RATNADEEP IMPEX, MUMBAI V. DCIT 16(3), MUMBAI

ITA 4861/MUM/2011

• Counselvise Citation: 486119914 RSA 2011
• Duration Of Justice: 2 year(s) 9 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-03-2014
• Appeal Filed By: Assessee
• Bench Allotted: D
• Next Hearing Date: 19-03-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 17-06-2011
• Court: TRIBUNAL
• Department Lawyers: SANJEEV JAIN
• Assessee Lawyers: AARTI VISSANJI
• Keywords: Speculation loss

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES D MUMBAI . . , / BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER /AND . , SHRI D.KARUNAKARA RAO, ACCOUNTANT MEMBER . / ITA NO.4861/MUM/2011 / ASSESSMENT YEAR 2007-08 RATNADEEP IMPEX, 810, PRASAD CHAMBER, OPERA HOUSE, MUMBAI 400004 / VS. THE ACIT 5(1), MATRU MANDIR, TARDEO, MUMBAI ! ./ '# ./ PAN/GIR NO. : AAEFR 6683C ( !$ / APPELLANT ) .. ( %&!$ / RESPONDENT ) !$ ' / APPELLANT BY: MS. AARTI VISSANJI %&!$ ( ' / RESPONDENT BY : SHRI SANJEEV JAIN ( ) / DATE OF HEARING : 19/03/2014 *+ ( ) / DATE OF PRONOUNCEMENT : 19/04/2014 , / O R D E R PER I.P.BANSAL, J.M: THIS IS AN APPEAL FILED BY THE ASSESSEE. IT IS DI RECTED AGAINST THE ORDER PASSED BY LD. CIT(A)-27, MUMBAI DATED 3/3/2011 FOR ASSESSM ENT YEAR 2007-08. THE GROUNDS OF APPEAL READ AS UNDER: THE LEARNED ASSESSING OFFICER AND THE LEARNED COM MISSIONER OF INCOME-TAX (APPEALS)- 27 ERRED IN DISALLOWING LOSS OF RS.62,67,308/- INCU RRED ON ACCOUNT OF REVALUING THE OUTSTANDING FORWARD CONTRACT ENTERED WITH BANKS. . / ITA NO.4861/MUM/2011 / ASSESSMENT YEAR 2007-08 2 2. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF IMPOR T, EXPORT AND TRADING OF ROUGH AND POLISHED DIAMONDS. IT ENTERED INTO FORWARD CON TRACT FOR FOREIGN EXCHANGE IN THE NORMAL COURSE OF ITS BUSINESS. ACCORDING TO ASSESS EE THE TRANSACTIONS WERE ENTERED FOR HEDGING OF FOREIGN EXCHANGE FLUCTUATIONS ON A CCOUNT OF THE ASSESSEES BUSINESS OF EXPORT AND IMPORT OF DIAMONDS. IT WAS SUBMITTED TH AT ACCORDING TO THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. BA DRIDAS GAURIDU PVT. LTD. 134 TAXMAN 376 ( 2004), THE LOSS INCURRED BY THE ASSE SSEE IS ALLOWABLE AS BUSINESS LOSS. IN THE PROCESS THE ASSESSEE HAS INCURRED TOTAL LOSS OF RS.98,85,546/-, WHICH WAS DISALLOWED BY THE AO BEING SPECULATION LOSS AND WAS CARRIED FORWARD TO NEXT YEAR. THE ADDITION WAS CHALLENGED IN THE APPEAL FILED BE FORE LD. CIT(A). RELIANCE WAS PLACED ON AFOREMENTIONED DECISION OF HONBLE BOMBAY HIGH COURT. AFTER EXAMINING THE CONTENTION OF THE ASSESSEE, LD. CIT(A) HAS OBSERVED THAT THE LOSS SHOWN BY THE ASSESSEE CONSISTED OF TWO PARTS, LOSS OF RS.36,18,2 38/- IS ON ACCOUNT OF FORWARD CONTRACTS SETTLED DURING THE YEAR AND THE BALANCE A MOUNT OF RS.62,67,308/- IS ON ACCOUNT OF YEAR ENDING CONVERSION OF OUTSTANDING FO RWARD CONTRACTS. THE LOSS OF RS.62,67,378/- HAS BEEN RECOGNIZED BY THE ASSESSEE BY WAY OF REVALUATING FORWARD CONTRACT ENTERED INTO WITH THE BANKS, PENDING FOR S ETTLEMENTS AS AT THE END OF THE YEAR. THEREFORE, LD. CIT(A) HELD THAT OUT OF TOTAL LOSS R S.98,85,546/-, THE ASSESSEE IS ENTITLED TO GET BENEFIT OF RS.36,18,238/-. ACCORDING TO LD. CIT(A) THE CONTRACTS PENDING FOR SETTLEMENT AS AT THE END OF THE YEAR WERE ENTERED TO HEDGE THE ASSESSEES RISK FOR FOREIGN EXCHANGE FLUCTUATION IN RESPECT OF IMPORT AND EXPORT OF DIAMONDS, WHICH IS ASSESSEES BUSINESS. THE ASSESEE IS NOT DEALING IN FOREIGN EXCHANGE, THE REFORE, IT CANNOT REVALUE FOREIGN EXCHANGE AT THE END OF T HE YEAR AND ASSESSEE CAN REVALUE ONLY IN ITS GIVEN BUSINESS WHICH BECAME AS CERTAIN TO SAY THE LIABILITY AND SUCH LIABILITY NOT BEING ASCERTAINED LIABILIT Y AT THE END OF THE YEAR CANNOT BE ALLOWED AS BUSINESS LOSS. ACCORDINGLY, PART ADD ITION TO THE EXTENT OF RS.62,67,308/- WAS CONFIRMED. THE ASSESSEE IS AGG RIEVED BY SUCH SUSTENANCE AND HAS FILED AFOREMENTIONED GROUNDS OF APPEAL. 3. AFTER NARRATING THE FACTS, IT WAS SUBMITTED BY L D. AR THAT THE FORWARD CONTRACTS IN FOREIGN EXCHANGE WERE ENTERED INTO BY THE ASSESSEE WITH REGARD TO . / ITA NO.4861/MUM/2011 / ASSESSMENT YEAR 2007-08 3 ITS ACTIVITY OF IMPORT AND EXPORT OF DIAMONDS. SHE SUBMITTED THAT ALL THE DETAILS WERE SUBMITTED TO LD. CIT(A) VIDE LETTER DA TED 3/2/2011, COPY OF WHICH IS FILED AT PAGES 1 TO 9 OF THE PAPER BOOK. SHE IN VITED OUR ATTENTION TOWARDS ANNEXURE-C ATTACHED TO THE SAID LETTER, COPY OF WHI CH IS PLACED AT PAGE 7 OF THE PAPER BOOK. REFERRING TO THE SAID ANNEXURE IT WAS SUBMITTED BY HER THAT ALL THE FORWARD CONTRACTS OF FOREIGN EXCHANGE WERE IN R ELATION TO IMPORT AND EXPORT CONTRACTS ENTERED INTO BY THE ASSESSEE WITH REGARD TO ITS BUSINESS OF IMPORT AND EXPORT OF DIAMONDS. SHE SUBMITTED THAT LD. CIT(A) HAS ACCEPTED SUCH CONTENTION OF THE ASSESSEE BUT HAS INCORRECTLY UPHE LD THE PART OF THE ADDITION ON THE GROUND THAT IT WAS AN UNASCERTAINED LIABILI TY. SHE SUBMITTED THAT SUCH ASSUMPTION OF LD. CIT(A) IS INCORRECT AND ALL THE F ORWARD CONTRACTS WERE ENTERED INTO IN RELATION TO IMPORT AND EXPORT ACTIVITY OF T HE ASSESSEE RELATING TO DIAMOND. SHE SUBMITTED THAT LOSS RELATING TO PENDI NG FORWARD CONTRACTS ON THE CLOSING DAY CANNOT BE DISALLOWED AS SPECULATIVE LO SS ACCORDING TO THE FOLLOWING DECISIONS OF THE TRIBUNAL: (1) ACIT VS. H. DIPAK & COMPANY, ITA NO.7629/MUM/2 011 ORDER DATED 30/4/2013. (2.) ACIT VS. S.RAJIV & CO. ITA NO.7095/MUM/2012 O RDER DATED 12/2/2014 4. ON THE OTHER HAND, LD. DR RELIED UPON THE ORDER PASSED BY LD. CIT(A). 5. WE HAVE HEARD BOTH THE PARTIES AND THEIR CONTENT IONS HAVE CAREFULLY BEEN CONSIDERED. THE ASSESSEE HAS DEMONSTRATED THAT FO RWARD CONTRACT OF FOREIGN EXCHANGE WERE ENTERED INTO BY IT IN REGARD TO ITS ACTIVITY OF IMPORT AND EXPORT OF DIAMONDS. IF SUCH IS THE POSITION THEN THE ISSU E WILL BE COVERED IN FAVOUR OF THE ASSESSEE BY THE AFOREMENTIONED DECISIONS WHICH HAVE BEEN RELIED UPON BY LD. AR. IN THE DECISION IN THE CASE OF ACIT VS. S. RAJJIV & CO.(SUPRA) IN WHICH ONE OF US (A.M) IS A PARTY. THE QUESTION RAISED BE FORE THE TRIBUNAL BY THE DEPARTMENT WAS AS UNDER: . / ITA NO.4861/MUM/2011 / ASSESSMENT YEAR 2007-08 4 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE LEARNED CIT(A) ERRED IN HOLDING THAT MARK TO MARKE T LOSS OF RS.13,85,718/- AISING ON VALUATION OF FORWARD EXCHANGE CONTRACTS O N THE CLOSING DATE OF ACCOUNTING YEAR IS NOT A NOTIONAL LOSS AND, THEREFO RE, ALLOWABLE. FOLLOWING THE DECISION OF CO-ORDINATE BENCH IN THE CASE OF LONDON STAR DIAMOND CO. INDIA PVT. LTD. VS. DCIT, ITA NO.6169/M UM/2012 ORDER DATED 11/10/2013 THE ISSUE WAS DECIDED IN FAVOUR OF ASSES SEE AS UNDER: 4 BEFORE US, IT HAS BEEN SUBMITTED THAT THIS ISSU E HAD COME UP FOR CONSIDERATION IN SERIES OF DECISIONS OF THE CO-ORDI NATE BENCH OF THE TRIBUNAL. STRONG RELIANCE WAS PLACED ON THE LATEST DECISION O F THE TRIBUNAL, MUMBAI BENCH, IN LONDON STAR DIAMOND CO.INDIA PVT LTD V/S DCIT, I TA NO.6169/MUM./2012, ORDER DATED 11TH OCTOBER 2013. THE RELEVANT CONCLUS ION OF THE TRIBUNAL IS AS UNDER : 35. XXXX (A) LOSS ON CANCELLATION OF MATURED FCS AMOUNTING T O RS. 4,14,88,805 RELATES TO THE FCS CANCELLED OR TERMINATED ON OR AF TER THE DUE DATE. IN OTHER WORDS, THE FCS BOOKED AS INTEGRAL PART OF THE EXPORT INVOICES LIVED ITS BOOKING PERIOD IN FULL AND THEY WERE EITHER TER MINATED BY THE 2ANK ON OR AFTER DUE DATE OF MATURITY DATE OF THE CONTRACT AS THE ACTUAL REALIZATION WERE NOT RECEIVED IN TIME THESE ARE NOT PREMATURE C ANCELLATIONS BY THE ASSESSEE AND THEREFORE, IN OUR CONSIDERED VIEW, THE SAID LOSS OF RS 4,14,88,805/-, BEING RELATED TO THE FCS WHICH ARE I NTEGRAL ,PR INCIDENTAL TO THE EXPORTS OF THE DIAMONDS, SHOULD BE ALLOWED AS B USINESS LOSS IN VIEW OF THE BINDING HIGH COURT OR TRIBUNAL DECISIONS/JUDGME NTS IN THE CASE OF D KISHARE KUMAR AND CO (SUPRA) BADRIDAS GAURIDU PVT L TD (SUPRA), SAAROJ MUILL MAGARMULL (SUPRA), ETC THUS, LOSS ARISING FRO M CANCELLATION OF THE MATURED CONTRACTS IS ALTO WEE IN FAVOUR OF THE ASSE SSEE THUS, THIS PART OF THE GROUND OF THE ASSESSEE IS ALLOWED. 5 FURTHER, WE FIND THAT THIS ISSUE HAS ALSO BEEN DE CIDED BY THE SPECIAL BENCH OF THE TRIBUNAL, MUMBAI BENCH, IN DCIT V/S BON BAHRAIN (SUPRA) WHEREIN THE TRIBUNAL, WHILE HOLDING THAT MARK TO MARKET LOSSE S IN RESPECT OF FORWARD FOREIGN EXCHANGE CONTRACT DEBITED TO PROFIT & LOSS ACCOUNT IS AN ALLOWABLE DEDUCTION ON THE FOLLOWING REASONING:- I) A BINDING OBLIGATION ACCRUED AGAINST THE APPELL ANT THE MINUTES IT ENTERED INTO FORWARD FOREIGN EXCHANGE CONTRACTS. II) A CONSISTENT METHOD OF ACCOUNTING FOLLOWED BY T HE APPELLANT CANNOT BE DISREGARDED THE APPELLANT HAS CONSISTENTLY FOLLOWED THE SAME METHOD OF ACCOUNTING IN REGARD TO RECOGNITION OF PROFIT OR LO SS BOTH, IN RESPECT OF FORWARD FOREIGN EXCHANGE CONTRACT AS PER THE RATE PREVAILING ON MARCH, 31. . / ITA NO.4861/MUM/2011 / ASSESSMENT YEAR 2007-08 5 III) A LIABILITY IS SAID TO HAVE CRYSTALLIZED WHEN A PENDING OBLIGATION ON THE BALANCE SHEET DATE IS DETERMINABLE WITH REASONABLE CERTAINTY. IV) AS PER AS-IL, WHEN THE TRANSACTION IS NOT SETTL ED HI THE SAME ACCOUNTING PERIOD AS THAT IN WHICH IT OCCURRED, THE EXCHANGE D IFFERENCE ARISES OVER MORE THAN ONE ACCOUNTING PERIOD. V) IN VIEW OF THE DECISION OF THE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA (I) P. LTD., THE APPELLANTS CLAIM IS ALLOWABLE. VI) IN THE ULTIMATE ANALYSIS, THERE IS NO REVENUE E FFECT AND IT IS ONLY OF TAXATION OF LOSS/PROFIT. THUS, IN VIEW OF THE ABOVE, WE UPHOLD THE FINDINGS OF THE LEARNED COMMISSIONER (APPEALS) FOR ALLOWING LOSS INCURRED BY THE ASSESSE E ON RE-STATEMENT OF PENDING FORWARD CONTRACT AGREEMENT AT THE YEAR END WAS ALL OWABLE BUSINESS LOSS. THUS, THE GROUND RAISED BY THE REVENUE IS TREATED AS DISM ISSED. 7. IN THE RESULT, REVENUES APPEAL IS TREATED AS A 1LOWED. ACCORDINGLY, WE HOLD THAT LD. CIT(A) HAS ERRED IN S USTAINING THE DISALLOWANCE OF RS.62,67,308/- AND THE ADDITION SUSTAINED BY HIM IS DELETED. THE GROUND RAISED BY THE ASSESSEE IS ALLOWED. 6. BEFORE PARTING WE MAY MENTION HERE THAT BENCH H AS REQUIRED THE LD. DR TO STATE THAT WHETHER THE DEPARTMENT HAS ALSO FILED ANY APPEAL AGAINST THE PART DELETION OF RS.36,18,238/-. LD. DR STATED THAT HE HAS ENQUIRED FROM AO AND AO HAS REPLIED THAT NO APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE DELETION MADE BY LD. CIT(A). ACCORDINGLY, THIS APP EAL WAS HEARD. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 19/03/201 4 , ( *+ - ./ 19/03/2014 + ( 0 1 SD/- S D/- ( . / D.KARUNAKARA RAO ) ( . . / I.P. BANSAL ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; . DATED 19/03/2014 . / ITA NO.4861/MUM/2011 / ASSESSMENT YEAR 2007-08 6 , , , , ( (( ( %)2 %)2 %)2 %)2 32 ) 32 ) 32 ) 32 ) / COPY OF THE ORDER FORWARDED TO : 1. !$ / THE APPELLANT 2. %&!$ / THE RESPONDENT. 3. 4 ( ) / THE CIT(A)- 4. 4 / CIT 5. 250 %) , , / DR, ITAT, MUMBAI 6. 0 6 / GUARD FILE. , , , , / BY ORDER, &2) %) //TRUE COPY// 7 77 7 / 8 8 8 8 ' ' ' ' (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI . . ./ VM , SR. PS