ASST CIT 16(3), MUMBAI vs. SHREE BALKRISHNA EXPORTS, MUMBAI

The assessee firm is engaged in the business of import, manufacture, sale and export of diamonds. We shall first take up the appeal filed by the assessee for A.Y. 2009-10. The Assessing Officer noticed that the assessee has claimed a sum of ` 5,03,84,146/- as deduction on account of loss arising on revaluation of foreign exchange forward contracts outstanding as on 31.3.2009. The assessee explained the same as loss arising on account of mark to market revaluation of forward contracts as per rupee value of US dollar as on 31.3.2009. The assessee placed reliance on account of Accounting Standard 11 issued by ICAI and also on the decision rendered in the case of Woodward Governor India Pvt. Ltd. (312 ITR 254)(SC) and DCIT Vs. Bank of Bahrain & Kuwait (ITA No. 4404 & 1883/Mum/2004) in order to contend that the loss arisen on account of mark to market revaluation forward contracts is an ascertained liability eligible for deduction.

However, the Assessing Officer took the view that the ratio of decision rendered in the above said cases would apply only in respect of outstanding debtors, creditors or other usual items of assets/liabilities available in the Balance sheet. He further took the view that ultimate economic benefit arising in the case of forward contracts in foreign exchange is contingent upon occurrence or otherwise of several events and hence loss claimed by the assessee is a notional loss. Accordingly, he disallowed the claim of ` 5.03 crores referred above. The learned CIT(A) however allowed the claim of the assessee and hence the Revenue has filed this appeal before us.

Learned Departmental Representative submitted that the impugned forward contracts are not hedging contracts as prescribed in section 43(5)(c) of the Act and hence the impugned loss should be treated as speculative loss. He further submitted that the learned CIT(A) has failed to take cognizance of 3 M/s. Shree Balkrishna Exports decision rendered by Mumbai Bench of ITAT in the case of S. Vinodkumar Diamonds Pvt. Ltd. (ITA No. 506/Mum/2013 dated 3.5.2013).

On the contrary, learned AR submitted that the case of the Assessing Officer in disallowing the claim of the assessee is that the same is “notional loss” only. Accordingly, learned AR submitted that learned Departmental Representative was not entitled to defend the order of the AO on an altogether different ground like speculation loss. Learned AR further submitted that Hon'ble Bombay High Court has held in the case of CIT Vs. M/s. D. Chetan & Co. (IT Appeal No. 278 of 2014 dated 1.10.2016) that the decision of Hon'ble Bombay High Court rendered in the case of CIT Vs.Badridas Garidu (P) Ltd. (2004) 134 Taxman 376) was not brought to the notice of the Tribunal when it rendered its decision in the case of S. Vinodkumar Diamonds Pvt. Ltd. (supra). Accordingly, learned AR submitted that the Revenue is not justified in taking support of decision rendered in the case of S. Vinodkumar Diamonds Pvt. Ltd. (supra) when decision rendered by Hon'ble Jurisdictional High Court as well as other courts are available in favour of the assessee.

We have heard the rival contentions and perused the record. Learned AR submitted that the assessee has entered forward contracts in order to hedge its liabilities whenever imports were made and also to protect its assets whenever exports are made. He also submitted that the assessee has revalued all assets and liabilities having foreign currency exposure as at the year end and such revaluation has resulted in loss during the year under consideration. He further submitted that this loss would be offset when the foreign exchange liability/asset/forward contracts are ultimately settled. He submitted that the revaluation has resulted in gains in the succeeding years. Learned AR further submitted that the assessee has revalued assets as per the Accounting Standard 11 issued by ICAI and also decisions rendered in various cases wherein it has been held that mark to market loss on account of revaluation of foreign exchange liability/asset is not notional or contingent loss.

We have heard rival contentions and perused the record. The only question urged before is whether the loss arising on revaluation of foreign exchange forward contract is a Notional loss or not. It appears that there is no dispute with regard to the fact that the entire amount of foreign exchange forward contracts are covered by the amount of creditors, debtors and other assets having foreign exchange exposure. We noticed that the learned CIT(A) has taken support of the following decisions in order to hold that the above said claim of the assessee cannot be considered as a Notional loss:- a) Woodward Governnor India P. Ltd. (312 ITR 254) b) DCIT Vs. Bank of Bahrain and Kuwait (2010) 41 SOT 290 c) Bharat Earth Movers Vs. CIT (245 ITR 428) d) ONGC Vs. CIT (322 ITR 180)

The Ld D.R relied upon the decision rendered by the co-ordinate bench in the case of S. Vinodkumar Diamonds Pvt. Ltd (supra). However, as pointed out by Ld D.R, the above said decision cannot be taken support of in view of the observations made by Hon’ble Bombay High Court in the case of M/s. D. Chetan & Co.(supra). Further, the Ld A.R has stated that the assessee has been following this practice of valuing in the past and also in the succeeding years. He has stated that the valuation has resulted in gains in the succeeding years and they have been offered to tax. The Ld CIT(A) has also noticed that the claim of the assessee is supported by the decisions referred above. Under these set of facts, we are of the view that the Ld CIT(A) was justified in holding that mark to market loss on account of revaluation of foreign currency forward contract outstanding as on 31.3.2009 cannot be considered as a Notional Loss and hence allowable as deduction while computing income under the head business. Accordingly, we uphold the order passed by the learned CIT(A) on this issue.

We shall now take up the appeal filed by the Revenue for A.Y. 2010-11.

In the assessment relating to A.Y. 2010-11, the assessee claimed that the loss brought forward from A.Y. 2009-10 should be set off against income relating to A.Y. 2010-11. The Assessing Officer noticed that the loss claimed by 5 M/s. Shree Balkrishna Exports the assessee on account of revaluation of forward contracts and other assets have been disallowed. Hence the Assessing Officer rejected the claim of the assessee for set off brought forward loss.

In the appellate proceedings, the learned CIT(A) noticed that the claim of the assessee was allowed in A.Y. 2009-10 by him and hence the assessee would be eligible for set off brought forward loss. Accordingly, he directed the Assessing Officer to grant consequential relief to the assessee. The Revenue is aggrieved by the said decision the learned CIT(A).

We have heard the parties and perused the record. In the preceding paragraph, we have upheld the decision rendered by the learned CIT(A) in A.Y. 2009-10 and hence direction given by the learned CIT(A) in A.Y. 2010-11 to the Assessing Officer to grant consequential relief to the assessee does not call for any interference.

The cross objections filed by the assessee in both the years do not require any adjudication as they only support the order passed by the learned CIT(A).

In the result, both the appeals filed by the Revenue and both the cross objections filed by the assessee are dismissed.