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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI RAJENDRA & SHRI SAKTIJIT DEY
आदेश / ORDER शक्तिजीि दे, न्याययक सदस्य के द्वारा / PER SAKTIJIT DEY, J.M.
This is an appeal by the assessee against the order dated 14th February 2012, passed by the learned Commissioner (Appeals)–9, Mumbai, for the assessment year 2008–09.
M/s. M. Suresh Co. Pvt. Ltd. 2 2. At the outset, the learned Counsel for the assessee submitted that he does not want to press ground no.1, relating to disallowance under section 14A of the Act. Accordingly, ground no.1, is dismissed as “not pressed”.
The only other surviving issue, as raised in ground no.2, relates to disallowance of loss claimed on cancellation of forward exchange contracts amounting to ` 1,50,54,490.
Briefly the facts relating to the issue in dispute are the assessee a company is engaged in the business of export manufacturing and trading of diamond. For the assessment year under dispute, the assessee filed its return of income on 29th September 2009, declaring total income of ` 18,35,11,270. During the assessment proceedings, the Assessing Officer noticed that the assessee has debited an amount of ` 1,50,54,490, as exchange difference. On verifying details, he found that such loss was on account of forward contracts in foreign currency. On verifying the factual details, it was noticed by the Assessing Officer that the assessee has entered into 50 contracts and all of them have been cancelled without taking actual delivery. He observed that as per section 43(5), any transaction which has been settled other than by way of actual delivery is to be considered as speculative in nature. Hence, as per section 73 r/w CBDT Instructions
M/s. M. Suresh Co. Pvt. Ltd. 3 no.3 of 2010 dated 23rd March 2010, cannot be allowed as business loss. He, therefore, propose to disallow the same. Though the assessee submitted a detailed explanation stating therein that such loss has been incurred in the course of its regular business but the Assessing Officer did not find merit in the submissions of the assessee. He observed that the assessee has not been able to link any of the forward contract with specific order and ultimately, he treated the loss claimed as speculative and disallowed the same. Being aggrieved of such disallowance, the assessee preferred appeal before the learned Commissioner (Appeals).
The learned Commissioner (Appeals) also confirmed the disallowance made by the Assessing Officer. While confirming the disallowance, the learned Commissioner (Appeals) also observed that the loss shown is exclusively due to forward contract against which no actual delivery of foreign exchange was made. He further observed that all forward contracts were cancelled. They were neither settled by actual delivery nor by transfer of commodity. In this context, he also relied upon certain judicial precedents.
The learned Counsel for the assessee referring to the details of forward contract submitted that all the forward contracts were cancelled during the year. Referring to the details of forward contracts,
M/s. M. Suresh Co. Pvt. Ltd. 4 again the learned counsel submitted that the export / import made by the assessee against forward contract is always more. He submitted that in assessee’s own case, the Tribunal has allowed the loss on account of forward contract. In this context, he referred to the order dated 25th May 2009 in ITA no.4821/Mum./2007, for the assessment year 2004–05. He submitted that the Tribunal, following the decision of the Hon'ble Jurisdictional High Court in CIT v/s Badridas Gauridu India Ltd., [2004] 261 ITR 256 (Bom.), has allowed assessee’s claim of loss on forward contract. In this context, he also referred to a number of other decisions of the Tribunal, Mumbai Bench, including the order passed in ACIT v/s Mahindra Brothers, ITA no.1880/Mum./ 2005, dated 29th April 2009, which was confirmed by the Hon'ble Jurisdictional High Court.
The learned Departmental Representative submitted before us, the facts in Badridas Gauridu India Ltd. (supra) are different as in that case, loss resulted on account of failure of contract. However, in assessee’s case, the contracts were cancelled prematurely. Hence, the ratio laid down in Badridas Gauridu India Ltd. (supra) would not apply. The learned Departmental Representative referring to the decision of the Tribunal, Mumbai Bench, in London Star Diamond Co. Ltd. v/s DCIT, ITA no.616/Mum./2012, dated 11th October 2013, submitted, when the contracts are prematurely cancelled, the assessee cannot
M/s. M. Suresh Co. Pvt. Ltd. 5 claim loss. Referring to the observations made by the Assessing Officer, the learned Departmental Representative submitted, onus is on the assessee to prove hedging as the allegation of the Assessing Officer is, assessee has not entered into any contract or taken actual delivery. He, therefore, submitted, to verify the fact as to whether such contracts were linked to any export or whether they were cancelled before maturity, the issue may be restored back to the file of the Assessing Officer.
In the rejoinder, the learned Counsel for the assessee submitted that except three contracts, all other contracts were cancelled after maturity. Even in respect of these three contracts, the assessee has earned profit. He further submitted that the assessee has received contract from foreign company for exporting diamond worth U.S. $ 90,00,000 and the forward contracts are linked to these transactions. Similarly, the assessee has placed orders for import of diamond worth U.S. $ 10,00,000 which are also linked to some forward contract. He, therefore, submitted that the allegation of the Department that there is neither any nexus between forward contracts and export / import nor actual delivery was taken is incorrect.
We have considered the submissions of the parties and perused the material available on record. On a perusal of the list of forward
M/s. M. Suresh Co. Pvt. Ltd. 6 contract and related transactions details of which are at Page–1 and 2 of the paper book, it is noticed that all such contracts were cancelled after maturity. Only in respect of two contracts, dated 11th April 2007 and 26th April 2007, which are for export of goods, the contracts were cancelled before maturity but the assessee has booked profit. Similarly, forward contract dated 23rd August 2007, for import was also cancelled before maturity but the assessee has again booked profit. Thus, from the aforesaid fact, it is very much clear that forward contracts, except the above referred three contracts were cancelled after maturity. Therefore, the allegation of the Department that forward contracts were cancelled prematurely is without any basis. That being the case, the principle laid down by the Hon'ble Jurisdictional High Court in Badridas Gauridu India Ltd. (supra) clearly applies. Moreover, in assessee’s own case for the assessment year 2004–05, the co–ordinate bench has decided the issue in assessee’s favour in ITA no.4821/Mum./2007, following the principle laid down by the Hon'ble Jurisdictional High Court in Badridas Gauridu India Ltd. (supra). Therefore, factually as well as by applying the principle of law, we are of the view that the loss claimed by the assessee cannot be treated as speculative loss and as a consequence it has to be allowed. We order accordingly.
M/s. M. Suresh Co. Pvt. Ltd. 7
In the result, assessee’s appeal stands partly allowed. Order pronounced in the open Court on 30.10.2015