2015 (5) TMI 38 - AT - Income Tax

Disallowance of Mark to Market loss arising on valuation of forward exchange contracts - Losses on account of outstanding / open foreign exchange forward contracts - Business loss or Notional loss - Held that - We find that this issue has also been decided by the Special Bench of the Tribunal, Mumbai Bench, in Bank of Bahrain 2010 (8) TMI 578 - ITAT, MUMBAI wherein the Tribunal, while holding that Mark to Market losses in respect of forward foreign exchange contract debited to Profit & Loss account is an allowable deduction. The reasons given to allow this loss are - A binding obligation accrued against the Appellant t the minutes it entered into forward foreign exchange contracts - A consistent method of accounting followed by the Appellant cannot be disregarded - Liability is said to have crystallized when a pending obligation on the balance sheet date is determinable with reasonable certainty - As per AS-11, when the transaction is not settled in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting period - In view of the decision of the Supreme Court in the case of Woodward Governor India (I) P. Ltd. 2009 (4) TMI 4 - SUPREME COURT , the Appellant's claim is allowable - In the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit. Thus, in view of the above, we uphold the findings of the learned Commissioner (Appeals) for allowing loss incurred by the assessee on re-statement of pending forward contract agreement at the year end as allowable business loss. - Decided against the revenue.

Summary

Issues:
1. Allowability of "Mark to Market" loss on valuation of forward exchange contracts as a business loss for income tax purposes.

Analysis:
The Revenue challenged an order regarding the assessment year 2009-10 under the Income Tax Act, 1961. The assessee, engaged in diamond manufacturing and trading, incurred a loss on foreign exchange forward contracts revaluation. The Assessing Officer disallowed the loss, but the Commissioner (Appeals) allowed it, citing relevant case law. The assessee relied on a Special Bench decision and a Supreme Court judgment to support their claim. The Tribunal considered various decisions and upheld the Commissioner's decision, treating the loss as an allowable business loss.

The Tribunal emphasized that the loss on matured foreign exchange contracts should be allowed as a business loss, following precedents and considering the integral nature of the contracts to diamond exports. The Special Bench decision in another case supported the allowance of Mark to Market losses on forward foreign exchange contracts, highlighting the binding obligation, consistent accounting method, crystallized liability, and lack of revenue effect. Ultimately, the Tribunal upheld the Commissioner's decision to allow the loss incurred by the assessee on re-statement of pending forward contract agreements as a business loss, dismissing the Revenue's appeal.

In conclusion, the Tribunal ruled in favor of the assessee, allowing the "Mark to Market" loss on forward exchange contracts as a business loss for income tax purposes. The decision was based on a thorough analysis of relevant case law, emphasizing the consistent accounting practices and lack of revenue impact in such transactions.