MESSUNG SYSTEMS PRIVATE LTD.,PUNE vs. PR. COMMISSIONER OF INCOME-TAX : 6,

आदेश/ ORDER

PER D. KARUNAKARA RAO, AM:

This appeal is filed by the assessee against the order of Pr. CIT-6,

Pune dated 22.03.2016 passed u/s 263 of the Act.

“1. The Hon’ble Pr. CIT erred in holding that the AO failed to make necessary enquiry/ verification while allowing the assessee’s claim of loss on forward contract of Rs.33,58,118/- in the assessment order dated 28/03/2014 passed u/s. 143(3) of the IT Act, 1961; when full particulars of the transaction were on record and properly explained. 2. The Hon. CIT(A) failed to appreciate that the assessee had no forward contracts outstanding on 31/03/2011 and there were no notional losses in respect thereof claimed in YE 31/03/2011. 3. The Hon. Pr. CIT failed to appreciate that Instruction No.03/2010 dated 23/03/2010 provided guidelines with regard to marked to market transactions (so that notional losses of contingent nature could not be set off against taxable income) and in respect of speculative transactions

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whereas in the assessee’s case there were real transactions where no notional gain or loss was claimed. 4. The Hon. Pr. CIT erred in directing the AO to reframe the assessment order by setting aside the order of the AO without pointing out how the order of assessment was erroneous or prejudicial to the interest of the revenue. 5. The order of the Pr. CIT under Sec. 263 of the IT Act, 1961 is not tenable in law. 6. The appellant pleads that his appeal be allowed and craves leave to add to, alter, amend, modify or withdraw any or all grounds of appeal.”

engaged in the business of trading of Programmable Logic Controllers

(PLC) and parts thereof. The assessee filed the return of income on

30.09.2011 declaring total income of Rs.15,11,04,121/-. In the

assessment proceedings u/s 143(3) of the Act, the Assessing Officer

determined the total income of Rs.15,14,70,020/-.

noticed that the Assessing Officer did not make any enquiry or

investigation into the claim of expenditure of Rs.33,58,118/- on account

of loss on account of the forward contracts. Accordingly, the Pr.CIT

issued a show-cause notice, copy of which is placed at page 77 of the

Paper Book. Paras 3 and 4 of the said letter dated 11.12.2015 are

relevant to extract in this regard and the same are extracted hereunder :-

“03. In respect of above mentioned Assessment Year, it is observed that the allowability of loss on forward contract of Rs.33,58,118/- claimed by the assessee in his P&L A/c has not been examined as per the guidelines issued by CBDT Vide Instruction No.03/2010 dated 23.3.2010. 04. For the reason stated hereinabove, the order dated 28.03.2014 made by the Assessing Officer in your case for the A.Y. 2011-12 appears to be erroneous in so far as it is prejudicial to the interest of the revenue. Accordingly by virtue of the power vested in the undersigned as per the provisions of section 263 of the Income Tax Act, 1961, the said order is proposed to be revised under the said section.”

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Rs.33,58,118/- in the light of Instruction No.03/2010 dated 23.03.2010

is the issue raised by the Pr.CIT for assuming jurisdiction u/s 263 of the

Act. The assessee replied to the said show-cause notice stating that the

claim of loss of Rs.33,58,118/- is the difference between the gains arose

on concluded forward contracts and the loss incurred on such contracts

in the year under consideration. Further, the assessee explained that

the subject-matter of the said Instruction No.03/2010 (supra) was

neither the loss claimed by the assessee nor any provision created by the

assessee. Assessee also explained the loss mentioned in the said

Instruction relates to the notional loss arrived at the end of the year on

the non-concluded forward contracts. Whereas, the loos debited to Profit

& Loss Account relates to the concluded contracts and the actual loss

arrived on the concluded contracts. This is the method of accounting

consistently followed by the assessee. Therefore, Instruction No.03/2010

(supra) is not applicable to the facts of the loss debited to the Profit &

Loss Account. The contents of para 3 and 4 of the reply dated

21.03.2016 is relevant to extract and the same is extracted hereunder :-

“3. We wish to point out that in assessment proceedings, the assessee has furnished details of such loss and has also explained the same. We are enclosing a copy of the account extract of Loss on Forward Contracts of Rs.3358118 for ready reference. 4. The summary of gain/loss on forward contract is as under: Particulars Rs. - Gains arising on foreign payment transactions 49,88,760 - Loss incurred on foreign payment transactions 83,46,878 Net loss on forward contract 33,58,118

well reasoned order of the Pr.CIT and submitted that the Pr.CIT directed

the Assessing Officer to disallow the sum of Rs.33,58,118/- when the

sum is otherwise an allowable “business loss”. Referring to the contents

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of para 3 of the order of Pr.CIT, ld. Counsel submitted that the Pr.CIT

erroneously relied on the Instruction No.03/2010 (supra) and directed

the Assessing Officer to apply the said Instruction (supra) for disallowing

the sum of Rs.33,58,118/- when the order of the Assessing Officer does

not suffer from any error on fact or law.

order of the Pr.CIT.

Instruction No.03/2010 (supra), copy of which is placed at page 73 of the

Paper Book, deals with the ‘marked to market’ loss on account of forex

derivatives and allowable against the taxable income of the assessee.

Explaining the meaning of ‘marked to market’, Ld. AR submitted that the

method of assigning value to a position held in a financial instrument method of assigning value to a position held in a financial instrument

based on its market price on the closing day of the accounting or

reporting record and the same is applicable to the existing line forward

contracts and is not applicable to the contracts already concluded and

where the market values are rightly recognizable. Referring to the loss in

the present case, Ld. AR submitted that the same is determined on the

concluded forward contracts of the derivatives. Therefore, the net loss is

an allowable expenditure. There is no dispute about the determination of

market price on the closing day of accounting period in respect of the

concluded contracts. Consequently, the order of the Assessing Officer

does not suffer from any error leave alone the loss of revenue on perusal

of the Instruction on one side and facts of the case on the other.

Therefore, we are of the opinion that the said sum of Rs.33,58,118/- is

the net loss after adjusting the loss earned by the assessee on account of

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forward contract against the gain earned by the assessee in the same

context. This method is being followed by the assessee over the years

consistently and the same is undisturbed by the Revenue. Therefore, in

our opinion, the Pr.CIT erred in assuming the jurisdiction u/s 263 of the

Act in respect of the said issue of claim of loss of Rs.33,58,118/- which is

rightly allowed by the Assessing Officer in his order. Accordingly,

grounds raised by the assessee are allowed.

Order pronounced on 17th day of December, 2018.

Sd/- Sd/- (िवकास अव�थी/VIKAS AWASTHY) (डी. क�णाकरा राव/D. KARUNAKARA RAO) �याियक सद�य/JUDICIAL MEMBER लेखा सद�य/ACCOUNTANT MEMBER पुणे/ Pune; �दनांक/ Dated : 17th December, 2018. Sujeet Sujeet

आदेश क� �ितिलिप अ�ेिषत/ Copy of the Order forwarded to :

आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकरअपीलीयअिधकरण, पुणे/ ITAT, Pune.