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Income Tax Appellate Tribunal, MUMBAI BENCHES “G”, MUMBAI
Before: Shri Amit Shukla, & Shri Ashwani Taneja
आदेश / O R D E R Per Ashwani Taneja (Accountant Member): This appeal has been filed by the Revenue against the order of Ld. Commissioner of Income Tax (Appeals), Mumbai- 27 {(in short ‘CIT(A)’}, dated 08.08.2014 passed against assessment order u/s 143(3) dated 30.03.2013 for the Assessment Year 2009-10 on the following grounds:
2 Gem Star Company “1.On the facts and circumstances of the case and in law, the Ld CIT(A) has erred in deleting the addition of Rs. 45,07,794/-made by the Assessing officer on account of disallowance of loss on foreign exchange forward contract without appreciating the fact that the said loss was a notional loss and hence cannot be allowed. 2.On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in treating the loss on account of revaluation of foreign exchange forward contract as business loss without appreciating the fact that the assessee had debited the provision for such losses which is nothing but a contingent liability and hence cannot be allowed as deductible expenditure u/s 37 of the IT. Act 1961. 3.On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in relying upon the decisions of Hon’ble Supreme Court in the case of ONGC vs CIT, Dehradun (322 ITR 180) and CIT vs. Woodward Governor India (P) Ltd (312 ITR 254) without appreciating that the facts of that case are entirely different from facts of the instant case. 4.The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.”
During the course of hearing, arguments were made by Shri B.B. Jokhakar, (AR) on behalf of the Assessee and by Shri A. Ramachandran, Departmental Representative (Ld. DR) on behalf of the Revenue.
The solitary issue raised in this appeal is with regard to deletion of the disallowance made by the AO on account of loss on foreign exchange forward contract by treating the same as notional loss.
3.1. During the course of assessment proceedings it was found by the AO that the assessee had booked mark-to-
3 Gem Star Company market loss on outstanding foreign exchange forward contracts. He disallowed the same by treating it as notional loss on revaluation of a liability that had not yet crystallized on the date of drawing balance sheet i.e.31.03.2009.
3.2. Being aggrieved the assessee filed an appeal before Ld. CIT(A) and made detailed submissions and relied upon many judgments in its favour in support of its claim. After considering the facts of the case and various judgments relied upon by the Ld. Counsel, it was found by Ld. CIT(A) that the impugned amount of loss was allowable to the assessee and therefore he deleted the disallowance made by the AO to the extent of Rs.45,07,794/-.
3.3. Being aggrieved, the revenue filed an appeal before the Tribunal.
3.4. During the course of hearing before us the Ld. DR relied upon the order of the AO whereas the assessee relied upon the order of the Ld. CIT(A) and also relied upon various case laws which have been relied upon by the Ld. CIT(A) for deciding this issue in favour of the assessee.
3.5. We have gone through the orders of the lower authorities as well as judgment relied upon by the Ld. CIT(A). It is noted by us that Ld. CIT(A) has analysed the facts of this case in detail and also various judgments
4 Gem Star Company which directly deal with this issue. It is noted that Ld. CIT(A) discussed and relied upon the judgment of Hon’ble Supreme Court in the case of Woodward Governor India (P) Ltd (312 ITR 254)(SC) wherein it was held that loss suffered by the assessee on account of exchange difference on the balance sheet date is an items of expenditure as on balance sheet date. Thus, if the assessee is following mercantile system of accounting and also applicable accounting standards, then deduction on account of exchange rate difference should be allowed to the assessee. It is further noted by us that similar view has been taken in various other judgments which have been discussed in detail and relied upon by the Ld. CIT(A) in its order viz: i. DCIT vs. Bank of Bahrain & Kuwait 41 SOT 290 ii. Bharat Earth Movers Ltd.245 ITR 428(SC) iii. ONGC vs. CIT, Dehradun 322 ITR 180(SC) iv. Rusabh Diamonds v. ACIT 34 taxmann.com 160 (Mumbai-Trib.)
3.6. It is further noted by us that after discussing the facts of the case and entire law, the Ld. CIT(A) has given detailed reasoning to decide this issue in favour of the assessee, the relevant observations of his order are reproduced hereunder: “2.3.20. Thus the judicial decisions of the Hon. Supreme Court and various other Authorities are clearly in favour of the appellant on this issue. The restatement of the 5 Gem Star Company 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. 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 of 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. 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. 2.4.21 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 which resulted in MTM loss, were carried out during the normal course of the appellant's business. What matters is whether the forward contract transaction was 6 Gem Star Company entered during the course or appellant's regular business or whether it is tainted with a colour of speculative transaction. In my considered opinion, the facts of the appellant's case are fully covered by the above cited decisions of the Hon. Supreme Court, Delhi High Court and the ITAT Mumbai Bench. Accordingly, this part of the ground is allowed.
3.7. Further, it is noted from the perusal of the order of the Ld. CIT(A) that he has properly discussed the facts of the case as well as appropriate position of law while deciding this issue. The facts brought before us are that assessee has been maintaining its accounts on mercantile system and has been following accounting system(AS)-11 with regard to the impugned transactions. The assessee has been consistently following this practice and no disallowance has ever been made while the assessments were also framed u/s 143(3) in the earlier years. In view of the given facts and legal position as discussed by the Ld. CIT(A) it is clear that the loss booked by the assessee had accrued to the assessee for the year under consideration, and hedging transaction was done by the assessee in the course of its business to cover the risk of fluctuation in foreign exchange involved in the business of the assessee. Under these circumstances, we find that Ld. CIT(A) has rightly allowed the loss after discussing the facts and applicable position of law. We do not find any justification to make interference in the well reasoned and detailed
7 Gem Star Company findings of the Ld.CIT(A). Nothing has been brought by the Ld. DR before us to contradict the factual analysis made by the Ld. CIT(A) or position of law as were discussed by the Ld. CIT(A). Under these cirumstnaces we uphold the order of the Ld. CIT(A) and dismiss the appeal filed by the Revenue. 4. In the result, this appeal filed by the Revenue is dismissed.
Order pronounced in the open court on 3rd June, 2016.