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(Assessment Year 2010-11) DCIT Range-5(2)(2) M/s Mehta Brothers Gems Pvt. R.No. 571, Aayakar Bhavan, Ltd. 635, Pancharatna, M.K. Road, Mumbai-20. Vs. Opera House, Mumbai -400004. PAN: AAECM1130C Appellant Respondent Appellant by : Shri T.A. Khan (DR) Respondent by : Ms. Arati Vissanji (AR) Date of Hearing : 22.05.2018 Date of Pronouncement : 22.05.2018 Order under section 254(1) of Income–tax Act PER PAWAN SINGH, JUDICIAL MEMBER;
These two appeal by Revenue are directed against the order of ld. Commissioner of Income-Tax (Appeals)-10 [ld. CIT(A)], Mumbai for Assessment Year 2009-10 & 2010-11 respectively. In both the appeals, the Revenue has raised common ground of appeal, therefore, both the appeals were clubbed together, heard and are being decided by consolidated order to avoid the conflicting decision. & 4452/M/16- M/s Mehta Brothers Gems Pvt. Ltd.
With the consent of parties, the appeal for Assessment Year 2009-10 was treated as lead case. The Revenue in appeal for Assessment Year 2009-10 has raised the following grounds of appeal:
1. "On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleted the interest disallowed u/s. 36(l)(ii) without appreciating that the interest bearing funds had been utilised for purchase of office premises and, consequently, the interest paid was required to be capitalized with the cost of the assets.
2. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of the mark to market (MTM) loss of Rs. 6,40,532/- on outstanding derivatives contracts as on 31.03.2009 without appreciating that the said loss was only a national loss and the loss, if any, can be allowed only in the following assessment year when the outstanding derivatives were closed on their maturity.
3. On the facts and in the circumstances of the case, the Ld. CIT(A) erred in deleting the disallowance of loss or Rs. 1,21,00,000/- on cancellation of forward contracts without appreciating that the assessee has failed to establish with documentary evidence how the forward contracts were entered into to reduce its future losses on account of foreign exchange fluctuations.
The appellant prays that the order of the Ld. CIT(A) be set aside and the order of the AO be restored.
Brief facts of the case are that the assessee-company is engaged in trading in cut and polished and as exporter of diamonds, filed its return for AY 2009-10 on 26.09.2009 declaring Nil income. The assessment was completed on 15.03.2013 under section 143(3). The Assessing Officer while framing the assessment order besides the other addition and disallowance, disallowed of Rs. 10,24,368/- under section 36(1)(iii), & 4452/M/16- M/s Mehta Brothers Gems Pvt. Ltd. disallowed mark to market loss of Rs. 6,40,000/- and further disallowed Rs. 1,21,00,000/- on account of loss on cancellation of forward contract.
On appeal before the ld. CIT(A), all the disallowance was deleted.
Therefore, aggrieved by the order of ld. CIT(A), the Revenue has filed the present appeal before us.
We have heard the ld. Departmental Representative (DR) for the Revenue and ld. Authorized Representative (AR) of the assessee and perused the material available on record. Ground No.1 relates to disallowance of interest under section 36(1)(iii) [wrongly mentioned in GOA under section 36(1)(ii)]. The ld. DR for the Revenue supported the order of Assessing Officer. The ld. DR for the Revenue further submits that on verification of balance-sheet, the Assessing Officer noted that assessee invested substantial amount towards Bharat Diamond Bourse and in Gujarat Hira Bourse. The assessee claimed that the amount was paid on account of to advances for purchase of office premises at Bandra Kurla Complex and Gujarat. The assessee was asked as to why the proportionate disallowance of interest expenses on borrowed funds be not made. The assessee made similar payment in earlier Assessment Year 2006-07 and 2007-08. In response to the question, the assessee submitted that no interest is disallowable since assessee has not borrowed anything for acquisition of the said premises. The Assessing Officer noted that the assessee has substantially borrowing. The assessee has not substantiated that no 3 & 4452/M/16- M/s Mehta Brothers Gems Pvt. Ltd. borrowed fund was utilized for purchase of office premises. Therefore, the Assessing Officer made the proportionate disallowance. On the other hand, the ld. AR of the assessee submits that the Assessing Officer made the disallowance on the basis of disallowance in Assessment Year 2006-07 & 2007-08. Against the disallowance, the assessee filed appeal before the Tribunal and the Tribunal vide its order dated 25.01.2012 in appeal for Assessment Year 2006-07 in ITA No. 6245/Mum/2010 deleted the similar disallowance. The ld. AR of the assessee placed on record the copy of order of Tribunal.
We have considered the submission of both the parties and find that the Assessing Officer while making disallowance disallowed the interest expenses under section 36(1)(iii) holding that identical issue was involved in Assessment Year 2006-07 & 2007-08. We have further noted that the Co-ordinate Bench of Tribunal in assessee’s own case for Assessment Year 2006-07 on identical facts deleted the disallowance holding that when the payment for acquisition of assets have been made from own funds, there cannot be any disallowance of interest. No contrary facts or law is brought to our notice to take a contrary view; therefore, we do not find any merit in the ground of appeal raised by Revenue. Moreover, the ld. CIT(A) deleted he addition while relying upon the decision of Tribunal for Assessment Year 2006-07 vide order dated 25.01.2012. & 4452/M/16- M/s Mehta Brothers Gems Pvt. Ltd.
Ground No.2 relates to mark to market loss of Rs. 6,40,532/-. The ld. DR for the Revenue supported the order of Assessing Officer and submits that where no sale or settlement has actually taken place and the loss on mark to market basis has resulted in reduction of book profit, such notional loss is contingent in nature cannot be allowed against the taxable income. On the other hand, the ld. AR of the assessee supported the order of Assessing Officer. The ld. AR of the assessee further submits that the transaction entered by assessee is not in nature of speculative activities. Hedging transaction were entered so as to cover the variation in foreign exchange rate and the grounds of appeal
raised is covered by the decision of jurisdictional High Court in case of CIT v/s M/s. D. Chetan & Co. in of 2014 dated 01.10.2016. It is submitted that the Hon’ble High Court while relied upon its earlier decision in CIT v/s Badridas Gauridas (P.) Ltd. wherein it was held that forward contract in foreign exchange when incidental to carrying on business of cotton exporter and done to cover up losses on account of differences in foreign exchange valuations, would not be speculative activity but a business activity.
7. We have considered the rival submission of the parties and have gone through the orders of authorities below. The Assessing Officer disallowed the mark to market loss on forward contracts, not expired during the year hold it as notional and speculative in nature. The ld. CIT(A) considering the date of booking, date of maturity concluded that the assessee has not 5 ITA No.590 & 4452/M/16- M/s Mehta Brothers Gems Pvt. Ltd. closed the forward contract before their maturity date and that assessee- company has simply re-valued the forward contract as per exchange rate prevalent at the closing of 31.03.2009. The ld. CIT(A) further appreciated that the assessee is consistently following the Accounting Standard-11 (AS-11) and that the assessee disclosed both gain and losses in its account and cannot be treated that the loss has arisen out of speculation. Further, the assessee has not closed the forward contract before the due date, the assessee has shown the ledger copy as on 01.04.2009 by reversing the debit entries and booking it as a credit entries in the ledger and concluded that the loss of Rs. 6,40,532/- does not fall under the speculation loss within the meaning of section 43(5). The ld. CIT(A) deleted the disallowance by relying on the decision of Tribunal in case of CIT v/s M/s London Star Diamond Co. (India) Pvt. Ltd. in ITA No. 6169/Mum/2012 dated 11.11.2013. The ld. AR of the assessee has placed on record the copy of decision of Hon’ble jurisdictional High Court in CIT v/s M/s London Star Diamond Co. (India) Pvt. Ltd.(supra) wherein the appeal of the assessee is dismissed by the Hon’ble High Court in its order dated 19.10.2016 in ITA No. 712/2014. No contrary decision is brought to our notice. Therefore, considering the decision of Hon’ble jurisdictional High Court in CIT v/s M/s London Star Diamond Co. (India) Pvt. Ltd.(supra) on the basis of which the assessee was granted relief, therefore, we do not & 4452/M/16- M/s Mehta Brothers Gems Pvt. Ltd. find any illegality or infirmity in the finding of ld. CIT(A). In the result, this ground of appeal is dismissed.
8. Ground No.3 relates to deleting the disallowance of Rs. 1,21,00,000/- on cancellation of forward contract. The ld. DR for the Revenue supported the order of Assessing Officer. The ld. DR for the Revenue further submits that the assessee failed to establish the business losses as it was speculative in nature, therefore, the same was not allowable as business expenditure. The ld. CIT(A) allowed it on wrong premises. On the other hand, the ld. AR of the assessee supported the order of ld. CIT(A). The ld. AR of the assessee submits that the loss was accounted as per accounting principal in AS-11 and was claimed in accordance with the guidance of Reserve Bank of India (RBI). The ld. AR of the assessee submits that assessee entered forward contract with the designate bank to as avoid future losses due to volatility of foreign currency and to safeguarding the future losses in the business. In support of her submission, the ld. AR of the assessee relied upon the decision of jurisdictional High Court in case of CIT v/s M/s Jaimin Jeweller Exports Pvt. Ltd. (ITA No. 1440/2014 dated 17.02.2017.
9. We have considered the rival submission of the parties and have gone through the orders of authorities below; the Assessing Officer disallowed the loss on cancellation on forward contracts by invoking the provision of section 43(5) holding that loss incurred without delivery on transfer of 7 ITA No.590 & 4452/M/16- M/s Mehta Brothers Gems Pvt. Ltd. commodity is speculative in nature. The ld. CIT(A) while relying upon the decision of Hon’ble Supreme Court in case of Woodward Governor Pvt. Ltd. 312 ITR 254 held that when the assessee while following AS-11 and not closing forward contracts permanently but simply rolling over to the next date, the Net loss claimed should be allowed during the year. The ld. CIT(A) also examined the detailed of loss claimed on forward contract during the relevant period and noted that the assessee closed the forward contract just few days before their maturity date and book the loss as per exchange rate prevailing on the date of closing. The assessee has re-book the forward contracts on the date of closure and rolling over to the next date of maturity. Since the forward contract were closed just few days prior to the date of maturity and prior date happened to be weakened and closed holiday, the explanation of assessee is reasonable and acceptable.
The ld. CIT(A) further relying upon the decision of Tribunal in M/s London Star Diamond Co. (India) Pvt. Ltd. (supra) allowed the loss on cancellation of forward contracts. The jurisdictional High Court in case of CIT v/s M/s Jaimin Jeweller Exports Pvt. Ltd. (supra) while relying upon the decision in M/s D. Chetan & Co. (supra) held that the forward contracts in foreign exchange are done to cover up loss on account of difference in foreign exchange valuation is not speculative activity but business activity. In view of the above discussion, we do not find any & 4452/M/16- M/s Mehta Brothers Gems Pvt. Ltd. infirmity in the order of ld. CIT(A). In the result, this ground of appeal is also dismissed.
10. In the result, appeal of the Revenue is dismissed. by Revenue
11. The Revenue has raised the identical grounds of appeal as raised for Assessment Year 2009-10. Ground No.1 of appeal is identical to the ground of appeal No.1 and Ground No. 2 is identical to the ground of appeal No.3 of Assessment Year 2009-10. As we have already dismissed the identical grounds of appeal in appeal for AY 2009-10, therefore, following the principal of consistency both the grounds of appeal raised by revenue are dismissed.
12. In the result, both the appeal filed by Revenue is dismissed.