2015 (9) TMI 1348 - AT - Income Tax

Disallowance of the loss incurred on forward contract in foreign exchange - CIT(A) deleted the addition - Held that - In view of the ratio laid down by the Hon ble Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd. (2007 (4) TMI 118 - HIGH COURT , DELHI) which squarely covers the issue in favour of the assessee, we uphold the order of the CIT(A) in deleting the addition made on account of disallowance of the loss incurred on forward contract in foreign exchange. The grounds of appeal raised by the Revenue are thus dismissed. - Decided in favour of assessee.

Summary

Issues:
- Allowability of mark to market loss on forward exchange contracts
- Applicability of previous tribunal decisions and Apex Court ruling
- Disallowance of mark to market loss by AO

Analysis:
1. The main issue in the appeals filed by the Revenue was the allowability of mark to market loss on forward exchange contracts for assessment years 2009-10 and 2010-11. The Revenue contended that the loss was notional and hence not allowable. The assessee, on the other hand, argued that the loss was a legitimate business expense incurred to hedge against foreign exchange fluctuations.

2. The assessee relied on previous Mumbai Tribunal orders and the Apex Court ruling in the case of CIT vs. Woodward Governor India Pvt. Ltd. to support their claim. They highlighted that the CIT(A) had allowed the appeal based on the Apex Court's decision, emphasizing that the forward contracts were integral to their export business and were utilized in subsequent years.

3. The Revenue, represented by the learned D.R., argued that the facts of the case differed from previous decisions and cited a Mumbai Tribunal case where a contrary view was taken. The AO disallowed the claim stating that the contracts were not settled by year-end, thus the losses were not actual. However, the assessee demonstrated consistency in offering profits from foreign exchange differences in other years.

4. The Tribunal analyzed the case, noting that the assessee's forward contracts were essential for their diamond import-export business to mitigate foreign exchange risks. By following the Apex Court's ruling and considering the business nature of the contracts, the CIT(A) allowed the claim. The Tribunal upheld the CIT(A)'s decision based on previous tribunal decisions and the Apex Court's judgment.

5. Regarding the cross objections by the assessee, since the appeals of the Revenue were dismissed, the cross objections were also dismissed. Ultimately, both the appeals of the Revenue and the cross objections of the assessee were dismissed, affirming the decision in favor of the assessee regarding the mark to market loss on forward exchange contracts.