, " "
IN THE INCOME TAX APPELLATE TRIBUNAL" D" BENCH, MUMBAI
BEFORE S/SHRI B.R.BASKARAN (AM) AND AMIT SHUKLA, (JM)
.. , ,
./I.T.A. No.282/Mum/2014
( / Assessment Year :2009-10)
Asstt. Commissioner of / M/s Diamond Star,
Income Tax,16(3), 2nd floor, Vs. 804, Panchratna,
Room No.206,Matru Mandir, Opera House,
Tardeo Road, Mumbai-400004,
Mumbai-400007
( /Appellant) .. ( / Respondent)
./I.T.A. No.346/Mum/2014
( / Assessment Year :2009-10)
M/s Diamond Star, / Asstt. Commissioner of Income
804, Panchratna, Vs. Tax,16(3),
Opera House, 2nd floor,Room No.206,
Mumbai-400004, Matru Mandir,Tardeo Road,
Mumbai-400007
( /Appellant) .. ( / Respondent)
./I.T.A. No.1239/Mum/2014
( / Assessment Year :2009-10)
M/s Diamond Star, / Asstt. Commissioner of Income
804, Panchratna, Vs. Tax,16(3),
Opera House, Matru Mandir,Tardeo Road,
Mumbai-400004. Mumbai-400007
( /Appellant) .. ( / Respondent)
. / . /PAN/GIR No. :AACFD6531D
ITA No.1239/M/2014,
2 346/M/2014
and 282/M/2014
/Revenue by Shri Akhilendra P Yadav
/Assessee by S/shri Bharat D Damodar and
Ms.Sneha P Oak
/ Date of Hearing : 26.3.2015
/Date of Pronouncement : 5.6.2015
/ O R D E R
PER B.R. BASKARAN (AM)
Both the parties have filed appeals challenging the order dated 01-
10-2013 passed by Ld CIT(A)-27, Mumbai for assessment year 2009-10
against the quantum assessment order. The assessee has also filed
appeal challenging the order dated 13.01.2014 passed by Ld CIT(A)-27,
Mumbai imposing penalty u/s 271(1)(c) of the Act for Assessment year
2009-10.
2. We heard the parties and perused the record. The assessee is
engaged in the business of manufacturing and exporting of cut and
polished diamonds and jewellery. It filed its return of income declaring a
total income of Rs.92.46 lakhs. The AO rejected the book results and
estimated the Gross Profit @ 6% and accordingly computed the net profit
of the assessee. In addition, the AO also disallowed claim of Rs.63.22
lakhs pertaining to losses arising on outstanding/open foreign exchange
forward contracts upon revaluation of them on 31.3.2011 (mark to market
revaluation).
3. In the appellate proceedings, the Ld CIT(A) held that the rejection
of books was not correct and accordingly the estimated addition of Gross
profit was deleted. He also allowed the claim of mark to market
revaluation of outstanding foreign exchange forward contracts by following
the decision of Hon'ble Supreme Court rendered in the case of Woodward
ITA No.1239/M/2014,
3 346/M/2014
and 282/M/2014
Governor India (P) Ltd (312 ITR 254) . However, the Ld CIT(A) noticed
that the assessee had claimed deduction of Rs.2,00,60,098/- as forward
contract cancellation charges, which included the mark to market
revaluation claim of Rs.63.22 lakhs. The remaining amount of
Rs.1,37,48,098/- was considered by Ld CIT(A) as speculation loss.
Accordingly the Ld CIT(A) issued enhancement notice to the assessee and
disallowed the claim of Rs.1,37,48,098/- referred above. Aggrieved, both
the parties are in appeal before us.
4. In the appeal filed by the revenue, only issue urged relates to the
deletion of mark to market revaluation of outstanding foreign exchange
contracts. We have already noticed that the Ld CIT(A) has allowed the
claim by following the decision rendered by Hon'ble Supreme Court in the
case of Woodward Governor India (P) Ltd (supra). Before us, the revenue
could not show that the above said decision of Hon'ble Supreme Court is
not applicable to the facts of the present claim. Hence, we do not find any
reason to interfere with his decision on this issue.
5. We shall now take up the appeal filed by the assessee in the
quantum assessment proceedings. According to Ld CIT(A), the assessee
could not link the forward contracts with any specific order and further the
assessee could not furnish proper explanations for cancellation of forward
contracts. Thus, according to Ld CIT(A), the assessee has dealt in foreign
exchange independently, i.e., independent of his business transactions.
Accordingly the Ld CIT(A) has taken the view that the assessee has carried
out transaction in forward contracts in foreign exchange as an
independent activity unconnected with his business transaction and hence
the loss arising there from should be considered as speculation loss.
ITA No.1239/M/2014,
4 346/M/2014
and 282/M/2014
6. Before us, the Ld A.R submitted that the assessee that the assessee
had earned foreign exchange gain of Rs.3.74 crores during the year under
consideration. After setting off of loss on cancellation foreign exchange
forward contract and mark to market revaluation both aggregating to
Rs.2.00 crores, the assessee had offered net gain of Rs.1.74 crores. Thus,
according to Ld A.R, the Ld CIT(A) was not justified in singling out the
"loss component" alone ignoring the foreign exchange gain declared by
the assessee on cancellation of forward contracts.
7. On merits, the Ld A.R submitted that the assessee had always had
huge outstanding balance of Export receivables which are susceptible to
foreign exchange fluctuations. Even though the assessee could not make
one to one link of the forward contract with the receivables, yet the
outstanding forward contract balance was always less than the amount of
Export receivables, meaning thereby, the assessee has entered into
forward contract only to hedge against the possible loss that may arise
against Export receivables due to foreign exchange fluctuations. The Ld
A.R furnished a statement disclosing the forward contract vis-à-vis the
outstanding export receivables. The Ld A.R also placed reliance on a
number of case laws to support the case of the assessee.
8. We heard Ld D.R on this issue and perused the record. The
arguments advanced by Ld A.R would show that the Ld CIT(A) has singled
out the loss component only and accordingly decided the same against the
assessee, thus ignoring the gain made by the assessee. Admittedly the
approach adopted by the ld CIT(A) does not appear to be correct, since
consideration of only part of transactions would give misleading result.
Further, the assessee has contended that the forward contracts have been
entered into only to hedge against the outstanding Export receivables.
This factual aspect has also not been examined by the tax authorities.
ITA No.1239/M/2014,
5 346/M/2014
and 282/M/2014
Under these set of facts, we are of the view that this issue requires fresh
examination at the end of the assessing officer, since the same involves
verification of certain factual aspects. Accordingly, we set aside the order
of Ld CIT(A) on this issue and restore the same to the file of the AO with
the direction to examine this issue afresh and take appropriate decision in
accordance with the law, after affording necessary opportunity of being
heard to the assessee.
9. Before us, the assessee has also raised a ground challenging the
enhancement notice given by Ld CIT(A). On examination of facts, we
notice that the notice given by Ld CIT(A) was not pertaining to any fresh
source of income, but related to foreign exchange loss that was already
considered by the AO. Hence, we do not find any merit in the contentions
of the assessee.
10. The assessee has also filed appeal against the penalty levied by Ld
CIT(A) u/s 271(1)(c) of the Act. We have earlier noticed that the Ld
CIT(A) enhanced the assessment by disallowing forward contract loss of
Rs.1.37 crores claimed by the assessee. The Ld CIT(A) also imposed a
penalty of Rs.46,72,978/- on the above cited enhancement. Aggrieved,
the assessee has filed this appeal before us.
11. In the earlier paragraphs, we have restored the above said issue to
the file of the assessing officer. Hence, the impugned penalty order does
not have independent legs to stand on its own. Accordingly, the AO may
consider imposing penalty in the set aside proceedings, if found necessary.
ITA No.1239/M/2014,
6 346/M/2014
and 282/M/2014
12. In the result, the appeal filed by the revenue is dismissed. Both the
appeals filed by the assessee are treated as allowed for statistical
purposes.
5th June, 2015
Sd sd
( / AMIT SHUKLA) (.. / B.R. BASKARAN)
/ JUDICIAL MEMBER / ACCOUNTANT MEMBER
Mumbai:5th June,2015.
. ../ SRL , Sr. PS
/Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent.
3. () / The CIT(A)- concerned
4. / CIT concerned
5. , , /
DR, ITAT, Mumbai concerned
6. / Guard file.
/ BY ORDER,
True copy
(Asstt. Registrar)
, /ITAT, Mumbai
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