ITO - 16(3)(2), MUMBAI V. M/S KALP DIAMONDS, MUMBAI

ITA 2670/MUM/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 79383 (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: Dismissed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 05-04-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIKASH AGARWAL
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'A' BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER ITA NO. 2670/MUM/2013 (ASSESSMENT YEAR: 2009-10) INCOME TAX OFFICER - 16(3)(2) M/S. KALP DIAMONDS MATRU MANDIR MUMBAI VS. G-9-10, PEARL ARCADE, SOPARIWALA ESTATE, TATA ROAD NO. 2 GIRGAUM, MUMBAI 400004 PAN - AADFK2465Q APPELLANT RESPONDENT APPELLANT BY: SHRI VIKASH AGARWAL RESPONDENT BY: NONE DATE OF HEARING: 09.07.2014 DATE OF PRONOUNCEMENT: 09.07.2014 O R D E R PER D. MANMOHAN, V.P. THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER PASSED BY THE CIT(A)-27, MUMBAI AND IT PERTAINS TO A.Y. 2009-10. 2. THE FOLLOWING GROUNDS WERE URGED BY THE ASSESSEE: - 1. THAT THE LEARNED CIT(A) HAS ERRED IN HOLDING TH AT THE LOSS OF RS.2,31,56,475/- ON ACCOUNT OF FOREIGN EXCHANGE FLU CTUATION WAS NEITHER NOTIONAL NOR SPECULATIVE AND HENCE WAS ALLO WABLE. 2. THAT THE LEARNED CIT(A) FAILED TO APPRECIATE THA T THE ASSESSEE HAD ENTERED INTO FORWARD CONTRACTS ON AN EXCEPTIONALLY HIGHER SIDE COMPARED TO NET EXPOSURE OF FOREIGN CURRENCY. 3. THE ASSESSEE IS AN IMPORTER, MANUFACTURER AND EXPOR TER OF DIAMONDS. FOR THE YEAR UNDER CONSIDERATION THE ASSESSEE DECLA RED A TOTAL INCOME OF ` 3,57,890/-. DURING THE SCRUTINY PROCEEDINGS THE AO CALLED UPON THE ASSESSEE TO EXPLAIN AS TO WHY THE LOSS ON FORWARD C ONTRACT CANCELLATION, TO THE TUNE OF ` 2,31,56,475/-, DEBITED TO THE P & L ACCOUNT SHOULD NOT BE DISALLOWED. THE ASSESSEE CONTENDED THAT THE CONTRAC TS WERE EXCLUSIVELY BOOKED ONLY TO HEDGE RECEIVABLES AND HENCE THE SAME IS ALLOWABLE AS DEDUCTION. HOWEVER, THE AO REJECTED THE CONTENTION OF THE ASSESSEE BY ITA NO. 2670/MUM/2013 M/S. KALP DIAMONDS 2 OBSERVING THAT THERE IS NO SPECIAL PROVISION FOR TR EATMENT OF MARK-TO-MARKET METHOD OF ACCOUNTING. LOSS OR GAIN ARISES ONLY WHEN SOMETHING GOES OUT OF HIS POCKET OR SOMETHING GOES INTO HIS POCKET. THERE FORE, IN THE INSTANT CASE THERE IS NO ACTUAL LOSS ON ACCOUNT OF DEALING IN FO REX DERIVATIVES UNTIL THEIR FINAL VALUES ARE KNOWN. IN HIS OPINION THE LIABILIT Y DID NOT CRYSTALLISE ON THE REPORTING DATE AND THEREFORE IT IS ONLY A NOTIONAL LOSS WHICH IS CLAIMED, IT CANNOT BE ALLOWED IN THE YEAR UNDER CONSIDERATION. ON AN APPEAL FILED BY THE ASSESSEE THE LEARNED CIT(A) ACCEPTED THE CONTENTION OF THE ASSESSEE THAT THE LOSS SUFFERED BY HIM CANNOT BE CONSIDERED AS SPECUL ATION LOSS BUT IT IS A BUSINESS LOSS. IN THIS REGARD HE OBSERVED AS UNDER: - 6. I HAVE CAREFULLY CONSIDERED THE CONTENTS OF THE ASSESSMENT ORDER, APPELLANTS SUBMISSIONS, REMAND REPORT AND THE APPE LLANTS REJOINDER THEREOF. AT THE OUTSET, IT IS UNDISPUTED THAT EXCEP T AN AMOUNT OF `50231/- BEING PROFIT BOOKED ON MTM VALUATION, THE ENTIRE LOSS CLAIMED BY THE APPELLANT WAS AN ACTUAL LOSS INCURRED ON CAN CELLATION OF THE FORWARD CONTRACTS. GENERALLY, FOREIGN EXCHANGE FORW ARD CONTRACTS ARE ENTERED AS PER THE GUIDELINES LAID DOWN BY THE RBI. FURTHER, FORWARD CONTRACTS ARE ALLOWED TO BE ENTERED SEPARATELY FOR SALE OF DOLLARS AND PURCHASE OF DOLLARS DEPENDING UPON THE EXPOSURE TO FOREIGN EXCHANGE FLUCTUATIONS. IT IS ALWAYS THE CASE THAT PAYMENT CY CLES/DURATION ARE DIFFERENT FOR THE DEBTORS AND CREDITORS DEPENDING O N THE TERMS OF THE TRANSACTION. EVEN THOUGH APPELLANT HAS CERTAIN RECE IVABLES AND CERTAIN PAYABLES RECORDED IN THE BOOKS, BASED ON THE INVOIC ES, ON A PARTICULAR DATE, NEVERTHELESS AMOUNT INCLUDED IN EACH INVOICE HAS A DIFFERENT DURATION FOR PAYMENT. THEREFORE, IT IS NOT THE CASE THAT AT A GIVEN POINT OF TIME ALL THE RECEIVABLES AND ALL PAYABLES CAN BE ADJUSTED AGAINST EACH OTHER. THERE MAY BE A POSITION THAT THE FOR IM PORTS MAY NOT BE DUE AS ON THE DATE OF RECEIVING THE EXPORT PROCEEDS AND VICE-VERSA. IN SUCH CASE, APPELLANT HAS TO PLAN FOR THE CASH FLOW IN N CURRENCY DEPENDING UPON THE TIME LINE OF EXPECTED RECEIPTS A ND PAYMENTS WHICH MAY RESULT IN A SITUATION THAT THERE CAN BE SOME ID LE FUNDS OF FOREIGN CURRENCY OR MAY BE SHORTAGE OF THE SAME. IN OTHER W ORDS, THE TIME LINES FOR RECEIPTS AND PAYMENTS MAY NOT STRICTLY MATCH SO AS TO NET OFF THE FUND POSITION IN FOREIGN EXCHANGE ON ANY PARTICULAR DATE, WHICH MEANS THAT THE APPELLANTS EXPOSURE TO FOREIGN EXCHANGE T RANSACTIONS CANNOT BE NETTED OFF TO ENTER INTO FORWARD CONTRACTS. AS S TATED ALREADY, RBI ALLOWS FORWARD CONTRACTS BASED ON THE DEBTORS, CRED ITORS, STOCKS AND LOANS AVAILABLE TO THE APPELLANT IN FOREIGN EXCHANG E TERMS SEPARATELY AND NOT BASED ON THE NET EXPOSURE TO FOREIGN EXCHAN GE. FURTHER, LEGALLY SPEAKING THE FORWARD CONTRACTS FOR PURCHASE OF DOLL ARS AND SALE OF DOLLARS ARE TWO DIFFERENT TRANSACTIONS THAT THE APP ELLANT HAS TO FULFILL EACH CONTRACT SEPARATELY AS AND WHEN IT MATURES. TH US, EITHER ON THE PRACTICAL FRONT OR ON THE LEGAL FRONT, THE FORWARD CONTRACT TRANSACTIONS CANNOT BE CONSIDERED IN TERMS OF NETTING OFF OF FOR EIGN EXCHANGE ITA NO. 2670/MUM/2013 M/S. KALP DIAMONDS 3 REALIZABLE/PAYABLE. IN VIEW OF THE ABOVE DISCUSSION , I AM UNABLE TO AGREE WITH THE AC. THAT THE NET EXPOSURE TO FOREIGN EXCHANGE HAS TO BE COMPARED WITH OUTSTANDING FORWARD CONTRACTS IN ORDE R TO ARRIVE AT A CONCLUSION WHETHER SUCH CONTRACTS WERE ENTERED WITH AN INTENT OF SPECULATION. THAT APART, WITHOUT NETTING OF THE DEB TORS AND CREDITORS, FROM THE DETAILS PLACED ON RECORD I NOTE THAT THE F ORWARD CONTRACTS ENTERED FOR SALE OF DOLLARS AND PURCHASE OF DOLLARS ARE BACKED BY THE UNDERLYING ASSETS NAMELY, THE DEBTORS AND THE CREDI TORS IN FOREIGN CURRENCY RESPECTIVELY AT ANY GIVEN POINT OF TIME. I N THE ABOVE BACKGROUND, HAVING ACCEPTED THAT THE APPELLANT IS E XPOSED TO FLUCTUATION IN FOREIGN EXCHANGE GIVEN ITS SCALE OF OPERATIONS AND HEDGING OF SUCH TRANSACTIONS IS THE NEED OF THE BUS INESS, IN MY CONSIDERED OPINION THE LOSS OR PROFIT ARISING OUT O F SUCH TRANSACTIONS SHOULD ALSO BE TREATED AS BUSINESS LOSS/INCOME. THU S, THERE IS NO ELEMENT OF SPECULATION INVOLVED IN THESE TRANSACTIO NS. IN SUCH CIRCUMSTANCES, THE LOSS INCURRED BY THE APPELLANT I S NOT A NOTIONAL LOSS BUT IT IS AN ACTUAL LOSS SUFFERED. THEREFORE, SUCH LOSS IS TO BE ALLOWED AS BUSINESS LOSS U/S. 37(1) OF THE ACT IN TERMS OF DECISION OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. BADRIDAS G AURIDU PVT. LTD. 261 ITR 256. ACCORDINGLY, I DIRECT THE A.O. TO ALLO W THE AFORESAID LOSS CLAIMED BY THE APPELLANT. THE APPELLANT SUCCEEDS ON THIS ISSUE. AGGRIEVED, REVENUE IS IN APPEAL BEFORE US. 4. NONE APPEARED ON BEHALF OF THE ASSESSEE. WE HAVE HE ARD THE LEARNED D.R. AND CAREFULLY PERUSED THE RECORD. 5. IT IS NOT IN DISPUTE THAT THE ASSESSEE IS EXPOSED T O FLUCTUATIONS IN FOREIGN EXCHANGE GIVEN ITS SCALE OF OPERATIONS AND HEDGING OF SUCH TRANSACTIONS IS THE NEED OF THE BUSINESS. IT IS ALS O NOT IN DISPUTE THAT EXCEPT AN AMOUNT OF ` 50,231/-, BEING PROFIT BOOKED BY MTM VALUATION, THE ENTIRE LOSS CLAIMED BY THE ASSESSEE WAS ACTUAL LOSS INCURR ED ON CANCELLATION OF THE FORWARD CONTRACTS. IT IS NOT THE CASE OF THE REVENU E THAT AT A GIVEN POINT OF TIME ALL THE RECEIVABLES AND ALL THE PAYABLES CAN B E ADJUSTED EACH OTHER. THERE MAY BE A POSITION THAT THE PAYMENTS FOR IMPOR TS MAY NOT BE DUE AS ON A PARTICULAR DATE AND VICE VERSA. HAVING REGARD TO THE OVERALL CIRCUMSTANCES THE LEARNED CIT(A) APPLIED THE RATIO OF THE HON'BLE JURISDICTIONAL HIGH COURT DECISION IN THE CASE OF CIT VS. BADRIDAS GAURIDU PV T. LTD. 261 ITR 256 TO HOLD THAT THE LOSS INCURRED BY THE ASSESSEE CANNOT BE TREATED AS A NOTIONAL LOSS BUT AN ACTUAL LOSS WHICH IS ALLOWABLE AS DEDUC TION. 6. THE LEARNED D.R. WAS UNABLE TO MAKE OUT A CASE TO S UPPORT THE STAND OF THE REVENUE. ITA NO. 2670/MUM/2013 M/S. KALP DIAMONDS 4 7. UNDER THESE CIRCUMSTANCES WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER PASSED BY THE CIT(A) SINCE IT IS ESSENTIA LLY BASED ON FACTS AND ON APPLICATION OF THE RATIO LAID DOWN BY THE HON'BLE B OMBAY HIGH COURT . WE, THEREFORE, AFFIRM THE ORDER PASSED BY THE CIT(A) AN D DISMISS THE APPEAL FILED BY THE REVENUE. ORDER PRONOUNCED IN THE OPEN COURT ON 9 TH JULY, 2014. SD/- SD/- (N.K. BILLAIYA) (D. MANMOHAN) ACCOUNTANT MEMBER VICE PRESIDENT MUMBAI, DATED: 9 TH JULY, 2014 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 27, MUMBAI 4. THE CIT 16, MUMBAI CITY 5. THE DR, A BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.