ASST CIT 16(3), MUMBAI vs. RATANDEEP IMPEX, MUMBAI

As could be seen from the ground raised, the Department is aggrieved with the decision of the learned Commissioner (Appeals) in allowing assessee’s claim of mark to market loss of ` 2,88,07,401.

Brief facts are, the assessee a partnership firm is engaged in the business of export of diamonds. For the assessment year under consideration, assessee filed its return of income on 29th September 2009, declaring total loss of ` 4,07,15,499. In the course of assessment proceedings, the Assessing Officer on verifying the accounts of the assessee has debited an amount of ` 2,88,07,401, towards loss on account of foreign exchange forward contract. The Assessing Officer, therefore, called upon the assessee to justify the claim of loss by observing that the loss being a notional loss on valuation of a liability which has not been crystallized cannot be allowed. In response to the query raised by the Assessing Officer, it was submitted by the assessee that as per the Accounting Standard– 11 of ICAI, the assessee has to account for the loss since there is a contractual liability on the part of the assessee with the banks to buy / sell US dollar at a future date beyond 31st March 2009 and its magnitudes needs to be estimated with reasonable certainty on the date of drawing the Balance Sheet on 31st March 2009. It was, therefore, stated that the loss claimed not being a notional loss has to be allowed. In support of such contention, assessee relied upon the decision of the Tribunal in DCIT v/s Bank of Bahrain & Kuwait, and 1883/Mum./2004, and the decision of the CIT v/s Woodward Governor (India) P. Ltd., [2009] 312 ITR 354 (SC), the 3 M/s. Ratnadeep Impex Assessing Officer after considering the submissions of the assessee, however, was not convinced with the same. Deliberating upon the nature of forward contract and consequential gain / loss for outstanding foreign exchange, the Assessing Officer finally concluded that the claim of loss being notional one on a contingent liability cannot be allowed. Being aggrieved of such disallowance of loss, assessee preferred appeal before the learned Commissioner (Appeals).

The learned Commissioner (Appeals) after considering the submissions of the assessee and examining the nature of forward contract found that these contracts have a maturity profile which coincides with expected dates of foreign currency receivables or payables and quantum involved in such foreign contracts do not exceed the quantum of exposure to foreign currency receivables / payables. He also found that the assessee had been consistently following a method of accounting wherein the year end re–statement or mark to market gain or loss in respect of all assets and liabilities, including forward contract of foreign currency are recognised as profit or loss in Profit & Loss account, along with the exchange difference of exports, exchange difference in imports and exchange difference on borrowings in foreign currency. He also observed that no disallowance has been made to any of these accounting entries except the loss of outstanding foreign exchange forward contract amounting to ` 2..88

Learned Departmental Representative supporting the reasoning of the Assessing Officer submitted, the liability of the assessee being contingent in nature the loss on such liability is notional, hence, the learned Commissioner (Appeals) was not justified in allowing assessee’s claim. In support of such contention, the learned Authorised Representative relied upon the decision of the Tribunal, Mumbai Bench, in S. Vinod Kumar Diamonds Pvt. Ltd., Mum./2013 dated 3rd May 2013.

Learned Authorised Representative on the other hand, strongly supporting the view expressed by the first appellate authority submitted, the issue is otherwise covered by the decision of the Tribunal, Mumbai Bench, in assessee’s own case for the assessment year 2007–08, wherein under identical facts and circumstances, the Tribunal allowed assessee’s claim of loss on foreign exchange forward contract. As far as the decision of S. Vinod Kumar Diamonds Pvt. Ltd. (supra), relied upon the Department, learned Authorised Representative submitted, the said decision is not applicable as held

We have considered the submissions of the parties and perused the material available on record in the light of the decisions referred to by both the parties. The fact that the assessee is an exporter of diamond and the forward contracts have been entered into with the banks in respect of import and export made by the assessee in the regular course of business has not been disputed by the Assessing Officer. The Assessing Officer has disallowed assessee’s claim of loss only for the reason that the liability arising out of such contract is not ascertained, hence, the loss is a notional one. In our view the reasoning of the Assessing Officer is not acceptable. As rightly held by the learned Commissioner (Appeals), applying the ratio laid down in Bank of Bank of Bahrain & Kuwait (supra) and Woodward Governor (India) P. Ltd. (supra), mark to market loss has to be allowed if the assessee has entered into forward exchange contract in respect of 7 M/s. Ratnadeep Impex import / export. There is no allegation by the department that any of forward foreign exchange contract was cancelled before the date of maturity. In fact, in assessee’s own case for the assessment year 2007–08, the co–ordinate bench of the Tribunal while deciding the issue in ITA no.4861/Mum./2011 dated 19th April 2014, has allowed assessee’s claim of loss on foreign exchange forward contract entered into with the Banks in the regular course of business. The Department has not brought to our notice any material difference in facts to take a contrary view in the impugned assessment year. Moreover, the reasoning of the learned Commissioner (Appeals) while allowing the appeal being on the basis of sound principle supported by the ratio laid down in judicial precedents referred to by him, we do not see any reason to interfere with the same. Accordingly, upholding the order of the learned Commissioner (Appeals), we dismiss the ground raised by the Department.