TMI Blog2017 (1) TMI 447X X X X Extracts X X X X X X X X Extracts X X X X ..... rate variation as at year end. The revenue has disallowed the same at threshold on the ground that the same is a notional loss . No finding of fact is recorded that the said foreign exchange forward contracts were entered into by the assessee to hedge against its business activity of import of raw material for manufacturing of tiles and sanitary wares and these forward foreign exchange contracts are backed with foreign exchange exposure of the assessee towards foreign currency liability outstanding as at year end towards import payables dues for import of tiles and sanitary wares. In our considered view , the matter needs to be set aside and restored to the file of the AO for denovo determination of the issue on merits after satisfying ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by learned Commissioner of Income Tax (Appeals)- 39, Mumbai (hereinafter called the CIT(A) ), for the assessment year 2008-09, the appellate proceedings before the learned CIT(A) arising from the assessment order dated 30.12.2010 passed by the learned Assessing Officer (hereinafter called the AO ) u/s 143(3) of the Income-tax Act,1961 (Hereinafter called the Act ). 2. The grounds of appeal raised by the Revenue in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called the Tribunal ) read as under:- 1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of ₹ 2,86,98,167/- being the loss pertaining the option contract open at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the CIT(A) on the above ground above set aside and that of the ITO/ ACIT/DCIT be restored. 3. The Brief facts of the case are that the assessee is engaged in the business of vitrified tiles and sanitary ware and also as a part of business does import of raw materials for manufacture of vitrified tiles and sanitary ware . In the return of income filed with the Revenue, the assessee had claimed ₹ 2,89,76,450/ being foreign exchange rate loss on account of outstanding transactions (marked to market). The A.O. disallowed the said exchange rate loss on the ground that the said loss pertains to unsettled transactions and in view of instructions no 3/2010 dated 22.3.2010, the said loss on unsettled transactions is not allowable which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange loss is a business loss and that it is to be allowed as deduction while computing income of the assessee as per provisions of the Act. The ld. CIT(A) held that the conversion of receivables/payables in respect of import/export at the prevailing exchange rate at the year end and valuing the open forward contract at the yearend exchange rate is statutory requirement under the Companies Act which may result in gain or loss. The A.O. has disallowed the exchange rate loss of ₹ 2,89,76,450/- on the premise that this is an unrealized transaction. The A.O. disallowed the loss relying on the CBDT Instruction No. 3/2010 dated 23rd March, 2010. The ld.CIT(A) observed that the assessee is following mercantile system of accounting and under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 007-08 there was profit on unsettled foreign exchange forward contracts wherein the assessee offered the profit for tax and paid the due taxes. The decision of Hon ble Supreme Court in the case of Woodward Governor India P. Ltd. (supra) is clearly applicable in this case. 7. We have considered the rival contentions and also perused the material available on record including the case law cited by the assessee. The assessee is engaged in the business of tiles and sanitary ware and also as a part of business does import of raw material for manufacture of tiles and sanitary wares. The assessee is consistently following mercantile system of accounting. In the return of income filed with the Revenue, the assessee had claimed ₹ 2,89,76,45 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness to hedge against the forex loss and that the assessee has not entered into the forward contracts with an intention to earn any gain due to fluctuation in foreign currency rate but it is necessary for it to enter into such forward contracts to hedge against foreign exchange rate fluctuation i.e. to verify that this is an integral part of the business undertaken by the assessee and incidental to the import business of the assessee as in the absence of such forward contracts, the assessee may sustain huge losses and hence it became essential for the assessee to book such forward contracts as a prudent business practices to safeguard against losses which may be sustained by the assessee towards import obligation in foreign currency outsta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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