ACIT 16(3), MUMBAI V. MONHARCH GEMS, MUMBAI

ITA 2613/MUM/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 79407 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 3 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-07-2014
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 05-04-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: JIVANLAL LAVIDIYA
• Assessee Lawyers: K K VEDI A SINGH
• Section: 37(1)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES B MUMBAI . . , , BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER /AND SHRI SANJAY ARORA, ACCOUNTANT MEMBER ITA NO.2613/MUM/2013, A.Y. 2009-10 THE ACIT 16(3), MATRU MANDIR, 2 ND FLOOR, ROOM NO.206, TARDEO ROAD, MUMBAI 400 007 (APPELLANT ) VS. M/S.MONARCH GEMS, 401, DECAN CHAMBERS, JSS ROAD, GIRGOAN, MUMBAI 400 004. PAN:AAAFM 2977J (RESPONDENT) APPELLANT BY : SHRI JIVAN LAL LAVIDIY A RESPONDENT BY : S/SHRI K.K.VED/I.A. SINGH DATE OF HEARING : 09/07/20 14 DATE OF PRONOUNCEMENT : 09/07/2014 ORDER PER I.P.BANSAL, J.M, THIS IS AN APPEAL FILED BY THE REVENUE AND IT IS D IRECTED AGAINST ORDER PASSED BY LD. CIT(A)-27, MUMBAI DATED 18/01/2013 FOR ASSESSMENT YEAR 2009- 10. GROUNDS OF APPEAL READ AS UNDER: 1. WHETHER ON THE FACTS AND CIRCUMSTANCES AND IN LAW, THE LD. CIT(A) HAS ERRED IN HOLDING THAT MARK-TO-MARKET LOSS OF RS.85,86,096/ - ARISING ON RE-VALUATION OF FORWARD CONTRACT AGREEMENTS ON THE CLOSING DATE OF ACCOUNTING YEAR IS NOT NOTIONAL LOSS AND, THEREFORE, ALLOWABLE. 2. THE APPELLANT CRAVES LEAVES TO AMEND OR ALTER A NY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF IMPO RT AND EXPORTS OF DIAMONDS. SUBSTANTIAL AMOUNT OF ITS TURNOVER IS DE NOMINATED IN FOREIGN CURRENCY. IT ENJOYS WORKING CAPITAL FACILITY FROM BANKS SOME OF WHICH ARE ALSO DENOMINATED IN FOREIGN CURRENCY. IT ALSO CARRIES C URRENCY RISK IN RESPECT OF ITS ITA NO.2613/MUM/2013, A.Y. 2009-10 2 STOCK AS IT IS MOST LIKELY TO BE SOLD BY WAY OF EXP ORTS. THEREFORE, FORWARD CONTRACTS WERE ENTERED INTO TO HEDGE THESE CURRENCY RISK ASSOCIATED WITH NORMAL BUSINESS TRANSACTION. THESE DERIVATIVE CONTRACTS A RE ENTERED WITHIN THE FRAMEWORK OF RELEVANT RBI GUIDELINES (INCLUDING QU ANTUM LIMITS SET BY RBI). THE INTENT OF ENTERING INTO DERIVATIVE CONTRACTS WAS T O SAFEGUARD ITSELF AGAINST EXCHANGE FLUCTUATION RISK ON FOREIGN CURRENCY RECE IVABLES OR PAYABLES. THESE DERIVATIVE TRANSACTIONS ARE EITHER IN RESPECT OF SALE OF FOREIGN CURRENCY IN RESPECT OF ITS EXPOSURE TO FOREIGN CURRENCY RECEIVA BLE OR PURCHASE OF FOREIGN CURRENCY IN RESPECT OF ITS EXPOSURE TO FOREIGN CURR ENCY PAYABLES. THESE CONTRACTS GENERALLY HAVE A MATURITY PROFILE WHICH COINCIDES WITH THE EXPECTED DATE OF FOREIGN CURRENCY RECEIVABLES OR PAYABLES AND THE QU ANTUM INVOLVED IN DERIVATIVE CONTRACTS DOES NOT EXCEED THE QUANTUM OF EXPOSURE T O FOREIGN CURRENCY RECEIVABLES/PAYABLES. 3. WITH REGARD TO AFOREMENTIONED CONTRACTS ASSESSEE IS CONSISTENTLY FOLLOWING THE ACCOUNTING METHOD WHERE IN YEAR-END RESTATEMEN T OF MARK TO MARKET GAIN OR LOSS IN RESPECT OF ALL ASSETS OR LIABILITIES DENOM INATED IN FOREIGN CURRENCY I.E. DEBTORS, CREDITORS, LOAN & FORWARD CONTRACT BEING R ECOGNIZED AS GAIN OR LOSS IN PROFIT AND LOSS ACCOUNT. IN THE PROCESS, THE ASSES SEE IN THE PRESENT CASE HAS RECOGNIZED GAIN OF RS.1,01,94,740/- DURING THE SAME YEAR BY RESTATING THE RECEIVABLE AT CLOSING RATE. SUCH GAIN IS NOT RE ALIZED. ACTUAL GAIN MAY BE DIFFERENT AMOUNT DEPENDING ON THE RATE PREVALENT W HEN IT IS ACTUALLY REALIZED. SIMILARLY, IT HAS RECOGNIZED LOSS OF RS.85,86.100/ - BY REVALUATING THE SAME AT THE PREVALENT YEAR AND DATE. THE SAID LOSS HAS B EEN DISALLOWED BY THE AO ON THE GROUND THAT IT WAS FOR OUTSTANDING FOREIGN CURRENC Y FORWARD CONTRACT IS A NOTIONAL LOSS OF CONTINGENT LIABILITY DEBITED TO P& L ACCOUNT. 4. THE DISALLOWANCE HAS BEEN DELETED BY LD. CIT(A) ON THE GROUND THAT SUCH LOSS CANNOT BE HELD TO BE NOTIONAL LOSS PARTICULAR LY WHEN GAIN REALIZED ON SIMILAR TRANSACTION DURING THE SAME YEAR IS BEING ASSESSE D BY THE AO. LD. CIT(A) ALSO HAS RELIED UPON VARIOUS DECISION TO DELETE THE ADDI TION, WHICH INCLUDE THE ITA NO.2613/MUM/2013, A.Y. 2009-10 3 DECISION OF SPECIAL BENCH IN THE CASE OF DCIT VS. BANK OF BAHRAIN AND KUWAIT ( ITA NOS. 4404 & 1883/MUM/2004). THE REVENUE IS AG GRIEVED BY THE RELIEF GIVEN BY LD. CIT(A) AND HAS FILED AFOREMENTIONED GROUNDS OF APPEAL. 5. AT THE OUTSET IT WAS STATED BY LD. AR THAT THIS ISSUE IS COVERED IN FAVOUR OF THE ASSESSEEE BY THE FOLLOWING DECISIONS. SR. NO. PARTICULARS PAGE NOS. OF P.B 1. UNREPORTED DECISION OF THE MUMBAI BENCH OF ITA T IN THE CASE OF ACIT VS. M/S. RUPAM IMPEX IN ITA NO.4008/MUM/201 2. 01-03 2. UNREPORTED DECISION OF MUMBAI ITAT IN THE CASE O F ACIT /S. M/S. VIMAL EXPORT IN ITA NO.6610/M/2012 04-07 3. UNREPORTED DECISION OF MUMBAI BENCH OF ITAT IN T HE CASE OF THE PAPER PRODUCTS LTD. VS. ADDL. CIT IN ITA NO.7761/MU M/2012 08-15 4. UNREPORTED DECISION OF MUMBAI BENCH OF ITAT IN T HE CASE OF DCIT -8(2) V/S. M/S. LAGUNA CLOTHING PVT. LTD. IN I TA NO.6129/MUM/2012 16-17 5. UNREPORTED DECISION OF MUMBAI BENCH OF ITAT IN T HE CASE OF DCIT VS. ECL FINANCE LTD., EDELWISS CAPITAL LTD. VS . ADDL. DCIT AND EDELWEISS FINANCE & INVESTMENTS LTD. VS. DCIT I N ITA NO.6612/MUM/11, 7656/MUM/11, 6607/MUM/11 AND 6609/MUM/11 18-26 6. DECISION OF MUMBAI BENCH OF ITAT IN THE CASE OF RELIANCE INDUSTRIES LIMITED V/S. COMMISSIONER OF INCOME TAX REPORTED IN (2014) 147 ITD 323 27-35 7. UNREPORTED DECISION OF MUMBAI BENCH OF ITAT IN T HE CASE OF RELIANCE COMMUNICATIONS LTD. VS. CIT IN ITA NO.671/MUM/2013 36-46 8. UNREPORTED DECISION OF MUMBAI BENCH OF ITAT IN T HE CASE OF ASST.CIT VS. M/S. H. DIPAK & CO. IN ITA NO.7629/MUM /2011 6. LD. DR HOWEVER, RELIED UPON THE PASSED BY THE A SSESSING OFFICER. 7. WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTENT IONS HAVE CAREFULLY BEEN CONSIDERED. THE ISSUE IS COVERED BY THE AFOREMENTI ONED DECISIONS WHICH HAVE BEEN RELIED BY LD.A. R. REFERENCE CAN BE MADE TO THE DECISION OF TRIBUNAL IN THE CASE OF ACIT VS. M/S. RUPAM IMPEX (SUPRA), WHER EIN SIMILAR GROUND WAS ITA NO.2613/MUM/2013, A.Y. 2009-10 4 RAISED BY THE REVENUE AND THE ISSUE WAS DECIDED AGA INST THE REVENUE WITH THE FOLLOWING OBSERVATIONS: THIS APPEAL IS FILED BY THE REVENUE AGAINST THE O RDER OF CIT(A) DATED 05/03/2012 FOR THE ASSESSMENT YEAR 2008-09. THE GRO UND OF APPEAL RAISED BY THE REVENUE READ AS UNDER :- 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD .CIT (A) HAS ERRED IN HOLDING THAT MARKET T O MARKET LOSS OF RS.1,06,47,416/- ARISING ON VALUATION OF FORWARD EX CHANGE CONTRACTS ON THE CLOSING DATE OF ACCOUNTING YEAR IS NOT A NOT IONAL LOSS AND, THEREFORE, ALLOWABLE. 1.1 THE ASSESSEE IS ENGAGED IN THE BUSINESS OF EXPO RT AND IMPORT OF DIAMONDS. IT HAS MADE A PROVISION FOR EXCHANGE DIFFERENCE LOSS O F RS.1,06,47,416/- ON FORWARD EXCHANGE CONTRACTS FOR EXPORT. AO DISALLOWED SUCH L OSS ON THE GROUND THAT INCOME TAX ACT DOES NOT ALLOW DEDUCTION OF SUCH NOTIONAL L OSS FOR WHICH LIABILITY HAS NOT BEEN CRYSTALLIZED. ACCORDING TO ASSESSING OFFICER T HE LOSS CLAIMED BY THE ASSESSEE ON FORWARD EXCHANGE CONTRACTS IS A NOTIONAL LOSS. I N THIS MANNER THE LOSS WAS DISALLOWED. LD. CIT(A) RELYING ON THE FOLLOWING DEC ISIONS HAS DECIDED THE ISSUE IN FAVOUR OF ASSESSEE. 1. CIT VS. WOODWARD GOVERNOR INDIA (P) LTD. (294 ITR 451)(DEL.); 2. CIT VS. WOODWARD GOVERNOR INDIA (P) LTD. (312 ITR 2 54)(SC); 3. ITAT SPECIAL BENCH DECISION IN THE CASE OF DCIT VS . BANK OF BAHRAIN AND KUWAIT (ITA NOS.4404 & 1883/MUM/2004) AND 4. ONGC VS. CIT (322 ITR 180)(SC) 1.2 RELYING ON THE AFOREMENTIONED DECISIONS THE LD. CIT(A) HELD THAT FOREIGN EXCHANGE LOSS INCURRED BY THE ASSESSEE DURING ITS N ORMAL COURSE OF BUSINESS REGARDING RESTATEMENT OF FORWARD CONTRACT OBLIGATIO NS IS IN ACCORDANCE WITH AS-11 AND ASSESSEE IS CLAIMING SUCH LOSS IN A CONSISTENT MANNER OVER THE YEARS. THE GAIN EARNED BY THE ASSESSEE REGARDING SIMILAR TRANSACTIO NS WAS ACCEPTED AND BROUGHT TO TAX BY THE DEPARTMENT IN EARLIER YEARS AND ACCORDIN G TO AFOREMENTIONED DECISIONS THE ISSUE WAS TO BE DECIDED IN FAVOUR OF ASSESSEE. 2. AT THE OUTSET IT WAS CLAIMED BY THE LD. AUTHORIZ ED REPRESENTATIVE THAT CIT(A) HAS RIGHTLY DECIDED THE ISSUE WHICH IS IN ACCORDANC E WITH AFOREMENTIONED DECISIONS. 2.1 ON THE OTHER HAND, LD. DR RELIED ON THE ORDER P ASSED BY AO. 3. AFTER HEARING BOTH THE PARTIES, WE FIND THAT THE LD. CIT(A) DID NOT COMMIT ANY ERROR IN DECIDING THE ISSUE IN FAVOUR OF ASSESSEE. THE HON'BLE SUPREME COURT IN CASE OF ONGC VS. CIT (SUPRA), FOLLOWING THE EARLIER DECI SION IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA (P.) LTD. (SUPRA), HAVE HEL D THAT THE ASSESSEE HAVING MAINTAINED ACCOUNT ON MERCANTILE SYSTEM OF ACCOUNTI NG, LOSS CLAIMED BY THE ASSESSEE ON ACCOUNT FLUCTUATION IN THE RATE OF FORE IGN EXCHANGE AS ON THE DATE OF BALANCE SHEET IN RESPECT OF LOANS TAKEN FOR REVENUE PURPOSE IS ALLOWABLE AS ITA NO.2613/MUM/2013, A.Y. 2009-10 5 EXPENDITURE U/S. 37(1) NOTWITHSTANDING THE FACT THA T LIABILITY HAS NOT BEEN ACTUALLY DISCHARGED IN THE YEAR IN WHICH THE FLUCTUATION RAT E OF FOREIGN EXCHANGE IS ACCRUED. THEREFORE, WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LD. CIT(A) AND WE DECLINE TO INTERFERE. 3. APPEAL FILED BY THE DEPARTMENT IS DISMISSED. 7.1 IN THE AFOREMENTIONED DECISION ONE OF US I.E. JUDICIAL MEMBER IS A PARTY. THEREFORE, FOLLOWING THE AFOREMENTIONED DECISION IN THE CASE OF ACIT VS. M/S. RUPAM IMPEX(SUPRA) AND OTHER DECISIONS RELIED UPON BY LD. AR WE FIND NO MERIT IN THE DEPARTMENTAL APPEAL AND THE SAME IS DISMISSE D. 8. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 09/07/2014 ! ' #$ % &'( 09/07/2014 ' ) SD/- SD/- ( /SANJAY ARORA ) ( . . / I.P. BANSAL ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; &' DATED 09/07/2014 ! ! ! ! ' '' ' *+, *+, *+, *+, -,$+ -,$+ -,$+ -,$+ / COPY OF THE ORDER FORWARDED TO : 1. ./ / THE APPELLANT 2. *0./ / THE RESPONDENT. 3. 1 ( ) / THE CIT(A)- 4. 1 / CIT 5. ,2) *+' , , / DR, ITAT, MUMBAI 6. )3 4 / GUARD FILE. !' !' !' !' / BY ORDER, 0,+ *+ //TRUE COPY// 5 55 5 / 6 6 6 6 (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI . ' . ./ VM , SR. PS