2020 (2) TMI 1649 - AT - Income Tax

Mark to market loss - whether the exchange difference arising on the loan transaction with foreign subsidiary company could be considered as a notional loss? - HELD THAT - We find that the Revenue had not understood the transaction carried out by the assessee in the instant case. This is a simple case of loan given by the assessee to its foreign subsidiary in the earlier years and at the time of re-statement of the said loans in earlier years at the exchange rate prevailing at the end of the year, it had resulted in exchange gain which has been duly offered to tax by the assessee voluntarily and assessed as such by the Revenue in the scrutiny assessment proceedings completed u/s. 143(3). During the year under consideration, when the said loans were received back by the assessee and the assessee had actually incurred exchange loss, the revenue had considered the same as transaction carried out in forex derivatives and treating the same as mark to market loss, which in our considered opinion, is against the facts of the assessee and material available on record. We find that the issue is squarely covered by the decision of Hon'ble Supreme Court in the case of CIT vs. Woodward Governor India (P.) Ltd. 2009 (4) TMI 4 - SUPREME COURT and respectfully following the same, we hold that the exchange fluctuation loss incurred by the assessee during the year under consideration is a regular revenue loss and is squarely allowable as deduction. Accordingly, the grounds raised by the assessee are allowed.

Summary

Issues:
1. Treatment of exchange difference on loan transaction with foreign subsidiary company as notional loss.

Detailed Analysis:
The appeal before the ITAT Chennai arose from the order of the Ld. Commissioner of Income Tax (Appeals) against the order passed by the DCIT, Corporate Circle-4(2), Chennai under section 143(3) of the Income Tax Act, 1961 for the Assessment Year 2015-16. The main issue to be decided was whether the exchange difference arising on the loan transaction with a foreign subsidiary company could be considered as a notional loss.

The assessee had given a loan to its foreign subsidiary company in 2013, which was repaid during the relevant year, resulting in a foreign exchange fluctuation loss. In the previous assessment year, the assessee had earned an exchange gain on the same transaction and had offered it for taxation. However, in the year under consideration, the assessee incurred an exchange fluctuation loss upon receiving the loan back, which was claimed as a revenue loss under section 37(1) of the Act. The assessing officer treated this loss as notional and capital expenditure, disallowing it in the assessment.

The Ld. CIT(A) considered the exchange fluctuation loss as a "mark to market" loss akin to exchange loss on forex-derivatives, deeming it as capital in nature and contingent expenditure. However, the ITAT Chennai found that the Revenue misunderstood the transaction. The ITAT held that the exchange fluctuation loss incurred by the assessee was a regular revenue loss and thus allowable as a deduction, citing the decision of the Hon'ble Supreme Court in CIT vs. Woodward Governor India (P.) Ltd. The ITAT allowed the appeal of the assessee, overturning the lower authorities' decision.

In conclusion, the ITAT Chennai ruled in favor of the assessee, allowing the appeal and holding that the exchange fluctuation loss on the loan transaction with the foreign subsidiary company was a regular revenue loss and deductible under the Income Tax Act, 1961.