2014 (1) TMI 1680 - AT - Income Tax

Mark to Market loss - loss arising on valuation of forward exchange contracts on the closing date of accounting year - whether not a notional loss and therefore, allowable? - Held that - 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. - Decided in favour of the assessee.

Summary

Issues:
1. Allowability of 'Mark to Market' loss on valuation of forward exchange contracts.

Analysis:
The appeal was filed by the Revenue against the order of the CIT (A)-27, Mumbai for the assessment year 2009-2010. The main issue raised by the Revenue was whether the 'Mark to Market' loss of Rs. 23,72,500 arising on the valuation of forward exchange contracts was allowable as a business loss. The assessee, engaged in import and export of diamonds, had claimed this loss on account of revaluation as per the US Dollar rate on the closing date of the accounting year.

The assessee's argument was that the forward contracts were entered into to hedge currency risks associated with normal business transactions, as per RBI guidelines. The assessee consistently followed an accounting method where Mark to Market gain or loss in respect of assets or liabilities denominated in foreign currency was recognized in the profit & loss account. The CIT (A) allowed the appeal of the assessee, emphasizing that the liabilities in foreign exchange were incurred during the normal course of business and the restatement of forward contract obligations was done consistently over the years as per AS-11.

The CIT (A) referred to judicial decisions supporting the appellant's position and highlighted that the loss incurred on restatement of pending forward contract agreements at year-end was an allowable business loss. The CIT (A) also mentioned a specific case where a similar loss was allowed as a business loss by the ITAT Mumbai Bench. The Tribunal, after considering the settled position of the issue and the principle of consistency, upheld the decision of the CIT (A) that the loss incurred on restatement of pending forward contract agreements at year-end was an allowable business loss. The appeal of the Revenue was dismissed, affirming the decision in favor of the assessee.

In conclusion, the Tribunal found that the loss incurred by the assessee on the restatement of pending forward contract agreements at year-end was a legitimate business loss and upheld the decision of the CIT (A) in allowing the appeal of the assessee. The judgment emphasized the importance of consistency in recognizing such losses and referred to relevant judicial decisions supporting the allowance of such losses in similar circumstances.