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2016 (9) TMI 638 - ITAT KOLKATA

2016 (9) TMI 638 - ITAT KOLKATA - TMI - Forex Derivatives treating the same as unascertained liability and notional loss - Held that:- There is an underlying liability ( Loan) to hedge the risk and hence the derivative contract under consideration is for the purpose of business and not for the purpose to speculate the transaction without and underlying assets and liabilities. In the instant case there is an underlying liability and purpose of this derivative contract is to minimise the business .....

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nt repairs`. See M/s Saravana Spinning Mills Pvt. Ltd. [2007 (8) TMI 16 - SUPREME COURT OF INDIA ] and M/s Sri mangayarkarasi Mills (P) Ltd [2009 (7) TMI 17 - SUPREME COURT ]. Also on the similar set of facts, the Hon`ble ITAT has upheld the action of the assessing officer in treating the expenditure incurred by the assessee as a capital in the assessment year 2005-06 in the assessee`s own case, and the CIT (A) has also upheld the action of the Assessing Officer in treating the expenditure incur .....

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.CIT (A) worked out the disallowance as per Rule 8D (2) (ii) by taking opening balance of investment at ₹ 25,57,753/- therefore the total disallowance worked out by him was [ 25,57,753 x6,38,29029/1815274370] at ₹ 89,936/- whereas as per AO the disallowance was at ₹ 26,26,964/- And as per Rule 8D (2) (iii) the disallowance worked out by him was [ ₹ 25,57,753 x 0.5] at ₹ 12788/- whereas as per AO the disallowance was at ₹ 3,73,550/-. Thus, out of ₹ 30,00, .....

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rtment : Shri G. Mallikarjuna, CIT,DR ORDER Per Dr. A.L.Saini, A.M.: The captioned appeal filed by the assessee and the Cross appeal filed by the Revenue pertaining to assessment year 2008-09, are directed against the order passed by the Commissioner of Income-Tax (Appeals)-VI, Kolkata in appeal No.33/CIT(A)-VI/Cir-6/11-12/Kol, dated 21.12.2012, which in turn arises out of an order passed by the ld. Assessing Officer under section 143(3) of the Income Tax Act, 1961 (in short, the Act ) dated 28t .....

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med the assessment U/s 143(3). 3. Since the appeal filed by the assessee and cross appeal filed by the Revenue relate to the same assessee and involve common issues, therefore, these have been clubbed and heard together and a consolidated order is being passed for the sake of convenience and brevity. First, we deal with the assessee s appeal in ITA No.455/Kol/2013, which contains three grounds of appeal. The appeal filed by the Revenue in appeal ITA No.578/Kol/2013 wherein the Revenue has raised .....

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t loss on account of Forex Derivatives amounting to ₹ 1,58,94,821/-as notional loss and treating the same as unascertained liability. While upholding the action of the Assessing Officer the Learned CIT(A)-VI ignored the case laws relied upon by the Appellant. (2). That in the facts and circumstances of the case the Learned Commissioner of Income Tax (Appeals)-VI/Kol was not justified in upholding that A.O's action in treating the replacement cost of combers and ring frames of ₹ 4 .....

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ccounts No. 14(b) (Schedule O ), the company has charged an amount of ₹ 1,58,94,821/- to the Profit & Loss a/c. in respect of derivative contracts outstanding as on 31st March, 2008. The Ld. AO did the addition of ₹ 1,58,94,821/- holding that mark to market loss on account of forex derivative is a notional loss, the date of settlement of the forex derivative falls beyond 31/03/2008 and the contract was not matured as on 31/03/2008. The Learned Assessing Officer completely ignored .....

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Changes in Foreign Exchange Rates the company is under mandate to account gain or loss of forward contract. Accounting Standard - 30 Financial Instruments deals with various derivative products. Normally, a company which is engaged in the import and export of goods takes a forward contract to lock the prices against fluctuation of foreign exchange rates. The company may also enter into an option or cross currency swap to protect the risk of fluctuations in the interest rate and foreign exchange .....

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5. Applying the above observations to the facts and circumstances of present case, we find that the claimed loss under consideration occurred to the assessee on account of five unexpired forex forward contracts i.e a loss incurred on account of revaluation on contract on last day of accounting period before date of maturity of forward contract. The Ld. CIT-A observed that the assessee has been following a consistent accounting policy for determining loss under AS-11 and AS-30 as required under C .....

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ellate procedings that the CIT-A noticed that the AO allowed the loss of ₹ 85,70,425/- for 2010-11 which supports to show that the assessee has been following consistently accounting standards and the liability has been accrued for a pending obligation for every year i.e. the difference was arising for more than one accounting period. 26. We, accordingly, hold that disallowance made by AO treating the impugned amount of ₹ 54,23,955/- for A.Y. 2009-10 as contingent and notional loss i .....

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sessee has vehemently submitted that the above cited decision of Hon ble ITAT ,Kolkata is identical to the facts of the assessee under consideration. The treatment followed by the assessee company is in line with the matching concept of expenditure and liability since as at the close of the accounting year there was a liability which cannot be ignored or else the financial statements would not reflect a true and fair view of the assets and liabilities and corresponding profit for the year. In ad .....

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siness loss of Rs..1,58,94,8211- on account of Mark to Market of Unexpired Forex Derivatives Contracts is allowable and prayed that addition made on this account may be deleted. 6. On the other hand, the ld. Departmental Representative for the Revenue has primarily reiterated the stand taken by the Ld. AO and the Ld. CIT(A) and cited before us the CBDT Circular No.3/2010 dated 23rd March, 2010, wherein the CBDT has instructed to the department that mark to market losses which are in the nature o .....

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ion as such loss has not arisen so far in the normal course of business operation of the assessee. The exchange rates are still liable to fluctuate of the market in future, therefore, it is kind of a speculative transaction which settles otherwise than by the actual delivery within the meaning of sub-section 5 of Section 43 of the Income Tax Act, 1961. The Ld. DR also relied on the following judgments. 1). ACIT-vs- K. Mohan & Company Private Ltd., Bangalore ITAT 126 ITD 59 2) D. Kishore Comm .....

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by Hon ble ITAT-Kolkata, cited supra. There is an underlying liability ( Loan) to hedge the risk and hence the derivative contract under consideration is for the purpose of business and not for the purpose to speculate the transaction without and underlying assets and liabilities. In the instant case there is an underlying liability and purpose of this derivative contract is to minimise the business risk by way of hedging therefore it is not a speculative transaction as Ld. DR has pointed out (s .....

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combers and ring frames has been treated as capital expenditure. But in the computation of total income for income tax purpose the assessee has reduced the replacement cost of 4,52,50,588/- [5,32,06,580-79,55,992] for ring frames and combers from business income. That is, for the purpose of income tax, the assessee has charged the entire cost of replacement to profit and loss account ( Revenue expenditure), holding that each machine is an integral part of the spinning mill, and the same is objec .....

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Ltd [2009] 315 ITR 114 (SC) which support the view of the Assessing Officer. The Assessing Officer also noted that on the similar set of facts, the Hon ble ITAT has upheld the action of the assessing officer in treating the expenditure incurred by the assessee as a capital in the assessment year 2005- 06 in the assessee s own case, and the CIT (A) has also upheld the action of the Assessing Officer in treating the expenditure incurred by the assessee as a capital in the assessment year 2006-07 .....

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plant and the output from the various intermediate stages of production could not be sold or marketed and used for other purposes. Therefore, the Ring Frames cannot be worked independently but only as a part of the spinning unit. There is no new assets created in the process of replacement of worn out machines. 11. On the other hand, the Ld. DR for the revenue has submitted that each machine including the ring frame was an independent and separate machine capable of independent and specific fun .....

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e assessing officer in treating the expenditure incurred by the assessee as a capital in the assessment year 2005-06 in the assessee s own case, and the CIT (A) has also upheld the action of the Assessing Officer in treating the expenditure incurred by the assessee as a capital expenditure in the assessment year 2006-07 in the assessee s own case. 12. Having heard the rival submissions, we are of the view that there is merit in the submissions of the Ld. DR for Revenue, since the proposition can .....

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missed. 14. Ground No. 3 of assessee s appeal: Disallowance under section 14A read with Rule 8D at ₹ 2,83,604/- Ground No. 1 of Revenue s appeal in ITA No. 578/Kol/2013: On the facts and circumstances of the case and in law,when the Ld. CIT (A) has upheld the applicability of computation of the disallowance U/s 14A to be worked out as per the prescribed procedure U/s 8D, however, the Ld. CIT(A) grossly erred in giving leeway while considering the balance of investment, income from which do .....

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and purchased share worth of ₹ 144,804,322/- on 26/03/2008. Aggrieved form the order of the Assessing Officer, the assessee filed an appeal before Ld. CIT (A)-VI, Kolkata, who has confirmed the action of the Assessing Officer. Not being satisfied from the order of the CIT(A), the assessee is in further appeal before us. 15. Before us, the Ld. AR for the assessee has submitted that Assessing officer has disallowed ₹ 30,00,514/- arbitrarily without applying Rule 8D and without recordi .....

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d 40 of his order are reproduced below: 38. The appellant has submitted that by following the judgement of the Hon ble ITAT, Kolkata in the case of Balarampur Chini Mills Ltd. Vs. DCIT (supra), the nexus between funds borrowed and investments made has to have a link or nexus for making disallowance. Therefore, the Rule 8D is applied only on the amount of ₹ 25,57,753/- taking the opening value as the average investments due to the peculiar fact that a huge investment was done at the fag end .....

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ious year and Secured Term loans have reduced as compared to the immediately preceding previous year which signifies that no new investments were made out of secured borrowed funds. Further, that the working capital loans have increased as compared to immediately preceding previous year and this increase have been totally utilized for business purpose of the company since there is a corresponding increase in the net current assets as compared to immediately preceding previous year are not accept .....

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