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Income Tax Officer - 16(3)(2) Matru Mandir Mumbai Vs. M/s. K. Pankajkumar & Co. Shop No. 18, Shreeji Arcade Shreeji Chambers, Tata Road No. 1&2, Mumbai 400008
July, 10th 2014
                          "A" Bench, Mumbai

                 Before Shri D. Manmohan, Vice President
                and Shri N.K. Billaiya, Accountant Member

                           ITA No. 2669/Mum/2013
                           (Assessment Year: 2009-10)

     Income Tax Officer - 16(3)(2)       M/s. K. Pankajkumar & Co.
     Matru Mandir                        Shop No. 18, Shreeji Arcade
     Mumbai                              Shreeji Chambers, Tata Road
                                         No. 1&2, Mumbai 400008
                              PAN - AAAFK3852C
               Appellant                          Respondent

                            CO No. 130/Mum/2014
                           (Assessment Year: 2009-10)

     M/s. K. Pankajkumar & Co.         Income Tax Officer - 16(3)(2)
     Shop No. 18, Shreeji Arcade       Matru Mandir
     Shreeji Chambers, Tata Road       Mumbai
     No. 1&2, Mumbai 400008
                            PAN - AAAFK3852C
             Cross Objector                Appellant in Appeal

                    Revenue by:       Shri Vikash Agarwal
                    Assessee by:      Shri Nirav S. Shah

                    Date of Hearing:       09.07.2014
                    Date of Pronouncement: 09.07.2014


Per D. Manmohan, V.P.

     This appeal by the Revenue is directed against the order dated
16.01.2013 passed by the CIT(A)-27, Mumbai and it pertains to A.Y. 2009-10.

2.    The only ground urged before us reads as under: -

     "That the Learned CIT(A) has erred in allowing the loss of
     Rs.88,13,515/- on account of foreign exchange fluctuation holding that
     the same is not notional or contingent in nature."

3.    Facts necessary for disposal of the appeal are stated in brief. The
assessee, a partnership firm, is engaged in the business of export of polished
diamonds. In the P & L Account the assessee debited a sum of `88,13,515/-
                                       2          ITA No. 2669& C0 130/Mum/2013
                                                         M/s. K. Pankajkumar & Co.

referable to forward contract loss; in the opinion of the assessee it is on
account of foreign exchange fluctuations in the nature of hedging and/or
safeguard to the business of exports and hence falls outside the ambit of
section 43(5) of the Income Tax Act. Explaining further it was stated that
export proceeds are realised in foreign currency, which is always subject to
fluctuations depending upon the internal business scenario and hence it is
absolutely necessary for the assessee to hedge against such fluctuations/
variations in the exchange rates by entering into forward contracts. In this
year such loss works out to `88,13,515/-        which has to be allowed as
business loss or to be treated as expenditure against the business income
from exports.

4.    The AO rejected the contention of the assessee. He observed that the
provisions shown for outstanding forward contract do not merit place in the
Balance Sheet and the notional loss worked out on their estimated magnitude
on 31.03.2009 does not merit a reckoning to arrive at the true and fair
assessment of the assessee's income for 2009-10. The AO, moreover,
observed that there are no special provisions for treatment of Mark-to-Market
method of accounting; there is no actual loss on account of dealing in forex
derivatives until their final values are known. Mark-to-Market losses are only
notional losses and therefore he refused to allow deduction of the same.

5.    Aggrieved, assessee contended before the first Appellate Authority that
the debtors outstanding as on 01.04.2008 were to the tune of `3.53 crores
for all the sales made by the assessee out of which it preferred to hedge
some of the export sale proceeds ­ sales made to M/s. Diasons Gem
INCOME and Thamina Diamonds, Dubai. The amount hedged was backed
by the amount of sales and underlying assets. The details of export sales
made for which no payments were received, and export made for the current
year against which no payments were received, and other related
information were furnished to highlight that it is only hedging transaction,
i.e. to hedge the risk against currency fluctuations.

6.    Having regard to the circumstances of the case the learned CIT(A) set
aside the disallowance by observing as under: -
                                       3          ITA No. 2669& C0 130/Mum/2013
                                                         M/s. K. Pankajkumar & Co.

     "5. I have carefully considered the content of the assessment order,
     appellant's submissions and the materials placed on record. I note that
     the loss debited to the Profit and Loss Account is on account of actual
     cancellation of forward contracts during the year under consideration
     and in fact there were no outstanding forward contracts as on 31-03-
     2009. Therefore, the A.O. is factually incorrect in stating that the loss
     debited to the Profit and Loss Account is on account of revaluation of
     the pending forward contracts. Secondly, from the details placed on
     record by the appellant, it is noted that the forward contracts were
     entered into to hedge against the fluctuation in foreign exchange rate in
     respect of the outstanding debtors as on the date of transactions. It is
     also noted that the value for which forward contracts are entered into
     was less than that of the value of debtors pending for realization on the
     respective dates which goes to show that the forward contracts were
     duly supported by the underlying assets. Thus, there is no element of
     speculation involved in these transactions. In such circumstances, the
     loss incurred by the appellant is not a notional loss but it is an actual
     loss suffered by the appellant. Therefore, such loss is to be allowed as
     business loss u/s. 37(1) of the Act in terms of decision of Hon'ble
     Bombay High Court in the case of CIT vs. Badridas Gauridu Pvt. Ltd.
     261 ITR 256. Accordingly, I direct the A.O. to allow the aforesaid loss
     claimed by the appellant. The appellant succeeds on this issue."
Aggrieved, Revenue is in appeal before us.

7.    The assessee supported the view taken by the CIT(A) by filing a cross
objection wherein it was contended that the AO erred in ignoring the fact that
the loss incurred by the assessee was actual loss suffered by the assessee on
cancellation of forward contract and not a notional or Mark-to-Market loss
and hence the same is fully allowable under section 37(1) of the Act.

8.    We have heard the learned D.R. as well as the learned counsel in this
regard and carefully perused the record.

9.    The order of the learned CIT(A) is admittedly based on facts, i.e.
forward contracts were entered into to hedge against the fluctuations in
foreign exchange rates in respect of the outstanding debtors as on the date
of transactions and they were duly supported by underlying assets. It is also
not disputed that there is no element of speculation involved in this
transaction. In the light of the undisputed facts we are of the view that the
learned CIT(A) was justified in holding that the loss incurred by the assessee
cannot be treated as notional loss. In other words, it is an actual loss
suffered which is allowable as business loss in the light of the ratio laid
                                        4          ITA No. 2669& C0 130/Mum/2013
                                                          M/s. K. Pankajkumar & Co.

down by the Hon'ble Bombay High Court in the case of CIT vs. Badridas
Gauridu Pvt. Ltd. 261 ITR 256. Since the decisions is essentially based on
the facts and the law laid down by the Hon'ble jurisdictional High Court, we
do not find any infirmity in the order passed by the CIT(A). Therefore the
appeal filed by the Revenue is dismissed and the cross objection filed by the
assessee is dismissed as infructuous.

Order pronounced in the open court on 9th July, 2014.

                   Sd/-                                   Sd/-
              (N.K. Billaiya)                        (D. Manmohan)
           Accountant Member                         Vice President

Mumbai, Dated: 9th July, 2014

Copy to:

   1.   The   Appellant
   2.   The   Respondent
   3.   The   CIT(A) ­ 27, Mumbai
   4.   The   CIT­ 16, Mumbai City
   5.   The   DR, "A" Bench, ITAT, Mumbai
                                                       By Order

//True Copy//
                                                    Assistant Registrar
                                            ITAT, Mumbai Benches, Mumbai
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