Case Law Details
Kesoram Industries Ltd. Vs DCIT (ITAT Kolkata)
The issue under consideration is whether the addition made by AO for ‘Mark to market’ Loss on account of disallowance of loss on foreign exchange forward contract loss is justified in law?
ITAT states that, the AO treated the loss arising on account of forward contracts in foreign currency which has not been settled in the year under consideration as notional loss. However the ld. CIT(A) allowed such loss having reliance on judgment of the Hon’ble Delhi High Court in the case CIT Vs Woodward Governor India Ltd. In rejoinder ld. DR stated that the said judgment of the Hon’ble Delhi High Court was delivered much earlier whereas the Instruction No. 3/2010 was issued dated 23.03.2010. Thus the instruction issued by the CBDT was not considered by the Hon’ble Delhi High Court. However, ITAT find that the instructions issued by the CBDT are not binding on the Courts. So there is no value in the argument of the ld. DR. However, ITAT disagree with the view of the AO on the ground that the adjustment was made by the assessee in terms of AS 11 issued by ICAI and in pursuance of mercantile system of accounting as notified u/s 145 of the Act. It is thus clear that the solitary issue involved in this appeal of the Revenue is squarely covered by the various judicial pronouncements referred to and relied upon by the ld. CIT(A) in his impugned order as well as the orders of this Tribunal as discussed above, and respectfully following the same, ITAT uphold the impugned order of ld. CIT(A) allowing the claim of the assessee for loss on derivative trading. The appeal of the Revenue is dismissed.
FULL TEXT OF THE ITAT JUDGEMENT
3. The assessee in the present case is a company which is engaged in the business of manufacturing and sale of cement, tyre, viscose filament, rayon yarn, transparent paper, cast iron spun pipe and certain chemicals. The return of income for the year under consideration was filed by the assessee on 30.09.2011 declaring a loss of ₹369,67,31,212/- under the normal provision of the Act and book loss of ₹96,00,77,348/- u/s 115JB of the Act. In the said return, total income of ₹5,32,68,132/- received from dividend on the shares during the year under consideration was claimed to be exempt by the assessee-company u/s 10(34) of the Act. A disallowance of ₹1.20 lakhs was also offered by the assessee on account of expenses incurred in relation to earning of the said exempt income as required by the provision of u/s 14A of the Act. Not satisfied with the said disallowance offered by the assessee on estimated basis, the Assessing Officer invoked Rule 8D of the Income Tax Rules, 1962 and worked out the disallowance to be made u/s 14A of the Act at ₹2,80,64,837/-as under:-
As per Rule 8D(2)(i) of the Income Tax Rule, 1962 expenditure directly related to earning of exempt income of ₹6,873/-.
As per Rule 8D(2)(ii) interest expenditure attributable to the earning of exempt income ₹2,51,26,736/-
As per Rule 8D(2)(iii) 0.5% of average value of investment Rs.29,31,228/-total ₹2,80,64,837/-
Since the assessee-company had already offered a disallowance of ₹1.20 lakh suo motu , a further disallowance to ₹2,79,44,837/- was made by the Assessing Officer u/s 14A r.w.r. 8D in the assessment completed u/s 143(3) on 28.03.2014.
4. The disallowance made by the AO u/s 14A r/w.r 8D was challenged by the assessee in the ground filed before ld. CIT(A) and after considering the submission made on behalf of the assessee-company and perusing the relevant materials on record, the ld. CIT(A) deleted the disallowance made by the Assessing Officer on account of interest expenditure amounting to Rs.2,51,26,736/-, as per Rule 8D(2)(ii) on the ground that the assessee-company at the relevant time had sufficient funds of its own and there was a presumption that the said funds were utilized by the assessee-company for making investments in the corresponding shares, as held by the Hon’ble Calcutta High Court in the case of CIT Vs. Rasult (IT No.09/416 dated 15.02.2017). As regards disallowance of Rs.29,31,280 made by the Assessing Officer u/s 14A as per Rule 8D(2)(iii), Ld. CIT(A) followed the decision of this tribunal in assessee’s own case for assessment years 2008-09 and 2009-10 rendered by its order dated 26.04.2018 passed in ITA No.1722/Kol/2012 & others and directed the Assessing Officer to re-compute the said disallowance as per Rule 8D(2)(ii) by taking into consideration only those investments which actually had yielded the exempt dividend income to the assessee-company during the year under consideration.
5. Still aggrieved by the assessee ld. CIT(A) on this issue, the assessee has preferred this appeal before the tribunal on the following grounds:-
“1.For that on the facts and in respect to the circumstances of the case, the AO erred in law by mechanically invoking Rule 8D without pointing out any defect or infirmity in the claim of the assessee and in that view of the matter the disallowance made u/s 14A was bad in law and deserves to be struck down.
2. For that on the facts and in the circumstances of the case, the Ld. CIT(A) erred on facts and in law in partially confirming the disallowance computed by the AO under Section 14A in terms of Rule 8D(2)(iii) without establishing any proximate cause between the expenditure disallowed and the earning of exempt income.\
3. For that on the facts and in the circumstances of the case, the order of the Ld. CIT(A) without dealing with the grounds of appeal relating to disallowance u/s 14A on merits be held unsustainable and be therefore cancelled and/or set aside.”
6. We have heard the arguments of both the sides and also perused the relevant material available on record. As argued by the ld. Representatives of both the sides, this issue is squarely covered by the order of the tribunal dated 26.04.2010 (supra) passed in assessee’s own case for AYs. 2008-09 & 2009-10 wherein the similar issue was decided by the tribunal vide paragraph 10 to 12 as under:-
“10. Now coming to the disallowance of Rs. 19,17,487/- made under rule 8D(2)(iii), we find force in the alternate argument of learned AR that only dividend bearing investment of scrips are to be considered for making disallowance under section 14A of the Act. In this regard, reliance was placed by the learned AR on the decision of the Tribunal in the case REI Agro Ltd. reported in 143 ITD 141 Kolkata which we note is very well founded wherein it was held:
“(8.1) Thus, not all investments become the subject-matter of consideration when computing disallowance under section 14A read with rule 8D. The disallowance under section 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. Under the circumstances, the computation of the disallowances under section 14A read with rule 8D(2)(iii), which is issue in the assessee’s appeal, is restored in the file of the A.O. for recomputation in line with the direction given above. No disallowance under section 14A read with rule 8D(2)(i) and (ii) can be made in this case.”
11. In view of the aforesaid findings and respectively following the decision of the Coordinate Bench of this Tribunal, we remand this issue to the file of A.O. with the direction to consider only the investment which yielded dividend income to the assessee for computing the disallowance under section 14A of the Act read with Rule 8D(2)(ii) of the Rules.
12. We further direct that after re-working the gross disallowance of Rule 8D in terms of the discussion and direction given above, the A.O. shall reduce the sum of Rs. 10,00,000/- already suo-moto disallowed by the assessee under section 14A and the net sum so computed alone shall be added back to the total income. However, in case the revised disallowance under section 14A work out at a sum lower than the amount of Rs.10,00,000/- suo-moto disallowed by the assessee, then the A.O. shall restrict the disallowance under section 14A to Rs.10,00,000/-. Therefore, grounds raised by assessee’s appeal are partly allowed for statistical purposes.”
As the issue involved in the year under consideration as well as all the material facts relating therein are similar to that of AYs 2008-09 and 2009-10, we respectfully following the order of the tribunal for AYs 2008-09 and AY 2009-10 and uphold the impugned order of ld. CIT(A) on this issue. This appeal of the assessee is accordingly dismissed.
7. At the outset, it is noted that there is a delay of 51 days on the part of the Revenue in filing this appeal before the Tribunal. In this regard, the Revenue has moved an application seeking condonation of the said delay and keeping in view the reason given therein, we are satisfied that there was a sufficient cause for the delay of 51 days on the part of the Revenue in filing this appeal before the Tribunal. Even the learned counsel for the assessee has not raised any objection in this regard. The delay of 51 days on the part of the Revenue in filing this appeal before the Tribunal is accordingly condoned. The case is now taken up for adjudication on merits.
8. Now we shall take up the appeal of the Revenue which involves a solitary issue relating to the deletion by the ld. CIT(A) of the addition made by the Assessing Officer by disallowing the assessee’s claim for deduction on account of provision for future loss on derivative due to foreign exchange fluctuation.
9. In the profit and loss filed alongwith the return of income, a sum of ₹3,67,22,220/- was debited by the assessee on account of derivative loss under the head miscellaneous expenses. In this regard, it was explained on behalf of the assessee-company before the Assessing Officer that the market to market loss had been booked on net basis on foreign exchange fluctuation at the year-end on mercantile accounting basis and the same was therefore alloweable. This explanation of the assessee was not found acceptable by the Assessing Officer. According to him, the assessee-company had undergone hedging and loss for the entire future period for which the payment was still be made had been debited as the provision which was not allowable as deduction as clarified in the Instruction No. 3/2010 date 23.03.2010 issued by the CBDT. He accordingly disallowed the claim of the assessee for deduction of ₹3,67,22,220/- being provision for future loss on derivatives due to foreign exchange fluctuation and added back the same to the total income of the assessee.
10. The disallowance made by the Assessing Officer on account of its claim for loss on derivative trading was challenged by the assessee in the appeal filed before the ld. CIT(A) and after considering the submission made on behalf of the assessee and the material available on record, the ld. CIT(A) deleted the said disallowance for the following reasons given in paragraph No.5.2 to 5.10 of his impugned order:-
“5.2 I have carefully considered the action of the AO as also the reasons recorded tor such action as well as the arguments advanced by the appellant I have carefully perused tile Judicial decisions on which the reliance was placed by the appellant-company F ram the details of foreign exchange loss furnished by the appellant, the AO had noted that It comprised of unrealized foreign exchange loss of ₹3,67 22.2201-recognized With reference to the open forward contracts at the year-end. Upon being questioned by the AO, the appellant explained that such loss was recognized by marking to market (‘MTM’) the unrealized and open forward contracts at the exchange rates prevailing on the last date of the financial year. The appellant was thereafter asked by the AO as to why the unrealized loss of ₹3,67,22,220/- should not be disallowed. Although the assessee had relied on the decisions of the Hon’ble Apex Court In the case of Woodward Governor Pvt. Ltd (312 ITR 254) and ONGC vs CIT (322 ITR 180), the AO has attempted to distinguish the appellant’s factual situation, without actually bringing forth the distinction. According to the AO, the case decided by the Hon’ble Apex Court was prior to the amendment made in Section 43A of the Act. In the considered opinion of the AO, such loss was nothing but notional and therefore the same was not allowable to be deducted in arriving at the total income In support of his conclusion the AO relied on the Instruction No. 3/2010 was issued dated 23.03.2010 issued-by the CBDT, wherein marked to market loss in respect of unrealised forward derivatives entered into in the course of trading was directed to be considered as a notional loss.
5.3 On the other hand the appellant has placed on record sufficient material to substantiate the argument that the loss which the appellant accounted in its books was quantified in a scientific manner. the same cannot be called a notional loss as alleged by the AO The appellant relied on Accounting Standard-11 issued by the ICAI In terms of which the appellant was mandatorily required to account for the outstanding foreign currency forward contracts at the prevailing exchange rate at the time of drawing annual financial statements, Referring to Section 211(3) of the Companies Act, 1956 it was submitted that following of AS-11 was mandatory for the appellant The AR of the appellant further pointed out that in terms of Section 145 of the Act, the Central Government had to prescribe that any other accounting standard for income computation which was contrary to AS-11 prescribed by the ICAI, in terms of which MTM loss was accounted for by the appellant in its books, Referring to AS-11, it was submitted that the said standard mandated that all transactions expressed in foreign currency whether relating to revenue or capital field were required to be restated in the financial accounts at the exchange rates prevailing on the Balance Sheet date. AS-11 also prescribed the accounting method to be adopted for accounting of the losses or gains arising and/or accruing from re-statement of the assets and liabilities in foreign currency Referring to the judgement of the Hon’ble Apex court In the case of Woodward Governor India Ltd (Supra) & ONGC (supra) the AR pointed out that in these decisions although the Hon’ble Court was not directly concerned with the losses in relation to unsettled forward contracts yet the court had held that MTM losses determined at the year-end on the basis of prevailing exchange rates represented real loss and were admissible for tax purposes, where an assessee followed mercantile system of accounting. In particular, the Hon’ble Court observed that where the outstanding foreign currency transactions related to revenue field, then the gains or losses incurred on restatement of outstanding foreign currency transactions would be considered as income or loss in real sense and cannot be termed as notional gain or notional loss, It was further explained that the Board Instruction No. 3/2010 was issued dated 23.03.2010 was not applicable in as much as it was rendered In the context of dealers in foreign exchange derivatives whereas in the given facts of the case the assessee had entered into the foreign exchange forward contracts to hedge its foreign currency payables & receivables.
5.4 After giving a thoughtful consideration to the facts of the present case, it is noted that although the factual matrix is which the Supreme Court rendered its judgement in the case of Woodward Governor India Ltd (Supra) was not identical with the appellant’s case, however, In my considered view of the matter, it is necessary to bear in mind that the ratio decidendi in the judgement of the Hon’ole Apex Court is of the relevance in deciding the issue. The facts of any two decided cases may not be identical and exactly the same, but that would not be a good or adequate reason to ignore the ratio decidendi laid down by the Hon’ble Court.
5.5 It is observed that for the matter at hand, there was no dispute with regard to the fact that the assessee-company had entered into foreign currency forward contracts In order to protect against exchange fluctuation risks involved in foreign currency transactions involving import of raw materials. The AO has not disputed the appellant’s contention that it was carrying on substantial transactions involving import of materials and export of goods and these transactions were conducted in foreign currency In relation to the international transactions involving import and export of goods the appellant had substantial exposure to foreign currency transactions and consequently the appellant was exposed to foreign currency exchange losses/gains. In order to mitigate its exposure to foreign currency fluctuations, the appellant had undertaken forward contracts in foreign exchange to guard itself against anticipated losses. That the appellant entered into forward contracts during the relevant year with regard to its foreign currency transactions against purchase and/or export of goods has not been denied or doubted by the AO in the emergent circumstances. I find that the underlying transactions with reference to which forward contracts in foreign currency were executed related to revenue operations of the assessee The forward contracts were thus entered into by the assessee-company to guard against the losses that could have arisen in the course of carrying on its business transactions entered into ordinary course of business The forward contracts did not pertain to transactions in the capital field but pertained to revenue field It is also pertinent to note that the assessee regularly followed mercantile system of accounting and therefore any losses known to the assessee -and which accrued or crystallized during the previous year during the relevant 2011-12 were required to be accounted in the appellant’s books for the relevant year.
5.6 In the cases decided by the Hon’ble Supreme Court i.e, Woodward Governor India Ltd (Supra) & ONGC (supra), the appellant had restated its outstanding foreign currency liabilities in respect of import of materials at the exchange rate prevailing the Balance sheet date. On account of re-statement of the outstanding foreign currency liability, there was enhancement of the liability and accordingly the differential sum was debited in the P &L A/c as an item of expense. Admittedly, the additional liability debited in the P&L A/c was not actually paid by the assessee during the relevant year and the appellant’s claim was disallowed. One of the ground on which the loss incurred was disallowed by the AO was that such loss was a notional one because during the relevant year the assessee had not actually paid the additional liability arising from exchange rate fluctuation. Therefore, the only difference in the decided case and the given facts of the present case is that the loss arose on account of restatement of the forward contracts entered into by the assessee-company to guard against foreign exchange exposure in respect of import/export obligations as opposed to the decided case where the loss arose on account of restatement of liability in relation to goods imported prior to balance sheet date. In my considered opinion, the distinction between these two facts did not materially alter or affect the fact that in either case the liability expressed in foreign currency related to transactions which were entered in the ordinary course of business and the underlying of the forward contracts was ultimately the foreign currency denominated trade receivables & trade payables. In my considered opinion, therefore the ratio laid down by the Hon’ble Supreme Court in the cases of Woodward Governor India Ltd (Supra) & ONGC (supra) are equally applicable to appellant’s case as well.
5.7 I also do not find any force in the AO’s reliance on the Board Instruction No. 3/2010 was issued dated 23.03.2010. From perusal of the said Instruction, it is noted that this Instruction was issued in respect of loss on account of trading in foreign exchange derivatives. In the present case however the assessee had entered into derivative contracts in order to hedge its exchange risk in respect of export proceeds receivable by it in foreign exchange. The forward contracts entered into by the assessee were not by way of trading per se in foreign exchange derivatives In my considered view therefore Instruction No, 3/2010 had no relevance in the facts of the instant case
5.8 The facts on record demonstrate that the foreign exchange forward contracts were entered into by the appellant with reference to underlying which were import/export bills In the ordinary course of its business, In my considered view therefore any gain or loss arising on restatement of such foreign exchange forward contracts also arose in the ordinary course of assessee’s business. Applying the ratio laid down by the Hon’ble Supreme Court i.e, Woodward Governor India Ltd. (Supra) & ONGC (supra) to the, facts of the present case, in my considered view since the underlying of the derivative contracts entered into by the assessee were trade payables & receivables, the gain/loss arising on Its restatement as on 31st March was real in nature and in the revenue field.
5.9 I find that the decision of the Hon’ble Bombay High Court in the case of CIT Vs D Chetan & Co (390 ITR 36) is squarely applicable to the facts involved in the present case. In the decided case the question raised before the Hon’ble Bombay High Court and the decision rendered thereon is as under:-
‘The Revenue has urged the following question of law for our consideration:-,
“Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in deleting the addition of ‘Mark to market’ Loss of Rs. 78, 10,000/- made by the Assessing Officer on account of disallowance of loss on foreign exchange forward contract loss and not appreciating the fact that the said loss was a notional loss and hence cannot be allowed?”
7. The Impugned order of the Tribunal has, while upholding the finding of the CIT (Appeals) independently come to the conclusion that the transaction entered into by the Respondent assessee is not in the nature-of speculative activities. Further the hedging transactions were entered into so as to cover variation foreign exchange rate which would Impact its business of import and export of diamonds. These concurrent finding of facts am not shown to be perverse in any manner. In fact, the Assessing Officer also in the Assessment Order does not find that the transaction entered into by the Respondent assessee was speculative in nature. It further holds that at no point of time did Revenue challenge the assertion of the Respondent assessee that the activity of entering into forward connect was in the regular course of its business only to safeguard against the loss on account of foreign exchange variation. Even before the Tribunal, we find that there was no submission recorded on behalf of the Revenue that the Respondent assessee should be called upon to explain the nature of its transactions. Thus, the submission now being made is without any foundation as the stand of the assessee on faces was never disputed. So far as the reliance on Accounting Standard-11 is concerned, it would not by itself determine whether the activity was the Respondent-assessee’s regular business transaction or it was a speculative transaction. On present facts, it was never the Revenue’s contention that the transaction was speculative but only disallowed on the ground that it was notional. Lastly, the reliance placed on the decision in S Vinod Kumar Diamonds (P) Ltd. (supra) in the Revenue’s favour would not by itself govern the issues arising herein. This is so as every decision is rendered in the of the facts which arise before the authority for adjudication. Mere conclusion in favour of the Revenue in another case by itself would not entitle a party to have an identical relief case In fact, if the Revenue was of the view that the facts in S Vinod Kumar (supra) are identical/similar to the present facts, then reliance would have been placed by the Revenue upon It at the hearing before the Tribunal The impugned order does not indicate any such reliance. It appears that in S Vinod Kumar Diamonds (P) Ltd. (supra), the Tribunal held the forward contract on facts before it to be speculative in nature In view of Section 43(5) of the Act However. it appears that the decision of this court m CIT v Badridas Gauridu (P) Ltd. [2003] 261 ITR 256/ [2004] 134 Taxman 376 (Mum) was not brought to the notice of the Tribunal when it rendered its decision in S Vinod Kumar Diamonds (P) Ltd (supra). In the above case, this court has held that forward contract in foreign exchange when incidental to carrying on business of cotton exporter and done to cover up losses on account of differences in fooreign exchange valuations, would not be speculative activity but a business activity.
8. In the above view, the question of law, as formulated by the Revenue, does not give rise to any substantial of law. Thus, not entertained.”
5.10 The decision of the Hon’ble ITAT. Delhi in the case of Bechtel India Pvt. Ltd. Vs. Addl. CIT (146 ITO 733) is also of much relevance wherein the Honble Tribunal after considering the Instruction No. 3/2010 was issued dated 23.03.2010 held as follows :-
“8 Coming to the corporate additions i.e disallowance of loss, it clearly emerges from the record that the assessee in respect of foreign exchange realization follows mercantile system of accounting and not cash system of accounting The loss has been incurred for hedging of foreign currency fluctuation involved in sales invoices on the basis of forward contracts, which is a business decision to safeguard its interest. The loss has been incurred on the basis of scientific method in the ordinary course of business. The loss being based on a scientific method, on the basis of contractual liability with banks and on mercantile system has to be allowed to the assessee following Hon’ble Supreme Court judgment In the case of Woodward Governor India (P) Ltd. (supra). Our view is further fortified by the fact that DRP in its own order in subsequent year has itself held that the issue about the loss on mercantile system is pending dispute in AY 2008-09. Therefore. the allow ability of the loss on actual payment in AY 2009-10 has been made subject to the allow ability of the loss for AY 2008-09. Thus stand of the DRP Itself negates the observations of assessing officer that it is a notional loss and establishes that it is a business loss incurred by the assessee on mercantile system which method is consistently followed by the assessee. Under these circumstances, we are inclined to allow the foreign exchange fluctuation loss to assessee ,in this year. This ground of the assessee is allowed.”
5.11 For this reasons set out above and respectfully following the decisions of the Hon’ble Supreme Court. Hon’ble Bombay High Court and the Hon’ble ITAT, Delhi, the MTM loss of ₹3,67,22,220/- recognized at the year-end with reference to unrealized forward contracts is held to be in the nature of real loss and therefore allowable as deduction from the profits of the business. The AO is therefore directed to delete the disallowance of ₹3,67,22,220/-. Ground No.2 therefore stands allowed.”
Aggrieved by the relief given by the ld. CIT(A) to the assessee on this issue, the Revenue has preferred this appeal before the Tribunal.
11. We have heard the arguments of both the side and also perused the relevant materials available on record. The Ld. DR has mainly relied on the order of the Assessing Officer in support of the Revenue’s case on this issue. The Ld. Counsel for the assessee on the other hand, has submitted that this issue involved in the Revenue’s appeal is squarely covered, besides the judicial pronouncements/referred to and relied upon by the ld. CIT(A) in his impugned order, by the various decisions of the coordinate benches of this Tribunal. In one of such decisions rendered in the case of Hindustan Gum & Chemical Ltd. vs. DCIT,Circle-12 Kolkata vide its order dated 08.03.2017 passed in ITA No.462/Ko/2014, a similar decision was decided by the Tribunal vide paragraph No.7.5 to 7.5.3 as under:-
“7.5. We have heard the rival submissions and perused the materials available on record. We find that the ld AO had placed heavy reliance on Instruction No. 3/2010 was issued dated 23.03.2010. From the perusal of the said Instruction, we find that the same was issued in respect of loss on account of trading in foreign exchange derivatives. The assessee had entered into forward contracts in order to hedge its exchange risk in respect of export proceeds receivable by it in foreign exchange. The assessee’s forward contracts were not by way of trading as such in foreign exchange derivatives. Hence, Instruction No. 3/2010 cannot be made applicable to the facts of the instant case. We find that the decision relied upon by the ld AR on the decision of the Hon’ble Bombay High Court supra is in favour of the assessee wherein the question raised before the Hon’ble Court and the decision rendered thereon is as under:-
“The Revenue has urged the following question of law for our consideration:-
“Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in deleting the addition of ‘Mark to Market’ Loss of Rs.78,10,000/- made by the Assessing Officer on account of disallowance of loss on foreign exchange forward contract loss and not appreciating the fact that the said loss was a notional loss and hence cannot be allowed?”
7. The impugned order of the Tribunal has, while upholding the finding of the CIT (Appeals), independently, come to the conclusion that the transaction entered into by the Respondent assessee is not in the nature-of speculative activities. Further the hedging transactions were entered into so as to cover variation in foreign exchange rate which would impact its business of import and export of diamonds. These concurrent finding of facts are not shown to be perverse in any manner. In fact, the Assessing Officer also in the Assessment Order does not find that the transaction entered into by the Respondent assessee was speculative in nature. It further holds that at no point of time did Revenue challenge the assertion of the Respondent assessee that the activity of entering into forward contract was in the regular course of its business only to safe guard against the loss on account of foreign exchange variation. Even before the Tribunal, we find that there was no submission recorded on behalf of the Revenue that the Respondent assessee should be called upon to explain the nature of its transactions. Thus, the submission now being made is without any foundation as the stand of the assessee on facts was never disputed. So far as the reliance on Accounting Standard-II is concerned, it would not by itself determine whether the activity was a part of the Respondent-assessee’s regular business transaction or it was a speculative transaction. On present facts, it was never the Revenue’s contention that the transaction was speculative but only disallowed on the ground that it was notional. Lastly, the reliance placed on the decision in S. Vinodkumar Diamonds (P) Ltd. (supra) in the Revenue’s favour would not by itself govern the issues arising herein. This is so as every decision is rendered in the context of the facts which arise before the authority for adjudication. Mere conclusion in favour of the Revenue in another case by itself would not entitle a party to have an identical relief in this case. In fact, if the Revenue was of the view that the facts in S. Vinodkumar (supra) are identical/similar to the present facts, then reliance would have been placed by the Revenue upon it at the hearing before the Tribunal. The impugned order does not indicate any such reliance. It appears that in S. Vinodkumar Diamonds (P.) Ltd. (supra), the Tribunal held the forward contract on facts before it to be speculative in nature in view of Section 43(5) of the Act.
However, it appears that the decision of this court in CIT v. Badridas Gauridu (P.) Ltd. [2003] 261 ITR 256/[2004] 134 Taxman 376 (Mum.) was not brought to the notice of the Tribunal when it rendered its decision in S. Vinodkumar Diamonds (P.) Ltd. (supra). In the above case, this court has held that forward contract in foreign exchange when incidental to carrying on business of cotton exporter and done to cover up losses on account of differences in foreign exchange valuations, would not be speculative activity but a business activity.
8. In the above view, the question of law, as formulated by the Revenue, does not give rise to any substantial of law. Thus, not entertained.”
7.5.1. We find that the co-ordinate bench of Mumbai Tribunal supra had also decided this issue in favour of the assessee wherein it was held that:-
“8. We have carefully considered the order of Ld. Commissioner of Income Tax and the submissions of Ld. Representatives of the parties. We have also carefully considered the cases cited before us (supra). It is relevant to state that in the case of Woodward Governor India (P.) Ltd. (supra), the Hon’ble Apex Court observed and held that the assessee debited to its profit and loss account certain unrealized loss due to foreign exchange fluctuation in foreign currency transactions towards revenue items as on the last day of the accounting year. The A.O. held that the liability as on the last date of the previous year was not an ascertained but a contingent liability. Resultantly, the same was added back to the total income. The CIT(A) echoed the assessment order. However, the Tribunal held that the claim of the assessee for deduction of unrealized loss due to foreign exchange fluctuation as on the last date of the previous year was deductible. The said order of the Tribunal was upheld by the Hon’ble High Court. On further appeal by the department, the Hon’ble Supreme Court held that the loss suffered by the assessee is on revenue account towards foreign exchange difference as on the date of balance sheet and is an item of expenditure deductible u/s 37(1). It further observed than an enterprise has to report outstanding liability relating to import of raw material using closing rate of foreign exchange and any difference, loss or gain, arising on conversion of said liability at closing rate should be recognized in profit and loss account for reporting period. From the judgment of the Hon’ble Supreme Court it can be clearly deduced that unrealized loss due to foreign exchange fluctuation in foreign currency transactions on revenue item as on the last the accounting year is deductible.”
7.5.2. We also find that the co-ordinate bench of Delhi Tribunal supra had rendered a decision in favour of the assessee on an identical issue after considering the Instruction No. 3/2010 wherein it was held that :-
“8. Coming to the corporate additions i.e. disallowance of loss, it clearly emerges from the record that the assessee in respect of foreign exchange realization follows mercantile system of accounting and not cash system of accounting. The loss has been incurred for hedging of foreign currency fluctuation involved in sales invoices on the basis of forward contracts, which is a business decision to safeguard its interest. The loss has been incurred on the basis of scientific method in the ordinary course of business. The loss being based on a scientific method, on the basis of contractual liability with banks and on mercantile system has to be allowed to the assessee following Hon’ble Supreme Court judgment in the case of Woodward Governor India (P) Ltd. (supra). Our view is further fortified by the fact that DRP in its own order in subsequent year has itself held that the issue about the loss on mercantile system is pending dispute in AY 2008-09. Therefore, the allowability of the loss on actual payment in AY 2009-10 has been made subject to the allowability of the loss for AY 2008-09. This stand of the DRP itself negates the observations of assessing officer that it is a notional loss and establishes that it is a business loss incurred by the assessee on mercantile system which method is consistently followed by the assessee. Under these circumstances, we are inclined to allow the foreign exchange fluctuation loss to assessee in this year. This ground of the assessee is allowed.”
7.5.3. Respectfully following the aforesaid decisions and in view of the facts and circumstances, we do not find any infirmity in the order of the ld CITA in this regard. Hence the Ground No. 3 raised by the revenue is dismissed.”
12. A similar view was also taken by this tribunal while deciding an identical issue in the case of DCIT, Central Circle-XVI, Kolkata vs. South Asian Petrochem Ltd., in ITA No.1222/Kol/2014 vide paragraph Nos 18 to 20 of its order dated 03.05.2017 which read as under:-
“18. We have heard rival contentions and perused the materials available on record. From the aforesaid discussion, we find that the AO treated the loss arising on account of forward contracts in foreign currency which has not been settled in the year under consideration as notional loss. However the ld. CIT(A) allowed such loss having reliance on judgment of the Hon’ble Delhi High Court in the case CIT Vs Woodward Governor India Ltd. reported in 294 ITR 451. In rejoinder ld. DR stated that the said judgment of the Hon’ble Delhi High Court was delivered much earlier whereas the Instruction No. 3/2010 was issued dated 23.03.2010 was issued dated 23.03.2010. Thus the instruction issued by the CBDT was not considered by the Hon’ble Delhi High Court. However, we find that the instructions issued by the CBDT are not binding on the Courts. So there is no value in the argument of the ld. DR. However, we disagree with the view of the AO on the ground that the adjustment was made by the assessee in terms of AS 11 issued by ICAI and in pursuance of mercantile system of accounting as notified u/s 145 of the Act. The relevant extract of Accounting Standard 11 is reproduced below:-
“3.6 The Accounting Standards (A) 11, the Effects of changes in Foreign Exchange Rates (revised 2003), issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 14-2004. Relevant extract of the Accounting Standard is reproduced as follows:-
‘9. A foreign currency transactions should be recorded on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transactions.
10…
11 (a) At each balance sheet date foreign currency monetary items should be reported using the closing rate. However, in certain circumstances, the closing rate may not reflect with reasonable accuracy the amount in reporting currency that is likely to be realized from, or required to disburse, a foreign currency monetary item at the balance sheet date, e.g. where there are restrictions on remittances or where the closing rate is unrealistic and it is not possible to effect an exchange of currencies at that rate at the balance sheet date. In such circumstances, the relevant monetary item should be reported in the reporting currency at the amount which is likely to be realized from, or required to disburse, such item at the balance sheet date:
11(b)….
11(c)…
12. Cash receivables and payables are examples of monetary items….
13. Exchange differences arising on the settlement of monetary items or on reporting an enterprise’s monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognized as income or as expenses in the period in which they arise…”
19. At this juncture we also wish to reproduce the provisions of Section 145 of the Act which reads as under:-
“3.4 As per section 145 of the Act,
‘(1) Income chargeable under the head “Profits and gains of business or profession” or “income from other sources” shall, subject to the provisions of sub-section (2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee.
(2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income.
(3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in subsection (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.”
20. We also find support from the decision of Hon’ble Delhi High Court in the case of CIT vs Woodward Governor India Private Limited [2007] 294 ITR 451 (Del) where it was held that:-
“We affirm the decision of the Income-tax Appellate Tribunal in Oil and natural Gas Corporation Ltd. V. Deputy CIT (Asstt.) [2003] 261 ITR (AT) 1 (Delhi) which rightly follows the settled position as explained in the judgment of the Hon’ble Supreme Court which we have referred to. We, therefore, reject the submission of the Appellant in these appeals that the increase in liability on account of the fluctuation in the rate of foreign exchange remaining on the last day of the financial year is notional or contingent and, therefore, cannot be allowed as a deduction.” From the aforesaid discussion we find no reason to interfere in the order of Ld CIT(A) and accordingly we uphold. Hence this ground of Revenue’s appeal is dismissed.”
13. It is thus clear that the solitary issue involved in this appeal of the Revenue is squarely covered by the various judicial pronouncements referred to and relied upon by the ld. CIT(A) in his impugned order as well as the orders of this Tribunal as discussed above, and respectfully following the same, we uphold the impugned order of ld. CIT(A) allowing the claim of the assessee for loss on derivative trading. The appeal of the Revenue is dismissed.
14. In the result, the appeal of Revenue as well that of assessee both are dismissed.
