Loss for forward contract to protect against loss for fluctuations in foreign exchange allowed as deduction

The ITAT, Mumbai in the case of ACIT , Mumbai (Appellant) vs. M/s. Venus Jewel, EC-5021/22, Bharat Diamond Bourse, Bandra-Kurla Complex Bandra, Mumbai 400051 (having PAN : AAAFV0888R) (Respondent) being ITA No. 7329/Mum/2013) for the Assessment Year – 2010-11, and in the case of M/s. Venus Jewel, EC-5021/22, Bharat Diamond Bourse, Bandra-Kurla Complex, Bandra, Mumbai 400051, (Appellant) vs. ACIT – 16(3), Room No. 206, 2nd Floor, Matru Mandir, Tardeo Road, Mumbai 400007, (Respondent) held that a loss due to forward contract entered to protect against the loss for fluctuations in foreign exchange can be allowed as deduction.

Pleaders engaged in the case:

Shri G.M. Doss appeared on behalf of the Revenue and Shri K. Shivaram & Shri Rahul R. Sarda appeared on behalf of the Assessee.

Date of Hearing:

The hearing was concluded on 30.07.2015.

Date of order:

The common order was pronounced on 31 .07.2015.

Purpose of filing the appeals:- Is loss for fluctuations in foreign exchange allowable as deduction?

The two appeals were filed by the Revenue challenging a common order of the CIT (A) passed on 16.09.2013 in connection with the assessment years 2009-10 and 2010-11 against the order passed against the Revenue under section 143(3) of the Income Tax Act.

The assessee raised objections against the appeals filed by the Revenue in connection with the assessment year 2010-11 against the order passed under section 143(3) of the Act.

Both the appeals were filed by the Revenue and the objections filed by the assessee were heard together and were disposed of by a common order.

Issues of the appeals:

The issues raised by the Revenue in the appeals were same. The grounds of appeal were as follows:
1. Whether the Ld. CIT (A) was wrong in considering that ‘Mark to Market’ loss arising out of valuation of forward exchange contracts on the closing date of the financial year was not a notional loss and was allowable?
2. Whether the Ld. CIT (A) was right in not considering the decision of the ITAT, Mumbai in the case of ITA No. 506/Mum/2013 dated 03.05.2013 in that of M/s. S. Vinod Kumar Diamonds Pvt. Ltd.?

Grounds of appeal:

It was urged that the Ld. CIT (A) was absolutely wrong in not-confirming the disallowance. The learned counsel for the assessee pointed out that the issue of the appeal was covered by many orders of the Mumbai Tribunal in favour of the assessee. The order of the Hon’ble Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd. 294 ITR 451 also supported the contentions of the assessee.

It was further pointed out by the said counsel that the CIT (A) had allowed the appeal of the assessee following the aforesaid judgment of the Apex Court.

The learned counsel for the Revenue stated that the facts of the case were different. The AO noted that there were pending contracts; as such the earlier decision was not applicable.

The objection of the learned D.R. was that the Mumbai Benches of the Tribunal in the case of M/s. Vinod Kumar Diamonds Pvt. Ltd. in ITA No. 506/Mum/2013 dated 03.05.2013 expressed contrary view.

The learned counsel also stated that the assessee offered its profits from foreign exchange in the earlier and later years to income tax.

The order of the CIT (A) was referred and it was pointed out that only in the relevant year there was loss on account of foreign exchange fluctuations whereas in every year there were gains.

The Tribunal in M/s. S. Vinod Kumar Diamonds Pvt. Ltd. (supra) had stated the loss on foreign exchange fluctuations was speculation loss and the issue was not relating to allow ability of mark to market loss. It was further added that the Tribunal did not consider the decision of the Apex Court in the case of Woodward Governor India Pvt. Ltd. (supra).

Brief facts of the case:

The assessee had the business of import and export of diamonds. The assessee entered into forward exchange contracts revalued on the closing day of the financial year.
Based on such revaluation, the assessee claimed market loss on the said forward exchange contracts amounting to Rs. 66,51,21,162/-. The AO was expressed the view that the contract had not been settled and the loss cannot be allowed in the hands of the assessee. The assessee explained that it was engaged in import of diamonds business and thereafter polishing the same and exporting them. The assessee had a substantial finance in foreign currency which was supposed to be settled only in foreign currency. To escape exposure of foreign exchange rates it entered into forward contract to protect against the risk of fluctuations in the rates of foreign currency.

The transaction of entering into forward contracts was claimed by the assessee to be a part of the export business of the assessee.

The contracts were monitored under regulations of the RBI and assessee was allowed to enter into forward exchange contracts due to its export activity. The assessee booked loss due to forward contract in foreign exchange. However, the assessee earned gain on such forward contracts which was assessed as business income of the assessee.

The AO rejected the claim as the assessee entered into mark to market loss on forward exchange contracts. The AO disallowed the claim of the assessee as it was not settled at the end of the year for which the losses could not be considered as actual losses.
The CIT (A) observed that the assessee was exposed to fluctuation of exchange rate and it would like to escape its risk. The CIT (A) also noted that the assessee had utilized the forward contracts which allowed them to run up the business up to the date of contract. The claim of the assessee was allowed by the CIT (A), against which the Revenue filed an appeal before the ITAT, Mumbai.

Cases referred:

The learned counsel for the assessee cited the following decisions:-
1) ACIT vs. M/s. Monarch Gems, ITA No. 2613/Mum/2013 passed on 09.07.2014 by the ITAT, Mumbai.
2) ACIT vs. M/s. Vimal Export, ITA No. 6610/Mum/2012 passed on 08.01.2014 by the ITAT, Mumbai.
3) ACIT vs. M/s. Rupam Impex, ITA No. 4008/Mum/2012 passed by the ITAT, Mumbai.

The learned counsel for the Revenue placed reliance on the following decisions:-
1) The decision passed in M/s. Vinod Kumar Diamonds Pvt. Ltd. (Supra).
2) ITA No. 7329/Mum/2013 passed by the ITAT, Mumbai.

The judgment:

The rival submissions of both the parties were heard. The records of the cases were also perused. It was observed that the issue i.e. loss due to forward contract entered into by the assessee arose before the Tribunal in all the cases.

The grounds of appeal raised by the Revenue were all dismissed. While dismissing the appeals of the Revenue, the Tribunal expressed that the cross objections raised by the assessee cannot be entertained and the same should be dismissed. Accordingly the cross objections of the assessee were also dismissed.

The Tribunal upheld the order of the CIT (A) in deleting the addition made due to disallowance of the loss on account of forward contract in foreign exchange.