JANAM CORPORATION P.LTD,MUMBAI vs. DCIT 5(2), MUMBAI

आदेश / O R D E R Per Ashwani Taneja (Accountant Member): These appeals involve common issues, and therefore these are being decided together:

"1. In disallowing a sum of Rs.5,18,875/- being loss on account of mark to market of derivative contracts done as per Accounting stipulations. 2. in disallowing a sum of Rs.14,77,500/- being loss on cancellation of forward exchange contracts during the year. 3.1. in confirming a disallowance u/s.14A by mechanically applying rule 8D. 3.2. In making various averments about interest bearing funds being use for making investments without realizing that there was no such statement even by the Assessing Officer. "

3.1. The brief facts are that during the year, the assessee claimed a loss of Rs.5,18,875/- on account of Mark-to-Market loss on futures and options. The said loss in futures and option was accounted for based on treatment required as per guidance noted on accounting for equity index and equity tax future and options, issued by the Institute of Chartered Accountant of India. But the AO treated the said loss as contingent in nature and disallowed it as not being in the nature of business loss. The assessee carried the matter before the Ld. CIT(A), wherein it submitted as under: “•The above loss has been accounted for following guidance note issued by the ICAI and is thus a part of the Generally Accepted Accounting Principles (GAAP), followed in India and is a method adopted consistently by the appellant. Any loss which arises on account of adoption of accounting policies which are regularly followed is allowable as a deduction and this view is supported by the Supreme Court judgment in case of Woodward Governor 312 ITR 254. • A parallel can be drawn to a consistent method of valuing stock in trade at cost or market value whichever is lower. Where stock is valued at market value which is lower than cost, the said loss is allowed to an assessee, notwithstanding that this loss may or may not actually materialize when the stock is ultimately sold. The loss on mark to market of 4 Janam Corporation derivatives held, income form which is taxed as business income, is on the exact some footing. • It is also to be noted that the said loss is different form a contingent liability which is a liability for an expense which may or may not be payable. A loss cannot be equated with an expense / liability incurred. • We also submit that a CBDT instruction cannot be the base for the levy of a tax or for the disallowance of an item which is otherwise not disallowable as per the legislated tax law.”

3.2. But, Ld. CIT(A) did not allow the loss on the ground that loss was not allowable since the liability had not crystallized during the year under consideration. It was further held by him that the loss was not allowable also for the reason that it was speculative in nature. Being aggrieved, assessee filed appeal before the Tribunal.

3.3. During the course of hearing before us, Ld. Counsel of the assessee has reiterated the submissions made before Ld. CIT(A) and further submitted that this issue is covered in its favour on the basis of various judgments of the Tribunal. Reliance has been placed on the following judgments: i. Prime Woven Ltd. copy attached ii. Edelweiss Capital Ltd. ITA No.5324/M/2007-copy attached iii. Woodword Governor India Ltd. –Supreme Court 312 ITR 254

5 Janam Corporation 3.4. In addition to the above, the Ld. Counsel also placed copy of judgments passed by the Mumbai Bench of the Tribunal in the case of Perfect Circular India Ltd. (ITA No.7241/Mum/2012 dated 27.03.2015. On the other hand, Ld. DR has placed reliance on the orders of the lower authorities.

3.5. We have gone through the submissions as well as judgment placed before us. It is noted that in all these judgments, it has been held that mark-to- market loss is not contingent in nature and therefore the loss arising in such transactions was allowable. Relevant Paras’ from one of the judgments in the case of Perfect Circular India Ltd. (supra) are reproduced herein: “6. It may be further observed that the Hon'b!e Supreme Court in the case of 'CIT v. Woodward Governor India (P.) Ltd.' (2009) 179 Taxman 326, while dealing with the question as to whether the additional liability arising on account of fluctuation in the rate of exchange can be allowed to be adjusted pending actual payment of the varied, has observed that "expenditure" as used in section 37 in income Tax Act may in the circumstances of a particular case cover an amount which is a "loss" even though said amount has not been given from the pocket of the assessee.

7. While dealing with the issue of the nature of forward contracts in commodity derivatives, the co-

6 Janam Corporation ordinate bench of the Tribunal in the case of DCIT vs. Kotak Mahindra Investment Ltd.' relating to A.Y. 2008- 09,{(2013) 59 SOT 4; 35 taxrnann.com 225 (Mumbai- Trib.)] (judicial member of the bench being party to that order also) has observed that such type of forward contracts are not purely contingent in nature rather loss or profit is somewhat ascertainable in such type of contracts because of constant watch on daily market rates. The quantum of profit or loss though not actually ascertainable can be anticipated in view of the trends of the market. The difference between the predetermined price and market price is settled daily on mark-to-market basis. In such type of contracts, it is not the stock value which is subject matter of the contract rather the contract itself is the stock in trade. Contracts in such type of cases can be squared off before the arrival of actual performance of date of contract, as the profit and loss are calculated on daily basis and the margins are settled accordingly.”

3.5. It is noted that judgment of Kotak Mahindra Investment Ltd has been authored by one of us ( Hon’ble Judicial Member). Thus, respectfully following the judgments of Coordinate Bench, we allow the loss claimed by the assessee. As a result ground no.1 of assessee’s appeal is allowed.

7 Janam Corporation on cancellation of forward exchange contracts incurred during the year.

4.1. Brief facts are that the assessee had claimed loss of Rs.14,77,450/- on account of cancellation forward derivative of foreign exchange contracts. The assessee explained to AO during the course of assessment proceedings that the said loss was covered by proviso (d) to section 43(5) of the Act. But the AO held that transactions of foreign derivatives do not satisfy any of the conditions given under proviso (d) to section 43(5), and for the reasons recorded by him in the assessment order he concluded that foreign derivatives transactions were speculative transactions.

4.2. Being aggrieved, the assessee contested the matter before the Ld. CIT(A) wherein it was submitted that the speculative transactions are defined u/s 43(5) of the Act. The transactions entered into by the assessee were covered by the exceptions provided by the sub-section. It was further submitted that the assessee’s business profits were exposed to fluctuations in the rate of foreign currency and to guard against that, the assessee entered into forward contracts for hedging foreign currency. Therefore, these transactions were not speculative in nature. Once they are not speculative in nature, any profit/loss on cancellation of these contracts would be a business gain/ loss since the underlying transaction also becomes hedged and the corresponding loss/gain thereon gets treated as a business transaction. Reliance was placed on the 8 Janam Corporation judgment of Hon’ble Bombay High Court in the case of Badridas Gauridu (P) Ltd reported at 261 ITR 256, and the judgments of Mumbai ITAT in the case of Intergold reported at 27 SOT 239 and Voltas International 31 DTR 432 in this regard. Accordingly, the assessee’s plea was that the Ld. AO was incorrect in treating this as a speculative loss. But the Ld. CIT(A) did not accept the claim of the assessee and held these transactions to be speculative in nature, and therefore, confirmed the disallowance made by the AO.

4.3. Before us, Ld. Counsel of the assessee has submitted that the assessee is an exporter and forward contracts were entered into for hedging the exposure to fluctuation in foreign currency. It was further submitted that contracts were entered for booking remittance and certain contracts were cancelled. Our attention was drawn on the chart containing details of all the contracts which were utilized or cancelled during the year under consideration. It was submitted that this issue was covered in favour of the assessee by various judgments, and specific reliance was placed on the following judgments: (i) London Store D. Co. India Pvt. Ltd. ITAT) (ii) Jamin Jewellery Export Pvt. Ltd. ITA No.5770/Mum/2012 4.4. On the other hand, Ld. DR relied upon the orders of the lower authorities and also submitted that the assessee was not able to show properly from the facts that these were purely hedged transactions to cover the risk undertaken by assessee

9 Janam Corporation on account of its expose only. It was submitted that the assessee has entered into the transactions more than the requirement of covering risk of the exposure undertaken by it on account of exports earning.

4.5. We have gone through the submissions made by both the sides. It is noted by us that assessee’s claim is correct that this issue has been principally decided in favour of the assessee on the basis of aforesaid judgments relied upon by the assessee. Hon’ble Bombay High Court in the case of Badridas Gauridu (P) Ltd, supra has decided this issue in favour of the assessee. However, Ld. Counsel was not able to demonstrate before us, on facts that hedging of foreign currency was done purely and limited upto the exports transactions of the assessee only. Therefore, this issue is being sent back to the file of the AO to enable the assessee to show to the AO that all the transactions in this regard were done by the assessee to cover the risk and limited to the exposures of the assessee in the export receipts. If the transactions are found not related with the exports transactions or if these are found to be more than the expected exports receipts, then these shall not be allowable to the assessee and would be held as speculative in nature. The assessee is free to raise all factual and legal issues in this regard before the AO. The AO shall give full opportunity of hearing to the assessee in this regard, and shall keep in mind the ratio of the decision of Hon’ble Bombay High Court in the case of Badridas Gauridu (P) Ltd, supra, as well as other judgments as may be made

10 Janam Corporation available by the assessee at that time, while deciding this issue afresh. This ground is allowed for statistical purposes.

5.1. The brief facts are that the assessee earned dividend income of Rs.9,21,593/- during the year. The AO made disallowance under Rule 8D(2)(III) @ of 0.5% of the average amount of investments.

5.2. Being aggrieved, the assessee contested this issue before the Ld. CIT(A) wherein no relief was given and disallowance was confirmed.

5.3. Before us, Ld. Counsel of the assessee has submitted that the assessee has made investment in the partnership firm and that should not be considered for computing disallowance of expenses @ of 0.5%. He has placed reliance on the judgment of Hon’ble Bombay High Court in the case of Delite Enterprises (ITA No.110 of 2009) for the proposition that if no income has been earned form the partnership firm then the investment made under the said firm and cannot be considered for computing disallowance under rule 8D. On the other hand Ld. DR has relied upon the order of Ld. CIT(A).

11 Janam Corporation 5.4. We have gone through the submission made by both the sides. It is noted from the perusal of the balance sheet that the assessee has made investment in the partnership firm, which has been considered by the Ld. AO by computing average value of investment for the purpose of making disallowance under rule 8D. It is further noted by us that no profit has been earned by the assessee from the said firm rather share of loss has been reflected in the computation of income. It has been held by Hon’ble Bombay High Court in the case of CIT vs. Delite Enterprises (supra) that in case no profit has been earned from the partnership firm, then it cannot be considered for making disallowance u/s 14A. Thus, respectfully following the judgments of Hon’ble Bombay High Court, we decide this issue in favour of the assessee and direct the AO to exclude the amount of the investment made in the partnership firm, as has been shown in the balance sheet by the assessee. This ground is partly allowed.

Now, we take up ITA No.351/Mum/2014:

12 Janam Corporation 8. In the result, these appeals are partly allowed.

Order pronounced in the open court on 6th January, 2016.