THE ACIT., CIRCLE-1, RAJAHMUNDRY., Rajahmundry V. M/s Sri Ramalingeswara Rice & Oil Mills,

ITA 487/VIZ/2012

• Counselvise Citation: [2016] 130 COUNSELVISE.COM (IT) 9805 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 3 year(s) 9 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-10-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 07-12-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 17-12-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Bonafide belief; Speculation loss; Revenue expenditure
• Section: 142(1); 133A; 43(5)

Judgement Text

ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . , $ BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER ./I.T.A.NO.487/VIZAG/2012 ( / ASSESSMENT YEAR: 2009-10) ACIT, CIRCLE - 1, RAJAHMUNDRY VS. SRI RAMALINGESWARA RICE & OIL MILL, VELPUR [PAN : AAIFS3902M ] ( % / APPELLANT) ( &'% / RESPONDENT) / APPELLANT BY : SHRI ARAVINDAKSHAN, DR / RESPONDENT BY : SHRI G.V.N. HARI, AR / DATE OF HEARING : 08.09.2016 / DATE OF PRONOUNCEMENT : 07.10.2016 / O R D E R PER G. MANJUNATHA, ACCOUNTANT MEMBER: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST ORDER OF THE CIT(A), GUNTUR, DATED 3.10.2012 AND IT PERTAINS TO ASSESSMENT YEAR 2009-10. ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 2 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS A PARTNERSHIP FIRM CARRYING ON BUSINESS OF RICE MILL AND FORWARD CONTRACTS, FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2009-10 ON 29.9.2010 DECLARING LOSS OF ` 2,51,48,852/-. THE CASE HAS BEEN SELECTED FOR SCRUTINY THROUGH CASS, AND ACCORDINGLY, NOTICE U/S 143(2) & 142(1) OF THE INCOME TAX ACT, 1961 (HEREINAFTER CALLED AS 'TH E ACT') WERE ISSUED. IN RESPONSE TO NOTICES, THE AUTHORIZED REPRESENTATI VE OF THE ASSESSEE APPEARED FROM TIME TO TIME AND FURNISHED DETAILS AN D OTHER INFORMATION CALLED FOR. DURING THE COURSE OF ASSESSMENT PROCEED INGS, THE A.O. OBSERVED THAT IN THIS CASE, A SURVEY OPERATION U/S 133A OF THE ACT WAS CONDUCTED ON 16.11.2010. DURING THE COURSE OF SURV EY OPERATION, BOOKS OF ACCOUNTS, REGISTERS AND DOCUMENTS HAVE BEEN FOUN D AND IMPOUNDED. THE IMPOUNDED BOOKS OF ACCOUNTS REVEALS THAT THE AS SESSEE IS MAINTAINING GATE PASSES FOR INWARD OF MATERIALS PUR CHASED AND ON VERIFICATION OF THE GATE PASSES MAINTAINED BY THE A SSESSEE, IT WAS NOTICED THAT THE ASSESSEE IS NOT MAINTAINING SERIAL NUMBER, NAME OF THE FARMER FROM WHOM THE PADDY WAS PURCHASED, VILLAGE, DETAILS OF GOODS PURCHASED, WEIGHT IN QUINTALS, MODE OF TRANSPORT/VE HICLE NUMBERS, DATE OF PURCHASE AND SIGNATURE OF RECEIVING PERSON. SIN CE THE BOOKS OF ACCOUNTS MAINTAINED BY THE ASSESSEE ARE FOUND WITH DISCREPANCIES, THE A.O. OPINED THAT PURCHASES SHOWN IN THE BOOKS OF AC COUNTS ARE NOT ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 3 CORRECT. KEEPING THESE FACTS INTO CONSIDERATION, D ISALLOWED 5% OF PADDY PURCHASES WHICH WORKS OUT TO ` 1,19,53,700/-. SIMILARLY, THE A.O. OBSERVED THAT THE ASSESSEE HAS CLAIMED VARIOUS EXPE NDITURES, HOWEVER, FAILED TO FILE BILLS AND VOUCHERS AND OTHER RELEVAN T DETAILS IN SUPPORT OF EXPENDITURE CLAIMED, THEREFORE, DISALLOWED 10% EXPE NDITURES UNDER THE HEAD FREIGHT CHARGES, TRAVELLING & CONVEYANCE EXPEN SES, ADMINISTRATIVE EXPENSES, VEHICLE MAINTENANCE EXPENSES, REPAIRS & M AINTENANCE, PROCESSING & PACKING, PRINTING & STATIONERY AND ADD ED BACK TO THE TOTAL INCOME. 3. THE A.O. FURTHER OBSERVED THAT, DURING THE YEAR, THE ASSESSEE FIRM IS ENGAGED IN THE BUSINESS OF EXPORT OF AGRI COMMOD ITIES. AFTER THE PROCUREMENT OF EXPORT ORDER FROM THE PROSPECTIVE BU YERS AT A FIXED RATE, THE FIRM WILL PROCURE GOODS LOCALLY AND THE SHIPMEN T OF THE GOODS WILL BE DISPATCHED TO FOREIGN COUNTRIES. IN ITS BUSINESS OF EXPORT OF AGRI COMMODITIES, THE ASSESSEE FIRM USED TO ENTER INTO F ORWARD CONTRACTS WITH THEIR BANKERS TO HEDGE THE CURRENCY RISK TO MI TIGATE THE POSSIBLE FLUCTUATION IN CURRENCY. DURING THE YEAR, THE ASSE SSEE FIRM HAS ENTERED INTO FORWARD EXCHANGE CONTRACTS WITH ITS BANKER. TH E A.O. OBSERVED THAT THE ASSESSEE HAS ENTERED INTO A FORWARD EXCHANGE CO NTRACT WITHOUT THERE BEING ANY EXPORTS TURNOVER TO HEDGE THE POSSI BLE LOSS IN FOREIGN ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 4 CURRENCY. THE A.O. FURTHER OBSERVED THAT THE ASSES SEE HAS ENTERED INTO FORWARD CONTRACTS TO DEAL IN CURRENCY, THEREFORE, O PINED THAT FORWARD CONTRACT ENTERED BY THE ASSESSEE ARE IN THE NATURE OF SPECULATIVE TRANSACTIONS. THEREFORE, ISSUED A SHOW CAUSE NOTICE AND ASKED TO EXPLAIN WHY THE LOSS INCURRED UNDER THE HEAD EXCHA NGE LOSS SHALL NOT BE DISALLOWED. 4. IN RESPONSE TO SHOW CAUSE NOTICE, THE ASSESSEE S UBMITTED THAT IT IS IN THE BUSINESS OF EXPORT OF AGRI-COMMODITIES AND I N THE PROCESS, IT HAS ENTERED INTO FORWARD EXCHANGE CONTRACTS TO HEDGE TH E FLUCTUATION IN FOREIGN CURRENCY. THE ASSESSEE FIRM ENTERED INTO F ORWARD CONTRACTS WITH THEIR BANKERS TO MITIGATE FUTURE LOSSES IN FLUCTUAT ION IN FOREIGN CURRENCY. THE ASSESSEE FURTHER SUBMITTED THAT THE FIRM HAS DO NE EXPORT TURNOVER OF MORE THAN ` 80 CRORES IN THE PRECEDING FINANCIAL YEAR, HOWEVER , DURING THE CURRENT FINANCIAL YEAR, ITS EXPORT TURNO VER BECAME NIL BECAUSE OF UNEXPECTED BAN IMPOSED BY GOVERNMENT OF INDIA ON EXPORT OF RICE. THE ASSESSEE FURTHER SUBMITTED THAT THE GOVERNMENT OF INDIA HAS IMPOSED BAN ON EXPORT OF RICE IN THE BEGINNING OF T HE FINANCIAL YEAR FOR A PERIOD OF 3 MONTHS, HOWEVER, IT HAS BEEN FURTHER EX TENDED TO THE WHOLE FINANCIAL YEAR. THE ASSESSEE WAS ON BONAFIDE BELIE F THAT THE BAN IMPOSED BY THE GOVERNMENT ON EXPORT OF RICE IS TEMP ORARY, ONCE THE ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 5 BAN IS LIFTED, THE FIRM CAN RESUME ITS OPERATIONS A ND CONTINUE ITS EXPORTS. THE ASSESSEE FURTHER SUBMITTED THAT IT HAS ENTERED INTO FORWARD EXCHANGE CONTRACTS IN THE PREVIOUS FINANCIAL YEARS AND THE SAME WERE CONTINUED DURING THE CURRENT FINANCIAL YEAR. SINCE THERE WAS NO EXPORT TURNOVER, IT HAS CLOSED FORWARD EXCHANGE CONTRACTS WITH ITS BANKERS AND THE RESULTANT LOSS ON ACCOUNT OF FLUCTUATION IN FOR EIGN CURRENCY HAS BEEN RECOGNIZED AS BUSINESS LOSS, THEREFORE, IT CANNOT B E HELD AS SPECULATIVE TRANSACTION. 5. THE A.O. AFTER CONSIDERING THE EXPLANATIONS OF T HE ASSESSEE, HELD THAT THE EXPENDITURE CLAIMED BY THE ASSESSEE UNDER THE HEAD EXCHANGE LOSS IS NOT ALLOWABLE AS A BUSINESS EXPENDITURE, A S IT IS ONLY A NOTIONAL LOSS, BUT NOT CRYSTALISED LOSS. THE A.O. FURTHER O BSERVED THAT THE ASSESSEE HAS ENTERED INTO FORWARD EXCHANGE CONTRACT S WITHOUT THERE BEING ANY UNDERLYING EXPOSURE I.E. EXPORT TURNOVER, THEREFORE, THE LOSS INCURRED BY THE ASSESSEE IS A SPECULATIVE LOSS WHIC H CANNOT BE ALLOWED AS A NORMAL BUSINESS LOSS. THE A.O. HAS DISCUSSED AT LENGTH THE TERM SPECULATIVE LOSS, DERIVATIVES AND FORWARD EXCHANGE CONTRACTS AND CAME TO THE CONCLUSION THAT LOSS AGAINST CURRENCY FLUCTU ATIONS, CRYSTALLIZATION OF LIABILITY WILL NOT BE THERE. THE A.O. FURTHER O BSERVED THAT THE ASSESSEE HAS FAILED TO CORRELATE THE HEDGING OF FOREIGN CURR ENCY WITH THE ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 6 NECESSARY EXPENDITURES ON MERCHANDISE FOR SALE I.E. EXPORT OBLIGATION. IN THE ABSENCE OF SUCH EXPORT OBLIGATION, IT CAN BE INFERRED THAT THE HEDGING OF PROFITS BY WAY OF FORWARD CONTRACTS IS N OT RELATED TO THE BUSINESS ACTIVITY OF THE ASSESSEE. THOUGH ASSESSEE CLAIMS THAT IT HAD EXPORT TURNOVER IN THE IMMEDIATELY PRECEDING FINANC IAL YEAR, DURING THE CURRENT FINANCIAL YEAR, IT HAS ACHIEVED ZERO EXPO RT TURNOVER. THE EXPLANATION OF THE ASSESSEE THAT BAN ON EXPORT OF R ICE IS TEMPORARY, IT CAN CONTINUE ITS EXPORT ONCE BAN IS LIFTED CANNOT B E ACCEPTED, AS THE FACTS REMAINS THAT THE ASSESSEE COULD NOT DO ANY EX PORTS AND ALSO IT HAS PURCHASED FORWARD CONTRACTS EVEN AFTER BAN WAS IMPO SED BY THE GOVERNMENT. THEREFORE, IT CANNOT BE HELD THAT THE A SSESSEE HAS ENTERED INTO FORWARD EXCHANGE CONTRACTS TO HEDGE THE POSSIB LE LOSS IN CURRENCY FLUCTUATIONS. WITH THESE OBSERVATIONS, DISALLOWED L OSS CLAIMED BY THE ASSESSEE AND ADDED BACK TO THE TOTAL INCOME. 6. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A). BEFORE THE CIT(A), THE A SSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE A.O. THE CIT(A) AF TER CONSIDERING THE EXPLANATIONS OF THE ASSESSEE, PARTLY ALLOWED APPEAL FILED BY THE ASSESSEE. THE CIT(A) DELETED ADDITIONS MADE TOWARDS DISALLOWANCE OF 5% PADDY PURCHASES, BY HOLDING THAT DOCUMENTARY EVI DENCES PRODUCED ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 7 IN SUPPORT OF PADDY PURCHASES SHOWS THAT THERE WAS NO INFLATION OF PURCHASE OF PADDY OR SUPPRESSION OF THE QUANTITY OF PADDY PURCHASES DURING THE YEAR UNDER REPORT. AS SOUGHT TO BE HIGHL IGHTED BY THE ASSESSEE, NO DEFECTS IN THE BOOKS WERE POINTED OUT BY THE A.O. NOR DID THE SAME STAND REJECTED. FURTHER, NO DEFECTS IN TH E FORM B REGISTER WERE MENTIONED AND NO POINTS WERE RAISED ON THE PUR CHASE PRICE PAID BY THE APPELLANT. THE ONLY DEFECT POINTED OUT BY TH E A.O. IS IRREGULAR MAINTENANCE OF GATE PASSES. DURING THE COURSE OF AP PELLATE PROCEEDINGS, THE ASSESSEE HAS FILED COPY OF THE ORDER OF THE GOV ERNMENT ANNOUNCING MINIMUM SUPPORT PRICE (MSP) OF PADDY AND ALSO THE O RDER PASSED BY THE AGRICULTURAL MARKETING COMMITTEE, WHEREIN THE QUANT ITY RECORDED BY THE ASSESSEE IN ITS BOOKS OF ACCOUNTS AND QUANTITY ASSE SSED BY THE AUTHORITY ARE ONE AND THE SAME. AS REGARDS DISALLOWANCE OF TR AVELLING & CONVEYANCE EXPENSES, ADMINISTRATIVE EXPENSES AND VE HICLE MAINTENANCE, THE CIT(A) HAS SUSTAINED ADDITIONS TO THE EXTENT OF ` 2 LAKHS AND BALANCE IS DIRECTED TO BE DELETED. AS RE GARDS DISALLOWANCE OF REPAIRS & MAINTENANCE, PROCESSING EXPENSES AND PRIN TING & STATIONERY, SUSTAINED ADDITIONS OF ` 4,50,000/- AND BALANCE AMOUNT IS DIRECTED TO BE DELETED. WITH REGARD TO DISALLOWANCE OF LOSS ON FOR WARD CONTRACTS, THE CIT(A) HELD THAT THE LOSS CLAIMED BY THE ASSESSEE I S NOT A NOTIONAL LOSS AND THE LOSS IS INCURRED ON TERMINATION/RENEWAL OF FORWARD EXCHANGE ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 8 CONTRACTS. THE A.O. DISALLOWED THE LOSS ON THE GROU ND THAT THE LOSS CLAIMED BY THE ASSESSEE IS MARKED TO MARKET LOSSES (MTM), HOWEVER, ON PERUSAL OF DETAILS FILED BY THE ASSESSEE, IT WAS OB SERVED THAT THE LOSSES HAVE BEEN DEBITED BY THE BANKERS ON TERMINATION OF FORWARD CONTRACTS, THEREFORE, THE A.O. WAS NOT CORRECT IN DISALLOWING THE LOSS INCURRED BY THE ASSESSEE. AGGRIEVED BY THE CIT(A) ORDER, THE R EVENUE IS IN APPEAL BEFORE US. 7. THE FIRST ISSUE THAT CAME UP FOR OUR CONSIDERATI ON IS DISALLOWANCE OF 5% PADDY PURCHASES. THE A.O. DISALLOWED 5% PADDY PURCHASES FOR THE REASONS THAT GATE PASSES MAINTAINED BY THE ASSE SSEE ARE NOT GIVING TRUE AND CORRECT POSITION OF PURCHASES. THE A.O. W AS OF THE OPINION THAT DURING THE COURSE OF SURVEY OPERATION, IMPOUNDED DO CUMENTS REVEALS THAT THE ASSESSEE IS NOT MAINTAINING PROPER GATE PA SSES FOR RECORDING PURCHASES OF PADDY. ACCORDING TO THE A.O., THE ASS ESSEE IS NOT MENTIONING SERIAL NUMBER AND OTHER DETAILS IN THE G ATE PASSES, THEREFORE, OPINED THAT THE ASSESSEE HAS INFLATED PA DDY PURCHASES. IT IS THE CONTENTION OF THE ASSESSEE THAT ITS PADDY PURCH ASES ARE SUPPORTED BY VALID BILLS & VOUCHERS AND ALSO IT HAS PAID AGRI CULTURAL MARKETING CESS, ACCORDING TO WHICH THERE IS NO DIFFERENCE IN PADDY PURCHASES RECORDED IN ITS BOOKS OF ACCOUNTS AND ORDER PASSED BY THE AGRIC ULTURAL MARKETING ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 9 COMMITTEE. WE FIND FORCE IN THE ARGUMENTS OF THE AS SESSEE FOR THE REASON THAT DURING THE COURSE OF APPELLATE PROCEEDI NGS, THE ASSESSEE HAS FURNISHED COPY OF ORDER PASSED BY AGRICULTURAL MARKETING COMMITTEE AND RECONCILED THE QUANTITY OF PADDY PURCHASES WITH MSP TO ITS BOOKS OF ACCOUNTS. THE CIT(A) HAS RECORDED CATEGORICAL FINDI NG OF FACTS THAT THE PURCHASES RECORDED BY THE ASSESSEE AND PURCHASES AS PER THE AMC REPORTS ARE MATCHED. THE REVENUE FAILED TO PROVE TH E FINDING OF FACTS RECORDED BY THE CIT(A) IS INCORRECT. THEREFORE, WE ARE OF THE VIEW THAT THE CIT(A) HAS RIGHTLY DELETED ADDITIONS MADE TOWAR DS DISALLOWANCE OF PADDY PURCHASES. WE DO NOT SEE ANY ERROR OR INFIRMIT Y IN THE ORDER OF CIT(A). HENCE, WE INCLINED TO UPHELD CIT(A) ORDER AND REJECT GROUND RAISED BY THE REVENUE. 8. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATIO N IS DISALLOWANCE OF CERTAIN EXPENDITURE ON ADHOC BASIS. THE A.O. DIS ALLOWED ADHOC DISALLOWANCE OF 10% EXPENDITURE UNDER THE HEAD FREI GHT CHARGES, TRAVELLING AND CONVEYANCE, ADMINISTRATIVE EXPENSES, VEHICLE MAINTENANCE, REPAIRS & MAINTENANCE EXPENDITURE, PRO CESSING & PACKING AND PRINTING & STATIONERY. THE A.O. DISALLOWED EXPE NDITURE ON THE GROUND THAT THE ASSESSEE HAS FAILED TO SUBSTANTIATE EXPENSES WITH NECESSARY BILLS & VOUCHERS. THE A.O. OBSERVED THAT THE ASSESSEE HAS ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 10 MAINTAINED SELF-MADE VOUCHERS AND THE VOUCHERS MAIN TAINED BY THE ASSESSEE ARE NOT HAVING SERIAL NUMBERS, SIGNATURE O F THE MANAGING PARTNER AND NO REVENUE STAMPS ARE AFFIXED AND IN FE W VOUCHERS, THE RECIPIENT SIGNATURE IS NOT OBTAINED, THEREFORE, OPI NED THAT THE VOUCHERS MAINTAINED BY THE ASSESSEE ARE NOT SUSCEPTIBLE FOR VERIFICATION. IT IS THE CONTENTION OF THE ASSESSEE THAT IT HAS MAINTAINED P ROPER BILLS & VOUCHERS IN SUPPORT OF ALL EXPENSES. THE ASSESSEE FURTHER SU BMITTED THAT DUE TO HUGE VOLUME OF TRANSACTIONS, THE CASHIER HAS BEEN P REPARING SINGLE VOUCHERS WHEN THE NATURE OF PAYMENT COMES UNDER THE SAME HEAD BY TAKING THE ENTIRE RECIPIENTS SIGNATURE ON THE SAME VOUCHERS. AS REGARDS NOT AFFIXING THE REVENUE STAMP ON THE VOUCHERS, IT WAS SUBMITTED THAT DUE TO NON-AVAILABILITY OF REVENUE STAMP, THE FIRM HAD NOT BEEN AFFIXED REVENUE STAMP ON THE VOUCHERS. THE ASSESSEE FURTHE R SUBMITTED THAT CONSIDERING ITS TOTAL VOLUME OF BUSINESSES, THE EXP ENDITURE CLAIMED UNDER THE HEAD FREIGHT CHARGES AND OTHER EXPENSES IS MEAGER IN NATURE AND ALSO ALL THE EXPENDITURES ARE COVERED BY FRINGE BENEFIT TAX, THEREFORE, THERE WAS NO REASON FOR THE A.O. TO DOUB T THE GENUINENESS OF THE EXPENDITURE. WE FIND FORCE IN THE ARGUMENTS OF THE ASSESSEE FOR THE REASON THAT CONSIDERING HUGE VOLUME OF BUSINESS OF THE ASSESSEE, THE EXPENDITURE INCURRED BY THE ASSESSEE UNDER FREIGHT CHARGES AND OTHER EXPENDITURE IS MEAGER IN NATURE. WE FURTHER OBSERVE D THAT ALL THE ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 11 EXPENDITURE IS COVERED UNDER FRINGE BENEFIT TAX. TH E A.O., WHILE ASSESSING THE FRINGE BENEFIT TAX HAS ACCEPTED THE E XPENDITURE CLAIMED BY THE ASSESSEE AS GENUINE IN NATURE. THEREFORE, WE A RE OF THE VIEW THAT ONCE THE EXPENDITURE HAS BEEN ACCEPTED AS GENUINE, THERE IS NO REASON FOR THE A.O. TO DOUBT THE SAME FOR THE PURPOSE OF A LLOWING DEDUCTION AGAINST BUSINESS INCOME. THE CIT(A) AFTER CONSIDERI NG THE RELEVANT FACTS, HAS RIGHTLY SUSTAINED PART OF THE ADDITIONS AND DIRECTED THE A.O. TO DELETE THE REMAINING ADDITIONS. WE DO NOT FIND ANY ERROR OR INFIRMITY IN THE ORDER PASSED BY THE CIT(A). HENCE, WE INCLINED TO UPHOLD THE CIT(A) ORDER AND REJECT THE GROUND RAISED BY THE RE VENUE. 9. THE NEXT ISSUE THAT CAME UP FOR OUR CONSIDERATIO N IS DISALLOWANCE OF EXPENDITURE INCURRED UNDER THE HEAD EXCHANGE LO SS. THE FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSEE IS INVO LVED IN THE BUSINESS OF EXPORT OF RICE AND AGRI COMMODITIES. IN THE PROCES S, THE ASSESSEE HAS ENTERED INTO FORWARD EXCHANGE CONTRACTS WITH ITS BA NKERS TO HEDGE THE POSSIBLE FLUCTUATION IN FOREIGN CURRENCY. DURING T HE FINANCIAL YEAR RELEVANT TO ASSESSMENT YEAR 2009-10, THE ASSESSEE H AS CLAIMED AN AMOUNT OF ` 2,57,66,856/- LOSS ON ACCOUNT OF EXCHANGE LOSS AND CLAIMED AS REVENUE EXPENDITURE. DURING THE COURSE OF ASSES SMENT PROCEEDINGS, THE A.O. OBSERVED THAT THE ASSESSEE HAS CLAIMED EXC HANGE LOSS, ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 12 HOWEVER, FAILED TO SUBSTANTIATE THE LOSS WITH NECES SARY UNDERLYING EXPOSURE I.E. EXPORT TURNOVER. THE A.O. FURTHER OB SERVED THAT DURING THE FINANCIAL YEAR RELEVANT TO ASSESSMENT YEAR 2009 -10, THE ASSESSEE HAS ACHIEVED ZERO EXPORT TURNOVER AND WHEN THERE IS NO EXPORTS, THE QUESTION OF HEDGING CURRENCY DOES NOT ARISE. ACCOR DINGLY, OPINED THAT FORWARD CONTRACTS ENTERED BY THE ASSESSEE ARE IN TH E NATURE OF SPECULATIVE TRANSACTIONS AND HENCE, THE LOSS IS NOT ALLOWABLE AS A BUSINESS LOSS ETC. THE A.O. HAS DISCUSSED AT LENGTH THE MODUS OPERANDI OF THE ASSESSEE. THE A.O. ALSO DISCUSSED THE TERMS FORWARD CONTRACTS, DERIVATIVES, SPECULATIVE LOSS AND CRYSTALLIZATION L OSSES. ACCORDING TO THE A.O., THE LOSS CLAIMED BY THE ASSESSEE IS A NOTIONA L LOSS. THE A.O. FURTHER OBSERVED THAT ONLY CRYSTALLIZED LOSSES ARE ALLOWABLE AS A DEDUCTION, BUT NOT NOTIONAL LOSSES. THE A.O. FURTHE R OBSERVED THAT THE ASSESSEE HAS FAILED TO CORRELATE THE FORWARD CONTRA CTS WITH EXPORT ORDERS ON HAND SO AS TO JUSTIFY THE NEED FOR HEDGING THE F OREIGN CURRENCY. 10. IT IS THE CONTENTION OF THE ASSESSEE THAT THESE FORWARD EXCHANGE CONTRACTS ARE ENTERED IN THE PREVIOUS FINANCIAL YEA R AND MATURED DURING THE CURRENT FINANCIAL YEAR. THE ASSESSEE FURTHER CO NTENDED THAT DURING THE PREVIOUS FINANCIAL YEAR, IT HAS ACHIEVED MORE T HAN ` 80 CRORES EXPORT TURNOVER, HOWEVER, IN THE CURRENT FINANCIAL YEAR BE CAUSE OF UNEXPECTED ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 13 BAN IMPOSED BY THE GOVERNMENT OF INDIA, ON EXPORT O F RICE, IT COULD NOT ACHIEVE ANY EXPORT TURNOVER. IT WAS FURTHER SUBMIT TED THAT SINCE THE FORWARD EXCHANGE CONTRACTS HAVE BEEN ENTERED IN THE PREVIOUS FINANCIAL YEAR, ON CLOSURE OF THESE FORWARD EXCHANGE CONTRACT S, THE BANKER HAS DEBITED THE LOSS INCURRED ON ACCOUNT OF FLUCTUATION IN CURRENCY AND THE SAME HAS BEEN CLAIMED AS EXPENDITURE. THE ASSESSEE FURTHER CLAIMS THAT THE LOSS INCURRED UNDER THE HEAD EXCHANGE LOS S IS A CRYSTALISED LOSS, THEREFORE, THE A.O. WAS NOT CORRECT IN HOLDIN G THAT THE LOSS INCURRED IS A NOTIONAL LOSS. 11. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATE RIALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. THE A.O. DISALLOWED LOSS INCURRED ON FORWARD CONTRACTS FOR THE REASON THAT THE LOSS CLAIMED BY THE ASSESSEE IS A NOTIONAL LOSS . THE A.O. FURTHER OBSERVED THAT THE ASSESSEE HAS FAILED TO CORRELATE EXCHANGE LOSS TO EXPORT TURNOVER TO HEDGE THE CURRENCY FLUCTUATIONS, THEREFORE, OPINED THAT THE LOSS CLAIMED BY THE ASSESSEE IS NOT ALLOWA BLE DEDUCTION. ACCORDING TO THE A.O., ONLY CRYSTALLIZED LOSS ON AC COUNT OF CLOSURE OF FORWARD CONTRACTS IS ALLOWABLE AS A DEDUCTION. IN THE PRESENT CASE ON HAND, THE ASSESSEE HAS PRE-CLOSED FORWARD EXCHANGE CONTRACTS BECAUSE OF NON-AVAILABILITY OF EXPORT TURNOVER AND HENCE, T HE LOSS INCURRED IS A ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 14 SPECULATIVE LOSS WITHIN THE MEANING OF SECTION 43(5 ) OF THE ACT AND HENCE, IT CANNOT BE ALLOWED AS A DEDUCTION. 12. BEFORE WE, GO IN TO THE FACTS OF THE PRESENT CA SE, LET US UNDERSTAND, FORWARD CONTRACTS, SPECULATIVE TRANSACTIONS, HEDGIN G, FOREIGN EXCHANGE LOSS AND TREATMENT OF LOSS IN THE BOOKS OF ACCOUNTS . A FORWARD CONTRACT IS A AGREEMENT BETWEEN AN ENTERPRISES AND A BANKER TO PURCHASE OR SELL A PARTICULAR QUANTITY OF CURRENCY FOR A MUTUALLY AG REED PRICE AT A PARTICULAR DATE. THESE FORWARD CONTRACTS ARE USED B Y EXPORTERS TO GET THEIR EXPORT RECEIVABLES HEDGED AGAINST ADVERSE CUR RENCY MOVEMENTS. HEDGING IS DEFINED AS TO ENTER IN TO TRANSACTIONS T O REDUCE THE RISK OF ADVERSE MOVEMENT OF CURRENCY. ANY PERSON HAVING EXP OSURE TO FOREIGN CURRENCY MAY ENTER INTO HEDGING TO FIX HIS COST AND PROFITS AT A PARTICULAR LEVEL. THEREFORE, FORWARD CONTRACTS MEANS ENTERING INTO AGREEMENT WITH BANKERS TO HEDGE THE CURRENCY FLUCTUATIONS TO MITIG ATE THE LOSS IN THE COURSE OF IMPORT/EXPORT BUSINESS. FORWARD EXCHANGE CONTRACTS AND TREATMENT OF ANY PROFIT/LOSS ARISING ON CANCELLATIO N OR RENEWAL OF SUCH FORWARD EXCHANGE CONTRACTS HAS BEEN DEALT BY ACCOUN TING STANDARD-11 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, IN PARA 36, 37, 38 & 39. ACCORDING TO THE AS-11, OF ICAI, ANY FORW ARD EXCHANGE CONTRACTS ENTERED TO HEDGE THE FOREIGN CURRENCY EXP OSURE, TO MITIGATE ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 15 UNEXPECTED LOSS WITH ITS IMPORT/EXPORT BUSINESS HAS TO BE REGARDED AS BUSINESS LOSS AND INCOME AS THE CASE MAY BE. IN CA SE 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 THE ACT DEFINES THE TERM SPECULATIVE TRANSACTIONS, MEANS A TRANSACTION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY, INCLUDIN G STOCK AND SHARES IS PERIODICALLY OR ULTIMATELY SETTLED OTHERWISE THAN B Y THE ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY OR SCRIPTS. SUB-CLAUSE (A ) OF SECTION 43(5) OF THE ACT, EXCLUDES CERTAIN TRANSACTIONS WITHIN THE M EANING OF SPECULATIVE TRANSACTION. ACCORDING TO THE SUB-CLAUSE (A), A CO NTRACT IN RESPECT OF RAW MATERIALS OR MERCHANDISE ENTERED INTO BY A PERS ON IN THE COURSE OF HIS MANUFACTURING OR MERCHANDISING BUSINESS, TO GUA RD AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATIONS IN RESPECT OF HIS CONTRACTS FOR ACTUAL DELIVERY OF GOODS MANUFACTURED BY HIM OR MERCHANDIS E SOLD BY HIM. A PLAIN READING OF SUB-CLAUSE (A) OF 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 FLU CTUATION IN FOREIGN CURRENCY, THEN SUCH TRANSACTIONS ARE KEPT OUTSIDE T HE PURVIEW OF THE DEFINITION OF SPECULATIVE TRANSACTIONS. THEREFORE, TO SEE WHETHER A ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 16 PARTICULAR TRANSACTION IS A SPECULATIVE TRANSACTION OR A MERE HEDGING TRANSACTION, THERE SHOULD BE EXPORT OR IMPORT OF GO ODS OR MERCHANDISE AT LEAST TO THE EXTENT OF VALUE OF FORWARD EXCHANGE CONTRACTS. 14. THE TREATMENT TO BE GIVEN TO FOREIGN CURRENCY I TEMS AS PER THE AMENDED AS 11 OF ICAI, NOTIFIED BY CENTRAL GOVERN MENT U/S 211(3C) OF COMPANIES ACT, DOES NOT MAKE ANY DISTINCTION BET WEEN ITEMS OF CAPITAL NATURE AND REVENUE NATURE. BOTH ARE REQUIRE D 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 BOOKS OF ACCOUNTS AND IN THE INDIAN TAX LAWS. FURTH ER, WITH AN INCREASED FLOW OF INBOUND / OUTBOUND TRANSACTIONS A ND THEIR COMPLEX DYNAMIC STRUCTURING, THE TAX TREATMENT OF FOREIGN E XCHANGE GAINS / LOSSES HAS BEEN SURROUNDED BY HUGE LITIGATION AND V ARIOUS COURTS HAVE DISCUSSED THE SAME IN GREAT DETAIL. EXCHANGE FLUCTU ATION DIFFERENCE AND TAX TREATMENT OF THE CAPTIONED ISSUE WAS DISCUSSED IN GREAT DETAIL IN THE RECENT LANDMARK RULING OF SUPREME COURT IN THE CASE OF CIT VS WOODWARD GOVERNOR INDIA P. LTD (312 ITR 254) WHERE I N THE SC RELIED ON THE EARLIER JUDGMENT IN THE CASE OF SUTLEJ COTTO N MILLS LTD VS. CIT (116 ITR 1), OBSERVED THAT THE LAW MAY, THEREFORE, NOW BE TAKEN TO BE WELL SETTLED THAT WHERE PROFIT OR LOSS ARISES TO AN ASSESSEE ON ACCOUNT OF ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 17 APPRECIATION OR DEPRECIATION IN THE VALUE OF FOREIG N CURRENCY HELD BY IT, ON CONVERSION INTO ANOTHER CURRENCY, SUCH PROFIT OR LOSS WOULD ORDINARILY BE A TRADING 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 VS. V.S.D EMPO & CO PVT. LTD (206 ITR 291), WHEREIN IT WAS HELD THAT A LOSS ARIS ING IN THE PROCESS OF CONVERSION OF FOREIGN CURRENCY WHICH IS PART OF TRA DING ASSET OF THE ASSESSEE IS A TRADING LOSS AS ANY OTHER LOSS. IN DE TERMINING THE TRUE NATURE AND CHARACTER OF THE LOSS, THE CAUSE WHICH O CCASIONS THE LOSS IS IMMATERIAL; WHAT IS MATERIAL IS WHETHER THE LOSS HA S OCCURRED IN THE COURSE OF CARRYING ON THE BUSINESS OR IS INCIDENTAL TO IT. IF THERE IS LOSS IN A TRADING ASSET, IT WOULD BE A TRADING LOSS, WHA TEVER BE ITS CAUSE BECAUSE IT WOULD BE A LOSS IN THE COURSE OF CARRYIN G ON THE BUSINESS. LOSS IN RESPECT OF CIRCULATING CAPITAL IS REVENUE L OSS WHEREAS LOSS IN RESPECT OF FIXED CAPITAL IS NOT. LOSS RESULTING FRO M DEPRECIATION OF THE FOREIGN CURRENCY WHICH IS UTILISED OR INTENDED TO B E UTILISED IN BUSINESS ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 18 AND IS PART OF THE CIRCULATING CAPITAL, WOULD BE A TRADING LOSS, BUT DEPRECIATION OF FIXED CAPITAL ON ACCOUNT OF ALTERAT ION IN EXCHANGE RATE WOULD BE CAPITAL LOSS. FOR DETERMINING WHETHER DEVA LUATION LOSS IS REVENUE LOSS OR CAPITAL LOSS WHAT IS RELEVANT IS TH E UTILISATION OF THE AMOUNT AT THE TIME OF DEVALUATION AND NOT THE OBJEC T FOR WHICH THE LOAN HAD BEEN OBTAINED. THE WAY IN WHICH THE ENTRIES ARE MADE BY AN ASSESSEE IN THE BOOKS OF ACCOUNT IS NOT DETERMINATI VE OF THE QUESTION WHETHER THE ASSESSEE HAS EARNED ANY PROFIT OR SUFFE RED ANY LOSS. WHAT IS NECESSARY TO BE CONSIDERED IS THE TRUE NATURE OF TH E TRANSACTION AND WHETHER IN FACT IT HAS RESULTED IN PROFIT OR LOSS T O THE ASSESSEE. THEREFORE, ONCE LOSS INCURRED ON ACCOUNT OF FLUCTUA TION IN FOREIGN CURRENCY, THEN THE LOSS SUFFERED SHALL BE ALLOWED A S BUSINESS LOSS, UNLESS IT IS IN THE NATURE OF SPECULATION LOSS. 16. HAVING SAID THAT, LET US COME TO THE FACTS OF T HE PRESENT CASE. IN THE PRESENT CASE ON HAND, THE ASSESSEE IS INTO THE BUSINESS OF EXPORT OF RICE AND OTHER COMMODITIES. DURING THE PREVIOUS FI NANCIAL YEAR, IT HAS ACHIEVED EXPORT TURNOVER OF ABOUT ` 80 CRORES. THE FORWARD EXCHANGE CONTRACTS ARE ENTERED IN THE PREVIOUS FINANCIAL YEA R, WHICH WAS NOT DISPUTED BY THE A.O. THOUGH THERE IS NO EXPORT TUR NOVER FOR THE CURRENT FINANCIAL YEAR, THIS IS BECAUSE OF A BAN IMPOSED BY THE GOVERNMENT OF ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 19 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 FIN ANCIAL YEAR 2008-09, THE ASSESSEE WAS ON THE BONAFIDE BELIEF THAT THE BA N ON EXPORT IS TEMPORARY AND GOVERNMENT MAY REVIEW THE BAN, THEREF ORE, IT CAN CONTINUE ITS EXPORTS AND ACCORDINGLY IT HAS CONTINU ED ITS FORWARD EXCHANGE CONTRACTS WITH THE BANKS. SINCE THE BAN W AS CONTINUED FOR THE WHOLE FINANCIAL YEAR AND ALSO FACT THAT DURING THE SAME PERIOD, THE INDIAN CURRENCY HAD A DRAMATIC FALL IN THE INTERNAT IONAL MARKET, THE ASSESSEE HAS CLOSED FORWARD EXCHANGE CONTRACTS AND SUFFERED LOSS. THE ASSESSEE BEING A PRUDENT BUSINESS PERSON ENTERED FO REIGN 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 RES ULTS INTO LOSS. THEREFORE, THE LOSS SUFFERED BY THE 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 NO TIONAL LOSS AS THE LOSS IS NOT CRYSTALLIZED IN THE BOOKS OF ACCOUNTS. THE A.O. OBSERVED THAT ONLY ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 20 CRYSTALLIZED LOSS IS ALLOWABLE AS DEDUCTIONS, BUT N OT NOTIONAL LOSS. AS THE FORWARD CONTRACTS HAVE BEEN ENTERED INTO AGAINST CU RRENCY FLUCTUATIONS, THERE WOULD NOT BE ANY CRYSTALLIZATION OF LIABILITY . THE A.O. FURTHER OBSERVED THAT LOSS INCURRED BY THE ASSESSEE IS A MT M LOSSES, WHICH IS IN THE NATURE OF NOTIONAL LOSS CANNOT BE ALLOWED AS DE DUCTIONS. THE A.O. REFERRED TO AS-30 ISSUED BY THE ICAI AND CBDT CIRCU LAR AND OBSERVED THAT MTM LOSS PROVIDED IN THE BOOKS OF ACCOUNTS CAN NOT 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 CANCELLAT ION/RENEWAL OF FORWARD EXCHANGE CONTRACTS, WHICH HAS BEEN DEBITED BY THE BANKERS. THE ASSESSEE HAS FILED DETAILS OF FORWARD EXCHANGE CONTRACTS AND BANK ACCOUNTS. ON PERUSAL OF THE BANK STATEMENTS, WE FIN D THAT THE LOSSES INCURRED BY THE ASSESSEE IS ON ACCOUNT OF CANCELLAT ION/RENEWAL OF FORWARD EXCHANGE CONTRACTS, WHICH IS CRYSTALLIZED A ND DEBITED BY THE BANKERS. CONSIDERING FACTS AND CIRCUMSTANCES OF TH IS CASE, WE ARE OF THE VIEW THAT FOREIGN EXCHANGE LOSS INCURRED BY THE ASSESSEE ON ACCOUNT OF ENTERING INTO FORWARD CONTRACTS WITH BANKS FOR T HE PURPOSE OF HEDGING LOSS IN CONNECTION WITH ITS IMPORT/EXPORT BUSINESS HAS TO BE REGARDED AS BUSINESS LOSS. THE CIT(A) AFTER CONSIDERING THE REL EVANT EXPLANATIONS RIGHTLY DELETED THE ADDITIONS MADE BY THE A.O. WE DO NOT SEE ANY ITA NO.487/VIZAG/2012 SRI RAMALINGESWARA RICE & OIL MILL, VELPUR 21 REASONS TO INTERFERE WITH THE ORDER OF CIT(A). HEN CE, WE INCLINED TO UPHOLD THE CIT(A) ORDER AND REJECT THE GROUND RAISE D BY THE REVENUE. 18. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 7 TH OCT16. SD/- SD/- ( . ) ( . ) (V. DURGA RAO) (G. MANJUNATHA) /JUDICIAL MEMBER /ACCOUNTANT MEMBER # /VISAKHAPATNAM: ' /DATED : 7.10.2016 VG/SPS )# *# /COPY OF THE ORDER FORWARDED TO:- 1. / THE APPELLANT THE ACIT, CIRCLE-1, RAJAHMUNDRY 2. / THE RESPONDENT M/S. SRI RAMALINGESWARA RICE & OIL MILLS, DR.NO.2-153, RICE MILL STREET, VELPUR, WEST GODAVARI DIST. 3. + / THE CIT, RAJAHMUNDRY 4. + ( ) / THE CIT (A), GUNTUR 5. # . , . , # / DR, ITAT, VISAKHAPATNAM 6 . / GUARD FILE / BY ORDER // TRUE COPY // 12 . (SR.PRIVATE SECRETARY) . , # / ITAT, VISAKHAPATNAM