ASST CIT 16(3), MUMBAI V. ROSE GEMS, MUMBAI

ITA 7334/MUM/2013

• Counselvise Citation: 733419914 RSA 2013
• Duration Of Justice: 1 year(s) 6 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-06-2015
• Appeal Filed By: Department
• Bench Allotted: D
• Assessment Year: 2009-2010
• Appeal Filed On: 13-12-2013
• Court: TRIBUNAL
• Department Lawyers: LOVE KUMAR
• Assessee Lawyers: RAHUL R SARDA
• Keywords: Business income; Transfer pricing
• Section: 37(1); 43(5); 145

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL D , BENCH MUMBAI . . , , BEFORE SHRI R.C.SHARMA , A M & SHRI SANJAY GARG , J M ./ ITA N O. 7334 / MUM/20 1 3 ( / ASSESSMENT YEAR : 200 9 - 10 ) ACIT - 16(3), MUMBAI - 07 VS. M/S ROSE GEMS, 15, SHREEJI ARCADE, TATA ROAD NO.1&2, OPERA HOUSE, MUMBAI - 400004 ./ ./ PAN/GIR NO. : A A DFR 4361 G ( / APPELLANT ) .. ( / RESPONDENT ) /REVENUE BY : SHRI LOVE KUMAR /ASSESSEE BY : SHRI RAHUL R. SARDA / DATE OF HEARING : 14 /0 5 / 2015 / DATE OF PRONOUNCEMENT 26/06 /2015 / O R D E R PER R.C.SHARMA (A.M) : THIS IS AN APPEAL FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A) - 27 , MUMBAI , DATED 16 - 9 - 2013 FOR THE ASSESSMENT YEAR 200 9 - 10 IN THE MATTER ORDER PASSED U/S. 1 43 (3) OF THE I.T.ACT, WHEREIN THE REVENUE HAS TAKEN FOLLOWING GROUNDS : - 1. 'WHETHER ON THE FACTS AND CIRCUMSTANCES AND IN LAW, THE LD. CIT(A) HAS ERRED IN HOLDING THAT 'MARK TO MARKET' LOSS OF RS.13,48,738/ - ARISING ON VALUATION OF 'FORWARD EXCHANGE CONTRACTS ON THE CLOSING DATE OF ACCOUNTING YEAR IS NOT A NOTIONA L LOSS AND, THEREFORE, ALLOWABLE?' 2. 'WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) WAS RIGHT IN NOT TAKING COGNIZANCE OF THE DECISION OF THE ITAT, 'E' BENCH, MUMBAI IN ITA NO. 506/MUM/2013 DATED 03.05.2013 IN THE CASE O F M/S S. VINODKUMAR DIAMONDS PVT. LTD?' ITA NO. 7334 /1 3 2 3. THE LD CIT (APPEAL) GROSSLY ERRED ON FACTS IN NOT - CONFIRMING DISALLOWANCE OF MARK TO MARKET LOSS OF RS. 13,48,738/ - ON ACCOUNT OF OUTSTANDING FORWARD CONTRACTS. 4. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTE R ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT (A) ON THE ABOVE GROUNDS BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 2. RIVAL CONTENTIONS HAVE BEEN HEARD AND RECORD PERUSED. FACTS IN BRIEF ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF IMPORT OF ROUGH DIAMONDS, MANUFACTURING AND SALE OF CUT & POLISHED DIAMONDS. ASSESSEE FILED ITS RETURN OF INCOME ON 30.09.2 009 DECLARING TOTAL INCOME OF RS. 83,75,580/ - . ASSESSMENT U/S.143(3) WAS COMPLETED BY THE A O ON 19.12.2011 DETERMINING TOTAL INCOME AT RS. 97,24,320/ - . DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ASSESSEE SUBMITTED DETAILS CALLED FOR BY THE AO. IT WAS NOTED BY THE AO THAT THE ASSESSEE HAD DEBITED RS.13,48,738/ - AS LOSSES ON ACC OUNT OF THE OUTSTANDING/OPEN FOREIGN EXCHANGE FORWARD CONTRACTS. THE ASSESSEE EXPLAINED THEM AS LOSSES ON ACCOUNT OF MARK TO MARKET REVALUATION OF THE FORWARD CONTRACTS AS PER RUPEE VALUE OF US DOLLAR ON 31.03.2009. T HE ASSESSEE WAS ASKED BY THE AO TO GIVE THE DETAILS OF THIS LOSS AS WELL AS TO EXPLAIN AS TO WHY IT SHOULD NOT BE DISALLOWED AS A NOTIONAL LOSS ON THE VALUATION OF A LIABILITY THAT HAD NOT YET CRYSTALLIZED (A CONTINGENT LIABILITY), ON THE DATE OF DRAWING BALANCE SHEET FOR THE F.Y. RELEVANT TO A .Y.2009 - 2010 I.E. 31 - 3 - 2009. THE AO DID NOT CONVINCE WITH THE EXPLANATION OF THE ASSESSEE BE CAUSE THE FOREIGN EXCHANGE FORWARD CONTRACTS COULD NOT, ACCORDING TO HIM, BE ACCORDED THE USUAL ACCOUNTING TREATMENT OF REASONABLY ESTIMATING FOR FOREIGN EXCHANGE ITA NO. 7334 /1 3 3 F LUCTUATIONS BY ADOPTIN G THE RATE OF US DOLLAR. THEREFORE, THE AO DISALLOWED AN AMOUNT OF RS. 13,48,738/ - CLAIMED AS LOSSES ON ACCOUNT OF REVALUATION AS PER RATE OF US DOLLAR ON 31.03.2009 FOR OUTSTANDING FOREIGN EXCHANGE FORWARD CONTRACTS AS A NOTIONAL LOSS OF A CONTINGENT LIABILITY. 3. THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) AND THE CIT(A) AFTER RELYING VARIOUS JUDICIAL PRONOUNCEMENTS ALLOWED THE GROUND OF ASSESSEE . THE OBSERVATIONS OF THE CIT(A) IN THIS REGARD ARE REPRODUCED HEREUNDER : - 2.4.1 I HAVE GIVEN MY CAREFUL CONSIDERATION TO THE RIVAL SUBMISSIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED THE FACTUAL MATRIX OF THE CASE AS ALSO THE APPLICABLE LEGAL POSITION. 2.4.2 GROUND NO.1 IS IN RESPECT OF THE ACTION OF THE LD. AO IN DISALL OWING THE LOSS ON ACCOUNT OF CONVERSION OF OUTSTANDING POSITION OF FOREIGN EXCHANGE FORWARD CONTRACTS AT THE YEAR - END ON THE GROUND THAT IT WAS A NOTIONAL LOSS OR CONTINGENT LIABILITY DEBITED TO THE P&L ACCOUNT. LD. AO WHILE MAKING THE SAID DISALLOWANCE OF THE MARKED TO MARKET LOSS ON FORWARD EXCHANGE CONTRACTS OBSERVED THAT THEY HAD NOT BEEN SETTLED AT THE YEAR END. ACCORDING TO HIM, AS THE PENDING FORWARD CONTRACTS WERE NEITHER ASSETS NOR LIABILITIES HAVING ANY VALUE, THEY WERE IN THE NATURE OF UNASCERT AINED LIABILITY/ASSET AND THE RESULTING LOSS/GAIN WAS ONLY NOTIONAL IN NATURE. ACCORDING TO HIM, THERE. WAS NO SPECIAL PROVISION OR TREATMENT FOR 'MARKED TO MARKET' METHOD OF ACCOUNTING UNDER THE INCOME TAX AND THAT, IN SUCH CASES, THERE ARE NO ACTUAL LOSS ES ON ACCOUNT OF DEALINGS IN FOREX DERIVA T IVES U NTIL THEIR FINAL VALUES ARE KNOWN. THUS, ACCORDING TO HIM, IF THE CONTRACTS WERE ALLOWED TO RUN THEI R , FULL COURSE, NO LOSSES WOULD ARISE AND HENCE, THE REPORTING OF SUCH NOTIONAL LOSSES TO ADHERE TO THE ACCO UNTING GUIDELINES DID NOT BY ITSELF MAKE IT DEDUCTIBLE FOR INCOME TAX PURPOSES. 2.4.3 AT THE OUTSET, IT HAS BEEN STATED THAT THE APPELLANT WAS PREDOMINANTLY ENGAGED IN THE BUSINESS OF IMPORT OF ROUGH DIAMONDS, MANUFACTURING I E. CUTTING & POLISHING OF THE SAME INTO CUT AND POLISHED DIAMONDS AND EXPORTING THE SAID DIAMONDS. IN TOTAL SALE OF RS.41.39 CRORES, SALE DENOMINATED IN US$ IS RS.41.39 CRORES. SIMILARLY, WHOLE PURCHASES OF RS. 32.72 CRORES ARE DENOMINATED IN US $, AND ALMOST ALL OF THE TRADE CREDITOR S OF RS. 11.70 CRORES ARE PAYABLE IN DOLLAR TERMS. FURTHER, OUT OF TOTAL RECEIVABLES FOR GOODS IN THE WHOLE YEAR OF RS. 12.41 CRORES, US $ RECEIVABLE ACCOUNT FOR RS. 12.41 CRORES. THUS, IT IS EVIDENT THAT THE ITA NO. 7334 /1 3 4 APPELLANT WAS EXPOSED TO RISK ARISING IN FLUCTU ATION OUT OF EXCHANGE RATE AND AS A PRUDENT BUSINESSMAN IF' WOULD LIKE TO HEDGE ITS RISK. ACCORDINGLY, IT WAS PLEADED THAT THE APPELLANT HAD BOOKED THE FORWARD CONTRACTS AND UTILIZED THE SAME DURING THE YEAR OR IN THE SUCCEEDING YEAR. THUS, AS PER LD. AR, THE PATTERN SHOWED THAT THE APPELLANT ENTERED INTO FORWARD CONTRACT DURING THE NORMAL COURSE OF BUSINESS AND UTILIZED THE SAME FOR BUSINESS ALLOWING THEM TO RUN UP TO THE DATE OF CONTRACT. 2.4.4 IT WAS ALSO POINTED THAT THE APPELLANT ENTERED INTO FOREIGN EXCHANGE FORWARD CONTRACTS WITH BANKS IN ORDER TO HEDGE FOREIGN CURRENCY FLUCTUATION AND INCURRED A (NET) FOREIGN EXCHANGE LOSS AS A RESULT OF 'MARKING TO MARKET' THE FORWARD CONTRACTS THAT WERE OUTSTANDING ON MARCH 31. A FORWARD CONTRACT IS AN AGREEMENT BETWEEN A BUYER AND A SELLER OBLIGATING THE SELLER TO DELIVER A SPECIFIED ASSET OF SPECIFIED QUALITY AND QUANTITY TO THE BUYER ON A SPECIFIED DATE AT A SPECIFIED PLACE AND THE BUYER IN TURN IS OBLIGATED TO PAY THE SELLER A PRE - NEGOTIATED PRICE IN EXCHANGE OF THE DELIVERY . IN THE INSTANT CASE, THE APPELLANT IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND EXPORT OF DIAMONDS. IN RESPECT OF EXPORT OF DIAMONDS, THE APPELLANT ENTERED INTO FORWARD CONTRACT IN RESPECT OF FOREIGN EXCHAN G E TO BE RECEIVED AS A RESULT OF EXPORT. THIS WAS DONE TO AVOID THE RISK OF LOSS DUE TO FOREIGN EXCHANGE FLUCTUATI ON. THE APPELLANT AT THE TIME OF AGREEING TO EXPORT TOOK INTO CONSIDERATIO N , COST IN RUPEES AND ALSO CONSIDERED THE SPOT PRICE OF RUPEE AGAINST FOREIGN EXCHANGE. WHEN THE ACT UAL EXPORT IS MADE, THIS SPOT PRICE MAY BE DIFFERENT AS AGAINST THE SPOT PRICE ON THE DATE ON WHICH THE ASSESSEE EXPECTED AN EXPORT OR D ER. ON THE DATE OF RECEIPT OF THE FOREIGN EXCHANGE, IF THE SPOT PRICE OF RUPEE AGAINST FOREIGN EXCHANGE IN CREASES THEN TH E ASSESSEE WILL BE BENEFITED. FOR EXAMPLE, WHEN THE ASSESSEE UNDERTAKES TO ACCEPT AN EXPORT ORDER, THE VALUE OF ONE DOLLAR IS 40 RUPEES AND WHEN THE ASSESSEE ACTUALLY EXPORTS, THE VALUE OF ONE DOLLAR MAY BE DIFFERENT. THE ASSESSEE ENTERS INTO FORWARD CONTR ACT FOR RECEIPT OF RUPEES AGAINST DOLLAR. IF ON THE DATE OF RECEIPT OF FOREIGN EXCHANGE, THE RATE OF ONE DOLLAR IS 50 RUPEES THEN THE ASSESSEE WILL BE BENEFITED BY RUPEES 10 PER DOLLAR DUE TO FORWARD CONTRACT. THE ASSESSEE MAY CREDIT THE AMOUNT AS PER FORW ARD CONTRACT AS THE SALE PRICE OF EXPORT. ALTERNATIVELY, HE CAN CREDIT THE SPOT PRICE ON THE DATE OF ACCEPTING THE EXPORT ORDER AS THE SALE PRICE AND THE DIFFERENCE DUE TO SPOT PRICE ON THE DATE OF SETTLEMENT OF FORWARD CONTRACT MAY BE CREDITED AS PROFIT D UE TO FORWARD CONTRACT. HOWEVER, DURING THE COURSE OF PROCEEDINGS BEFORE ME, THE LEARNED AR ADMITTED THAT LOSS SHOWN DUE TO FOR WARD CONTRACT IS IN RESPECT OF THOSE CONTRACTS AGAINST WHICH ACTUAL DELIVERY OF FOREIGN EXCHANGE WAS MADE. THEREFORE, THE MOOT IS SUE IN DISPUTE IS WHETHER THE LOSS MADE ON REVALUATION OF OPEN FORWARD CONTRACTS WAS SPECULATIVE IN NATURE OR WAS IT A LOSS IN NORMAL COURSE OF BUSINESS. 2.4.5 AT THIS STAGE, IT MAY THEREFORE, BE PROFITABLE TO READ SECTION 43(5) WHICH IS AS UNDER - ITA NO. 7334 /1 3 5 'SPE CULATIVE TRANSACTION' MEANS A TRANSACTION IN WHICH A CONTRACT FOR THE PURPOSE OR SALE OF ANY COMMODITY, INCLUDING STOCKS AND SHARES, IS PERIODICALLY OR ULTIMATELY SETTL ED OTHERWISE THAN BY THE ACTUAL DELIVERY OR TRANSFER OF THE COMMODITY OR SCRIPS: PROVI DED THAT FOR THE PURPOSES OF THIS CLAUSE - (A) A CONTRACT IN RESPECT OF RAW MATERIALS OR MERCHANDISE ENTERED INTO BY A PERSON IN THE COURSE OF HIS MANUFACTURING OR MERCHANTING BUSINESS TO GUARD AGAINST LOSS THROUGH FUTURE PRICE FLUCTUATIONS IN RESPECT OF HIS CONTRACTS FOR ACTUAL DELIVERY OF GOODS MANUFACTURED BY HIM OR MERCHANDISE SOLD BY HIM; OR (B) A CONTRACT IN RESPECT OF STOCKS AND SHARES ENTERED INTO BY A DEALER OR INVESTOR THEREIN TO GUARD AGAINST LOSS IN HIS HOLDINGS OF STOCKS AND SHARES THROUGH PR ICE FLUCTUATIONS; OR (C )A CONTRACT ENTERED INTO BY A MEMBER OF A FORWARD MARKET OR A STOCK EXCHANGE IN THE COURSE OF ANY TRANSACTION IN THE NATURE OF JOBBING OR ARBITRAGE TO GUARD AGAINST LOSS WHICH MAY ARISE IN THE ORDINARY COURSE OF HIS BUSINESS AS SU CH MEMBER; (D) ****** EXPLANATION. - ******' 2.4.6 LD. AR FOR THE APPELLANT FURTHER CONTENDS THAT: (I) THERE IS NO DISPUTE ABOUT THE INCURRENCE OF THIS LOSS (II)SIMILARLY, THERE IS NO DISPUTE THAT THE METHOD OR ACCOUNTING FOLLOWED BY THE APPELLAN T IS MERCANTILE AS THE ID AO HAS RECORDED THIS FACT IN THE ASSESSMENT ORDER. (III)IT IS NOT DISPUTED THAT THESE LOSSES HAVE BEEN RECOGNIZED BY THE APPELLANT IN ACCORDANCE WITH APPLICABLE ACCOUNTING STANDARDS/POLICIES IN THIS REGARD. (IV)THE ID. AO HAS RAISED ONLY DISPUTE THAT THIS LOSS IS NOT ALLOWABLE AS A DEDUCTION IN THE YEAR OF INCURRENCE COMPUTED UNDER MERCANTILE SYSTEM BY FOLLOWING THE ACCOUNTING STANDARDS IN THIS RESPECT. (V) THE APPELLANT WAS OBLIGED TO CONVERT OUTSTANDING BALANCE OF FORWARD C ONTRACT AT THE YEAR END RATE, WHICH WERE EXECUTED AT HIGHER RATES, RESULTING IN CONSIDERABLE LOSS ON ACCOUNT OF YEAR - END CONVERSION OF FORWARD CONTRACT POSITION. 2.4.7 IT WAS STATED THAT THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, THE LEGAL APEX BOD Y ON ACCOUNTING MATTERS HAS ISSUED AN ACCOUNTING STANDARD 'ACCOUNTING FOR THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES (AS - 11) (REVISED)' WHICH IS REQUIRED TO BE COMPULSORILY FOLLOWED FROM 1 ST APRIL 1995. IN ACCORDANCE WITH THE ITA NO. 7334 /1 3 6 STIPULATIONS OF THIS STA NDARD, ALL THE MONETARY ITEMS ARE REQUIRED TO BE VALUED AT THE CLOSING RATE AND THE PROFIT OR LOSS ARISING THERE FROM IS REQUIRED TO BE DEBITED OR CREDI TED TO THE PROFIT AND LOSS ACCOUNT AS CAN BE SEEN FROM THE FOLLOWING EXCERPTS: T EACH BALANCE SHEET D ATE : 1. MONETARY ITEMS DENOMI NATED IN A FOREIGN CURRENCY (E. G FOREIGN CURRENCY NOTES AND LOANS DENOMINATED IN A FOREIGN CURRENCY) SHOULD BE REPORTED USING THE CLOSING RATE. 2. EXCHANGE DIFFERENCE ARISING ON FOREIGN CURRENCY TRANSACTIONS SHOULD BE RECOG NIZED AS INCOME OR AS EXPENSE IN THEIR PERIOD IN WHICH THEY ARISE. 2.4.8 THE INTERNATIONAL ACCOUNTING STANDARD (IAS - 21) ALSO STIPULATES THE SAME METHODOLOGY AS CAN BE SEEN FROM THE FOLLOWING EXCERPTS: 11 3. AT EACH BALANCE SHEET DATE, THE FOREIGN CUR RENCY MONETARY ITEMS THAT RESULT FROM TRANSACTIONS OF THE ENTITY SHOULD BE REPORTED AT THE CLOSING RATE EXCHANGE DIFFERENCE ARISING ON REPORTING AN ENTITY'S LONG TERM FOREIGN CURRENCY MONETARY ITEMS. AT RATES' DIFFERENT FROM THOSE AT WHICH THEY WERE RECORD ED DURING THE PERIOD OR PRESENTED IN PREVIOUS FINANCIAL STATEMENTS SHOULD NORMALLY BE RECOGNIZ ED IN INCOME FOR THE PERIOD. 2.4.9 IN A NUTSHELL, THE SUMMARY OF THE APPELLANT'S SUBMISSIONS ARE AS UNDER: I) IN THE FIRST PLACE, THE ID. AO HAS FAILED TO APP RECIATE THE CHARACTERISTICS OF A FORWARD CONTRACT. EACH FORWARD CONTRACT IS ALWAYS ASSIGNED WITH A VALUE THAT IS CONTRACTED WITH CREATION OF A FETTERED OBLIGATION ON THE ASSESSEE TO EXECUTE AND MEET AT A FUTURE CONTRACTED DATE. ALL THE CONTRACTS ARE ALWAYS ENFORCEABLE, IN AS MUCH AS REALISABLE. THE POINT THAT THE ID. AO WAS MAKING WAS THAT ANTICIPATED LIABILITIES ARE NOT ALLOWABLE, WHICH ARE NOTIONAL IN NATURE. BUT, THE DISTINCTION IN CASE OF FORWARD CONTRACTS IS THAT IF AN ANTICIPATED LIABILITY IS COUPLE D WITH PRESENT OBLIGATION AND ONLY QUANTIFICATION CAN VARY DEPENDING UPON THE TERMS OF CONTRACT, THEN A LIABILITY IS SAID TO HAVE CRYSTALLIZ ED ON THE REPORTING DATE I.E 31 ST MARCH. III) ARGUMENT OF THE . AO THAT AN EVENT OF CONTRACT MATURITY CAN FORWARD C ONTRACTS LOSSES / PROFITS ACCRUE ON DAILY BASIS DEPENDING ON THE FLUCTUATION OF US$ AND INDIAN RUPEE. ANY PRUDENT PERSON WOULD CONSTANTLY MONITOR THE POSITION OF FORWARD CONTRACT VALUE ON DAILY BASIS TO ASSESS THE IMPACT OF PROFIT OR LOSS. IT MAY BE APPREC IATED THAT VALUES OF OUTSTANDING POSITION OF FORWARD CONTRACT IS CLEARLY MEASURABLE BASED ON DAILY POSITION OF SPOT RATE OF US $ ITA NO. 7334 /1 3 7 AGAINST THE RUPEE, SO IS IT ALSO MEASURABLE WITH COMPLETE ACCURACY, AS ON THE LAST DATE OF THE BALANCE SHEET. IV) CUT - OFF OF 31 ST MARCH SPLITS PROFITS / LOSSES OF OUTSTANDING POSITION OF FORWARD CONTRACTS INTO TWO DIFFERENT ACCOUNTING PERIODS, AND THAT IS THE ONLY RATIONAL WAY TO EVALUATE PROFIT / LOSS IN A GIVEN PERIOD. LOSS, ALTHOUGH PURPORTED TO BE STATED BY THE ID. AO TO BE NOTIONAL, IS ACTUAL AND QUANTIFIABLE. LOSS HAD OCCURRED AND ACCRUED, AS A RESULT OF CONVERSION. ONLY THING IS THAT SUCH A LOSS IN THE SUBSEQUENT PERIOD WOULD GET EITHER FURTHER AGGRAVATED OR GET PLACID, DEPENDING UPON THE FOREIGN EXCHANGE FLUCTUATION THAT MAY HAPPEN AGAINST THE RUPEE. V) FOREIGN EXCHANGE LOSS AS A RESULT OF CONVERSION OF OUTSTANDING POSITION, OF FORWARD CONTRACTS IS - REAL QUANTIFIABLE WITH PRECISION BASED ON COMMERCIAL ACCOUNTING PRINCIPLES, AS A RESULT OF CUT - OFF 2.4. 10 SPEC IFICALLY, REGARDING LOSS OF RS. 13,48,738/ - ON ACCOUNT OF CONVERSION OF OUTSTANDING BALANCE OF FORWARD CONTRACT OF FOREIGN CURRENCY, FOLLOWING IS THE SUMMARY OF SUBMISSION SUBMITTED WITH WHICH I AM INCLINED TO AGREE AS THESE ARE BACKED BY THE BINDING JUDICIAL DECISIONS THAT APPLY ON ALL FOURS TO THE FACTS OBTAINING IN THE IMPUGNED APPEAL BEFORE ME : (A) IN THE CASE OF DCIT VS. BANK OF BAHRAIN & KUWAIT (LTAT) MUMBAI . SPECIAL BENCH) (43 - DTR - 505), MUMBAI SPECIAL BENCH HAS HELD A SIMILAR VIEW. THE AO TAXED THE PROFITS ON FORWARD CONTRACTS BY DISALLOWING THE LOSSES ON THE GROUND THAT THEY WERE 'NOTIONAL'. THE SPECIAL BENCH HAD TO CONSIDER WHETHER THE LOSS WAS 'NOTIONAL' OR 'CONTINGENT' LOSS OR WHETHER IT WAS AN 'ACCRUED' LOSS. WHERE A FORWARD CONTRACT IS ENTERED INTO BY THE ASSESSEE TO SELL FOREIGN CURRENCY AT AN AGREED PRICE AT A FUTURE DATE FALLING BEYOND THE LAST DATE OF ACCOUNTING PERIOD, LOSS IS INCURRED BY THE ASSESSEE ON ACCOUNT OF VALUATION OF THE CONTRACT ON THE LAST DATE OF THE ACCOUNTING PERI OD AND BEFORE THE DATE OF MATURITY OF THE FORWARD CONTRACT. IN THAT CASE, TRIBUNAL HELD THAT ANTICIPATED LOSS ON ACCOUNT OF EXISTING OBLIGATION AS ON 31ST MARCH, DETERMINABLE WITH REASONABLE ACCURACY, BEING IN THE NATURE OF EXPENDITURE/ACCRUED LIABILITY HA VE TO BE TAKEN INTO ACCOUNT WHILE PREPARING FINANCIAL STATEMENTS. ITA NO. 7334 /1 3 8 (B) MUMBAI BENCH OF ITAT IN THE CASE OF ADIT (IT) 1 (2) VS. DEVELOPMENT BANK OF SINGAPORE (46 SOT 122 MUMBAI), DEALT WITH SECTION 4 OF THE INCOME TAX ACT 1961. DURING COURSE OF BUSINESS AS SESSEE ENTERED INTO CERTAIN F ORWARD FOREIGN EXCHANGE CONTRACTS. AS PER METHOD OF ACCOUNT ING FOLLOWED BY ASSESSEE, CONTRACTS WHICH HAD NOT EXPIRED DURING YEAR HAD BEEN REVALUED AT THE END OF ACCOUNTING PERIOD RESULTING INTO NOTIONAL PROFIT - ASSESSING OFFIC ER ADDED THOSE NOTIONAL PROFITS TO TOTAL INCOME OF' ASSESSEE - ON APPEAL COMMISSIONER (APPEALS) HELD THAT NOTIONAL PROFIT WAS NOT REQUIRED TO BE ASSESSED - WHETHER ANY PROFIT ARISING ON ACCOUNT OF REVALUATION OF FORWARD FOREIGN EXCHANGE CONTRACTS ON LAST D AY OF ACCOUNTING PERIOD HAS TO BE TREATED AS INCOME OF ASSESSEE - HELD, YES - WHETHER, THERE FORE , ORDER OF COMMISSIONER (APPEALS) WAS TO BE SET ASIDE AND THAT OF THE ASSESSING OFFICER WAS TO BE RESTORED - HELD, YES. (C) ALSO, DELHI TRIBUNAL IN THE CASE O F HLS ASIA LTD. VS. DCIT (5 - ITR (TRIB) - 774) HELD THAT ASSESSEE'S CLAIM OF LIABILITY ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION WAS TO BE ALLOWED ON ACCRUAL BASIS WITH REFERENCE TO THE RATE OF FOREIGN EXCHANGE AT THE END OF THE YEAR. (D) ON THIS ISSUE, TH E APEX COURT HAS ALREADY DECIDED THE MATTER WHETHER AN ENTERPRISE IS REQUIRED TO REPORT THE OUTSTANDING LIABILITY RELATING TO CLOSING RATE OF EXCHANGE IN CASE OF CIT VS. WOODWARD GOVERNOR INDIA PVT. LTD. (21 - DTR - 1'06) (SC). (E) WITH REFERENCE TO THE ALLO WABILITY OF PROVISION OF THE LOSSES ON OUTSTANDING FORWARD CONTRACTS, IT WAS STATED THAT THOSE PARTICULAR CONTRACTS WERE FALLING DUE AFTER 31ST MARCH 2009. DIFFERENCE BETWEEN THE SPOT RATE AND THE YEAR - END CONVERSION RATE WAS PROVIDED IN ACCORDANCE WITH AS - 11 ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA, RELEVANT PARAGRAPH OF THE STANDARD STATES THAT: '14 AN EXCHANGE DIFFERENCE RESULTS WHEN THERE IS A CHANGE IN THE EXCHANGE RATE BETWEEN THE TRANSACTION DATE AND THE DATE OF SETTLEMENT OF ANY M ONETARY ITEMS ARISING FROM A FOREIGN CURRENCY TRANSACTION. WHEN THE TRANSACTION IS SETTLED WITHIN THE SAME ACCOUNTING PERIOD AS THAT IN WHICH IT OCCURRED, ALL THE EXCHANGE DIFFERENCE IS RECOGNIZED IN THAT PERIOD. HOWEVER, WHEN THE TRANSACTION IS SETTLED I N A SUBSEQUENT ACCOUNTING PERIOD, THE EXCHANGE DIFFERENCE RECOGNIZED IN EACH INTERVENING PERIOD UP TO THE PERIOD OF SETT L EMENT IS DETERMINED BY THE CHANGE IN EXCHANGE RATES DURING THAT PERIOD. 'AN ENTERPRISE MAY ENTER INTO A FORWARD EXCHANGE CONTRACT OR ANOTHER FINANCIAL INSTRUMENT THAT IS IN SUBSTANCE A FORWARD EXCHANGE CONTRACT, WHICH IS NOT INTENDED FOR TRADING OR SPECULATION PURPOSES, TO ESTABLISH THE AMOUNT OF THE REPORTING CURRENCY REQUIRED OR AVAILABLE AT THE SETTLEMENT DATE OF TRANSACTION. THE PRE MIUM OR DISCOUNT ARISING AT THE INCEPTION OF SUCH A FORWARD EXCHANGE ITA NO. 7334 /1 3 9 CONTRACT SHOULD BE AMORTISED AS EXPENSE OR INCOME OVER THE LIFE OF THE CONTRACT. EXCHANGE DIFFERENCES ON SUCH A CONTRACT SHOULD BE RECOGNIZED IN THE STATEMENT OF PROFIT AND LOSS IN THE RE PORTING PERIOD IN WHICH THE CHANGES IN FOREIGN EXCHANGE RATES EXCHANGE RATES CHANGE. ANY PROFIT OR LOSS ARISING ON CANCELLATION OR RENEWAL OF SUCH A FORWARD EXCHANGE CONTRACT SHOULD BE RECOGNIZED AS INCOME OR AS EXPENSES FOR THE PERIOD'. (F) BASED ON THE ABOVE, PROFIT OR LOSS ON THE OUTSTANDING POSITION OF THE FORWARD CONTRACTS WAS ASCERTAINED AND BOOKED PROFIT OR LOSS ON THE SAME AS ON THE REPORTING DATE (31ST MARCH) IN THE FINANCIAL STATEMENTS YEAR AFTER YEAR AND THIS HAS BEEN ACCEPTED BY THE DEPARTME NT. IN PREVIOUS YEARS, THERE WERE PROFITS ON SUCH RECASTING OF FORWARD CONTRACTS AT THE RATES PREVAILING AS ON THE LAST DAY OF THE REPORTING OF THE FINANCIAL STATEMENTS, SINCE RUPEE CONTINUED TO APPRECIATE. THE SAID PROFITS HAVE BEEN OFFERED FOR TAXATION A S A PART OF BUSINESS INCOME, AND ASSESSED AS SUCH AS BUSINESS INCOME. THE SAID ACCOUNTING POLICY IS CONSISTENTLY FOLLOWED YEAR AFTER YEAR, AND THE DISCLOSURE OF THE SAME COULD BE FOUND IN THE AUDIT REPORT AS ON 31 'MARCH, 2009, THERE WAS LOSS IN RECASTING OF SUCH FORWARD CONTRACTS WHICH SHOU L D BE ALLOWED AS BUSINESS LOSS ON THE SAME ANALOGY. ALL THE CONTRACTS WERE IN THE NATURE OF OPEN CONTRACTS AND COULD BE KNOCKED OFF AGAINST EXPORT REALIZATIONS OR CANCELLED A T ANY TIME DURING THE CURRENCY OF THE CONTRACT PERIOD, PROFIT/LOSS FLUCTUATE WITH CHANGE IN CURRENCY RATE ON DAY - TO - DAY BASIS. HENCE, IT IS ESSENTIAL TO CONVERT THE OUTSTANDING CONTRACTS AT THE YEAR - END RATE AND BOOK PROFIT/LOSS AS AT 31 ST MARCH. TO SUMMARIZE - (A) IT IS ONLY COINCIDENTAL THAT RUP EE WAS ALMOST AT THE PEAK AT THE BEGINNING OF THE YEAR, WHILE IT WAS AT ITS BOTTOM AT THE END OF THE YEAR AGAINST THE US$ RESULTING IN LOSS ON THE OUTSTANDING VALUE OF FORWARD CONTRACTS AT THE YEAR-END. (B) THE ASSESSEE INCURRED LOSS ON ACCOUNT OF OUTSTA NDING VALUE OF FORWARD CONTRACTS AT THE YEAR - END (31 ST M A RCH, 2009); WHILE IN PAST AND SUBSEQUENT YEARS, ASSESSEE HAD GAINED PROFITS ON SIMILAR TRANSACTIONS. IN PAST, THE DEPARTMENT HAS ALWAYS ACCEPTED PROFIT ON YEAR - END CONVERSION OF OUTSTANDING VALUE OF FORWARD CONTRACTS. ON ANALOGY, ACCURACY AND CONSISTENCY PERSPECTIVE, THE DEPARTMENT NEEDS TO ACCEPT LOSS INCURRED ON CONVERSION O F THE OUTSTANDING VALUE OF FORWARD CONTRACTS, PARTICULARLY IF IT HAS HAPPENED ON ACC OUNT OF CONTROLS BEYOND THE ASSESSEE. (C) ACCOUNTING STANDARD 11 DEALING WITH EFFECTS OF FOREIGN CURRENCY REQUIRES ASSESSE E TO ADJUST ITS MONETARY ASSETS AT THE YEAR END WITH THE YEAR - END CONVERSION RATE AND REFLECT PROFIT OR LOSS IN THE REVENUE STATEMENT. THEREFORE WHAT HAS BEEN DONE IS WHAT THE APPELLANT WAS TECHNICALLY OBLIGED TO DO . ITA NO. 7334 /1 3 10 (D) EVEN MERCANTILE SYSTEM OF ACCOUNTING AS RECOGNIZED UNDER SECTION 145 REQUIRES AT THE YEAR END , AN ASSESSEE SHOULD MAKE PROVISION FOR ALL K NOWN LIABILITIES. 2.4.11 AS EVIDENT FROM THE ABOVE, IT WAS PLEADED THAT SIMILAR QUESTION' AROSE IN THE CASE OF CIT V. WOODWARD GOVERNOR INDIA (P.) LTD. [2009] 312 ITR 254 I 179 TAXMAN 326 (SE) THAT WHETHER THE LOSS ARISING ON FLUCTUATION OF EXCHANGE IN RESPECT OF LOAN TAKEN FOR REVENUE PURPOSED IS ALLOWABLE AS DEDUCTION I N THE YEAR OF FLUCTUATION OF EXCHANGE RATE OR WHETHER THE SAME COULD BE ALLOWED ONLY IN THE YEAR OF REPAYMENT OF SUCH LOAN. THE SUPREME COURT HELD THAT THE LOSS SUFFERED BY THE ASSESSEE ON ACCOUNT OF EXCHANGE DIFFERENCE ON THE BALANCE SHEET DATE IS AN ITEM OF EXPENDITURE AS ON BALANCE SHEET DATE. IT FURTHER HELD THAT PROFITS OR LOSSES AS PER MERCANTILE SYSTEM OF ACCOUNTING AND AS PER THE APPLICABLE ACCOUNTING STANDARD IS ALLOWABLE AS DEDUCTION UNLESS THE SYSTEM OF ACCOUNTING IS SUPERSEDED OR MODIFIED BY THE LEGISLATIVE ENACTMENT. IT FURTHER HELD THAT THE METHOD OF ACCOUNTING CONTINUOUSLY UNDERTAKEN BY THE ASSESSEE IS SUPREME AS THERE IS NO FINDING GIVEN BY THE AO ON THE CORRECTNESS AND COMPLETENESS OF ACCOUNTS OR ANY FINDING TO THE CONTRARY THAT THE ASSESSEE HAS NOT COMPLIED WITH THE ACCOUNTING STANDARDS. IT WAS, INTER ALIA, CONCLUDED AS UNDER: ' IN ORDER TO FIND OUT IF AN EXPENDITURE IS DEDUCTIBLE THE FOLLOWING HAVE TO BE TAKEN INTO ACCOUNT: (I) WHETHER THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS MERCANTILE SYSTEM WHICH BRINGS INTO DEBIT THE EXPENDITURE AMOUNT FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURSED AND BRINGS INTO CREDIT WHAT IS DUE, IMMEDIATELY IT BECOMES DUE AND BEFORE IT IS ACTUALLY RECEIVED; WHETHER T HE SAME SYSTEM IS FOLLOWED BY ASSESSEE FROM THE VERY BEGINNING AND IF THERE WAS A CHANGE IN THE SYSTEM, WHETHER THE CHANGE WAS BONA FIDE; (III) WHETHER THE ASSESSEE HAS GIVEN THE SAME TREATMENT TO LOSSES CLAIMED TO HAVE ACCRUED AND TO THE GAINS THAT MAY ACCRUE TO IT; (IV) WHETHER THE ASSESSEE HAS BEEN CONSISTENT AND DEFINITE IN MAKING ENTRIES IN THE ACCOUNT BOOKS IN RESPECT OF LOSSES (V) WHETHER THE METHOD ADOPTED BY THE ASSESSEE FOR MAKING ENTRIES IN THE ACCOUNT BOOKS BOTH IN RESPECT OF LOSSES AND GA INS IS AS PER NATIONALLY ACCEPTED ACCOUNTING STANDARDS; (VI) WHETHER THE SYSTEM ADOPTED BY ASSESSEE IS FAIR AND REASONABLE OR IS ADOPTED ONLY WITH A VIEW TO REDUCING THE INCIDENCE OF TAXATION. ' ITA NO. 7334 /1 3 11 2.4.12 IN FACT, EVEN IF THE LOSSES ARE ALLOWED IN THE YEA R OF REALISATION OF EXPORT PROCEEDS THAT WOULD TANTAMOUNT TO FOLLOWING CASH SYSTEM OF ACCOUNTING WHICH WILL BE CONTRARY TO SECTION 145(1) OF THE ACT -- CIT V. UP STATE INDUSTRIAL DEVELOPMENT CORPN. [1997] 225 ITR 7031 92 TAXMAN 45 (SC):, 2.4.13 SIMILARLY , AS OBSERVED EARLIER, IN THE CASE OF DY. CIT (INTERNATIONAL TAXATION) V. BANK OF BAHRAIN & KUWAIT [2010] 41 SOT 290 , HON'BLE SPECIAL BENCH OF MUMBAI TRIBUNAL HELD THAT LOSSES INCURRED BY TILE APPELLANT ON ACCOUNT OF REVALUATION OF THE CONTRACT ON THE LAS T DATE OF THE RELEVANT ACCOUNTING PERIOD BASED ON THE RBI GUIDELINES/APPLICABLE ACCOUNTING STANDARD IS ALLOWABLE AS DEDUCTION. IT HELD THAT SUCH LOSS IS NEITHER NOTIONAL NOR CONTINGENT LIABILITY IN WHICH THE MOMENT BINDING CONTRACT IS ENACTED, IT BECOMES A LLOWABLE. FURTHER RELIANCE WAS PLACED ON BHARAT EARTH MOVERS V. CIT [200 0] 245 ITR 428/112 TAXMAN 61 (SC ), METAL BOX CO. OF INDIA LTD. V. THEIR WORKMEN [1969] 73 ITR 53 (S C ) AND CALCUTTA CO. LTD. V. CIT [1959] 37 ITR 1 (S C ). 4.14 IN THE CASE OF D C LT V/ S BANK OF BAHRAIN & KUWAIT(SUPRA), FORWARD CONTRACTS WERE ENTERED OF AN AMOUNT TO PROTECT THE FLUCTUATIONS IN THE FOREIGN CURRENCY HELD AS STOCK - IN - TRADE. FORWARD CONTRACTS VALUE ENTERED BY BANK OF BAHRAIN & KUWAIT HAD NOTHING TO DO WITH THE FOREIGN CURRENCY HELD AS STOCK - IN - TRADE EXCEPT PROTECTING FLUCTUATIONS, WHILE OF COURSE DEALING WITH REPORTING IN INDIAN CURRENCY. ON THE SAME FOOTING, IN THE INSTANT CASE OF THE APPELLANT STOCK AS WELL AS RECEIVABLE MAINLY ARE DOLLAR DENOMINATED AND ARE REALIZABLE IN FOR EIGN CURRENCY. TO HEDGE POSSIBLE FLUCTUATIONS IN US$ DENOMINATED STOCK, AS WELL AS RESULTANT DEBTORS OUT OF SUCH STOCK, THE APPELLANT HAD ENTERED INTO FORWARD CONTRACTS. THE PROPOSITION IN THAT CASE, AS WELL AS IN THIS CASE IS STARKLY SIMILAR. THEY BEING B ANK HAD 'MONEY' LYING IN FOREIGN CURRENCY AS THEIR STOCK - IN - TRADE, WHICH REQUIRED TRANSLATION INTO INDIAN CURRENCY FOR THE PURPOSE OF INDIAN REPORTING AND INDIAN TAXATION, WHICH WOULD NATURALLY EXPOSE THEM TO FLUCTUATION RISK. TO HEDGE SUCH RISK, THEY HAD ENTERED INTO FORWARD CONTRACTS, AND HAD MADE YEAR - END CONVERSION ON OUTSTANDING POSITION OF THE FORWARD CONTRACTS, ALTHOUGH SUCH FORWARD CONTRACTS WERE NEVER REFLECTED IN THEIR BALANCE SHEET, AND LOSSES SO INCURRED AS A RESULT OF TRANSFER HAD UNREALIZED AT THE POINT OF CONVERSION. ON THE SAME ANALOGY, THE APPELLANT'S STOCK, EVENTUALLY ALTHOUGH GETS REALIZED MOSTLY IN TERMS OF FOREIGN CURRENCY, THEY NEEDED TO TRANSLATE THE SAME INTO INDIAN CURRENCY FOR INDIAN REPORTING AND INDIAN TAXATION. THIS EXPOSED THEM TO THE EXCHANGE FLUCTUATION RISK, IF THE RUPEE WOULD APPRECIATE AGAINST THE US$. IN BOTH THE CASES, THAT IS OF BANK OF BAHRAIN & KUWAIT AND THE PRESENT APPELLANT, FOREIGN CURRENCY' POSITIONS WERE HEDGED BY ENTERING INTO FORWARD CONTRACTS, AND HAD INCURRED YEAR- END FORWARD CONTRACT CONVERSION LOSSES. 2.4.15 IN THE CASE OF BHARAT EARTH MOVERS LTD (SUPRA) ,THE COURT HAS DIFFERENTIATED BETWEEN WHAT IS ACCRUED LIABILITY AND ITA NO. 7334 /1 3 12 CONTINGENT LIABILITY. THE RELEVANT PORTION OF THE PRINCIPLES LAID DOWN BY THE HON'BLE COURT ARE REPRODUCED AS UNDER: FOR AN ASSESSEE MAINTAINING HIS ACCOUNT ON THE MERCANTILE SYSTEM, A LIABILITY ALREADY ACCRUED, THROUGH TO BE DISCHARGED AT FUTURE DATE WOULD BE A PROPER DEDUCTION WHILE WORKING OUT THE PROFITS AND GAINS OF HIS BUSINESS, REG ARD BEING HAD TO THE ACCEPTED PRINCIPLES OF COMMERCIAL AND ACCOUNTANCY. IT IS NOT AS IF SUCH DEDUCTION IS PERMISSIBLE ONLY IN THE CASE OF AMOUNT ACTUALLY EXPENDED OR PAID. JUST AS RECEIPTS THOUGH NOT ACTUAL RECEIPTS BUT ACCRUED AND DUE ARE BROUGHT IN I NCOME TAX ASSESSMENT SO ALSO LIABILITIES ACCRUED DUE WOULD BE TAKEN INTO ACCOUNT WHILE WORKING OUT THE PROFITS AND GAINS OF THE BUSINESS. A CONDITION SUBSEQUENT, THE FULFILLMENT OF WHICH MA Y RESULT IN THE REDUCTION OR EVEN EXTINCTION OF THE LIABILITY, WOULD NOT HAVE THE EFFECT OF CONVERTING THAT LIABILITY INTO A CONTINGENT LIABILITY. DISTINGUISHING AND DIFFERENTIATING CONTINGENT AND ACCRUED LIABILITY, IT WAS HELD THAT; IF A BUSINESS LIABILITY HAS DEFINITELY ARISEN IN THE ACCOUNTING YEAR, THE DED UCTION SHOULD BE ALLOWED ALTHOUGH THE LIABILITY MAY HAVE TO BE QUANTIFIED AND DISCHARGED AT A FUTURE DATE. WHAT SHOULD BE CERTAIN IS THE INCURRING OF THE LIABILITY. IT SHOULD BE ALSO BE CAPABLE OF BEING ESTIMATED WITH REASONABLE CERTAINTY THOUGH THE ACTUAL QUANTIFICATION MAY NOT BE POSSIBLE . 2.4.16 FURTHER, IN THE CASE OF RUSABH DIAMONDS V. ASSISTANT COMMISSIONER OF INCOME - TAX - 15(1), MUMBAI [2013] 34 TAXMANN.COM 160 (MUMBAI - TRIB.) IN IT APPEAL NO. 7217 (MUM.)/2012 DATED APRIL 26, 2013, IT HAS BEEN, INTER ALIA, HELD AS UNDER: '8.1 THE ASSESSEE CONSIDERED RS. 5,20, 70, 149 AS OPERATING INCOME ON ACCOUNT OF FOREIGN EXCHANGE GAIN ARISING ON FOR W ARD CONTRACTS. THE ASSESSEE CONTENDED THAT THE EXCHANGE GAIN ARISING ON CANCELLATION OF FOR W ARD CONTRAC TS ARE TO BE CONSIDERED AS PART OF OPERATING PROFIT SINCE IT IS AN INTEGRAL PART OF THE BUSINESS OF BUYING AND SELLING OF THE DIAMONDS AND HENCE, IS AN OPERATING INCOME. THE TPO DID NOT ACCEPT THE CLAIM OF THE ASSESSEE FOR THE REASON THAT THE EXCHANGE GAIN EARNED ARE AGAINST CANCELLATION OF FOR W ARD CONTRACTS AND THE ASSESSEE HAS SEPARATELY DISCLOSED AS PROFITS AND GAINS FROM FOREIGN EXCHANGE FLUCTUATIONS, WHICH ARE NOT INCLUDED IN PURCHASES AND SALES. FURTHER, THE TPO WAS OF THE VIEW THAT THIS CONSTITUTES S PECULATIVE AND THEREFORE, THE SAME CANNOT BE TREATED AS' PART OF THE MAIN BUSINESS ACTIVITY OF MANUFACTURING OF DI A MONDS OF THE ASSESSEE. ITA NO. 7334 /1 3 13 8.2 THE DRP CONCURRED WITH THE VIEW OF THE TPO ON THE GROUND THAT THE FOREIGN EXCHANGE EARNING ARE AGAINST CANCELLAT ION OF FORWARD CONTR ACTS AND NOT INTEGRAL PART OF THE ASSESSEES BUSINESS 9 . BEFORE US, THE SR COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE EARN ED FOREIGN EXCHANGE ON CANCELLATION OF FORWARD CONTRACTS WHIC H ARE CONNECTION OF ITS PURCHASE/SAL ES OF DIAMONDS. FOREIGN EXCHANGE GAIN IS DIRECTLY DEPENDENT ON THE ACTIVITY OF EXPORT OR IMPORT UNDERTAKEN BY THE ASSESSEE. THE ASSESSEE HAS ENTERED INTO FORWARD CONTRACTS FOR THE PURPOSE OF REDUCING THE FOREIGN EXCHANGE RISK FACED BY IT IN RESPECT OF ITS TRANSACTIONS WITH AES. HE HAS FURTHER SUBMITTED THAT FOREIGN EXCHANGE FLUCTUATION GAIN HAS BEEN EARNED BY THE ASSESSEE UNDER THE HEDGING CONTRACT WHICH IS DULY BACKED BY THE SALES AND PURCHASE CONTRACT /ORDERS IN RESPECT OF DIAMONDS. THE ID SR COUNSEL HAS FURTHER CONTENDED THAT DEALING IN FOREIGN EXCHANGE BEING TREASURY TRANSACTION IS NOT PERMITTED BY THE RBI AND THEREFORE, THE GAIN ARISING FROM THE FORWARD CONTRACTS IS PART AND PARCEL OF OPERATING PROFIT OF THE ASSESSEE. IN SUPPORT OF HIS CONTENTION HE HAS RELIED UPON THE DECISION OF THE BANGALORE BENCHES OF THE TRIBUNAL IN THE CASE OF SAP LABS INDIA (P.) V ACIT IN ITA NO.398/BANG/02; IN THE CASE OF BOMBAY DIAMOND CO LTD. V. DY. CIT IN ITA NO.7488/MUM/07; IN THE CASE OF CIT V. BADRIDAS GAURIDU (P.) LTD. [20 03 261 ITR 256 [2004 134 TAXMAN 376 (BOM). HE HAS FURTHER SUBMITTED THAT THE PREMIUM OR DISCOUNT ARISING AT THE INCEPTION OF FORWARD EXCHANGE CONTRACTS IS AMORTIZED AS EXPENSE OR INCOME OVER THE LIFE OF CONTRACT. THE EXCHANGE DIFFERENCE ON .SUCH CONTRACT A RE RECOGNIZED IN THE PROFIT & LOSS ACCOUNT FOR THE YEAR IN WHICH THE EXCHANGE RATE CHANGES RESULTING IN THE PROFIT OR LOSS ARISING ON CANCELLATION OR RENEWAL OF FORWARD EXCHANGE CONTRACT IS RECOGNIZED AS INCOME OR AS EXPENSES. 9.1 THE ID D R ON THE OTHER HAND HAS SUBMITTED THAT AS PER OECD GUIDELINES ON THE TRANSFER PRICING, THE FOREIGN EXCHANGE GAIN OR LOSS SHOULD BE EXCLUDED OR INCLUDED DEPENDS ON WHETHER OR NOT THE TESTED PARTY IS RESPONSIBLE FOR THE SAME. HE HAS REFERRED PARAS 2.82 OF THE OECD GUIDELIN ES AND SUBMITTED THAT WHEN, AS PER THE CONTRACT BETWEEN AND ASSESSEE AND THE AE, THE AE HAS ASSUMED THE RISK OF FOREIGN EXCHANGE FLUCTUATION; THEN EXCHANGE GAIN CANNOT BE INCLUDED IN THE PROFIT OF THE ASSESSEE FOR THE PURPOSE OF DETERMINATION OF NET MARGIN . THE ID OR HAS REFERRED THE TP STUDY AT PAGE 10 OF THE PAPER BOOK AND SUBMITTED THAT RISK OF FOREIGN EXCHANGE FLUCTUATION UPTO 3% IN USD IS TO BE EARNED BY THE AE. THEREFORE, THE SAME CANNOT BE INCLUDED TO THE PROFIT OF THE ASSESSEE FOR THE PURPOSE OF COM PUTATION OF OPERATING PROFIT OF THE ASSESSEE. 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THE ASSESSEE HAS ENTERED INTO FORWARD CONTRACTS FOR THE PURPOSE OF HEDGING OF FOREIGN CURRENCY EXPOSURE ON EXPORT AND I MPORT OF DIAMONDS WITH AES. THEREFORE, THE HEDGING OF FOREIGN CURRENCY HAS NEXUS WITH THE EXPORT AND IMPORT ACTIVITY OF ITA NO. 7334 /1 3 14 THE ASSESSEE AND THE EXPOSURE OF THE ASSESSEE IN RELATION TO THE EXPORT AND IMPORT. THE OE C D GUIDELINES IN PARA 2.82 ARE AS UNDER 2. 82. WHETHER FOREIGN EXCHANGE GAINS AND LOSSES SHOULD BE INCLUDED OR EXCLUDED FROM THE DETERMINATION OF THE NET PROFIT INDICATOR RAISES A NUMBER OF DIFFICULT COMPARABILITY ISSUES. FIRST, IT NEEDS TO BE CONSIDERED WHETHER THE FOREIGN EXCHANGE GAINS AND LOSSE S ARE OF A TRADING NATURE (E.G. EXCHANGE GAIN OR LOSS ON A TRACE RECEIVABLE OR PAYABLE) AND WHETHER OR NOT THE TESTED PARTY IS RESPONSIBLE FOR THEM. SECOND, ANY HEDGING OF FOREIGN CURRENCY EXPOSURE ON TH E UNDERLYING TRADE RECEIVABLE OR PAYABLE ALSO NEEDS T O BE CONSIDERED AND TREATED IN THE SAME' WAY IN DETERMINING THE NET PROFIT. IN EFFECT, IF A TRANSACTIONAL NET MARGIN APPLIED TO A TRANSACTION IN WHICH THE FOREIGN EXCHANGE RISK IS BORNE BY THE TESTED PARTY, FOREIGN EXCHANGE GAINS OR LOSSES SHOULD BE CONSIS TENTLY ACCOUNTED FOR (EITHER IN THE CALCULATION OF THE NET PROFIT INDICATOR OR SEPARATELY). ' 10.1 IT IS CLEAR THAT IN CASE OF HEDGING OF FOREIGN CURRENCY EXPOSURE ON THE UNDERLINING TRADE RECEIVABLE OR PAYABLE THE PROFIT OF LOSS WILL BE TREATED IN THE S AME WAY IN DETERMINING THE NET PROFIT. 10.2 IN VIEW OF THE FACTS THAT THE ASSESSEE HAS ENTERED INTO FORWARD CONTRACTS FOR THE PURPOSE OF HEDGING OF FOREIGN CURRENCY EXPOSURE ON THE EXPORT AND IMPORT OF DIAMOND, THE GAIN OR LOSS ARISING OF THE SAID, WILL BE TREATED AS PART AND PARCEL OF THE OPERATING PROFIT. (EMPHASIS SUPPLIED) 2.4.17 IN A RECENT DECISION RENDERED ON 9TH JANUARY, 2013 IN THE CASE OF SOCIETE GENERALE (2013 - ITS - 737 - ITAT), THE HON'BLE MUMBAI TRIBUNAL HAS ALLOWED A SIMILAR CLAIM OF THE A SSESSEE FOR THE LOSS OF RS. 9.16 CRORES ON FOREIGN EXCHANGE CONTRACTS OUTSTANDING AS ON 31 - 3 - 1998 HOLDING THAT THIS ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE SPECIAL BENCH OF IT AT IN THE CASE OF BANK OF BAHRAIN& KUWAIT (SU PRA). 2.4.18 IN THE CASE OF ONGC VS CIT 322 ITR 180, HON'BLE SUPREME COURT HAS REITERATED THE PRINCIPLES LAID DOWN ABOVE WHILE ANSWERING THE QUESTION THAT WHEN THE ASSESSEE MAINTAINED THEIR ACCOUNTS ON MERCANTILE SYSTEM OF ACCOUNTING AND THERE WAS NO FIN DING BY THE ASSESSING OFFICER ON THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNT AND WHEN THE ASSESSEE HAD COMPLIED WITH THE ACCOUNTING STANDARDS, LAID DOWN BY THE CENTRAL GOVERNMENT, THE 'LOSS' SUFFERED BY IT ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIG N EXCHANGE AS ON THE DATE OF BALANCE - SHEET IS ALLOWED AS EXPENDITURE UNDER SECTION 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 OCCUR RED AND FINALLY DECIDED THAT THE LOSS INCURRED ON ACCOUNT OF RESTATEMENT OF THE LIABILITIES IN FOREIGN EXCHANGE IS ALLOWABLE AND ANSWERED THE QUESTION IN FAVOUR OF THE ASSESSEE. ITA NO. 7334 /1 3 15 2.4.19 THUS, THE JUDICIAL DECISION OF THE HON. SUPREME COURT AND VARIOUS OTH ER AUTHORITIES ARE CLEARLY IN FAVOUR OF THE APPELLANT ON THIS ISSUE. THAT APART, AS DISCUSSED EARLIER, THE LIABILITIES IN FOREIGN EXCHANGE WERE INCURRED DURING THE NORMAL COURSE OF THE APPELLANT'S BUSINESS AND THE RESTATEMENT OF THE FORWARD CONTRACT OBLIGA TIONS WAS DONE AS PER AS - 11 IN A CONSISTENT MANNER OVER THE YEARS. 2.4.20 IN FACT, THE GAIN EARNED ON SUCH REVALUATION WAS ACCEPTED AND BROUGHT TO TAX IN THE RESPECTIVE YEARS AND THERE WAS NO REASON FOR THE LD. A.O. TO ARRIVE AT A DIFFERENT CONCLUSION IN PRESENT CASE MERELY BECAUSE THERE WAS LOSS DURING THE YEAR. APPARENTLY, THE ID. AO WAS OF THE VIEW THAT THE APPELLANT WAS NOT A DEALER IN FOREIGN EXCHANGE UNLIKE THE BANK OF BAHRAIN, AND THEREFORE THE SAID DECISION WAS HELD AS NOT APPLICABLE TO THE FACTS OF THE CASE. HOWEVER, AS SEEN EARLIER, THIS ISSUE IS NO MORE RES INTEGRA AND IS SETTLED BY A PLE THORA OF JUDICIAL DECISIONS. 2.4.21 IT IS NOT OUT OF PLACE TO MENTION THAT THE HON. SUPREME COURT, IN THE CASE OF ONGC (SUPRA), UPHELD THE SAME PRINCIPLES THA T WERE LAID DOWN IN THE CASE OF WOODWORD GOVERNOR, AND THE LOSS WAS HELD ALLOWABLE IN SIMILAR CIRCUMSTANCES, WHERE THE BUSINESS OF ONGC WAS NOT THAT OF A FOREIGN EXCHANGE DEALER. THEREFORE, IT IS NOT THE NATURE OF BUSINESS OR THE STOCK DEALT WITH I.E., CUR RENCY OR COMMODITIES OR GOODS LIKE DIAMONDS IN THE PRESENT CASE THAT MATTERS. 2.4.22 RECENTLY, HON'BLE MUMBAI ITAT 'H' BENCH IN THE CASE OF H. DIPAK & CO., MUMBAI I.T.A. NO. 7629/MUM/2011 ON 30 APRIL, 2013 HAS HELD THAT - 'WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AND ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. IT IS OBSERVED THAT A SIMILAR CLAIM FOR MARKED TO MARKET LOSS CLAIMED BY THE ASSESSEE IN RESPECT OF F ORWARD FOREIGN EXCHANGE CONTRACT DEBITED TO THE P&L ACCOUNT HAS BEEN ALLOWED BY THE SPECIAL BENCH OF THIS TRIBUNAL IN THE CASE OF BANK OF BAHRAIN & KUWAIT (SUPRA) AFTER DISCUSSING AND CONSIDERING ALL THE RELEVANT ASPECTS OF THE MA TTER AND THE RELEVANT OBSERVATIONS OF THE TRIBUNAL RECORDED IN THIS CONTEXT ARE SUMMARIZED AS UNDER: - ( I) A BINDING OBLIGATION ACCRUED AGAINST THE APPELLANT THE MINUTES(SIC) IT ENTERED INTO FORWARD FOREIGN EXCHANGE CONTRACTS. (II) A CONSISTENT METHOD OF ACCOUNTING FOLLOWED BY THE APPELLANT CANNOT BE DISREGARDED. THE APPELLANT HAS CONSISTENTLY FOLLOWED THE SAME METHOD OF ACCOUNTING IN REGARD TO RECOGNITION OF PROFIT OR LOSS BOTH, IN RESPECT OF FORWARD FOREIGN EXCHANGE CONTRACT AS PER THE RATE PREVAILING ON MARCH, 31. (III) A LIABILITY IS SAID TO HAVE CRYSTALLIZED WHEN A PENDING OBLIGATION ON THE BALANCE S HEET DATE IS DETERMINABLE WITH REASONABLE CERTAINTY. ITA NO. 7334 /1 3 16 (IV) AS PER AS - 11 WHEN THE TRANSACTION IS NOT SETT L ED IN THE SAME A CCOUNTING PERIOD AS THAT IN WHICH IT OCCURRED, THE EXCHANGE DIFFERENCE ARISES OVER MORE THAN ONE ACCOUNTING PERIOD. (V) IN VIEW OF T HE DECISION OF THE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA (/) 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. 2.4. 23 IN THE ABOVE BACKGROUND, IT IS UNDISPUTED THAT THE APPELLANT IS IN THE BUSINESS ,OF EXPORTS OF DIAMONDS AND HAS CERTAIN RECEIVABLES IN FOREIGN EXCHANGE AND SUBSTANTIAL STOCK AT ANY POINT OF TIME DURING THE YEAR AND IT IS ALSO A FACT THAT THE APPELLANT IS CONSTANTLY EXP OSED TO RISK ARISING OUT OF FLUCTUATION IN THE FOREIGN E XC HANGE RATES AND SUCH A RISK IS INTEGRAL TO THE APPELLANT'S BUSINESS AND IT ARISES OU T OF AND IS ASSOCIATED WITH SUCH BUSINESS. IT IS ALSO A FACT THAT THE AFORESAID RISK IS NOT BOUGHT BY THE APPELLAN T INDEPENDENT TO THE BUSINESS CARRIED BY HIM. IT IS ONLY WITH AN INTENTION MITIGATE THE RISK ASSOCIATED WITH BUSINESS THAT THE APPELLANT HAS ENTERED INTO FOREIGN EXCHANGE CONTRACTS. THEREFORE, AS PER THE PLEADI!J9S MADE BY THE LD. AR WHAT NEEDS TO BE SEEN IS WHETHER THE RISK THAT THE APPE L LANT H AS HEDGED BY WAY OF A FORWARD CONTRACT HAS AN UN DE RLYING ASSET/STOCKS OR LIABILITY, AS THE CASE MAY BE. IT IS IN THIS SENSE OF THE MATTER THAT THE VARIOUS COURTS HAVE HELD THAT THE PROFITS OR LOSS ARISING OUT OF FORW ARD CONTRACTS FORMS PART OF THE BUSINESS INCOME. THIS PROPOSITION HAS BEEN DEALT WITH AT GREAT LENGTH IN THE PRECEDING PARAGRAPHS AFTER CONSIDERING IN DETAIL THE SUBMISSIONS MADE BY THE LD. AR AS ALSO THE VARIOUS CASE LAWS ON THE SUBJECT. IT IS, THEREFORE, APPROPRIATE TO UNDERSTAND AT THIS STAGE THAT THE APPELLANTS PLEADINGS VEER AROUND THE PROPOSITION THAT THE FORW ARD CONTRACTS ENTERED INTO BUT DURING THE COURSE OF BUSINESS, CREATE A LEGAL LIABILITY IRRESPECTIVE OF THE FACT THAT WHETHER THESE CONTRACTS MA TURE DURING THE ACCOUNTING YEAR OR BEYOND. 2.4.24 THE IMPUGNED TRANSACTIONS ARE TWO SIDES OF THE SAME COIN AND BY IGNORING ONE SIDE, THE COIN LOSES ITS VALUE. THEREFORE, IN MY CONSIDERED OPINION, THE LD.AO CANNOT DETERMINE THE NATURE AND EFFECT OF A TRAN SACTION BASED MERELY ON ITS PRESENTATION, WITHOUT GOING INTO ITS SUBSTANCE. WHEN A LEGALLY TENABLE CONTRACT IS IN EXISTENCE, DULY SUPPORTED BY AN UNDERLYING ASSET/STOCK AND THE CONTRACT HAVING BEEN ENTERED DURING THE COURSE OF BUSINESS AND FURTHER THAT THE EXCHANGE RATE AS ON DATE OF ENTERING THE CONTRACT AND AS AT THE YEAR - END BEING ASCERTAINABLE, DUE EFFECT OF THE CONTRACT AT THE YEAR - END HAS TO BE GIVEN WHILE ASSESSING THE APPELLANT'S INCOME. HERE, IT IS NOT OUT OF PLACE TO MENTION THAT THE UPPER LIMITS OF EXPOSURE TO FORWARD CONTRACTS ARE REGULATED BY THE RBI GUIDELINES AND THAT THEY ARE ALLOWED ONLY TO CERTAIN EXTENT OF RECEIVABLES OR PAYABLES AND NOT TO THE FULL EXTENT. FURTHER, BANKS ALSO INSIST ON COLLECTING MARGINS IN CASE THE MOVEMENT OF FORWARD C ONTRACTS BEFORE MATURITY IS AGAINST THE EXPORTER/IMPORTER. IN OTHER ITA NO. 7334 /1 3 17 WORDS, THE ENTIRE GAMUT OF THE IMPUGNED TRANSACTIONS IS INTEGRAL TO THE APPELLANT'S BUSINESS AND IT CANNOT BE CALLED A CONTINGENT TRANSACTION. THERE IS NO MERIT IN THE LD. AO'S ARGUMENT IN TREATING THE IMPUGNED TRANSACTION AS INDEPENDENT TO THAT OF APPELLANT'S BUSINESS AND TO STATE THAT THE FLOW OF BENEFIT IS NOT KNOWN OR IT DEPENDS ON ANYONE OF THE VARIOUS EVENTS LISTED BY HIM. IN FACT THE LD. AO HAS FAILED TO SEE THAT SUCH EVENTS ARE PART AND PARCEL OF THE APPELLANTS BUSINESS AND NOT EXTERNAL TO IT. THEREFORE, WHATEVER MAY BE THE RESULT OF THE EVENTS LISTED OUT BY THE LD. AO, SUCH RESULT HAS TO BE TREATED AS BUSINESS RESULT AT THE TIME OF ITS HAPPENING AND HENCE, THE EFFECT OF THE FORWARD CONTACT AS AT THE YEAR - END HAS TO BE CONSIDERED FOR THE PURPOSE OF ARRIVING AT THE APPELLANT'S INCOME. 2.4.25 SECONDLY, THE ISSUE OF NOTIONAL LOSS IS LIKELY TO ARISE ONLY IN THE CONTEXT OF APPELLANT'S EXPOSURE TO FORWARD CONTRACTS EXCEEDING THE UNDERLYI NG ASSETS/LIABILITIES, WHICH MAY BE IN CASE OF LUMPSUM FORWARD CONTRACTS. THE L.D. AR HAS EXPL AINED THAT THE LUMPSUM FORWARD CONTRACTS ARE ENTERED HAVING REGARD TO ITS DEBTORS, STOCKS AND THE LOANS IN DOLLAR TERMS ETC., AND NORMALLY THE FORWARD CONTRACTS ARE IMMEDIATELY COVERED BY THE VALUE OF SUBSEQUENT EXPORTS. THE - APPELLANT HAS PLACED ON RECORD OF THE L.D. AO. THE MONTH WISE POSITION OF THE DEBTORS, CREDITORS, STOCK ETC., VIS - A - VIS, FORWARD CONTRACTS ENTERED IN DOLLAR TERMS, TO DEMONSTRATE THE ABOVE POS ITION. FURTHER, TO REITERATE, THE APPELLANT HAS BEEN CONSISTENTLY FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND HAS BEEN VALUING THE YEAR - END OUTSTANDING FOREIGN EXCHANGE TRANSACTIONS IN TERMS OF THE ACCOUNTING STANDARD AS - 11. 2.4.26 AS SEEN EARLIER, IN THE CASE OF WOODWARD GOVERNOR 294 ITR 451 HON. DELHI HIGH COURT HAS OBSERVED AS UNDER: - 'IN THE INSTANT CASES, ON THE OTHER HAND, THE LIABILITY ARISES OUT OF ALREADY CONCLUDED CONTRACTS. THE LIABILITY ALREADY STANDS ACCRUED THE MINUTE THE CONTRACT WAS EN TERED 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 BHARAT 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 EX ACT QUANTIFICATION IS NOT FEASIBLE. E V EN IF THE LIABILITY IS DISCHARGED AT A FUTURE DATE, IT WILL NEVERTHELESS BE A LIABILITY WHICH IS CERTAIN AND NOT CONTINGENT. THIS APPROACH IS CONSISTENT WITH AND INFORMED BY THE ACCOUNTING PRACTICES IN THE MERCANTILE SYSTEM, WITH FURTHER GUIDANCE FROM THE ACCOUNTING STANDARDS OF THE ICAI WHICH HAVE RECEIVED JUDICIAL ACKNOWLEDGEMENT. ' 2.4.27 SIMILARLY, AS DISC USSED, THIS DECISION HAS BEEN APPROVED BY THE HON. SUPREME COURT IN CIT V WOODWARD GOVERNOR INDIA P LTD (312 ITR 254). 2.4.28 FURTHER, AS SEEN EARLIER, N THE CASE OF DC IT V/ S. BANK OF BAHRAIN AND KUWAIT (ITA NOS. 4404 & 1883/MUM.L2004), THE ITA NO. 7334 /1 3 18 SPECIAL BENC H OF JURISDICTIONAL MUMBAI , ITAT HELD THAT MTM LOSSES IN RESPECT OF FORWARD FOREIGN EXCHANGE CONTRACTS DEBITED TO PROFIT AND LOSS ACCOUNT IS ALLOWABLE. 2.4.29 IN THE CASE OF ONGC VS CIT 322 ITR 180, HON'BLE SUPREME COURT HAS REITERATED THE PRINCIPLES LAI D DOWN ABOVE WHILE ANSWERING THE QUESTION THAT WHEN THE ASSESSEE MAINTAINED THEIR ACCOUNTS ON MERCANTILE SYSTEM OF ACCOUNTING AND THERE WAS NO FINDING BY THE ASSESSING OFFICER ON THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNT AND THAT THE ASSESSEE HAD COMP LIED WITH THE ACCOUNTING STANDARDS, LAID DOWN BY THE CENTRAL GOVERNMENT, THE 'LOSS' SUFFERED BY IT ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS ON THE DATE OF BALANCE - SHEET IS AN ALLOWABLE EXPENDITURE UNDER SECTION 37(1) OF THE ACT NOTWITHS TANDING 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. 2.4.30 THUS THE JUDICIAL DECISIONS OF THE HON. SUPREME COURT AND VARIOUS OTHER AUTHORITIES ARE CLEARL Y IN FAVOUR OF THE APPELLANT ON THIS ISSUE. THAT APART, AS DISCUSSED EARLIER, THE TRANSACTIONS IN FOREIGN EXCHANGE WERE CARRIED OUT DURING THE NORMAL COURSE OF THE APPELLANT'S BUSINESS AND THE RESTATEMENT OF THE FORWARD CONTRACT OBLIGATIONS WAS DONE AS PER AS - 11 IN A CONSISTENT MANNER OVER THE YEARS. IN FACT, THE GAIN EARNED ON SUCH REVALUATION WAS OFFERED TO TAX AND ACCEPTED BY THE LD AO IN THE RESPECTIVE YEARS AND THERE IS NO REASON TO ARRIVE AT A DIFFERENT CONCLUSION MERELY BECAUSE THERE WAS A LOSS DURIN G THE YEAR. WHAT MATTERS IS WHETHER THE FORWARD CONTRACT TRANSACTION WAS ENTERED DURING THE COURSE OF APPELLANT'S REGULAR BUSINESS OR WHETHER IT IS TAINTED WITH A COLOUR OF SPECULATIVE TRANSACTION. FURTHER, THE AFORESAID ISSUE OF ALLOWING THE LOSS ON ACCOU NT OF REVALUATION OF PENDING FORWARD CONTRACTS WAS CONSIDERED BY THE HONBLE. ITAT MUMBAI BENCH IN THE CASE O F M/ S BHAVANI GEMS VS ACIT CC - 35 IN ITA NO.2855/MUM/2010 DATED 30/3/2011 FOR A.Y 2006 - 07 AND THE SAID LOSS WAS ALLOWED AS BUSINESS LOSS AND THE ISSU E WAS HELD TO BE COVERED BY SPECIAL BENCH DECISION IN THE CASE OF DCIT VS. BANK OF BAHRAIN. THEREFORE, IN MY CONSIDERED OPINION THE FACTS OF THE APPELLANT'S CASE ARE FULLY COVERED BY THE ABOVE CITED DECISIONS THE HON. SUPREME COURT AND THE ITAT MUMBAI BENC H. 2.4.31. FOR THE REASONS SET OUT ABOVE AND KEEPING IN VIEW ALL THE DECIDED JUDGMENTS OF HONBLE SUPREME COURT, VARIOUS HIGH COURTS/AAR AND INCOME TAX APPELLATE TRIBUNALS, I AM OF THE CONSIDERED VIEW THAT THE APPELLANT WAS INDEED ELIGIBLE FOR INCURRING O F LOSSES OF BUSINESS BY WAY OF THE MARKED TO MARKET LOSSES ON FORWARD CONTRACT FOR ASSESSMENT YEAR 2009 - 2010. ACCORDINGLY, GROUND NO.1 IS ALLOWED. ITA NO. 7334 /1 3 19 4. AGAINST THE ABOVE ORDER OF CIT(A) , THE REVENUE IS IN APPEAL BEFORE US. 5. WE HAVE CONSIDERED RIVAL CO NTENTIONS AND CAREFULLY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE CIT(A) WHILE DELETING THE ADDITION MADE ON ACCOUNT OF MARKED - TO - MARKET VALUATION OF THE FORWARD CONTRACT, HAS APPLIED THE PROPOSITION OF LAW LAID DOWN BY THE HONBLE SUPREME CO URT AND VARIOUS HONBLE HIGH COURTS . THE ISSUE IS WELL SETTLED BY THE VARIOUS DECISIONS OF TRIBUNAL AS DISCUSSED BY THE CIT(A) IN HIS IMPUGNED ORDER. ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A) FOR DELETING THE ADDITION OF RS. 13,48,738 / - FOR ALLOWING CLAIM OF MARKED - TO - MARKET LOSS ON ACCOUNT OF OUTSTANDING FORWARD CONTRACTS. 6 . IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED. O RDER PRONOUNCED IN THE OPEN COURT ON THIS 26 /06 / 201 5 . SD/ - SD/ - ( ) ( SANJAY GARG ) ( . . ) ( R.C.SHARMA ) / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; DATED 26 /06 /201 5 . . /PKM , . / PS / COPY OF THE ORDER FORWARDED TO : / BY ORDER, / ( ASSTT. REGISTRAR) , / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A), MUMBAI. 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE. //TRUE COPY//