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TMI Blog2017 (8) TMI 851X X X X Extracts X X X X X X X X Extracts X X X X ..... standing / open foreign exchange forward contracts and the same is sole subject matter of this appeal. 3. During Assessment proceedings, the assessee explained that the impugned loss represent losses on account of mark-to-market revaluation of a liability that has not yet crystallized and the was in tune with Accounting Standard-11 issued by the Institute of Chartered Accountants of India. However, not convinced, Ld. AO opined that the same being a notional and contingent loss was not allowable to the assessee. Finally, the loss was determined after disallowing this loss claimed by the assessee. 4. Aggrieved, the assessee contested the same successfully before Ld. CIT(A) vide impugned order dated 27/02/2013 where it was contended that the assessee, by following consistent accounting policy, has been restating all the foreign denominated assets as well as liabilities at year-end date to equivalent Indian currency and recognizing the resultant gain / loss in the profit & loss account. The attention was drawn to the fact that the assessee, in similar fashion, recognized gain on receivables for Rs. 331.86 Lacs in the profit & loss account. Reliance was placed on the decision of Speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 20000 US dollars on 5th February with a credit period of 90 days The prevailing exchange rate on 5th February was Rs. 45 per dollar and the export proceeds are accordingly realizable at that rate on 5th May i.e. beyond the accounting year. On 5th March the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tering 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 any one 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 not external to it. Therefore, whatever may be the result of the events listed out by the AO, such result has to be treated as business result at the time of its happ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 tosses 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 v/s. Bank of Bahrain and Kuwait (ITA Nos. 4404 & 1883/Mum/2004) the Special Bench of Jurisdictional Mumbai ITAT while holding that MTM losses in respect of forward foreign exchange contracts debited to profit and Loss account is allowable, observed as under: (i) A binding obliga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ONGC is not that 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 does not dispute that the impugned transaction is speculative in nature. Further, the aforesaid issue of allowing the loss on account of revaluation of pending forward contracts was considered by the Honble. I ..... X X X X Extracts X X X X X X X X Extracts X X X X
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