IN INCOME TAX APPELLATE TRIBUNAL BENCH, MUMBAI BEFORE SRI MAHAVIR SINGH, JM AND SRI RAMIT KOCHAR, AM ITA No.4588/Mum/2014 (A.Y:2009-10) Asst. Commissioner of Vs. M/s K P Sanghvi and Sons, Income Tax -16(3), Matru 1301, Prasad Chambers, Mandir, Tardeo Road, OperaHouse,Mumbai -4 Mumbai-400007 PAN:AAAFK8390F Appellant .. Respondent Appellant by .. Sri R P Meena Respondent by .. Sri K Shivram Date of hearing .. 29-09-2016 Date of pronouncement .. 29 -09- 2016 ORDER PER MAHAVIR SINGH, JM: This appeal by Revenue is arising out of order of CIT (Appeals)-27, Mumbai in appeal No.CIT(A)-27/AC-16(3)/135/13-14 dated 22.4.2014. Assessment was framed by ACIT- Circle 16(3), Mumbai for assessment year 2009-10 vide his order dated 28.3.2013 u/s 143(3) of Income Tax Act, 1961 (hereinafter Act ). 2. first issue in this appeal of Revenue is against order of CIT (A) in deleting disallowance made by AO of "Mark to Market on revaluation of forward exchange contracts which was outstanding as on date of balance sheet, treating same as notional loss. In this appeal, revenue has raised following two grounds: 1. "Whether on facts and circumstances and in law, Id. CIT(A) has erred in holding that "Mark to Market" loss of Rs.18,80,94,300/- arising on valuation of forward exchange contracts on closing date of accounting year is not notional loss and, therefore allowable. 2. Whether on facts and circumstances of case and in law, Id.CIT(A)was right in not taking cognizance of decision of ITAT,'E' Bench, Mumbai in ITA NO.506/Mum/2013 dt.03.05.2013 in case of M/s. S. Vinodkumar Diamond Pvt. Ltd. 2 ITA No.4588/Mum/2014 3. Briefly stated facts are that assessee firm is engaged in manufacturing and export of cut and polished diamonds. AO during course of assessment proceedings noticed that assessee has debited sum of Rs.18,80,94,300/- as loss on account of outstanding foreign exchange forward contracts. He required assessee to explain same as to why same should not be disallowed by treating same as notional loss. assessee explained that loss on account of "Mark to Market revaluation of forward contracts as per rupee value equivalent to US $ as on 31.3.2009 was claimed. AO required assessee to file details of these losses. According to AO these losses have not been crystallized and hence again asked assessee as to why same should not be disallowed as notional loss on valuation of liability. ld. AR explained that as per accountancy prudence and in view of Accounting Standard -11 (AS-11) guidelines issued by ICAI assessee claimed these losses, since there was contractual liability on part of assessee with banks to buy/sell US $ at future date beyond 31.3.2009 and its magnitude needs to be estimated with reasonable certainty on date of balance sheet i.e. on 31.3.2009. But AO rejected claim of assessee by observing that foreign exchange forward contract could not be accorded usual accounting treatment of reasonably estimating foreign exchange fluctuations by adopting rate of US $ as on date of balance-sheet for reasons that these are not ascertained liabilities. Accordingly, he disallowed claim of loss on account of revaluation of US$ for outstanding foreign exchange contracts treating same as notional loss or contingent liability. Aggrieved assessee preferred appeal before CIT (A). CIT (A) considered assessee s outstanding foreign exchange exports and monthly average of outstanding foreign debts as under: 1.0 Financial Information for AY 2009-2010 1.1 As submitted earlier, appellant is partnership firm, mainly engaged in business of import of diamonds, cutting and polishing and export of cut and polished diamonds. 1.2 total export turnover during Previous Year 2008-2009 corresponding to AY 2009-2010, was Rs.714.98 crores and total 3 ITA No.4588/Mum/2014 import of diamonds was Rs.517.10. crores. Apart from said import of diamonds, appellant has also purchase diamonds of Rs.20.66 crores locally through Diamond Dollar Account, which were settled in foreign currency. Accordingly, both limbs of transactions i.e. purchase and sales are in foreign currency. 1.3 As on 31 March 2009, outstanding foreign exposure of appellant is as under: Sr. Nature of foreign currency exposure Amount No. (USD in million, 1 Exports receivables (i.e. overseas debtors) 19.22 2 Imports Payables (i.e. overseas creditors) 9.31 3 Bank loan 65.78 4 Advance from Overseas Customers 8.96 5 Closing Stock for export 91.44 Total 194.72 From above, Your Honor shall appreciate fact that total amount of foreign currency exposure as on 31 March, 2009 amounts to USD 194.71 million approx. 1.4 Considering substantial foreign currency exposure and due to substantial fluctuation in foreign currency rates, appellant entered into forward contracts (FCs) with Banks as integral part of export import business with aim to hedge and safeguard against foreign exchange fluctuation of US doller vis- -vis Indian currency, from time to time. 2.0 Details relating to Forward Contract undertaken by Appellant during financial year ended 31 March 2009 2.1 Appellant herewith submits following details of foreign exchange gain (loss) made during year ended 31 March 2009, such as: Sr. No. Particulars Annexure 1 Statement of revaluation of outstanding forward- contract as on 31 March 2009 for exchange loss of Rs. 18,80,94,300 2 Statement of Gain / (Loss) for Forward Contracts B outstanding as on 31 March 2009 and its effect in subsequent year ended 31 March 2010 2.2 Appellant further submits that there was huge volatility in exchange rate of US Dollar viz. Rupee from April 2008 to March 2009. USD had registered appreciation from Rs. 39.7650 to Rs. 51.9700 during year as is evident from yearly graph plotting volatility marked as Annexure - C. 4 ITA No.4588/Mum/2014 2.3 Your Honour will appreciate fact that Appellant has hedge underlying exposure in foreign currency. As such, it is humbly submitted that forward contracts entered were for purpose of business to hedge against forex loss. appellant has forex exposure on all limbs its business activities. firm has not entered into forward contracts with 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. This is integral part of business undertaken by appellant and incidental to export and import business. In absence of such forward contracts, firm may sustain huge losses. Therefore, it becomes essential for firm to book such forward contracts as prudent business practices. Further, you will appreciate that appellant is engaged in business of diamonds export and not in business of foreign exchange. This is evident from financial results of firm as well as objects of firm as mentioned in Partnership Deed. In view of same, it may be appreciated that these contracts are nothing but integral part of its export and import activities and resultant hedging difference on their revaluation cannot be isolated artificially. 4. Further, CIT (A) deleted disallowance and allowed claim of assessee by observing in following paragraphs:- 2.4.5 As will be seen in subsequent paragraphs, appellant has been regularly following AS-11 as per which forward exchange contracts outstanding on balance sheet date has to be restated and profit/gain has been offered to tax in respective years. Thus, it was claimed that loss on account of fluctuation in rate of foreign exchange whether realized or unrealized has to be treated as revenue expenditure and should be allowed as deduction from taxable income, In this regard, appellant has also submitted details, of outstanding foreign exchange exposure as at end of year which is as under:- Sr. Nature of foreign currency exposure Amount No. (USD in million, 1 Exports receivables (i.e. overseas debtors) 19.22 2 Imports Payables (i.e. overseas creditors) 9.31 3 Bank loan 65.78 4 Advance from Overseas Customers 8.96 5 Closing Stock for export 91.44 Total 194.72 2.4.6 appellant has also given average and month wise exposure in foreign exchange during F.Y.2008-09 as per which monthly average of outstanding foreign debtors was US Dollar 40.86 million. Also, stock as on 31.3.2004 was worth US Dollar 91.44 million. said chart is reproduced herein below:- 5 ITA No.4588/Mum/2014 Average and month wise exposure in foreign exchange during financial year 2008-09 Month Outstanding Outstanding forex Outstanding bank Advance from from as on month Total foreign Stock forex debtors creditors as on loan as on month customers as endon (expected exchange as on month month end end month end forex receivables) exposure as on end contract Apr-08 44,816,959 31,288,490 75,534,866 21,008,529 112,410,918 285,059,763 May-08 44,781,311 41,323,348 73,532,621 18,919,110 113,654,036 292,210,425 Jun-08 46,587,421 53,896,970 65,980,079 12,131,098 112,462,944 291,058,512 July-08 51,339,913 51,149,907 68,528,680 20,569,801 120,631,271 312,219,572 Aug-08 51,753,000 53,002,048 67,088,900 18,606,497 118,096,552 308,546,997 Sep--08 47,781,111 59,348,072 69,039,634 12,656,252 118,864,305 307,689,375 Oct-08 60,291,363 24,771,240 91,001,852 10,791,675 94,208,024 281,064,153 Nov--08 46,612,670 31,437,520 81,862,954 9,863,734 109,145,182 278,922,061 Dec-08 35,229,699 30,221,002 61,068,826 10,453,065 105,600,941 242,573,533 Jan-09 22,416,651 28,503,142 51,602,952 9,663,219 101,810,515 213,996,279 Feb-08 19,570,135 35,551,859 39,181,671 9,239,317 92,294,245 195,837,227 Mar-08 19,224,253 9,311,415 65,785,464 8,961,480 91,442,232 194,724,845 Average 40,867,041 37,483,751 67,517,375 13,571,982 107,551,764 266,991,912 2.4.7 To understand concept of speculative transaction, at this stage, I may also be profitable to read section 43(5) which is as under: speculative transaction" means transaction in which contract for purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by actual delivery or transfer of commodity or scrips: Provided that for purposes of this clause (a) contract in respect of raw materials or merchandise entered into by person in course of his manufacturing or merchanting business to guard against loss through future price fluctuations in respect of his contracts for actual delivery of goods manufactured by him or merchandise sold by him; or (b) contract in respect of stocks and shares entered into by dealer or investor therein to guard against loss in his holdings of stocks and shares through price fluctuations; or (c) contract entered into by member of forward market or stock exchange in course of any transaction in nature of jobbing or arbitrage to guard against loss which may arise in ordinary course of his business as such member; 26[or] [(d) [Explanation 1]***** 2.4.8 Justifying that this loss on revaluation was real, Ld.AR for appellant further contends that: (i)There is no dispute about incurrence of this loss (ii)Similarly, there is no dispute that method of accounting followed by appellant is mercantile as ld. AO has recorded this fact in assessment order. 6 ITA No.4588/Mum/2014 (iii)It is not disputed that these losses have been recognized by appellant in accordance with applicable accounting standards/policies in this regard. (iv)The Id. AO has raised only dispute that this loss is not allowable as deduction in year of incurrence computed under mercantile system by following accounting standards in this respect. v) `The appellant was obliged to convert outstanding balance of forward contract at year end rate, which were executed at higher rates, resulting in considerable loss on account of year end conversion of forward contract positions 2.4.9 It was also stated that Institute of Chartered Accountants of India, legal apex body, on accounting matters has issued Accounting standard "Accounting for effects of changes in foreign exchange rates (AS-11)(revised)" which is required to be compulsorily followed from 1 st April 1995. In accordance with stipulations of this standard, all monetary items are required to be valued at closing rate and profit or loss arising there from is required to be debited or credited to profit and loss account as can be seen from following excerpts: At each balance sheet date: 1. Monetary items denominated in foreign currency (e.g. foreign currency notes and loans denominated in .foreign currency) should be reported using closing rate. 2. Exchange difference arising on foreign currency transactions should be recognized as income or as expense in period in which they arise. " 2.4.10 International Accounting standard (IAS - 21) also stipulates same methodology as can be seen from following excerpts: 3. At each Balance sheet date, foreign currency monetary items that result from transactions of entity should be reported at closing rate 4. Exchange difference arising on reporting entity's long term foreign currency monetary items at rates different from those at which they were recorded during period or presented in previous financial statements should normally be recognized in income for period. " 2.4.11 In nutshell, summary of appellant's submissions are as under: i) In first place, ld. AO has failed to appreciate characteristics of Forward contract. Each Forward contract is 7 ITA No.4588/Mum/2014 always assigned with value that is contracted with creation of fettered obligation on assessee to execute and meet at future contracted date. All contracts are always enforceable, in as much as realizable. ii) point that Id. AO was making was that anticipated liabilities are not allowable, which are notional in nature. But, distinction in case of Forward contracts is that if anticipated liability is coupled with present Obligation and only quantification can vary depending upon terms of contract, then liability is said to have crystallized on reporting date i.e 31st March. iii) Argument of Id. AO that event of contract maturity can only quantify contract value is tenuous and weak. In reality, Forward contracts losses / profits accrue on daily basis depending on fluctuation of US$ and Indian Rupee. Any prudent person would constantly monitor position of forward contract value on daily basis to assess impact of profit or loss. It may be appreciated that values of outstanding position of Forward contract is clearly measurable based on daily position of spot rate of US $ against Rupee, so is it also measurable with complete accuracy, as on last date of Balance sheet. iv) Cut-off of 31st March splits profits /losses of outstanding position of forward contracts into two different accounting periods, and that is only rational way to evaluate profit / loss in given period. Loss, although purported to be stated by Id. AO to be notional, is actual and quantifiable. Loss had occurred and accrued, as result of conversion. Only thing is that such loss in subsequent period would get either further aggravated or get placid, depending upon foreign exchange fluctuation that may happen against rupee. v) Foreign exchange loss as result of conversion of outstanding position of Forward contracts is - real quantifiable with precision based on commercial accounting principles as result of cut-off in consonance with Accounting standard -11 issued by Institute of Chartered Accountants of India allowable 2.4.12 To summarize, it was stated that (a) It is only coincidental that rupee was almost at peak at beginning of the. year, while it was at its bottom at end of year against US$ resulting in loss on outstanding value of Forward contracts at year-end. (b) Assessee incurred loss on account of outstanding value of forward contracts at year-end (31st March, 2009); while in past and subsequent years, assessee had gained profits on similar 8 ITA No.4588/Mum/2014 transactions. In other years, department has always accepted profit on year-end conversion of outstanding value of forward contracts. On analogy, accuracy and consistency perspective, department needs to accept loss incurred on conversion of outstanding value of forward contracts, particularly if it has happened on account of controls beyond assessee. (c) Accounting Standard 11 dealing with effects of foreign currency requires assessee to adjust its monetary assets at year end with year-end conversion rate and reflect profit or loss in revenue statement. Therefore what we have done is what we are technically obliged to do. (d) Even mercantile system of accounting as recognized under section 145 requires that at year end, assessee should make provision for all known liabilities. 2.4.13 As evident from above, it was pleaded' that similar question arose in case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254 I 179 Taxman 326 (SC) that whether loss arising on fluctuation of exchange in respect of loan taken for revenue purposed is allowable as deduction in year of fluctuation of exchange rate or whether same could be allowed only in year of repayment of such loan. Supreme Court held that loss suffered by assessee on account of exchange difference on balance sheet date is item of expenditure as on balance sheet date. It further held that profits or losses as per mercantile system of accounting and as per applicable accounting standard is allowable as deduction unless system of accounting is superseded or modified by legislative enactment. It also held that method of accounting continuously undertaken by assessee is supreme as there is no finding given by AO on correctness and completeness of accounts or any finding to contrary that assessee had not complied with accounting standards. It was, inter alia, concluded as under: " in order to find out if expenditure is deductible following have to be taken into account: (i) Whether system of accounting followed by assessee is mercantile system which brings into debit expenditure amount for which legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due and before it is actually received; (ii) whether same system is followed by assessee from very beginning and if there was change in system, whether change was bona fide; (iii) whether assessee has given same treatment to losses claimed to have accrued and to gains that may accrue to it; 9 ITA No.4588/Mum/2014 (iv) whether assessee has been consistent and definite in making entries in account books in respect of losses and gains; (v) whether method adopted by assessee for making entries in account books both in respect of losses and gains is as per nationally accepted accounting standards; whether system adopted by assessee is fair and reasonable or is adopted only with view to reducing incidence of taxation" 2.4.14 In fact, even if losses are allowed in year of realisation of export proceeds that would tantamount to following cash system of accounting which will be contrary to section 145(1) of Act-- CIT v. UP State Industrial Development Corpn. [1997] 225 ITR 703/92 Taxman 4-5 (SC). 2.4.15 Similarly, as pleaded earlier, in case of Dy. CIT (International Taxation) v. Bank of Bahrain & Kuwait [2010] 41 SOT 290 , Hon'ble Special Bench of Mumbai Tribunal held that losses incurred by appellant on account of revaluation of contract on last date of relevant accounting period based on RBI guidelines/applicable accounting standard is allowable as deduction. It held that such loss is neither notional nor contingent liability in which moment binding contract is enacted, it becomes allowable. Further reference could be made to Bharat Earth Movers v, CIT [2000] 245 ITR 4281 112 Taxman 61 (SC), Metal Box Co. of India . Ltd. v. Their Workmen [1969] 73 ITR 53 (SC) .and Calcutta Co. Ltd. v. CIT [1959] 37 ITR 1(SC) 2.4.16 In case of DCIT vIs Bank of Bahrain & Kuwait(supra), forward contracts were entered of amount to protect fluctuations in foreign currency held as stock-in-trade. Forward contracts value entered by. Bank of Bahrain & Kuwait had nothing to do with foreign currency held as stock-in-trade except protecting fluctuations, while of course dealing with reporting in Indian currency. On same footing, in instant case of appellant stock. as well as receivable mainly are dollar denominated and are realizable in foreign currency. To hedge possible fluctuations in US$ denominated stock, as well as resultant debtors out of such stock, appellant had entered into forward contracts. proposition in that case, as well as in this case is starkly similar. They being bank had "Money" lying in foreign currency as their stock-in-trade, which required translation into Indian currency for purpose of Indian reporting and Indian taxation, which would naturally expose them to fluctuation risk. To hedge such risk, they had entered into forward contracts, and had made year-end conversion on outstanding position of forward contracts, although such forward contracts were never reflected in their Balance sheet, and losses so incurred as result of transfer had remained unrealized at point of conversion. On same analogy, appellant's stock, eventually although gets realized 10 ITA No.4588/Mum/2014 mostly in terms of foreign currency, they needed to translate same into Indian currency for Indian reporting and Indian taxation. This exposed them to exchange fluctuation risk, if Rupee would appreciate against US$. In both cases, that is of Bank of Bahrain & Kuwait and present appellant, foreign currency positions were hedged by entering into Forward contracts, and they had incurred year-end forward contract conversion losses. 2.4.17 In case of BHARAT EARTH MOVERS LTD (supra), court has differentiated between what is accrued liability and contingent liability. relevant portion of principles laid down by Hon'ble court are reproduced as under: For assessee maintaining his account on mercantile system, liability already accrued, through to be discharged at future date would be proper deduction while working out profits and gains of his business, regard be had to accepted principles of commercial and accountancy. It is not as if such deduction is permissible only in case of amount actually expended or paid. Just as receipts though not actual receipts but accrued and due are brought in for income tax assessment so also liabilities accrued due would be taken in to account while working out profits and gains of business. condition subsequent,' fulfillment of which may result in reduction or even extinction of liability, would not have effect of converting that liability into contingent liability Distinguishing and differentiating contingent and accrued liability, it was held that; If business liability has definitely arisen in accounting year, deduction should be allowed although liability may have to quantified and discharged at future date. What should be certain is incurring of liability. It should be also be capable of being estimated with reasons certainty though actual quantification may not be possible. 2.4.18 Further, in case of Rusabh Diamonds v. Assistant Commissioner Income-tax - 15(1), Mumbai [2013] 34 taxmann.com 160 (Mumbai - Trib.) in Appeal No. 7217 (MUM.)/2012 dated April 26, 2013, it has been, inter alia, held, under: "8.1 assessee considered Rs. 5,20, 70, 149 as operating income on account of foreign exchange gain arising on forward contracts. assessee contended that exchange gain arising on cancellation forward contracts are to be considered 11 ITA No.4588/Mum/2014 as part of operating profit since it integral part of business of buying and selling of diamonds al hence is operating income. TPO did not accept claim of assessee for reason that exchange gain earned are against cancellation of forward contracts and assessee has separately disclosed as profits and gains from foreign exchange fluctuations, which are not included in purchases and sales. Further, TPO was of view that this constitutes speculative and therefore, same cannot be treated as part of main business activity of manufacturing of diamonds of assessee. 8.2 ORP concurred with view of TPO on ground that foreign exchange earning are against cancellation of forward contracts and not integral part of assessee's business. 9 . Before us, Id Sr. counsel for assessee has submitted that assessee earned foreign exchange on cancellation of forward contracts which are connection of its purchase/sales of diamonds. Foreign exchange gain is directly dependent on activity of export or import undertaken by assessee. assessee has entered into forward contracts for purpose of reducing foreign exchange risk faced by it in respect of its transactions with AEs. He has further submitted that foreign exchange fluctuation gain has been earned by assessee under hedging contract which is duly backed by sales and purchase contract/orders in respect of diamonds. Id Sr counsel has further contended that dealing in foreign exchange being treasury transaction is not permitted by RBI and therefore, gain arising from forward contracts is part and parcel of operating profit of -assessee, In support of his contention he has relied upon decision of Bangalore Benches of Tribunal in case of SAP Labs India (P.) v ACIT in ITA No.398iBangI02;in case of Bombay Diamond Co Ltd. v. DCIT in ITA No.7488/Mum/07; in case of c/r v. Badridas Gauridu (P.) Ltd. [2003]261 ITR 256 1[2004] 134 Taxman 376 (Bom). He has further submitted that premium or discount arising at 1nception of forward exchange contracts is amortized as expense or income over life of contract. exchange difference on such contract are recognized in profit & loss account for year in which exchange rate changes resulting in profit or loss arising on cancellation or renewal of forward exchange contract is recognized as income or as expenses. 9.1 Id OR on other hand has submitted that as per DECD guidelines on Transfer Pricing, foreign exchange gain or loss should be excluded or included depends on whether or not tested party is responsible for same. He has referred paras 2.82 of OECD guidelines and submitted that when, as per contract between and assessee and AE, AE has assumed risk of foreign exchange fluctuation; then 12 ITA No.4588/Mum/2014 exchange gain cannot be included in profit of assessee for purpose of determination of net margin. Id OR has referred TP study at page 1.0 of paper book and submitted that risk of foreign exchange fluctuation upto 3% in USD is to be earned by AE. Therefore, same cannot be included to profit of assessee for purpose of computation of operating profit of assessee. 10. We have considered rival submissions as well as relevant material on record. assessee has entered into forward contracts for purpose of hedging of foreign currency exposure on export and import of diamonds with AEs. Therefore, hedging of foreign currency has nexus with export and import activity of assessee and exposure of assessee in relation to export and import. OECD guidelines in para 2.82 are as under; "2.82 Whether foreign exchange gains and losses should be included or excluded from determination of net profit indicator raises number of difficult comparability issues. First, it needs to be considered whether foreign exchange gains and losses are of trading nature (e.g. exchange gain or loss on trace receivable or payable) and whether or not tested party is responsible for them. Second, any hedging of foreign currency exposure on underlying trade receivable or payable also needs to be considered and treated in same way in determining net profit. In effect, if transactional net margin applied to transaction in which foreign exchanger risk is borne by tested party, foreign exchange gains or losses should be consistently accounted for (either in calculation of net profit indicator or separately). " 10.1 It is clear that in case of hedging of foreign currency exposure on underlining trade receivable or payable profit of loss will be treated in same way in determining net profit. 10.2 In view of facts that assessee has entered into forward contracts for purpose of hedging of foreign currency exposure on export and import of diamond, gain or loss arising of said, will be treated as part and parcel of operating profit." (Emphasis supplied) 2.4.19 In recent decision in case of Societe Generate (2013- ITS-737-ITAT), Hon'ble Mumbai Tribunal has allowed similar claim of assessee for loss of Rs. 9.16 crores on foreign exchange contracts outstanding as on 31-3-1998 holding that this issue was squarely covered in favour of assessee by decision of Special Bench of IT AT in case of Bank of Bahrain & Kuwait (supra). 13 ITA No.4588/Mum/2014 2.4.20 In case of ONGC Vs CIT 322 ITR 180, Hon'ble Supreme Court has reiterated principles laid down above while answering question that when assessee maintained their accounts on mercantile system of accounting and there was no finding by AO on correctness or completeness of account and when assessee had complied with accounting standards, laid down by central Government, "loss" suffered by it on account of fluctuation in rate of foreign exchange as on date of balance-sheet was to be allowed as expenditure under section 37(1) of Act notwithstanding fact that liability had not been actually discharged in year in which fluctuation in rate of foreign exchange had occurred and it finally decided that loss incurred on account of restatement of liabilities in foreign exchange was allowable and answered question in favour of assessee. 2.4.21 Thus, judicial decision of Hon. Supreme Court and various other authorities are clearly in favour of appellant on this issue. That apart, as discussed earlier, liabilities in foreign exchange. were incurred during normal course of appellant's business and restatement of forward contract obligations was done as per AS-11 in consistent manner over years. 2.4.22 In fact, gain earned on such revaluation was accepted and brought to tax in respective years and there was no reason for Ld. AO. to arrive at different conclusion in present case merely because there was loss during year Apparently, Id. AO was of view that appellant was not dealer in foreign exchange unlike Bank of Bahrain, and therefore said decision was held as not applicable to facts of case. However, as seen earlier, this issue is no more res integra and is settled by plethora of judicial decisions. 2.4.23 It is not out of place to mention that Hon. Supreme Court, in case of ONGC (supra), upheld same principles that were laid down in case of Woodword Governorn (supra), and loss was held allowable in similar circumstances, where business of ONGC was not that of foreign exchange dealer. Therefore, it is not nature of business or stock dealt with i.e., currency or commodities or goods like diamonds in present case that matters. 2.4.24 Recently, Hon'ble Mumbai ITAT "H" bench in case of H. Dipak & Co.,Mumbai I.T.A. No. 7629/Mum/2011 on 30 April, 2013 has held that- "We have heard arguments of both sides and also perused relevant material available on record. It is observed that similar claim for marked to market loss claimed by assessee in respect of forward foreign exchange contract debited to P&L account has been allowed by Special Bench of this Tribunal in case of Bank of Behrein & Kuwait (supra) after discussing and considering all relevant aspects of matter,and relevant 14 ITA No.4588/Mum/2014 observations of tribunal recorded in this context are summarized as under:- (i) binding obligation accrued against Appellant minutes (sic) it entered into forward foreign exchange contracts. (ii) consistent method of accounting followed by Appellant cannot be disregarded. Appellant has consistently followed same method of accounting in regard to recognition of profit or loss both, in respect of forward foreign exchange contract as per rate prevailing on March, 31, (iii) liability is said to have crystallized when pending obligation on balance sheet date is determinable with reasonable certainty. (iv) As per AS-11 when, transaction is not settled in same accounting period as that in which it occurred, exchange difference arises over more than one accounting period. (v) In view of decision, of the. Supreme Court in case of Woodward Governor India (I) P Ltd, Appellant s claim is allowable. (vi) In ultimate analysis, there is no revenue effect and it is only timing of taxation of loss/profit. 2.4.25 On basis of facts obtaining in impugned appeal and one in case of H. Dipak (supra), following chart summarizes similarities in two cases: Particulars K.P. Sanghvi H Dipak & Co. S.No . 1 Constitution Partnership Partnership Firm Firm 1 Business Engaged in Similar activity Activity business of i.e engaged in Import, business of Manufacturing Manufacturing, and Export of trading as well Cut & as import and Polished export of cut diamonds and polished diamond 2 Import (USD) Rs.517.10 Cr Rs.476.68 Cr 3 Export (USD) Rs.714.98 Cr. 4 % of Export SalesExport 95% of total sales to Total Sales 5 Credit Facility from Enjoying Foreign Enjoying Foreign Bank Currency Loan from Currency Loan say say PCFC Loan from PCFC Loan from Bank Bank 6 Accounting Policy Policy followed by Policy followed by for Currency firm clearly stated in firm clearly stated in 15 ITA No.4588/Mum/2014 Transactions. Significant Para 6 of Schedule-F Accounting Policies on of Balance Sheet "Foreign Currency under heading Transactions" "Reporting on Notified Accounting Standards" 7 Hedging through. Has entered into Same purposes Forward Contractobligation at time of Requirement entering into forward foreign exchange contracts dealt with Export realization without any speculation. transactions 8 Hedging transactions To be genuine and valid Same situation V/s Speculative hedging contracts of sale transactions as per total of such proviso (a) of transactions should not section 43(5) of exceed value of total Act stock of raw material or merchandise on hand 9 Method of accounting Consistently followed Same practice followed method of accounting with regard to recognition of profit of loss both for forward foreign exchange contract at rate prevailing on 31st March 10 Liability crystallized Has crystallized its Same treatment given liability as amount can be determined with reasonable certainty 11 AS-11 When FC Same practice followed transactions not settled in same accounting period, book profit/loss on outstanding forward contracts as on 31st March by converting same at closing rate 12 Decision of SC in SC decision squarely On basis of SC case of Woodward applicable in appellate decision, appellant s Governor India (I) P case claim is allowed Ltd. 13 Dy.CIT (International Held that, loss Applicable to taxation) V/s Bank of incurred by assessee appellant on basis of Baharain and Kuwait on account of evaluation same facts. (2010) 41 SOT 290 of contracts on (Mum) last day of accounting year, ie. Before date of maturity of Forward contract, is allowable deduction, which exactly matches with this case. 14 Only timing of unmatured contracts unmatured contracts taxation of profit / at year end, forwards at year end, forward loss contracts value date contracts valued at year end rate and year end rate and booked booked exchange exchange difference at difference at end of end of year which 16 ITA No.4588/Mum/2014 year which resulted resulted in loss of Rs.7.14 in loss. cr. 2.4.26 At this stage, it may also be prudent to refer to observations of Authority for Advance Ruling in case of SOPROPHA S A., IN RE (2004) 268 ITR 37 (AAR) where scope of Central Board of Revenue (The Board) circular No.23D (F No.412/4/60/TPL dt 12th Sept, 1960) has been analyzed. It was, inter alia, held therein as under: Now scope of provisions of Act and Circular of Board have to be examined in light of material placed before us. Before issue of circular of Board, IT authorities gave restrictive meaning to hedging transactions. said view was also confirmed by various High Courts including Madras High Court and Allahabad High Court in cases relied on before us. It was, however, brought to our notice that in case of Raghunath Das Prahlad Oas (supra); Allahabad High Court followed Gujarat High Court's decision in case of Chimenlel Chhotalal (supra). However, larger Bench of Gujarat High Court overruled decision in Chimanlal Chhotalal's case in case of Pankaj Oil M/!/s (supra). There is no doubt that within meaning of proviso (a) to s. 43(5) transaction proposed to be undertaken by applicant cannot be termed as 'hedging contracts' at all, it is, therefore, necessary to examine whether case of applicant is covered by concession allowed by Board through its beneficial circular No. 230 which is binding on officers of Department. 22. For proper appreciation of scope of Board's Circular, it will be useful to refer to observations in Report of Direct Taxes Administration Enquiry Committee in paras 3.55, 3.56 and 3.58 of Chapter Ill, which read as under: "3.55 Definition of speculative transaction-An important criticism made by large number of witnesses who appeared before us, had been that assurance given by Shri C D Deshmukh, with regard to treatment of bona fide hedging transactions as ordinary business, was not being duly implemented. It was stated that spirit of amendments had been lost sight of by Department in course of administration of proviso and that sometimes even genuine hedging losses were being treated as speculative losses. In this connection, distinction in phraseology of cls.(a) and (b) of Expln. 2 to s. 24(1) of IT Act, 1922, was brought to our notice. It was pointed out that while one clause made reference to stocks held, other did not and that some officers were taking restrictive view and disallowing deduction of hedging losses in commodities other than stocks and shares, if they were not against stocks held but against purchases. 3.56 We have examined same at some length. We find that even Central Board of Revenue had put too rigid and restrictive 17 ITA No.4588/Mum/2014 interpretation on this provision, which is not in accord with spirit of assurances given by Finance Minister. It does not, therefore, surprise us that AOs have also taken unduly narrow view in matter and genuine businessmen have been put to considerable hardship. We certainly appreciate, as we have done earlier, principle underlying proviso, but we equally disapprove of its wrong application for denying genuine hedging losses. We feel that solution to various problems which have been brought to our notice in relation to this subject can be found by expanding Expln. 2 to s. 24(1) so as to classify and exclude such transactions which should not come under i mischief of this section. AO should first examine whether hedging transaction is genuine or not. If it is genuine one, and it is by way of future sale of commodity against stock of same commodity, loss arising out of this transaction should be excluded from purview of speculation . . 3.58 hardship caused by too literal interpretation of Expln. 2 to s. 24(1) of IT Act was illustrated to us by case where dealer having ready cloth business entered into contract for purchase of 1000 bales of cloth from mill on forward delivery basis. Ultimately, it was found that mill could supply only 980 bales, remaining twenty bales being rejected on account of some defect and settlement was made between dealer and mill regarding these twenty bales by payment of difference in price. It was stated even such transaction was taken by AO to fall within mischief of Expln. 2 to s. 24(1) of IT Act on ground that there was no actual delivery of twenty bales. We are certain that this extreme view could never have been intention of legislature while inserting Explanation. Since instances of this type have been brought to our notice, we recommend that intentions of Government in matter should be clarified by suitable administrative instructions. " 23. There can be no doubt, Circular of Board has expanded scope of 'hedging transactions', but it would be wrong to conclude that all speculative transactions can be termed as 'hedging' simply because they are in commodities dealt with by assessee. basic premise of Circular is that hedging transaction is genuine. Act originally provides that where assessee has entered into contract of sale for actual delivery on future date and he then enters into forward contract of purchase to minimize his loss due to price fluctuations, such contract of purchase shall not be regarded as 'speculative transaction'. It was brought to notice of Board that trader who has merchandise-in-stock may enter into transaction of 'hedging sales' with view to guard against risk to merchendise-in- stocks falling in value and thereafter Board issued said Circular and expanded scope of hedging transactions. 24. Keeping in view Circular No. 230, and decision of Gujarat High Court in case of Pankaj Oil Mills (supra), in 18 ITA No.4588/Mum/2014 case of trader, following position emerges in regard to scope of hedging contracts: (1) Hedging contracts can be both for purchase and sale; (2) In order to be genuine and valid hedging contract of sales, total of such' transactions should not exceed total stock of raw material or merchandise on hand; (3) In order to be genuine and valid hedging contract of purchase, there should be existing forward contract of sale by actual delivery. (4) hedging contracts need not necessarily be in same variety of commodity. They could be in connected commodities e.g. one type of cotton against another type of cotton We accordingly rule as under: Q.No. 1-ln view of meaning assigned to it in Board's Circular No. 23D of 12th Sept., 1960,on facts and in circumstances of case, forward transactions in which applicant deals will be in nature of hedging contracts. Q. No. 2- Though existence of contract of sale is condition precedent to attract cl. (a) of proviso to s. 43(5) of Act, it stands relaxed to extent allowed byCircular No. 230 of 12th Sept., 1960. Q. No. 3-Forward sale transactions, though not covered within meaning of hedging contracts as per proviso (a) to s. 43(5), they are covered within extended meaning given in Board's Circular No. 230 of 12th Sept., 1960. Q. No. 4-ln view of extended meaning assigned. to hedging transactions in Board in Circular No. 230 of 12th Sept., 1960, hedging contracts need not be of identical quality/quantity of goods held in stock." . (Emphasis supplied) 2.4.27 In light of above, while construing as to what constitutes 'hedging contract", we may derive guidance from observations made by Hon'ble Supreme Court, in case CIT v. Hindustan Bulk Carriers [2003] 259 ITR 449/126 Taxman 321(SC) , as follows: construction which reduces statute to futility has to be avoided. statute or any enacting provision therein must be so construed as to make it effective and operative on principle expressed in maxim ut res magis valeat quam pereat i.e., liberal construction should be put upon written instruments, so as to uphold them, if possible, and carry into effect intention of parties. [See Broom's Legal Maxims (10th Edition), page 361, Craies on Statutes (7th 19 ITA No.4588/Mum/2014 Edition) page 95 and Maxwell on Statutes (11th Edition) page 221.] statute is designed to be workable and interpretation thereof by Court should be to secure that object unless crucial omission or clear direction makes that end unattainable - Whitney v. Commissioner of Inland Revenue [1926] AC 07 p. 52 referred to in CIT v. S. Teja Singh AIR 1959 SC 352, Gursahai Saigal V/s CIT AIR 1963 SC 1062. Courts will have to reject that construction which will defeat plain intention of Legislature even though there may be some inexactitude in language used - Salmon v. Duncombe [1886]11 AC 627 p. 634 (PC), Curtis v. Stovin [1889]22 CBD 513 referred to in S. Teja Singh' s case (supra). If choice is between two interpretations, narrower of which would fail to achieve manifest purpose of legislation we should avoid. Whenever it is possible to do so, it must be done to construe provisions which appear to conflict so that they harmonise. It should not be lightly assumed that Parliament had given with one hand what it took away with other." 2.4.28 Hon'ble Supreme Court, in case of K.P. Varghese v. ITO [1981] 131 ITR 597/7 Taxman 13, has further held that task of interpretation is not mechanical task and, quoted with approval, Justice Hand's observation that "it is one of surest indexes of mature and developed jurisprudence not to make fortress out of dictionary but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is surest guide to their meaning". Their Lordships, inter alia, observed as follows: . task of interpretation of statutory enactment is not mechanical task. It is more than mere reading of mathematical formulae because few words possess precision of mathematical symbols. 1.1 is attempt to discover intent of Legislature from language used by it and it must always be remembered that language is at best imperfect instrument for expression of human thought and, as pointed out by Lord Denning, it would be idle to expect every statutory provision to be "drafted with divine prescience and perfect clarity". We can do no better than repeat famous words of judge Learned Hand when he said: ' ... it is true that words used, even in their literal sense, are primary and ordinarily most reliable source of interpreting meaning of any writing: be it statute, contract or anything else. But it is one of surest indexes of 20 ITA No.4588/Mum/2014 mature and developed jurisprudence not to make fortress out of dictionary; but to remember that statutes always have some purpose or object to eccompllsh, whose sympathetic and imaginative discovery is surest guide to their meaning. ' We must not adopt strictly literal interpretation of ... but we must construe its language having regard to object and purpose which Legislature had in view in enacting that provision and in context of setting in which it occurs. We cannot ignore context and collection of provisions in which .appears, because, as pointed out by judge Learned Hand in most felicitous language: interpret ' ... meaning of sentence may be more than that of separate words, as melody is more than notes, and no degree of particularity can ever obviate recourse to setting in which all appear, and which all collectively create .. , 2.4.29 In above background, it is undisputed that appellant is in business of exports of diamonds and has certain receivables in foreign exchange and substantial stock at any point of time during year and it is also fact that appellant is constantly exposed to risk arising out of fluctuation in foreign exchange rates and such risk is integral to appellant's business and it arises out of and is associated with such business. It is also fact that aforesaid risk is not bought by appellant independent to business carried by him. It is only with intention to mitigate risk associated with business that appellant has entered into foreign exchange contracts. Therefore, as per pleadings made by Ld. AR what needs to be seen is whether risk that appellant has hedged by way of forward contract has underlying asset/stocks or liability, as case may be. It is in this sense of matter that various courts have held that profits or loss arising out of forward contracts forms part of business income. This proposition has been dealt with at great length in preceding paragraphs after considering in detail submissions made by Ld. AR as also various case laws on subject. It is, therefore, appropriate to understand at this stage that appellant's pleadings veer around proposition that forward contracts entered into by it during course of business, create legal liability irrespective of fact that whether these contracts mature during accounting year or beyond . 2.4.30 impugned transactions are two sides of same coin and by ignoring one side, coin loses its value. Therefore, in my considered opinion, Ld. AO cannot determine nature and effect of transaction based merely on its presentation, without going into its substance. When legally tenable contract is in existence, duly supported by underlying asset/stock and contract having been entered during course of business and further that exchange rate as on date of entering contract and as at year- end being ascertainable, due effect of contract at year-end has to be given while assessing appellant's income. Here, it is not out of place to mention that 21 ITA No.4588/Mum/2014 upper limits of exposure to forward contracts are regulated by RBI guidelines and that they are allowed only to certain extent of receivables or payables and not to full extent. Further, banks also insist on collecting margins in case movement of forward contracts before maturity is against exporter/importer. In other words, entire gamut of impugned transactions is integral to appellant's business and it cannot be called contingent transaction. There is no merit in Ld. AO's argument in treating impugned transaction as independent to that of appellant's business and to state that flow of benefit is not known or it depends on any one of various events listed by him. In fact Ld. AO has failed to see that such events are part and parcel of appellant's business and not external to it. Therefore, whatever may be result of events listed out by Ld. AO, such result has to be treated as business result at time of its happening and hence, effect of forward contact as at year-end has to be considered for purpose of arriving at appellant's income. 2.4.31 Secondly, issue of notional loss is likely to arise only in context of appellant's exposure to forward contracts exceeding underlying assets/liabilities, which may be in case of lumpsum forward contracts. Ld. AR has explained that lumpsum forward contracts are entered having regard to its debtors, stocks and loans in dollar terms etc. and normally Forward contracts are immediately covered by value of subsequent exports, appellant had placed on record of Ld. AO, month wise position of debtors, creditors, stock etc., vis-a-vis, forward contracts entered in dollar terms, to demonstrate above position (refer chart at para 2.4.6, supra). Further, to reiterate, appellant has been consistently following mercantile system of accounting and has been valuing year-end outstanding foreign exchange transactions in terms of Accounting Standard AS-11. 2.4.32 As seen earlier, in case of Woodward Governor 294 ITR 451, Hon. Delhi High Court has observed as under:- "In instant cases, on other hand, liability arises out of already concluded contracts; liability already stands accrued minute contract was entered into. mere postponement of payment to different date cannot extinguish liability and render it notional or contingent. decision of Hon. Supreme Court in Bharat Earth Movers settles position. That decision explains that what should be certain is incurring of liability and it being estimate with reasonable certainty even if exact quantification is not feasible. Even if liability is discharged at future date, it will nevertheless be liability which is certain and not contingent. This approach is consistent with and informed by accounting practice in mercantile system, with further guidance from accounting standards of ICAI which have received judicial acknowledgement 22 ITA No.4588/Mum/2014 2.4.33 Similarly, as discussed, this decision has been approved by Hon. Supreme Court in CIT v Woodward Governor India P Ltd (312 ITR 254). 2.4.34 Further, as seen earlier, in case of DCIT v/s. Bank of Bahrain and Kuwait (ITA Nos. 4404 & 1883/Mum./2004), Special Bench of Jurisdictional Mumbai ITAT held that MTM losses in respect of forward foreign exchange contracts debited to profit and loss account is allowable. 2.4.35 Similarly, in case of ONGC Vs CIT 322 ITR 180, Hon'ble Supreme Court has reiterated principles laid down above while answering question that when assessee maintained its accounts on mercantile system of accounting and there was no finding by Assessing Officer on correctness or completeness of account and that assessee had complied with accounting standards, laid down by Central Government, "loss" suffered by it on account of fluctuation in rate of foreign exchange as on date of balance-sheet is allowable expenditure under section 37(1) of Act notwithstanding fact that liability had not been actually discharged in year in which fluctuation in rate of " foreign exchange had occurred. 2.4.36 To reiterate, thus judicial decisions of Hon. Supreme Court and various other Authorities are clearly in favour of appellant on this issue. That apart, as discussed earlier, transactions in foreign exchange were carried out during normal course of appellant's business and restatement of forward contract obligations was done as per AS-11 in consistent manner over years. In fact, gain earned on such revaluation was offered to tax and accepted by Ld AO in respective years and there is no reason to arrive at different conclusion merely because there was loss during year so much so that in AY. 2010-11, Ld. A.O. has taxed gain of Rs. 15.18 crore on account of MTM Profit. What matters is whether forward contract transaction was entered during course of appellant's regular business or whether it is tainted with colour of speculative transaction. Further, aforesaid issue of allowing loss on account revaluation of pending forward contracts was considered by Honble. ITAT Mumbai bench in case of M/s Bhavani Gems Vs ACIT CC-35 in ITA No.2855/Mum/2010 dated 30/3/2011 for A.Y 2006-07 and said loss was allowed as business loss and issue was held to be covered by Special Bench decision in case of DCIT Vs. Bank of Bahrain (supra). Therefore, in my considered opinion facts of appellant's case are fully covered by above cited decisions of Hon. Supreme Court and ITAT Mumbai bench. 2.4.37 For reasons set out above and keeping in view all decided judgments of Hon'ble Supreme Court, various High Courts/AAR and Income Tax Appellant Tribunals, I am of considered view that appellant was indeed. eligible for incurring of losses of business by way of 'marked to market' losses on forward contract for assessment year 2009-10. Accordingly, Ground No.2 is allowed. 23 ITA No.4588/Mum/2014 5. In this view of facts, CIT (A) deleted disallowance and allowed claim of assessee. Aggrieved by order of CIT (A), revenue is in second appeal before Tribunal. Before us, Ld. CIT(DR) only made argument that CIT(A) has not considered co-ordinate bench s decision in case of S. Vinodkumar Diamonds Pvt. Ltd. V/s Addl. C.I.T. in ITA No. 506/Mum/2013(AY:2008-09) dated 3.5.2013. 6. On other hand, ld.AR for assessee argued that more than 90% of assessee s business is deriving income from exports of diamonds and most of purchases and sales were made in foreign currency. According to him, assessee had availed substantial banking channels in foreign currency and had used export on account of fluctuation in foreign currency rates. He argued that in order to mitigate this export in foreign currency rates assessee entered into forward contract to hedge fluctuation of foreign currency rates in respect of export and import transactions, which is integral part of institutional to exports business undertaken by assessee. He stated that as on 31.3.2009, assessee revalued all monitory assets and liability outstanding by following AS-11 and recognized profit and loss account during year. Similarly, it also recognized Mark to Market Loss in respect of outstanding forward exchange contracts. In our opinion, these contracts are as per AS-11 of ICAI. He stated that CIT (A) has considered all these facts, which are reproduced in above order. ld. Counsel also stated that transactions in foreign exchange were carried out during normal course of business of assessee and restatement of forward contracts application was done as per AS-11 in consistent manner over years. He explained that whenever accounts are revalued and excess, what so ever, was offered to tax and accepted by revenue in respective years. He stated that there is no reason to take different view or conclusion because there was loss during year. He explained that even in assessment year 2010-11, AO has taken gain of Rs.15.18 crores on account of foreign exchange fluctuation. In this view of arguments and facts of case ld. Counsel for assessee relied on certain case laws and stated that case law cited by revenue in case of S. 24 ITA No.4588/Mum/2014 Vinodkumar Diamonds Pvt. Ltd.(supra) cannot overwrite judgment of Hon ble Supreme Court in case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254 (SC). 7. We find from facts of case that assessee is partnership firm, mainly engaged in business of import of diamonds, cutting and polishing and export of cut and polished diamonds. total export turnover during Previous Year 2008-2009 relevant to AY 2009-2010 under consideration, was Rs.714.98 crores and total import of diamonds was Rs.517.10. crores. Apart from said import of diamonds, assessee has also purchase diamonds of Rs.20.66 crores locally through Diamond Dollar Account, which were settled in foreign currency. Accordingly, both limbs of transactions i.e. purchase and sales are in foreign currency. As on 31 March 2009, outstanding foreign exposure of assessee is as under: Sr. Nature of foreign currency exposure Amount No. (USD in million, 1 Exports receivables (i.e. overseas debtors) 19.22 2 Imports Payables (i.e. overseas creditors) 9.31 3 Bank loan 65.78 4 Advance from Overseas Customers 8.96 5 Closing Stock for export 91.44 Total 194.72 From above facts, it is clear that total amount of foreign currency exposure as on 31 March, 2009 amounts to USD 194.71 million approx. Considering substantial foreign currency exposure and due to substantial fluctuation in foreign currency rates, assessee entered into forward contracts (FCs) with Banks as integral part of export import business with aim to hedge and safeguard against foreign exchange fluctuation of US $ vis- -vis Indian currency, from time to time. 8. From details filed by assessee it is clear that there was huge volatility in exchange rate of US Dollar viz. Rupee from April 2008 to March 2009. US Dollar had registered appreciation from Rs. 39.7650 to Rs. 51.9700 during year as is evident from yearly graph plotting volatility filed before us. We find that assessee has hedge underlying exposure in foreign 25 ITA No.4588/Mum/2014 currency and as such, forward contracts entered were for purpose of business to hedge against forex loss. assessee has forex exposure on all limbs its business activities. firm has not entered into forward contracts with 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. This is integral part of business undertaken by assessee and incidental to export and import business. In absence of such forward contracts, firm may sustain huge losses. Therefore, it becomes essential for firm to book such forward contracts as prudent business practices. Further, we find that assessee is engaged in business of diamonds export and not in business of foreign exchange. This is evident from financial results of firm. In view of same, we are of view that these contracts are nothing but integral part of its export and import activities and resultant hedging difference on their revaluation cannot be isolated artificially as notional loss. Hence, we confirm order of CIT (A) and this issue of revenue s appeal is dismissed. 9. next issue in this appeal of revenue is against order of CIT (A) deleting disallowance of additional claim of depreciation. For this, revenue has taken following grounds of appeal: 3. Whether on facts and circumstances and in law, Ld.CIT(A) has erred in allowing additional depreciation of RS.29,38,884/- 4. Whether on facts and circumstances .of case, Ld.CIT(A) erred in not appreciating fact that Hon'ble Supreme Court in case of CIT Vs. Gem India Manufacturing Co.(2001) 249 ITR 307 (SC) & Hon'ble High Court of Bombay in case of London Star Diamond Co(I)Ltd.213 ITR 517 (Bom) had held that diamond cutting & polishing amounts to processing of goods and not manufacturing of goods and decision relied upon in case of M/s Sheetal Manufactures has not been accepted on merits. 10. We have heard rival contentions of parties and perused material placed before us. We find that claim of assessee is that business of cutting and polishing of diamonds is manufacturing and production of article or thing as required for claiming additional depreciation u/s 32(1) (iia) of Act. AO disallowed claim by observing that assessee is not engaged in 26 ITA No.4588/Mum/2014 manufacturing or production of any article or thing. CIT (A) relying on decision of Hon ble Supreme Court in case of Arihant Tiles & Marble Pvt. Ltd. 320 ITR 79 (SC) allowed claim of assessee vide Para 2.4.40 as under:- 2.4.40 It is seen that in earlier year, this claim has been allowed following decision in case of Sheetal Diamonds Ltd. in ITA No.6687 to 6689/Mum/2002 dated 23.3.2011 where issue of cutting and polishing of diamonds whether constituted manufacturing activity or not was considered in detail by Hon ble ITAT, Mumbai Bench. In aforesaid decision, reference was also made to decision of Hon ble Supreme Court in case of Gen India Mfg. Co. 249 ITR 307 and subsequent decisions of apex Court in case of Arihant Tiles and Marble (P) Ltd. 320 ITR 79 (SC), Vijay Ship Breaking Corpn. 314 ITR 309 (SC) and Empee Poly Yarn Pvt. Ltd. 320 ITR 665 to hold that t he assessee was engaged in business of manufacturing of cutting and polishing rough diamonds and hence, it was eligible for deduction u/s 80 IA of Act. Following above said decisions, appellant s claim for additional depreciation u/s. 32(1) (ii) of Act was allowed. As facts obtaining in current year are in pari material with facts obtaining in earlier year in respect of appellant s claim of additional depreciation, this ground is allowed. 11. We also find that Tribunal in case of Flawless Diamond India Ltd. Vs Addl. CIT (2014) 45 Taxmann.com 67 (Mum.) after considering recent of Hon ble Supreme Court held that cutting and polishing of diamonds amounts to manufacturing or production of article or thing by observing in Para 16 as under:- 16. Thus, from aforesaid decision, it can be safely inferred that, what is required is process undertaken for conversion of raw / rough diamonds into superior or polished diamond. In this case, as stated above, assessee has duly placed on record entire process and stages through which rough diamond undergoes for becoming polished diamond, which is separate and distinct product and has different usage. Such process has neither been rebutted by Revenue nor any other counter-opinion have been sought to contradict assessee s version of process. Thus, in our opinion, once entire process of cutting and polishing of diamond have not been rebutted and also fact that rough and polished diamond are two distinct commodity having different usage, not only in common parlance but also in real sense, then it has to be understood that cutting and polishing of diamond amounts to manufacturing or production of article or thing as envisaged for purpose of claiming deduction under section 80- IC. Thus, contention raised by learned counsel before us is accepted that simply relying on decision of Gem India Mfg. Co. 27 ITA No.4588/Mum/2014 (supra) by Revenue to deny claim of deduction is uncalled for in present case, especially in wake of later decision of Hon ble Supreme Court in Heavens Diamond (supra) which has clarified this point. Accordingly, decision and conclusion drawn by learned Commissioner (Appeals) for year under appeal i.e., assessment year 2008-09 are set aside and assessee s claim for deduction under section 80-IC is allowed. Respectfully following Coordinate Bench decision in case of Flawless Diamond India Ltd. (supra), we hold that cutting and polishing of diamonds amounts to manufacturing or production of article or thing as envisaged for purpose of claiming additional depreciation u/s 32(1) (iia) of Act. Hence, we confirm order of CIT (A) on this issue and dismiss Revenue s appeal. 12. In result, appeal of revenue is dismissed. Order pronounced in open court on 29-09-2016. Sd/- Sd/- (RAMIT KOCHAR) (MAHAVIR SINGH) ACCONTANT MEMBER JUDICIAL MEMBER Mumbai, Dated: 29-09-2016 SRL:Sr.PS/ Lakshmikant Deka/Sr.PS 28 ITA No.4588/Mum/2014 Copy of Order forwarded to: 1. Appellant 2. Respondent. 3. CIT (A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// BY ORDER, Assistant Registrar ITAT, MUMBAI Date Initials 1. Draft dictated on 29.9.2016 SPS 2. Draft placed before author 29.9.2016/ SPS 14.10.16 3. Draft proposed & placed before AM Second Member 4. Draft discussed/approved by Second AM Member 5. Approved Draft comes to Sr. PS SPS 6. Kept for pronouncement on SPS 7. File sent to Bench Clerk SPS 8. Date on which file goes to Head Clerk 9. Date on which file goes to A.R. 10. Date of dispatch of order Asst. Commissioner of Income-tax-16(3), Mumbai v. M/s K P Sanghvi and Son