2014 (4) TMI 163 - AT - Income Tax

Disallowance on account of mark to market loss Foreign exchange contracts Held that - The decision in CIT v/s Woodward Governor India P. Ltd. 2009 (4) TMI 4 - SUPREME COURT followed - the loss suffered by the assessee is on revenue account towards foreign exchange difference as on the date of balance sheet and is an item of expenditure deductible u/s 37(1) - an enterprise has to report outstanding liability relating to import of raw material using closing rate of foreign exchange and any difference, loss or gain, arising on conversion of said liability at closing rate should be recognized in profit and loss account for reporting period - unrealized loss due to foreign exchange fluctuation in foreign currency transactions on revenue item as on the last date of the accounting year is deductible - thus, order of the CIT(A) set aside and the AO is directed to allow the loss claimed by the assessee on account of marked to market loss on foreign exchange contract Decided in favour of Assessee. Disallowance of write off of 1/10th of non-compete fee Held that - As decided in assessee s own case for the previous assessment years that there was no merit in the ground raised by the assessee Decided against Assessee.

Summary

Issues:
1. Disallowance of marked to market losses on foreign exchange contracts.
2. Disallowance of write-off of non-compete fee.

Issue 1: Disallowance of marked to market losses on foreign exchange contracts

The appeal challenged the order passed by the Commissioner (Appeals) regarding the disallowance of Rs. 1,13,88,976 on account of marked to market losses on foreign exchange contracts for the assessment year 2009-10. The assessee claimed the loss as an allowable expenditure based on revaluation of unexpired contracts at the end of the accounting year. The Assessing Officer disallowed the claim, stating it was a notional loss. The Commissioner (Appeals) upheld this decision. The assessee argued that various Tribunal decisions, including the Supreme Court's decision in Woodward Governor India P. Ltd., supported their claim. The Tribunal, after considering the submissions, found in favor of the assessee, citing precedents and the Supreme Court's ruling that unrealized loss due to foreign exchange fluctuation is deductible as expenditure under section 37(1) of the Income Tax Act. The Tribunal set aside the Commissioner (Appeals) order and directed the Assessing Officer to allow the claimed loss.

Issue 2: Disallowance of write-off of non-compete fee

The second issue involved the disallowance of Rs. 20 lakhs claimed as deferred revenue expenditure amortized on account of non-compete fees. The Assessing Officer disallowed this claim, which was upheld by the Commissioner (Appeals) based on previous Tribunal decisions against the assessee. The assessee contended that the issue was being contested to keep it alive, as their appeal had been admitted by the High Court under section 260A. However, the Tribunal found that this was a recurring issue in the assessee's case, with previous decisions against them. Therefore, following judicial precedence, the Tribunal dismissed the ground raised by the assessee regarding the disallowance of the write-off of the non-compete fee.

In conclusion, the Tribunal partly allowed the assessee's appeal, allowing the marked to market loss on foreign exchange contracts but dismissing the claim regarding the write-off of the non-compete fee.