2017 (1) TMI 1424 - AT - Income Tax

Notional loss - mark to mark loss arising on valuation of forward exchange contract on closing date of accounting year - Held that - The forward contract in foreign exchange incidental to carrying on a business of exports and done to cover up the losses on account of differences in foreign exchange valuation would not be speculative activity but a business activity. The stand taken by the Ld. Commissioner of Income Tax (Appeal) is therefore affirmed resulting into dismissal of appeal of the Revenue.

Summary

Issues:
1. Whether mark to mark loss on valuation of forward exchange contract is allowable as a business loss or considered a notional loss.

Analysis:
The Appellate Tribunal ITAT Mumbai heard the appeal by the Revenue against the order of the Ld. First Appellate Authority, Mumbai, regarding the treatment of mark to mark loss of ?2,75,11,085 arising on the valuation of a forward exchange contract. The Revenue contended that the loss should be disallowed as it was deemed a notional loss. The assessee, supported by case law, argued that the loss was a business loss and not speculative in nature. The Tribunal referred to a decision by the Hon'ble jurisdictional High Court which upheld the treatment of similar losses as business losses in the context of hedging transactions related to import and export activities. The Tribunal found that the forward contract in foreign exchange was entered into as part of the assessee's regular business to mitigate losses due to foreign exchange rate variations. The Tribunal dismissed the Revenue's appeal, affirming the decision of the Ld. Commissioner of Income Tax (Appeal) that the loss was a revenue loss and not speculative. The Tribunal emphasized that the Revenue did not challenge the nature of the transactions as business-related during the assessment proceedings. The Tribunal also noted that the reliance on Accounting Standard-11 was not determinative of the nature of the transaction. The Tribunal concluded that the forward contract was a business activity, following the precedent set by the Hon'ble High Court, and upheld the decision of the Ld. Commissioner of Income Tax (Appeal), resulting in the dismissal of the Revenue's appeal.

In summary, the Tribunal held that the mark to mark loss on the valuation of a forward exchange contract was allowable as a business loss and not a notional loss. The decision was based on the nature of the transaction being part of the regular business activities of the assessee to hedge against foreign exchange rate variations impacting import and export operations. The Tribunal's ruling aligned with the precedent set by the Hon'ble jurisdictional High Court, which considered similar transactions as business activities rather than speculative in nature. The Tribunal emphasized that the Revenue did not dispute the business nature of the transactions during the assessment, and the reliance on Accounting Standard-11 was not conclusive in determining the nature of the loss. Therefore, the Tribunal dismissed the Revenue's appeal, affirming the decision of the Ld. Commissioner of Income Tax (Appeal) that the loss was a revenue loss connected to business activities, leading to the dismissal of the Revenue's appeal.