ASST CIT 5(2)(2), MUMBAI V. MEHTA BROTHERS GEMS P.LTD, MUMBAI

ITA 590/MUM/2016

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 6789 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-05-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2009-2010
• Appeal Filed On: 05-02-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: T A KHAN
• Keywords: Business expenditure; Transactions in derivatives; Speculation loss
• Section: 43(5)

Judgement Text

IN THE INCOME-TAX APPELLATE TRIBUNAL B BENCH MUMB AI BEFORE SHRI PAWAN SINGH, JUDICIAL MEMBER AND SHRI RAJESH KUMAR, ACCOUNTANT MEMBER ITA NO.590/MUM/2016 (ASSESSMENT YEAR 2009 -10 ) ACIT RANGE-5(2)(2) R. NO. 571, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-20. VS. M/S MEHTA BROTHERS GEMS PVT. LTD. 635, PANCHARATNA, OPERA HOUSE, MUMBAI -400004. PAN: AAECM1130C ITA NO.4452/MUM/2016 (ASSESSMENT YEAR 2010-11 ) DCIT RANGE-5(2)(2) R.NO. 571, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-20. VS. M/S MEHTA BROTHERS GEMS PVT. LTD. 635, PANCHARATNA, OPERA HOUSE, MUMBAI -400004. PAN: AAECM1130C APPELLANT RESPOND ENT APPELLANT BY : SHRI T.A. KHAN (DR) RESPONDENT BY : MS. ARATI VISSANJI (AR) DATE OF HEARING : 22.05.2018 DATE OF PRONOUNCEMEN T : 22.05.2018 ORDER UNDER SECTION 254(1) OF INCOMETAX ACT PER PAWAN SINGH, JUDICIAL MEMBER; 1. THESE TWO APPEAL BY REVENUE ARE DIRECTED AGAINST TH E ORDER OF LD. COMMISSIONER OF INCOME-TAX (APPEALS)-10 [LD. CIT(A) ], MUMBAI FOR ASSESSMENT YEAR 2009-10 & 2010-11 RESPECTIVELY. IN BOTH THE APPEALS, THE REVENUE HAS RAISED COMMON GROUND OF APPEAL, THEREFO RE, BOTH THE APPEALS WERE CLUBBED TOGETHER, HEARD AND ARE BEING DECIDED BY CONSOLIDATED ORDER TO AVOID THE CONFLICTING DECISION. ITA NO.590 & 4452/M/16- M/S MEHTA BROTHERS GEMS PVT. LTD. 2 2. WITH THE CONSENT OF PARTIES, THE APPEAL FOR ASSESSM ENT YEAR 2009-10 WAS TREATED AS LEAD CASE. THE REVENUE IN APPEAL FOR ASS ESSMENT YEAR 2009-10 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. 'ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. CIT(A) ERRED IN DELETED THE INTEREST DISALLOWED U/S. 36(L)(II) WITH OUT APPRECIATING THAT THE INTEREST BEARING FUNDS HAD BEEN UTILISED FOR PURCHA SE OF OFFICE PREMISES AND, CONSEQUENTLY, THE INTEREST PAID WAS REQUIRED TO BE CAPITALIZED WITH THE COST OF THE ASSETS. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF THE MARK TO MARKET (MT M) LOSS OF RS. 6,40,532/- ON OUTSTANDING DERIVATIVES CONTRACTS AS ON 31.03.20 09 WITHOUT APPRECIATING THAT THE SAID LOSS WAS ONLY A NATIONAL LOSS AND THE LOSS , IF ANY, CAN BE ALLOWED ONLY IN THE FOLLOWING ASSESSMENT YEAR WHEN THE OUTSTANDI NG DERIVATIVES WERE CLOSED ON THEIR MATURITY. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF LOSS OR RS. 1,21,00,00 0/- ON CANCELLATION OF FORWARD CONTRACTS WITHOUT APPRECIATING THAT THE ASS ESSEE HAS FAILED TO ESTABLISH WITH DOCUMENTARY EVIDENCE HOW THE FORWARD CONTRACTS WERE ENTERED INTO TO REDUCE ITS FUTURE LOSSES ON ACCOUNT OF FOREIGN EXCH ANGE FLUCTUATIONS. THE APPELLANT PRAYS THAT THE ORDER OF THE LD. CIT(A ) BE SET ASIDE AND THE ORDER OF THE AO BE RESTORED. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE-COMPA NY IS ENGAGED IN TRADING IN CUT AND POLISHED AND AS EXPORTER OF DIAMONDS, FI LED ITS RETURN FOR AY 2009-10 ON 26.09.2009 DECLARING NIL INCOME. THE ASS ESSMENT WAS COMPLETED ON 15.03.2013 UNDER SECTION 143(3). THE A SSESSING OFFICER WHILE FRAMING THE ASSESSMENT ORDER BESIDES THE OTHE R ADDITION AND DISALLOWANCE, DISALLOWED OF RS. 10,24,368/- UNDER S ECTION 36(1)(III), ITA NO.590 & 4452/M/16- M/S MEHTA BROTHERS GEMS PVT. LTD. 3 DISALLOWED MARK TO MARKET LOSS OF RS. 6,40,000/- AN D FURTHER DISALLOWED RS. 1,21,00,000/- ON ACCOUNT OF LOSS ON CANCELLATIO N OF FORWARD CONTRACT. ON APPEAL BEFORE THE LD. CIT(A), ALL THE DISALLOWAN CE WAS DELETED. THEREFORE, AGGRIEVED BY THE ORDER OF LD. CIT(A), TH E REVENUE HAS FILED THE PRESENT APPEAL BEFORE US. 4. WE HAVE HEARD THE LD. DEPARTMENTAL REPRESENTATIVE ( DR) FOR THE REVENUE AND LD. AUTHORIZED REPRESENTATIVE (AR) OF THE ASSES SEE AND PERUSED THE MATERIAL AVAILABLE ON RECORD. GROUND NO.1 RELATES T O DISALLOWANCE OF INTEREST UNDER SECTION 36(1)(III) [WRONGLY MENTIONE D IN GOA UNDER SECTION 36(1)(II)]. THE LD. DR FOR THE REVENUE SUPPORTED TH E ORDER OF ASSESSING OFFICER. THE LD. DR FOR THE REVENUE FURTHER SUBMITS THAT ON VERIFICATION OF BALANCE-SHEET, THE ASSESSING OFFICER NOTED THAT ASS ESSEE INVESTED SUBSTANTIAL AMOUNT TOWARDS BHARAT DIAMOND BOURSE AN D IN GUJARAT HIRA BOURSE. THE ASSESSEE CLAIMED THAT THE AMOUNT WAS PA ID ON ACCOUNT OF TO ADVANCES FOR PURCHASE OF OFFICE PREMISES AT BANDRA KURLA COMPLEX AND GUJARAT. THE ASSESSEE WAS ASKED AS TO WHY THE PROPO RTIONATE DISALLOWANCE OF INTEREST EXPENSES ON BORROWED FUNDS BE NOT MADE. THE ASSESSEE MADE SIMILAR PAYMENT IN EARLIER ASSESSMENT YEAR 2006-07 AND 2007-08. IN RESPONSE TO THE QUESTION, THE ASSESSEE SUBMITTED TH AT NO INTEREST IS DISALLOWABLE SINCE ASSESSEE HAS NOT BORROWED ANYTHI NG FOR ACQUISITION OF THE SAID PREMISES. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS SUBSTANTIALLY BORROWING. THE ASSESSEE HAS NOT SUBST ANTIATED THAT NO ITA NO.590 & 4452/M/16- M/S MEHTA BROTHERS GEMS PVT. LTD. 4 BORROWED FUND WAS UTILIZED FOR PURCHASE OF OFFICE P REMISES. THEREFORE, THE ASSESSING OFFICER MADE THE PROPORTIONATE DISALLOWAN CE. ON THE OTHER HAND, THE LD. AR OF THE ASSESSEE SUBMITS THAT THE A SSESSING OFFICER MADE THE DISALLOWANCE ON THE BASIS OF DISALLOWANCE IN AS SESSMENT YEAR 2006-07 & 2007-08. AGAINST THE DISALLOWANCE, THE ASSESSEE F ILED APPEAL BEFORE THE TRIBUNAL AND THE TRIBUNAL VIDE ITS ORDER DATED 25.0 1.2012 IN APPEAL FOR ASSESSMENT YEAR 2006-07 IN ITA NO. 6245/MUM/2010 DE LETED THE SIMILAR DISALLOWANCE. THE LD. AR OF THE ASSESSEE PLACED ON RECORD THE COPY OF ORDER OF TRIBUNAL. 5. WE HAVE CONSIDERED THE SUBMISSION OF BOTH THE PARTI ES AND FIND THAT THE ASSESSING OFFICER WHILE MAKING DISALLOWANCE DISALLO WED THE INTEREST EXPENSES UNDER SECTION 36(1)(III) HOLDING THAT IDEN TICAL ISSUE WAS INVOLVED IN ASSESSMENT YEAR 2006-07 & 2007-08. WE HAVE FURTH ER NOTED THAT THE CO-ORDINATE BENCH OF TRIBUNAL IN ASSESSEES OWN CAS E FOR ASSESSMENT YEAR 2006-07 ON IDENTICAL FACTS DELETED THE DISALLO WANCE HOLDING THAT WHEN THE PAYMENT FOR ACQUISITION OF ASSETS HAVE BEE N MADE FROM OWN FUNDS, THERE CANNOT BE ANY DISALLOWANCE OF INTEREST . NO CONTRARY FACTS OR LAW IS BROUGHT TO OUR NOTICE TO TAKE A CONTRARY VIE W; THEREFORE, WE DO NOT FIND ANY MERIT IN THE GROUND OF APPEAL RAISED BY RE VENUE. MOREOVER, THE LD. CIT(A) DELETED HE ADDITION WHILE RELYING UPON T HE DECISION OF TRIBUNAL FOR ASSESSMENT YEAR 2006-07 VIDE ORDER DATED 25.01. 2012. ITA NO.590 & 4452/M/16- M/S MEHTA BROTHERS GEMS PVT. LTD. 5 6. GROUND NO.2 RELATES TO MARK TO MARKET LOSS OF RS. 6 ,40,532/-. THE LD. DR FOR THE REVENUE SUPPORTED THE ORDER OF ASSESSING OF FICER AND SUBMITS THAT WHERE NO SALE OR SETTLEMENT HAS ACTUALLY TAKEN PLAC E AND THE LOSS ON MARK TO MARKET BASIS HAS RESULTED IN REDUCTION OF BOOK P ROFIT, SUCH NOTIONAL LOSS IS CONTINGENT IN NATURE CANNOT BE ALLOWED AGAINST T HE TAXABLE INCOME. ON THE OTHER HAND, THE LD. AR OF THE ASSESSEE SUPPORTE D THE ORDER OF ASSESSING OFFICER. THE LD. AR OF THE ASSESSEE FURTHER SUBMITS THAT THE TRANSACTION ENTERED BY ASSESSEE IS NOT IN NATURE OF SPECULATIVE ACTIVITIES. HEDGING TRANSACTION WERE ENTERED SO AS TO COVER THE VARIATI ON IN FOREIGN EXCHANGE RATE AND THE GROUNDS OF APPEAL RAISED IS COVERED BY THE DECISION OF JURISDICTIONAL HIGH COURT IN CASE OF CIT V/S M/S. D . CHETAN & CO. IN ITA NO. 1440 OF 2014 DATED 01.10.2016. IT IS SUBMITTED THAT THE HONBLE HIGH COURT WHILE RELIED UPON ITS EARLIER DECISION IN CIT V/S BADRIDAS GAURIDAS (P.) LTD. WHEREIN IT WAS HELD THAT FORWARD CONTRACT IN FOREIGN EXCHANGE WHEN INCIDENTAL TO CARRYING ON BUSINESS OF COTTON E XPORTER AND DONE TO COVER UP LOSSES ON ACCOUNT OF DIFFERENCES IN FOREIG N EXCHANGE VALUATIONS, WOULD NOT BE SPECULATIVE ACTIVITY BUT A BUSINESS AC TIVITY. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSION OF THE PART IES AND HAVE GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE ASSESS ING OFFICER DISALLOWED THE MARK TO MARKET LOSS ON FORWARD CONTRACTS, NOT E XPIRED DURING THE YEAR HOLD IT AS NOTIONAL AND SPECULATIVE IN NATURE. THE LD. CIT(A) CONSIDERING THE DATE OF BOOKING, DATE OF MATURITY CONCLUDED THA T THE ASSESSEE HAS NOT ITA NO.590 & 4452/M/16- M/S MEHTA BROTHERS GEMS PVT. LTD. 6 CLOSED THE FORWARD CONTRACT BEFORE THEIR MATURITY D ATE AND THAT ASSESSEE- COMPANY HAS SIMPLY RE-VALUED THE FORWARD CONTRACT A S PER EXCHANGE RATE PREVALENT AT THE CLOSING OF 31.03.2009. THE LD. CIT (A) FURTHER APPRECIATED THAT THE ASSESSEE IS CONSISTENTLY FOLLOWING THE ACC OUNTING STANDARD-11 (AS-11) AND THAT THE ASSESSEE DISCLOSED BOTH GAIN A ND LOSSES IN ITS ACCOUNT AND CANNOT BE TREATED THAT THE LOSS HAS ARISEN OUT OF SPECULATION. FURTHER, THE ASSESSEE HAS NOT CLOSED THE FORWARD CONTRACT BE FORE THE DUE DATE, THE ASSESSEE HAS SHOWN THE LEDGER COPY AS ON 01.04.2009 BY REVERSING THE DEBIT ENTRIES AND BOOKING IT AS A CREDIT ENTRIES IN THE LEDGER AND CONCLUDED THAT THE LOSS OF RS. 6,40,532/- DOES NOT FALL UNDER THE SPECULATION LOSS WITHIN THE MEANING OF SECTION 43(5). THE LD. CIT(A) DELETED THE DISALLOWANCE BY RELYING ON THE DECISION OF TRIBUNAL IN CASE OF CIT V/S M/S LONDON STAR DIAMOND CO. (INDIA) PVT. LTD. IN ITA NO . 6169/MUM/2012 DATED 11.11.2013. THE LD. AR OF THE ASSESSEE HAS PL ACED ON RECORD THE COPY OF DECISION OF HONBLE JURISDICTIONAL HIGH COU RT IN CIT V/S M/S LONDON STAR DIAMOND CO. (INDIA) PVT. LTD.(SUPRA) WH EREIN THE APPEAL OF THE ASSESSEE IS DISMISSED BY THE HONBLE HIGH COURT IN ITS ORDER DATED 19.10.2016 IN ITA NO. 712/2014. NO CONTRARY DECISIO N IS BROUGHT TO OUR NOTICE. THEREFORE, CONSIDERING THE DECISION OF HON BLE JURISDICTIONAL HIGH COURT IN CIT V/S M/S LONDON STAR DIAMOND CO. (INDIA ) PVT. LTD.(SUPRA) ON THE BASIS OF WHICH THE ASSESSEE WAS GRANTED RELI EF, THEREFORE, WE DO NOT ITA NO.590 & 4452/M/16- M/S MEHTA BROTHERS GEMS PVT. LTD. 7 FIND ANY ILLEGALITY OR INFIRMITY IN THE FINDING OF LD. CIT(A). IN THE RESULT, THIS GROUND OF APPEAL IS DISMISSED. 8. GROUND NO.3 RELATES TO DELETING THE DISALLOWANCE OF RS. 1,21,00,000/- ON CANCELLATION OF FORWARD CONTRACT. THE LD. DR FOR TH E REVENUE SUPPORTED THE ORDER OF ASSESSING OFFICER. THE LD. DR FOR THE REVENUE FURTHER SUBMITS THAT THE ASSESSEE FAILED TO ESTABLISH THE BUSINESS LOSSES AS IT WAS SPECULATIVE IN NATURE, THEREFORE, THE SAME WAS NOT ALLOWABLE AS BUSINESS EXPENDITURE. THE LD. CIT(A) ALLOWED IT ON WRONG PRE MISES. ON THE OTHER HAND, THE LD. AR OF THE ASSESSEE SUPPORTED THE ORDE R OF LD. CIT(A). THE LD. AR OF THE ASSESSEE SUBMITS THAT THE LOSS WAS ACCOUN TED AS PER ACCOUNTING PRINCIPAL IN AS-11 AND WAS CLAIMED IN ACCORDANCE WI TH THE GUIDANCE OF RESERVE BANK OF INDIA (RBI). THE LD. AR OF THE ASSE SSEE SUBMITS THAT ASSESSEE ENTERED FORWARD CONTRACT WITH THE DESIGNAT E BANK TO AS AVOID FUTURE LOSSES DUE TO VOLATILITY OF FOREIGN CURRENCY AND TO SAFEGUARDING THE FUTURE LOSSES IN THE BUSINESS. IN SUPPORT OF HER SU BMISSION, THE LD. AR OF THE ASSESSEE RELIED UPON THE DECISION OF JURISDICTI ONAL HIGH COURT IN CASE OF CIT V/S M/S JAIMIN JEWELLER EXPORTS PVT. LTD. (I TA NO. 1440/2014 DATED 17.02.2017. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSION OF THE PART IES AND HAVE GONE THROUGH THE ORDERS OF AUTHORITIES BELOW; THE ASSESS ING OFFICER DISALLOWED THE LOSS ON CANCELLATION ON FORWARD CONTRACTS BY IN VOKING THE PROVISION OF SECTION 43(5) HOLDING THAT LOSS INCURRED WITHOUT DE LIVERY ON TRANSFER OF ITA NO.590 & 4452/M/16- M/S MEHTA BROTHERS GEMS PVT. LTD. 8 COMMODITY IS SPECULATIVE IN NATURE. THE LD. CIT(A) WHILE RELYING UPON THE DECISION OF HONBLE SUPREME COURT IN CASE OF WOODWA RD GOVERNOR PVT. LTD. 312 ITR 254 HELD THAT WHEN THE ASSESSEE WHILE FOLLOWING AS-11 AND NOT CLOSING FORWARD CONTRACTS PERMANENTLY BUT SIMPL Y ROLLING OVER TO THE NEXT DATE, THE NET LOSS CLAIMED SHOULD BE ALLOWED D URING THE YEAR. THE LD. CIT(A) ALSO EXAMINED THE DETAILED OF LOSS CLAIMED O N FORWARD CONTRACT DURING THE RELEVANT PERIOD AND NOTED THAT THE ASSES SEE CLOSED THE FORWARD CONTRACT JUST FEW DAYS BEFORE THEIR MATURITY DATE A ND BOOK THE LOSS AS PER EXCHANGE RATE PREVAILING ON THE DATE OF CLOSING. TH E ASSESSEE HAS RE-BOOK THE FORWARD CONTRACTS ON THE DATE OF CLOSURE AND RO LLING OVER TO THE NEXT DATE OF MATURITY. SINCE THE FORWARD CONTRACT WERE C LOSED JUST FEW DAYS PRIOR TO THE DATE OF MATURITY AND PRIOR DATE HAPPEN ED TO BE WEAKENED AND CLOSED HOLIDAY, THE EXPLANATION OF ASSESSEE IS REAS ONABLE AND ACCEPTABLE. THE LD. CIT(A) FURTHER RELYING UPON THE DECISION OF TRIBUNAL IN M/S LONDON STAR DIAMOND CO. (INDIA) PVT. LTD. (SUPRA) A LLOWED THE LOSS ON CANCELLATION OF FORWARD CONTRACTS. THE JURISDICTION AL HIGH COURT IN CASE OF CIT V/S M/S JAIMIN JEWELLER EXPORTS PVT. LTD. (SUPR A) WHILE RELYING UPON THE DECISION IN M/S D. CHETAN & CO. (SUPRA) HELD TH AT THE FORWARD CONTRACTS IN FOREIGN EXCHANGE ARE DONE TO COVER UP LOSS ON ACCOUNT OF DIFFERENCE IN FOREIGN EXCHANGE VALUATION IS NOT SPE CULATIVE ACTIVITY BUT BUSINESS ACTIVITY. IN VIEW OF THE ABOVE DISCUSSION, WE DO NOT FIND ANY ITA NO.590 & 4452/M/16- M/S MEHTA BROTHERS GEMS PVT. LTD. 9 INFIRMITY IN THE ORDER OF LD. CIT(A). IN THE RESULT , THIS GROUND OF APPEAL IS ALSO DISMISSED. 10. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED. ITA NO. 4452/MUM/2016 BY REVENUE 11. THE REVENUE HAS RAISED THE IDENTICAL GROUNDS OF APP EAL AS RAISED FOR ASSESSMENT YEAR 2009-10. GROUND NO.1 OF APPEAL IS I DENTICAL TO THE GROUND OF APPEAL NO.1 AND GROUND NO. 2 IS IDENTICAL TO THE GROUND OF APPEAL NO.3 OF ASSESSMENT YEAR 2009-10. AS WE HAVE ALREADY DISMISSED THE IDENTICAL GROUNDS OF APPEAL IN APPEAL FOR AY 20 09-10, THEREFORE, FOLLOWING THE PRINCIPAL OF CONSISTENCY BOTH THE GRO UNDS OF APPEAL RAISED BY REVENUE ARE DISMISSED. 12. IN THE RESULT, BOTH THE APPEAL FILED BY REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 22 .05.2018. SD/- SD/- RAJESH KUMAR PAWAN SINGH ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 22 .05.2018 SK COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. DR B BENCH, ITAT, MUMBAI 6. GUARD FILE BY ORDER, DY./ASST. REGISTRAR ITAT, MUMBAI