The Acit, Guntur V. M/s. Deccan Tabacco Exports (P) Ltd, Guntur

ITA 337/VIZ/2016

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 6441 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 1 year(s) 5 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-12-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2010-2011
• Appeal Filed On: 04-07-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Depreciation; Speculation loss
• Section: 43(5)

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . . , BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH , ACCOUNTANT MEMBER . / I . T .A.NO. 337 / VIZ / 201 6 ( / ASSESSMENT YEAR: 20 10 - 11 ) ASST.COMMISSIONER OF INCOME TAX CIRCLE - 1(1), GUNTUR VS. M/S DECCAN TOBACCO EXPORTS(P) LTD. 1/5, BRODIPET GUNTUR [PAN :AACCD3623M) ( / APPELLANT) ( / RESPONDENT) / APPELLANT BY : S HRI M.N.MURTHY NAIK, DR / RESPONDENT BY : SHRI G.V.N.HARI, AR / DATE OF HEARING : 2 2 . 11 .2017 / DATE OF PRONOUNCEMENT : 20 . 1 2 .2017 / O R D E R PER D.S. SUNDER SINGH , ACCOUNTANT MEMBER : 1 . THIS APPEAL IS FILED BY THE REVENUE AGAINST THE ORDER OF THE COMMISSIONER OF INCOME - TAX (APPEALS) - 1 , GUNTUR VIDE ITA NO. 5 6 / CIT(A) - 1 / GNT/ 201 3 - 1 4 DATED 29 . 0 2 .201 6 FOR THE ASSESSMENT YEAR 20 10 - 11 . 2 ITA NO . 337 / VIZ/2016 M/S DECCAN TOBACCO EXPORTS PVT. LTD., GUNTUR 2 . ALL THE GROUNDS OF APPEAL ARE RELATED TO FORWARD CONTRACTS LOSS ON FOREIGN EXCHANGE TRANSACTIONS ASSESSED AS SPECULATION LOSS U/S 43(5) OF I.T.ACT. THE ASSESSEE IS EXPORTER OF TOBACCO AND DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER (AO) FOUND THAT THE ASSESSEE DEBITED A SUM OF RS. 1,43,14,575/ - IN FOREIGN EXCHANGE DIFFERENCE ACCOUNT WHICH INCLUDED THE SUM OF R S. 62,20,829/ - FOREIG N EXCHANGE FORWARD CONTRACT LOSS. 3. THE ASSESSEE EXPLAINED THAT A SUM OF RS.62,20,829/ - WAS INCURRED BY THE ASSESSEE DUE TO CANCELLATION OF FOREIGN EXCHANGE FORWARD CONTRACTS. THE ASSESSEE ENTERED INTO FOREIGN FORWARD CONTRACT IN ORDER TO HEDGE THE CU RRENCY FLUCTUATION RISK WHILE REALIZING EXPORT DEBTORS. IT WAS ALSO ACKNOWLEDGED BY THE ASSESSEE THAT IT HAS ENTERED INTO FOREX EXCHANGE FO RWARD CONTRACTS WITH THE BANK IN ORDER TO FIX THE RATE AT WHICH THE US DOLLARS RECEIVED FROM THE EXPORT DEBTORS AT A LATER DATE CAN BE EXCHANGED FOR INDIAN RUPEES SO AS TO AVOID THE LIKELY LOSS DUE TO THE EXCHANGE RATE FOR US DOLLAR FALLING BELOW THE SAID RATE. AS THE LOSS OF RS.62,20,829/ - WAS INCURRED DUE TO CANCELLATION OF FORWARD CONTRACTS FOR SETTLEMENT OF THE CONT RACT FOR SALE OF US DOLLARS, THE ASSESSEE REQUESTED TO ALLOW THE SAME AS BUSINESS LOSS. THE TOTAL EXPORT TURNOVER OF THE ASSESSEE WAS RS.5,61,17,429/ - AND THE TOTAL VALUE OF FORWARD CONTRACTS BOOKED BY THE 3 ITA NO . 337 / VIZ/2016 M/S DECCAN TOBACCO EXPORTS PVT. LTD., GUNTUR ASSESSEE DURING THE YEAR WAS US $ 4,22,92,364 WHICH WAS LESS THAN THE EXPORT SALES MADE DURING THE YEAR. THE EXTENT OF FORWARD CONTRACTS ENTERED INTO BY THE ASSESSEE WAS BASED ON THE EXPECTED INFLOW OF EXPORT SALE S REALIZATIONS DURING THE YEAR. THE AGGREGATE REALIZATION OF EXPORT DEBTORS AMOUNTED TO US $ 4,69,24,357 DURING THE YEAR AGAINST THE TOTAL VALUE OF FORWARD CONTRACTS BOOKED DURING THE YEAR WAS US $ 4,22,92,354. OUT OF THE TOTAL VALUE OF FORWARD CONTRACTS BOOKED DURING THE YEAR OF US $ 4,22,92,364/ - , A SUM OF US $ 2,64,87 ,307 WERE UTILIZED DU RING THE YEAR, BY ACTUAL DELIVERY OF US $ TO THE BANK AT THE FORWARD CONTRACT RATE , OUT OF THE REALIZATION OF EXPORT DEBTORS. THE ASSESSEE EXPLAINED THAT T HE VALUE OF FORWARD CONTRACTS CANCELLED DURING THE YEAR WAS US $ 1,06,59,879 . THE CANCELLATION OF FORWAR D CONTRACTS WAS RESORTED TO PREVENT FURTHER LOSSES DUE TO THE PREVAILING TREND OF INCREASING EXCHANGE RATE. THE AO CONSIDERED THE EXPLANATION OF THE ASSESSEE AND OBSERVED THAT THE TRANSACTIONS ENTERED BY THE ASSESSEE AND THE LOSS INCURRED WAS OTHERWISE THAN ACTUAL DELIVERY AND IS IN THE NATURE OF SPECULATIVE TRANSACTION WITHIN THE MEANING OF PROVISO TO SEC.43(5) OF THE ACT. 4. THE AO HELD THAT T HOUGH, THE ASSESSEE HAS RELI ED ON THE DECISION OF THE HON'BL E CALCUTTA HIGH COURT IN IN THE CASE OF CIT(CENTRAL) VS. SURAJMULL 4 ITA NO . 337 / VIZ/2016 M/S DECCAN TOBACCO EXPORTS PVT. LTD., GUNTUR NAGARMULL IN SUPPORT OF ITS CONTENTION THAT SEC.43(5) IS NOT APPLICABLE TO ITS CASE, THERE IS NEITHER A DECISION OF THE JURISDICTIONAL HIGH COURT NOR THAT OF THE HONBLE SUPREME COURT WHICH IS BINDING. THE AO AC CORDINGLY HELD THAT FOREIGN EXCHANGE LOSS IS SPECULATIVE LOSS AND CANNOT BE SET OFF AGAINST REGULAR BUSINESS INCOME. ACCORDINGLY DISALLOWED AND ADDED BACK TO THE INCOME. 5. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE WENT ON APPEAL BEFORE THE CIT(A) AND THE LD.CIT(A) ALLOWED THE APPEAL OF THE ASSE SSEE HOLDING THAT THE FORWARD CONTRACT LOSS IS INCIDENTAL TO THE BUSINESS AND RELIED ON THE DECISION OF H ON'BLE IT AT, MUMBA I BENCH IN THE CASE OF LONDON STAR DIAMOND COMPANY ITA NO.6169/M/2012, TAKING INTO A CCOUNT VARIOUS JUDICIAL PRONOUNCEMENTS HAS HELD THAT FORWARD CONTRACTS ENTERED INTO WITH BANKS FOR HEDGING FOREIGN EXCHANGE LOSS ON OUTSTANDING RECEIVABLES IN FOREIGN CURRENCY ARE INTEGRAL OR INCIDENTAL TO EXPORTS. THEREFORE, LOSS ON SUCH FORWARD CONTRACTS IS BY NATURE A BUSINESS LOSS RATHER THAN A SPECULATIVE LOSS. THE LD. CIT (A) RELIED ON THE FOLLOWING OBSERVATION OF THE TRIBUNAL IN THE CASE CITED (SUPRA) (I) FCS WERE A COMMODITY 5 ITA NO . 337 / VIZ/2016 M/S DECCAN TOBACCO EXPORTS PVT. LTD., GUNTUR (II) FCS, WHEN ENTERED INTO WITH BANKS FOR HEDGING LOSSES WITH RESPECT TO FOREIGN EXCHANGE FLUCTUATIONS OF THE EXPORT PROCEEDS, HAD TO BE CONSIDERED INTEGRAL OR INCIDENTAL TO THE ASSESSEE'S EXPORT ACTIVITY. AS SUCH, THE LOSSES AND GAINS CONSTITUTED BUSINESS LOSS OR GAINS, AS OPPOSED TO SPECULATION LOSS OR GAINS. THE FACT THAT F ORWARD CONTRACTS WERE PREMATURELY CANCELLED COULD NOT ALTER THE NATURE OF THE TRANSACTION. (III) THE LAW DOES NOT REQUIRE ONE - TO - ONE CORRELATION BETWEEN THE FCS AND EXPORT INVOICES. WHERE TOTAL VALUE OF THE FC DOES NOT EXCEED THE TOTAL OUTSTANDING RECEIVA BLE IN FOREIGN EXCHANGE, THE CLAIM IS SUSTAINABLE AS A BUSINESS LOSS. (IV) CONSIDERING THE DOCUMENTS/ANALYSIS OF TRANSACTION PUT FOR BY THE COMPANY, FCS WERE AN INTEGRAL PART, OR INCIDENTAL TO, THE CORE BUSINESS OF EXPORTING DIAMONDS. THEREFORE, FCS CONSTI TUTED 'HEDGING TRANSACTIONS' AND NOT 'SPECULATIVE CONTRACTS'. 5.1. THE LD CIT(A) OBSERVED IN THE ASSESSEES THAT THE FACTS CLEARLY REVEAL THAT THE FORWARD CONTRACTS WERE ENTERED TO HEDGE AGAINST THE POSSIBLE LOSSES ON ACCOUNT OF DEPRECIATION OF US $ ON REALISATION OF SALE PROCEEDS . THE ASSESSEE HOWEVER SUFFERED LOSSES IN RESPECT OF THESE FORWARD CONTRACTS 6 ITA NO . 337 / VIZ/2016 M/S DECCAN TOBACCO EXPORTS PVT. LTD., GUNTUR BECAUSE THE US $ APPRECIATED AGAINST THE RUPEE DURING THE YEAR. THE CONTENTION OF THE ASSESSEE FOR ENTERING INTO FORWARD CONTRACTS IS INTEGRAL PART OF EXPORT BUSINESS AND UTILIZATION/CANCELLATION IS A DECISION TO BE MADE BY THE BUSINESS ENTITY HAVING REGARD TO THE FLUCTUATIONS IN THE FOREIGN CURRENCY AND IT HAS PROVED BEYOND DOUBT THAT THERE IS AVAILABILITY OF DOLLA RS ON THE DUE DATE OF THE FORWARD CONTRACT A N D IT HAS PREMATURELY CANCELLED THE FORWARD CONTRACT IN ORDER TO AVOID FURTHER LOSSES. IN VIEW OF THE DETAILED DISCUSSION OF FACTS AND CIRCUMSTANCES OF THE CASE AND VARIOUS COURT JUDGMENTS, THE LOSS CLAIMED BY T HE ASSESSEE ON ACCOUNT OF CANCELLATION OF FORWARD CONTRACTS TO AVOID FURTHER LOSS HELD TO BE BUSINESS LOSS AND ACCORDINGLY DELETED THE ADDITION AND ALLOWED THE APPEAL OF THE ASSESSEE. 6. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE REVENUE FILED APPEAL BE FORE THIS TRIBUNAL . 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL PLACED ON RECORD. THE ASSESSEE IS EXPORTER OF TOBACCO AND DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE ENTERED INTO FOREIGN EXCHANGE FORWARD CONTRACT TO MITIGATE THE LOSS ON FLUCTUATION OF FOREIGN CURRENCY. THERE IS NO DISPUTE 7 ITA NO . 337 / VIZ/2016 M/S DECCAN TOBACCO EXPORTS PVT. LTD., GUNTUR WITH REGARD TO THE FACT THAT THE ASSESSEE IS NOT TRADING IN CURRENCY AND THE ENTIRE TRANSACTIONS WERE ROUTED THROUGH BANK. THE TOTAL EXPORT TURNOVER OF THE ASSESSEE WAS US $ 5,61,17,429 AND THE VALUE OF FORWARD CONTRACTS BOOKED BY THE ASSESSEE WAS US $ 4,22,92,364 WHICH IS LESS THAN THE VALUE OF THE EXPORTS. THE LD.AR STATED THAT THE FACTS OF THE ISSUE ARE SIMILAR TO THAT OF THE DECISION OF HONBLE ITAT, VISAKHAPATNAM IN THE C ASE OF SRI RAMALINGESWARA RICE & OIL MILL, VIDE ITA NO.487/VIZAG/2012 AND THE ISSUE IS SQUARELY COVERED BY THE ORDER OF THIS TRIBUNAL . ON THE SIMILAR FACTS AND CIRCUMSTANCES, THIS TRIBUNAL, IN THE CASE OF ACIT CIRCLE - 1 VS. SOUTHERN ROCKS & MINERALS (P) LTD . IN ITA NO.195/VIZAG/2015 DATED 11.10.2017 ALLOWED THE APPEAL OF THE ASSESSEE FOLLOWING THE DECISION OF HONBLE ITAT MUMBAI BENCH IN THE CASE OF LONDON STAR DIAMOND COMPANY (I) PVT. LTD. VS. DCIT IN ITA NO.6169/M/2012 AND THE DECISION OF THIS TRIBUNAL IN THE CASE OF ACIT, CIRCLE - 1, RAJAHMUNDRY VS. RAMALINGESWARA RICE AND OIL MILL ON SIMILAR FACTS WHICH READS AS UNDER: 8.1. THE COORDINATE BENCH, VISAKHAPATNAM IN THE CASE OF ASSISTANT COMMISSIONER OF INCOME - TAX, CIRCLE - 1, RAJAHMUNDRY .V.SRI RAMALINGESWARA RICE & OIL MILL * ON SIMILAR FACTS IN 2017] 78 TAXMANN.COM 17 (VISAKHAPATNAM - TRIB.) HELD THAT 12. BEFORE WE, GO IN TO THE FACTS OF THE PRESENT CASE, LET US UNDERSTAND, FORWARD CONTRACTS, SPECULATIVE TRANSACTIONS, HEDGING, FOREIGN EXCHANGE LOSS AND TREATMENT OF LOSS IN THE BOOKS OF ACCOUNT. A FORWARD CONTRACT IS A AGREEMENT BETWEEN AN ENTERPRISES AND A BANKER TO PURCHASE OR SELL A 8 ITA NO . 337 / VIZ/2016 M/S DECCAN TOBACCO EXPORTS PVT. LTD., GUNTUR PARTICULAR QUANTITY OF CURRENCY FOR A MUTUALLY AGREED PRICE AT A PARTICULAR DATE. THESE FORWARD CONTRACTS ARE USED BY EXPORTERS TO GET THEIR EXPORT RECEIVABLES HEDGED AGAINST ADVERSE CURRENCY MOVEMENTS. HEDGING IS DEFINED AS T O ENTER IN TO TRANSACTIONS TO REDUCE THE RISK OF ADVERSE MOVEMENT OF CURRENCY. ANY PERSON HAVING EXPOSURE TO FOREIGN CURRENCY MAY ENTER INTO HEDGING TO FIX HIS COST AND PROFITS AT A PARTICULAR LEVEL. THEREFORE, FORWARD CONTRACTS MEANS ENTERING INTO AGREEME NT WITH BANKERS TO HEDGE THE CURRENCY FLUCTUATIONS TO MITIGATE THE LOSS IN THE COURSE OF IMPORT/EXPORT BUSINESS. FORWARD EXCHANGE CONTRACTS AND TREATMENT OF ANY PROFIT/LOSS ARISING ON CANCELLATION OR RENEWAL OF SUCH FORWARD EXCHANGE CONTRACTS HAS BEEN DEAL T BY ACCOUNTING STANDARD - 11 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, IN PARAS 36, 37, 38 & 39. ACCORDING TO THE AS - 11, OF ICAI, ANY FORWARD EXCHANGE CONTRACTS ENTERED TO HEDGE THE FOREIGN CURRENCY EXPOSURE, TO MITIGATE UNEXPECTED LOSS WIT H ITS IMPORT/EXPORT BUSINESS HAS TO BE REGARDED AS BUSINESS LOSS AND INCOME AS THE CASE MAY BE. IN CASE OF SUCH FORWARD EXCHANGE CONTRACT IS NOT IN THE NATURE OF HEDGING, THEN SUCH LOSS SHOULD BE IGNORED. 13 . SIMILARLY, THE PROVISIONS OF SECTION 43(5) OF T HE ACT DEFINES THE TERM SPECULATIVE TRANSACTIONS, MEANS A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY, INCLUDING STOCK AND SHARES IS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE C OMMODITY OR SCRIPTS. SUB - CLAUSE (A) OF SECTION 43(5) OF THE ACT, EXCLUDES CERTAIN TRANSACTIONS WITHIN THE MEANING OF SPECULATIVE TRANSACTION. ACCORDING TO THE SUB - CLAUSE (A), A CONTRACT IN RESPECT OF RAW MATERIALS OR MERCHANDISE ENTERED INTO BY A PERSON IN THE COURSE OF HIS MANUFACTURING OR MERCHANDISING BUSINESS, TO GUARD AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATIONS IN RESPECT OF HIS CONTRACTS FOR ACTUAL DELIVERY OF GOODS MANUFACTURED BY HIM OR MERCHANDISE SOLD BY HIM. A PLAIN READING OF SUB - CLAUSE (A) O F SECTION 43(5) OF THE ACT, MAKES IT CLEAR THAT ANY FORWARD EXCHANGE CONTRACTS ENTERED INTO IN ITS BUSINESS OF IMPORT OR EXPORT OF GOODS TO HEDGE THE POSSIBLE FLUCTUATION IN FOREIGN CURRENCY, THEN SUCH TRANSACTIONS ARE KEPT OUTSIDE THE PURVIEW OF THE DEFIN ITION OF SPECULATIVE TRANSACTIONS. THEREFORE, TO SEE WHETHER A PARTICULAR TRANSACTION IS A SPECULATIVE TRANSACTION OR A MERE HEDGING TRANSACTION, THERE SHOULD BE EXPORT OR IMPORT OF GOODS OR MERCHANDISE AT LEAST TO THE EXTENT OF VALUE OF FORWARD EXCHANGE C ONTRACTS. 14. THE TREATMENT TO BE GIVEN TO FOREIGN CURRENCY ITEMS AS PER THE AMENDED AS - 11 OF ICAI, NOTIFIED BY CENTRAL GOVERNMENT U/S. 211(3C) OF COMPANIES ACT, DOES NOT MAKE ANY DISTINCTION BETWEEN ITEMS OF CAPITAL NATURE AND REVENUE NATURE. BOTH ARE R EQUIRED TO BE RECOGNIZED IN THE PROFIT & LOSS ACCOUNT. IN VIEW OF THE AFORESAID AMENDMENT, THERE EXISTS A DIVERGENCE OF VIEWS ON THE TREATMENT TO BE METED OUT IN THE 9 ITA NO . 337 / VIZ/2016 M/S DECCAN TOBACCO EXPORTS PVT. LTD., GUNTUR BOOKS OF ACCOUNT AND IN THE INDIAN TAX LAWS. FURTHER, WITH AN INCREASED FLOW OF INBOUND/OU TBOUND TRANSACTIONS AND THEIR COMPLEX DYNAMIC STRUCTURING, THE TAX TREATMENT OF FOREIGN EXCHANGE GAINS/LOSSES HAS BEEN SURROUNDED BY HUGE LITIGATION AND VARIOUS COURTS HAVE DISCUSSED THE SAME IN GREAT DETAIL. EXCHANGE FLUCTUATION DIFFERENCE AND TAX TREATME NT OF THE CAPTIONED ISSUE WAS DISCUSSED IN GREAT DETAIL IN THE RECENT LANDMARK RULING OF SUPREME COURT IN THE CASE OF CIT V. WOODWARD GOVERNOR INDIA (P.) LTD. [2009] 312 ITR 254/179 TAXMAN 326 WHERE IN THE SC RELIED ON THE EARLIER JUDGMENT IN THE CASE OF SUTLEJ COTTON MILLS LTD. V. CIT [1979] 116 ITR 1 , OBSERVED THAT THE LAW MAY, THEREFOR E, NOW BE TAKEN TO BE WELL SETTLED THAT WHERE PROFIT OR LOSS ARISES TO AN ASSESSEE ON ACCOUNT OF APPRECIATION OR DEPRECIATION IN THE VALUE OF FOREIGN CURRENCY HELD BY IT, ON CONVERSION INTO ANOTHER CURRENCY, SUCH PROFIT OR LOSS WOULD ORDINARILY BE A TRADIN G PROFIT OR LOSS IF THE FOREIGN CURRENCY IS HELD BY THE ASSESSEE ON REVENUE ACCOUNT OR AS A TRADING ASSET OR AS PART OF CIRCULATING CAPITAL EMBARKED IN THE BUSINESS. BUT, IF ON THE OTHER HAND, THE FOREIGN CURRENCY IS HELD AS A CAPITAL ASSET OR AS FIXED CAP ITAL, SUCH PROFIT OR LOSS WOULD BE OF CAPITAL NATURE.' 15. FURTHER IN THE AFORESAID RULING THE APEX COURT ALSO AFFIRMED THE PRINCIPLES LAID DOWN IN THE RULING OF CIT V. V.S. DEMPO & CO. (P.) LTD. [1994] 206 ITR 291/72 TAXMAN 134 (BOM.) , WHEREIN IT WAS HELD THAT A LOSS ARISING IN THE PROCESS OF CONVERSION OF FOREIGN CURRENCY WHICH IS PART OF TRADING ASSET OF THE ASSE SSEE IS A TRADING LOSS AS ANY OTHER LOSS. IN DETERMINING THE TRUE NATURE AND CHARACTER OF THE LOSS, THE CAUSE WHICH OCCASIONS THE LOSS IS IMMATERIAL; WHAT IS MATERIAL IS WHETHER THE LOSS HAS OCCURRED IN THE COURSE OF CARRYING ON THE BUSINESS OR IS INCIDENT AL TO IT. IF THERE IS LOSS IN A TRADING ASSET, IT WOULD BE A TRADING LOSS, WHATEVER BE ITS CAUSE BECAUSE IT WOULD BE A LOSS IN THE COURSE OF CARRYING ON THE BUSINESS. LOSS IN RESPECT OF CIRCULATING CAPITAL IS REVENUE LOSS WHEREAS LOSS IN RESPECT OF FIXED C APITAL IS NOT. LOSS RESULTING FROM DEPRECIATION OF THE FOREIGN CURRENCY WHICH IS UTILISED OR INTENDED TO BE UTILISED IN BUSINESS AND IS PART OF THE CIRCULATING CAPITAL, WOULD BE A TRADING LOSS, BUT DEPRECIATION OF FIXED CAPITAL ON ACCOUNT OF ALTERATION IN EXCHANGE RATE WOULD BE CAPITAL LOSS. FOR DETERMINING WHETHER DEVALUATION LOSS IS REVENUE LOSS OR CAPITAL LOSS WHAT IS RELEVANT IS THE UTILISATION OF THE AMOUNT AT THE TIME OF DEVALUATION AND NOT THE OBJECT FOR WHICH THE LOAN HAD BEEN OBTAINED. THE WAY IN W HICH THE ENTRIES ARE MADE BY AN ASSESSEE IN THE BOOKS OF ACCOUNT IS NOT DETERMINATIVE OF THE QUESTION WHETHER THE ASSESSEE HAS EARNED ANY PROFIT OR SUFFERED ANY LOSS. WHAT IS NECESSARY TO BE CONSIDERED IS THE TRUE NATURE OF THE TRANSACTION AND WHETHER IN F ACT IT HAS RESULTED IN PROFIT OR LOSS TO THE ASSESSEE. THEREFORE, ONCE LOSS INCURRED ON ACCOUNT OF FLUCTUATION IN FOREIGN CURRENCY, THEN THE LOSS SUFFERED SHALL BE ALLOWED AS BUSINESS LOSS, UNLESS IT IS IN THE NATURE OF SPECULATION LOSS. 10 ITA NO . 337 / VIZ/2016 M/S DECCAN TOBACCO EXPORTS PVT. LTD., GUNTUR 16. HAVING SAID TH AT, LET US COME TO THE FACTS OF THE PRESENT CASE. IN THE PRESENT CASE ON HAND, THE ASSESSEE IS INTO THE BUSINESS OF EXPORT OF RICE AND OTHER COMMODITIES. DURING THE PREVIOUS FINANCIAL YEAR, IT HAS ACHIEVED EXPORT TURNOVER OF ABOUT RS. 80 CRORES. THE FORWAR D EXCHANGE CONTRACTS ARE ENTERED IN THE PREVIOUS FINANCIAL YEAR, WHICH WAS NOT DISPUTED BY THE A.O. THOUGH THERE IS NO EXPORT TURNOVER FOR THE CURRENT FINANCIAL YEAR, THIS IS BECAUSE OF A BAN IMPOSED BY THE GOVERNMENT OF INDIA, ON EXPORT OF RICE AND OTHER COMMODITIES. AS RIGHTLY POINTED OUT BY THE LD. A.R. FOR THE ASSESSEE, THE GOVERNMENT OF INDIA IMPOSED BAN ON EXPORT OF RICE FOR A TEMPORARY PERIOD. ALTHOUGH THE BAN WAS EXTENDED FOR A FURTHER PERIOD I.E. UP TO END OF FINANCIAL YEAR 2008 - 09, THE ASSESSEE WA S ON THE BONA FIDE BELIEF THAT THE BAN ON EXPORT IS TEMPORARY AND GOVERNMENT MAY REVIEW THE BAN, THEREFORE, IT CAN CONTINUE ITS EXPORTS AND ACCORDINGLY IT HAS CONTINUED ITS FORWARD EXCHANGE CONTRACTS WITH THE BANKS. SINCE THE BAN WAS CONTINUED FOR THE WHOL E FINANCIAL YEAR AND ALSO FACT THAT DURING THE SAME PERIOD, THE INDIAN CURRENCY HAD A DRAMATIC FALL IN THE INTERNATIONAL MARKET, THE ASSESSEE HAS CLOSED FORWARD EXCHANGE CONTRACTS AND SUFFERED LOSS. THE ASSESSEE BEING A PRUDENT BUSINESS PERSON ENTERED FORE IGN EXCHANGE CONTRACTS WITH A HOPE THAT THE INDIAN CURRENCY MAY RECOVER AND IT MAY RECOUP THE LOSSES. BUT, ULTIMATELY WHEN THINGS ARE NOT TURNED AROUND, IT HAS CANCELLED FORWARD EXCHANGE CONTRACTS, WHICH RESULTS INTO LOSS. THEREFORE, THE LOSS SUFFERED BY T HE ASSESSEE CANNOT BE CONSIDERED AS SPECULATIVE LOSS WITHIN THE MEANING OF SECTION 43(5) OF THE ACT. 17. COMING TO THE ALLEGATIONS OF THE A.O. THE A.O.'S MAIN ALLEGATION IS THAT LOSS CLAIMED BY THE ASSESSEE IS MTM LOSS OR NOTIONAL LOSS AS THE LOSS IS NOT C RYSTALLIZED IN THE BOOKS OF ACCOUNT. THE A.O. OBSERVED THAT ONLY CRYSTALLIZED LOSS IS ALLOWABLE AS DEDUCTIONS, BUT NOT NOTIONAL LOSS. AS THE FORWARD CONTRACTS HAVE BEEN ENTERED INTO AGAINST CURRENCY FLUCTUATIONS, THERE WOULD NOT BE ANY CRYSTALLIZATION OF L IABILITY. THE A.O. FURTHER OBSERVED THAT LOSS INCURRED BY THE ASSESSEE IS A MTM LOSSES, WHICH IS IN THE NATURE OF NOTIONAL LOSS CANNOT BE ALLOWED AS DEDUCTIONS. THE A.O. REFERRED TO AS - 30 ISSUED BY THE ICAI AND CBDT CIRCULAR AND OBSERVED THAT MTM LOSS PROV IDED IN THE BOOKS OF ACCOUNT CANNOT BE ALLOWED. WE DO NOT FIND MERITS IN THE FINDINGS OF THE A.O., FOR THE REASON THAT IN THE PRESENT CASE ON HAND, THE A.O. HIMSELF HAS ACCEPTED THAT THE LOSS CLAIMED BY THE ASSESSEE ARE ON ACCOUNT OF CANCELLATION/RENEWAL O F FORWARD EXCHANGE CONTRACTS, WHICH HAS BEEN DEBITED BY THE BANKERS. THE ASSESSEE HAS FILED DETAILS OF FORWARD EXCHANGE CONTRACTS AND BANK ACCOUNT. ON PERUSAL OF THE BANK STATEMENTS, WE FIND THAT THE LOSSES INCURRED BY THE ASSESSEE IS ON ACCOUNT OF CANCELL ATION/RENEWAL OF FORWARD EXCHANGE CONTRACTS, WHICH IS CRYSTALLIZED AND DEBITED BY THE BANKERS. CONSIDERING FACTS AND CIRCUMSTANCES OF THIS CASE, WE ARE OF THE VIEW THAT FOREIGN EXCHANGE LOSS INCURRED BY THE ASSESSEE ON ACCOUNT OF 11 ITA NO . 337 / VIZ/2016 M/S DECCAN TOBACCO EXPORTS PVT. LTD., GUNTUR ENTERING INTO FORWARD CONT RACTS WITH BANKS FOR THE PURPOSE OF HEDGING LOSS IN CONNECTION WITH ITS IMPORT/EXPORT BUSINESS HAS TO BE REGARDED AS BUSINESS LOSS. THE CIT (A) AFTER CONSIDERING THE RELEVANT EXPLANATIONS RIGHTLY DELETED THE ADDITIONS MADE BY THE A.O. WE DO NOT SEE ANY REA SONS TO INTERFERE WITH THE ORDER OF CIT (A). HENCE, WE INCLINED TO UPHOLD THE CIT (A) ORDER AND REJECT THE GROUND RAISED BY THE REVEN UE. 8.2. IN THE ASSESSES CASE, THE ASSESSEE IS AN EXPORTER OF GRANITE AND BECAUSE OF THE ASSESSEES BUSINESS OF EXPORT OF GRANITE, THE ASSESSEE COULD ENTER INTO CONTRACT WITH THE ICICI BANK FOR HEDGING THE CROSS CURRENCY TRANSACTIONS TO INSULATE THE REVENUE AND TO MITIGATE THE LOSS. THE RESERVE BANK OF INDIA VIDE CIRCULAR 22/2007 - 08 DATED 02.07.2007 PERMITTED A PERSON, RESID ENT OF INDIA TO ENTER INTO FOREIGN CONTRACT WITH AN AUTHORIZED DEALER TO HEDGE AN EXPORT TO EXCHANGE RISK IN RESPECT OF TRANSACTIONS FOR WHICH SALE AND PURCHASE OF FOREIGN EXCHANGE IS PERMITTED UNDER THE ACT. IT MEANS, AUTHORIZED DEALER CAN HEDGE THE BUSI NESS RECEIVABLES SO AS TO ENABLE THE PARTIES TO AVOID EXCHANGE VALUE DIFFERENCES. THE AUTHORIZED DEALER I.E. BANK CAN DO THIS ONLY FOR HEDGING NOT FOR SPECULATION. THE RESERVE BANK OF INDIA IN JULY 2006 HAD ISSUED A MASTER CIRCULAR CONSOLIDATING ALL NOTI FICATIONS, GUIDELINES AND CIRCULARS ON THE FORWARD AND DERIVATIVE CONTRACTS IN FOREIGN EXCHANGE. TO SUMMARISE THE DERIVATIVES AND OPTION CONTRACTS ARE PERMITTED FOR THE FOLLOWING PURPOSES : (I) TO COVER THE RISK OF EXCHANGE IN FOREIGN EXCHANGE BORROWINGS. (II) TO COVER INTEREST RATE VARIATIONS (III) TO COVER EXPOSURE RECEIVABLES OR IMPORT PAYABLES IN FOREIGN EXCHANGE. (IV) NO NET FLOW, INFLOW OF PREMIUM AND ANNEXURE VII TO RBI MASTER CIRCULAR JULY 2006 STATES THAT MARKET PARTICIPANTS SHALL FOLLOW ONLY ISDA DOCUMENTATIO N. IN THE INSTANT CASE, THE ASSESSEE IS NOT A FOREIGN EXCHANGE DEALER AND NOT IN THE BUSINESS OF FOREIGN EXCHANGE DEALINGS. OUT OF THE TOTAL TURNOVER OF THE ASSESSEE OF 50 CRORES, 88% OF THE TURNOVER OF THE BUSINESS WAS EXPORT TURNOVER. IN THE DECISIO N RELIED BY THE ASSESSEE IN THE CASE OF LONDON STAR DIAMOND COMPANY LTD. (SUPRA), THE COORDINATE BENCH HELD THAT HEDGING NEED NOT BE 1 : 1 BASIS. THE COORDINATE BENCH OF ITAT, VISAKHAPATNAM IN THE CITED CASE HELD THAT NO DISALLOWANCE OF LOSS UNDER FORWAR D CONTRACT JUST BECAUSE ASSESSEE HAD NIL EXPORT TURNOVER DUE TO BAN ON EXPORT. IN THE 12 ITA NO . 337 / VIZ/2016 M/S DECCAN TOBACCO EXPORTS PVT. LTD., GUNTUR INSTANT CASE THE ASSESSHAD MADE EXPORT TURNOVER OF RS.40.00 CRORES AND THE AO HAD NOT MADE OUT A CASE THAT THE TOTAL TURNOVER FROM THE DERIVATIVE TRANSACTIONS WAS MORE TH AN THE EXPORT TURNOVER. THEREFORE, WE HOLD THAT THE ASSESSEES CASE IS SQUARELY COVERED BY THE CASE LAWS RELIED UPON BY THE ASSESSEE AND THE DECISION OF THE LONDON STAR DIAMOND CO. LTD. (SUPRA) AND THE DECISION OF THIS TRIBUNAL CITED. HENCE, THE TRANSACTIO NS ENTERED BY THE ASSESSEE CANNOT BE HELD AS SPECULATION LOSS AND REQUIRED TO BE ALLOWED AS BUSINESS LOSS. ACCORDINGLY, WE UPHOLD THE ORDER OF THE LD.CIT(A) ON THIS ISSUE AND ALLOW THE APPEAL OF THE ASSESSEE. SINCE THE FA CTS OF THE ASSESSEE S CASE ARE SI MILAR AND THE LD.DR DID NOT CONTROVERT OR BRING ANY OTHER DECISION TO SUPPORT THE ORDER O F THE AO, WE THEREFORE RESPECTFULLY FOLLOW ING THE VIEW TAKEN BY THE COORDINATE BENCH OF THIS TRIBUNAL, UPHOLD THE ORDER OF THE LD. CIT (A) AND DISMISS THE APPEAL OF TH E REVENUE . 8. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 20 TH DEC 2017 . SD/ - SD/ - ( . ) ( . . ) (V. DURGA RAO) ( D.S. SUNDER SINGH ) /JUDICIAL MEMBER /ACCOUNTANT MEMBER /VISAKHAPATNAM /DATED : 20 . 1 2 .2017 L. RAMA, SPS 13 ITA NO . 337 / VIZ/2016 M/S DECCAN TOBACCO EXPORTS PVT. LTD., GUNTUR / COPY OF THE ORDER FORWARDED TO: - 1. / THE APPELLANT - ASST.COMMISSIONER OF INCOME TAX, CIRCLE - 1(1), GUNTUR 2 . / THE RESPONDENT M/S DECCAN TOBACCO EXPORTS(P) LTD., 1/5, BRODIPET, GUNTUR 3. THE PR. COMMISSIONER OF INCOME TAX , GUNTUR 4 . THE COMMISSIONER OF INCOME TAX (APPEALS) - 1 , GUNTUR 5 . , , / DR, ITAT, VISAKHAPATNAM 6 . / GUARD FILE / BY ORDER // TRUE COPY // SR. PRIVATE SECRETARY ITAT, VISAKHAPATNAM