DCIT 5(1), MUMBAI V. GOLD STAR DIAMOND P.LTD, MUMBAI

ITA 3901/MUM/2014

• Counselvise Citation: [2018] 122 COUNSELVISE.COM (IT) 4171 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 4 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-10-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Assessment Year: 2009-2010
• Appeal Filed On: 29-05-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AKHILENDRA YADAV
• Assessee Lawyers: M SUBRAMANIAN
• Keywords: Business income; Rule of consistency; Speculation loss
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'G' BENCH, MUMBAI BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA NO. 3901/MUM/2014 (ASSESSMENT YEAR: 2009-10) D C I T - 5(1) ROOM NO. 568, 5TH FLOOR AAYAKAR BHAVAN, M.K. ROAD MUMBAI 400020 VS. M/S. GOLD STAR DIAMOND P. LTD. 7/714, PRASAD CHAMBERS OPERA HOUSE, MUMBAI 400004 PAN AAACR4157Q APPELLANT RESPONDENT ITA NO. 4212/MUM/2014 (ASSESSMENT YEAR: 2009-10) M/S. GOLD STAR DIAMOND P. LTD. 7/714, PRASAD CHAMBERS OPERA HOUSE, MUMBAI 400004 VS. D C I T - 5(1) ROOM NO. 568, 5TH FLOOR AAYAKAR BHAVAN, M.K. ROAD MUMBAI 400020 PAN AAACR4157Q APPELLANT RESPONDENT REVENUE BY: SHRI AKHILENDRA YADAV ASSESSEE BY: SHRI M. SUBRAMANIAN DATE OF HEARING: 14.09.2018 DATE OF PRONOUNCEMENT: 12.10.2018 O R D E R PER RAJESH KUMAR, AM THESE CROSS APPEALS FILED BY REVENUE AND ASSESSEE A RE DIRECTED AGAINST THE ORDER OF THE CIT(A)-9, MUMBAI DATED 07. 03.2014 AND IT RELATES TO A.Y. 2009-10. ITA NO. 4212/MUM/2014 A.Y. 2009-10 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUND OF APP EAL: - 1. THE LEARNED CIT(APPEAL) - 9 HAS ERRED IN LAW, FACTS AND CIRCUMSTANCES OF THE CASE BY TREATING THE;' BUSINES S LOSS INCURRED ITA NO. 3901/MUM/2014 M/S. GOLD STAR DIAMOND P. LTD. 2 ON FORWARD CONTRACT WHICH ARE IN THE NATURE OF HEDG ING TRANSACTIONS OF RS.7,71,14,597/- AS SPECULATION LOS S. 2. THE LEARNED CIT(APPEAL) - 9 HAS ERRED IN LAW, FA CTS AND CIRCUMSTANCES OF THE CASE BY TREATING THE BUSINESS LOSS ON FORWARD CONTRACTS WHICH ARE CANCELLED 3 DAYS PRIOR TO DATE OF MATURITY AMOUNTING TO RS. 3,34,43,630/- AS SPECULAT ION LOSS. 3. THE LEARNED CIT(APPEAL) - 9 HAS ERRED IN LAW, FA CTS AND CIRCUMSTANCES OF THE CASE BY TREATING THE BUSINESS LOSS ON FORWARD CONTRACTS WHICH ARE CANCELLED MORE THAN 3 D AYS PRIOR TO DATE OF MATURITY AMOUNTING TO RS. 4,44,06,250/- AS SPECULATION LOSS INSPITE OF PROVIDING DETAILED REASONS AND DOCU MENTS. 4. THE LEARNED CIT(APPEAL) - 9 HAS ERRED IN LAW, FA CTS AND CIRCUMSTANCES OF THE CASE BY DISALLOWING OF RS. 1,8 1,27,500/- AS MARK TO MARKET LOSS ON A WITHOUT PREJUDICE BASIS IN SPITE OF THESE CONTRACTS BEING HEDGING CONTRACTS AND WERE CLOSED 3 DAYS PRIOR TO DATE OF MATURITY. 5. THE LEARNED CIT(APPEAL) - 9 HAS ERRED IN LAW & FACTS BY CHARGING INTEREST U/S. 234A, 234B, 234C AND 234D. 3. THE ISSUE RAISED IN GROUND NO. 1 IS AGAINST THE ORD ER OF THE CIT(A) TREATING BUSINESS LOSS INCURRED ON FORWARD CONTRACT IN THE NATURE OF HEDGING TRANSACTIONS OF ` 7,71,14,597/- AS SPECULATION LOSS WHEREAS THE ISSUE RAISED IN GROUND NOS. 2 & 3 ARE IN RESPECT OF TREATING BUSINESS LOSS ON FORWARD CONTRACT WHICH WERE CANCELLED 3 DAYS PRI OR TO THE DATE OF MATURITY AMOUNTING TO ` 3,34,43,630/- AND MORE THAN 3 DAYS PRIOR TO THE DATE OF MATURITY AMOUNTING TO ` 4,44,06,250/- AS SPECULATION LOSS. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF IMPORT OF ROUGH DIAMONDS AND THEREAFTER MANUFACTURING POLISHED DIAMONDS AND EXPORTING THE S AME. BESIDES , IT HAS A WIND MILL AND ALSO INVOLVED IN GENERATION AND SAL E OF ELECTRICITY. DURING THE YEAR THE ASSESSEE ENTERED INTO FORWARD CONTRACT FOR HEDGING THE RISK OF FOREIGN EXCHANGE FLUCTUATIONS ARISING OUT OF ITS IM PORT AND EXPORT PAYABLES AND RECEIVABLES AND INCURRED LOSS OF `13,88,66,467/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSEE FILED NECESSARY DETAILS OF TRANSACTION-WISE LOSS QUA THE SAID HEDGING CONTRAC T BEFORE THE AO EXPLAINING THAT THE SAID LOSS WAS INCURRED UPON FOR EIGN CURRENCY HEDGING CONTRACTS WHICH ARE INTEGRAL PART OF THE BUSINESS O F THE ASSESSEE AND THESE CONTRACTS WERE TEMPORARILY TAKEN TO COVER THE EXPOR T IMPORT CONTRACTS ITA NO. 3901/MUM/2014 M/S. GOLD STAR DIAMOND P. LTD. 3 LOSSES RESULTING FROM THE FLUCTUATION IN THE FOREIG N EXCHANGE RATE AND COVER THE EXISTING IMPORT AND EXPORT PURCHASES OF THE ASS ESSEE. THE AO, HOWEVER, TREATED THE SAID LOSS AS SPECULATION LOSS INSTEAD OF BUSINESS LOSS AND ADDED A SUM OF `13,88,66,467/- TO THE INCOME OF THE ASSESSEE AND COMPLETED THE ASSESSMENT UNDER SECTION 143(3) OF IN COME TAX ACT, 1961 (HEREINAFTER 'THE ACT') VIDE ORDER DATED 26 DECEMBE R, 2011. 5. THE CIT(A), THE APPELLATE PROCEEDINGS, PARTIALLY AL LOWED THE APPEAL OF THE ASSESSEE BY HOLDING THAT THE ASSESSEE HAS INCUR RED LOSS ON MATURITY OF THE CONTRACTS FOR FOREIGN CURRENCY ONLY TO THE TUNE OF `6,17,51,870/-, WHICH IS ONLY ALLOWABLE TO THE ASSESSEE AS BUSINESS LOSS AND THE BALANCE LOSS WAS INCURRED IN RESPECT OF CONTRACTS WHICH WERE TER MINATED BEFORE THE DATE OF MATURITY AND THEREFORE THE LOSS PERTAINING TO TH E CONTRACTS WHICH WERE TERMINATED BEFORE THE MATURITY WAS OF THE NATURE OF SPECULATIVE AND NOT TO BE TREATED AS BUSINESS LOSS. THE LEARNED CIT(A) OBS ERVED AND HELD AS UNDER: - GROUND OF APPEAL NO. 1 & 6 :- THE DISPUTE IN THESE GROUNDS BETWEEN THE AO AND THE APPELLANT IS IN RESPECT OF THE CLAIM OF FOREIGN EXCHANGE LOSS ON FORWARD CONTRACTS OF FOREIGN EXCHANGE. THE APPELLANT HAS CLAIMED THAT IT HAS EARNED OUT THE TRANSACTIONS OF FORWARD CONTRACT OF FOREIGN EXC HANGE AS HEDGING TRANSACTIONS TO COVER THE RISK OF FOREIGN EXCHANGE FLUCTUATION IN THE EXPORT AND IMPORT BUSINESS OF THE APPELLANT, SO THE LOSS ON ACCOUNT OF CANCELLATION OF SUCH CONTRACTS AS WELL AS MARKED TO MARKET LOSS WORKED OUT AT THE END OF ACCOUNTING YEAR IN QUESTIO N IS DEDUCTIBLE BUSINESS LOSS. ON THE OTHER HAND, IT IS THE CONTENT ION OF THE AO THAT THE LOSS IN QUESTION IS IN THE NATURE OF SPECULATIV E LOSS AS THE ASSESSEE HAS ENGAGED IN LARGE SCALE TRANSACTIONS EQ UIVALENT TO SALES, HENCE IT CANNOT BE ALLOWED AS A BUSINESS LOSS. BOTH THE A.O. AND THE APPELLANT HAS PLACED RELIANCDE ON SEVERAL CASES, HO WEVER IT IS NOTED THAT SIMILAR ISSUE WAS BEFORE THE HONBLE MUMBAI IT AT IN THE CASE OF M./S LONDON STAR DIAMOND COMPANY (INDIA) PVT. LTD. IN ITA NO.6169/M/2012, WHERE IN ORDER DATED 11/10/2013 AFT ER CONSIDERING VARIOUS DECISIONS OF HIGHER COURTS, IT IS HELD BY THE ITAT THAT IN THE CASE OF EXPORTERS/ IMPORTERS FORWARD CO NTRACTS OF FOREIGN EXCHANGE ARE IN THE NATURE OF HEDGING TRANSACTIONS IF THEY MATCH WITH THE EXPORT/ IMPORT TURNOVER. IN THIS CASE ALSO SUCH CONTRACTS ARE NOT EXCEEDING THE EXPORT/ IMPORT BILLS. IT IS FURTHER H ELD BY THE ITAT THAT (I) THE LOSS ON HEDGING TRANSACTIONS OF THE EXPORTE RS/IMPORTERS ARE BUSINESS LOSS IF THE LOSS ARISES ON THE MATURITY OF FORWARD CONTRACTS OF FOREIGN CURRENCY (II) WHEN THE ASSESSEE CLAIMS LOSS ON PRE-MATURE ITA NO. 3901/MUM/2014 M/S. GOLD STAR DIAMOND P. LTD. 4 CANCELLATION/TERMINATION OF THE FORWARD CONTRACT, T HEN ASSESSEE NEEDS TO ANSWER AS TO WHY IT WENT FOR PREMATURE TERMINATI ON FOR CLAIMING THE LOSS ON SUCH PREMATURE CANCELLATION AS BUSINESS LOSS OR DAMAGES AND IF ME ASSESSEE DOES NOT PROVIDE SPECIFIC EXPLAN ATION FOR PRE- MATURE CANCELLATION, THEN SUCH LOSSES WILL BE DISAL LOWED. IN THE LIGHT OF THIS RECENT DECISION OF THE JURISDICTIONAL ITAT, THE CLAIM OF THE APPELLANT ONLY SUCCEED PARTLY, BECAUSE IN THE INSTA NT CASE THE APPELLANT HAS INCURRED A PART OF LOSS ON THE MATURI TY OF CONTRACTS OF FOREIGN CURRENCY, WHICH IS ONLY RS.6,17,51,870/- WH EREAS THE REST OF THE LOSS IS IN RESPECT OF CONTRACTS WHICH WERE TERM INATED BEFORE THE DUE DATE OF MATURITY. THE CONTRACTS OF SECOND CATEG ORY WHICH WERE TERMINATED PREMATURE ARE THEREFORE, IN THE NATURE O F SPECULATION AS THE APPELLANT HAS NOT BEEN ABLE TO FILE ANY CONVINC ING EVIDENCE AS TO WHY THESE CONTRACTS WERE TERMINATED BEFORE MATURITY . AS REGARDS THE LOSS ON ACCOUNT OF VALUATION OF PENDING CONTRACTS W HICH HAS BEEN HELD AS MARKED TO MARKET LOSS, BY THE A.O. IT IS SEEN TH AT IN THE LIGHT OF THE AFORESAID DECISION OF ITAT SUCH LOSS IS ALSO NOT AC TUAL HEDGING LOSS AS THE CONTRACTS ARE STILL IMMATURE, THEREFORE, IT IS PURELY NOTIONAL LOSS WHICH HAS CORRECTLY BEEN DISALLOWED BY THE A.O. IT IS ADMITTED BY THE APPELLANT THAT SUCH LOSS IS ACTUALLY RS.1,81,27,500 /- AS AGAINST THE AMOUNT OF RS.1,20,87,500/-. TO THIS EXTENT THE DISA LLOWANCE WILL STAND ENHANCED FROM RS.1,20,87,500/- TO RS.1,81,27, 500/-. WITH THESE REMARKS THE APPEAL IS PARTLY ALLOWED. 5.3. GROUND OF APPEAL NO,2 ;- THIS GROUND IS REGARDING NOT ALLOWING, THE CARRY FORWARD OF SPECULATIVE LOSS ON GOLD ACCOU NT AMOUNTING TO RS.4,47,55,000/-. THE AO HAS PRIMARILY REJECTED THE CLAIM OF CARRY FORWARD OF THIS LOSS ON THE GROUND THAT ASSESSEE HA S NOT CLAIMED THIS LOSS TO BE CARRIED FORWARD TO SUBSEQUENT YEARS. THE APPELLANT ON THE OTHER HAND HAS CLAIMED THAT THIS LOSS CANNOT BE SET -OFF FROM NORMAL BUSINESS AND IT WAS CLAIMED BY IT TO BE CARRIED FOR WARD IN THE RETURN OF INCOME. SINCE IT IS A MATTER OF RECORD THE AO IS DIRECTED TO VERIFY THIS CLAIM OF THE APPELLANT FROM ITS RETURN OF INCOME AN D IF THE CLAIM WAS MADE IN THE RETURN OF INCOME, THE SAME SHOULD BE AL LOWED TO BE CARRIED FORWARD. TO THIS EXTENT THIS GROUND IS ACCO RDINGLY STATISTICALLY ALLOWED. 6. THE LEARNED A.R. VEHEMENTLY SUBMITTED BEFORE US THA T SINCE THE ASSESSEE IS IN THE BUSINESS OF IMPORTING ROUGH DIAM ONDS AND AFTER MANUFACTURING POLISHED DIAMONDS EXPORTING THE SAME AND THEREFORE IT HAS HUGE PAYABLES AND RECEIVABLES IN THE NORMAL COURSE OF BUSINESS. THE LEARNED A.R. STATED THAT IN ORDER TO SAFEGUARD THE INTEREST OF ASSESSEE FROM ANY FOREIGN EXCHANGE FLUCTUATIONS THE ASSESSEE HAS ENTERED INTO FORWARD CONTRACTS FOR HEDGING THE RISK OF EXCHANGE FLUCTUAT IONS AND INCURRED LOSS OF ` 13,88,66,347/-. THE LEARNED A.R. ALSO SUBMITTED THA T ALL THESE TRANSACTIONS WERE ENTERED INTO BY THE ASSESSEE TO C OVER THE EXPORT/IMPORT ITA NO. 3901/MUM/2014 M/S. GOLD STAR DIAMOND P. LTD. 5 CONTRACTS BY REFERRING TO PAGE NOS. 19 TO 124 AND 1 82-197 OF THE PAPER BOOK. THE LEARNED A.R. SUBMITTED THAT IN THE EARLIE R YEAR, I.E. A.Y. 2008-09 THE ASSESSEE HAD EARNED A SUM OF ` 5,18,14,250/- FROM THE SAID FORWARD CONTRACTS AND THE SAME WAS TREATED AS BUSINESS INCO ME IN THE ASSESSMENT WHICH WAS COMPLETED UNDER SECTION 143(3) OF THE INC OME TAX ACT, 1961 (HEREINAFTER 'THE ACT'). ON THE SAME ANALOGY, THE L EARNED A.R. SUBMITTED THAT IN THE CURRENT ASSESSMENT ALSO THE ASSESSEE HA S INCURRED SPECULATION LOSS ON SIMILAR TRANSACTIONS, THEREFORE THE AO HAS VIOLATED THE RULE OF CONSISTENCY BY TREATING THE SAME AS SPECULATION LO SS AND BY NOT ALLOWING SET OFF UNDER THE HEAD BUSINESS LOSS. THE LEARNED A.R. SUBMITTED THAT THE LEARNED CIT(A), RELYING ON THE DECISION IN THE CASE OF LONDON STAR DIAMOND COMPANY (INDIA) P. LTD. CATEGORISED THE LOSS INTO 3 CATEGORIES NAMELY, (I) LOSS ON FORWARD CONTRACTS CANCELLED AFTER MATURITY DATE, (II) LOSS ON CONTRACTS CANCELLED 3 DAYS PRIOR TO MATURITY, AND ( III) LOSS ON CONTRACT CANCELLED MORE THAN 3 DAYS BEFORE THE MATURITY AND THUS ALLOWED THE LOSS ONLY IN THE FIRST CATEGORY AND DISALLOWED THE OTHER TWO BY TREATING THE SAME AS SPECULATION LOSS. THE LEARNED A.R. SUBMITTED THA T THE HON'BLE TRIBUNAL IN A SUBSEQUENT CASE NAMELY MAHENDRA BROTHERS EXPOR TS PVT. LTD., WHICH WAS PASSED AFTER TAKING INTO ACCOUNT VARIOUS CASE L AWS ON THE SUBJECT INCLUDING ONE RENDERED BY THE HON'BLE JURISDICTIONA L HIGH COURT IN THE CASE OF CIT VS. BADRIDAS GAURIDU (P.) LTD. 261 ITR 256, HAS HELD THAT THE LOSS INCURRED ON ACCOUNT OF FOREIGN CURRENCY FORWAR D/HEDGING CONTRACT IS A BUSINESS LOSS SINCE ALL RECEIPTS, PAYMENTS, RECEIVA BLES AND PAYABLES WERE IN FOREIGN CURRENCY WHICH WAS INSEPARABLE AND INEXT RICABLY LINKED WITH THE DIAMOND BUSINESS AND THE LOSS WAS NOTHING BUT BUSIN ESS LOSS AND PART OF THE LOSS COULD NOT BE CONSIDERED AS SPECULATION LOS S SIMPLY ON THE GROUND THAT THE EXPOSURE DO NOT TALLY WITH THE MONTH-WISE TRANSACTIONS. THE SAID DECISION OF THE TRIBUNAL IN CASE OF MAHENDRA BROTHE RS HAS BEEN UPHELD BY THE HON'BLE BOMBAY HIGH COURT BY DISMISSING ITA NO. 777 OF 2010 FILED BY THE REVENUE VIDE ORDER DATED 17 TH JANUARY, 2011. THE ASSESSEE ALSO RELIED ON A SERIES OF DECISIONS, WHICH ARE AS FOLLOWS: - I) D. KISHOREKUMAR & CO. VS. DCIT (2005) 2 SOT 769(MUM ) ITA NO. 3901/MUM/2014 M/S. GOLD STAR DIAMOND P. LTD. 6 II) CIT VS. FRIENDS AND FRIENDS SHIPPING (P.) LTD. (201 3) 35 TAXMANN.COM 553 (GUJ) III) CIT VS. SOORAJMULI NAGARMULI (1981) 5 TAXMAN 289 (C AL) IV) LONDON STAR DIAMOND COMPANY (I) P. LTD. VS. DCIT (2 013) 38 TAXMANN.COM 338 (MUM-TRIB.) V) JAIMIN JEWELLERY EXPORTS (P.) LTD. VS. ACIT (2014) 43 TAXMANN.COM 380 (MUM-TRIB) FINALLY THE LEARNED A.R. VEHEMENTLY PLEADED BEFORE THE BENCH THAT IN VIEW OF THE RATIO OF DECISIONS LAID DOWN BY VARIOUS COUR TS THE LOSS RESULTING FROM FORWARD CONTRACTS IS A BUSINESS LOSS AND NOT SPECUL ATION LOSS AND THEREFORE NO CLASSIFICATION OF FORWARD CONTRACTS CANCELLED ON MATURITY/PRIOR TO 3 DAYS OR PRIOR TO MORE THAN 3 DAYS COULD BE POSSIBLE AS A LL THESE TRANSACTIONS WERE ENTERED IN THE ORDINARY COURSE OF BUSINESS. 7. THE DR ON THE OTHER HAND SUBMITTED THAT LOSS INCUR RED BY THE ASSESSEE UPON PREMATURE CANCELLATION OF FORWARD CON TRACTS IN FOREIGN EXCHANGE IS ON THE NATURE OF SPECULATION LOSS AND WAS RIGHTLY TREATED SO BY THE AO AN AFFIRMED BY THE CIT(A). FINALLY THE LD DR PRAYED BEFORE THE BENCH THE ORDER OF AO MAY RESTORED AND THAT OF CIT( A) BE SET ASIDE ON THE GROUND THAT THE REVENUE HAS ALSO CHALLENGED THE RE LIEF GRANTED BY THE CIT(A) IN RESPECT OF MATURED FORWARD CONTRACTS TREA TING THE SAME AS BUSINESS LOSS. 8. WE HAVE HEARD THE RIVAL PARTIES AND PERUSED CAREFUL LY THE MATERIALS PLACED BEFORE US INCLUDING THE DECISIONS RELIED UPO N BY THE LD AR AND LD DR. THE LD AR DISALLOWED THE LOSS ON MATURITY OR PR EMATURITY OF FORWARD CONTRACTS FOR HEDGING THE RISK OF EXCHANGE FLUCTUAT IONS TO THE TUNE OF ` 13,88,66,347/-. THERE IS NO DISPUTE ABOUT THE LOSS BEING RESULTING FROM THE FORWARD CONTRACTS ENTERED INTO BY THE ASSESSEE IN THE NORMAL COURSE OF BUSINESS TO HEDGE ANY LOSS WHICH MAY RESULT FROM TH E EXCHANGE RATE FLUCTUATION IN THE INTERNATIONAL MARKET AS THE ASSE SSEE IS ENGAGED IN IMPORT AND EXPORT AND HAS TRADE RECEIVABLE AND PAYA BLES. THIUS IS ALSO UNDISPUTED THAT IN THE EARLIER YEAR, I.E. A.Y. 200 8-09 THE ASSESSEE HAD EARNED A SUM OF ` 5,18,14,250/- FROM THE SAID FORWARD CONTRACTS AND T HE SAME WAS TREATED AS BUSINESS INCOME IN THE ASSESSME NT WHICH WAS ITA NO. 3901/MUM/2014 M/S. GOLD STAR DIAMOND P. LTD. 7 COMPLETED UNDER SECTION 143(3) OF THE INCOME TAX AC T, 1961 (HEREINAFTER 'THE ACT'). ON THE SAME ANALOGY, ASSESSEE CLAIMS TH E LOSS INCURRED IS A BUSINESS LOSS AND NOT SPECULATION LOSS AND HAS TO BE ALLOWED ON THE PRINCIPLE OF CONSISTENCY WHEREAS THE AO TREATED TH E SAME AS SPECULATION LOSS AND DENIED SET OFF. CIT(A) CATEGORISED THE LOS S INTO THREE CATEGORIES NAMELY, (I) LOSS ON FORWARD CONTRACTS CANCELLED AFT ER MATURITY DATE, (II) LOSS ON CONTRACTS CANCELLED 3 DAYS PRIOR TO MATURITY, AN D (III) LOSS ON CONTRACT CANCELLED MORE THAN 3 DAYS BEFORE THE MATURITY AND THUS ALLOWED THE LOSS ONLY IN THE FIRST CATEGORY AND DISALLOWED THE OTHER TWO BY TREATING THE SAME AS SPECULATION LOSS. IN OUR CONSIDERED OPINION THE ENTIRE LOSS OF RS. ` 13,88,66,347/-. IS A BUSINESS LOSS AND NOT SPECULAT ION LOSS. THE CASE OF THE ASSESSEE IS SQUARELY COVERED BY THE DECISION OF MAHENDRA BROTHERS EXPORTS PVT. LTD., WHICH WAS PASSED AFTER TAKING IN TO ACCOUNT VARIOUS CASE LAWS ON THE SUBJECT INCLUDING ONE RENDERED BY THE H ON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. BADRIDAS GAURIDU (P.) LTD. 261 ITR 256, HAS HELD THAT THE LOSS INCURRED ON ACCOUNT OF FOREI GN CURRENCY FORWARD/HEDGING CONTRACT IS A BUSINESS LOSS SINCE A LL RECEIPTS, PAYMENTS, RECEIVABLES AND PAYABLES WERE IN FOREIGN CURRENCY W HICH WAS INSEPARABLE AND INEXTRICABLY LINKED WITH THE DIAMOND BUSINESS A ND THE LOSS WAS NOTHING BUT BUSINESS LOSS AND PART OF THE LOSS COUL D NOT BE CONSIDERED AS SPECULATION LOSS SIMPLY ON THE GROUND THAT THE EXPO SURE DO NOT TALLY WITH THE MONTH-WISE TRANSACTIONS. THE SAID DECISION OF T HE TRIBUNAL IN CASE OF MAHENDRA BROTHERS HAS BEEN UPHELD BY THE HON'BLE BO MBAY HIGH COURT BY DISMISSING ITA NO. 777 OF 2010 FILED BY THE REVE NUE VIDE ORDER DATED 17 TH JANUARY, 2011. WE ARE , THEREFORE, INCLINED TO SET ASIDE THE ORDER OF CIT(A) ON THIS ISSUE AND DIRECT THE AO TO ALLOW THE LOSS AS BUSINESS LOSS. RESULTANTLY GROUND NO 1,2 AND 3 ARE ALLOWED. 9. THE ISSUE IN GROUND NO. 4 IS AS REGARDS THE DISALLO WANCE OF RS. 1,20,87,500/- ENHANCED BY THE CIT(A) TO 1,81,27,500 /- IS WITHOUT PREJUDICE TO DISALLOWANCES OF `13,88,66,467/- RESULTING FROM VALUATION OF FORWARDS CONTRACTS AT THE YEAR END ON THE BASIS OF EXCHANGE RATE AT THE YEAR END. ITA NO. 3901/MUM/2014 M/S. GOLD STAR DIAMOND P. LTD. 8 10. THE BRIEF FACTS OF THE CASE ARE THAT THE CIT(A) OBS ERVED DURING THE COURSE OF APPELLATE PROCEEDINGS THAT THE ASSESSEE H AS CALCULATED LOSS ON ACCOUNT OF VALUATION OF PENDING CONTRACTS AS MARKED TO MARKET LOSS. AS PER THE CIT(A) THE SAID LOSS IS NOT AN ACTUAL LOSS ON H EDGING OF CONTRACT AS THE FORWARD CONTRACTS ARE STILL TO MATURE ON A SUBSEQUE NT DATE AND THEREFORE THE LEARNED CIT(A) TREATED THE LOSS PURELY NOTIONAL LOSS AND THUS UPHELD THE DISALLOWANCE MADE BY THE AO ON THIS GROUND. IN THE APPELLATE PROCEEDINGS THE ASSESSEE CANDIDLY ADMITTED THAT THE SAID LOSS IS ACTUALLY ` 1,81,27,500/- AS AGAINST THE AMOUNT OF ` 1,20,87,500/-, THE DISALLOWANCE MADE BY THE AO AND THEREFORE THE LEARNED CIT(A) ENH ANCED THE DISALLOWANCE FROM ` 1,20,87,500/- TO ` 1,81,27,500/-. THE LEARNED A.R. VEHEMENTLY SUBMITTED THAT THE VALUATION OF CONTRACT S ARE DONE IN THE ORDINARY COURSE OF BUSINESS ACCORDING TO THE ACCOUN TING STANDARD 11. THE LEARNED A.R. SUBMITTED THAT THE ISSUE IS SQUARELY C OVERED BY THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. WO ODWORD GOVERNOR INDIA (P) LTD. (2009) 179 TAXMAN 326. 11. THE LEARNED D.R., ON THE OTHER HAND, RELIED ON THE ORDER OF THE CIT(A). 12. HAVING HEARD THE RIVAL CONTENTIONS AND PERUSING THE MATERIAL ON RECORD WE FIND THAT THE ASSESSEE HAS RECOGNISED LOS S ON PENDING/ OUTSTANDING CONTRACT AT THE YEAR END AT ` 1,81,27,500/- PURSUANT TO ACCOUNTING STANDARD 11, WHICH IS MANDATORY TO BE FO LLOWED BY THE ASSESSEE. THE ACCOUNTING STANDARD 11 DEALS WITH THE ACCOUNTING TREATMENT EFFECTIVE ON CHANGES ON FOREIGN CURRENCY RATES. THEREFORE, THE ASSESSEE HAS TO ACCOUNT ONLY THE EFFECTS OF FLUCTUA TIONS IN THE FOREIGN EXCHANGE RATES AND ACCORDINGLY THE LOSS OF ` 1,81,27,500/- WAS CLAIMED IN THE PROFIT & LOSS ACCOUNT, WHICH IS OF COURSE A REG ULAR PRACTICE AT THE END OF EVERY YEAR ACCORDING TO THE SAID STANDARD. THE S AID PRACTICE OF THE ASSESSEE OF VALUING OR RE-APPRECIATION OF OUTSTANDI NG CONTRACTS AT THE YEAR END IS ON THE BASIS OF THE RATE PREVALENT AT THE YE AR END AS PER THE RATIO LAID BY THE HON'BLE SUPREME COURT IN THE CASE OF WO ODWORD GOVERNOR INDIA (P) LTD. (SUPRA) WHEREIN THE HON'BLE SUPREME COURT HAS HELD THAT THE ITA NO. 3901/MUM/2014 M/S. GOLD STAR DIAMOND P. LTD. 9 ASSESSEE IS ENTITLED TO CLAIM LOSS ARISING ON ACCOU NT OF FLUCTUATIONS IN THE FOREIGN CURRENCY RATE AT THE END OF THE YEAR ON THE OUTSTANDING FORWARD CONTRACTS. WE, THEREFORE, RESPECTFULLY FOLLOWING TH E RATIO LAID DOWN BY THE HON'BLE SUPREME COURT HOLD THAT THE ISSUE IS COVERE D IN FAVOUR OF THE ASSESSEE. 13. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLO WED. ITA NO. 3901/MUM/2014 A.Y. 2009-10 14. AS WE HAVE ALREADY DECIDED VARIOUS ISSUES RAISED BY THE ASSESSEE IN ITA NO. 4212/MUM/2014 IN ITS FAVOUR. THE CROSS APPE AL IS FILED BY THE DEPARTMENT, IN WHICH THE REVENUE HAS CHALLENGED THE ORDER OF THE CIT(A) ALLOWING THE LOSS OF ` 6,17,51,870/- AS BUSINESS LOSS RELATING TO MATURITY OF FORWARD CONTRACTS. SINCE WE HAVE DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE IN ASSESSEES APPEAL, THEREFORE THE APPEAL FILED BY THE REVENUE IS RENDERED INFRUCTUOUS AND IS DISMISSED ACCORDINGLY. 15. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED AND APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH OCTOBER, 2018. SD/ - SD/ - (MAHAVIR SINGH) (RAJESH KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 12 TH OCTOBER, 2018 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) -9, MUMBAI 4. THE CIT - 5, MUMBAI 5. THE DR, G BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.