2017 (2) TMI 1232 - AT - Income Tax

Notional loss - Loss arising on revaluation of foreign exchange forward contract - account of Accounting Standard 11 issued by ICAI - Held that - In the assessment relating to A.Y. 2010-11, the assessee claimed that the loss brought forward from A.Y. 2009-10 should be set off against income relating to A.Y. 2010-11. The Assessing Officer noticed that the loss claimed by the assessee on account of revaluation of forward contracts and other assets have been disallowed. Hence the Assessing Officer rejected the claim of the assessee for set off brought forward loss. In the appellate proceedings, the learned CIT(A) noticed that the claim of the assessee was allowed in A.Y. 2009-10 by him and hence the assessee would be eligible for set off brought forward loss. Accordingly, he directed the Assessing Officer to grant consequential relief to the assessee. The Revenue is aggrieved by the said decision the learned CIT(A). We have heard the parties and perused the record. In the preceding paragraph, we have upheld the decision rendered by the learned CIT(A) in A.Y. 2009-10 and hence direction given by the learned CIT(A) in A.Y. 2010-11 to the Assessing Officer to grant consequential relief to the assessee does not call for any interference.

Summary

Issues:
1. Allowability of deduction on loss arising from revaluation of foreign exchange forward contracts for A.Y. 2009-10.
2. Treatment of loss as speculative or notional loss.
3. Set off of brought forward loss against income for A.Y. 2010-11.

Analysis:
1. Allowability of deduction on loss for A.Y. 2009-10:
The assessee, engaged in diamond business, claimed a deduction of ?5,03,84,146 for loss on revaluation of foreign exchange forward contracts for A.Y. 2009-10. The Assessing Officer disallowed the claim, stating the loss was notional as the economic benefit was contingent on future events. However, the CIT(A) allowed the claim, leading to the Revenue's appeal. The AR argued the loss was not notional and was in line with Accounting Standard 11 and judicial precedents. The Tribunal upheld the CIT(A)'s decision, emphasizing the loss was not notional and eligible for deduction under the head of business income.

2. Treatment of loss as speculative or notional:
The Revenue contended that the loss should be treated as speculative loss, not eligible for deduction. They cited a Mumbai ITAT decision in a similar case. However, the AR argued that the loss was not notional but a real loss offset by future settlements, supported by relevant judicial decisions. The Tribunal agreed with the AR, dismissing the Revenue's argument and upholding the CIT(A)'s decision based on the non-notional nature of the loss.

3. Set off of brought forward loss for A.Y. 2010-11:
In A.Y. 2010-11, the assessee sought to set off the loss brought forward from A.Y. 2009-10 against the income. The Assessing Officer rejected the claim due to disallowance of the loss in the previous year. However, the CIT(A) allowed the set off, considering the allowance of the loss in A.Y. 2009-10. The Revenue appealed this decision, but the Tribunal upheld the CIT(A)'s direction to grant consequential relief to the assessee, as the decision in A.Y. 2009-10 was upheld.

In conclusion, the Tribunal dismissed the appeals filed by the Revenue and cross objections by the assessee, affirming the decisions regarding the deduction of loss on revaluation of foreign exchange forward contracts and the set off of brought forward loss against income for the respective assessment years.