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2018 (11) TMI 376 - AT - Income TaxMark to market loss - Allowance of foreign exchange fluctuation loss as notional - Held that - Even though Board circular No. 3/2010 considered the marked to market losses has notional. This issue was examined by the Coordinate Bench and Hon ble Jurisdictional High Court in the case of VST Industries Ltd. 2013 (8) TMI 941 - ITAT HYDERABAD has upheld the issue and distinguished that CBDT instruction No. 3/2010 would only apply to derivative transactions and not to transactions in the course of business. Since there is a finding that the loss incurred is not out of derivatives and was incurred in the course of the normal business on the transactions entered into by Assessee we do not see any reason to interfere with the order of Ld. CIT(A). There is no merit in Revenue grounds and accordingly the same are rejected.
Issues involved:
- Allowance of foreign exchange fluctuation loss as notional - Interpretation of CBDT instruction No. 3/2010 - Applicability of marked to market losses to derivative transactions Analysis: 1. Allowance of foreign exchange fluctuation loss as notional: The appeal by Revenue was against the order of Ld. CIT(A) regarding the allowance of foreign exchange fluctuation loss considered by the Assessing Officer as notional. The Assessee-company was involved in manufacturing and trading of edible oils and vanaspathi. The AO disallowed certain foreign exchange losses, including unrealized forex loss and realized forex loss. The Ld. CIT(A) allowed the Commodity hedging loss, which was accepted by Revenue. However, the issue was with the claim of foreign exchange fluctuation loss of &8377; 20,11,60,005/-. The Revenue contended that the unrealized forex loss was 'marked to market loss' and notional as per CBDT instruction No. 3/2010. The Ld. CIT(A) analyzed the loss and allowed both unrealized and realized forex losses. The Revenue raised specific grounds challenging the decision of Ld. CIT(A) in allowing the unrealized forex loss. 2. Interpretation of CBDT instruction No. 3/2010: The Revenue argued that the unrealized forex loss should not be allowed as a deduction as it was considered notional under CBDT instruction No. 3/2010. However, the Ld. CIT(A) based the decision on the principles laid down by the Jurisdictional High Court, which distinguished that the CBDT instruction would only apply to derivative transactions and not to transactions in the course of business. The Ld. CIT(A) considered the loss as incurred in the normal course of business and not out of derivatives, leading to the decision to allow the deduction. 3. Applicability of marked to market losses to derivative transactions: The issue of marked to market losses and their treatment as notional was a key point of contention. The Ld. CIT(A) followed the decision of the Jurisdictional High Court, which consistently held that losses/expenditures claimed on account of fluctuation in foreign exchange rates could not be considered notional by following CBDT instruction No. 3/2010. The Tribunal dismissed the appeal by Revenue, citing the application of judicial precedents to the facts of the case and directing the deletion of the disallowed amount of &8377; 20,11,60,005/-. In conclusion, the Tribunal upheld the decision of Ld. CIT(A) to allow the foreign exchange fluctuation loss, considering it as notional. The judgment was based on the interpretation of CBDT instructions, applicability of marked to market losses, and the distinction between derivative transactions and normal business transactions. The principles established by the Jurisdictional High Court were crucial in determining the allowability of the claimed losses, leading to the dismissal of the Revenue's appeal.
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