Alliance One Industries India Pvt Ltd., Guntur V. THE DCIT, Guntur

ITA 655/VIZ/2014

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 6540 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 2 year(s) 10 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-11-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2009-2010
• Appeal Filed On: 30-12-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: R GOVINDARAJAN
• Keywords: Business income; Depreciation; Residential status; Speculation loss
• Section: 43(5)

Judgement Text

ITA NO.653 & 655/VIZAG/2014 M/S. ALLIANCE ONE INDUSTRIES PVT. LTD., GUNTUR 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM . , . . ' , % BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER ./I.T.A.NO.653/VIZAG/2014 ( / ASSESSMENT YEAR: 2009-10) ACIT, CIRCLE - 1(1), GUNTUR M/S. ALLIANCE ONE INDUSTRIES (PVT) LTD., GUNTUR [PAN NO. AAACT8064A ] ( ' / APPELLANT) ( ()' / RESPONDENT) ./I.T.A.NO.655/VIZAG/2014 ( / ASSESSMENT YEAR: 2009-10) M/S. ALLIANCE ONE INDUSTRIES (PVT) LTD., GUNTUR ACIT, CIRCLE - 1(1 ), GUNTUR ( ' / APPELLANT) ( ()' / RESPONDENT) / APPELLANT BY : SHRI R. GOVINDA RAJAN, DR / RESPONDENT BY : SHRI G.V.N. HARI, AR / DATE OF HEARING : 11.10.2017 / DATE OF PRONOUNCEMENT : 08.11.2017 ITA NO.653 & 655/VIZAG/2014 M/S. ALLIANCE ONE INDUSTRIES PVT. LTD., GUNTUR 2 / O R D E R PER D.S. SUNDER SINGH, ACCOUNTANT MEMBER: THESE CROSS APPEALS FILED BY THE REVENUE AS WELL AS THE ASSESSEE ARE DIRECTED AGAINST ORDER OF THE COMMISSIONER OF I NCOME TAX (APPEALS), {CIT(A)}, GUNTUR VIDE ITA NO.40/CIT(A)/G NT/2011-12 DATED 10.10.2014 FOR THE ASSESSMENT YEAR 2009-10. 2.0 THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE COMPANY IS ENGAGED IN THE BUSINESS ACTIVITY OF TRADE AND EXPOR T OF UNMANUFACTURED TOBACCO I.E., THRESHED AND REDRIED TOBACCO FILED IT S RETURN OF INCOME ON 25-09-2009, DECLARING TOTAL INCOME OF RS.11,42,.14, 830/- AND THE RETURN OF INCOME WAS PROCESSED U/S.143(1) OF THE INCOME TA X ACT, 1961 (HEREINAFTER CALLED AS 'THE ACT'). SUBSEQUENTLY, TH E CASE WAS SELECTED FOR SCRUTINY THROUGH 'CASS' AND DURING THE ASSESSMENT P ROCEEDINGS, THE A.O. FOUND THAT THE ASSESSEE HAD CLAIMED THE EXPENDITURE TOWARDS 'LOSS ON FORWARD EXCHANGE CONTRACTS' AMOUNTING TO RS.1 1,51, 07,664/- UNDER THE HEAD 'INTEREST AND FINANCE CHARGES'. THE ASSESSEE'S A.R. WAS ASKED TO FURNISH THE DETAILS OF LOSS ON FORWARD EXCHANGE CON TRACTS AND THE A.O. FOUND FROM THE INFORMATION THAT THE ASSESSEE COMPAN Y HAD ENTERED INTO FORWARD CONTRACTS IN RESPECT OF FOREIGN EXCHANGE DE RIVATES WITH STANDARD CHARTERED BANK, QUOTING CERTAIN SPOT RATE ON A FUTURE DATE AND CANCELLED SUCH CONTRACTS EITHER BEFORE THE FIXED DA TE OR ON THE FIXED DATE ITA NO.653 & 655/VIZAG/2014 M/S. ALLIANCE ONE INDUSTRIES PVT. LTD., GUNTUR 3 WITHOUT TAKING THE POSSESSION OF SUCH FOREIGN EXCHA NGE, IN THE FORM OF US DOLLARS. CONSEQUENT ON SUCH CANCELLATIONS, THE A MOUNT RECEIVABLE/PAYABLE IN INDIAN CURRENCY RESULTED IN E ITHER GAIN OR LOSS. THE LOSS ARRIVED ON SUCH TRANSACTIONS WAS DEBITED TO PR OFIT & LOSS A/C AND CLAIMED AS DEDUCTION. 2.1 THE A.O. WAS OF THE VIEW THAT THE ASSESSEE'S CL AIM OF CARRYING ON THE TRANSACTIONS UNDER REFERENCE IN ORDER TO MITIGA TE FLUCTUATION RISK IN FOREX IS DEVOID OF ANY CREDENCE IN VIEW OF THE NATU RE, NUMBER AND TIMING OF THE SAID TRANSACTIONS AND NOTED THAT THE ASSESSEE DID NOT CARRY ON MERELY A SINGLE TRANSACTION FOR THE SAKE OF SAFE GUARDING ITS INTEREST AGAINST SUPPOSED FOREX FLUCTUATION BUT CONTINUED TH E ACTIVITY BEYOND SUCH PURPORTED SAFEGUARD LIMIT. ACCORDINGLY, HE HE LD THE LOSS ON FOREIGN EXCHANGE CONTRACT WAS SPECULATION LOSS BUT NOT BUSI NESS LOSS AND HENCE REJECTED THE CLAIM OF THE ASSESSEE. 2.2 A.O. ALSO OBSERVED THAT THE PROVISIONS OF SEC.4 3(5) OF THE I.T. ACT, A TRANSACTION IN WHICH A CONTRACT FOR PURCHASE OR S ALE OF ANY COMMODITY INCLUDING STOCKS AND SHARES IS PERIODICALLY OR ULTI MATELY SETTLED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMM ODITY OR SCRIPS, IS TERMED AS 'SPECULATIVE TRANSACTION'. THEREFORE, THE A.O. WAS OF THE VIEW THAT THE ABOVE TRANSACTIONS ENTERED BY THE ASSESSEE COMPANY ARE IN THE ITA NO.653 & 655/VIZAG/2014 M/S. ALLIANCE ONE INDUSTRIES PVT. LTD., GUNTUR 4 NATURE OF SPECULATIVE ONLY AND HENCE THE LOSS ARRIV ED ON SUCH TRANSACTIONS ARE TO BE SET-OFF AGAINST ONLY THE INC OME OF SPECULATIVE NATURE. AS PER THE LETTER DATED 23-03-2010 OF THE C BDT, ANY 'ELIGIBLE TRANSACTION' IN RESPECT OF TRADING IN DERIVATES REF ERRED TO IN CLAUSE (AC) OF SEC.2 OF THE SECURITIES CONTRACTS (REGULATION) ACT, 1956 THAT HAS BEEN CARRIED OUT IN A RECOGNIZED STOCK EXCHANGE SHALL NO T BE TREATED AS A SPECULATIVE TRANSACTION. FURTHER, AN 'ELIGIBLE TRAN SACTION' FOR THIS PURPOSE WOULD BE ONE THAT FULFILLS THE CONDITIONS LAID DOWN IN EXPLANATION TO SECTION 43(5)(D) OF THE INCOME-TAX ACT, 1961. HOWEV ER, THE A.O. OBSERVED THAT THE TRANSACTIONS CARRIED ON BY THE AS SESSEE ARE NOT COVERED BY THE SAID EXCEPTION. THE DECISION OF THE HON'BLE CALCUTTA HIGH COURT RELIED ON BY THE ASSESSEE IN THE CASE OF CIT, CALCUTTA VS. SOORAJMULL NAGARMULL, 129 ITR 169 (1981) IS NO WAY RELATED TO THE FACTS OF THIS INSTANT CASE. 2.3 IN VIEW OF THE ABOVE OBSERVATIONS, THE A.O. CAM E TO THE CONCLUSION THAT THE LOSS CLAIMED ON ACCOUNT OF 'LOS S ON FORWARD FOREIGN EXCHANGE CONTRACTS' AMOUNTING TO RS. 11,51,07,664/- WARRANTS TO BE DISALLOWED AS IT WAS TO BE TREATED AS 'LOSS ON SPEC ULATION' AND THE ASSESSEE IS ELIGIBLE TO CARRY THE SAME FORWARD AS L OSS TO BE SET-OFF AGAINST INCOME FROM SPECULATION ONLY AS AND WHEN IT ARISES AND AS PER ITA NO.653 & 655/VIZAG/2014 M/S. ALLIANCE ONE INDUSTRIES PVT. LTD., GUNTUR 5 LAW. HENCE, THE AMOUNT OF RS. 11,51,07,664/ - WAS D ISALLOWED BY THE A.O. AND ADDED TO THE TOTAL INCOME RETURNED. 3. AGGRIEVED BY THE ORDER OF THE A.O., THE ASSESSEE WENT ON APPEAL BEFORE THE CIT(A) AND THE LD. CIT(A) SUSTAINED THE DISALLOWANCE TO RS.20,70,048/- OUT OF THE TOTAL FORWARD CONTRACT LO SSES OF RS.11,51,07,664/- WHICH WAS DISALLOWED BY THE A.O. WHILE DELETING THE ADDITION, THE LD. CIT(A) RELIED ON THE DECISION OF HONBLE KOLKATA HIGH COURT IN THE CASE OF CIT, CALCUTTA VS. SOORAJMUL NA GARMUL, 129 ITR 169 (1981) CIT VS. BADRIDAS GAURIDU (P) LTD. (2003) 261 ITR 256 (BOM.), D. KISHORE KUMAR 2 SOT 769 (MUM) OF MUMBAI ITAT, HONB LE GUJARAT HIGH COURT DECISION IN THE CASE OF CIT VS. PANCHMAHAL ST EEL LTD. (1994) 210 ITR 723 (GUJ) AND THE DECISION OF AUTHORITY OF ADVA NCE RULING IN THE CASE OF SOPROPHA S.A. (2004) 268 ITR 37 (AAR) AND T HE DECISION OF HONBLE ITAT MUMBAI BENCH IN THE CASE OF LONDON STA R DIAMOND COMPANY ITA NO.6169/M/2012 AND HELD THAT KEEPING TH E ABOVE JUDICIAL PRONOUNCEMENTS IN VIEW, IT CAN SAFELY BE SAID THAT (I) THE FOREIGN EXCHANGE MANAGEMENT ACT AND THE RESERVE BANK OF IND IA RULES GOVERNING THE SUBJECT, DO NOT PERMIT SPECULATIVE TR ANSACTIONS IN FOREIGN CURRENCIES OR ITS DERIVATIES. FOREIGN CONTRACTS AR E ALLOWED ONLY AGAINST UNDERLYING EXPOSURE, (II) FORWARD CONTRACTS ARE HED GING TRANSACTIONS AND ARE INTEGRAL/INCIDENTAL TO THE EXPORT BUSINESS OF T HE ASSESSEE AND NOT A ITA NO.653 & 655/VIZAG/2014 M/S. ALLIANCE ONE INDUSTRIES PVT. LTD., GUNTUR 6 SEPARATE AND DISTINCT BUSINESS AS PER EXPLANATION 2 TO SECTION 28, (III). AS AN EXPORTER, THE ENTIRE PROFITABILITY OF THE APP ELLANTS BUSINESS DEPENDS ON THE VALUE OF US$ VIS--VIS THE RUPEE. H ENCE, THIS VALUE OF THE US$ NEEDS TO BE PROTECTED BY THE APPELLANT. TH US, LOSSES ON SUCH FORWARD CONTRACTS ARE NOT LOSS FROM SPECULATION BUS INESS SINCE THEY ARE GENUINE HEDGING TRANSACTIONS AND SHALL BE ALLOWED A GAINST BUSINESS INCOME AND ALLOWED THE APPEAL OF THE ASSESSEE. 4. AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE RE VENUE IS IN APPEAL BEFORE THIS TRIBUNAL. 5. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE MATER IALS AVAILABLE ON RECORD AND GONE THROUGH THE ORDERS OF THE AUTHOR ITIES BELOW. THE ASSESSEE HAS INCURRED A LOSS IN FORWARD CONTRACTS F OR HEDGING THE RECEIVABLES. THERE IS NO DISPUTE WITH REGARD TO TH E FACT THAT THE FORWARD CONTRACTS ARE ENTERED AGAINST THE HEDGING OF RECEIV ABLES. THE ASSESSEE IS AN EXPORTER OF TOBACCO AND THE TOTAL EXPORT TURN OVER OF THE ASSESSEE WAS ` 227.96 CRORES OUT OF EXPORT WHICH EXPORT TURNOVER WAS 223.69 CRORES. THE TURNOVER OF HEDGING WAS LESS THAN THE EXPORT TURNOVER AND THERE IS NO DISPUTE ON THIS FACT. THE ASSESSEE IS NOT ENGAGED IN THE BUSINESS OF FOREIGN EXCHANGE TRADE AND THE HEDGING IS INCIDENTAL TO BUSINESS CARRIED ON BY THE ASSESSEE. ON THE SIMILA R FACTS AND ITA NO.653 & 655/VIZAG/2014 M/S. ALLIANCE ONE INDUSTRIES PVT. LTD., GUNTUR 7 CIRCUMSTANCES, THIS TRIBUNAL, IN THE CASE OF ACIT C IRCLE-1 VS. SOUTHERN ROCKS & MINERALS (P) LTD. IN ITA NO.195/VIZAG/2015 DATED 11.10.2017 ALLOWED THE APPEAL OF THE ASSESSEE FOLLOWING THE DE CISION OF HONBLE ITAT MUMBAI BENCH IN THE CASE OF LONDON STAR DIAMON D COMPANY (I) PVT. LTD. VS. DCIT IN ITA NO.6169/M/2012 AND THE DE CISION OF THIS TRIBUNAL IN THE CASE OF ACIT, CIRCLE-1, RAJAHMUNDRY VS. RAMALINGESWARA RICE AND OIL MILL ON SIMILAR FACTS WHICH READS AS U NDER: 8.1. THE COORDINATE BENCH, VISAKHAPATNAM IN THE CA SE OF ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1, RAJAHMUNDRY . V.SRI RAMALINGESWARA RICE & OIL MILL * ON SIMILAR FACTS IN 2017] 78 TAXMANN.COM 17 (VISAKHAPATNAM - TRIB.) HELD THAT 12. BEFORE WE, GO IN TO THE FACTS OF THE PRESENT CA SE, LET US UNDERSTAND, FORWARD CONTRACTS, SPECULATIVE TRANSACT IONS, HEDGING, FOREIGN EXCHANGE LOSS AND TREATMENT OF LOSS IN THE BOOKS OF ACCOUNT. A FORWARD CONTRACT IS A AGREEMENT BETWEEN AN ENTERPRISES AND A BANKER TO PURCHASE OR SELL A PART ICULAR QUANTITY OF CURRENCY FOR A MUTUALLY AGREED PRICE AT A PARTIC ULAR DATE. THESE FORWARD CONTRACTS ARE USED BY EXPORTERS TO GET THEI R EXPORT RECEIVABLES HEDGED AGAINST ADVERSE CURRENCY MOVEMEN TS. HEDGING IS DEFINED AS TO ENTER IN TO TRANSACTIONS T O REDUCE THE RISK OF ADVERSE MOVEMENT OF CURRENCY. ANY PERSON HA VING EXPOSURE 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 MITIGATE THE LOSS IN THE C OURSE 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 A CCOUNTING STANDARD-11 ISSUED BY THE INSTITUTE OF CHARTERED ACC OUNTANTS OF INDIA, IN PARAS 36, 37, 38 & 39. ACCORDING TO THE AS -11, OF ICAI, ANY FORWARD EXCHANGE CONTRACTS ENTERED TO HEDGE THE FOREIGN CURRENCY EXPOSURE, TO MITIGATE UNEXPECTED LOSS WITH ITS IMPORT/EXPORT BUSINESS HAS TO BE REGARDED AS BUSINE SS LOSS AND INCOME AS THE CASE MAY BE. IN CASE OF SUCH FORWARD EXCHANGE CONTRACT IS NOT IN THE NATURE OF HEDGING, THEN SUCH LOSS SHOULD BE IGNORED. ITA NO.653 & 655/VIZAG/2014 M/S. ALLIANCE ONE INDUSTRIES PVT. LTD., GUNTUR 8 13 . SIMILARLY, THE PROVISIONS OF SECTION 43(5) OF THE ACT DEFINES THE TERM SPECULATIVE TRANSACTIONS, MEANS A TRANSACT ION IN WHICH A CONTRACT FOR THE PURCHASE OR SALE OF ANY COMMODITY, INCLUDING STOCK AND SHARES IS PERIODICALLY OR ULTIMATELY SETT LED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMM ODITY OR SCRIPTS. SUB-CLAUSE (A) OF SECTION 43(5) OF THE ACT , EXCLUDES CERTAIN TRANSACTIONS WITHIN THE MEANING OF SPECULAT IVE TRANSACTION. ACCORDING TO THE SUB-CLAUSE (A), A CON TRACT IN RESPECT OF RAW MATERIALS OR MERCHANDISE ENTERED INTO BY A P ERSON IN THE COURSE OF HIS MANUFACTURING OR MERCHANDISING BUSINE SS, TO GUARD AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATIONS IN R ESPECT OF HIS CONTRACTS FOR ACTUAL DELIVERY OF GOODS MANUFACTURED BY HIM OR MERCHANDISE SOLD BY HIM. A PLAIN READING OF SUB-CLA USE (A) OF SECTION 43(5) OF THE ACT, MAKES IT CLEAR THAT ANY F ORWARD EXCHANGE CONTRACTS ENTERED INTO IN ITS BUSINESS OF IMPORT OR EXPORT OF GOODS TO HEDGE THE POSSIBLE FLUCTUATION I N FOREIGN CURRENCY, THEN SUCH TRANSACTIONS ARE KEPT OUTSIDE T HE PURVIEW OF THE DEFINITION OF SPECULATIVE TRANSACTIONS. THEREFO RE, TO SEE WHETHER A PARTICULAR TRANSACTION IS A SPECULATIVE T RANSACTION OR A MERE HEDGING TRANSACTION, THERE SHOULD BE EXPORT OR IMPORT OF GOODS OR MERCHANDISE AT LEAST TO THE EXTENT OF VALU E 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 GOVE RNMENT U/S. 211(3C) OF COMPANIES ACT, DOES NOT MAKE ANY DISTINC TION BETWEEN ITEMS OF CAPITAL NATURE AND REVENUE NATURE. BOTH ARE REQUIRED TO BE RECOGNIZED IN THE PROFIT & LOSS ACCO UNT. IN VIEW OF THE AFORESAID AMENDMENT, THERE EXISTS A DIVERGENCE OF VIEWS ON THE TREATMENT TO BE METED OUT IN THE BOOKS OF ACCOU NT AND IN THE INDIAN TAX LAWS. FURTHER, WITH AN INCREASED FLOW OF INBOUND/OUTBOUND TRANSACTIONS AND THEIR COMPLEX DYN AMIC STRUCTURING, THE TAX TREATMENT OF FOREIGN EXCHANGE GAINS/LOSSES HAS BEEN SURROUNDED BY HUGE LITIGATION AND VARIOUS 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 RU LING OF SUPREME COURT IN THE CASE OF CIT V. WOODWARD GOVERNOR INDIA (P.) LTD. [2009] 312 ITR 254/179 TAXMAN 326 WHERE IN THE SC RELIED ON THE EARLIER JUDGMENT IN THE CASE OF SUTLEJ COTTO N MILLS LTD. V. CIT [1979] 116 ITR 1 , OBSERVED THAT THE LAW MAY, THEREFORE, NOW BE TAKEN TO BE WELL SETTLED THAT WHE RE PROFIT OR LOSS ARISES TO AN ASSESSEE ON ACCOUNT OF APPRECIATI ON OR DEPRECIATION IN THE VALUE OF FOREIGN CURRENCY HELD BY IT, ON CONVERSION INTO ANOTHER CURRENCY, SUCH PROFIT OR LO SS WOULD ORDINARILY BE A TRADING PROFIT OR LOSS IF THE FOREI GN CURRENCY IS HELD BY THE ASSESSEE ON REVENUE ACCOUNT OR AS A TRADING ASSET OR AS PART OF CIRCULATING CAPITAL EMBARKED IN THE BUSINES S. BUT, IF ON THE ITA NO.653 & 655/VIZAG/2014 M/S. ALLIANCE ONE INDUSTRIES PVT. LTD., GUNTUR 9 OTHER HAND, THE FOREIGN CURRENCY IS HELD AS A CAPIT AL ASSET OR AS FIXED CAPITAL, SUCH PROFIT OR LOSS WOULD BE OF CAPI TAL NATURE.' 15. FURTHER IN THE AFORESAID RULING THE APEX COURT ALSO AFFIRMED THE PRINCIPLES LAID DOWN IN THE RULING OF CIT V. V. S. DEMPO & CO. (P.) LTD. [1994] 206 ITR 291/72 TAXMAN 134 (BOM.) , WHEREIN IT WAS HELD THAT A LOSS ARISING IN THE PROCESS OF CONV ERSION OF FOREIGN CURRENCY WHICH IS PART OF TRADING ASSET OF THE ASSE SSEE IS A TRADING LOSS AS ANY OTHER LOSS. IN DETERMINING THE TRUE NATURE AND CHARACTER OF THE LOSS, THE CAUSE WHICH OCCASIONS TH E LOSS IS IMMATERIAL; WHAT IS MATERIAL IS WHETHER THE LOSS HA S OCCURRED IN THE COURSE OF CARRYING ON THE BUSINESS OR IS INCIDE NTAL TO IT. IF THERE IS LOSS IN A TRADING ASSET, IT WOULD BE A TRA DING LOSS, WHATEVER BE ITS CAUSE BECAUSE IT WOULD BE A LOSS IN THE COURSE OF CARRYING ON THE BUSINESS. LOSS IN RESPECT OF CIRCUL ATING CAPITAL IS REVENUE LOSS WHEREAS LOSS IN RESPECT OF FIXED CAPIT AL IS NOT. LOSS RESULTING FROM DEPRECIATION OF THE FOREIGN CURRENCY WHICH IS UTILISED OR INTENDED TO BE UTILISED IN BUSINESS AND IS PART OF THE CIRCULATING CAPITAL, WOULD BE A TRADING LOSS, BUT D EPRECIATION OF FIXED CAPITAL ON ACCOUNT OF ALTERATION IN EXCHANGE RATE WOULD BE CAPITAL LOSS. FOR DETERMINING WHETHER DEVALUATION L OSS IS REVENUE LOSS OR CAPITAL LOSS WHAT IS RELEVANT IS THE UTILIS ATION OF THE AMOUNT AT THE TIME OF DEVALUATION AND NOT THE OBJECT FOR W HICH 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 SUFFERED ANY LOSS. WHAT IS NECESSARY TO BE CONSIDERED IS THE TRUE NATURE OF THE TRANSACTION AND WHETHER IN FACT IT HAS RESULTED IN PROFIT OR LOSS TO THE ASSESSEE. THEREFORE, ONCE LOSS INCURRED ON A CCOUNT OF FLUCTUATION IN FOREIGN CURRENCY, THEN THE LOSS SUFF ERED SHALL BE ALLOWED AS BUSINESS LOSS, UNLESS IT IS IN THE NATUR E 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 TH E BUSINESS OF EXPORT OF RICE AND OTHER COMMODITIES. DURING THE PR EVIOUS FINANCIAL YEAR, IT HAS ACHIEVED EXPORT TURNOVER OF ABOUT RS. 80 CRORES. THE FORWARD EXCHANGE CONTRACTS ARE ENTERED IN THE PREVIOUS FINANCIAL YEAR, WHICH WAS NOT DISPUTED BY THE A.O. THOUGH THERE IS NO EXPORT TURNOVER FOR THE CURRENT FINANCIAL YEAR, THIS IS BECAUSE OF A BAN IMPOSED BY THE GOVERNMENT OF INDIA, ON EXPORT OF RICE AND OTHER COMMODITIES. AS RIGHTLY PO INTED OUT BY THE LD. A.R. FOR THE ASSESSEE, THE GOVERNMENT OF IND IA IMPOSED BAN ON EXPORT OF RICE FOR A TEMPORARY PERIOD. ALTHO UGH THE BAN WAS EXTENDED FOR A FURTHER PERIOD I.E. UP TO END OF FINANCIAL YEAR 2008-09, THE ASSESSEE WAS ON THE BONA FIDE BELIEF T HAT THE BAN ON EXPORT IS TEMPORARY AND GOVERNMENT MAY REVIEW TH E BAN, THEREFORE, IT CAN CONTINUE ITS EXPORTS AND ACCORDIN GLY IT HAS CONTINUED ITS FORWARD EXCHANGE CONTRACTS WITH THE B ANKS. SINCE ITA NO.653 & 655/VIZAG/2014 M/S. ALLIANCE ONE INDUSTRIES PVT. LTD., GUNTUR 10 THE BAN WAS CONTINUED FOR THE WHOLE FINANCIAL YEAR AND ALSO FACT THAT DURING THE SAME PERIOD, THE INDIAN CURRENCY HAD A DRAMATIC FALL IN THE INTERNATIONAL MARKET, THE ASSESSEE HAS CLOSED FORWARD EXCHANGE CONTRACTS AND SUFFERED LOSS. THE ASSESSEE BEING A PRUDENT BUSINESS PERSON ENTERED FOREIGN EXCHANGE CO NTRACTS WITH A HOPE THAT THE INDIAN CURRENCY MAY RECOVER AND IT MAY RECOUP THE LOSSES. BUT, ULTIMATELY WHEN THINGS ARE NOT TUR NED 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 O F 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 NOTIONAL LOSS AS THE LOSS IS NOT CRYSTALLIZED IN TH E BOOKS OF ACCOUNT. THE A.O. OBSERVED THAT ONLY CRYSTALLIZED L OSS IS ALLOWABLE AS DEDUCTIONS, BUT NOT NOTIONAL LOSS. AS THE FORWAR D CONTRACTS HAVE BEEN ENTERED INTO AGAINST CURRENCY FLUCTUATION S, THERE WOULD NOT BE ANY CRYSTALLIZATION OF LIABILITY. THE A.O. F URTHER OBSERVED THAT LOSS INCURRED BY THE ASSESSEE IS A MTM LOSSES, WHICH IS IN THE NATURE OF NOTIONAL LOSS CANNOT BE ALLOWED AS DEDUCT IONS. THE A.O. REFERRED TO AS-30 ISSUED BY THE ICAI AND CBDT CIRCULA R AND OBSERVED THAT MTM LOSS PROVIDED IN THE BOOKS OF ACC OUNT CANNOT BE ALLOWED. WE DO NOT FIND MERITS IN THE FINDINGS O F 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 CANCELLATION/RENEWAL OF FORWARD EXCHANGE CONTRACTS, WHICH HAS BEEN DEBITED BY THE BANKERS. THE ASSESSEE HAS FILED DETAILS OF FORWARD EXCHANGE CONTRACTS AND BANK ACCOUNT. ON PER USAL OF THE BANK STATEMENTS, WE FIND THAT THE LOSSES INCURRED B Y THE ASSESSEE IS ON ACCOUNT OF CANCELLATION/RENEWAL OF FORWARD EX CHANGE CONTRACTS, WHICH IS CRYSTALLIZED AND DEBITED BY THE BANKERS. CONSIDERING FACTS AND CIRCUMSTANCES OF THIS CASE, W E ARE OF THE VIEW THAT FOREIGN EXCHANGE LOSS INCURRED BY THE ASS ESSEE ON ACCOUNT OF ENTERING INTO FORWARD CONTRACTS WITH BAN KS FOR THE PURPOSE OF HEDGING LOSS IN CONNECTION WITH ITS IMPO RT/EXPORT BUSINESS HAS TO BE REGARDED AS BUSINESS LOSS. THE C IT (A) AFTER CONSIDERING THE RELEVANT EXPLANATIONS RIGHTLY DELET ED THE ADDITIONS MADE BY THE A.O. WE DO NOT SEE ANY REASONS TO INTER FERE WITH THE ORDER OF CIT (A). HENCE, WE INCLINED TO UPHOLD THE CIT (A) ORDER AND REJECT THE GROUND RAISED BY THE REVENUE. 8.2. IN THE ASSESSES CASE, THE ASSESSEE IS AN EXPOR TER OF GRANITE AND BECAUSE OF THE ASSESSEES BUSINESS OF EXPORT OF GRA NITE, THE ASSESSEE COULD ENTER INTO CONTRACT WITH THE ICICI BANK FOR HED GING THE CROSS CURRENCY TRANSACTIONS TO INSULATE THE REVENUE AND T O MITIGATE THE LOSS. THE RESERVE BANK OF INDIA VIDE CIRCULAR 22/2007-08 DATE D 02.07.2007 ITA NO.653 & 655/VIZAG/2014 M/S. ALLIANCE ONE INDUSTRIES PVT. LTD., GUNTUR 11 PERMITTED A PERSON, RESIDENT OF INDIA TO ENTER INTO FOREIGN CONTRACT WITH AN AUTHORIZED DEALER TO HEDGE AN EXPORT TO EXCHANGE RI SK IN RESPECT OF TRANSACTIONS FOR WHICH SALE AND PURCHASE OF FOREIGN EXCHANGE IS PERMITTED UNDER THE ACT. IT MEANS, AUTHORIZED DEALER CAN HED GE THE BUSINESS RECEIVABLES SO AS TO ENABLE THE PARTIES TO AVOID EX CHANGE VALUE DIFFERENCES. THE AUTHORIZED DEALER I.E. BANK CAN D O THIS ONLY FOR HEDGING NOT FOR SPECULATION. THE RESERVE BANK OF INDIA IN J ULY 2006 HAD ISSUED A MASTER CIRCULAR CONSOLIDATING ALL NOTIFICATIONS, GU IDELINES AND CIRCULARS ON THE FORWARD AND DERIVATIVE CONTRACTS IN FOREIGN EXC HANGE. TO SUMMARISE THE DERIVATIVES AND OPTION CONTRACTS ARE PERMITTED FOR THE FOLLOWING PURPOSES : (I) TO COVER THE RISK OF EXCHANGE IN FOREIGN EXCHANGE B ORROWINGS. (II) TO COVER INTEREST RATE VARIATIONS (III) TO COVER EXPOSURE RECEIVABLES OR IMPORT PAYABLES IN FOREIGN EXCHANGE. (IV) NO NET FLOW, INFLOW OF PREMIUM AND ANNEXURE VII TO RBI MASTER CIRCULAR JULY 2006 STA TES THAT MARKET PARTICIPANTS SHALL FOLLOW ONLY ISDA DOCUMENTATION. IN THE INSTANT CASE, THE ASSESSEE IS NOT A FOREIGN EXCHANGE DEALER AND N OT IN THE BUSINESS OF FOREIGN EXCHANGE DEALINGS. OUT OF THE TOTAL TURNOV ER OF THE ASSESSEE OF 50 CRORES, 88% OF THE TURNOVER OF THE BUSINESS WAS EXP ORT TURNOVER. IN THE DECISION RELIED BY THE ASSESSEE IN THE CASE OF LOND ON STAR DIAMOND COMPANY LTD. (SUPRA), THE COORDINATE BENCH HELD THA T HEDGING NEED NOT BE 1 : 1 BASIS. THE COORDINATE BENCH OF ITAT, VISAK HAPATNAM IN THE CITED CASE HELD THAT NO DISALLOWANCE OF LOSS UNDER FORWARD CONTRACT JUS T BECAUSE ASSESSEE HAD NIL EXPORT TURNOVER DUE TO BAN ON EXPORT. IN THE INSTANT CASE THE ASSESSHAD MADE EXPORT TURNOVER OF RS.40.00 CRORES AND THE AO HAD NOT MADE OUT A CASE THAT THE TOTAL TURNO VER FROM THE DERIVATIVE TRANSACTIONS WAS MORE THAN THE EXPORT TU RNOVER. THEREFORE, WE HOLD THAT THE ASSESSEES CASE IS SQUARELY COVERED B Y THE CASE LAWS RELIED UPON BY THE ASSESSEE AND THE DECISION OF THE LONDON STAR DIAMOND CO. LTD. (SUPRA) AND THE DECISION OF THIS TRIBUNAL CITE D. HENCE, THE TRANSACTIONS ENTERED BY THE ASSESSEE CANNOT BE HELD AS SPECULATI ON LOSS AND REQUIRED TO BE ALLOWED AS BUSINESS LOSS. ACCORDINGLY, WE UPH OLD THE ORDER OF THE LD.CIT(A) ON THIS ISSUE AND ALLOW THE APPEAL OF THE ASSESSEE. IN THE INSTANT CASE FACTS ARE SIMILAR TO THAT OF T HE CASE CITED (SUPRA), HENCE THE CASE IS SQUARELY COVERED BY THE DECISION OF THIS ITA NO.653 & 655/VIZAG/2014 M/S. ALLIANCE ONE INDUSTRIES PVT. LTD., GUNTUR 12 TRIBUNAL IN ITA NO.195/VIZAG/2015 (SUPRA). ACCORDI NGLY, WE HOLD THAT THE FOREIGN EXCHANGE FLUCTUATION LOSS INCURRED BY T HE ASSESSEE IS INCIDENTAL TO BUSINESS AND BUSINESS LOSS. THEREFOR E, WE UPHOLD ORDER OF THE LD. CIT(A) AND DISMISS THE APPEAL OF THE REVENU E. ITA NO.655/VIZAG/2014: 6. THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD. CIT(A). DURING THE ASSESSMENT PROCEEDINGS, THE A.O . DISALLOWED THE FOREIGN EXCHANGE LOSS OF ` 11,51,07,664/-. ON APPEAL BEFORE THE CIT(A), THE LD. CIT(A) ALLOWED THE LOSS ON FOREIGN EXCHANGE FORWARD CONTRACTS TO THE EXTENT OF ` 11,30,37,616/- AND THE BALANCE AMOUNT OF LOSS OF ` 20,70,048/- WAS CONFIRMED BY THE LD. CIT(A) HOLDIN G THAT THE LOSS REPRESENTS MARKED TO MARKET (MTM) LOSS. THIS AMOUNT OF NOTIONAL LOSS WAS INCURRED BY THE ASSESSEE ON THE BASIS OF V ALUATION OF SUBSISTING FORWARD CONTRACTS AS ON 31.3.2009. THE LD. CIT(A) OBSERVED THAT THESE MTM LOSSES ARE ENTIRELY NOTIONAL AND BEING NOT BEEN ARISEN DURING THE YEAR AS NO SALE/CONCLUSION/SETTLEMENTS OF CONTRACT HAS TAKEN PLACE AND ASSET CONTINUES TO BE OWNED BY THE ASSESSEE. 7. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSESS EE FILED APPEAL BEFORE THIS TRIBUNAL. WE HAVE HEARD BOTH THE PARTIE S AND PERUSED THE MATERIAL PLACED ON RECORD. THE LD. CIT(A) OBSERVED THAT THIS LOSS WAS A ITA NO.653 & 655/VIZAG/2014 M/S. ALLIANCE ONE INDUSTRIES PVT. LTD., GUNTUR 13 NOTIONAL LOSS AND MTM LOSS AND HAS NOT BEEN ARISEN DUE TO SALE/ CONCLUSION OR ACTUAL SETTLEMENT OF THE CONTRACT. T HEREFORE, THE ASSET CONTINUED TO BE HELD BY THE COMPANY AND THERE WAS N O LOSS AS SUCH BY THE ASSESSEE. THE LD. CIT(A) FOLLOWED THE COORDINA TE BENCH DECISION IN THE CASE OF HONBLE MUMBAI ITAT IN THE CASE OF S. V INOD KUMAR DIAMONDS PVT. LTD. VS. ACIT IN ITA NO.506/M/2013. THE CBDT IN INSTRUCTION NO.3 OF 2010 DATED 23.3.2010 CLARIFIED THAT MTM LOSSES ON FOREX DERIVATIVES BEING A DIFFERENCE BETWEEN THE PU RCHASE PRICE AND THE VALUE AS ON THE DATE OF VALUATION DATE IS A NOTIONA L LOSS AND IS CONTINGENT IN NATURE AND THEREFORE, NOT ALLOWABLE I N COMPUTING THE TAXABLE INCOME. THE LD. A.R. DID NOT BRING ANY OTH ER MATERIAL TO CONTROVERT THE DECISION OF THE COORDINATE BENCH CIT ED (SUPRA) OR THE BOARDS INSTRUCTION CITED (SUPRA). THEREFORE, WE D O NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD. CIT(A) AND THE SAME IS UPHE LD AND THE APPEAL OF THE ASSESSEE IS DISMISSED. 8. IN THE RESULT, THE APPEAL FILED BY THE REVENUE A S WELL AS THE ASSESSEE ARE DISMISSED. THE ABOVE ORDER WAS PRONOUNCED IN THE OPEN COURT O N 8 TH NOV17. SD/- SD/- ( . ) ( . . ' ) (V. DURGA RAO) (D.S. SUNDER SINGH) /JUDICIAL MEMBER /ACCOUNTANT MEMBER ITA NO.653 & 655/VIZAG/2014 M/S. ALLIANCE ONE INDUSTRIES PVT. LTD., GUNTUR 14 # /VISAKHAPATNAM: ' /DATED : 08.11.2017 VG/SPS )# *# /COPY OF THE ORDER FORWARDED TO:- 1. / THE APPELLANT THE ACIT, CIRCLE-1(1), GUNTUR 2. / THE RESPONDENT M/S. ALLIANCE ONE INDUSTRIES PV T. LTD., NARENDRA NAGAR, POTTUR VILLAGE-522 005, GUNTUR DIST. A.P. 3. + / THE CIT, GUNTUR 4. + ( ) / THE CIT (A), GUNTUR 5. # . , . , # / DR, ITAT, VISAKHAPATNAM 6 . / GUARD FILE / BY ORDER // TRUE COPY // SR. PRIVATE SECRETARY ITAT, VISAKHAPATNAM