2014 (7) TMI 1155 - 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 - Assessee having maintained account on mercantile system of accounting, loss claimed by the Assessee on account fluctuation in the rate of foreign exchange as on the date of balance sheet in respect of loans taken for Revenue purpose is allowable as expenditure u/s. 37(1) notwithstanding the fact that liability has not been actually discharged in the year in which the fluctuation rate of foreign exchange is accrued. See ACIT vs. M/s. Rupam Impex 2013 (10) TMI 1364 - ITAT MUMBAI - Decided in favour of the assessee.

Summary

Issues:
1. Treatment of 'Mark-to-Market' loss on re-valuation of forward contract agreements as notional loss.
2. Allowability of the 'Mark-to-Market' loss in profit and loss account.

Analysis:
1. The appeal concerns the treatment of a 'Mark-to-Market' loss of &8377; 85,86,096 arising on the re-valuation of forward contract agreements for the assessment year 2009-10. The appellant challenges the Ld. CIT(A)'s decision that this loss is not a notional loss and should be allowed. The assessee, engaged in diamond import and export, entered into forward contracts to hedge currency risks associated with its business transactions. These contracts were within RBI guidelines and aimed to mitigate exchange fluctuation risks on foreign currency receivables or payables. The AO disallowed the loss on the grounds of being a notional loss for an outstanding foreign currency forward contract. However, the Ld. CIT(A) deleted the disallowance, stating that such losses are not notional, especially when gains from similar transactions were recognized. The Ld. CIT(A) cited various decisions, including a Special Bench case, to support the deletion of the addition.

2. The issue was further supported by unreported decisions from the Mumbai Bench of ITAT, emphasizing the consistent treatment of such losses as allowable. The Ld. DR, however, supported the AO's decision. After considering both parties' arguments, the Tribunal found no error in the Ld. CIT(A)'s decision. Citing the Hon'ble Supreme Court's ruling in ONGC vs. CIT and other relevant decisions, the Tribunal upheld the allowability of the loss. The Tribunal dismissed the department's appeal, aligning with previous decisions and finding no merit in the department's arguments.

In conclusion, the Tribunal upheld the Ld. CIT(A)'s decision, emphasizing the consistent treatment of 'Mark-to-Market' losses and the allowability of such losses in the profit and loss account. The appeal filed by the Revenue was dismissed, and the decision was pronounced in open court on 09/07/2014.