2016 (10) TMI 629 - HC - Income Tax

Addition of Mark to Market Loss - disallowance of loss on foreign exchange forward contract loss - Held that - The impugned order of the Tribunal has, while upholding the finding of the CIT (Appeals), independently come to the conclusion that the transaction entered into by the Respondent assessee is not in the nature of speculative activities. Further the hedging transactions were entered into so as to cover variation in foreign exchange rate which would impact its business of import and export of diamonds. These concurrent finding of facts are not shown to be perverse in any manner. In fact, the Assessing Officer also in the Assessment Order does not find that the transaction entered into by the Respondent assessee was speculative in nature. It further holds that at no point of time did Revenue challenge the assertion of the Respondent assessee that the activity of entering into forward contract was in the regular course of its business only to safeguard against the loss on account of foreign exchange variation. Even before the Tribunal, we find that there was no submission recorded on behalf of the Revenue that the Respondent assessee should be called upon to explain the nature of its transactions. Thus, the submission now being made is without any foundation as the stand of the assessee on facts was never disputed So far as the reliance on Accounting Standard11 is concerned, it would not by itself determine whether the activity was a part of the Respondent assessee s regular business transaction or it was a speculative transaction. On present facts, it was never the Revenue s contention that the transaction was speculative but only disallowed on the ground that it was notional. Tribunal was justified in deleting the addition of Mark to Market Loss made by the Assessing Officer on account of disallowance of loss on foreign exchange forward contract loss. - Decided in favour of assessee

Summary

Issues:
Challenge to order of Income Tax Appellate Tribunal regarding addition of 'Mark to Market' Loss on foreign exchange forward contract.

Analysis:
The appeal under Section 260A of the Income Tax Act, 1961 challenges the Income Tax Appellate Tribunal's order dated 14 August 2013 regarding the addition of 'Mark to Market' Loss of ?78,10,000 made by the Assessing Officer on account of disallowance of loss on a foreign exchange forward contract. The Respondent Assessee, engaged in import and export of diamonds, claimed the loss was due to hedging transactions to safeguard against exchange rate variations. The Assessing Officer disallowed the claim, considering it a notional loss, which was added to the total income. The Commissioner of Income Tax (CIT) (Appeals) allowed the appeal, stating the forward contract was not speculative but a business transaction. The Revenue appealed to the Tribunal, which upheld the CIT (Appeals) decision, emphasizing the loss was a revenue loss related to normal business activities. The Tribunal dismissed the Revenue's appeal.

The Revenue argued that the Tribunal's decision ignored a previous case in favor of the Revenue and failed to call for proof that the transaction was not speculative. Additionally, the Revenue relied on Accounting Standard 11 to claim the loss was not allowable. However, the Tribunal found the transaction was not speculative, entered into for hedging purposes in the course of regular business activities. The Tribunal's findings were deemed not perverse, as the Assessing Officer did not consider the transaction speculative. The Revenue did not challenge the nature of the transaction during proceedings, and no submission was made to call for explanations from the Assessee. The reliance on Accounting Standard 11 was dismissed as it did not determine the nature of the transaction. The Tribunal highlighted that decisions in favor of the Revenue in other cases did not automatically apply to the present case, emphasizing the need for specific factual similarities. The Tribunal's decision was based on the regular business nature of the transaction, distinguishing it from speculative activities.

The Tribunal concluded that the Revenue's formulated question of law did not present a substantial legal issue, leading to its dismissal. The appeal was ultimately dismissed, with no order as to costs.