & CO NO. 232/A/2011 . A.Y. 2008- 09 2 FOR A.Y. 08-09 ON 24.09.2009 DECLARING TOTAL INCOME OF RS. 7,17,21,196/-. THE CASE WAS SELECTED FOR SCRUTINY AND THEREAFTER THE A SSESSMENT WAS FRAMED 143(3) VIDE ORDER DATED 27.12.2010 AND THE TOTAL IN COME WAS DETERMINED AT RS. 15,07,96,240/-. AGGRIEVED BY THE ORDER OF A.O, ASSESSEE CARRIED THE MATTER BEFORE CIT(A). CIT(A) VIDE ORDER DATED 19.05 .2011 GRANTED SUBSTANTIAL RELIEF TO THE ASSESSEE. AGGRIEVED BY THE ORDER OF C IT(A), REVENUE IS NOW IN APPEAL BEFORE US AND ASSESSEE HAS ALSO FILED C.O WH ICH IS BASICALLY IN SUPPORT OF THE ORDER OF CIT(A). THE GROUNDS RAISED BY THE REVENUE READS AS UNDER:- 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DEL ETING THE DISALLOWANCE MADE BY THE A.O ON ACCOUNT OF ADDITIONAL DEPRECIATION ON WINDMILL OF R S. 1,87,57,882/-. 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DEL ETING THE DISALLOWANCE MADE BY THE A.O ON ACCOUNT OF FOREIGN EXCHANGE HEDGING LOSS OF RS. 5,8 9,29,812/- WITHOUT APPRECIATING FACT THAT THE ASSESSEE HAD NOT ENTERED INTO ANY FORWARD CONTRACTS AND THE LOSS WAS NOTIONAL IN CHARACTER. 1 ST GROUND IS WITH RESPECT TO DELETION OF DISALLOWANCE MADE ON ACCOUNT OF ADDITIONAL DEPRECIATION OF WINDMILL OF RS. 1,87, 57,882/-. 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, A.O NOTICED THAT ASSESSEE COMPANY HAS ACQUIRED WINDMILL AMOUNTING TO RS. 9,37 ,89,412/- AND HAD CLAIMED ADDITIONAL DEPRECIATION U/S. 32(1)(IIA) OF THE ACT. A.O WAS OF THE VIEW THAT THE WINDMILL WAS NOT USED IN THE MANUFACTURING PROCESS UNDERTAKEN BY THE ASSESSEE AND THEREFORE ASSESSEE WAS NOT ELIGIBL E TO CLAIM ADDITIONAL DEPRECIATION. THE SUBMISSION OF THE ASSESSEE THAT T HE PROVISIONS OF SECTION 32(1)(IIA) DOES NOT STATE THAT THE SETTING UP OF NE W MACHINERY OF PLANT SHOULD HAVE ANY OPERATIONAL CONNECTIVITY WITH ARTICLE MANU FACTURED BY THE ASSESSEE WAS NOT FOUND ACCEPTABLE TO THE A.O. THE RELIANCE P LACED ON VARIOUS DECISIONS BY THE ASSESSEE WAS ALSO NOT ACCEPTED BY THE A.O. HE IN THE ABSENCE OF ANY DECISION OF THE JURISDICTIONAL HIGH COURT IN FAVOUR OF THE ASSESSEE DISALLOWED THE CLAIM OF ADDITIONAL DEPRECI ATION. AGGRIEVED BY THE ORDER OF A.O, ASSESSEE CARRIED THE MATTER BEFORE CI T(A). CIT(A) DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE BY HOLDING AS UNDER :- 4.3 IN THE PRESENT CASE, THE APPELLANT COMPANY ALRE ADY ENGAGED IN THE BUSINESS OF MANUFACTURING OF PRODUCTION OF PIPES AND TUBES WHICH IS AN ARTICLE O R THINGS AND THE APPELLANT COMPANY HAS ALSO ITA NO 1951/A/2011 & CO NO. 232/A/2011 . A.Y. 2008- 09 3 INSTALLED A WINDMILL, THROUGH WHICH THE PRODUCTION/ GENERATION OF ELECTRICITY IS DONE. THE PROVISION OF SECTION 32(1)(IIA) OF THE ACT DOES NOT STATE THAT S ETTING UP A NEW PLANT AND MACHINERY WHICH IS ACQUIR ED AND INSTALLED AFTER MARCH 31, 2005 SHOULD HAVE ANY OPERATIONAL CONNECTIVITY TO THE ARTICLE OR THINGS THAT WAS ALREADY BEEN MANUFACTURED BY THE APPELLANT COMPANY. THEREFORE, THE APPELLANT COMPANY HAS FULFILLED ALL THE CONDITIONS FOR CLAIM OF ADDITIONA L DEPRECIATION. THE APPELLANT COMPANY HAS ALSO RELI ED UPON THE AFORESAID DECISION OF MADRAS HIGH COURT AN D TWO DECISIONS GIVEN BY CIT(A) FOR A.Y.2007-08, IN WHICH IT IS HELD THAT THERE IS NO REQUIREMENT TH AT SETTING UP OF A NEW MACHINERY OR PLANT SHOULD HA VE ANY OPERATIONAL CONNECTIVITY TO ARTICLE OR THING TH AT WAS ALREADY MANUFACTURED BY THE ASSESSEE. IN THE AFORESAID MADRAS HIGH COURT DECISIONS, IT IS CLEAR THAT ASSESSEES IN THESE CASES WERE INVOLVED IN DIFFERENT ITEMS OF MANUFACTURING AND PURCHASED/INST ALLED WINDMILL AND THE A.O. HAS ALSO CONFIRMED THAT ISSUE IS IDENTICAL THAT OF THE SAID MADRAS HIG H COURT DECISIONS AND ON THE IDENTICAL ISSUE THE HON'BLE MADRAS HIGH COURT HELD THAT ASSESSEES ARE E NTITLED TO ADDITIONAL DEPRECIATION ON COST OF WINDMILL ACQUIRED. IT IS ALSO HELD THAT PLANT AND M ACHINERY PURCHASED NEED NOT BE OPERATIONALLY USED FOR MANUFACTURING ARTICLE OR THINGS. HENCE, THE APP ELLANT COMPANY HAS FULFILLED ALL THE CONDITIONS REQUIRED FOR ADDITIONAL CLAIM FOR DEPRECIATION ON W INDMILL PURCHASED BY IT. ACCORDINGLY, THE DISALLOWANCE MADE BY A.O. IN RESPECT OF ADDITIONAL DEPRECIATION ON WINDMILL IS NOT JUSTIFIED AND HENCE IS DELETED. AS SUCH, THE APPELLANT COMPANY GETS REL IEF OF RS.1,87,57,882/-. 5. AGGRIEVED BY THE ORDER OF CIT(A), THE REVENUE IS NOW IN APPEAL BEFORE US. 6. BEFORE US LD. D.R. RELIED ON THE ORDER OF A.O. O N THE OTHER HAND LD. A.R. SUPPORTED THE ORDER OF CIT(A) AND FURTHER SUBMITTED THAT JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. DIAMINES AND CHEMICALS LTD REPORTED IN (2013) 87 CCH 58 (GUJARAT HIGH COURT). HAS DECIDED THE ISS UE IN FAVOUR OF ASSESSEE. HE ALSO PLACED ON RECORD THE COPY OF THE AFORESAID DECISION. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IT IS AN UNDISPUTED FACT THAT ASSESSEE HAS INSTALLED A WI NDMILL DURING THE YEAR UNDER REVIEW. WE FURTHER FIND THAT CIT(A) WHILE DEC IDING THE ISSUE HAS GIVEN A FINDING THAT THE ASSESSEE IS ALREADY ENGAGED IN THE BUSINESS OF MANUFACTURING OF PRODUCTION OF PIPES AND TUBES AND HAS ALSO FULFILLED ALL THE CONDITIONS LAID DOWN FOR CLAIM OF ADDITIONAL DEPREC IATION. WE FURTHER FIND THAT THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT V S. DIAMINES AND CHEMICALS LTD. (SUPRA) HAS CONCLUDED THAT WHILE CLA IMING THE DEDUCTION U/S. 32(1)(IIA) SETTING UP WINDMILL HAS NOTHING TO DO WI TH THE POWER INDUSTRY AND WHAT IS REQUIRED TO BE SATISFIED IN ORDER TO CLAIM ADDITIONAL DEPRECIATION IS THAT SETTING UP OF NEW MACHINERY OR PLANT SHOULD HAVE BE EN ACQUIRED AND INSTALLED BY AN ASSESSEE WHO WAS ALREADY ENGAGED IN THE BUSIN ESS OF MANUFACTURE OR PRODUCTION OF ANY ARTICLE OR THING. FURTHER BEFORE US REVENUE HAS NOT BROUGHT ITA NO 1951/A/2011 & CO NO. 232/A/2011 . A.Y. 2008- 09 4 ANY BINDING CONTRARY DECISION IN ITS SUPPORT. CONSI DERING THE FACT THAT ASSESSEE IS ALREADY ENGAGED IN THE BUSINESS OF MANU FACTURING AND THE ASSESSEE HAS INSTALLED A WINDMILL DURING THE YEAR A ND SEEN IN THE LIGHT OF THE DECISION OF HONBLE GUJARAT HIGH COURT WE FIND NO R EASON TO INTERFERE WITH THE ORDER OF CIT(A). IN VIEW OF THE AFORESAID FACTS, TH IS GROUND OF REVENUE IS DISMISSED. 2 ND GROUND IS WITH RESPECT TO DELETION OF DISALLOWANCE ON ACCOUNT OF FOREIGN EXCHANGE HEDGING LOSS. 8. ON PERUSING THE PROFIT AND LOSS ACCOUNT, A.O NOT ICED THAT ASSESSEE HAS CLAIMED LOSS ON ACCOUNT OF FOREIGN EXCHANGE DERIVAT IVE AMOUNTING TO RS. 5,89,29,812/-. IT WAS ASSESSEES SUBMISSION THAT IT HAD AVAILED FOREIGN CURRENCY LOAN FOR IMPORTING RAW MATERIALS AND IT HA D SHIFTED ITS LOAN LIABILITY IN DOLLAR TO SWISS FRANC AND THE LOSS RESULTED DUE TO FALL IN THE VALUE OF SWISS FRANC VIS--VIS DOLLAR ON THE BALANCE SHEET DATE WA S UNDERTAKEN TO MINIMIZE THE RISK OF FOREIGN EXCHANGE FLUCTUATION. THE SUBMI SSION OF THE ASSESSEE WAS NOT FOUND ACCEPTABLE TO THE A.O. A.O WAS OF THE VIE W THAT THE FOREX DERIVATIVE LOSS ON ACCOUNT OF SWITCHING OF DOLLAR LOAN TO SWIS S FRANC LOAN WAS UNREALIZED LOSS. HE WAS FURTHER OF THE VIEW THAT TH E ASSESSEE COMPANY HAS CLAIMED LOSS ON ACCOUNT OF RE-STATEMENT OF LOANS/CR EDIT LIABILITY EXISTING AS ON THE DATE OF BALANCE SHEET BY SWAPPING THE LOAN FROM DOLLAR TO SWISS FRANC TO REDUCE ITS FOREX EXPOSER RISK AND THEREFORE THE LOS S CLAIMED BY THE ASSESSEE WAS NOT OF REVENUE IN NATURE BUT WAS AN UNASCERTAIN ED AND NOTIONAL LOSS. HE WAS OF THE VIEW THAT THE LOSS CLAIMED BY THE ASS ESSEE WAS SPECULATIVE IN NATURE. HE ACCORDINGLY DISALLOWED THE CLAIM OF LOSS OF RS. 5,89,29,812/-. AGGRIEVED BY THE ORDER OF A.O, ASSESSEE CARRIED THE MATTER BEFORE CIT(A). CIT(A) DECIDED THE ISSUE IN FAVOUR OF ASSESSEE BY H OLDING AS UNDER:- 8. I HAVE CAREFULLY CONSIDERED THE OBSERVATIONS AND FI NDINGS OF THE A.O. AS WELL AS SUBMISSIONS OF THE APPELLANT. THE APPELLANT COMPANY IS ENGAGED IN THE MANUFACTURING OF TUBES & PIPES. IT PURCHASES THE REQUIRED RAW MATERIALS MAINLY FROM IMPORT SOURC E. DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION, APPROX. 90% OF THE VALUE OF MATERIALS CONSUMED IS FROM IMPORT PURCHASE. THERE ARE EXPORT SALES ALSO. THUS, IT APPEARS THAT THE APPELLANT COMPANY ITA NO 1951/A/2011 & CO NO. 232/A/2011 . A.Y. 2008- 09 5 REQUIRES DEALING IN FOREIGN EXCHANGE IN NORMAL COUR SE OF BUSINESS AND TO SAFEGUARD THE FUTURE LOSSES AGAINST FOREIGN EXCHANGE RATE FLUCTUATION IT ENTERS IN TO HEDGING TRANSACTION. IT HAS AVAILED THE FUND BASED AND NON FUND BASED FINANCIAL FACILIT IES FROM ITS BANKERS IN THE FORM OF LETTER OF CREDIT, BUYER'S CREDIT, CASH CREDIT LIMITS IN FOREI GN CURRENCY FOR PURCHASE OF RAW MATERIALS & PAYMENT TO OVERSEAS SUPPLIERS, AGAINST STOCK OF RAW MATERIALS & COLLECTION OF BOOK DEBTS. IT IS SUBMITTED THAT SINCE THE APPELLANT COMPANY USES THE FUND AND NON FUND BASED FACILITIES IN FOREIGN CURRENCY, THE BANKERS HAVE ADVISED THE COMPANY TO C OVER UP THE FOREIGN EXCHANGE PAYMENT LIABILITIES AGAINST THE RISK OF FLUCTUATION IN RATE OF FOREIGN EXCHANGE. THERE IS ALWAYS AN INHERENT RISK OF FLUCTUATION IN THE RATES OF FOREIGN EXCHANG E, I.E. THE RATES OF FOREIGN EXCHANGE CHANGES BETWEEN THE TIME OF PURCHASE OF RAW MATERIALS AND A CTUAL PAYMENT TO SUPPLIERS OR BANK, WHICH DEPENDS ON THE DEMAND AND SUPPLY POSITION OF THE FO REIGN EXCHANGE IN THE INTERNATIONAL MARKET. 8.1 DURING THE PREVIOUS YEAR, THE APPELLANT COMPANY HAS SWAP ITS WORKING CAPITAL BANK LIABILITY AGAINST PURCHASE OF RAW-MATERIALS IN DOLLAR CURRENC Y TO SWISS FRANK CURRENCY BY ENTERING INTO DERIVATIVE CONTRACTS WITH BANK. THE STATED LOGIC FO R SUCH SWAP FROM DOLLAR TO SWISS FRANK CURRENCY WAS THAT THE SWISS FRANK IS CONSIDERED AS ONE OF THE MOST STABLE CURRENCY AS COMPARED TO DOLLAR AND ACCORDINGLY, THE LOSS, IF ANY ON ACCO UNT OF FOREIGN EXCHANGE FLUCTUATION CAN BE MINIMIZED. HOWEVER, THERE WAS FALL IN THE VALUE OF SWISS FRANK VIS-A-VIS DOLLAR AND ON THE BALANCE SHEET DATE I.E. 31-03-2008, THE APPELLANT C OMPANY BOOKED THE LOSS OF RS. 5,89,29,812/-. THIS FACTS HAVE NOT BEEN DISPUTED BY THE A.O. 8.2 IT IS FURTHER SUBMITTED BY THE AUTHORIZED REPRESENT ATIVE OF THE APPELLANT COMPANY THAT AS PER THE CONSISTENT PRUDENT PRACTICE AND REQUIREMENTS OF ACC OUNTING STANDARDS ISSUED BY THE ICAI, IT FOLLOWS ACCOUNTING OF TRANSACTIONS FOR PURCHASE & S ALES IN FOREIGN CURRENCY AT THE PREVAILING FOREIGN EXCHANGE RATE AT THE TIME OF EXECUTING TRAN SACTIONS AND DIFFERENCE IF ANY BETWEEN THE AMOUNT OF PURCHASE/SALES AND AMOUNT AT WHICH THE TR ANSACTIONS IS ACTUALLY SETTLED BY THE PAYMENT TO/FROM SUPPLIERS/DEBTORS IS ACCOUNTED AS 'LOSS/GAI N ON FOREIGN EXCHANGE FLUCTUATION'. IN THE TRADING & PROFIT & LOSS ACCOUNT, THE PURCHASE AND S ALES ARE DISCLOSED AFTER SET OFF ON ACCOUNT OF THE LOSS OR GAIN DUE TO FLUCTUATION IN RATES OF FOREIGN EXCHANGE ON ACCOUNT OF TRANSACTIONS OF IMPORT PURCHASE AND EXPORT SALES IN FOREIGN EXCHANG E. SUCH GAIN OR LOSS IN FOREIGN EXCHANGE TRANSACTIONS SETTLED DURING THE YEAR IS PART OF THE COST OF IMPORT PURCHASE OR VALUE OF EXPORT SALES. IT IS FURTHER SUBMITTED THAT AT TIMES, IT HAPPENS T HAT THE FORWARD CONTRACT TO BUY/SELL FOREIGN EXCHANGE REMAINS OUTSTANDING AT THE LAST DATE OF BA LANCE SHEET. AS PER THE PRUDENT ACCOUNTING POLICY OF MERCANTILE/ACCRUAL SYSTEM OF ACCOUNTING A ND ACCOUNTING STANDARDS ISSUED BY THE ICAI, THE UNSETTLED OUTSTANDING FOREIGN EXCHANGE FORWARD CONTRACTS HAVE TO BE EVALUATED AT AN EXCHANGE RATE PREVAILING ON THE DATE OF BALANCE SHE ET AND LOSS, IF ANY, ON EVALUATION OF SUCH UNSETTLED FORWARD CONTRACTS HAVE TO BE ACCOUNTED IN THE BOOKS. AS SUCH THERE IS NO DIFFERENCE BETWEEN THE LOSS ON ACCOUNT OF EVALUATION OF UNSETT LED OUTSTANDING FOREIGN EXCHANGE FORWARD CONTRACTS AND LOSS ON ACCOUNT OF SETTLED FOREIGN EX CHANGE FORWARD CONTRACTS DURING THE YEAR. LOSS, UNDER BOTH THE SITUATIONS, I.E. SETTLED AND U NSETTLED FORWARD CONTRACTS IN FOREIGN EXCHANGE, IS REVENUE LOSS INCURRED IN THE NORMAL COURSE OF BU SINESS TO HEDGE THE RISK OF FLUCTUATIONS IN FOREIGN EXCHANGE RATES. FURTHER, IT IS ALSO SUBMITT ED THAT AS PER THE ACCOUNTING STANDARD-11 (AS- 11) ISSUED BY THE ICAI AND RBI'S GUIDELINES, THE COMPAN IES ARE REQUIRED TO REVALUE UN-MATURED CONTRACTS AS PER RATES OF EXCHANGE NOTIFIED BY FORE IGN EXCHANGE DEALER'S ASSOCIATION OF INDIA (FEDAI). 8.3 DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEA R UNDER CONSIDERATION, THERE WERE 2 UNSETTLED FORWARD CONTRACTS AGGREGATING TO US $ 76.00 LACS AS ON THE LAST DATE OF BALANCE SHEET I.E. 31-03- 2008 TO SELL THE FOREIGN CURRENCY AT AN AGREED PRIC E AT A FUTURE DATE FALLING BEYOND THE LAST DATE OF ACCOUNTING PERIOD. THE LOSS IS INCURRED BY THE A PPELLANT COMPANY ON ACCOUNT OF EVALUATION OF THESE UNSETTLED OUTSTANDING FORWARD FOREIGN EXCHANG E CONTRACTS ON THE LAST DATE OF THE ACCOUNTING PERIOD I.E. BEFORE THE DATE OF MATURITY OF THE FORW ARD CONTRACTS. IT WAS FURTHER SUBMITTED BY THE AUTHORIZED REPRESENTATIVE THAT THE GAIN/LOSS IN FOR WARD CONTRACT FOR FOREIGN EXCHANGE TRANSACTIONS BACKED BY LIABILITY IN FOREIGN EXCHANG E ON ACCOUNT OF PURCHASE/SALES OF GOODS ARE BUSINESS LOSSES COVERED BY SECTION 28 OF THE ACT AN D NOT LOSSES IN THE NATURE OF 'SPECULATION' AS DEFINED IN SECTION 43(5) OF THE ACT. 8.4 IT HAS BEEN FURTHER SUBMITTED THAT IN THE SUBSEQUEN T YEAR I.E. FINANCIAL YEAR 2008-09 RELEVANT TO A.Y.2009-10 ON SETTLEMENT OF THE SAID 2 FORWARD CON TRACTS, THERE WAS A GAIN OF RS. 1,96,26,284/- WHICH IS CREDITED TO THE PROFIT & LOSS A/C AND SHOW N AS BUSINESS INCOME IN THE FINANCIAL YEAR ITA NO 1951/A/2011 & CO NO. 232/A/2011 . A.Y. 2008- 09 6 2008-09 RELEVANT TO A.Y.2009-10. HENCE, THE NET FOR EIGN CURRENCY DERIVATIVE LOSS IS OF RS.3,93,03,528/- (RS.5,89,29,812/-LESS RS.1,96,26,2 84/-). 8.5 THE APPELLANT COMPANY MADE THE TRANSACTIONS OF IMPO RT PURCHASE OF RAW MATERIALS AND EXPORT SALES OF MANUFACTURED GOODS IN THE NORMAL COURSE OF BUSINESS. THE LIABILITY FOR PAYMENT TO SUPPLIERS FOR IMPORT PURCHASE IN FOREIGN EXCHANGE I S SUBJECT TO RISK OF LOSSES ON ACCOUNT OF FLUCTUATION IN EXCHANGE RATE OF FOREIGN CURRENCY. T O SAFE GUARD AGAINST SUCH LOSSES AND TO HEDGE AGAINST THE UNFORESEEN FUTURE LOSS DUE TO FLUCTUATI ON IN RATE OF FOREIGN EXCHANGE TRANSACTIONS OF PURCHASE & SALES COMPANY MAKES THE FORWARD CONTRACT IN THE NORMAL COURSE OF BUSINESS TO BUY/SELL THE FOREIGN EXCHANGE AS PER THE MARKET CON DITION AND ADVICE OF THE BANK. THUS, LOSSES INCURRED IN FORWARD CONTRACTS FOR FOREIGN EXCHANGE IN THE NORMAL COURSE OF BUSINESS ARE NOT SPECULATIVE TRANSACTIONS AND SIMILAR THE SAID TRANS ACTIONS NOT REGARDED AS SPECULATIVE TRANSACTION AS PER THE PROVISO (A) BELOW THE SECTIO N 43(5) OF THE ACT AND IS A BUSINESS LOSS COVERED BY SECTION 28 OF THE ACT. IT IS SUBMITTED THAT AS PER THE ACCOUNTING STANDARD -11 (AS-11) ISSUED BY THE ICAI AND RBI'S GUIDELINES, THE COMPANIES WERE REQUIRED TO REVALUE UN-MATURED CONTRACTS AS PER RATES OF EXCHANGE NOTIFIED BY FOREIGN EXCHANGE DEALER'S ASSO CIATION OF INDIA (FEDAI). ACCORDINGLY, ON THE BALANCE SHEET DATE, BASED ON THE EXCHANGE RATE ON THAT DATE, PROVISION OF PROFIT/LOSS SUBSTITUTES THE FIGURES BOOKED AT THE TIME OF CONTR ACT. THUS, REVALUED LOSS/PROFIT IS DEBITED TO THE PROFIT AND LOSS ACCOUNT. FURTHER, THIS TREATMENT IS AS PER PRINCIPLES OF ACCOUNTING WHICH REQUIRED THE CURRENT ASSETS TO BE MARKED TO THE MARKET RATE. 8.6 THE RATIO LAID DOWN IN THE DECISION OF INCOME-TAX A PPELLATE TRIBUNAL, MUMBAI BENCH-'C' SPECIAL BENCH, MUMBAI IN THE CASE OF DCIT VS. M/S.BANK OF B AHRAIN & KUWAIT (ITA NO.4404 & 1883/MUM72004) IS SQUARELY APPLICABLE TO THE APPELL ANT COMPANY. 8.7 THE LOSS INCURRED BY THE APPELLANT COMPANY ON ACCOU NT OF EVALUATION OF CONTRACT ON THE LAST DAY OF ACCOUNTING YEAR I.E. BEFORE THE DATE OF MATURITY OF FORWARD CONTRACT BE ALLOWED AS BUSINESS LOSS FOR THE FOLLOWING REASONS :-. 8.8 CONSIDERING ALL THE ABOVE FACTS TOGETHER, I AM INCL INED TO AGREE WITH THE CONTENTION OF THE APPELLANT COMPANY THAT THE LOSS INCURRED BY THE APP ELLANT COMPANY ON ACCOUNT OF FOREIGN EXCHANGE HEDGING TRANSACTIONS IN FORWARD CONTRACTS WHICH IS BACKED BY THE TRADING LIABILITY OF THE APPELLANT COMPANY ON ACCOUNT OF IMPORT PURCHASE S, IS A BUSINESS REVENUE LOSS AND NOT SPECULATIVE LOSS AS HELD BY THE A.O. THE CASE OF TH E APPELLANT COMPANY SQUARELY FALLS UNDER PROVISO (A) TO SEC. 43(5) OF THE ACT AND ACCORDINGL Y, THE TRANSACTIONS ENTERED INTO BY THE APPELLANT COMPANY IN RESPECT OF HEDGING OF THE PROB ABLE LOSS ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE IN FORWARD CONTRACT ARE NOT SPE CULATIVE TRANSACTIONS. THE A.O. HAS FAILED TO BRING ON RECORD ANY COGENT MATERIAL EVIDENCE IS SUP PORT OF HIS FINDING THAT THE LOSS SUFFERED BY THE APPELLANT COMPANY IS SPECULATIVE LOSS. THEREFOR E, THE ACTION OF THE A.O TO DISALLOW THE SAME AS SPECULATIVE LOSS IS UNJUSTIFIED ON THE FACTS OF THE CASE AND ACCORDINGLY , THE DISALLOWANCE MADE BY HIM IS DELETED. THE APPELLANT, ACCORDINGLY, GETS THE RELIEF OF RS.. 5,89,29,812/-. 9. AGGRIEVED BY THE ORDER OF CIT(A) REVENUE IS NOW IN APPEAL BEFORE US. 10. BEFORE US, LD. D.R. STRONGLY SUPPORTED THE ORDE R OF A.O. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS NOT PLACED ON RECORD THE AGRE EMENT ENTERED BY IT WITH THE BANK WHEREIN THE BANK WAS AUTHORISED TO HEDGE T HE LOSS. ON THE OTHER HAND LD. A.R. REITERATED THE SUBMISSIONS MADE BEFOR E CIT(A) AND FURTHER PLACED RELIANCE ON THE DECISION IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA PVT. LTD. 312 ITR 354 (SC), CIT VS. PANCHMAHA L STEEL LTD. 215 ITA NO 1951/A/2011 & CO NO. 232/A/2011 . A.Y. 2008- 09 7 TAXMAN.COM 140 (GUJ.) AND CIT VS. FRIENDS AND FRIEN DS SHIPPING PVT. LTD. 217 TAXMAN.COM 267 (GUJ.). THE LD. A.R. THUS SUPPO RTED THE ORDER OF CIT(A). 11. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IT IS AN UNDISPUTED FACT, THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING TUBES AND PIPES. FROM THE COPY OF THE BALANCE SHEET PLACED ON RECORD IT IS SEEN THAT THE APPROXIMATELY 90% OF THE MATERIAL CONSUMED IS FROM IMPORT PURCHASES. IT IS ALSO A FACT THAT ASSES SEE HAS AVAILED FINANCIAL FACILITIES FROM ITS BANKERS FOR PURCHASE OF RAW MAT ERIAL. WE FIND THAT CIT(A) WHILE ALLOWING THE APPEAL OF THE ASSESSEE HAS GIVEN A FINDING THAT THE DEALING OF ASSESSEE IN FOREIGN EXCHANGE WAS IN THE NORMAL C OURSE OF BUSINESS AND TO SAFEGUARD THE FUTURE LOSSES AGAINST FOREIGN EXCHANG E RATE FLUCTUATIONS IT HAD ENTERED INTO HEDGING TRANSACTION. HE HAS FURTHER NO TED THAT THE LOSS INCURRED BY THE ASSESSEE ON ACCOUNT OF FOREIGN EXCHANGE HEDG ING TRANSACTIONS IN FORWARD CONTRACTS WAS BACKED BY THE TRADING LIABILI TY ON ACCOUNT OF IMPORT PURCHASES AND THEREFORE THE LOSS WAS REVENUE IN NAT URE AND WAS NOT A SPECULATIVE LOSS. HE IS FURTHER GIVEN A FINDING THA T THE LOSS FALLS UNDER PROVISO (A) TO SECTION 43(5) OF THE ACT AND THEREFORE THE L OSS ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE IN FORWARD CONTRACT WAS NOT SPECULATIVE TRANSACTION BUT IS A BUSINESS LOSS COVERED BY SECTI ON 28 OF THE ACT. CIT(A) HAS FURTHER NOTED THAT THE A.O HAS FAILED TO BRING ANY MATERIAL EVIDENCE ON RECORD TO SUPPORT ITS STAND THAT THE LOSS SUFFERED BY THE ASSESSEE WAS SPECULATIVE LOSS. WE FURTHER FIND THAT IN THE CASE OF CIT VS. WOODWARD GOVERNOR THE HEAD NOTES OF THE DECISION OF HONBLE APEX COURT READS AS UNDER:- BUSINESS EXPENDITUREYEAR OF ALLOWABILITYADDITIONAL LIABIL ITY DUE TO EXCHANGE RATE FLUCTUATIONEXPRESSION 'EXPENDITURE' AS USED IN S. 37 MAY, IN THE CIRCUMSTANCES OF A PARTICULAR CASE, COVER AN AMOUNT WHICH IS REALLY A 'LOSS' EVEN THOUGH THE SAID AMOUNT HAS NOT GONE OUT FROM THE POCKET OF THE ASSESSEEWORD 'PAID' IN S. 43(2 ) MEANS ACTUALLY PAID OR INCURRED ACCORDING TO THE METHOD OF ACCOUNTING ON THE BASIS OF WHICH PROFITS OR GAINS ARE COMPUTED UNDER S. 28/29SEC. 37(1) HAS TO BE READ WITH SS. 28, 29 AND 145(1)THERE IS NO FINDING OF THE AO ON THE CORRECT NESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE OR THAT THE ASSESSEE HAS NOT COMPLI ED WITH THE ACCOUNTING STANDARDSTHEREFORE, LOSS SUFFERED BY TH E ASSESSEE IN RESPECT OF A REVENUE LIABILITY ON ACCOUNT OF EXCHANGE DIFFERENCE AS ON THE DATE OF THE BALANCE SHEET IS AN ITEM OF EXPENDITURE ALLOWABLE UNDER S. 37(1)UNDER PARA 9 OF AS-11, EXCHANGE DIFFERENCES ARISING ON FOREIGN CURRENCY TRANSACTIONS HAVE TO BE RECOGNIZED AS INCO ME OR EXPENSE IN THE PERIOD IN WHICH THEY ARISE, ITA NO 1951/A/2011 & CO NO. 232/A/2011 . A.Y. 2008- 09 8 EXCEPT AS STATED IN PARA 10 AND PARA 11AN ENTERPRI SE HAS TO REPORT THE OUTSTANDING LIABILITY RELATING TO IMPORT OF RAW MATERIALS USING CLOSING RATE OR EXCHANGEANY LOSS ARISING ON CONVERSION OF SAID LIABILITY AT THE CLOSING RATE HAS TO BE RECOGNIZED IN THE P&L A/C FOR THE REPORTING PERIOD. 12. BEFORE US, REVENUE HAS NOT BROUGHT ANY MATERIAL ON RECORD TO CONTROVERT THE FINDINGS OF CIT(A). IN VIEW OF THE AFORESAID FACTS AND RELYING ON THE DECISION OF APEX COURT IN THE CASE OF WOODWARD GOVERNOR (SUPRA) WE FIND NO REASON TO INTERFERE WITH THE ORDER OF CIT(A) AND THUS THIS GR OUND OF REVENUE IS DISMISSED. 13. IN THE RESULT, THE APPEAL OF REVENUE IS DISMISS ED. 14. SINCE THE APPEAL OF REVENUE IS DISMISSED, THE C .O OF THE ASSESSEE DOES NOT SURVIVE AND THE SAME IS ALSO DISMISSED. 15. IN THE RESULT, THE APPEAL OF REVENUE AND C.O OF ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 30 -06 - 2014. SD/- SD/- (KUL BHARAT) (ANIL CHATURVEDI) 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, AHMEDABAD