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Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा सद�य लेखा सद�य, राजे�� राजे�� केकेकेके अनुसार अनुसार- PER RAJENDRA, AM- लेखा लेखा सद�य सद�य राजे�� राजे�� अनुसार अनुसार Challenging the order, dated 30/08/2013, of the CIT (A)-40,Mumbai, the assessee has filed the present appeal. Assessee-Firm,engaged in the business of export of diamond jewellery, filed its return of income on 30/03/2009,declaring loss of Rs.70.86 crores.The Assessing Officer (AO) completed the assessment, u/s.143 (3), on 29/12/2011, determining its income at Rs.17.34 crores. 2.First ground of appeal is about confirming the disallowance in respect of Foreign Exchange (FE)loss of Rs.59.37 crores.During the assessment proceedings,the AO found that the assessee had debited and amount of Rs.59,69,49,634/-under the head FE gain/loss. He dis - allowed the claim made by the assessee on the ground that it did not furnished documentary evidences in form of purchase bills,proof of payment of customs duty bill of entries bank realisation certificates and import clearance documents. He also held that it did not furnish any justification for claiming such a huge loss.Finally, he disallowed four items namely Exchange Difference Import (Rs.24.87 crores), Dollar Adjustment Account (Rs. 5.08 crores), Forward Contract Loss (27.89 crores)and Deemed Export Exchange Difference(Rs.1.52 crores). 3.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA).It was stated that exchange difference import loss of Rs. 24.87 crores was result of a routine import exchange difference, that the assessee suffered the loss
6255/M/13 M/s. Niru Impex mainly on account of hedging against export receivable effected via export sales, that assessee had not suffered the notional loss by revaluing open forward contracts, that is dealing in a FE derivatives was not covered u/s.43 (d)(5) of the Act. The FAA called for remand report in that regard from the AO. In his remand report, he admitted that assessee had submitted all the necessary documents, that the AO had missed the details and had added back by entire sum, that the assessee had to comply with Accounting Standard 11,that the loss book by the assessee was speculative loss and not hedging loss. After considering the available material, the FAA referred to the Instruction No. 03 of 2010, dated 23/03/2010, issued by the CBDT and held that losses suffered by the assessee in foreign exchange transactions appear to be nature of speculative transactions. He confirmed the disallowance made by the AO.He further observed that the assessee had claimed loss of Rs. 5.08 crores in dollar adjustment account,that it appeared that it had raised certain loans from PCFC/EBRD in dollar currency,that same was revaluation of loan amount is on 31/03/2009, that the transaction was of capital nature, that the assessee was not eligible to claim such a loss.With regard to FE loss on account of forward contracts to the tune of Rs. 27.89 crores,he held that loss was speculative loss,that same was not eligible against current year’s income. About deemed export exchange difference of Rs. 1.52 crores, he observed that same was in nature of realised loss on export of polished diamonds to SEEPZ units, that sufficient material was not produced to prove that the losses actually occurred and that it was directly related to sales realization. Finally he held that losses claimed by the assessee under Forex transaction were not allowable against the income of the year under consideration.
4.Before us,the Authorised Representative(AR)stated that the FAA had not given a finding that the assessee was covered by the proviso to section 43(5)(d), that the transactions entered into by the assessee were hedging transactions and not speculative transactions.He referred to pages 53-55 of the paper book wherein the actual loss of Rs.24.87 crores was computed.He further argued that forward contract cancellation to the tune of Rs. 27.89 crores was crystallised during the year under consideration,that the AO had taxed the FE gains and disallowed the FE loss without giving any reason.He referred to pages 59 to 61 of the paper book in support of the claim that forward contract cancellation had crystallized. For exchange fluctuation loss on account of deemed export,of Rs.1.52 crores,he referred to page 62 of the paper book. He relied upon the cases of D. Chetan and Co.(75 Taxmann.com),M/s. Sanghavi & Sons(ITA/4484/Mum/2012, AY. 2009-10,dated 31/01/2017), Mahendra Brothers Exports Private Ltd.(161 ITD 772),Foods and Inns Ltd.(71 Taxmann.com.338),London Star Diamond
6255/M/13 M/s. Niru Impex Company (I) Private Ltd.(38 Taxmann. com 338),M/s.Hiraco India Pvt.Ltd. (ITA/ 2300/ Mum/2015,AY.2009-10,dated 20/01/2016) and Jaimin Jewellery Exports Private Ltd.(151 ITD 357).The Departmental Representative(DR) supported the order of the FAA stated that transactions entered into by the assessee speculative transactions.He relied upon the case of Araska Diamond (P.)Ltd.(52 Taxmann.com 238).
5.We have heard the rival submissions and perused the material before us.Out of the forex loss of Rs.59.69 crores loss of Rs. 27.89 crores was booked under the head forward contract cancellation.The assessee had filed the details in that regard. The explanation given by the assessee contains bill wise detail of the exchange loss suffered by it on account of forward contract cancellation. In our opinion, loss arising out of it cannot be treated as speculative loss.We also find that import exchange difference of Rs.24.87 crores was a routine exchange difference on import and creditors revaluation carried out at the end of the year, that dollar adjustment account represented routine revaluation of PCFC/EBRD bank facilities obtain in dollar currency. We have gone through the Ledger accounts produced by the assessee. A perusal of the pages 53-64 of the paper book revealed that none of the transactions entered into by the assessee were of speculative nature. The assessee had turnover of more than 400 crores,that it had made revaluation and compliance of AS-11. The FAA has not commented upon the requirements of AS 11, while rejecting the claim made by the assessee. 5.1.We find that the AO had taxed the foreign exchange gain for the year under consideration. We are reproducing the relevant portion of trading, profit and loss account for the year ended on 31/03/2009 and it reads as under: Debit Rs. Credit Rs. Exchange Fluctuation Loss 24.87 crores Exchange Fluctuation gain 57.88 crores (Import payment and revaluation (Export sale proceeds and of creditors) revaluation of debtors) Exchange Fluctuation Loss 5.08 crores Exchange Fluctuation gain 19.03 lakhs (Dollar adjustment account) (Dollar Polished Diamond account) Exchange Flusctuation Loss 1.52 crores Exchange Fluctuation gain 16.41 lakhs (Deemed Export sale of polished (Export sale proceeds-SEEPZ) diamonds) Loss on cancellation of Forward 27.89 crores Contract Total 59.37 crores 58.23 crores We are unable to understand as to how he has taxed the foreign exchange gains and disallowed the losses.He has not given any reason for taxing the profits and disallowing the losses. Transaction resulting in profit and losses were not different transactions.Exchange fluctuation loss(import payment and revaluation of creditors) was disallowed, but, exchange
6255/M/13 M/s. Niru Impex fluctuation gain (export sale proceeds and revaluation of debtors) was taxed. In our opinion,there was no logic for applying two different yardstick is for import payments/export sale proceeds as well as for revaluation of creditors/debtors.They are the part of the chain of similar transactions. In other words the transactions in question are the two sides of same coin.If the FAA wanted to confirm the disallowance the forex loss holding that loss had not arisen on 31.03.2009,he should have held that FE gain amounting to Rs. 57.88 crores on revaluation of debtors was also not taxable as the gain had also not arisen on that date.Therefore,we hold that FE loss on payment to creditors and on revaluation on the last date of the accounting year aggregating to Rs.24.87 crores has to allowed.
5.2.As per the details available the assessee had revalued Packing Credit Facility and Post- Shipment Credit Facility, as on 31/03/2009 whereby it had to pay not additional amount of Rs. 5.08 crores.In our opinion,both the facilities cannot be held to be capital in nature as these facilities are provided by the bank not for acquiring any capital asset but as a working capital. Therefore we hold that FAA loss of Rs. 5.08 has to be allowed, as it was a revenue expenditure.
5.3.It is found that the loss on cancellation of forward contract, amounting to Rs. 27.89 crores has been disallowed on the ground that the transactions were of speculative nature.Circular No.3 of 2010, issued by the CBDT has been referred to in support of the disallowance.No evidence has been brought on record to prove that transactions entered into by the assessee were speculative.The AO has in the remand report mentioned that he ‘realised’ that transaction were not regular business transactions.No basis for his so-called ‘realisation’ is available.He did not elaborate as to how he had arrived at that conclusion- especillay when the assessee had furnished transaction wise details of the FE loss suffered by it.If we look at those transactions,it becomes clear that same were pure and simple hedging contracts.The assessee had produced all the necessary evidences before the AO and the FAA to justify the claim made by it on account of forex loss.But,both the authorities negated its claim alleging that transaction were speculative. They have not commented upon the documents produced by it that clearly established that claim made by the assessee about FE loss was normal business loss. Codes are of the view that forward contracts for purpose of hedging in course of normal business activities do not amount to speculative activity, that losses incurred as forward contract losses is to be allowed as business loss.Here,we would like to rely upon the case of D. Chetan and Co.(supra).In that matter,the assessee was engaged in the business of 6255/M/13 M/s. Niru Impex import and export of diamonds. For the AY.2009-10, the assessee explained that the amount of Rs.78.10 lakhs claimed as loss was on account of hedging transactions entered into to safeguard variation in exchange rates affecting its transactions of import and export.The AO disallowed the claim on the ground that it was a notional loss of a contingent liability debited to the profit and loss account. The First Appellate Authority allowed the loss incurred on the forward contracts as a business loss. The Tribunal confirmed this. On appeal to the Hon’ble High Court, the matter was decided as under: “ ……the Tribunal concluded that the transaction entered into by the assessee was not in the nature of speculative activities. Further the hedging transactions were entered into so as to cover variation in foreign exchange rate which would impact its business of import and export of diamonds. These concurrent findings of fact were not shown to be perverse in any manner. The Assessing Officer in the assessment order did not find that the transaction entered into by the assessee was speculative in nature. At no point of time did the Department challenge the assertion of the assessee that the activity of entering into forward contract was in the regular course of its business only to safeguard against the loss on account of foreign exchange variation. The Department never contended that the transaction was speculative but only disallowed on the ground that it was notional. Thus, it was to be concluded that the transactions entered were only in regular course of business and not speculative. Therefore no substantial question of law arose.” Finally,we would like to refer to judgment of the Hon’ble Bombay High Court, delivered in the case of Vinergy International Private Ltd. (supra) wherein the honorable court has held as under: “5. The grievance of the Revenue before us is that Instruction No. 3 of 2010 dated 31st March 2010 issued by the CBDT in respect of loss on account of foreign exchange derivatives is subsequent to the Apex Court’s decision in Woodward Governer India private Ltd. (supra) and was not considered by the Tribunal. The instruction according to the Revenue would govern the issue.
In the present facts, we find that loss was not on account of derivatives but are in fact losses and gains in foreign exchange relating to purchase and sale transactions i.e. creditors and debtors outstanding as on 31st of March, 2010. Therefore, the Instruction No. 3 of 2010 issued by CBDT would have no application to the facts of the present case. In fact the issue arising year in would be covered by the principle laid down by the Apex Court in Woodward Governer India private Ltd. (supra)…….”
We would also like to refer to the other cases relied upon by the assessee.In all those matters the Tribunal has,in similar circumstances,held that FE loss arising to an assessee has to be allowed.As far as the matter of Araska Diamond is concerned,we would like to mention that facts of that case are not similar to the facts of the case under appeal.It is a fact the assessee had entered for its derivatives as it had export debtors all year round.Therefore,the transactions entered into by it cannot be treated speculative,as stated earlier.So,considering all these facts,we hold that disallowance of Rs. 27.89 crores on account of forward contract loss has to be allowed.
6255/M/13 M/s. Niru Impex 5.4.We find that fluctuation loss of Rs.1.52 crores was accepted by the FAA as a realised loss on export of polished diamonds to SEEPZ units.However, the same was disallowed on the ground that the assessee had not produced sufficient material to show as to how the loss had actually occurred and how it was directly connected to sales realisation. Paragraph 5 of the remand report of the AO prove that documentary evidence in respect of exchange fluctuation loss had filed before him during the assessment proceedings. It appears that because of paucity of time,he could not go through the details submitted by the assessee.Therefore,in our opinion, in the interest of Justice, the issue of FE loss of Rs.1.52 crores should be restored back to the file of the AO for verification.He is directed to afford a reasonable opportunity of hearing to the assessee.As a result,GOA-1 is decided in favour of the assessee, in part.
6.Second ground of appeal is about confirming the addition of Rs. 1.38 crores on ground of undervaluation of turnover. The AO had disallowed discount on sale given by the assessee to its sister concern on the ground that the assessee had failed to furnish details called for in that regard. During the appellate proceedings the AO filed a remand report, as stated earlier. We are reproducing the relevant portion of remand report and it reads as under: “Contents of Grey coloured box file-The file contains 353 pages plus a covering letter dated 27.12.2011 containing 2 pages: S.No. Page No. Title/Subject Contents of page Remarks 3. 18
50. Party-wise details Month wise export Point 9-discount of sales summary, party expense on sale wise export register to Niru Creation which contains (Niru Creation quantity, value, ledger given here party name, with full address, country narration) and details of sale of rejection and rough diamond. 5. 72-323 Expense ledger A/c. Copy of general Discount ledger a/c. of expenses ledger various business of sale to Niru expenses, sales and Creation point-9 administrative of disallowance expenses. Etc. of discount expenses of Rs.1,38,85,210/-
“6. Under valuation of turnover of Rs.1,38,85,210/-: This represents discount given to M/s. Niru creation for exports made to it and therefore it is not under valuation of turnover. Even the letter dated 14/12/2012 does contain similar note of credit given to Niru Creation.” It is found that the FAA had confirmed the addition on the ground that the assessee had given discount to its sister concern and that the assessee itself had incurred loss during the year under consideration.
6255/M/13 M/s. Niru Impex 6.1.During the course of hearing before us, the AR stated that the payment made by the assessee was not in doubt, that all the necessary details were filed before the revenue authorities during the assessment/appellate proceedings. The DR supported the order of the FAA. 6.2.We find that the FAA had confirmed the disallowance on the ground that discount was given to sister concern,namely M/s. Niru Creations.There is no bar in the Act which prohibits giving discount to sister concerns.The genuineness of the payment has not been doubted.The business need of an assessee has to be decided by him and not by the departmental officers. How to run its business is a domain of an assessee.We find that the AO/FAA has not alleged that the sister concern was suffering a loss or that the payment made to it was in any way directly or indirectly connected to evade the taxes.Just because payment has been made to sister-entity,it cannot be disallowed.Therefore, reversing the order of the F AA we decide second ground of appeal in favour of the assessee.