ASST CIT 16(3), MUMBAI V. STERLING GEMS, MUMBAI

ITA 281/MUM/2014

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8115 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 11 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 27-07-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 10-01-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V JUSTIN
• Keywords: Business income
• Section: 143(3); 142(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES E , MUMBAI BEFORE S HRI G.S. PANNU (AM) AND SHRI RAM LAL NEGI (JM) ITA NO. 281 /MUM/20 1 4 ASSESSMENT YEAR: 2009 - 10 THE ACIT 16(3), MATRU MANDIR, 2 ND FLOOR, R. NO. 206, TARDEO ROAD, MUMBAI - 400007 VS. M/S STERLING GEMS, 301/302, SHREEJI DARSHAN, TATA ROAD NO. 1, OPP. PRASAD CHAMBERS, OPERA HOUSE, MUMBAI 400004 PAN: AAAFS7414C (APPELLANT) (RESPONDENT) REVENUE BY : SHRI V. JUSTIN ( DR ) ASSESSEE BY : NONE DAT E OF HEARING: 18 /09 /201 7 DATE OF PRONOUNCEMENT: 14 / 12 /201 7 O R D E R PER RAM LAL NEGI, JM THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE ORDER DATED 28/10/2013 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS) - 2 7 , MUMBAI , FOR THE A S S ESSMENT YEAR 2009 - 10 , WHEREBY THE LD. CIT (A) HAS PARTLY ALLOWED THE APPEAL FILED BY THE ASSESSEE AGAINST ASSESSMENT ORDER PASSED U/S 143(3) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE A CT). 2. BRIEF FACTS OF THE CASE ARE THAT THE AS SESSEE FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR UNDER CONSIDERATION DECLARING THE TOTAL INCOME OF RS.1,43,15,884/ - . SINCE THE CASE WAS SELECTED FOR SCRUTINY NOTICE UNDER SECTION 143(2) AND 142(1) WERE SERVED UPON THE ASSESSEE. IN RESPONSE THEREOF , THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE APPEARED BEFORE THE AO AND ALSO FILED THE DETAILS. IT WAS SEEN THAT THE ASSESSEE HAD DEBITED RS. 3,73,26,014/ - AS LOSSES ON ACCOUNT OF OUTSTANDING/OPEN FOREIGN EXCHANGE FORWARD CONTRACTS. THE ASSESSEE WAS ACC ORDINGLY ASKED TO GIVE THE DETAILS OF THE SAID LOSSES AND TO 2 ITA NO. 281 / M UM/2014 ASSESSMENT YEAR: 2009 - 10 EXPLAIN AS TO WHY THE SAME SHOULD NOT BE DISALLOWED AS A NOTIONAL LOSS OF CONTINGENT LIABILITY DEBITED TO P & L ACCOUNT. THE ASSESSEE CONTENDED THAT SINCE THERE IS A CONTRACTUAL LIABILITY ON THE PART OF THE BANK TO BUY/SELL THE US DOLLARS AT A FUTURE DATE BEYOND 31.03.2009 AND ITS MAGNITUDE NEEDS TO BE ESTIMATED WITH REASONABLE CERTAINTY ON THE DATE OF DRAWING THE BALANCE SHEET, THE LOSS MAY BE ALLOWED. HOWEVER, REJECTING THE CONTENTION OF THE ASS ESSEE THE AO MADE ADDITION OF THE SAID AMOUNT TO THE INCOME OF THE ASSESSEE AND DETERMINED THE TOTAL INCOME OF THE ASSESSEE AT RS.5,20,41,900/ - . 3. IN THE FIRST APPEAL, THE LD. CIT(A) FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN ONGC VS. CIT(A) 3 22 ITR 180 ,CIT VS . WOODWARD GOVERNOR INDIA P LTD.312 ITR 254 AND THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL RENDERED IN DCIT VS. BANK OF BAHRAIN AND KUWAIT ITA NOS. 4404 & 1883/MUM/2004 REVERSED THE FINDINGS OF THE AO AND ALLOWED THE APPEAL OF THE ASSE SSEE. 4 . AGGRIEVED BY THE ORDER OF LD. CIT (APPEAL S ), THE REVENUE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUNAL ON THE FOLLOWING EFFECTIVE GROUNDS: - 1. WHETHER ON THE FACTS AND CIRCUMSTANCES AND IN LAW, THE LD. CIT (A) HAS ERRED IN HOLDING THAT MARK TO MA RKET LOSS OF RS. 3,73,26,014/ - ARISING ON VALUATION OF FORWARD EXCHANGE CONTRACTS ON THE CLOSING DATE OF ACCOUNTING YEAR IS NOT A NOTIONAL LOSS AND, THEREFORE, ALLOWABLE? 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT (A) WAS R IGHT IN NOT TAKING COGNIZANCE OF THE DECISION OF THE ITAT, E BENCH, MUMBAI IN ITA NO. 506/MUM/2013 DATED 03.05.2013 IN THE CASE OF M/S S. VINODKUMAR DIAMONDS PVT. LTD.? 3. THE LD. CIT (APPEALS) GROSSLY ERRED ON FACTS IN NON - CONFIRMING DISALLOWANCE OF MARK T O MARKET LOSS OF RS. 3,73,26,014/ - ON ACCOUNT OF OUTSTANDING FORWARD CONTRACTS. 4. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT (A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 3 ITA NO. 281 / M UM/2014 ASSESSMENT YEAR: 2009 - 10 5. THIS CASE WAS FIXED FOR HEARING ON 18.09. 2017. ON THE SAID DATE WHEN THE CASE WAS CALLED FOR HEARING, NONE APPEARED ON BEHALF OF THE ASSESSEE. WE NOTICED THAT THIS APPEAL HAS BEEN FIXED FOR HEARING ON EIGHT DATES SINCE ITS INSTITUTION IN THE YEAR 2015 AND THE RESPONDENT / ASSESSEE DID NOT APPEAR EV EN ON A SINGLE DATE. TWO NOTICES SENT THROUGH REGISTERED POST HAVE RECEIVED BACK WITH THE REMARKS THAT THE ADDRESSEE HAS LEFT THE PLACE. IN OUR CONSIDERED VIEW NO FRUITFUL PURPOSE WOULD BE SERVED IN CASE FRESH NOTICE IS ISSUED TO THE RESPONDENT ASSESSEE. UNDER THESE CIRCUMSTANCES WE HAVE NO OPTION BUT TO DISPOSE OF THE CASE ON THE BASIS OF MATERIAL ON RECORD AFTER HEARING THE DEPARTMENTAL REPRESENTATIVE (DR). 6. BEFORE US, THE LD. DR RELYING ON THE ASSESSMENT ORDER SUBMITTED THAT THE LD. CIT(A) HAS WRONGLY ALLOWED THE LOSS OF RS. 3,73,26,014/ - ARISING ON VALUATION OF FORWARD EXCHANGE CONTRACT HOLDING MARK TO MARKET LOSS. THE LD. DR FURTHER CONTENDED THAT SINCE THE FINDINGS OF THE LD. IS CONTRARY TO THE DECISION OF THE MUMBAI BENCH OF THE TRIBUNAL RENDERED IN ITA NO. 506/MUM/2013 DATED 03.05.2013, THE SAME IS LIABLE TO BE SET ASIDE. 7. WE HAVE PERUSED THE MATERIAL ON RECORD INCLUDING THE CASES RELIED UPON BY THE AUTHORITIES BELOW. THE ONLY GRIEVANCE OF THE REVENUE IS THAT THE LD CIT(A) HAS ERRED IN HOLDING THA T MARK TO MARKET LOSS OF RS. 3,73,26,014 ARISING ON VALUATION OF FORWARD EXCHANGE CONTRACTS ON THE CLOSING DATE OF ACCOUNTING YEAR IS NOT A NOTIONAL LOSS. THE LD. CIT (A) HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE HOLDING AS UNDER: 2.4.16 .., IT IS UNDISPUTED THAT THE APPELLANT IS IN THE BUSINESS OF IMPORT AND EXPORT DIAMONDS AND HAS CERTAIN PAYABLES/RECEIVABLES IN FOREIGN EXCHANGE AND SUBSTANTIAL STOCK AT ANY POINT OF TIME DURING THE YEAR AND IT IS ALSO A FACT THAT THE APPELLANT IS CONSTANTLY EXP OSED TO RISK ARISING OUT OF FLUCTUATION IN THE FOREIGN EXCHANGE RATES AND SUCH A RISK IS INTEGRAL TO THE APPELLANTS 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 APPELLA NT INDEPENDENT TO THE BUSINESS CARRIED BY IT. IT IS ONLY WITH AN INTENTION TO MITIGATE THE RISK ASSOCIATED WITH BUSINESS THAT THE APPELLANT 4 ITA NO. 281 / M UM/2014 ASSESSMENT YEAR: 2009 - 10 HAS ENTERED INTO FOREIGN EXCHANGE CONTRACTS. THEREFORE, AS PER THE PLEADINGS MADE BY THE L. AR, WHAT NEEDS TO BE SEE N IS WHETHER THE RISK THAT THE APPELLANT HAS HEDGED BY WAY OF A FORWARD CONTRACT HAS AN UNDERLYING ASSET/STOCKS OR LIABILITY, AS THE CASE MAY BE. IT IS IN THIS SENSE OF THE MATTER THAT THE VARIOUS COURTS HAVE HELD THAT THE PROFITS OR LOSS ARISING OUT OF FO RWARD CONTRACTS FORMS PART OF THE BUSINESS INCOME. THIS PROPOSITION HAS BEEN DEALT WITH AT GREAT LENGTH IN THE PRECEDING PARAGRAPHS AFTER CONSIDERING IN DETAIL THE SUBMISSIONS MADE BY THE LD. AR AS ALSO THE VARIOUS CASE LAWS ON THE SUBJECT. IT IS, THEREFOR E, APPROPRIATE TO UNDERSTAND AT THIS STAGE THAT THE APPELLANTS PLEADINGS VEER AROUND THE PROPOSITION THAT THE FORWARD CONTRACTS ENTERED INTO BY IT DURING THE COURSE OF BUSINESS, CREATE A LEGAL LIABILITY IRRESPECTIVE OF THE FACT THAT WHETHER THESE CONTRACT S MATURE DURING THE ACCOUNTING YEAR OR BEYOND AND THE DIFFERENCE BETWEEN THE FORWARD CONTRACT RATE AND SPOT RATE IS, THEREFORE, AN ALLOWABLE EXPENSE. 2.4.17 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 LD. AO CANNOT DETERMINE 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 UN DERLYING ASSET/STOCK 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 PER THE FORWARD CONTRACT BEING ASCERTAINABLE, DUE EFFECT OF THE CONTRACT AT T HE YEAR - END H AS TO BE GIVEN WHILE ASSESSING THE APPELLANTS INCOME. HERE, IT IS NOT OUT OF PLACE TO MENTION THAT THE UPPER LIMITS OF EXPOSURE TO FORWARD CONTRACTS ARE REGULATED BY THE RBI GUIDELINES AND THAT THEY ARE ALLOWED ONLY TO CERTAIN EXTENT OF RECEIVABLES OR PAY ABLES 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 INTEGRAL TO THE APPELLANTS BUSINESS AND IT CANNOT BE CALLED A CONTINGENT TRANSACTION. THERE IS NO MERIT IN THE LD. AOS ARGUMENT IN TREATING THE IMPUGNED TRANSACTION AS INDEPENDENT TO THAT OF APPELLANTS BUSINESS AND TO STATE THAT THE FLOW OF BENEFITS IS NOT KNOWN OR IT DEPENDS ON ANY ONE OF THE VARIOUS EVENTS LISTED BY HIM. IN FACT THE LD. AO HAS FAILED TO SEE THAT SUCH EVENTS ARE PART AND PARCEL OF THE APPELLANTS BUSINESS AND NOT EXTERNAL TO IT. THEREFORE, WHATEVER MAY BE THE RESULT OF THE EVENTS LISTED OUT BY THE LD. AO, SUCH RESULT HAS TO BE TREATED AS 5 ITA NO. 281 / M UM/2014 ASSESSMENT YEAR: 2009 - 10 BUSINESS RESULT AT THE TIME OF ITS HAPPENING AND HENCE, THE EFFECT OF THE FORWARD CONTRACT DURING THE YEAR HAS TO BE CONSIDERED FOR THE PURPOSE OF ARRIVING AT THE APPELLANTS INCOME. 2.4.18 AS SEEN EARLIER, IN THE CAS E OF WOODWARD GOVERNOR 294 ITR 451 HON. DELHI HIGH COURT HAS OBSERVED AS UNDER: - 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 INT O. THE MERE POSTPONEMENT OF THE PAYMENT TO DIFFERENT DATE CANNOT EXTINGUISH THE LIABILITY AND RENDER IT NOTIONAL OR CONTINGENT. THE DECISION OF HON. SUPREME COURT IN BHARAT EARTH MOVERS SETTLES THE POSITION. THAT DECISION EXPLAINS THAT WHAT SHOULD BE CERTA IN IS THE INCURRING OF THE LIABILITY 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 CONTI NGENT . THIS APPROACH IS CONSISTENT WITH AN INFORMED BY THE ACCOUNTING PRACTICES IN THE MERCANTILE SYSTEM, WITH FURTHER GUIDANCE FROM THE ACCOUNTING STANDARDS OF THE ICAI WHICH HAVE RECEIVED JUDICIAL ACKNOWLEDGEMENT. 2.4.19 SIMILARLY, AS DISCUSSED, THIS D ECISION HAS BEEN APPROVED BY THE HON. SUPREME COURT IN CIT V WOODWARD GOVERNOR INDIA P LTD. (312 ITR 254). 2.4.20 FURTHER, AS SEEN EARLIER, IN THE CASE OF DCIT V/S. BANK OF BAHRAIN AND KUWAIT (ITA NOS. 4404 & 1883/MUM/2004), THE SPECIAL BENCH OF JURISDIC TIONAL MUMBAI ITAT HELD THAT MTM LOSSES IN RESPECT OF FORWARD FOREIGN EXCHANGE CONTRACTS DEBITED TO PROFIT AND LOSS ACCOUNT IS ALLOWABLE. 2.4.21 IN THE CASE OF ONGC VS CIT 322 ITR 180, HONBLE SUPREME COURT HAS REITERATED THE PRINCIPLES LAID DOWN ABOVE W HILE 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 ACCOUNT AND THAT THE ASSESSEE HAD COMPLIED WITH THE ACCOUNTING STANDARDS, LAID DOWN BY THE CENTRAL GOVERNMENT, THE LOSS SUFFERED BY IT ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS ON THE DATE OF BALANCE - SHEET IS AN ALLOWABLE EXPENDITURE UNDER SECTION 37 (1) OF THE ACT NOTWITHSTANDING THE F ACT THAT THE LIABILITY HAD NOT BEEN ACTUALLY DISCHARGED IN THE YEAR IN WHICH THE FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE HAD OCCURRED. 2.4.22 THUS THE JUDICIAL DECISIONS OF THE HONBLE SUPREME COURT AND VARIOUS OTHER AUTHORITIES ARE CLEARLY IN FAVOU R OF THE APPELLANT ON THIS 6 ITA NO. 281 / M UM/2014 ASSESSMENT YEAR: 2009 - 10 ISSUE. THAT APART, AS DISCUSSED EARLIER, THE TRANSACTIONS IN FOREIGN EXCHANGE WERE CARRIED OUT DURING THE NORMAL COURSE OF THE APPELLANTS BUSINESS. WHAT MATTERS IS WHETHER THE FORWARD CONTRACT TRANSACTION WAS ENTERED DURING THE COURSE OF APPELLANTS REGULAR BUSINESS OR WHETHER IT IS TAINTED WITH A COLOUR OF SPECULATIVE TRANSACTION. IN MY CONSIDERED OPINION, THE FACTS OF THE APPELLANTS CASE ARE FULLY COVERED BY THE ABOVE CITED DECISIONS OF THE HONBLE SUPREME COURT, DELHI HIGH CO URT AND THE ITAT MUMBAI BENCH. ACCORDINGLY, GROUND NOS. 1 & 2 ARE ALLOWED. 8. IN OUR CONSIDERED VIEW , THE LD. CIT (A) HAS PROPERLY APPRECIATED THE EVIDENCE ON RECORD AND HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE IN ACCORDANCE WITH THE PRINCIPLES OF LAW LAID DOWN BY THE HONBLE SUPREME COURT IN ONGC VS. CIT (SUPRA), THE DECISION OF HONBLE DELHI HIGH COURT IN WOODWARD GOVERNOR (SUPRA) AND THE DECISION OF THE COORDINATE BENCH RENDERED IN THE CASE OF DCIT VS. BANK OF BAHRIN AND KUWAIT (SUPRA). SINCE , THE FINDINGS OF THE LD. CIT (A) ARE IN ACCORDANCE WITH THE SETTLED PRINCIPLES OF LAW LAID DOWN IN THE CASES AFORESAID, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE FINDINGS OF THE LD. CIT (A). HENCE, WE UPHOLD THE IMPUGNED ORDER AND DISMISS ALL THE GROUNDS OF THE REVENUES APPEAL. IN THE RESULT, APPEAL FILED BY THE REVENUE FOR A SSESSMENT YEAR 2009 - 2010 IS DISMISSED . ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH DECEMBER , 2017 . SD/ - SD/ - ( G.S. PANNU ) ( RAM LAL NEGI ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI ; DATED: 14 / 12 / 2017 ALINDRA, PS 7 ITA NO. 281 / M UM/2014 ASSESSMENT YEAR: 2009 - 10 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . / BY ORDER, //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI