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TMI Blog2017 (1) TMI 673X X X X Extracts X X X X X X X X Extracts X X X X ..... ect/mistake in the finding of learned CIT(A) , which we confirm/sustain and the grounds raised in the Revenue appeal is dismissed. With Respect to the deduction disallowed by the learned CIT(A) arising out of fluctuation in foreign currency rates on forward foreign exchange contracts which are not backed by the export receivables but are stated to be backed with confirmed export orders against which the assessee had stated to have purchased stock and such stock being held by the assessee as on 31-03-2009 with respect to the confirmed export orders in hand , as against which the exports are stated to be made in subsequent financial year, needs verification by the AO of the contentions of the assessee , and hence interest of justice will be best served if the matter is set aside and restored to the file of AO for verification of contentions of the assessee and for fresh determination of the matter on merit in accordance with our directions as contained in this order . - I .T.A. No. 7311/Mum/2012, I .T.A. No. 112/Mum/2013 - - - Dated:- 7-11-2016 - SHRI C.N. PRASAD, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER For The Assessee : Dr. K. Shivaram For The Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as at year end . On revaluation of forward foreign exchange contracts, the assessee has claimed marked to market loss on these outstanding forward foreign exchange contracts amounting to ₹ 32,69,33,306/- and since these contracts have not been settled the assessee was asked to explain why this loss be not disallowed being notional loss. The assessee submitted before the AO that it is engaged in the business of import of rough diamonds, cutting and polishing the same and export of polished diamonds , whereby the assessee has exposure to foreign exchange due to transactions of imports and exports in foreign currency . Further, the assessee submitted that it had availed substantial bank finance in foreign currency, which is required to be settled in foreign currency only. In view of the same, it was submitted by the assessee that it has substantial exposure on account of fluctuation in foreign currency rates. Further the assessee submitted that it had entered into the forward contracts to hedge against the risk of fluctuation in foreign currency rates in respect of its exports and imports transactions. It was submitted that the contract for purchase and sale of foreign currenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts are concerned, it was observed by the AO these are neither assets nor liabilities having any value. Thus it was observed by the AO that forward contracts are not the ascertained asset/liability of the assessee and if valued at the reporting date of the financial statements would result only in an unascertained liability, asset and resulting loss or gain would be notional and such notional loss cannot be allowed as deduction. The A.O. further observed that as per the Act there is no provision or treatment for mark to market method of accounting and is governed by general principle of taxation. It was also observed that the Act does not allow deduction of any such notional loss for which the liability has not crystallized and there is no actual loss incurred/sustained by the assessee on account of dealing in forex derivatives until their final values are known. , thus, the A.O. disallowed the said loss vide assessment order dated 26.12.2011 passed by the AO u/s. 143(3) of the Act. 4. Aggrieved by the assessment order dated 26.12.2011 passed by the A.O. u/s. 143(3) of the Act, the assessee preferred an appeal before the ld. CIT(A). 5. Before the ld. CIT(A) the assessee submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served that the assessee was exposed to risk arising out of fluctuation in foreign exchange rate and as a prudent businessmen likely to hedge its risk. The ld. CIT(A) noted that assessee has booked all the forward contracts in respect of export receivables only. It was further noted that in addition to the opening outstanding forward contracts of 61,000,000 US dollars during the year under consideration , the assessee has booked forward contracts of 767,000,000 US dollar, utilized forward contracts of 72,406,591 US dollar, cancelled forward contracts of 6,000,000 US dollar and finally held the forward contracts of 59,293,409 US dollar at the year end. Thus, the assessee has entered into the forward contracts during the normal course of business and utilized the same for business by allowing them to run up to the date of contract. Further, there was a loss of ₹ 90,000 incurred on cancellation of forward contracts which is meager as compared to the volume of assessee s business, thus forward contracts were entered and utilized for business, was the observation of learned CIT(A). Thus from the notes to the accounts it was observed by the learned CIT(A) that the assessee was repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... racts were entered into for the export orders pending on hand which were backed by the stocks held by the assessee and actual exports had taken place in the subsequent financial year. The learned CIT(A) allowed the loss on the foreign exchange forward contracts to the tune of US $ 41,293,417 which were export receivable outstanding as at 31-03-2009 and the loss arising on forward foreign exchange contracts to the tune of excess amount of US $ 17,999,992 was not allowed by learned CIT(A) as the said foreign exchange forward contracts were not backed by underlying asset receivable in foreign exchange as at 31-03-2009 to back it up and hence it was held by the learned CIT(A) that the aforesaid forward contracts pending as on 31-03-2009 are not for the purposes of business and loss arising on revaluation of such contract is purely notional and speculative in nature and cannot be provided on the prudency principle in computing assessees income. Thus, the learned CIT(A) confirmed/sustained the disallowance of loss on revaluation of forward contracts amounting to ₹ 9,92,48,752 which were not backed by underlying asset receivable in foreign exchange to back it up and the loss incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port receivables but backed with confirmed export orders and stock held by the assessee as at year end are not allowed by learned CIT(A) which was to the tune of ₹ 9,92,48,752/- . It is submitted that these forward foreign exchange contracts were entered within the frame work of relevant RBI FEMA guidelines and are monitored by RBI. It is submitted that the assessee is regularly following this method of accounting whereby year-end restatement or marked to market gain or loss in respect of all assets or liabilities denominated in foreign currency are restated at prevailing foreign exchange rates as at year end . The restatement of forward foreign currency contracts is followed strictly as per AS-11 prescribed by ICAI. The ld. Counsel has also invited our attention to the written submissions and paper book whereby all the details of forward foreign exchange contracts were submitted. Our attention was drawn to the orders of authorities below.Our attention was also drawn to the audited financial statements and tax audit report of the assessee which are placed in paper book filed with the Tribunal (page 4-67/PB). The details of foreign exchange difference loss/profit are placed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9. In the rejoinder, the ld. Counsel for the assessee submitted that the decision of the Tribunal in the case of S. Vinodkumar Diamonds Pvt. Ltd. relied on by the ld. D.R. was duly considered in ACIT v. Venus Jewel in decided on 26/2/2016. The learned counsel for the assessee submitted that the Tribunal has given part relief to the assessee with respect to forward foreign exchange contracts which are backed with outstanding export receivables as at year end. The ld. CIT(A) denied the benefit of loss on account of revaluation of forward foreign exchange contracts as at year end which were backed by confirmed export orders supported by stock in hand held by the assessee towards those export orders , hence, this issue may be verified by the A.O. by considering the factual matrix of the case. 10. We have considered the rival contentions and also perused the material available on record including the case laws relied upon. We have observed that the assessee is engaged in the business of import of rough diamonds, cutting and polishing the same and export of polished diamonds. The assessee imports rough diamonds whereby the payments are made in foreign currency for such imports and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA no. 7012/Mum/2012 vide orders dated 26/02/2016 wherein the mark to market losses on unexpired/un-matured forward foreign exchange contracts as at year end were allowed keeping in view prevailing foreign exchange rates. The Hon ble Bombay High Court in a recent decision in CIT v. D. Chetan and Company in ITA no. 278 of 2014 vide orders dated 01-10-2016 has held that the activity of entering into foreign exchange forward contract to cover against variation in foreign exchange rate which would impact its business of import and export of diamonds was in the regular course of business only to safeguard against the loss on account of foreign exchange variation and cannot be categorized as speculative in nature but is a business activity. The Hon ble Bombay High Court dismissed the appeal of the Revenue in the case of CIT v. D. Chetan and Company(supra) on the grounds that no substantial question of law arises from the appeal and consequently decision of the tribunal in allowing mark to market losses of ₹ 78,10,000/- on forward foreign exchange contracts being not a notional loss was upheld. The AO has disallowed the entire loss on threshold on revaluation of forward foreign exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e subsequent financial year. The learned CIT(A) allowed the loss on the foreign exchange forward contracts to the tune of US $ 41,293,417 which were backed by export receivable outstanding as at 31-03-2009 and marked to market loss on forward foreign exchange contract of 22,76,84,554/- was allowed by learned CIT(A) as the same were backed by export receivable outstanding as on 31-03-2009. The ld. DR could not show us any perversity in the afore-stated finding of learned CIT(A). In our considered view, such marked to market losses with respect to the unsettled/un-matured foreign currency forward contracts on account of revaluation at the year end on the basis of exchange rates prevailing as at year end should be allowed to the assessee as business loss as the same is supported by export receivables outstanding as at year end arising out of normal trading activities of export-import of diamonds undertaken by the assessee. In our considered view , the said loss of ₹ 22,76,84,554/- arising out of forward foreign exchange contracts entered into to hedge against exchange fluctuations and which are backed by the underlying exposure in foreign currency towards exports of diamonds aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut are stated to be backed with confirmed export orders against which the assessee had stated to have purchased stock and such stock being held by the assessee as on 31-03-2009 with respect to the confirmed export orders in hand , as against which the exports are stated to be made in subsequent financial year, needs verification by the AO of the contentions of the assessee , and hence interest of justice will be best served if the matter is set aside and restored to the file of AO for verification of contentions of the assessee and for fresh determination of the matter on merit in accordance with our directions as contained in this order . If after verification and enquiry it is found by the AO that the said forward foreign exchange contracts are backed by stock purchased and held by the assessee as at year end which are backed by purchased for executing confirmed export orders in hand , which export orders are executed in next financial year , the loss shall stand allowed after such verification and enquiry by the AO as the assessee by holding confirmed export orders denominated in foreign currency and holding stock for execution of those export orders as at year end has definitel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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