ASST CIT 16(3), MUMBAI V. NAVIN MEHTA & CO, MUMBAI

ITA 3729/MUM/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 4240 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-04-2016
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 23-02-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 10-05-2013
• Court: TRIBUNAL
• Assessee Lawyers: K A VAIDYALINGAN
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUM BAI BEFORE SHRI R.C. SHARMA, AM AND SHRI MAHAVIR SINGH, JM ITA NO. 3729/MUM/2013 (ASSESSMENT YEAR: 2009-10) ASSISTANT COMMISSIONER OF INCOME TAX-16(3), MUMBAI MATRU MANDIR, 2 ND FLOOR, R. NO. 206, TARDEO ROAD, MUMBAI-700 007. VS. NAVIN MEHTA & CO. 1602/A, PANCHRATNA OPERA HOUSE, MUMBAI-400 004. (PAN:AAAFN1846P) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SANJEEV JAIN, DR RESPONDENT BY : SHRI K. A. VAIDYALINGAN, AR DATE OF HEARING: 31.03.2016 DATE OF PRONOUNCEMENT: 07.04.2016 O R D E R PER MAHAVIR SINGH, JM: THIS APPEAL BY REVENUE IS DIRECTED AGAINST THE ORDE R OF CIT(A)-27, MUMBAI IN APPEAL NO. CIT(A)-27/ACIT-16(3)/2011-12 VIDE ORDER DATED 27.02.2013. ASSESSMENT WAS FRAMED BY ACIT-16(3), MUMBAI U/S. 14 3(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT) FO R AY 2009-10 VIDE HIS ORDER DATED 22.12.2011. 2. THE ONLY ISSUE IN THIS APPEAL OF REVENUE IS AGAINST THE ORDER OF CIT(A) IN HOLDING THAT THE LOSS ARISING ON REVALUATION OF FOR WARD EXCHANGE CONTRACTS ON THE CLOSING DATE OF ACCOUNTING YEAR TREATING THE SAME A S NOTIONAL LOSS. FOR THIS, ASSESSEE HAS RAISED FOLLOWING GROUND NO.1: 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD. CIT(A) HAS ERRED IN HOLDING THAT MARK-TO-MARKE T LOSS OF RS.39,87,645/- ARISING ON RE-VALUATION OF FORWARD E XCHANGE CONTRACTS ON THE CLOSING DATE OF ACCOUNTING YEAR IS NOT A NOTION AL LOSS AND, THEREFORE, ALLOWABLE. 3. BRIEFLY STATED FACTS ARE THAT THE ASSESSEE IS ENGAG ED IN THE BUSINESS OF IMPORT AND EXPORT OF DIAMONDS AND SUBSTANTIAL AMOUN T OF TURNOVER IS DENOMINATING IN FOREIGN CURRENCIES. THE ASSESSEE I NDUCED WORKING CAPITAL 2 ITA NO. 3729/MUM/2013 NAVIN MEHTA & CO. ASST. YEAR 2009-10 FACILITIES FROM BANKS AND SOME OF WHICH ARE ALSO DE NOMINATING IN FOREIGN CURRENCIES. ACCORDING TO ASSESSEE, IT CARRIES CURR ENCY RISK IN RESPECT OF HIS STOCK AND IT IS MOST LIKELY SOLD BY WAY OF EXPORTS. FOR THIS, ASSESSEE HAS ENTERED INTO FORWARD CONTRACT TO HEDGE THESE CURRENCY RISK ASSOC IATES WITH NORMAL BUSINESS TRANSACTIONS. ACCORDING TO HIM, THESE DERIVATIVE CO NTRACTS ARE ENTERED INTO WITH THE FRAMEWORK OF RBI GUIDELINES. ACCORDING TO ASSE SSEE, THE INTENT OF ENTERING INTO DERIVATIVE CONTRACTS WAS TO SAFEGUARD ITSELF A GAINST EXCHANGE FLUCTUATION RISK ON FOREIGN CURRENCY RECEIVABLES OR PAYABLES. THESE DERIVATIVE TRANSACTIONS HAVE EITHER BEEN IN RESPECT OF SALE OF FOREIGN CURRENCY IN RESPECT OF ITS EXPOSURE TO FOREIGN CURRENCY RECEIVABLES OR PURCHASE OF FOREIGN CURRENCY IN RESPECT OF ITS EXPOSURE TO FOREIGN CURRENCY PAYABLES. IT WAS CLAI MED THAT THESE CONTRACTS GENERALLY HAVE A MATURITY PROFILE WHICH COINCIDES W ITH EXPECTED DATES OF FOREIGN CURRENCY RECEIVABLES OR PAYABLES AND THE QUANTUM IN VOLVED IN DERIVATIVE CONTRACTS DOES NOT EXCEED THE QUANTUM OF EXPOSURE T O FOREIGN CURRENCY RECEIVABLES/PAYABLES. IT WAS CLAIMED THAT THE ASSE SSEE IS FOLLOWING CONSISTENTLY ACCOUNTING METHOD WHEREIN YEAR END RESTATEMENT OR M ARK TO MARKET GAIN OR LOSS IN RESPECT OF ALL ASSETS OR LIABILITIES DENOMINATED IN FOREIGN CURRENCY I.E. DEBTORS, CREDITORS, LOAN & FORWARD CONTRACT ETC. ARE BEING R ECOGNIZED AS GAIN OR LOSS IN P&L ACCOUNT. BUT THE AO TREATED THE LOSS AS NOTION AL LOSS AND DISALLOWED THE SAME. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFORE C IT(A), WHO ALSO CONFIRMED THE ACTION OF AO. AGGRIEVED, NOW ASSESSEE IS IN SECOND APPEAL BEFORE TRIBUNAL. 4. WE HAVE HEARD RIVAL SUBMISSIONS AND GONE THROUGH FA CTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE ASSESS EE HAS RECOGNIZED GAIN OF RS.64,11,705/- DURING THE SAME YEAR BY RESTATING TH E RECEIVABLES AT CLOSING RATES. WE FIND THAT AS ON 31.03.2009, THE ASSESSEE HAS OUT STANDING RECEIVABLE IN FOREIGN CURRENCY OF US $ 56,76,895 WHICH WAS RESTATED AT CL OSING RATE AND GAIN OF RS.64,11,705/- HAS BEEN RECOGNIZED AS INCOME. SIMI LARLY, IN ORDER TO HEDGE RISK ARISING OUT OF VARIATION IN EXCHANGE RATE, ASSESSEE HAD ENTERED INTO FORWARD CONTRACTS FOR SALE OF US$18,67,746 WHICH WAS PENDIN G MATURITY AS AT YEAR END I.E. 31.03.2009. IN RESPECT OF THESE CONTRACTS, IT HAS RECOGNIZED LOSS OF 3 ITA NO. 3729/MUM/2013 NAVIN MEHTA & CO. ASST. YEAR 2009-10 RS.39,87,645/- BY REVALUING THE SAME AT THE RATE PR EVALENT ON YEAR END. LD. COUNSEL FOR THE ASSESSEE BEFORE US STATED THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CI T VS. WOODWARD GOVERNOR (2007) 294 ITR 451 (SC), WHEREIN IT HAS BEEN HELD T HAT T HE LIABILITY ARISING ON ACCOUNT OF FLUCTUATION IN THE RATE OF EXCHANGE IN R ESPECT OF LOANS TAKEN FOR REVENUE PURPOSES WAS ALLOWABLE AS DEDUCTION U/S 37( 1) IN THE YEAR OF FLUCTUATION IN THE RATE OF EXCHANGE AND NOT IN THE YEAR OF REPA YMENT OF SUCH LOANS. THE ACTUAL COST OF IMPORTED ASSETS ACQUIRED IN FOREIGN CURRENCY IS ENTITLED TO BE ADJUSTED U/S 43A ,PRIOR TO THE AMENDMENT, ON ACCOUN T OF FLUCTUATION IN THE RATE OF EXCHANGE AT EACH BALANCE SHEET DATE, PENDING ACT UAL PAYMENT OF THE VARIED LIABILITY. IT IS HELD THAT THE TERM EXPENDITURE I N S. 37 COVERS AN AMOUNT WHICH IS A LOSS EVEN THOUGH THE SAID AMOUNT HAS NOT GONE O UT FROM THE POCKET OF THE ASSESSEE. THE LOSS SUFFERED BY THE ASSESSEE ON AC COUNT OF THE EXCHANGE DIFFERENCE AS ON THE DATE OF THE BALANCE SHEET IS A N ITEM OF EXPENDITURE U/S 37(1). IN SIMILAR WAY, THE PROFITS ARE ALSO TO BE COMPUTED IN ACCORDANCE WITH COMMERCIAL PRINCIPLES AND ACCOUNTING STANDARDS. IN THE PRESENT CASE BEFO RE US ALSO, THE FACTS ARE IDENTICAL AND LOSS CLAIMED BY ASSESSEE WA S CLAIMED AS EXPENSES AND IN EARLIER YEARS GAIN WAS COMPUTED AS INCOME. 5. WE ALSO FIND THAT ITAT, MUMBAI BENCH IN THE CASE OF DCIT VS. BANK OF BAHRAIN & KUWAIT IN ITA NO. 4404 & 1883/MUM/2004 (R EPORTED IN 41 SOT 29) HAS ALLOWED MARKED TO MARKET LOSS ON ACCOUNT OF REV ALUATION OF OUTSTANDING FORWARD CONTRACTS AT THE CLOSING RATE. RESPECTFULL Y FOLLOWING THE CASE LAWS AND IN THE GIVEN FACTS OF THE CASE, WE ARE OF THE VIEW THA T THE LOSS CLAIMED BY THE ASSESSEE IS ALLOWABLE LOSS. THE CIT(A) HAS RIGHTLY ALLOWED THE CLAIM OF THE ASSESSEE AND WE CONFIRM THE SAME. APPEAL OF REVENUE IS DISMISSED. 6. IN THE RESULT, APPEAL OF REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 7TH APRIL , 2016. SD/- SD/- ( R.C. SHARMA ) ( MAHAVIR SINGH ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 7TH APRIL, 2016 4 ITA NO. 3729/MUM/2013 NAVIN MEHTA & CO. ASST. YEAR 2009-10 JD. SR. P.S. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. CIT(A) -27, MUMBAI 4. CIT- , MUMBAI 5. DR, B BENCH ITAT, MUMBAI 6. GUARD FILE. BY ORDER //TRUE COPY// (ASSTT. REGISTRAR) ITAT, MUMBAI