2022 (4) TMI 850 - AT - Income Tax

Disallowance of SWAP contract loss - HELD THAT - It is observed by the CIT(A) that the M2M loss on SWAP contract is allowable where loans were converted into foreign currency loan to take benefit of low interest rate and loss recognised on account of foreign exchange fluctuation as per notified Accounting Standard 11 is an accrued and subsisting liability and not merely a contingent or hypothetical liability. There is no need to interfere with the findings of the CIT(A). Therefore, appeal of the Revenue is dismissed.

Summary

Issues Involved:

1. Deletion of addition made on account of disallowance of SWAP contract loss.
2. Whether the CIT(A) erred in law and on facts in deleting the addition.
3. Whether the order of the CIT(A) should be set aside and the order of the Assessing Officer be restored.

Issue-Wise Detailed Analysis:

1. Deletion of Addition Made on Account of Disallowance of SWAP Contract Loss:

The primary issue revolves around the deletion of an addition of ?6,46,83,102/- made by the Assessing Officer (AO) on account of disallowance of SWAP contract loss. The assessee, engaged in the business of general cargo and associated facilities, filed a return declaring a total loss of ?177,98,05,980/-. The AO disallowed the SWAP contract loss, treating it as a notional/unascertained liability.

2. Whether the CIT(A) Erred in Law and on Facts in Deleting the Addition:

The CIT(A) partly allowed the assessee's appeal, leading to the Revenue's appeal against this order. The CIT(A) observed that the loss on SWAP contracts, recognized as per Accounting Standard 11, is an accrued and subsisting liability rather than a contingent or hypothetical one. This observation was backed by precedents set in similar cases, notably the Ahmedabad Tribunal's decision in the case of Adani Enterprise Limited and Veer Gems Vs ACIT, where the loss on forward contracts was deemed allowable.

3. Whether the Order of the CIT(A) Should Be Set Aside and the Order of the Assessing Officer Be Restored:

The Tribunal, after hearing both parties and reviewing the relevant materials, found that the issue was covered in favor of the assessee by previous decisions. The Tribunal cited the case of Veer Gems Vs ACIT, where it was established that losses on forward contracts, recognized as per the applicable accounting standards, are allowable. The Tribunal also referenced the Supreme Court's decision in the case of Woodward Governor India (P.) Ltd., which upheld the deductibility of foreign exchange losses recognized as per Accounting Standard-11.

The Tribunal concluded that the CIT(A)'s decision was consistent with these judicial precedents and the accounting standards. Consequently, it found no reason to interfere with the CIT(A)'s findings.

Conclusion:

The Tribunal upheld the CIT(A)'s order, dismissing the Revenue's appeal. It affirmed that the loss on SWAP contracts, recognized as per Accounting Standard 11, is an accrued liability and not merely a contingent one. The appeal of the Revenue was dismissed, and the order was pronounced in the open court on April 6, 2022.