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TMI Blog2015 (5) TMI 606X X X X Extracts X X X X X X X X Extracts X X X X ..... hange is allowable deduction. The detailed finding recorded by CIT(A) to the effect that loss on account of revaluation of pending forward contracts was revenue in nature, as per para 5 & 6, has not been controverted. Accordingly, we do not find any reason to interfere in the order of CIT(A) deleting the disallowance of loss on account of revaluation of pending forward contract. - Decided in favour of assessee. - ITA No.2610/Mum/2013, ITA No.2611/Mum/2013 - - - Dated:- 27-3-2015 - Shri R.C.Sharma And Shri Sanjay Garg JJ For the Appellant : Shri Pavan Kumar Beerla For the Respondent : Shri K. Shivram ORDER Per R.C.Sharma (A.M.) : These appeals are filed by the revenue against the order of CIT(A), for assessment year 2009-10 in respect of two different assessee in the matter of order passed u/s.143(3) of the I.T.Act. 2. The only grievance of the revenue relates to CIT(A) s action in holding that mark to market loss arising on revlauation of forward contract agreements on the closing date of accounting year is not a notional loss and, therefore, allowable. 3. Rival contentions have been heard and record perused. Facts in brief are that assessee is en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss. It is also a fact that the aforesaid risk is not bought by the appellant independent to the business carried on by him. It is only with an intention to mitigate the risk associated with business the appellant has entered into forward exchange contracts. Therefore, what needs to be seen is whether the risk which appellant has hedged by way of a forward contract has an underlying asset or a liability by way of debtors or creditors. It is only in this sense of the matter, courts have held that the profit or loss arising out of forward contracts either on maturity or on cancellation of such contracts forms part of the business income. In other words, the forward contract entered during the course of business creates a legal liability irrespective of the fact that whether it matures during the accounting year or beyond the accounting the year. Therefore, it is not correct to state that the contract does not result in an asset or a liability and hence its revaluation does not arise. 5.4 To consider an example, appellant is an exporter and has exported goods worth 20000 US dollars on 5th February with a credit period of 90 days. The prevailing exchange rate on s February was S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stence, duly supported by an underlying asset and the contract having been entered during the course of business and further that the exchange rate as on date of entering the contract and as at the year- end being ascertainable, due effect of the contract at the year-end has to be considered while assessing appellants income. Here, it is not out of place to mention that the upper limits of exposure to forward contracts are always regulated by the RBI guidelines that they are allowed only to certain extent of receivables or payables and not to the full extent. Further banks also insist on collecting margins in case the movement of forward contracts before maturity is against the exporter/importer. In other words, the entire gamut of the impugned transactions is integral to the appellants business and it cannot be called a contingent transaction. There is no merit in the AO's argument in treating the impugned transaction as independent to that of appellants business and state that the flow of benefit is not known or it depends on anyone of the various events listed by him. In fact the AO has failed to see that such events are part and parcel of the appellant's business and no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following have to be taken into account (I) whether the system of accounting followed by the assessee is mercantile system, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due and before it is actually received; (ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bona fide; (iii ) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains; (v) whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is' as per nationally accepted accounting standards; (VI) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation. 5.9 In the case of DCIT vis. Bank of Bahrain and Kuwait (ITA Nos. 4404 1883/Mum.l2004) the Special Bench of Jurisdi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess and the restatement of the 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 accepted and brought to tax in the respective years and there is no reason to arrive at a different conclusion at present merely because there is a loss during the year. Apparently, the AO was of the view that the appellant is not a dealer in foreign exchange unlike the Bank of Bahrain, and therefore the said decision is not applicable to the facts of the case. It is not out of place to mention that the Hon. Supreme Court, in the case of ONGC cited above, upheld the same principles that were laid down in the case of Woodword Governor, and the loss was held allowable in similar circumstances, where the business of ON GC is not f~at of a foreign exchange dealer. Further, it is not the nature of business or the stock dealt with i.e., currency or commodities or goods like diamonds in the present case that matters. 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. At present, the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od where in end restatement of Mark to Market gain or loss in respect of all assets or liabilities denominated in foreign currency i.e. Debtors, Creditors, Loan Forward Contract, is being recognized as gain or loss in profit loss account. 6. As per assessee s nature of business being export, it has certain receivables on foreign exchange at any point of time during the year, thus, consistently exposed to the risk arising out of the fluctuation in foreign exchange rates. Such risk is integral to the assessee s business with intention to mitigate the risk associated with the business the assessee has entered into foreign exchange contracts. Thus what needs to be seen is whether the risk which assessee has hedged by way of a forward contract has an underlying asset or a liability by way of debtors or creditors. Thus, forward contract entered during the course of business creates a legal liability irrespective of the fact that whether it matures during the accounting year or beyond the accounting year. Since legally tenable forward contract is in existence, dully supported by an underlying asset and the contract having been entered during the course of business and further that ..... X X X X Extracts X X X X X X X X Extracts X X X X
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