TMI Blog2020 (10) TMI 983X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing 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. - ITA No.1195 And 1776/Kol/2019 - - - Dated:- 21-10-2020 - Shri P.M. Jagtap, Vice-President And Shri S.S. Godara, Judicial Member For the Assessee : Shri Akkal Dhudewadia, AR For the Revenue : Shri Dhrubajoti Ray, JCIT-SR-DR ORDER PER P.M.JAGTAP, VICE PRESIDENT:- These two appeals, one filed by the assessee being ITA No.1195/Kol/2019 and the other filed by the Revenue being ITA No.1776/Kol/2019, are cross-appeals which are directed against the common order of Commissioner of Income-tax (Appeals)-7, Kolkata dated 29.03.2019. 2. The solitary issue involved in the appeal of the assessee relates to be disallowance made by the Assessing Officer Assessing Officer u/s 14A of the Income Tax Act, 1961 (hereinafter referred to as the Act ) read with Rule 8D of Income Tax Rules,1962 which is partly sustained by the ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the case of CIT Vs. Rasult (IT No.09/416 dated 15.02.2017). As regards disallowance of ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 ₹ 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 ₹ 10,00,000/- suo-moto disallowed by the assessee, then the A.O. shall restrict the disallowance under section 14A to ₹ 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 Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble 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 of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port 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 materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 allowability of the loss on actual payment i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 ₹ 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 tra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otice 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount 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 ..... 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