ASST CIT 16(3), MUMBAI vs. K.P. SANGHVI & SONS, MUMBAI

O R D E R

PER MAHAVIR SINGH, JM:

2.3 Your Honour will appreciate the fact that the Appellant has hedge the underlying exposure in foreign currency. As such, it is humbly submitted that the forward contracts entered were for the purpose of the business to hedge against the forex loss. The appellant has forex exposure on all limbs its business activities. The firm has not entered into the forward contracts with an intention to earn any gain due to fluctuation in foreign currency rate but it is necessary for it to enter into such forward contracts to hedge against foreign exchange rate fluctuation. This is an integral part of the business undertaken by the appellant and incidental to the export and import business. In the absence of such forward contracts, the firm may sustain huge losses. Therefore, it becomes essential for the firm to book such forward contracts as a prudent business practices. Further, you will appreciate that the appellant is engaged in the business of diamonds export and not in the business of foreign exchange. This is evident from the financial results of the firm as well as the objects of the firm as mentioned in the Partnership Deed. In view of the same, it may be appreciated that these contracts are nothing but an integral part of its export and import activities and the resultant hedging difference on their revaluation cannot be isolated artificially.

Average and month wise exposure in foreign exchange during the financial year 2008-09 Month Outstanding Outstanding forex Outstanding bank Advance from from Stock as on month Total foreign forex debtors creditors as on loan as on month customers as end on (expected exchange as on month month end end month end forex receivables) exposure as on end contract Apr-08 44,816,959 31,288,490 75,534,866 21,008,529 112,410,918 285,059,763 May-08 44,781,311 41,323,348 73,532,621 18,919,110 113,654,036 292,210,425 Jun-08 46,587,421 53,896,970 65,980,079 12,131,098 112,462,944 291,058,512 July-08 51,339,913 51,149,907 68,528,680 20,569,801 120,631,271 312,219,572 Aug-08 51,753,000 53,002,048 67,088,900 18,606,497 118,096,552 308,546,997 Sep--08 47,781,111 59,348,072 69,039,634 12,656,252 118,864,305 307,689,375 Oct-08 60,291,363 24,771,240 91,001,852 10,791,675 94,208,024 281,064,153 Nov--08 46,612,670 31,437,520 81,862,954 9,863,734 109,145,182 278,922,061 Dec-08 35,229,699 30,221,002 61,068,826 10,453,065 105,600,941 242,573,533 Jan-09 22,416,651 28,503,142 51,602,952 9,663,219 101,810,515 213,996,279 Feb-08 19,570,135 35,551,859 39,181,671 9,239,317 92,294,245 195,837,227 Mar-08 19,224,253 9,311,415 65,785,464 8,961,480 91,442,232 194,724,845 Average 40,867,041 37,483,751 67,517,375 13,571,982 107,551,764 266,991,912 2.4.7 To understand the concept of a speculative transaction, at this stage, I may also be profitable to read section 43(5) which is as under:

―speculative transaction" means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips: Provided that for the purposes of this clause— (a) a contract in respect of raw materials or merchandise entered into by a person in the course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) a contract in respect of stocks and shares entered into by a dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) a contract entered into by a member of a forward market or a stock exchange in the course of any transaction in the nature of jobbing or arbitrage to guard against loss which may arise in the ordinary course of his business as such member; 26[or] [(d)………… [Explanation 1]*****‖ 2.4.8 Justifying that this loss on revaluation was real, Ld.AR for the appellant further contends that:

(i)There is no dispute about the incurrence of this loss (ii)Similarly, there is no dispute that the method of accounting followed by the appellant is mercantile as the ld. AO has recorded this fact in the assessment order.

(iii)It is not disputed that these losses have been recognized by the appellant in accordance with applicable accounting standards/policies in this regard. (iv)The Id. AO has raised only dispute that this loss is not allowable as a deduction in the year of incurrence computed under mercantile system by following the accounting standards in this respect. v) `The appellant was obliged to convert outstanding balance of forward contract at the year end rate, which were executed at higher rates, resulting in considerable loss on account of year –end conversion of forward contract positions 2.4.9 It was also stated that The Institute of Chartered Accountants of India, the legal apex body, on accounting matters has issued an Accounting standard "Accounting for the effects of changes in foreign exchange rates (AS-11)(revised)" which is required to be compulsorily followed from 1 st April 1995. In accordance with the stipulations of this standard, all the monetary items are required to be valued at the closing rate and the profit or loss arising there from is required to be debited or credited to the profit and loss account as can be seen from the following excerpts: ― At each balance sheet date:

1. 1. Monetary items denominated in a foreign currency (e.g. foreign currency notes and loans denominated in a .foreign currency) should be reported using the closing rate.

2. Exchange difference arising on foreign currency transactions should be recognized as income or as expense in the period in which they arise. " 2.4.10 The International Accounting standard (IAS - 21) also stipulates the same methodology as can be seen from the following excerpts: ―3. At each Balance sheet date, the foreign currency monetary items that result from transactions of the entity should be reported at the closing rate 4. Exchange difference arising on reporting an entity's long term foreign currency monetary items at rates different from those at which they were recorded during the period or presented in previous financial statements should normally be recognized in income for the period. "

2.4.11 In a nutshell, the summary of the appellant's submissions are as under: i) In the first place, the ld. AO has failed to appreciate the characteristics of a Forward contract. Each Forward contract is always assigned with a value that is contracted with creation of a fettered obligation on the assessee to execute and meet at a future contracted date. All the contracts are always enforceable, in as much as realizable. ii) The point that the Id. AO was making was that anticipated liabilities are not allowable, which are notional in nature. But, the distinction in case of Forward contracts is that if an anticipated liability is coupled with present Obligation and only quantification can vary depending upon the terms of contract, then a liability is said to have crystallized on the reporting date i.e 31st March. iii) Argument of the Id. AO that an event of contract maturity can only quantify contract value is tenuous and weak. In reality, Forward contracts losses / profits accrue on daily basis depending on the fluctuation of US$ and Indian Rupee. Any prudent person would constantly monitor the position of forward contract value on daily basis to assess the impact of profit or loss. It may be appreciated that values of outstanding position of Forward contract is clearly measurable based on daily position of spot rate of US $ against the Rupee, so is it also measurable with complete accuracy, as on the last date of the Balance sheet. iv) Cut-off of 31st March splits profits /losses of outstanding position of forward contracts into two different accounting periods, and that is the only rational way to evaluate profit / loss in a given period. Loss, although purported to be stated by the Id. AO to be notional, is actual and quantifiable. Loss had occurred and accrued, as a result of conversion. Only thing is that such a loss in the subsequent period would get either further aggravated or get placid, depending upon the foreign exchange fluctuation that may happen against the rupee. v) Foreign exchange loss as a result of conversion of outstanding position of Forward contracts is - • real • quantifiable with precision • based on commercial accounting principles • as a result of cut-off • in consonance with the Accounting standard -11 issued by the Institute of Chartered Accountants of India • allowable 2.4.12 To summarize, it was stated that (a) It is only coincidental that rupee was almost at the peak at the beginning of the. year, while it was at its bottom at the end of the year against the US$ resulting in loss on the outstanding value of Forward contracts at the year-end. (b) The Assessee incurred loss on account of outstanding value of forward contracts at the year-end (31st March, 2009); while in past and subsequent years, assessee had gained profits on similar transactions. In other years, the department has always accepted profit on year-end conversion of outstanding value of forward contracts. On analogy, accuracy and consistency perspective, the department needs to accept loss incurred on conversion of the outstanding value of forward contracts, particularly if it has happened on account of controls beyond the assessee.‖ (c) Accounting Standard 11 dealing with effects of foreign currency requires assessee to adjust its monetary assets at the year end with the year-end conversion rate and reflect profit or loss in the revenue statement. Therefore what we have done is what we are technically obliged to do. (d) Even mercantile system of accounting as recognized under section 145 requires that at the year end, an assessee should make provision for all known liabilities. 2.4.13 As evident from the above, it was pleaded' that similar question arose in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254 I 179 Taxman 326 (SC) that whether the loss arising on fluctuation of exchange in respect of loan taken for revenue purposed is allowable as deduction in the year of fluctuation of exchange rate or whether the same could be allowed only in the year of repayment of such loan. The Supreme Court held that the loss suffered by the assessee on account of exchange difference on the balance sheet date is an item of expenditure as on balance sheet date. It further held that profits or losses as per mercantile system of accounting and as per the applicable accounting standard is allowable as deduction unless the system of accounting is superseded or modified by the legislative enactment. It also held that the method of accounting continuously undertaken by the assessee is supreme as there is no finding given by the AO on the correctness and completeness of accounts or any finding to the contrary that the assessee had not complied with the accounting standards. It was, inter alia, concluded as under: " in order to find out if an expenditure is deductible the following have to be taken into account: (i) Whether the system of accounting followed by the assessee is mercantile system which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due and before it is actually received; (ii) whether the same system is followed by assessee from the very beginning and if there was a change in the system, whether the change was bona fide; (iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains; (v) whether the method adopted by the assessee for making entries in the account books both in respect of losses and gains is as per nationally accepted accounting standards; whether the system adopted by assessee· is fair and reasonable or is adopted only with a view to reducing the incidence of taxation" 2.4.14 In fact, even if the losses are allowed in the year of realisation of export proceeds that would tantamount to following cash system of accounting which will be contrary to section 145(1) of the Act-- CIT v. UP State Industrial Development Corpn. [1997] 225 ITR 703/92 Taxman 4-5 (SC). 2.4.15 Similarly, as pleaded earlier, in the case of Dy. CIT (International Taxation) v. Bank of Bahrain & Kuwait [2010] 41 SOT 290 , Hon'ble Special Bench of Mumbai Tribunal held that losses incurred by the appellant on account of revaluation of the contract on the last date of the relevant accounting period based on the RBI guidelines/applicable accounting standard is allowable as deduction. It held that such loss is neither notional nor contingent liability in which the moment binding contract is enacted, it becomes allowable. Further reference could be made to Bharat Earth Movers v, CIT [2000] 245 ITR 4281 112 Taxman 61 (SC), Metal Box Co. of India . Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) .and Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1(SC) 2.4.16 In the case of DCIT vIs Bank of Bahrain & Kuwait(supra), forward contracts were entered of an amount to protect the fluctuations in the foreign currency held as stock-in-trade. Forward contracts value entered by. Bank of Bahrain & Kuwait had nothing to do with the foreign currency held as stock-in-trade except protecting fluctuations, while of course dealing with reporting in Indian currency. On the same footing, in the instant case of the appellant stock. as well as receivable mainly are dollar denominated and are realizable in foreign currency. To hedge possible fluctuations in US$ denominated stock, as well as resultant debtors out of such stock, the appellant had entered into forward contracts. The proposition in that case, as well as in this case is starkly similar. They being bank had "Money" lying in foreign currency as their stock-in-trade, which required translation into Indian currency for the purpose of Indian reporting and Indian taxation, which would naturally expose them to fluctuation risk. To hedge such risk, they had entered into forward contracts, and had made year-end conversion on outstanding position of the forward contracts, although such forward contracts were never reflected in their Balance sheet, and losses so incurred as a result of transfer had remained unrealized at the point of conversion. On the same analogy, the appellant's stock, eventually although gets realized Indian currency for Indian reporting and Indian taxation. This exposed them to the exchange fluctuation risk, if the Rupee would appreciate against the US$. In both the cases, that is of Bank of Bahrain & Kuwait and the present appellant, foreign currency positions were hedged by entering into Forward contracts, and they had incurred year-end forward contract conversion losses. 2.4.17 In the case of BHARAT EARTH MOVERS LTD (supra), the court has differentiated between what is accrued liability and contingent liability. The relevant portion of the principles laid down by the Hon'ble court are reproduced as under: • For an assessee maintaining his account on the mercantile system, a liability already accrued, through to be discharged at future date would be a proper deduction while working out the profits and gains of his business, regard be had to the accepted principles of commercial and accountancy. It is not as if such deduction is permissible only in the case of amount actually expended or paid. • Just as receipts though not actual receipts but accrued and due are brought in for income tax assessment so also liabilities accrued due would be taken in to account while working out the profits and gains of the business. • A condition subsequent,' the fulfillment of which may result in reduction or even extinction of the liability, would not have the effect of converting that liability into a contingent liability • Distinguishing and differentiating contingent and accrued liability, it was held that;  If a business liability has definitely arisen in the accounting year, deduction should be allowed although the liability may have to quantified and discharged at a future date.  What should be certain is the incurring of the liability.  It should be also be capable of being estimated with reasons certainty though the actual quantification may not be possible. 2.4.18 Further, in the case of Rusabh Diamonds v. Assistant Commissioner Income-tax - 15(1), Mumbai [2013] 34 taxmann.com 160 (Mumbai - Trib.) in Appeal No. 7217 (MUM.)/2012 dated April 26, 2013, it has been, inter alia, held, under: "8.1 The assessee considered Rs. 5,20, 70, 149 as operating income on account of foreign exchange gain arising on forward contracts. The assessee contended that the exchange gain arising on cancellation forward contracts are to be considered as part of operating profit since it an integral part of the business of buying and selling of the diamonds al hence is an operating income. The TPO did not accept the claim of the assessee for the reason that the exchange gain earned are against cancellation of forward contracts and the assessee has separately disclosed as profits and gains from foreign exchange fluctuations, which are not included in purchases and sales. Further, the TPO was of the view that this constitutes speculative and therefore, the same cannot be treated as part of the main business activity of manufacturing of diamonds of the assessee. 8.2 The ORP concurred with the view of the TPO on the ground that the foreign exchange earning are against cancellation of forward contracts and not integral part of the assessee's business. 9 . Before us, the Id Sr. counsel for the assessee has submitted that the assessee earned foreign exchange on cancellation of forward contracts which are connection of its purchase/sales of diamonds. Foreign exchange gain is directly dependent on the activity of export or import undertaken by the assessee. The assessee has entered into forward contracts for the purpose of reducing the foreign exchange risk faced by it in respect of its transactions with AEs. He has further submitted that foreign exchange fluctuation gain has been earned by the assessee under the hedging contract which is duly backed by the sales and purchase contract/orders in respect of diamonds. The Id Sr counsel has further contended that dealing in foreign exchange being treasury transaction is not permitted by the RBI and therefore, the gain arising from the forward contracts is part and parcel of operating profit of the -assessee, In support of his contention he has relied upon the decision of the Bangalore Benches of the Tribunal in the case of SAP Labs India (P.) v ACIT in the case of Bombay Diamond Co Ltd. v. DCIT in ITA No.7488/Mum/07; in the case of c/r v. Badridas Gauridu (P.) Ltd. [2003]261 ITR 256 1[2004] 134 Taxman 376 (Bom). He has further submitted that the premium or discount arising at the 1nception of forward exchange contracts is amortized as expense or income over the life of contract. The exchange difference on such contract are recognized in the profit & loss account for the year in which the exchange rate changes resulting in the profit or loss arising on cancellation or renewal of forward exchange contract is recognized as income or as expenses. 9.1 The Id OR on the other hand has submitted that as per DECD guidelines on the Transfer Pricing, the foreign exchange gain or loss should be excluded or included depends on whether or not the tested party is responsible for the same. He has referred paras 2.82 of the OECD guidelines and submitted that when, as per the contract between and assessee and the AE, the AE has assumed the risk of foreign exchange fluctuation; then exchange gain cannot be included in the profit of the assessee for the purpose of determination of net margin. The Id OR has referred the TP study at page 1.0 of the paper book and submitted that risk of foreign exchange fluctuation upto 3% in USD is to be earned by the AE. Therefore, the same cannot be included to the profit of the assessee for the purpose of computation of operating profit of the assessee.

2.4.20 In the case of ONGC Vs CIT 322 ITR 180, Hon'ble Supreme Court has reiterated the principles laid down above while answering the question that when the assessee maintained their accounts on mercantile system of accounting and there was no finding by the AO on the correctness or completeness of the account and when the assessee had complied with the accounting standards, laid down by the central Government, the "loss" suffered by it on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet was to be allowed as an expenditure under section 37(1) of the Act notwithstanding the fact that the liability had not been actually discharged in the year in which the fluctuation in the rate of foreign exchange had occurred and it finally decided that the loss incurred on account of restatement of the liabilities in foreign exchange was allowable and answered the question in favour of the assessee. 2.4.21 Thus, the judicial decision of the Hon. Supreme Court and various other authorities are clearly in favour of the appellant on this issue. That apart, as discussed earlier, the liabilities in foreign exchange. were incurred during the normal course of the appellant's business and the restatement of the forward contract obligations was done as per AS-11 in a consistent manner over the years. 2.4.22 In fact, the gain earned on such revaluation was accepted and brought to tax in the respective years and there was no reason for the Ld. AO. to arrive at a different conclusion in present case merely because there was loss during the year Apparently, the Id. AO was of the view that the appellant was not a dealer in foreign exchange unlike the Bank of Bahrain, and therefore the said decision was held as not applicable to the facts of the case. However, as seen earlier, this issue is no more res integra and is settled by a plethora of judicial decisions. 2.4.23 It is not out of place to mention that the Hon. Supreme Court, in the case of ONGC (supra), upheld the same principles that were laid down in the case of Woodword Governorn (supra), and the loss was held allowable in similar circumstances, where the business of ONGC was not that of a foreign exchange dealer. Therefore, it is not the nature of business or the stock dealt with i.e., currency or commodities or goods like diamonds in the present case that matters. 2.4.24 Recently, Hon'ble Mumbai ITAT "H" bench in the case of H. Dipak & Co.,Mumbai on 30 April, 2013 has held that- "We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that a similar claim for marked to market loss claimed by the assessee in respect of forward foreign exchange contract debited to the P&L account has been allowed by the Special Bench of this Tribunal in the case of Bank of Behrein & Kuwait (supra) after discussing and considering all the relevant aspects of the matter,and the relevant (i) A binding obligation accrued against the Appellant the minutes (sic) it entered into forward foreign exchange contracts. (ii) A consistent method of accounting followed by the Appellant cannot be disregarded. The Appellant has consistently followed the same method of accounting in regard to recognition of profit or loss both, in respect of forward foreign exchange contract as per the rate prevailing on March, 31, (iii) A liability is said to have ~crystallized when a pending obligation on the balance sheet date is determinable with reasonable certainty. (iv) As per AS-11 when, the transaction is not settled in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting period. (v) In view of the decision, of the. Supreme Court in the case of Woodward Governor India (I) P Ltd, the Appellant’s claim is allowable. (vi) In the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit.

2.4.25 On the basis of facts obtaining in the impugned appeal and the one in the case of H. Dipak (supra), following chart summarizes the similarities in the two cases: Particulars K.P. Sanghvi H Dipak & Co. S.No . 1 Constitution Partnership Partnership Firm Firm 1 Business Engaged in Similar activity Activity the business of i.e engaged in Import, the business of Manufacturing Manufacturing, and Export of trading as well Cut & as import and Polished export of cut diamonds and polished diamond 2 Import (USD) Rs.517.10 Cr Rs.476.68 Cr 3 Export (USD) Rs.714.98 Cr. 4 % of Export Sales Export 95% of total sales to Total Sales 5 Credit Facility from Enjoying Foreign Enjoying Foreign Bank Currency Loan from Currency Loan say say PCFC Loan from PCFC Loan from Bank Bank 6 Accounting Policy Policy followed by the Policy followed by the for Currency firm clearly stated in firm clearly stated in Transactions. the Significant Para 6 of Schedule-F Accounting Policies on of Balance Sheet "Foreign Currency under the heading Transactions" "Reporting on Notified Accounting Standards" 7 Hedging through. Has entered into Same purposes Forward Contract obligation at the time of Requirement entering into the forward foreign exchange contracts dealt with Export realization without any speculation. transactions 8 Hedging transactions To be genuine and valid Same situation V/s Speculative hedging contracts of sale transactions as per the total of such proviso (a) of the transactions should not section 43(5) of the exceed the value of total Act stock of raw material or the merchandise on hand 9 Method of accounting Consistently followed Same practice followed the method of accounting with regard to recognition of profit of loss both for forward foreign exchange contract at the rate prevailing on 31st March 10 Liability crystallized Has crystallized its Same treatment given liability as the amount can be determined with reasonable certainty 11 AS-11 When the FC Same practice followed transactions not settled in the same accounting period, book the profit/loss on the outstanding forward contracts as on 31st March by converting the same at closing rate 12 Decision of SC in SC decision squarely On the basis of SC case of Woodward applicable in appellate decision, appellant’s Governor India (I) P case claim is allowed Ltd. 13 Dy.CIT (International Held that, the loss Applicable to the taxation) V/s Bank of incurred by the assessee appellant on the basis of Baharain and Kuwait on account of evaluation same facts. (2010) 41 SOT 290 of the contracts on the (Mum) last day of the accounting year, ie. Before the date of maturity of the Forward contract, is allowable deduction, which exactly matches with this case. 14 Only the timing of The unmatured contracts The unmatured contracts taxation of profit / at the year end, forwards at the year end, forward loss contracts value date the contracts valued at the year end rate and year end rate and booked booked exchange exchange difference at the difference at the end of end of the year which Rs.7.14 in loss. cr.

2.4.26 At this stage, it may also be prudent to refer to the observations of Authority for Advance Ruling in the case of SOPROPHA S A., IN RE (2004) 268 ITR 37 (AAR) where the scope of Central Board of Revenue (The Board) circular No.23D (F No.412/4/60/TPL dt 12th Sept, 1960) has been analyzed. It was, inter alia, held therein as under: ―Now the scope of the provisions of the Act and Circular of the Board have to be examined in the light of material placed before us. Before the issue of circular of the Board, the IT authorities gave a restrictive meaning to the hedging transactions. The said view was also confirmed by various High Courts including Madras High Court and Allahabad High Court in the cases relied on before us. It was, however, brought to our notice that in the case of Raghunath Das Prahlad Oas (supra); Allahabad High Court followed Gujarat High Court's decision in the case of Chimenlel Chhotalal (supra). However, a larger Bench of Gujarat High Court overruled the decision in Chimanlal Chhotalal's case in the case of Pankaj Oil M/!/s (supra). There is no doubt that within the meaning of proviso (a) to s. 43(5) the transaction proposed to be undertaken by the applicant cannot be termed as 'hedging contracts' at all, it is, therefore, necessary to examine whether the case of the applicant is covered by the concession allowed by the Board through its beneficial circular No. 230 which is binding on the officers of the Department.

2.4.34 Further, as seen earlier, in the case of DCIT v/s. Bank of Bahrain and Kuwait (ITA Nos. 4404 & 1883/Mum./2004), the Special Bench of Jurisdictional Mumbai ITAT held that MTM losses in respect of forward foreign exchange contracts debited to profit and loss account is allowable. 2.4.35 Similarly, in the case of ONGC Vs CIT 322 ITR 180, Hon'ble Supreme Court has reiterated the principles laid down above while answering the question that when the assessee maintained its accounts on mercantile system of accounting and there was no finding by the Assessing Officer on the correctness or completeness of the account and that the assessee had complied with the accounting standards, laid down by the Central Government, the "loss" suffered by it on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet is an allowable expenditure under section 37(1) of the Act notwithstanding the fact that the liability had not been actually discharged in the year in which the fluctuation in the rate of " foreign exchange had occurred. 2.4.36 To reiterate, thus the judicial decisions of the Hon. Supreme Court and various other Authorities are clearly in favour of the appellant on this issue. That apart, as discussed earlier, the transactions in foreign exchange were carried out during the normal course of the appellant's business and the restatement of the forward contract obligations was done as per AS-11 in a consistent manner over the years. In fact, the gain earned on such revaluation was offered to tax and accepted by the Ld AO in the respective years and there is no reason to arrive at a different conclusion merely because there was a loss during the year so much so that in AY. 2010-11, Ld. A.O. has taxed the gain of Rs. 15.18 crore on account of MTM Profit. What matters is whether the forward contract transaction was entered during the course of appellant's regular business or whether it is tainted with a colour of speculative transaction. Further, the aforesaid issue of allowing the loss on account revaluation of pending forward contracts was considered by the Honble. ITAT Mumbai bench in the case of M/s Bhavani Gems Vs ACIT CC-35 in dated 30/3/2011 for A.Y 2006-07 and the said loss was allowed as business loss and the issue was held to be covered by Special Bench decision in the case of DCIT Vs. Bank of Bahrain (supra). Therefore, in my considered opinion the facts of the appellant's case are fully covered by the above cited decisions of the Hon. Supreme Court and the ITAT Mumbai bench. 2.4.37 For the reasons set out above and keeping in view all the decided judgments of Hon'ble Supreme Court, various High Courts/AAR and Income Tax Appellant Tribunals, I am of the considered view that the appellant was indeed. eligible for incurring of losses of business by way of the 'marked to market' losses on forward contract for assessment year 2009-10. Accordingly, Ground No.2 is allowed.‖

Vinodkumar Diamonds Pvt. Ltd.(supra) cannot overwrite the judgment of Hon’ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254 (SC).

Sr. Nature of foreign currency exposure Amount No. (USD in million, 1 Exports receivables (i.e. overseas debtors) 19.22 2 Imports Payables (i.e. overseas creditors) 9.31 3 Bank loan 65.78 4 Advance from Overseas Customers 8.96 5 Closing Stock for export 91.44 Total 194.72 From the above facts, it is clear that the total amount of foreign currency exposure as on 31 March, 2009 amounts to USD 194.71 million approx. Considering the substantial foreign currency exposure and due to substantial fluctuation in foreign currency rates, the assessee entered into the forward contracts (FCs) with the Banks as integral part of the export import business with the aim to hedge and safeguard against the foreign exchange fluctuation of the US $ vis-à-vis the Indian currency, from time to time.

4. Whether on facts and circumstances .of the case, the Ld.CIT(A) erred in not appreciating the fact that Hon'ble Supreme Court in the case of CIT Vs. Gem India Manufacturing Co.(2001) 249 ITR 307 (SC) & Hon'ble High Court of Bombay in the case of London Star Diamond Co(I)Ltd.213 ITR 517 (Bom) had held that the diamond cutting & polishing amounts to processing of goods and not manufacturing of goods and decision relied upon in the case of M/s Sheetal Manufactures has not been accepted on merits.‖

10. We have heard the rival contentions of the parties and perused the material placed before us. We find that the claim of the assessee is that the business of cutting and polishing of diamonds is manufacturing and production of an article or thing as required for claiming additional depreciation u/s 32(1) (iia) of the Act. The AO disallowed the claim by observing that the assessee is not engaged in manufacturing or production of any article or thing. The CIT (A) relying on the decision of the Hon’ble Supreme Court in the case of Arihant Tiles & Marble Pvt. Ltd. 320 ITR 79 (SC) allowed the claim of the assessee vide Para 2.4.40 as under:- ―2.4.40 It is seen that in the earlier year, this claim has been allowed following the decision in the case of Sheetal Diamonds Ltd. in to 6689/Mum/2002 dated 23.3.2011 where the issue of cutting and polishing of diamonds whether constituted manufacturing activity or not was considered in detail by the Hon’ble ITAT, Mumbai Bench. In the aforesaid decision, reference was also made to the decision of Hon’ble Supreme Court in the case of Gen India Mfg. Co. 249 ITR 307 and the subsequent decisions of the apex Court in the case of Arihant Tiles and Marble (P) Ltd. 320 ITR 79 (SC), Vijay Ship Breaking Corpn. 314 ITR 309 (SC) and Empee Poly Yarn Pvt. Ltd. 320 ITR 665 to hold that t he assessee was engaged in the business of manufacturing of cutting and polishing rough diamonds and hence, it was eligible for deduction u/s 80 IA of the Act. Following the above said decisions, the appellant’s claim for additional depreciation u/s. 32(1) (ii) of the Act was allowed. As the facts obtaining in the current year are in pari material with the facts obtaining in earlier year in respect of the appellant’s claim of additional depreciation, this ground is allowed.‖ 11. We also find that the Tribunal in the case of Flawless Diamond India Ltd. Vs Addl. CIT (2014) 45 Taxmann.com 67 (Mum.) after considering the recent of the Hon’ble Supreme Court held that cutting and polishing of diamonds amounts to manufacturing or production of article or thing by observing in Para 16 as under:- ―16. Thus, from the aforesaid decision, it can be safely inferred that, what is required is the process undertaken for conversion of raw / rough diamonds into superior or polished diamond. In this case, as stated above, the assessee has duly placed on record the entire process and the stages through which the rough diamond undergoes for becoming the polished diamond, which is a separate and distinct product and has different usage. Such a process has neither been rebutted by the Revenue nor any other counter-opinion have been sought to contradict the assessee’s version of the process. Thus, in our opinion, once the entire process of cutting and polishing of diamond have not been rebutted and also the fact that the rough and polished diamond are two distinct commodity having different usage, not only in the common parlance but also in real sense, then it has to be understood that the cutting and polishing of diamond amounts to manufacturing or production of article or thing as envisaged for the purpose of claiming deduction under section 80- IC. Thus, the contention raised by the learned counsel before us is accepted that simply relying on the decision of Gem India Mfg. Co.

(supra) by the Revenue to deny the claim of deduction is uncalled for in the present case, especially in the wake of later decision of the Hon’ble Supreme Court in Heavens Diamond (supra) which has clarified this point. Accordingly, the decision and the conclusion drawn by the learned Commissioner (Appeals) for the year under appeal i.e., assessment year 2008-09 are set aside and assessee’s claim for deduction under section 80-IC is allowed.‖ Respectfully following the Coordinate Bench decision in the case of Flawless Diamond India Ltd. (supra), we hold that cutting and polishing of diamonds amounts to manufacturing or production of article or thing as envisaged for the purpose of claiming additional depreciation u/s 32(1) (iia) of the Act. Hence, we confirm the order of the CIT (A) on this issue and dismiss the Revenue’s appeal.