ITO 16(3)(2), MUMBAI V. KUMBH GEMS, MUMBAI

ITA 6600/MUM/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75178 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-01-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2009-2010
• Appeal Filed On: 31-10-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M L PERUMAL
• Assessee Lawyers: ADJOURNMENT LETTER DT REJECTED
• Section: 37(1)

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, MUMBAI . . , !'#$ , % & BEFORE SHRI B.R. MITTAL, JM AND SHRI N.K. BILLAIYA, AM ./ I.T.A. NO.6600/MUM/2012 ( ' ' ' ' / ASSESSMENT YEAR : 2009-2010 THE ITO 16(3)(2), MATRU MANDIR, MUMBAI-400 007 / VS. M/S. KUMBH GEMS, 15-F, PEARL ARCADE, TATA ROAD NO. 2, OPERA HOUSE, MUMBAI-400 004 ( % ./ )* ./ PAN/GIR NO. : AADFK 5586G ( (+ / APPELLANT ) .. ( ,-(+ / RESPONDENT ) (+ . / APPELLANT BY: SHRI M.L. PERUMAL ,-(+ / . / RESPONDENT BY : ADJOURNMENT LETTER DT. 27.12.2013 REJECTED / 01% / DATE OF HEARING : 02.01.2014 23' / 01% / DATE OF PRONOUNCEMENT : 02.01.2014 4 / O R D E R PER N.K. BILLAIYA, AM: THIS APPEAL BY THE REVENUE IS PREFERRED AGAINST TH E ORDER OF THE LD. CIT(A)-27, MUMBAI DT.24.08.2012 PERTAINING TO A.Y. 2009-10. 2. THE SOLE GRIEVANCE OF THE REVENUE IS THAT THE LD . CIT(A) ERRED IN HOLDING THAT MARK-TO-MARKET LOSS OF RS. 38,09,880/- ARISING ON VALUATION OF FORWARD EXCHANGE CONTRACTS ON THE CLOSING DATE O F ACCOUNTING YEAR IS NOT A NATIONAL LOSS AND THEREFORE ALLOWABLE. ITA NO. 6600/M/2012 2 3. THE ASSESSEE HAS MOVED AN APPLICATION FOR ADJOUR NMENT. HOWEVER, WHEN IT WAS POINTED OUT TO THE LD. DEPARTMENTAL REP RESENTATIVE THAT THE CASE MAY BE HEARD AS THE ISSUE INVOLVED IN THE APPE AL APPEARED TO BE COVERED IN FAVOUR OF THE ASSESSEE BY VARIOUS JUDICI AL DECISIONS. THE LD. DR FAIRLY CONCEDED TO THIS AND SUBMITTED THAT HE RE LIES ON THE ASSESSMENT ORDER. 4. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE LOWE R AUTHORITIES. THE ONLY ISSUE TO BE CONSIDERED IS WHETHER THE ASSESSEE IS TO BE ALLOWED MARK- TO-MARKET LOSS ARISING OUT OF THE VALUATION OF FOR WARD CONTRACT LOSS. THE FACTS ON RECORD SHOW THAT THE ASSESSEE IS A TRADER AND EXPORTER OF DIAMONDS. SUBSTANTIAL PORTION OF ITS TRANSACTIONS ARE DENOMINATED IN US$. SUBSTANTIAL PORTION OF ITS CURRENT ASSETS AND LIABILITIES ARE ALSO DENOMINATED IN US$. THE ASSESSEE IS REGULARLY ENTE RING INTO FORWARD CONTRACTS TO HEDGE ITSELF AGAINST RISK ARISING OUT OF WILD FLUCTUATION IN EXCHANGE RATE. THE ASSESSEE IS FOLLOWING ACCOUNTIN G STANDARD-11 AND ACCORDINGLY RESTATING ALL ITS US DOLLAR DENOMINATED ASSETS AND LIABILITIES WHICH INCLUDES FORWARD CONTRACTS. THE ASSESSEE IS RECOGNIZING BOTH GAIN OR LOSS ON SUCH RESTATEMENT IN ITS PROFITS AND LOSS ACCOUNT. THE ASSESSEE IS FOLLOWING THE SAME ACCOUNTING PRACTICE CONSISTENTLY IN PAST AND IN PRESENT ALSO. DURING THE YEAR THE ASSESSEE HAS BOOKED LOSS ON ACCOUNT OF REVALUATION AS PER US DOLLAR RATE ON 31.3.2009 TO T HE TUNE OF RS. 38,09,880/-. THE AO WAS OF THE FIRM BELIEF THAT TH IS LOSS IS A NOTIONAL LOSS OF A CONTINGENT LIABILITY IN NATURE AND THEREFORE N OT ALLOWABLE. THE AO ALSO OBSERVED THAT UNDER THE INCOME TAX ACT, THERE IS NO SPECIAL PROVISION OR TREATMENT FOR MARK-TO-MARKET METHOD O F ACCOUNTING. THE AO FURTHER OBSERVED THAT REPORTING OF SUCH NOTIONA L LOSSES TO ADHERE TO THE ACCOUNTING GUIDELINES DOES NOT BY ITSELF MAKE IT DEDUCTIBLE FOR INCOME TAX PURPOSES. THE PROVISIONS OF INCOME TAX ACT 1961 DOES NOT ITA NO. 6600/M/2012 3 ALLOW DEDUCTION OF ANY SUCH NOTIONAL LOSS FOR WHICH LIABILITY HAS NOT CRYSTALLIZED. HENCE, MTM LOSSES ON ACCOUNT OF REVA LUATION OF FORWARD EXCHANGE CONTRACTS ARE ONLY NOTIONAL LOSSES AND THE REFORE, THESE LOSSES ARE NOT ALLOWABLE. 5. AGGRIEVED BY THIS, THE ASSESSEE CARRIED THE MATT ER BEFORE THE LD. CIT(A). 6. WE HAVE CAREFULLY PERUSED THE ORDER OF THE LD. C IT(A). THE LD. CIT(A) AFTER CONSIDERING THE FACTS OF THE CASE HAS DISCUSSED FOLLOWING DECISIONS: IN THE CASE OF WOODWARD GOVERNOR HON. DELHI HIGH C OURT HAS OBSERVED AS UNDER (294 ITR 451). IN THE INSTAN T CASES, ON THE OTHER HAND, THE LIABILITY ARISES OUT OF ALREADY CON CLUDED CONTRACTS. THE LIABILITY ALREADY STANDS ACCRUED THE MINUTE THE CONTRACT WAS ENTERED INTO. THE MERE POSTPONEMENT OF THE PAYMENT TO DIFFERENT DATE CANNOT EXTINGUISH THE LIABILITY AND RENDER IT NOTIONAL OR CONTINGENT. THE DECISION OF HON.SUPREME COURT IN BH ARAT EARTH MOVERS SETTLES THE POSITION. THAT DECISION EXPLAINS THAT WHAT SHOULD BE CERTAIN IS THE INCURRING OF THE LIABILITY AND IT BEING ESTIMATED WITH REASONABLE CERTAINTY EVEN IF THE EXA CT QUANTIFICATION IS NOT FEASIBLE. EVEN IF THE LIABILITY IS DISCHARGE D AT A FUTURE DATE, IT WILL NEVERTHELESS BE A LIABILITY WHICH IS CERTAIN A ND NOT CONTINGENT. THIS APPROACH IS CONSISTENT WITH AND INFORMED BY TH E ACCOUNTING PRACTICES IN THE MERCANTILE SYSTEM, WITH FURTHER GU IDANCE FROM THE ACCOUNTING STANDARDS OF THE ICAI WHICH HAVE RECEIVE D JUDICIAL ACKNOWLEDGEMENT. THIS DECISION HAS BEEN APPROVED BY HON. SUPREME COU RT IN CIT V WOODWARD GOVERNOR INDIA P LTD (312 ITR 254) A ND IN CONCLUSION THE BENCH STATED THAT IN ORDER TO FIND O UT IF AN EXPENDITURE IS DEDUCTIBLE THE FOLLOWING HAVE TO BE TAKEN INTO ACCOUNT (I) WHETHER THE SYSTEM OF ACCOUNTING FOLLOW ED BY THE ASSESSEE IS MERCANTILE SYSTEM, WHICH BRINGS INTO DE BIT THE EXPENDITURE AMOUNT FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURSED AND BRINGS INTO CRE DIT WHAT IS DUE, ITA NO. 6600/M/2012 4 IMMEDIATELY IT BECOMES DUE AND BEFORE IT IS ACTUALL Y RECEIVED; (II) WHETHER THE SAME SYSTEM IS FOLLOWED BY THE ASSESSEE FROM THE VERY BEGINNING AND IF THERE WAS A CHANGE IN THE SYSTEM, WHETHER THE CHANGE WAS BONA FIDE; (III ) WHETHER THE ASSESSEE H AS GIVEN THE SAME TREATMENT TO LOSSES CLAIMED TO HAVE ACCRUED AN D TO THE GAINS THAT MAY ACCRUE TO IT; (IV) WHETHER THE ASSESSEE HA S BEEN CONSISTENT AND DEFINITE IN MAKING ENTRIES IN THE ACCOUNT BOOKS IN RESPECT OF LOSSES AND GAINS; (V) WHETHER THE METHOD ADOPTED BY THE ASSESSEE FOR MAKING ENTRIES IN THE BOOKS BOTH IN RESPECT OF LOSSES AND GAINS IS AS PER NATIONALLY ACCEPTED ACCOUNTING STANDARDS; (VI) WHETHER THE SYSTEM ADOPTED BY THE ASSESSEE IS FAIR AND REAS ONABLE OR IS ADOPTED ONLY WITH A VIEW TO REDUCING THE INCIDENCE OF TAXATION. 5.9 ) IN THE CASE OF DCIT V/S. BANK OF BAHRAIN AND KUWAIT (ITA NOS. 4404 &1883/MUM./2004) THE SPECIAL BENCH OF JUR ISDICTIONAL MUMBAL ITAT WHILE HOLDING THAT MTM LOSSES IN RESPEC T OF FORWARD FOREIGN EXCHANGE CONTRACTS DEBITED TO PROFIT AND LO SS ACCOUNT IS ALLOWABLE, OBSERVED AS UNDER: (I) A BINDING OBLIGATION ACCRUED AGAINST THE APPELLANT THE MINUTES IT ENTERED INTO FORWARD FOREIGN EXCHANGE CONTRACTS. (II) A CONSISTENT METHOD OF ACCOUNTING FOLLOWED BY THE APPELLANT CANNOT BE DISREGARDED. THE APPELLANT HAS CONSIS TENTLY FOLLOWED THE SAME METHOD OF ACCOUNTING IN REGARD TO RECOGNITION OF PROFIT OR LOSS BOTH, IN RESPECT OF FORWARD FOREI GN EXCHANGE CONTRACT AS PER THE RATE PREVAILING ON MARCH,31. (II) A LIABILITY IS SAID TO HAVE CRYSTALLIZED WHEN A PEN DING OBLIGATION ON THE BALANCE SHEET DATE IS DETERMINABLE WITH REAS ONABLE CERTAINTY. (IV) AS PER AS-11, WHEN THE TRANSACTION IS NOT SETT LED IN THE SAME ACCOUNTING PERIOD AS THAT IN WHICH IT OCCURRED, THE EXCHANGE DIFFERENCE ARISES OVER MORE THAN ONE ACCOUNTING PER IOD. (V) IN VIEW OF THE DECISION OF THE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA (I) P. LTD., THE APPELLANT S CLAIM IS ALLOWABLE. (VI) IN THE ULTIMATE ANALYSIS, THERE IS NO REVENUE EFFECT AND IT IS ONLY THE TIMING OF TAXATION OF LOSS/PROFIT. ITA NO. 6600/M/2012 5 5.10 IN THE CASE OF ONGC VS CIT 322 ITR 180, SUPRE ME COURT HAS REITERATED THE PRINCIPLES LAID DOWN ABOVE WHILE ANSWERING THE QUESTION THAT WHEN THE ASSESSEE MAINTAINED THEIR AC COUNTS ON MERCANTILE SYSTEM OF ACCOUNTING AND THERE WAS NO FI NDING BY THE ASSESSING OFFICER ON THE CORRECTNESS OR COMPLETENES S OF THE ACCOUNT AND THAT THE ASSESSEE HAD COMPLIED WITH THE ACCOUNT ING STANDARDS, LAID DOWN BY THE CENTRAL GOVERNMENT, CAN THE LOSS SUFFERED BY IT ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHA NGE AS ON THE DATE OF BALANCE-SHEET BE ALLOWED AS EXPENDITURE UNDER SECTI ON 37(1) OF THE ACT NOTWITHSTANDING THE FACT THAT THE LIABILITY HAD NOT BEEN ACTUALLY DISCHARGED IN THE YEAR IN WHICH THE FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE HAD OCCURRED AND FINALLY DECIDED THAT THE LOSS INCURRED ON ACCOUNT OF RESTATEMENT OF THE LIABILITIES IN FOREIG N EXCHANGE IS ALLOWABLE AND ANSWERED THE QUESTION IN FAVOUR OF TH E ASSESSSEE. 7. WE FIND THAT THE LD. CIT(A) HAS VERY JUDICIOUSLY APPLIED THE RATIO OF THE AFORE STATED DECISIONS ON THE FACTS OF THE C ASE. WE ALSO FIND THAT THE LD. CIT(A) HAS CONSIDERED THE DECISION OF THE TRIBU NAL IN THE CASE OF M/S. BHAVANI GEMS VS ACIT IN ITA NO. 2855/M/10 VIDE ORDER DT. 30.3.2011. CONSIDERING ALL THESE FACTS IN TOTALITY, NO INTERFERENCE IS CALLED FOR. ORDER OF THE LD. CIT(A) IS CONFIRMED. 8. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 02.01.2014 . 4 / 3' % 5 67 02.01.2014 3 / 8 SD/- SD/- (B.R. MITTAL ) (N.K. BILLAIYA) /JUDICIAL MEMBER % / ACCOUNTANT MEMBER MUMBAI; 6 DATED 02.01.2014 . . ./ RJ , SR. PS ITA NO. 6600/M/2012 6 4 4 4 4 / // / ,0! ,0! ,0! ,0! 9!'0 9!'0 9!'0 9!'0 / COPY OF THE ORDER FORWARDED TO : 1. (+ / THE APPELLANT 2. ,-(+ / THE RESPONDENT. 3. : ( ) / THE CIT(A)- 4. : / CIT 5. !;8 ,0 , , / DR, ITAT, MUMBAI 6. 8< = / GUARD FILE. 4 4 4 4 / BY ORDER, -!0 ,0 //TRUE COPY// > >> > / ? ? ? ? ) ) ) ) (DY./ASSTT. 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