2018 (2) TMI 2011 - HC - Income Tax

Disallowance of marked to market loss - Whether such losses are notional loss of contingent nature and hence not allowable as per the provisions of Section 37 1 - expenditure on account of Foreign Exchange fluctuation - ITAT deleted disallowance - HELD THAT - Assessing Officer as well as CIT A were of the opinion that though such expenditure was allowable, the same could be booked only on the basis of actual and not notional basis. The Tribunal by impugned judgment reversed decisions, relying on judgment of Woodward Governor India Private Limited, 2009 (4) TMI 4 - SUPREME COURT . The Tribunal, in particular, noted that the Assessing Officer had taxed the gains arising out of foreign exchange fluctuations on similar basis, however, when it came to the loss and adopted a different standard. - Decided against revenue.

Summary

Issues:
Disallowance of marked to market loss as notional loss under Section 37(1) of the Income Tax Act.

Analysis:
The issue in this case pertains to the disallowance of an amount claimed by the assessee as an expenditure on account of Foreign Exchange fluctuation. The Assessing Officer and CIT [A] contended that while the expenditure was allowable, it could only be booked on an actual basis, not a notional one. However, the Tribunal, relying on the judgment of the Supreme Court in the case of Commissioner of Income Tax v. Woodward Governor India Private Limited, held that the losses were notional and contingent in nature, thus allowable under Section 37(1) of the Income Tax Act. The Tribunal highlighted the inconsistency in the Assessing Officer's treatment of gains and losses arising from foreign exchange fluctuations, leading to the reversal of the earlier decisions.

Conclusion:
The High Court, in its judgment, dismissed the Tax Appeal, affirming the Tribunal's decision regarding the disallowance of marked to market loss as notional loss under Section 37(1) of the Income Tax Act. The case underscores the importance of consistent treatment of gains and losses for tax purposes, as highlighted by the Tribunal's reference to the Supreme Court's ruling in a similar context. This judgment provides clarity on the treatment of notional losses in the realm of foreign exchange fluctuations, emphasizing the applicability of relevant provisions of the Income Tax Act.