TMI Blog2017 (8) TMI 851X X X X Extracts X X X X X X X X Extracts X X X X ..... pective. The matter stood in assessee’s favor by several judicial pronouncements as rightly observed by Ld. CIT(A). Foreign currency forward contracts have expired in the next assessment year when actual loss on these transactions has been ascertained. Therefore, in principal, while upholding the decision of Ld. CIT(A), we deem it fit to restore the matter back to the file of Ld. AO for limited purpose of verifying the fact that the actual resultant loss on forward contracts has first been adjusted from the loss claimed by the assessee in the impugned AY and resultant gain, if any, has been offered to tax and there is no double deduction of the losses. The assessee is directed to provide the requisite information / documents to substantiate his claim in this regard failing which the Ld. AO shall be at liberty to decide the matter on the basis of material available on record. - I.T.A. No.3755/Mum/2013 - - - Dated:- 9-8-2017 - SHRI JOGINDER SINGH, JM AND SHRI MANOJ KUMAR AGGARWAL, AM For The Assessee : K.A.Vaidyalingam,Ld. AR For The Revenue : Suman Kumar, Ld. DR ORDER Per Manoj Kumar Aggarwal (Accountant Member) 1. The captioned appeal by revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dominantly engaged in the business of import of rough diamonds, manufacturing i.e. cutting polishing of same in to polished diamonds and exporting the said diamonds. In total sale of ₹ 99.48 Cr, sale denominated in foreign currency is ₹ 99.13 Cr. Secondly, entire purchases of ₹ 69.37 Crs are denominated in dollar terms and the year-end creditors for goods are at ₹ 23.26 payable in US $. Further, out of receivables for goods of ₹ 48.18 Crs an amount of ₹ 48.16 crs is denominated in US $. Thus it is evident that appellant is exposed to risk arising out of fluctuation in Exchange rate and as a prudent businessmen likely to hedge its risk. Appellant has booked all the forward contracts in respect of export receivables only. 5.2 From Notes to the accounts under the heading Significant Accounting policy followed its disclosure , it is evident that appellant is reporting all monetary items i.e. Export Receivable, Import Payable and Foreign Currency Working Capital Loan appearing in balance sheet at closing rate and recognizing the exchange rate difference in profit loss account as expenses or income, as the case may be. Similarly outstandin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was created against the appellant to sell 10000 US dollars at the rate of ₹ 48 per dollar, notwithstanding the fact that the maturity of contract falls beyond the accounting year. Further, appellant could enter into the aforesaid contract only based on the fact that he has receivables of 20,000 US dollars on 5th May i.e., the maturity date. In other words receivables of appellant to the extent of 10,000 US dollars are locked up as underlying asset to the aforesaid forward contract and only on the strength of such asset appellant was allowed to enter into the contract with bank. Now, appellant has to revalue his foreign debtors/ creditors on 31st March for the purpose of closing his books and as a matter of prudence he has to provide for the income or loss arising out of his transactions in foreign currency. The closing foreign exchange rate is 50 per dollar. Appellant has valued his debtors of 20,000 US dollars at the rate of ₹ 50 per dollar and recognized a gain of ₹ 1,00,000/-. Similarly, appellant has also recognized a loss of ₹ 20,000/- on forward contract of 10000 US dollars (i.e.Rs. 50-Rs.48). Now, appellant has shown the above gain/ loss separately f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be in case of lumpsum forward contracts. Appellant s AR has explained that whenever a lumpsum forward contract was entered, it was immediately covered by the value of subsequent exports and the sum of such forward contracts never exceeded the value of the underlying debtors at any point of time during the year. Appellant has placed on record the month wise position of the debtors vis-a-vis the forward contracts in dollar terms to demonstrate the above position. Further, to reiterate, appellant has been consistently following the mercantile system of accounting and has been valuing the year-end outstanding foreign exchange transactions in terms the Accounting Standard AS-11. 5.7 in the case of Woodward Governor Hon. Delhi High Court has Observed as under (294 ITR 451). In the instant cases, on the other hand, the liability arises out of already concluded contracts. The liability already stands accrued the minute the contract was entered into. The mere postponement of the payment to different date cannot extinguish the liability and render it notional or contingent. The decision of Hon.Supreme Court in Bharat Earth Movers settles the position. That decision explains that wha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... both, in respect of forward foreign exchange contract as per the rate prevailing on March,31. ( iii) A liability is said to have crystallized when a pending obligation on the balance sheet date is determinable with reasonable certainty. ( iv) As per AS-11, when the transaction is not settled in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting period. ( v) In view of the decision of the Supreme Court in the case of Woodward Governor India (I) P. Ltd., the Appellant s claim is allowable. ( vi) In the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit. 5.10 In the case of ONGC Vs CIT 322 ITR 180 Supreme Court has reiterated the principles laid down above while answering the question that when the assessee maintained their accounts on mercantile system of accounting and there was no finding by the Assessing Officer on the correctness or completeness of the account and that the assessee had complied with the accounting standards, laid down by the Central Government, can the loss suffered by it on account of fluctuation in the rate of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re, in my considered opinion the facts of the appellant's case are fully covered by the above cited decisions of the Hon. Supreme Court and the ITAT Mumbai bench. Accordingly, I hold that the loss incurred by the appellant on restatement of pending forward contract agreements at the yearend is an allowable business loss. Appellant succeeds on this ground. Aggrieved, the revenue is in appeal before us. 5. The Ld. Departmental Representative [DR] placed reliance on the findings of Ld. AO and contended that no deduction could be allowed to assessee against notional loss which has not been crystallized during the year. 6. Per contra, Ld. AR vehemently supported the findings of Ld. CIT(A) and contended that the matter is covered in assessee s favor by several judicial pronouncements in this regard. 7. We have heard the rival contention and perused the relevant material on record. The basic facts are not in dispute. The assessee is into the business of import and export of diamonds and restate foreign denominated assets and liabilities at year-end in Indian rupees and recognize resultant profit or gain in the profit loss account. This accounting methodology is consi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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