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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI R.C. SHARMA, AM & SHRI MAHAVIR SINGH, JM
PER MAHAVIR SINGH, JM:
This appeal by revenue is directed against the order of CIT(A)-27, Mumbai in Appeal No. CIT(A)-27/ACIT-16(3)/2011-12 vide order dated 27.02.2013. Assessment was framed by ACIT-16(3), Mumbai u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as “the Act”) for AY 2009-10 vide his order dated 22.12.2011.
The only issue in this appeal of revenue is against the order of CIT(A) in holding that the loss arising on revaluation of forward exchange contracts on the closing date of accounting year treating the same as notional loss. For this, assessee has raised following ground no.1: “1. Whether on the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in holding that ‘Mark-to-Market’ loss of rs.39,87,645/- arising on re-valuation of forward exchange contracts on the closing date of accounting year is not a notional loss and, therefore, allowable.”
3. Briefly stated facts are that the assessee is engaged in the business of import and export of diamonds and substantial amount of turnover is denominating in foreign currencies. The assessee induced working capital Navin Mehta & Co. Asst. Year 2009-10 facilities from banks and some of which are also denominating in foreign currencies. According to assessee, it carries currency risk in respect of his stock and it is most likely sold by way of exports. For this, assessee has entered into forward contract to hedge these currency risk associates with normal business transactions. According to him, these derivative contracts are entered into with the framework of RBI guidelines. According to assessee, the intent of entering into derivative contracts was to safeguard itself against exchange fluctuation risk on foreign currency receivables or payables. These derivative transactions have either been in respect of sale of foreign currency in respect of its exposure to foreign currency receivables or purchase of foreign currency in respect of its exposure to foreign currency payables. It was claimed that these contracts generally have a maturity profile which coincides with expected dates of foreign currency receivables or payables and the quantum involved in derivative contracts does not exceed the quantum of exposure to foreign currency receivables/payables. It was claimed that the assessee is following consistently accounting method wherein year end restatement or Mark to Market gain or loss in respect of all assets or liabilities denominated in foreign currency i.e. Debtors, Creditors, Loan & Forward Contract etc. are being recognized as gain or loss in P&L Account. But the AO treated the loss as notional loss and disallowed the same. Aggrieved, assessee preferred appeal before CIT(A), who also confirmed the action of AO. Aggrieved, now assessee is in second appeal before Tribunal.
We have heard rival submissions and gone through facts and circumstances of the case. We find that the assessee has recognized gain of Rs.64,11,705/- during the same year by restating the receivables at closing rates. We find that as on 31.03.2009, the assessee has outstanding receivable in foreign currency of US $ 56,76,895 which was restated at closing rate and gain of Rs.64,11,705/- has been recognized as income. Similarly, in order to hedge risk arising out of variation in exchange rate, assessee had entered into Forward Contracts for sale of US$18,67,746 which was pending maturity as at year end i.e. 31.03.2009. In respect of these contracts, it has recognized loss of Navin Mehta & Co. Asst. Year 2009-10 Rs.39,87,645/- by revaluing the same at the rate prevalent on year end. Ld. counsel for the assessee before us stated that the issue is squarely covered by the decision of Hon’ble Supreme Court in the case of CIT Vs. Woodward Governor (2007) 294 ITR 451 (SC), wherein it has been held that the liability arising on account of fluctuation in the rate of exchange in respect of loans taken for revenue purposes was allowable as deduction u/s 37(1) in the year of fluctuation in the rate of exchange and not in the year of repayment of such loans. The actual cost of imported assets acquired in foreign currency is entitled to be adjusted u/s 43A ,prior to the amendment, on account of fluctuation in the rate of exchange at each balance sheet date, pending actual payment of the varied liability. It is held that the term “expenditure” in s. 37 covers an amount which is a “loss” even though the said amount has not gone out from the pocket of the assessee. The “loss” suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure u/s 37(1). In similar way, the profits are also to be computed in accordance with commercial principles and accounting standards. In the present case before us also, the facts are identical and loss claimed by assessee was claimed as expenses and in earlier years gain was computed as income.
We also find that ITAT, Mumbai Bench in the case of DCIT Vs. Bank of Bahrain & Kuwait in & 1883/Mum/2004 (reported in 41 SOT 29) has allowed Marked to Market loss on account of revaluation of outstanding forward contracts at the closing rate. Respectfully following the case laws and in the given facts of the case, we are of the view that the loss claimed by the assessee is allowable loss. The CIT(A) has rightly allowed the claim of the assessee and we confirm the same. Appeal of revenue is dismissed.
In the result, appeal of revenue is dismissed. Order pronounced in the open court on 7th April, 2016.
Sd/- Sd/- (R.C. SHARMA) (MAHAVIR SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Dated 7th April, 2016
Navin Mehta & Co. Asst. Year 2009-10