ACIT 16(3), MUMBAI V. B ARVIND KUMAR & CO., MUMBAI

ITA 2611/MUM/2013

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 9250 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-03-2015
• Appeal Filed By: Department
• Bench Allotted: A
• Next Hearing Date: 21-01-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 05-04-2013
• Court: TRIBUNAL
• Department Lawyers: PAVAN KUMAR BEER LA
• Keywords: Business income
• Section: 37(1)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL A , BENCH MUMBAI . . , , BEFORE : SHRI R.C.SHARMA, AM & SHRI SANJAY GARG , JM ./ ITA NO. 2610 / MUM/20 1 3 ( / ASSESSMENT YEAR : 200 9 - 10 ) ACIT 16(3), MUMBAI - 40007 VS. ANKIT GEMS, 709 PRASAD CHAMBERS, TATA ROAD 1 & 2, OPERA HOUSE, MUMBAI - 400004 ./ ./ PAN/GIR NO. : A A BFA 2540 E ( / APPELLANT ) . . ( / RESPONDENT ) AND ./ ITA NO. 261 1 / MUM/20 13 ( / ASSESSMENT YEAR :2009 - 10 ) ACIT 16(3), MUMBAI - 40007 VS. M/S B.ARVINDKUMAR & CO., 406, MEHTA CHAMBERS, 311, R.R.MOHAN RAI RD. MUMBAI - 6 ./ ./ PAN/GIR NO. : AABF C 083 0 G ( / APPELLANT ) .. ( / RESPONDENT ) LA /REVENUE BY : SHRI PAVAN KUMAR BEERLA /ASSESSEE BY : SHRI K. SHIVRAM / DATE OF HEARING : 21 / 0 1 /201 5 / DATE OF PRO NOUNCEMENT : 27/03 /2015 / O R D E R PER R.C.SHARMA ( A .M.) : TH ESE APPEALS ARE FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A), FOR ASSESSMENT YEAR 200 9 - 10 IN RESPECT OF TWO DIFFERENT ASSESSEE IN THE MATTER OF ORDER PASSED U/S. 1 43 (3) OF THE I.T.ACT . ITA NO S . 2610 &2611 /20 1 3 2 2. THE ONLY GRIEVANCE OF THE REVENUE RELATES TO CIT(A)S ACTION IN HOLDING THAT MARK TO MARKET LOSS ARISING ON REVLAUATION OF FORWARD CONTRACT AGREEMENTS ON THE CLOSING DATE OF ACCOUNTING YEAR IS NOT A NOTIONAL LOSS AND, THEREFORE, ALLOWABLE. 3. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FACTS IN BRIEF ARE THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF IMPORT AND EXPORTS OF DIAMONDS. DURING THE COURSE OF SCRUTINY ASSESSMENT, THE AO DISALLOWED THE LOSS AROSE ON ACCOUNT OF REVA LUATION ON FORWARD CONTRACT AGREEMENT ON THE PLEA THAT IT IS A NOTIONAL LOSS. BY THE IMPUGNED ORDER, THE CIT(A) DELETED THE DISALLOWANCE SO MADE BY AO AFTER HAVING THE FOLLOWING OBSERVATIONS : - 5. I HAVE CAREFULLY CONSIDERED THE CONTENTS OF THE ASSESSMENT ORDER AND THE APPELLANTS SUBMISSIONS THEREOF. 5.1 AT THE OUTSET, APPELLANT IS PREDOMINANTLY ENGAGED IN THE BUSINESS OF IMPORT OF ROUGH DIAMONDS, MANUFACTURING I.E. CUTTING & POLISHING OF SAME IN TO POLISHED DIAMONDS AND EXPORTING THE SAID DIAMONDS. IN T OTAL SALE OF RS.413.99CR, SALE DENOMINATED IN FOREIGN CURRENCY IS RS.384.85 CR. SIMILARLY, OUT OF TOTAL PURCHASES OF RS.325.11 CRS, PURCHASE DENOMINATED IN US $ IS OF RS.302.50 CR AND ALMOST ALL OF THE TRADE CREDITORS OF RS.53.74 CRS ARE PAYABLE IN DOLLAR TERMS. FURTHER, OUT OF RECEIVABLES FOR GOODS OF RS.67.65 CR., US $ RECEIVABLE ACCOUNT FOR RS.67.62 CRS. THUS IT IS EVIDENT THAT APPELLANT IS EXPOSED TO RISK ARISING OUT OF FLUCTUATION IN EXCHANGE RATE AND AS A PRUDENT BUSINESSMEN LIKELY TO HEDGE ITS RISK. APPELLANT HAS BOOKED ALL THE FORWARD CONTRACTS IN RESPECT OF EXPORT RECEIVABLES ONLY. 5.2 FROM NOTES TO THE ACCOUNTS UNDER THE HEADING 'SIGNIFICANT ACCOUNTING POLICY FOLLOWED & ITS DISCLOSURE', IT IS EVIDENT THAT APPELLANT IS REPORTING ALL MONETARY ITEMS I.E. EXPORT RECEIVABLE, LMPORT PAYABLE AND FOREIGN CURRENCY WORKING CAPITAL LOAN APPEARING IN BALANCE SHEET AT CLOSING RATE AND RECOGNIZING THE EXCHANGE RATE DIFFERENCE IN PROFIT & LOSS ACCOUNT AS EXPENSES OR INCOME, AS THE CASE MAY BE. SIMILARLY OUTSTAND ING FORWARD CONTRACT ARE MARKED TO MARKET AND RESULTING LOSS OR GAIN IS BEING RECOGNIZED AS EXPENSES OR INCOME IN PROFIT & LOSS ACCOUNT. IT MAY BE MENTIONED THAT THIS METHOD OF RECORDING THE TRANSACTIONS DENOMINATED IN FOREIGN CURRENCY IS AS PER AS - 11 IS C ONSISTENTLY FOLLOWED. ITA NO S . 2610 &2611 /20 1 3 3 5.3 IN THE ABOVE BACK GROUND, IT IS UNDISPUTED THAT APPELLANT IS IN THE BUSINESS OF EXPORTS AND HAS CERTAIN RECEIVABLES IN FOREIGN EXCHANGE AT ANY POINT OF TIME DURING THE YEAR. IT IS ALSO A FACT THAT APPELLANT IS CONSTANTLY EXPOSED TO THE RISK ARISING OUT OF THE FLUCTUATION IN FOREIGN EXCHANGE RATES. FURTHER SUCH RISK IS INTEGRAL TO THE APPELLANT'S BUSINESS AND IT ARISES OUT OF AND IS ASSOCIATED WITH SUCH BUSINESS. IT IS ALSO A FACT THAT THE AFORESAID RISK IS NOT BOUGHT BY THE APPEL LANT INDEPENDENT TO THE BUSINESS CARRIED ON BY HIM. IT IS ONLY WITH AN INTENTION TO MITIGATE THE RISK ASSOCIATED WITH BUSINESS THE APPELLANT HAS ENTERED INTO FORWARD EXCHANGE CONTRACTS. THEREFORE, WHAT NEEDS TO BE SEEN IS WHETHER THE RISK WHICH APPELLANT HAS HEDGED BY WAY OF A FORWARD CONTRACT HAS AN UNDERLYING ASSET OR A LIABILITY BY WAY OF DEBTORS OR CREDITORS. IT IS ONLY IN THIS SENSE OF THE MATTER, COURTS HAVE HELD THAT THE PROFIT OR LOSS ARISING OUT OF FORWARD CONTRACTS EITHER ON MATURITY OR ON CANCEL LATION OF SUCH CONTRACTS FORMS PART OF THE BUSINESS INCOME. IN OTHER WORDS, THE FORWARD CONTRACT ENTERED DURING THE COURSE OF BUSINESS CREATES A LEGAL LIABILITY IRRESPECTIVE OF THE FACT THAT WHETHER IT MATURES DURING THE ACCOUNTING YEAR OR BEYOND THE ACCOU NTING THE YEAR. THEREFORE, IT IS NOT CORRECT TO STATE THAT THE CONTRACT DOES NOT RESULT IN AN ASSET OR A LIABILITY AND HENCE ITS REVALUATION DOES NOT ARISE. 5.4 TO CONSIDER AN EXAMPLE, APPELLANT IS AN EXPORTER AND HAS EXPORTED GOODS WORTH 20000 US DOLLAR S ON 5TH FEBRUARY WITH A CREDIT PERIOD OF 90 DAYS. THE PREVAILING EXCHANGE RATE ON S' FEBRUARY WAS RS.45 PER DOLLAR AND THE EXPORT PROCEEDS ARE ACCORDINGLY REALIZABLE AT THAT RATE ON 5TH MAY I.E., BEYOND THE ACCOUNTING YEAR. ON 5 TH MARCH THE EXCHANGE RATE WAS AT RS.48 PER DOLLAR AND THEREFORE TO HEDGE THE RISK OF FLUCTUATION IN EXCHANGE RATE APPELLANT ENTERED INTO FORWARD CONTRACT FOR AN AMOUNT OF 10000 US DOLLARS AT THE SPOT RATE OF RS.48 AND THE MATURITY OF CONTRACT FALLS ON 5TH MAY I.E., BEYOND THE ACCO UNTING YEAR. IN THIS SITUATION A LEGALLY ENFORCEABLE CONTRACT WAS ENTERED AND A LIABILITY WAS CREATED AGAINST THE APPELLANT TO SELL 10000 US DOLLARS AT THE RATE OF RS.48 PER DOLLAR, NOTWITHSTANDING THE FACT THAT THE MATURITY OF CONTRACT FALLS BEYOND THE AC COUNTING YEAR. FURTHER, APPELLANT COULD ENTER INTO THE AFORESAID CONTRACT ONLY BASED ON THE FACT THAT HE HAS RECEIVABLES OF 20000 US DOLLARS ON 5TH MAY I.E., THE MATURITY DATE. I N OTHER WORDS RECEIVABLES OF APPELLANT TO THE EXTENT OF 10000 US DOLLARS ARE LOCKED UP AS UNDERLYING ASSET TO THE AFORESAID FORWARD CONTRACT AND ONLY ON THE STRENGTH OF SUCH ASSET APPELLANT WAS ALLOWED TO ENTER INTO THE CONTRACT WITH BANK. NOW, APPELLANT HAS TO REVALUE HIS F OREIGN DEBTORS/ CREDITORS ON 31 ST MARCH FOR THE PURPOSE OF CLOSING HIS BOOKS AND AS A MATTER OF PRUDENCE HE HAS TO PROVIDE FOR THE INCOME OR LOSS ARISING OUT OF HIS TRANSACTIONS IN FOREIGN CURRENCY. THE CLOSING FOREIGN EXCHANGE RATE IS RS.50 PER DOLLAR. APPELLANT HAS VALUED HIS DEBTORS OF 20000 US DOLLARS AT THE RATE OF RS.50 PER DOLLAR AND RECOGNIZED A GAIN OF RS. 100000. SIMILARLY, APPELLANT HAS ALSO RECOGNIZED A LOSS OF RS. 20000 ON FORWARD CONTRACT OF 10000 US DOLLARS (I.E., RS.50 - RS.48). NOW, APPELLANT HAS SHOWN THE ABOVE GAIN/ LOSS SEPARATELY FOR THE PURPO SE OF PRESENTING THE ACCOUNTS. IT IS IN THIS BACK GROUND THAT THE AO HELD THE LOSS OF RS.20000 IS NOTIONAL AND HENCE NOT ALLOWABLE, WHILE HE HAS ITA NO S . 2610 &2611 /20 1 3 4 ACCEPTED THE PROFIT OF RS.100000 OFFERED TO TAX. I N FACT, IT IS THE NET GAIN OF 8 0000 BASED ON ASCERTAINED BOOK ED RATE THAT WOULD FORM PART OF APPELLANT'S INCOME AND NOT THE AMOUNT OF RS. 100000. 5.5 THE IMPUGNED TRANSACTIONS ARE TWO SIDES OF THE SAME COIN AND BY IGNORING ONE SIDE THE COIN LOSES ITS VALUE. THEREFORE, IN MY CONSIDERED OPINION, THE AO CANNOT DETERM INE THE NATURE AND EFFECT OF A TRANSACTION BASED MERELY ON ITS PRESENTATION, WITHOUT GOING INTO ITS SUBSTANCE. WHEN A LEGALLY TENABLE CONTRACT IS IN EXISTENCE, DULY SUPPORTED BY AN UNDERLYING ASSET AND THE CONTRACT HAVING BEEN ENTERED DURING THE COURSE OF BUSINESS AND FURTHER THAT THE EXCHANGE RATE AS ON DATE OF ENTERING THE CONTRACT AND AS AT THE YEAR - END BEING ASCERTAINABLE, DUE EFFECT OF THE CONTRACT AT THE YEAR - END HAS TO BE CONSIDERED WHILE ASSESSING APPELLANTS INCOME. HERE, IT IS NOT OUT OF PLACE TO MENTION THAT THE UPPER LIMITS OF EXPOSURE TO FORWARD CONTRACTS ARE ALWAYS REGULATED BY THE RBI GUIDELINES THAT THEY ARE ALLOWED ONLY TO CERTAIN EXTENT OF RECEIVABLES OR PAYABLES AND NOT TO THE FULL EXTENT. FURTHER BANKS ALSO INSIST ON COLLECTING MARGINS IN CASE THE MOVEMENT OF FORWARD CONTRACTS BEFORE MATURITY IS AGAINST THE EXPORTER/IMPORTER. IN OTHER WORDS, THE ENTIRE GAMUT OF THE IMPUGNED TRANSACTIONS IS INTEGR AL TO THE APPELLANTS BUSINESS AND IT CANNOT BE CALLED A CONTINGENT TRANSACTION. THERE IS NO MER IT IN THE AO'S ARGUMENT IN TREATING THE IMPUGNED TRANSACTION AS INDEPENDENT TO THAT OF APPELLANTS BUSINESS AND STATE THAT THE FLOW OF BENEFIT IS NOT KNOWN OR IT DEPENDS ON ANYONE OF THE VARIOUS EVENTS LISTED BY HIM. IN FACT THE AO HAS FAILED TO SEE THAT SU CH EVENTS ARE PART AND PARCEL OF THE APPELLANT'S BUSINESS AND NOT EXTERNAL TO IT. THEREFORE, WHATEVER MAY BE THE RESULT OF THE EVENTS LISTED OUT BY THE AO, SUCH RESULT HAS TO BE TREATED AS BUSINESS RESULT AT THE TIME OF ITS HAPPENING AND HENCE THE EFFECT O F THE FORWARD CONTACT AS AT THE YEAR - END HAS TO BE CONSIDERED FOR THE PURPOSE OF ARRIVING AT APPELLANT'S INCOME. 5.6 SECONDLY, THE ISSUE OF NOTIONAL LOSS IS LIKELY TO ARISE IN THE CONTEXT OF APPELLANT'S EXPOSURE TO FORWARD CONTRACTS EXCEEDING THE UNDERLY ING ASSETS/LIABILITIES, WHICH MAY BE IN CASE OF LUMPSUM FORWARD CONTRACTS. APPELLANT'S AR HAS EXPLAINED THAT WHENEVER A LUMPSUM FORWARD CONTRACT WAS ENTERED, IT WAS IMMEDIATELY COVERED BY THE VALUE OF SUBSEQUENT EXPORTS AND THE SUM OF SUCH FORWARD CONTRAC TS NEVER EXCEEDED THE VALUE OF THE UNDERLYING DEBTORS AT ANY POINT OF TIME DURING THE YEAR. APPELLANT HAS PLACED ON RECORD THE MONTH WISE POSITION OF DEBTOR'S VIS - A - VIS THE FORWARD CONTRACTS IN DOLLAR TERMS TO DEMONSTRATE THE ABOVE POSITION. FURTHER, TO RE ITERATE, APPELLANT HAS BEEN CONSISTENTLY FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING AND HAS BEEN VALUING THE YEAR - END OUTSTANDING FOREIGN EXCHANGE TRANSACTIONS IN TERMS THE ACCOUNTING STANDARD AS - 11. 5.7 IN THE CASE OF WOODWARD GOVERNOR HON. DELHI HIG H COURT HAS OBSERVED AS UNDER (294 ITR 451). 'IN THE INSTANT CASES, ON THE OTHER HAND, THE LIABILITY ARISES OUT OF ALREADY CONCLUDED CONTRACTS. THE LIABILITY ALREADY STANDS ACCRUED THE MINUTE THE CONTRACT WAS ENTERED INTO. THE MERE POSTPONEMENT OF THE PAYM ENT TO DIFFERENT DATE CANNOT EXTINGUISH THE LIABILITY AND RENDER IT NOTIONAL OR CONTINGENT. THE DECISION OF HON'BLE SUPREME COURT IN BHARAT EARTH MOVERS SETTLES THE POSITION. THAT DECISION EXPLAINS THAT WHAT SHOULD ITA NO S . 2610 &2611 /20 1 3 5 BE CERTAIN IS THE INCURRING OF THE LIABIL ITY AND IT BEING ESTIMATED WITH REASONABLE CERTAINTY EVEN IF THE EXACT QUANTIFICATION IS NOT FEASIBLE. EVEN IF THE LIABILITY IS DISCHARGED AT A FUTURE DATE, IT WILL NEVERTHELESS BE A LIABILITY WHICH IS CERTAIN AND NOT CONTINGENT. THIS APPROACH IS CONSISTEN T WITH AND INFORMED BY THE ACCOUNTING PRACTICES IN THE MERCANTILE SYSTEM, WITH FURTHER GUIDANCE FROM THE ACCOUNTING STANDARDS OF THE ICAI WHICH HAVE RECEIVED JUDICIAL ACKNOWLEDGEMENT.' 5.8 THIS DECISION HAS BEEN APPROVED BY HON. SUPREME COURT IN CIT V WO ODWARD GOVERNOR INDIA P LTD (312 ITR 254) AND IN CONCLUSION THE BENCH STATED THAT IN ORDER TO FIND OUT IF AN EXPENDITURE IS DEDUCTIBL THE FOLLOWING HAVE TO BE TAKEN INTO ACCOUNT (I) WHETHER THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS MERCANTILE SY STEM, WHICH BRINGS INTO DEBIT THE EXPENDITURE AMOUNT FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURSED AND BRINGS INTO CREDIT WHAT IS DUE, IMMEDIATELY IT BECOMES DUE AND BEFORE IT IS ACTUALLY RECEIVED; (I I ) WHETHER THE SAME SYST EM IS FOLLOWED BY THE ASSESSEE FROM THE VERY BEGINNING AND IF THERE WAS A CHANGE IN THE SYSTEM, WHETHER THE CHANGE WAS BONA FIDE; (III ) WHETHER THE ASSESSEE HAS GIVEN THE SAME TREATMENT TO LOSSES CLAIMED TO HAVE ACCRUED AND TO THE GAINS THAT MAY ACCRUE TO IT; (IV) WHETHER THE ASSESSEE HAS BEEN CONSISTENT AND DEFINITE IN MAKING ENTRIES IN THE ACCOUNT 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 LOSSES AND GAINS IS' AS PER NATIONALLY ACCEPTED ACCOUNTING STANDARDS; (VI) WHETHER THE SYSTEM ADOPTED BY THE ASSESSEE IS FAIR AND REASONABLE OR IS ADOPTED ONLY WITH A VIEW TO REDUCING THE INCIDENCE OF TAXATION. 5.9 IN THE CASE OF DCIT VIS. BANK OF BAHRAIN AND KUWAIT (ITA NOS. 4404 & 1883/MUM.L2004) THE SPECIAL BENCH OF JURISDICTIONAL MUMBAI ITAT WHILE HOLDING THAT MTM LOSSES IN RESPECT OF FORWARD FOREIGN EXCHANGE CONTRACTS DEBITED TO PROFIT AND LOSS ACCOUNT IS ALLOWABLE, OBSERVED AS UNDER: (I) A BINDING OBLIGATION ACCRUED AGA INST THE APPELLANT THE MINUTES IT ENTERED INTO FORWARD FOREIGN EXCHANGE CONTRACTS. (II) A CONSISTENT METHOD OF ACCOUNTING FOLLOWED BY THE APPELLANT CANNOT BE DISREGARDED. THE APPELLANT HAS CONSISTENTLY FOLLOWED THE SAME METHOD OF ACCOUNTING IN REGARD TO RECOGNITION OF PROFIT OR LOSS BOTH, IN RESPECT OF FORWARD FOREIGN EXCHANGE CONTRACT AS PER THE RATE PREVAILING ON MARCH, 31. (III) A LIABILITY IS SAID TO HAVE CRYSTALLIZED WHEN A PENDING OBLIGATION ON THE BALANCE SHEET DATE IS DETERMINABLE WITH REASONABL E CERTAINTY. (IV) AS PER AS - 11, WHEN THE TRANSACTION IS NOT SETTLED IN THE SAME ACCOUNTING PERIOD AS THAT IN WHICH IT OCCURRED, THE EXCHANGE DIFFERENCE ARISES OVER MORE THAN ONE ACCOUNTING PERIOD. (V) IN VIEW OF THE DECISION OF THE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA (I) P. LTD., THE APPELLANT'S CLAIM IS ALLOWABLE. ITA NO S . 2610 &2611 /20 1 3 6 (VI) IN THE ULTIMATE ANALYSIS, THERE IS NO REVENUE EFFECT AND IT IS ONLY THE TIMING OF TAXATION OF LOSS/PROFIT. 5.10 IN THE CASE OF ONGC VS CIT 322 ITR 180, SUPREME COURT HAS REITERATED THE PRINCIPLES LAID DOWN ABOVE WHILE ANSWERING THE QUESTION THAT WHEN THE ASSESSEE MAINTAINED THEIR ACCOUNTS ON MERCANTILE SYSTEM OF ACCOUNTING AND THERE WAS NO FINDING BY THE ASSESSING OFFICER ON THE CORRECTNESS OR COMPLETENESS OF THE ACCOU NT AND THAT THE ASSESSEE HAD COMPLIED WITH THE ACCOUNTING STANDARDS, LAID DOWN BY THE CENTRAL GOVERNMENT, CAN THE 'LOSS' SUFFERED BY IT ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS ON THE DATE OF BALANCE - SHEET BE ALLOWED AS EXPENDITURE UNDE R SECTION 37(1) OF THE ACT NOTWITHSTANDING THE FACT THAT THE LIABILITY HAD NOT BEEN ACTUALLY DISCHARGED IN THE YEAR IN WHICH THE FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE HAD OCCURRED AND FINALLY DECIDED THAT THE LOSS INCURRED ON ACCOUNT OF RESTATEMENT O F THE LIABILITIES IN FOREIGN EXCHANGE IS ALLOWABLE AND ANSWERED THE QUESTION IN FAVOUR OF THE ASSESSEE. 6. T HUS THE JUDICIAL DECISIONS OF THE HON. SUPREME COURT AND VARIOUS OTHER AUTHORITIES ARE CLEARLY IN FAVOUR OF THE APPELLANT ON THIS ISSUE. THAT APA RT, AS DISCUSSED EARLIER, THE LIABILITIES IN FOREIGN EXCHANGE WERE INCURRED DURING THE NORMAL COURSE OF THE APPELLANT'S BUSINESS AND THE RESTATEMENT OF THE FORWARD CONTRACT OBLIGATIONS WAS DONE AS PER AS - 11 IN A CONSISTENT MANNER OVER THE YEARS. IN FACT TH E GAIN EARNED ON SUCH REVALUATION WAS ACCEPTED AND BROUGHT TO TAX IN THE RESPECTIVE YEARS AND THERE IS NO REASON TO ARRIVE AT A DIFFERENT CONCLUSION AT PRESENT MERELY BECAUSE THERE IS A LOSS DURING THE YEAR. APPARENTLY, THE AO WAS OF THE VIEW THAT THE APPE LLANT IS NOT A DEALER IN FOREIGN EXCHANGE UNLIKE THE BANK OF BAHRAIN, AND THEREFORE THE SAID DECISION IS NOT APPLICABLE TO THE FACTS OF THE CASE. IT IS NOT OUT OF PLACE TO MENTION THAT THE HON. SUPREME COURT, IN THE CASE OF ONGC CITED ABOVE, UPHELD THE SAM E PRINCIPLES THAT WERE LAID DOWN IN THE CASE OF WOODWORD GOVERNOR, AND THE LOSS WAS HELD ALLOWABLE IN SIMILAR CIRCUMSTANCES, WHERE THE BUSINESS OF ON GC IS NOT F~AT OF A FOREIGN EXCHANGE DEALER. FURTHER, IT IS NOT THE NATURE OF BUSINESS OR THE STOCK DEALT WITH I.E., CURRENCY OR COMMODITIES OR GOODS LIKE DIAMONDS IN THE PRESENT CASE THAT MATTERS. WHAT MATTERS IS WHETHER THE FORWARD CONTRACT TRANSACTION WAS ENTERED DURING THE COURSE OF APPELLANT'S REGULAR BUSINESS OR WHETHER IT IS TAINTED WITH A COLOUR OF SPE CULATIVE TRANSACTION. AT PRESENT, THE AO DOES NOT DISPUTE THAT THE IMPUGNED TRANSACTION IS SPECULATIVE IN NATURE. FURTHER, THE AFORESAID ISSUE OF ALLOWING THE LOSS ON ACCOUNT OF REVALUATION OF PENDING FORWARD CONTRACTS WAS CONSIDERED BY THE HON'BLE ITAT MU MBAI BENCH IN THE CASE OF M/S BHAVANI GEMS VS ACIT CC - 35 IN ITA NO.2855/MUM/2010 DATED 30/3/2011 FOR AY 2006 - 07 AND THE SAID LOSS WAS ALLOWED AS BUSINESS LOSS AND THE ISSUE WAS HELD TO BE COVERED BY SPECIAL BENCH DECISION IN THE CASE OF DCIT VS. BANK OF BA HRAIN. THEREFORE, IN MY CONSIDERED OPINION THE FACTS OF THE APPELLANT'S CASE ARE FULLY COVERED BY THE ABOVE CITED DECISIONS OF THE HON. SUPREME COURT AND THE ITA T MUMBAI BENCH. ACCORDINGLY I HOLD THAT THE LOSS INCURRED BY THE APPELLANT ON RESTATEMENT OF ITA NO S . 2610 &2611 /20 1 3 7 P ENDING FORWARD CONTRACT AGREEMENTS AT THE YEAR - END IS AN ALLOWABLE BUSINESS LOSS. APP ELLANT SUCCEEDS ON THIS GROUND. 4 . AGAINST THE ABOVE ORDER OF CIT(A), THE REVENUE IS IN APPEAL BEFORE US. 5. WE HAVE CONSIDERED RIVAL CONTENTIONS AND CAREFULLY GONE THRO UGH THE ORDERS OF THE AUTHORITIES BELOW. FROM THE RECORD WE FOUND THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF IMPORT AND EXPORTS OF DIAMONDS. SUBSTANTIAL AMOUNT OF ITS PURCHASES AND SALES WERE DENOMINATED IN FOREIGN CURRENCY. IT ENJOYS WORKING CAPITAL FACILITY FROM BANKS SOME OF WHICH ARE ALSO DENOMINATED IN FOREIGN CURRENCY. IT ALSO CARRIES CURRENCY RISK IN RESPECT OF ITS STOCK AS IT IS MOST LIKELY TO BE SOLD BY WAY OF EXPORTS. SO, FORWARD CONTRACTS IN THE INSTANT CASE ARE ENTERED INTO TO HEDGE THESE C URRENCY RISK ASSOCIATED WITH NORMAL BUSINESS TRANSACTION. THESE DERIVATIVE CONTRACTS ARE ENTERED WITHIN THE FRAMEWORK OF RELEVANT RBI GUIDELINES (INCLUDING QUANTUM LIMITS SET BY RBI). THE INTENT OF ENTERING INTO DERIVATIVE CONTRACTS WAS TO SAFEGUARD ITSELF AGAINST EXCHANGE FLUCTUATION RISK ON FOREIGN CURRENCY RECEIVABLES OR PAYABLES. THESE DERIVATIVE TRANSACTIONS HAVE BEEN EITHER IN RESPECT OF SALE OF FOREIGN CURRENCY IN RESPECT OF ITS EXPOSURE TO FOREIGN CURRENCY RECEIVABLES OR PURCHASE OF FOREIGN CURRENCY IN RESPECT OF ITS EXPOSURE TO FOREIGN CURRENCY PAYABLES. THESE CONTRACTS GENERALLY HAVE A MATURITY PROFILE WHICH COINCIDES WITH EXPECTED DATES OF FOREIGN CURRENCY RECEIVABLES OR PAYABLES AND THE QUANTUM INVOLVED IN DERIVATIVE CONTRACTS DOES NOT EXCEED THE QUANTUM OF EXPOSURE TO FOREIGN CURRENCY RECEIVABLES/PAYABLES . ASSESSEE HAS BEEN CONSISTENTLY FOLLOWING THE ACCOUNTING METHOD WHERE IN END RESTATEMENT O F MARK TO MARKET GAIN OR LOSS IN RESPECT OF ALL ASSETS OR ITA NO S . 2610 &2611 /20 1 3 8 LIABILITIES DENOMINATED IN FOREIGN CURRENCY I. E. DEBTORS, CREDITORS, LOAN & FORWARD CONTRACT, IS BEING RECOGNIZED AS GAIN OR LOSS IN PROFIT & LOSS ACCOU NT. 6. AS PER ASSESSEES NATURE OF BUSINESS BEING EXPORT, IT HAS CERTAIN RECEIVABLES ON FOREIGN EXCHANGE AT ANY POINT OF TIME DURING THE YEAR, THUS, C ONSISTENTLY EXPOSED TO THE RISK ARISING OUT OF THE FLUCTUATION IN FOREIGN EXCHANGE RATES. SUCH RISK IS INTEGRAL TO THE ASSESSEES BUSINESS WITH INTENTION TO MITIGATE THE RISK ASSOCIATED WITH THE BUSINESS THE ASSESSEE HAS ENTERED INTO FOREIGN EXCHANGE CONTR ACTS. THUS WHAT NEEDS TO BE SEEN IS WHETHER THE RISK WHICH ASSESSEE HAS HEDGED BY WAY OF A FORWARD CONTRACT HAS AN UNDERLYING ASSET OR A LIABILITY BY WAY OF DEBTORS OR CREDITORS. THUS, FORWARD CONTRACT ENTERED DURING THE COURSE OF BUSINESS CREATES A LEGAL LIABILITY IRRESPECTIVE OF THE FACT THAT WHETHER IT MATURES DURING THE ACCOUNTING YEAR OR BEYOND THE ACCOUNT ING YEAR. SINCE LEGALLY TENABLE FORWARD CONTRACT IS IN EXISTENCE, DULLY SUPPORTED BY AN UNDERLYING ASSET AND THE CONTRACT HAVING BEEN ENTERED DURING THE COURSE OF BUSINESS AND FURTHER THAT THE EXCHANGE RATE AS ON DATE OF ENTERING THE CONTRACT AND AS AT THE YEAR - END BEING ASCERTAINABLE, DUE EFFECT OF THE CONTRACT AT THE YEAR END HAS TO BE CONSIDERED WHILE ASSESSING ASSESSEES INCOME. IT IS ALSO NOT IN D ISPUTE THAT ASSESSEE HAS BEEN CONSISTENTLY FOLLOWING MERCANTILE SYSTEM OF ACCOUNT AND HAS BEEN VALUING THE YEAR END OUTSTANDING FOREIGN EXCHANGE TRANSACTIONS IN TERMS OF ACCOUNTING STANDARD AS - 11. 7. THE HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVER NOR INDIA PVT. LTD., 312 ITR 254, OBSERVED THAT IN ORDER TO FIND OUT IF THE ITA NO S . 2610 &2611 /20 1 3 9 EXPENDITURE IS DEDUCTIBLE THE FOLLOWING HAVE TO BE TAKEN INTO ACCOUNT (I) WHETHER THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS MERCANTILE SYSTEM, WHICH BRINGS INTO DEBIT TH E EXPENDITURE AMOUNT FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURSED AND BRINGS INTO CREDIT WHAT IS DUE, IMMEDIATELY IT BECOMES DUE AND BEFORE IT IS ACTUALLY RECEIVED; (I I ) WHETHER THE SAME SYSTEM IS FOLLOWED BY THE ASSESSEE F ROM THE VERY BEGINNING AND IF THERE WAS A CHANGE IN THE SYSTEM, WHETHER THE CHANGE WAS BONA FIDE; (III ) WHETHER THE ASSESSEE HAS GIVEN THE SAME TREATMENT TO LOSSES CLAIMED TO HAVE ACCRUED AND TO THE GAINS THAT MAY ACCRUE TO IT; (IV) WHETHER THE ASSESSEE H AS BEEN CONSISTENT AND DEFINITE IN MAKING ENTRIES IN THE ACCOUNT 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 LOSSES AND GAINS IS' AS PER NATIONALLY ACCEPTED ACCOUN TING STANDARDS; (VI) WHETHER THE SYSTEM ADOPTED BY THE ASSESSEE IS FAIR AND REASONAB LE OR IS ADOPTED ONLY WITH A VIEW TO RED UCING THE INCIDENCE OF TAXATION. 8. THE HONBLE SUPREME COURT IN THE CASE OF ONGC VS. CIT, 322 ITR 180, HAS REITERATED THE PRINCIPLE S LAID DOWN IN THE CASE OF WOODWARD GOVERNOR INDIA PVT (SUPRA) AND OBSERVED THAT WHEN THE ASSESSEE MAINTAINED THEIR ACCOUNTS ON MERCANTILE SYSTEM OF ACCOUNTING AND THERE WAS NO FINDING BY THE AO ON THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNT AND THAT TH E ASSESSEE HAD COMPLIED WITH THE ACCOUNTING STANDARDS, LAID DOWN BY THE CENTRAL GOVERNMENT, CAN THE LOSS SUFFERED BY IT ON ACCOUNT OF FLUCTUATION IN THE RATE OF REIGN EXCHANGE AS ON THE DATE OF BALANCE SHEET BE ALLOWED AS EXPENDITURE UNDER SECTION 37(1) OF THE ACT ITA NO S . 2610 &2611 /20 1 3 10 NOTWITHSTANDING THE FACT THAT THE LIABILITY HAD NOT BEEN ACTUALLY DISCHARGED IN THE YEAR IN WHICH THE FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE HAD OCCURRED AND FINALLY DECIDED THAT THE LOSS INCURRED ON ACCOUNT OF RESTATEMENT OF THE LIABILITIE S IN FOREIGN EXCHANGE IS ALLOWABLE DEDUCTION. THE DETAILED FINDING RECORDED BY CIT(A) TO THE EFFECT THAT LOSS ON ACCOUNT OF REVALUATION OF PENDING FORWARD CONTRACTS WAS REVENUE IN NATURE, AS PER PARA 5 & 6, HAS NOT BEEN CONTROVERTED. ACCORDINGLY, WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF CIT(A) DELETING THE DISALLOWANCE OF LOSS ON ACCOUNT OF REVALUATION OF PENDING FORWARD CONTRACT. 9. AS THE FACTS AND CIRCUMSTANCES IN ITA NO.2611/MUM/2013 ARE EXACTLY SAME, FOLLOWING THE REASONING GIVEN IN ITA N O.2610/MUM/2013, HEREINABOVE, WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF CIT(A). 10. IN THE RESULT, BOTH APPEALS OF THE REVENUE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 2 7 TH MARCH, . 201 5 . SD/ - SD/ - ( ) ( SANJAY GARG ) ( . . ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 27 / 0 3 /201 5 . . /PKM , . / PS / COPY OF THE ORDER FORWARDED TO : / BY ORDER, / ( ASSTT. REGISTRAR) , / IT AT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A), MUMBAI. 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE. //TRUE COPY//