2015 (6) TMI 1020 - AT - Income Tax

Mark-to-Market loss arising on re-valuation of forward contract agreements on the closing date of accounting year - whether is not a notional loss and, therefore, allowable? - Held that - The learned CIT(A) followed the decision of DCIT vs. Bank of Bahrain and Kuwait (2010 (8) TMI 578 - ITAT, MUMBAI) and also the decision of CIT vs. Woodward Governor India Pvt. Ltd. 2009 (4) TMI 4 - SUPREME COURT to hold that the liabilities for foreign exchange was incurred during the normal course of assessee s business and in fact the gain earned on such revaluation having been accepted and brought to tax in the respective years, there is no reason to arrive at a different conclusion in this year merely because there is a loss. He accordingly correctly directed the AO to allow the impugned claim of the assessee. - Decided against revenue

Summary

Issues:
1. Allowability of 'Mark-to-Market' loss on re-valuation of forward contract agreements for A.Y. 2009-10.

Analysis:
The appeal before the Appellate Tribunal ITAT Mumbai centered around the question of whether the 'Mark-to-Market' loss of Rs. 7,05,11,295 arising on the re-valuation of forward contract agreements on the closing date of the accounting year was allowable. The assessee, engaged in the diamond business, entered into forward contracts to hedge currency risks in line with RBI guidelines. The loss incurred on revaluation of outstanding forward contracts was disallowed by the AO but allowed by the CIT(A) based on the ITAT Special Bench decision and the Supreme Court's ruling in a relevant case. The CIT(A) held that since gains on revaluation were previously taxed, there was no reason to disallow the loss in the current year.

The Revenue, aggrieved by the CIT(A)'s decision, appealed to the Tribunal. The assessee's counsel argued that the factual matrix was undisputed, and the CIT(A) correctly applied the legal precedents. Referring to a recent ITAT decision in another case, the counsel contended that the CIT(A)'s decision was consistent with established principles. The Revenue, through the learned D.R., conceded that the issue was unfavorable to them.

After considering the arguments and legal precedents, the Tribunal upheld the CIT(A)'s order and dismissed the Revenue's appeal. The decision was based on the existing legal framework and the consistent application of principles in similar cases. The judgment was pronounced on 24th June 2015 by the Tribunal, consisting of Shri D. Manmohan, Vice President, and Shri Sanjay Arora, Accountant Member.