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Income Tax Officer - 16(3)(2) M/s. KALP Diamonds Matru Mandir Mumbai Vs. G-9-10, Pearl Arcade, Sopariwala Estate, Tata Road No. 2 Girgaum, Mumbai 400004
July, 11th 2014
                 IN THE INCOME TAX APPELLATE TRIBUNAL
                            "A" Bench, Mumbai

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

                           ITA No. 2670/Mum/2013
                           (Assessment Year: 2009-10)

     Income Tax Officer - 16(3)(2)       M/s. KALP Diamonds
     Matru Mandir                        G-9-10, Pearl Arcade, Sopariwala
                                     Vs.
     Mumbai                              Estate, Tata Road No. 2
                                         Girgaum, Mumbai 400004
                               PAN - AADFK2465Q
               Appellant                            Respondent

                     Appellant by:     Shri Vikash Agarwal
                     Respondent by:    None

                     Date of Hearing:       09.07.2014
                     Date of Pronouncement: 09.07.2014

                                     ORDER

Per D. Manmohan, V.P.

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

2.      The following grounds were urged by the assessee: -

       "1. That the Learned CIT(A) has erred in holding that the loss of
           Rs.2,31,56,475/- on account of foreign exchange fluctuation was
           neither notional nor speculative and hence was allowable.
       2.   That the Learned CIT(A) failed to appreciate that the assessee had
            entered into forward contracts on an exceptionally higher side
            compared to net exposure of foreign currency."

3.      The assessee is an importer, manufacturer and exporter of diamonds.
For the year under consideration the assessee declared a total income of
`3,57,890/-. During the scrutiny proceedings the AO called upon the
assessee to explain as to why the loss on forward contract cancellation, to
the tune of `2,31,56,475/-, debited to the P & L Account should not be
disallowed. The assessee contended that the contracts were exclusively
booked only to hedge receivables and hence the same is allowable as
deduction. However, the AO rejected the contention of the assessee by
                                      2                  ITA No. 2670/Mum/2013
                                                             M/s. KALP Diamonds




observing that there is no special provision for treatment of Mark-to-Market
method of accounting. Loss or gain arises only when something goes out of
his pocket or something goes into his pocket. Therefore, in the instant case
there is no actual loss on account of dealing in forex derivatives until their
final values are known. In his opinion the liability did not crystallise on the
reporting date and therefore it is only a notional loss which is claimed, it
cannot be allowed in the year under consideration. On an appeal filed by the
assessee the learned CIT(A) accepted the contention of the assessee that the
loss suffered by him cannot be considered as speculation loss but it is a
business loss. In this regard he observed as under: -

    "6. I have carefully considered the contents of the assessment order,
    appellant's submissions, Remand Report and the appellant's rejoinder
    thereof. At the outset, it is undisputed that except an amount of
    `50231/- being profit booked on MTM valuation, the entire loss claimed
    by the appellant was an actual loss incurred on cancellation of the
    forward contracts. Generally, foreign exchange forward contracts are
    entered as per the guidelines laid down by the RBI. Further, forward
    contracts are allowed to be entered separately for sale of dollars and
    purchase of dollars depending upon the exposure to foreign exchange
    fluctuations. It is always the case that payment cycles/duration are
    different for the debtors and creditors depending on the terms of the
    transaction. Even though appellant has certain receivables and certain
    payables recorded in the books, based on the invoices, on a particular
    date, nevertheless amount included in each invoice has a different
    duration for payment. Therefore, it is not the case that at a given point
    of time all the receivables and all payables can be adjusted against
    each other. There may be a position that the for imports may not be
    due as on the date of receiving the export proceeds and vice-versa. In
    such case, appellant has to plan for the cash flow in n currency
    depending upon the time line of expected receipts and payments which
    may result in a situation that there can be some idle funds of foreign
    currency or may be shortage of the same. In other words, the time lines
    for receipts and payments may not strictly match so as to net off the
    fund position in foreign exchange on any particular date, which means
    that the appellant's exposure to foreign exchange transactions cannot
    be netted off to enter into forward contracts. As stated already, RBI
    allows forward contracts based on the debtors, creditors, stocks and
    loans available to the appellant in foreign exchange terms separately
    and not based on the net exposure to foreign exchange. Further, legally
    speaking the forward contracts for purchase of dollars and sale of
    dollars are two different transactions that the appellant has to fulfill
    each contract separately as and when it matures. Thus, either on the
    practical front or on the legal front, the forward contract transactions
    cannot be considered in terms of netting off of foreign exchange
                                      3                    ITA No. 2670/Mum/2013
                                                               M/s. KALP Diamonds

     realizable/payable. In view of the above discussion, I am unable to
     agree with the AC. that the net exposure to foreign exchange has to be
     compared with outstanding forward contracts in order to arrive at a
     conclusion whether such contracts were entered with an intent of
     speculation. That apart, without netting of the debtors and creditors,
     from the details placed on record I note that the forward contracts
     entered for sale of dollars and purchase of dollars are backed by the
     underlying assets namely, the debtors and the creditors in foreign
     currency respectively at any given point of time. In the above
     background, having accepted that the appellant is exposed to
     fluctuation in foreign exchange given its scale of operations and
     hedging of such transactions is the need of the business, in my
     considered opinion the loss or profit arising out of such transactions
     should also be treated as business loss/income. 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. 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.

4.    None appeared on behalf of the assessee. We have heard the learned
D.R. and carefully perused the record.

5.    It is not in dispute that the assessee is exposed to fluctuations in
foreign exchange given its scale of operations and hedging of such
transactions is the need of the business. It is also not in dispute that except
an amount of `50,231/-, being profit booked by MTM valuation, the entire
loss claimed by the assessee was actual loss incurred on cancellation of the
forward contracts. It is not the case of the Revenue that at a given point of
time all the receivables and all the payables can be adjusted each other.
There may be a position that the payments for imports may not be due as on
a particular date and vice versa. Having regard to the overall circumstances
the learned CIT(A) applied the ratio of the Hon'ble jurisdictional High Court
decision in the case of CIT vs. Badridas Gauridu Pvt. Ltd. 261 ITR 256 to
hold that the loss incurred by the assessee cannot be treated as a notional
loss but an actual loss which is allowable as deduction.

6.    The learned D.R. was unable to make out a case to support the stand
of the Revenue.
                                         4                 ITA No. 2670/Mum/2013
                                                               M/s. KALP Diamonds




7.        Under these circumstances we do not find any reason to interfere with
the order passed by the CIT(A) since it is essentially based on facts and on
application of the ratio laid down by the Hon'ble Bombay High Court . We,
therefore, affirm the order passed by the CIT(A) and dismiss the appeal filed
by the Revenue.

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
n.p.

 
 
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