2019 (1) TMI 1909 - HC - Income Tax

'Mark to Market' loss arising on valuation of forward exchange contracts on the closing date of accounting year - HELD THAT - The issue is squarely covered against the department by virtue of the judgment of this Court in the case of CIT Vs. M/s. D. Chetan Co. 2016 (10) TMI 629 - BOMBAY HIGH COURT we find that there was no submission recorded on behalf of the Revenue that the Respondent assessee should be called upon to explain the nature of its transactions. Thus, the submission now being made is without any foundation as the stand of the assessee on facts was never disputed - On present facts, it was never the Revenue's contention that the transaction was speculative but only disallowed on the ground that it was notional - thus as held that forward contract in foreign exchange when incidental to carrying on business of cotton exporter and done to cover up losses on account of differences in foreign exchange valuations, would not be speculative activity but a business activity. - Decided against revenue.

Summary

Issues:
Appeal challenging judgment of Income Tax Appellate Tribunal regarding 'Mark to Market' loss on forward exchange contracts.

Analysis:
The High Court of Bombay heard an appeal filed by the revenue challenging the decision of the Income Tax Appellate Tribunal regarding the allowance of a 'Mark to Market' loss on forward exchange contracts. The revenue questioned the justification of allowing a loss of ?1,54,83,835 arising from the valuation of forward exchange contracts on the closing date of the accounting year. The revenue contended that a previous judgment of the Court in the case of CIT Vs. M/s. D. Chetan & Co. supported their position. However, the Court noted that the Tribunal had independently concluded that the transactions were not speculative in nature. The Court highlighted that the Assessing Officer did not find the transactions speculative and that the revenue had not challenged the nature of the transactions. The Court emphasized that the forward contracts were entered into as part of the regular business to safeguard against foreign exchange variations impacting the import and export business. The Court also discussed the application of Accounting Standard 11 and distinguished the facts from previous cases to conclude that the revenue's submission lacked foundation. Ultimately, the Court dismissed the tax appeal, stating that no question of law arose from the case.