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Case Number

I.T.A No. 4674.MUM/2013, (Assessment Year 2009-10)

Advocates

Appellant by Shri Pavan Kumar Beerla
Respondent by Shri Paresh Shaparia

Judges

I.P Bansal, J.M
Sanjay Arora, A.M

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Smart Summary

Concise Structured Summary of the Court's Opinion

Factual and Procedural Background

The Revenue filed an appeal against the order of the learned Commissioner of Income Tax (Appeals)-17, Mumbai dated 19/11/2012 for assessment year 2009-2010. The assessing officer (AO) had disallowed a mark-to-market loss on commodity and foreign exchange transactions amounting to Rs. 13,05,884 on the ground that it represented an unrealised/notional loss and therefore not allowable under the Income-tax Act; the assessee had agreed to the proposed disallowance during assessment proceedings and the addition was made.

The assessee is a company engaged in manufacturing and processing of ferrous and non-ferrous metals. During the year the assessee undertook commodity transactions on MCX and some foreign-exchange related forward-type transactions (including joint MCX transactions with Metaplast Exim (I) Pvt. Ltd.) as hedges against inventory and processing operations tied to export orders. The assessee recorded mark-to-market losses of Rs. 13,05,884 computed as per ICAI (AS-11) guidelines and deducted that amount from MCX/MCXSX profits, showing it as a liability under "Other Liabilities".

The assessee appealed the AO's disallowance to the CIT(A). Relying on prior decisions (including a Supreme Court decision in CIT v. Woodward Governor India (P.) Ltd.), the CIT(A) deleted the disallowance and allowed the mark-to-market loss as a business loss. The Department (Revenue) appealed to the Tribunal; during hearing the Departmental Representative (DR) was unable to distinguish the facts of the assessee's case from the Supreme Court decision cited by the assessee. The Tribunal, after considering the parties' positions and prior authorities, dismissed the Department's appeal.

Legal Issues Presented

Whether the mark-to-market/unrealised foreign exchange loss of Rs. 13,05,884 shown by the assessee on open contracts (commodity and foreign exchange hedges) is allowable as a business loss or is an unrealised/notional loss not deductible under the Income-tax Act.
Whether the decision of the Hon'ble Supreme Court in CIT v. Woodward Governor India (P.) Ltd. (312 ITR 254 (SC)) and other authorities relied upon by the assessee and the CIT(A) are applicable to the facts of the present case such that the deletion of the disallowance should be sustained.

Arguments of the Parties

Revenue's Arguments (Appellant)

The learned CIT(A) erred in deleting the disallowance of Rs. 13,05,884 on account of unrealised foreign exchange loss on outstanding export/commodity positions because the loss is neither actual nor accrued and therefore not allowable under the Income-tax Act.
The learned CIT(A) wrongly relied upon the Supreme Court decision in CIT v. Woodward Governor India (P.) Ltd. (312 ITR 254 (SC)), asserting that the facts of that decision are entirely different from the facts of the present case and thus its ratio is not applicable.

Assessee's Arguments (Respondent)

The impugned loss arose from MCX commodity transactions and foreign exchange transactions entered into in the ordinary course of business as hedges linked to inventory and export-related processing obligations (including transactions undertaken jointly with Metaplast Exim (I) Pvt. Ltd.).
The mark-to-market loss of Rs. 13,05,884 was computed as on 31/3/2009 in accordance with ICAI accounting guidelines (AS-11) and was shown in profit & loss after considering MCX profits; the loss was notationally recorded as a liability under "Other Liabilities" but the assessee contended it was not merely notional or contingent — it was a genuine business loss arising from normal hedging/restatement practice.
The assessee relied on ledger evidence of MCX transactions, submissions to the AO (including joint ledgers with Metaplast), and multiple precedents (including the Supreme Court decision in Woodward Governor) supporting the allowability of unrealised/restated losses on revenue-related forward/contract obligations.

Departmental Representative's Position at Hearing

The DR was unable to point to material showing that the facts of the assessee's case were different from those in CIT v. Woodward Governor India (P.) Ltd. or to distinguish that Supreme Court proposition on the issue.

Table of Precedents Cited

The following table lists each precedent that the opinion expressly mentions and, where the opinion states the relevant principle, records the principle and how the Tribunal applied it.

Precedent	Rule or Principle Cited For	Application by the Court
CIT v. Woodward Governor India (P.) Ltd., 312 ITR 254 (SC)	Held that unrealized loss due to foreign exchange fluctuation on foreign currency transactions on revenue account (debited in P&L) is allowable; Supreme Court upheld High Court/Tribunal in allowing such deduction.	The Tribunal found no material distinction between the facts here and Woodward and relied on that Supreme Court proposition to sustain the allowability of the assessee's mark-to-market loss.
Cit v. Becton Dickinson India Pvt. Ltd. (SLP (C) No. 19477 of 2009)	Cited among authorities relied upon by the assessee/appeal side (specific principle as cited in the paper book relates to similar propositions on mark-to-market/unrealised losses).	Placed on record by the assessee/AR as part of a body of authorities supporting the claim; treated as supportive authority in combination with others.
DCIT v. Bank of Bahrain & Kuwait	Earlier decision cited by the Tribunal/authorities on the allowability of mark-to-market/restatement losses in business contexts (as referenced in the opinion).	Referred to as part of the chain of authorities covering the issue; used to support the conclusion that the loss is allowable as a business loss.
ONGC v. DCIT, 83 ITD 151 (Del SB)	Referred to as upholding the same principles as in Woodward Governor regarding allowance of revaluation/restatement losses on pending forward contracts.	The Tribunal noted that ONGC affirmed the Woodward principle and relied on this chain of authority in sustaining the CIT(A)'s deletion of the disallowance.
ACIT v. Vimal Export, I.T.A. No. 661 O.M. 2012 dated 8.1.2011	Decision where deletion of mark-to-market loss was upheld; the quoted text explains that restatement of forward contract obligations done as per AS-11 and where gains had been taxed earlier, the losses on revaluation are allowable if entered in the course of business and not speculative.	The Tribunal expressly relied on and reproduced portions of this decision to bolster the view that such losses are allowable business losses; it noted the Revenue's failure to distinguish that decision from the present facts.
Reliance Industries Limited v. CIT, ITA No. 7223.Mum/2011 dated 20.11.2013	Cited as one of several Tribunal/High Court decisions reflecting the proposition that mark-to-market/unrealised losses on revenue contracts may be allowable.	Included in the list of supporting authorities relied upon by the assessee/AR and considered in the Tribunal's view that the issue is covered by established decisions.
ACIT v. Sharekhan Financial Services Pvt. Ltd., I.T.A. No. 6342.Mum/2011 dated 21.7.2013	Cited as supporting authority on the proposition concerning allowability of such losses.	Listed among authorities supporting the deletion of the disallowance; formed part of the body of decisions followed by the Tribunal.
DCIT v. Kotak Mahindra Investment Limited, 2013-TIOL-362-ITA F-MUM	Cited in support of the general proposition that mark-to-market/revaluation losses in certain business contexts can be allowed.	Included in the compilation of precedents relied upon to sustain the CIT(A)'s conclusion.
Bhavani Gems v. ACIT, I.T.A. No. 2855.Mum/2010 dated 30.3.2011	ITAT decision allowing loss on restatement of pending forward contracts as business loss; explicitly referenced in the quoted ACIT v. Vimal Export reasoning.	Used as a directly relevant precedent; the Tribunal noted that Bhavani Gems supported allowing such losses and formed part of the chain of authorities followed.
ADIT v. J.P. Morgan Chase Bank, 2010 (ITAT Mum)	Cited among tribunal decisions on similar issues; listed as supportive authority.	Included in the catalogue of authorities relied upon by the assessee/AR and considered by the Tribunal in arriving at its conclusion.
ABN Amro Securities India Pvt. Ltd. v. ITO ITA No. 7073.Mum/06 dated 26.08.2011	Cited as part of the consistent line of tribunal decisions on the subject.	Counted among the precedents that the Tribunal considered supportive of allowing mark-to-market/unrealised losses.
HLS Asia Ltd. v. DCIT (Delhi)	Cited as a tribunal/authority decision addressing the issue of unrealised/mark-to-market losses.	Included in the list of supporting cases the Tribunal relied on in concluding the deletion was correct.
Edelweiss Capital Ltd. v. ITO ITA No. 5324 Mum/2007 (AY-2004-05) dated 10.11.2010	Cited among cases addressing similar accounting/revaluation issues and their tax consequences.	Placed on the record by the assessee/AR and regarded by the Tribunal as part of the settled position favouring allowability in appropriate circumstances.
Ramesh Kumar Damani v. Addl. CIT, ITA No. 1443.Mum/2009 (AY-2006-07) dated 26.11.2010	Cited as one of the decisions aligned with the proposition the assessee relied upon.	Included in the cluster of supporting authorities considered by the Tribunal in upholding the CIT(A)'s conclusion.

Court's Reasoning and Analysis

The Tribunal's analysis proceeded by reviewing the assessment officer's position, the assessee's factual matrix and submissions, the CIT(A)'s finding, and the authorities placed before it.

The AO's rationale for disallowance was that the mark-to-market loss was a notional/unascertained or contingent liability liable to change on subsequent settlement and therefore not deductible. The assessee countered that these transactions were entered in the course of its regular business as hedges for inventory and processing obligations, that the losses were computed in accordance with ICAI/AS-11 accounting guidance and were reflected in its profit & loss account and balance sheet (shown as liability).

The CIT(A) accepted the assessee's position, observing that a sister concern (Metaplast Exim (I) Pvt. Ltd.) had similar facts and relief was allowed there; the CIT(A) also relied upon several judicial decisions that treat mark-to-market or restatement losses on forward/contract obligations as allowable business losses when entered in the regular course of business and not speculative in nature.

At the Tribunal hearing the Departmental Representative could not point out a factual distinction between the present case and the Supreme Court's decision in Woodward Governor India (P.) Ltd. The assessee placed before the Tribunal multiple orders where similar propositions were laid down and appeals by the Revenue had been dismissed.

The Tribunal, after hearing both sides and respectfully following the line of authorities cited (including the Supreme Court decision and several tribunal/bench and High Court decisions), concluded that the assessee's case was covered by those precedents. The Tribunal emphasized the settled position reflected in the cited authorities and the principle of consistency — notably where revaluation/restatement was consistently done as per accounting standards and gains had been taxed in previous years, there was no reason to disallow losses when they arose in a later year.

On this basis the Tribunal found no merit in the Departmental appeal and therefore dismissed it.

Holding and Implications

Holding: The Departmental appeal is DISMISSED.

Implications:

The deletion of the AO's disallowance of Rs. 13,05,884 in respect of mark-to-market/unrealised foreign exchange and commodity losses is sustained — the loss stands allowed as a business loss for the assessment year 2009-2010.
The Tribunal explicitly relied upon and followed earlier decisions (including the Supreme Court in Woodward Governor) and other tribunal decisions; it treated the present facts as falling within that line of authority and applied the same legal proposition rather than laying down a novel principle.
No new precedent was formulated by the Tribunal; the decision applies existing authorities to the facts before it and results in no interference with the CIT(A)'s order in favour of the assessee.

This summary is based exclusively on the text of the provided opinion and does not add facts or inferences beyond what the opinion itself states.

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The Dy. Cit, Cir. 8(2), Room No. 216-A, Aaykar Bhavan, Mk Road, Mumbai 400020 () v. M/S. Nico Extrusions Pvt. Ltd. 12, Niraj Industrial Estate, Off. Mahakali Caves Road, Andheri (East), Mumbai 400093 ().

I.P Bansal, J.M:— This is an appeal filed by the Revenue and it is directed against the order passed by ld. CIT(A)-17, Mumbai dated 19/11/2012 for assessment year 2009-2010. Grounds of appeal 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 Rs. 13,05,884/- on account of unrealised foreign exchange loss on exports outstanding ignoring that the said loss is neither actual nor an accrued loss and hence not allowable under the provisions of the Income-tax Act”

2) “On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the disallowance of Rs. 13,05,884/- on account of unrealised foreign exchange loss on exports outstanding by placing reliance upon the decision of the Apex Court in the case of Woodward Governor India (P.) Ltd. (SC) (2009) 312 JTR 0254 ignoring that the facts in the said decision are entirely different from the facts of the instant case and hence, the ratio of the said decision is not applicable to the instant case”

2. The assessee company is engaged in the business of manufacturing and processing of ferrous and non ferrous metals. The A.O disallowed mark to market loss on commodity and foreign exchange amounting to Rs. 13,05,884/-. The AO observed in the assessment order that it is in the nature of notional loss which is liable to change at the time of subsequent settlement of foreign exchange transaction and there is no provision in the Act for allowability of such deduction of unrealized foreign exchange, therefore, he proposed for disallowance of the same to which assessee agreed during the course of assessment proceedings. Accordingly, the addition was made. Subsequently, the addition was challenged in an appeal filed before ld. CIT(A). It was submitted that during the year under consideration assessee has undertaken commodity transaction of MCX with various brokers in connection with ferrous and non-ferrous metals in order to hedge the stock held by the assessee. The assessee has offered income of MCX of Rs. 3,09,70,851/- after considering the mark to market loss of Rs. 13,05,884/. During the course of assessment proceedings ledger account of the transaction done on MCX with the brokers were submitted including transactions jointly done with Metaplast Exim (I) Pvt. Ltd., which was submitted to AO vide letter dated 13/09/2011. Metaplast Exim (I) Pvt. Ltd. had obtained various export orders from foreign parties for supply and had obtained advances against the orders. Metaplast Exim (I) Pvt. Ltd. in turn advanced funds to Nico Extrusions Pvt. Ltd. to process and manufacture goods at its Silvasa Unit for export order. The assessee in turn had started importing/procuring of raw materials and increased its inventory level. Due to postponement of the order due to drastic fall in the prices of various ferrous and non-ferrous metals, the export parties of Metaplast Exim (I) Pvt. Ltd. stalled the orders as it was not available for them. In order to hedge some of the raw materials joint transaction of MCX was carried out by the assessee with Metaplast Exim (I) Pvt. Ltd. which are reflected in the ledger account submitted to the AO. The assessee has imported raw material of Rs. 70,58,07,468/- and export of Rs. 7,13,35,000/-. The opening and closing stock of raw material is Rs. 39.54 crores and Rs. 72.41 crores respectively. As per accounting guidelines of ICAI the market price of contract was taken as on 31/3/2009 and loss was computed as per guidelines of ICAI. The assessee has also submitted the following calculation to show that the loss shown by the assessee was in accordance with the guidelines issued by ICAI.

Broker Expiry date Scrip Name Lot BUY Qty/Lot Total Rate Closing as on 31/3/09 Mark to Mark Amar Ferro Metals Pvt. Ltd. 30/04/2009 Nickel Buy 411 250 102750 513.54 501.10 1278310 1278310 Metaplast Exim Pvt. Ltd. (MCXSX) 28/04/2009 USD 187 1000 187000 50.77 50.92 27574 27574 Total 1305884

The amount of Rs. 13,05,884/- is reduced from the MCX (Rs. 1278310-commodities) & MCXSX (Rs. 27574 foreign exchange) profit recorded in the P. & L. A/c. and is shown as a Liability under the head Other Liabilities.

The assessee has recorded the Loss of Rs. 13,05,884/- on its open contracts as under:

2.1 It was further submitted that the loss shown by the assessee is neither notional loss nor a contingent loss but it is actual, which is entitled to be deducted. Upon considering the submissions of the assessee ld. CIT(A) has returned a finding that Metaplast Exim (I) Pvt. Ltd. which is sister concern of the assessee had obtained various export orders from foreign parties for supply and had obtained advances against the orders and in turn advanced funds given to the assessee to process and manufacture goods at its Silvasa Unit for the export order and in case of Metaplast Exim (I) Pvt. Ltd. he has allowed the relief to the assessee under similar facts and circumstances wherein relying upon several decisions the mark to market loss of foreign exchange was allowed as business loss. Thus ld. CIT(A) has allowed the claim of the assessee. The Revenue is aggrieved, hence, has filed aforementioned grounds of appeal.

3. During the course of hearing it was brought to the notice of ld. DR that as per finding recorded by ld. CIT(A) the loss returned by the assessee is with respect to trade of the assessee. No material has been brought on record by ld. DR to suggest that how the facts of the assessee's case were different from the facts in the case of CIT v. Woodward Governor India (P.) Ltd., 312 ITR 254 (SC). and proposition decided by Hon'ble Supreme Court in that case. Copy of this decision is placed at pages 2 to 12 of the paper book. In the said case assessee company had debited in its P. & L. Account certain unrealized loss due to foreign exchange fluctuation in foreign currency transaction on revenue items. The AO disallowed the same on the ground that it was an unascertain-liability and it was a contingent liability. ld. CIT(A) upheld the action of the AO. The Tribunal relying upon the earlier decisions in assessee's own case held that the claim of the assessee for deduction of unrealized loss due to foreign exchange fluctuation as on the last date of the previous year was allowable and the decision of the Tribunal was upheld by the High Court. Their Lordships of Hon'ble Supreme Court have upheld the order of Hon'ble High Court.

3.1 However, ld. DR could not point out any difference in the facts of the assessee's case to show that these are different from the proposition decided in the case of CIT v. Woodward Governor India (P.) Ltd. (supra).

4. On the other hand, Ld. AR has placed several orders of the Tribunal in which similar proposition has been laid down and the appeals filed by the Revenue on this issue have been dismissed. The decisions are filed in the paper books and list is filed at page one of the paper book which read as under:

• CIT v. Woodward Governor India P. Ltd., 312 ITR 254 (SC).

• Cit v. Becton Dickinson India Pvt. Ltd.: SLP (C) No. 19477 of 2009

• DCIT's Bank of Bahrain & Kuwait I 32 1 Ti 505 (S13)

• ONGC v. DCIT, 83 ITD 151 (Del SB).

• ACIFs Vimal Export I.T.A No. 661 0.M 2012 dated 8.1.2011

• Reliance Industries Limited v. CIT ITA No. 7223.Mum/2011 Dated 20.11.2013

• ACIT v. Sharekhan Financial Services Pvt. Ltd. I.T.A No. 6342.Mum 2011 21.7.2013

• DCIT v. Kotak Mahindra Investment Limited, 2013-TIOL-362-ITA F-MUM.

• Bhavani Gems v. ACIT I.T.A No. 2855.Mum 2010 dated 30.3.2011

• ADIT v. J.P Morgan Chase Bank 2010 11011 85 ITAT Mum.

• ABN Amro Securities India Pvt. Ltd. v. ITO ITA No. 7073.Mum/06 dated 26.08.2011

• HLS Asia Ltd. v. DCIT, 5-ITR (Trib)-774) (Delhi)

• Edelweiss Capital Ltd. v. ITO ITA No. 5324 Mum/2007 (AY-2004-05) dated 10.11.2010

• Ramesh Kumar Damani v. Addl. CIT in ITA No. 1443.Mum/2009 (AY-2006-07) dated 26.11.2010.

5. In this view of the situation, after hearing both the parties, respectfully following the aforementioned decisions we find no merit in the Departmental appeal. For completion of the matter we may mention that in the aforementioned decision in the case of ACIT v. Vimal Export (supra) the Department had agitated the deletion of mark to market loss of Rs. 23,72,500/- which was deleted by ld. CIT(A) and the order passed by ld. CIT(A) was upheld with the following observations:

“5. During the proceedings before us, Ld DR heavily relied on the order of the AO.

6. On the other hand, none appeared on behalf of the assessee to represent the case,

7. We have heard the Ld DR, perused the orders of the Revenue Authorities and the relevant material placed before us as well as the cited decisions of the ITAT cited before us. On perusal of the CIT (A)'s order in general, para 6 in particular, we find that the same is relevant which reads as under:

“6. Thus, the Judicial decisions of the Hon'ble Supreme Court and various other Authorities are clearly in favour of the appellant on this issue. That apart, as discussed earlier, the liabilities in foreign exchange were incurred during the normal course of the appellant's business and the restatement of the forward contract obligations was does as per AS-11 in a consistent manner over the years. In fact the gain earned on such revaluation was accepted and brought to tax in the respective years and there is no reason to arrive at a different conclusion at present merely because there is a loss during the year. Apparently, the AO was of the view that the appellant is not a dealer in foreign exchange unlike the Bank of Bahrain, and therefore, the said decision is not applicable to the facts of the case. It is not out of place to mention that the Hon'ble Supreme Court, in the case of ONGC cited above, upheld the same principles that were laid down in the case of ONGC cited above upheld the same principles that were laid down in the case of Woodword Governor, and the loss was held allowable in similar circumstances, where the business of ONGC is not that of a foreign exchange dealer. Further, it is not the nature of business or the stock dealt with i.e, currency or commodities or goods like diamonds in the present case that matters. What matters is whether the forward contract transaction was entered during the course of appellant's regular business or whether it is tainted with a colour of speculative transaction. At present, the AO does not dispute that the impugned transaction is speculative in nature. Further, the aforesaid issue of allowing the loss on account of revaluation of pending forward contracts was considered by the ITAT, Mumbai Bench in the case of Bhavani Gems v. ACIT, CC-35 in ITA No. 2855.Mum/2010 dated 30.3.2011 for AY 2006-2007 and the said loss was allowed as ‘business loss’ and the issue was held to be covered by the Special Bench decision in the case of DCIT v. Bank of Bahrain. Therefore, in my considered opinion the facts of the appellant's case are fully covered by the above dated decisions of the Hon'ble 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 year-end is an allowable business loss. Appellant succeeds on this ground.”

8. Considering the above settled position of the issue and also following the principle of consistency, we are of the opinion that the decision taken by CIT(A) by holding that the loss incurred on restatement of pending forward contract agreements at the year-end is an allowable business loss is fair and reasonable and it does not call for any interference. Accordingly, we allow the appeal in favour of the assessee and the ground raised by the Revenue is dismissed.

9. In the result, the appeal of the Revenue is dismissed.”

It may be mentioned here that one of us i.e Judicial Member is party to the said decision.

5. In view of above discussions, Departmental appeal is dismissed.

The Dy. Cit, Cir. 8(... v. M/S. Nico Extrusions...