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Income Tax Appellate Tribunal, G Bench, Mumbai
Before: Shri Mahavir Singh & Shri Rajesh Kumar
These cross appeals filed by Revenue and assessee are directed against the order of the CIT(A)-9, Mumbai dated 07.03.2014 and it relates to A.Y. 2009-10.
A.Y. 2009-10 2. The assessee has raised the following ground of appeal: -
1. The learned CIT(Appeal) - 9 has erred in law, facts and circumstances of the case by treating the;' business loss incurred 2 M/s. Gold Star Diamond P. Ltd. on forward contract which are in the nature of hedging transactions of Rs.7,71,14,597/- as speculation loss.
The learned CIT(Appeal) - 9 has erred in law, facts and circumstances of the case by treating the business loss on forward contracts which are cancelled 3 days prior to date of maturity amounting to Rs. 3,34,43,630/- as speculation loss.
3. The learned CIT(Appeal) - 9 has erred in law, facts and circumstances of the case by treating the business loss on forward contracts which are cancelled more than 3 days prior to date of maturity amounting to Rs. 4,44,06,250/- as speculation loss inspite of providing detailed reasons and documents.
4. The Learned CIT(Appeal) - 9 has erred in law, facts and circumstances of the case by disallowing of Rs. 1,81,27,500/- as mark to market loss on a without prejudice basis inspite of these contracts being hedging contracts and were closed 3 days prior to date of maturity.
The learned CIT(Appeal) - 9 has erred in law & facts by charging interest u/s. 234A, 234B, 234C and 234D.”
The issue raised in ground No. 1 is against the order of the CIT(A) treating business loss incurred on forward contract in the nature of hedging transactions of `7,71,14,597/- as speculation loss whereas the issue raised in ground Nos. 2 & 3 are in respect of treating business loss on forward contract which were cancelled 3 days prior to the date of maturity amounting to `3,34,43,630/- and more than 3 days prior to the date of maturity amounting to `4,44,06,250/- as speculation loss.
The brief facts of the case are that the assessee is a company engaged in the business of import of rough diamonds and thereafter manufacturing polished diamonds and exporting the same. Besides , it has a wind mill and also involved in generation and sale of electricity. During the year the assessee entered into forward contract for hedging the risk of foreign exchange fluctuations arising out of its import and export payables and receivables and incurred loss of `13,88,66,467/-. During the course of assessment proceedings the assessee filed necessary details of transaction-wise loss qua the said hedging contract before the AO explaining that the said loss was incurred upon foreign currency hedging contracts which are integral part of the business of the assessee and these contracts were temporarily taken to cover the export import contracts 3 M/s. Gold Star Diamond P. Ltd. losses resulting from the fluctuation in the foreign exchange rate and cover the existing import and export purchases of the assessee. The AO, however, treated the said loss as speculation loss instead of business loss and added a sum of `13,88,66,467/- to the income of the assessee and completed the assessment under Section 143(3) of Income Tax Act, 1961 (hereinafter "the Act") vide order dated 26 December, 2011.
5. The CIT(A), the appellate proceedings, partially allowed the appeal of the assessee by holding that the assessee has incurred loss on maturity of the contracts for foreign currency only to the tune of `6,17,51,870/-, which is only allowable to the assessee as business loss and the balance loss was incurred in respect of contracts which were terminated before the date of maturity and therefore the loss pertaining to the contracts which were terminated before the maturity was of the nature of speculative and not to be treated as business loss. The learned CIT(A) observed and held as under: - “Ground of appeal no. 1 & 6 :- The dispute in these grounds between the AO and the appellant is in respect of the claim of foreign exchange loss on forward contracts of foreign exchange. The appellant has claimed that it has earned out the transactions of forward contract of foreign exchange as hedging transactions to cover the risk of foreign exchange fluctuation in the export and import business of the appellant, so the loss on account of cancellation of such contracts as well as marked to market loss worked out at the end of accounting year in question is deductible business loss. On the other hand, it is the contention of the AO that the loss in question is in the nature of speculative loss as the assessee has engaged in large scale transactions equivalent to sales, hence it cannot be allowed as a business loss. Both the A.O. and the appellant has placed reliancde on several cases, however it is noted that similar issue was before the Hon’ble Mumbai ITAT in the case of M./s London Star Diamond Company (India) Pvt. Ltd. in ITA No.6169/M/2012, where in order dated 11/10/2013 after considering various decisions of higher Courts, it is held by the ITAT that in the case of exporters/ importers forward contracts of foreign exchange are in the nature of hedging transactions if they match with the export/ import turnover. In this case also such contracts are not exceeding the export/ import bills. It is further held by the ITAT that – (i) the loss on hedging transactions of the exporters/importers are business loss if the loss arises on the maturity of forward contracts of foreign currency (ii) when the assessee claims loss on pre-mature
4 M/s. Gold Star Diamond P. Ltd. cancellation/termination of the forward contract, then assessee needs to answer as to why it went for premature termination for claiming the loss on such premature cancellation as business loss or damages and if me assessee does not provide specific explanation for pre- mature cancellation, then such losses will be disallowed. In the light of this recent decision of the jurisdictional ITAT, the claim of the appellant only succeed partly, because in the instant case the appellant has incurred a part of loss on the maturity of contracts of foreign currency, which is only Rs.6,17,51,870/- whereas the rest of the loss is in respect of contracts which were terminated before the due date of maturity. The contracts of second category which were terminated premature are therefore, in the nature of speculation as the appellant has not been able to file any convincing evidence as to why these contracts were terminated before maturity. As regards the loss on account of valuation of pending contracts which has been held as marked to market loss, by the A.O. it is seen that in the light of the aforesaid decision of ITAT such loss is also not actual hedging loss as the contracts are still immature, therefore, it is purely notional loss which has correctly been disallowed by the A.O. It is admitted by the appellant that such loss is actually Rs.1,81,27,500/- as against the amount of Rs.1,20,87,500/-. To this extent the disallowance will stand enhanced from Rs.1,20,87,500/- to Rs.1,81,27,500/-. With these remarks the appeal is partly allowed. 5.3. Ground of appeal no,2 ;- This ground is regarding not allowing, the carry forward of speculative loss on gold account amounting to Rs.4,47,55,000/-. The AO has primarily rejected the claim of carry forward of this loss on the ground that assessee has not claimed this loss to be carried forward to subsequent years. The appellant on the other hand has claimed that this loss cannot be set-off from normal business and it was claimed by it to be carried forward in the return of income. Since it is a matter of record the AO is directed to verify this claim of the appellant from its return of income and if the claim was made in the return of income, the same should be allowed to be carried forward. To this extent this ground is accordingly statistically allowed.”
6. The learned A.R. vehemently submitted before us that since the assessee is in the business of importing rough diamonds and after manufacturing polished diamonds exporting the same and therefore it has huge payables and receivables in the normal course of business. The learned A.R. stated that in order to safeguard the interest of assessee from any foreign exchange fluctuations the assessee has entered into forward contracts for hedging the risk of exchange fluctuations and incurred loss of `13,88,66,347/-. The learned A.R. also submitted that all these transactions were entered into by the assessee to cover the export/import
5 M/s. Gold Star Diamond P. Ltd. contracts by referring to page Nos. 19 to 124 and 182-197 of the Paper Book. The learned A.R. submitted that in the earlier year, i.e. A.Y. 2008-09 the assessee had earned a sum of `5,18,14,250/- from the said forward contracts and the same was treated as business income in the assessment which was completed under Section 143(3) of the Income Tax Act, 1961 (hereinafter "the Act"). On the same analogy, the learned A.R. submitted that in the current assessment also the assessee has incurred speculation loss on similar transactions, therefore the AO has violated the rule of consistency by treating the same as speculation loss and by not allowing set off under the head ‘Business loss’. The learned A.R. submitted that the learned CIT(A), relying on the decision in the case of London Star Diamond Company (India) P. Ltd. categorised the loss into 3 categories namely, (i) loss on forward contracts cancelled after maturity date, (ii) loss on contracts cancelled 3 days prior to maturity, and (iii) loss on contract cancelled more than 3 days before the maturity and thus allowed the loss only in the first category and disallowed the other two by treating the same as speculation loss. The learned A.R. submitted that the Hon'ble Tribunal in a subsequent case namely Mahendra Brothers Exports Pvt. Ltd., which was passed after taking into account various case laws on the subject including one rendered by the Hon'ble Jurisdictional High Court in the case of CIT vs. Badridas Gauridu (P.) Ltd. 261 ITR 256, has held that the loss incurred on account of foreign currency forward/hedging contract is a business loss since all receipts, payments, receivables and payables were in foreign currency which was inseparable and inextricably linked with the diamond business and the loss was nothing but business loss and part of the loss could not be considered as speculation loss simply on the ground that the exposure do not tally with the month-wise transactions. The said decision of the Tribunal in case of Mahendra Brothers has been upheld by the Hon'ble Bombay High Court by dismissing ITA No. 777 of 2010 filed by the Revenue vide order dated 17th January, 2011. The assessee also relied on a series of decisions, which are as follows: - i) D. Kishorekumar & Co. vs. DCIT (2005) 2 SOT 769(Mum)
6 M/s. Gold Star Diamond P. Ltd. ii) CIT vs. Friends and Friends Shipping (p.) Ltd. (2013) 35 taxmann.com 553 (Guj) iii) CIT vs. Soorajmuli Nagarmuli (1981) 5 Taxman 289 (Cal) iv) London Star Diamond Company (I) P. Ltd. vs. DCIT (2013) 38 taxmann.com 338 (Mum-Trib.) v) Jaimin Jewellery Exports (P.) Ltd. vs. ACIT (2014) 43 taxmann.com 380 (Mum-Trib) Finally the learned A.R. vehemently pleaded before the Bench that in view of the ratio of decisions laid down by various courts the loss resulting from forward contracts is a business loss and not speculation loss and therefore no classification of forward contracts cancelled on maturity/prior to 3 days or prior to more than 3 days could be possible as all these transactions were entered in the ordinary course of business.
The DR on the other hand submitted that loss incurred by the assessee upon premature cancellation of forward contracts in foreign exchange is on the nature of speculation loss and was rightly treated so by the AO an affirmed by the CIT(A). Finally the ld DR prayed before the bench the order of AO may restored and that of CIT(A) be set aside on the ground that the revenue has also challenged the relief granted by the CIT(A) in respect of matured forward contracts treating the same as business loss.
We have heard the rival parties and perused carefully the materials placed before us including the decisions relied upon by the ld AR and ld DR. The ld AR disallowed the loss on maturity or prematurity of forward contracts for hedging the risk of exchange fluctuations to the tune of `13,88,66,347/-. There is no dispute about the loss being resulting from the forward contracts entered into by the assessee in the normal course of business to hedge any loss which may result from the exchange rate fluctuation in the international market as the assessee is engaged in import and export and has trade receivable and payables. Thius is also undisputed that in the earlier year, i.e. A.Y. 2008-09 the assessee had earned a sum of `5,18,14,250/- from the said forward contracts and the same was treated as business income in the assessment which was 7 M/s. Gold Star Diamond P. Ltd. completed under Section 143(3) of the Income Tax Act, 1961 (hereinafter "the Act"). On the same analogy, assessee claims the loss incurred is a business loss and not speculation loss and has to be allowed on the principle of consistency whereas the AO treated the same as speculation loss and denied set off. CIT(A) categorised the loss into three categories namely, (i) loss on forward contracts cancelled after maturity date, (ii) loss on contracts cancelled 3 days prior to maturity, and (iii) loss on contract cancelled more than 3 days before the maturity and thus allowed the loss only in the first category and disallowed the other two by treating the same as speculation loss. In our considered opinion the entire loss of Rs. `13,88,66,347/-. Is a business loss and not speculation loss. The case of the assessee is squarely covered by the decision of Mahendra Brothers Exports Pvt. Ltd., which was passed after taking into account various case laws on the subject including one rendered by the Hon'ble Jurisdictional High Court in the case of CIT vs. Badridas Gauridu (P.) Ltd. 261 ITR 256, has held that the loss incurred on account of foreign currency forward/hedging contract is a business loss since all receipts, payments, receivables and payables were in foreign currency which was inseparable and inextricably linked with the diamond business and the loss was nothing but business loss and part of the loss could not be considered as speculation loss simply on the ground that the exposure do not tally with the month-wise transactions. The said decision of the Tribunal in case of Mahendra Brothers has been upheld by the Hon'ble Bombay High Court by dismissing ITA No. 777 of 2010 filed by the Revenue vide order dated 17th January, 2011. We are , therefore, inclined to set aside the order of CIT(A) on this issue and direct the AO to allow the loss as business loss. Resultantly ground no 1,2 and 3 are allowed.
The issue in ground No. 4 is as regards the disallowance of Rs. 1,20,87,500/- enhanced by the CIT(A) to 1,81,27,500/- is without prejudice to disallowances of `13,88,66,467/- resulting from valuation of forwards contracts at the year end on the basis of exchange rate at the year end.
8 M/s. Gold Star Diamond P. Ltd.
The brief facts of the case are that the CIT(A) observed during the course of appellate proceedings that the assessee has calculated loss on account of valuation of pending contracts as marked to market loss. As per the CIT(A) the said loss is not an actual loss on hedging of contract as the forward contracts are still to mature on a subsequent date and therefore the learned CIT(A) treated the loss purely notional loss and thus upheld the disallowance made by the AO on this ground. In the appellate proceedings the assessee candidly admitted that the said loss is actually `1,81,27,500/- as against the amount of `1,20,87,500/-, the disallowance made by the AO and therefore the learned CIT(A) enhanced the disallowance from `1,20,87,500/- to `1,81,27,500/-. The learned A.R. vehemently submitted that the valuation of contracts are done in the ordinary course of business according to the Accounting Standard 11. The learned A.R. submitted that the issue is squarely covered by the decision of the Hon'ble Supreme Court in the case of CIT vs. Woodword Governor India (P) Ltd. (2009) 179 taxman 326.
The learned D.R., on the other hand, relied on the order of the CIT(A).
Having heard the rival contentions and perusing the material on record we find that the assessee has recognised loss on pending/ outstanding contract at the year end at `1,81,27,500/- pursuant to Accounting Standard 11, which is mandatory to be followed by the assessee. The Accounting Standard 11 deals with the accounting treatment effective on changes on foreign currency rates. Therefore, the assessee has to account only the effects of fluctuations in the foreign exchange rates and accordingly the loss of `1,81,27,500/- was claimed in the Profit & Loss Account, which is of course a regular practice at the end of every year according to the said standard. The said practice of the assessee of valuing or re-appreciation of outstanding contracts at the year end is on the basis of the rate prevalent at the year end as per the ratio laid by the Hon'ble Supreme Court in the case of Woodword Governor India (P) Ltd. (supra) wherein the Hon'ble Supreme Court has held that the 9 M/s. Gold Star Diamond P. Ltd. assessee is entitled to claim loss arising on account of fluctuations in the foreign currency rate at the end of the year on the outstanding forward contracts. We, therefore, respectfully following the ratio laid down by the Hon'ble Supreme Court hold that the issue is covered in favour of the assessee.
In the result, appeal filed by the assessee is allowed. – A.Y. 2009-10 14. As we have already decided various issues raised by the assessee in in its favour. The Cross appeal is filed by the Department, in which the Revenue has challenged the order of the CIT(A) allowing the loss of `6,17,51,870/- as business loss relating to maturity of forward contracts. Since we have decided the issue in favour of the assessee in assessee’s appeal, therefore the appeal filed by the Revenue is rendered infructuous and is dismissed accordingly.
In the result, the appeal filed by the assessee is allowed and appeal of the Revenue is dismissed.