MILL CONSULTANTS & INVESTMENT P.LTD, MUMBAI V. DCIT CIR 4(3), MUMBAI

ITA 2792/MUM/2012

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 3300 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 1 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-06-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 28-04-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 25-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D PRABHAKAR REDDY
• Keywords: Capital asset converted into stock in trade
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUMBAI , , BEFORE SHRI JOGINDER SINGH , JM AND SHRI SANJAY ARORA , AM ./ I. T.A. NO. 2792/MUM/2012 ( / ASSESSMENT YEAR: 2008 - 09 ) MILI CONSULTANTS & INVESTMENT PVT. LTD. 204, SHREEPAL COMPLEX, SUREN ROAD, ANDHERI (E), MUMBAI - 400 093 / VS. DY. CIT, CIRCLE - 4(3), 6 TH FLOOR, 638 AAYKAR BHAVAN, M. K. ROAD, MUMBAI - 400 021 ./ ./ PAN/GIR NO. AAACM 6095 Q ( / APPELLANT ) : ( / RESPONDENT ) / APPELLANT BY : SHRI K. GOPAL / RESPONDENT BY : SHRI D. PRABHAKAR REDDY / DATE OF HEARING : 02.3.2016 / DATE OF PRONOUNCEMENT : 01 . 6 .2016 / O R D E R PER SANJAY ARORA, A. M.: THIS IS AN A PPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS) - 9 , MUMBAI (CIT(A) FOR SHORT) DATED 20.01.2012 , DISMISSING T HE A SSESSEES APPEAL CONTESTING ITS ASSESSMENT U/S.143(3) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR THE ASSESSMENT YEAR (A.Y.) 2008 - 09 VIDE ORDER DATED 20.1 2 .2010 . 2. THE FACTS IN BRIEF ARE THAT THE ASSE SSEE - COMPANY , IN THE BUSINESS OF SHARE BROKING, TRADING AND INVESTMENT IN SHARES AND SECURITIES, WAS , DURING THE COURSE OF 2 ITA NO. 2792/MUM/2012 (A.Y. 2008 - 09) MILI CONSULTANTS & INVESTMENT PVT. LTD. VS. DY. CIT ASSESSMENT PROCEEDINGS FOUND BY THE ASSESSING OFFICER (A.O.) TO HAVE BOOKED LOSSES TO THE EXTENT OF RS.11,53,521/ - ON OPEN DERIVATIVE CONTRACTS, I.E., BY MARKING THEM TO MARKET AS AT THE YEAR - END (31.3.2008). THE ASSESSEE, IN JUSTIFICATION, BASED IT S CASE ON THE PRINCIPLE OF REAL INCOME, RELYING ON THE DECISION S IN THE CASE OF GODHRA ELECTRICITY CO. LTD. VS. CIT [ 1997 ] 225 ITR 746 (SC) ; CIT VS. BIRLA GWALIOR (P) LTD. [1973] 89 ITR 266 (SC); R. B. JODHA MAL KUTHIALA VS. CIT [1971] 82 ITR 570; POONA ELECTRIC SUPPLY CO. LTD. VS. CIT [1965] 57 ITR 521 (SC); CIT VS. SHOORJI VALLABHDAS AND CO. [1962] 46 ITR 144 (SC) ; AND H. M. KASHIPAREKH AND CO. LTD. VS. CIT [1960] 39 ITR 706 (BOM) . REL IANCE WAS ALSO PLACED ON THE ACCOUNTING STANDARD (AS - I) NOTIFIED BY THE BOARD U/S. 145(2) OF THE ACT, WHICH REQUIRES ADOPTION OF THE ACCOUNTING POLICIES AS WOULD REPRESENT A TRUE AND FAIR VIEW OF THE STATE OF A FFAIRS OF THE REPORTING ENTERPRISE AS AT THE VALUATION DATE. PRUDENCE, ALONG WITH SUBSTANCE OVER FORM AND MATERIALITY ARE THE PRINCIP A L CONSIDERATIONS THAT OUGHT TO GOVERN THE SELECTI ON OF THE ACCOUNTING POLIC IES . PRUDENCE REQUIRES THAT PROVISION S HOULD BE MADE FOR ALL KN OWN LIABILITIES AND LOSSES , EVEN THOUGH THE AMOUNT THEREOF MAY NOT BE DETERMINABLE WITH CERTAINTY AND REPRESENT ONLY A BEST ESTIMAT E IN LIGHT OF THE AVAILABLE INFORMATION. IN OIL & NATURAL GAS CORPN. LTD. VS. DY. CIT [ 2002 ] 83 ITD 1 51 (DEL) (SB) , THE T RIBUNAL PER ITS LARGER BENCH HAD HELD THAT FOREX LOSSES, I.E., ARISING OUT OF FOREIGN EXCHANGE FLUCTUATION IN RESPECT OF TRADING TRANSACTIONS, MADE WITH REFERENCE TO THE BALANCE - SHEET DATE, IS NOT A CONTINGENT LIABILITY OR A CONTINGENT LOSS BUT FAIT AACCOMPL I AND, ACCORDINGLY, ADMISSIBLE AS A DEDUCTION. IN VIEW OF THE A.O., THE DERIVATIVE CONTRACTS ARE NOT ACQUIRED AT A COST AND , FURTHER, D O NOT CONSTITUTE STOCK - IN - TRADE, SO AS TO ATTRACT THE PRINCIPLE OF VALUATION T COST OR MARKET VAL UE, WHICHEVER IS LESS. THE LIABILITY HAD NOT CRYSTALLIZED AS ON THE BALANCE - SHEET DATE, AND WOULD BE SO ONLY ON THE SETTLEMENT OF THE CONTRACT AT A FUTURE DATE. TRUE, THE PRINCIPLE OF REAL INCOME IS APPLICABLE, BUT THEN DISALLOWING SUCH NOTIONAL LOSS , AS B EING CLAIMED, IS ONLY TOWARD THE ASSESSMENT OF REAL INCOME . THE SAME CANNOT BE ALLOWED TO BE INFLUENCE D BY SUCH NOTIONAL LOSS ES . FURTHER, EVEN 3 ITA NO. 2792/MUM/2012 (A.Y. 2008 - 09) MILI CONSULTANTS & INVESTMENT PVT. LTD. VS. DY. CIT ASSUMING THAT THE DERIVATIVE CONTRACT IS ITSELF A STOCK - IN - TRADE , IT S C O ST BEING NIL , THERE WAS NO SCOPE FOR V ALU ING IT BELOW THE SAME. SUCH A LOSS IS NOT ALLOWABLE , AND IS ACCORDINGLY NOT ALLOWED EVEN IN THE C ASE OF FOREIGN EXCHANGE DERIVATIVES. THE LOSS WAS, ACCORDINGLY, DISALLOWED. IN APPEAL, THE LD. CIT(A) WAS OF THE VIEW THAT OPEN UNSETTLE D DERIVATIVE CONTRA CTS HELD BY THE ASSESSEE AS AT THE CLOSE OF THE YEAR FORMED PART OF THE CURRENT ASSET S , I.E., HELD ON REVENUE ACCOUNT , OR AS A TRADING ASSET. THE SAME IS , IN TERMS OF THE DECISION S BY THE A PEX C OURT IN CIT VS. WOODWARD GOVERNOR INDIA (P) LTD. [2009] 312 IT R 254 (SC) AND SUTLEJ COTTON MILLS LTD. VS. CIT [1979] 11 6 ITR 1 (SC), LIABLE TO ALLOWED. I N WOODWARD GOVERNOR INDIA (P) LTD. (SUPRA), WHEREIN THE LIABILITY UNDER REFERENCE WAS A FOREIGN EXCHANGE DENOMINATED LIABILITY , THE HONBLE COURT HAD HELD THAT WHERE FORMING PART OF THE CIRCULATING CAPITAL, IT AS IN THAT CASE , IS TO BE STATED BY CONVERTING THE SAME AT THE RATE OBTAINING AS AT THE YEAR - END; WHETHER RESTATING THE LIABILITY WHICH WAS IN RESPECT OF IMPORT OF RAW MATERIAL, BY APPLYING SUCH CLOSING RATE O F EXCHANGE LEAD TO STATING IT AT A LOWER OR HIGHER AMOUNT, I.E., RESULT ED IN A GAIN OR LOSS. A LISTING OF A LL SUCH CONTRACTS (AS ON 31.3.2008) REVEAL ED THAT THE ASSESSEE HAD UNOBS ORBED PROFIT OF RS.15,29,983/ - ON SUCH OPEN CONTRACTS ON THE BASIS OF THEIR M ARKET VALUE /S AS AT THE YEAR - END, I.E., MARK ING THEM TO MARKET , AND WHICH (PROFIT) HAD BEEN IGNORED BY THE A.O. T HE METHOD OF VALUATION HAS TO BE FAIR AND REASONABLE, AND NOT MOTIVATED OR GUIDED WITH A VIEW TO RE DUCE THE INCIDENCE OF TAX. HE, ACCORDINGLY, AFTER SHOW CAUSING THE ASSESSEE FOR ENHANCEMENT, WHILE DELETING THE IMPUGNED DISALLOWANCE (FOR RS.11.54 LACS), EFFECT ED AN ADDITION FOR RS.15.30 LACS, I.E., MADE AN ENHANCEMENT TO THE ASSESSED INCOME BY THE DIFFERENCE OF RS.3.76 LACS (RS.15.30 LACS RS.11 .54 LACS). AGGRIEVED, THE ASSESSEE IS IN SECOND APPEAL. 3. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATERIAL ON RECORD. TO BEGIN WITH, WE NOTE , EVEN AS OBSERVED BY THE B ENCH DURING HEARING, THAT THE LD. CIT(A) HAS ALLOWED THE ASSESSEES CLAIM FOR LOSS (FOR RS.11 . 54 LACS) AND, THEREFORE, 4 ITA NO. 2792/MUM/2012 (A.Y. 2008 - 09) MILI CONSULTANTS & INVESTMENT PVT. LTD. VS. DY. CIT THE ASSESSEES G ROUND N O. 1 CHALLENGING THE CONFIRMATION OF IT S DISALLOWANCE AND, AGAIN, GROUND # 3 TOWARD NOT OBSERVING CON SISTENCY , WOULD NOT SURVIVE. THE ONLY QUESTION BEFORE US ; THE REVENUE BEING NOT IN APPEAL, IS IF THE CORRESPONDING GAIN OF RS.15.30 LACS IS ASSESSABLE FOR THE CURRENT YEAR , HAVING BEEN BROUGHT TO TAX BY THE LD. CIT(A) , AND WHICH IS THE SUBSTANCE OF THE ASSESSEES G ROUND # 2 BEFORE US CHALLENGING THE ENHANCEMENT OF RS.3.76 LACS. THE SAME HAS BEEN EF FECTED BY THE LD. CIT(A) OSTENSIBLY FOLLOWING THE DECISION IN WOODWARD GOVERNOR INDIA (P) LTD. (SUPRA) (REFER PARA 5.1.2 AND 5.1.3 OF THE IMPUGNED ORDER). WE HAVE TOWARD THE SAME READ BOTH THE CITED DECISIONS BY THE A PEX C OURT AS WELL AS THAT IN O IL & NATU RAL GAS CORPORATION LTD. VS. CIT DATED 15.3.2010 (IN CIVIL APPEAL NO. 7223 OF 2008/COPY ON RECORD), TO FIND THAT THE VIEW TAKEN BY THE LD. CIT(A) IS NOT CONSISTENT WITH THOSE DECISION S , AT LEAST IN - SO - F AR AS THE ACCRUAL OF INCOME IS CONCERNED ; THE PRINCIPL E OF PRUDENCE IMPACTING IT DIFFERENTLY . THE GIST OF THE DECISION IN THE CASE OF ONGC (SUPRA), R ENDERED AFTER CONSIDERING ITS EARLIER DECISION IN WOODWARD GOVERNOR INDIA (P) LTD. (SUPRA) , IS VIDE PARA 10 OF THE JUDGMENT , WHICH READS AS UNDER: 10. HAVIN G CAREFULLY PERUSED THE DECISION OF THIS COURT IN WOODWARD'S CASE (SUPRA), WE ARE OF THE OPINION THAT BOTH THE ISSUES STAND CONCLUDED BY THE SAID DECISION. DEALING WITH THE SAID ISSUES EXTENSIVELY, SPEAKING FOR THE BENCH, S.H. KAPADIA, J. SUMMARISED THE FO LLOWING FACTORS WHICH SHOULD BE TAKEN INTO ACCOUNT IN ORDER TO FIND OUT IF AN EXPENDITURE ON ACCOUNT OF FLUCTUATION IN THE FOREIGN CURRENCY RATES, WHEN THE ASSESSEE IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, IS DEDUCTIBLE: (I) WHETHER THE SYSTEM OF ACCO UNTING FOLLOWED BY THE ASSESSEE IS THE MERCANTILE SYSTEM, WHICH BRINGS IN THE DEBITS OF THE AMOUNT OF EXPENDITURE FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED EVEN BEFORE IT IS ACTUALLY DISBURSED AND CREDITS, WHAT IS DUE, IMMEDIATELY IT BECOMES DUE EVEN B EFORE IT IS ACTUALLY RECEIVED; (II) WHETHER THE SAME SYSTEM 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 C LAIMED TO HAVE ACCRUED AND TO THE GAINS THAT MAY ACCRUE TO IT; 5 ITA NO. 2792/MUM/2012 (A.Y. 2008 - 09) MILI CONSULTANTS & INVESTMENT PVT. LTD. VS. DY. CIT (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 ENT RIES 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. APPLYIN G THESE FACTORS ON THE FACTS OF THAT CASE, IT WAS HELD THAT THE 'LOSS' SUFFERED BY THE ASSESSEE, MAINTAINING ACCOUNTS REGULARLY ON MERCANTILE SYSTEM AND FOLLOWING ACCOUNTING STANDARDS PRESCRIBED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA (ICAI), ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS ON THE DATE OF BALANCE - SHEET WAS AN ITEM OF EXPENDITURE UNDER SECTION 37(1) OF THE ACT, NOTWITHSTANDING THAT THE LIABILITY HAD NOT BEEN DISCHARG ED IN THE YEAR IN WHICH THE FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE OCCURRED. THE QUESTION OF BOOKING GAIN , I.E., ON AN APPRECIATION OF THE CONTRACT VALUE /S , AS WOULD BE APPARENT, DOES NOT ARISE. PROVIDING FOR A LIABILITY WITH REFERENCE TO THE MARK ET VALUE, WHICH IS ADOPTED AS A SURROGATE MEASURE FOR REALIZABLE VALUE , NET OF COST , IF ANY, TOWARD REALIZATION, I.E., AT NET REALIZABLE VALUE , W H ERE HELD ON REVENUE ACCOUNT, IS ON THE BASIS OF THE ACCOUNTING PRINCIPLE OF PRUDENCE WHICH SUGGESTS BOOKING OF ALL KNOWN LOSSES AND LIABILITIES . P ROVIDING FOR THE SAME IS ON THE PREMISE THAT THE ENTERPRISE FOLLOWING ACCRUAL METHOD OF ACCOUNTING, THE LOSS HAD ACCRUED EVEN THOUGH THE LIABILITY MAY NOT HAVE CRYSTALLIZED OR ITS AMOUNT MAY NOT BE QUANTIFI ABLE WITH EX AC T NESS AND, THEREFORE , REPRESENTS ONLY AN ESTIMATE THERE OF , BASED ON THE BEST AVAILABLE INFORMATION. SUCH ESTIMATES ARE CALLED ACCOUNTING ESTIMATES , WHICH INFORM AND PERMEATE THE PREPARATION AND PRESENTATION OF FINAL ACCOUNTS, THE BACKGROUND FACTS WITH REGA RD TO WHICH ARE GENERALLY CO MMUNICATED THROUGH TH E NOTES TO THE ACCOUNTS. AS AFORE - SAID, THE CONTROVERSY BEFORE US IS LIMITED TO WHETHER THE UNREALIZED GAIN, I.E., AS MAY STAND TO ARISE ON THE BASIS OF THE MARKET VALUE S ( OF THE UNDERLYING 6 ITA NO. 2792/MUM/2012 (A.Y. 2008 - 09) MILI CONSULTANTS & INVESTMENT PVT. LTD. VS. DY. CIT SHARES) AS AT TH E CLOSE OF THE YEAR ON OPEN CONTRACTS, PRIOR T O THE SETTLEMENT DATE, COULD BE TAKEN INTO ACCOUNT FOR THE PURPOSE OF CLOSING ACCOUNTS AND RECOGNIZING INCOME FOR THE RELEVANT YEAR. THE PRICE/S OBTAINING ON THE SETTLEMENT DATE /S , SUBSEQU ENT TO THE VALUATION ( BALANCE - SHEET) DATE , MAY WELL BE DIFFERENT AND NOT IN AGREEMENT WITH THAT AS AT THE YEAR - END, ANTERIOR THERETO. IN FACT, EVEN IF ANTICIPATED , THE GAIN IS PR O SCRIBED FOR BEING BOOKED , MIL I T ATE AS IT CLEARLY DOES AGAINST THE ACCOUNTING PRINCIPLE OF PRUDENCE, ADVOCATING THE PROVISION FOR ALL KNOWN LIABILITIES WHILE AT THE SAME TIME NOT RECOGNIZING A NY ANTICIPATED INCOME. T HE SAID PRINCIPLE, PRESCRIBED PER AS - I ISSUED BY THE BOARD, SINCE NOTIFIED U/S. 145(2) OF THE ACT, THEREFORE ACQUIRES THE FORCE OF LAW . REFE RENCE IN THIS CONTEXT MAY ALSO BE MADE TO AS - 9 (RECOGNITION OF INCOME) ISSUED BY INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, WHICH AGAIN ASSUMES LEGAL STATUS IN VIEW OF SECTION 209 OF THE COMPANIES ACT, 1956. THE STATEMENT OF A TRADE LIABILITY, AT CURRENT VALUE, IS ON AN ENTIRELY DIFFERENT FO O T I NG. FINALLY, BEFORE PARTING, WE MAY ADD THAT THE LOSS ON THE BASIS OF MARK TO MARKET OPEN DERIVATIVE CONTRACTS , STANDING THUS TO BE ALLOWED IN TH E FACTS AND CIRCUMSTANCES OF THE CASE, THE A.O. SHALL BE AT LIBERTY TO WITHDRAW THE SAID LOSS ON THE SETTLEMENT DATE /S, WHICH THE REVENUE WAS OTHERWISE BOUND TO ALLOW TO THE ASSESSEE , I.E., TO THAT EXTENT (RS.11.54 LACS). LIKE - WISE THE GAIN ON THE BALANCE (BROUGHT FORWARD) CONTRACTS WOULD STAND TO BE TAXED IN ITS ' ENTIRE TY ON SETTLEMENT. WE STATE SO IN ORDER TO AVOID ANY PREJUDICE OR DOUBLE BENEFIT TO EITHER SIDE. WE DECIDE ACCORDINGLY. 4. IN THE RESULT, THE ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON JUNE 01 , 201 6 SD/ - SD/ - ( JOGINDER SINGH ) (S ANJAY ARORA) / J UDICI AL MEMBER / A CCOUNTANT MEMBER MUMBAI ; DATED : 01 . 0 6 .201 6 . . ./ ROSHANI , SR. PS 7 ITA NO. 2792/MUM/2012 (A.Y. 2008 - 09) MILI CONSULTANTS & INVESTMENT PVT. LTD. VS. DY. CIT / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ( ) / THE CIT(A) 4. / CIT - CONCERNED 5. , , / DR, ITAT, MUMBAI 6. / GUARD F ILE / BY O RDER, / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI