2017 (6) TMI 339 - AT - Income Tax

Disallowance of losses on account of re-measuring of forward contracts - assessee characterized the said losses as marked to market ( MTM) losses - Held that - Hedging forward contracts of foreign currency cannot be marked to market (MTM) on balance sheet date as already there is a underlying asset and there is no extra outgo for settlement of the forward contract other than already determined in the contract and thus there is no additional liability or benefit to the assessee on the settlement date. Once there is no liability or benefit on the settlement date, there is no possibility of liability or benefit to the assessee on balance sheet date also. It is contested by the Revenue that in certain forward contracts, there was no underlying asset as on the date of balance sheet and, therefore, it need to be examined whether same were forward contract transaction in the nature of hedging or in the nature of speculation. However, in our opinion, when the contention of the assessee that all the forward contracts were settled by way of actual delivery through dollars received on export receivables, the assessee cannot be allowed mark to market losses on such forward contract and therefore it is not required to examine whether those forward contract transactions were speculative in nature. In view of above we hold that the loss claimed by the assessee on account of mark to market losses on account of fluctuation in foreign currency in respect of hedging forward contract is not allowable. - Decided against assessee.

Issues Involved:
1. Disallowance of INR 21,80,46,325 incurred on re-measuring of foreign exchange forward contracts (MTM losses).
2. Order passed by the Assessing Officer being barred by limitation.
3. Directions of the DRP regarding disallowance of MTM losses without appreciating the ITAT's prior order.
4. Direction of the DRP to disallow MTM losses despite the ITAT's agreement on the principle of allowability under section 37(1) of the Act.
5. Alleged malafide manner of the Assessing Officer in passing the order.
6. Reliance on CBDT Instruction No. 3/2010 by the DRP/AO.
7. Charging of interest under sections 234B and 244A of the Act.
8. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Detailed Analysis:

1. Disallowance of INR 21,80,46,325 incurred on re-measuring of foreign exchange forward contracts (MTM losses):
The assessee company provided "Engineering & Design Service" and entered into forward contracts to hedge against exchange fluctuation. The MTM losses on these contracts were claimed as business expenses. The Tribunal had previously remanded the issue to the DRP for fresh adjudication. The DRP directed the AO to disallow the loss, citing that the assessee failed to file necessary evidence to substantiate its claim. The Tribunal upheld this disallowance, stating that the MTM losses were not allowable as they were not actual trading liabilities but rather speculative in nature.

2. Order passed by the Assessing Officer being barred by limitation:
The assessee argued that the order was barred by limitation under section 153 of the Act. However, this ground was not argued specifically before the Tribunal and was dismissed as not pressed.

3. Directions of the DRP regarding disallowance of MTM losses without appreciating the ITAT's prior order:
The assessee contended that the DRP did not consider the ITAT's prior order, which in principle agreed that MTM losses were allowable under section 37(1) of the Act. The Tribunal noted that the DRP had provided opportunities to the assessee to file submissions and calculations, which the assessee failed to do. Thus, the DRP's direction to disallow the MTM losses was upheld.

4. Direction of the DRP to disallow MTM losses despite the ITAT's agreement on the principle of allowability under section 37(1) of the Act:
The Tribunal reiterated that while the principle of allowability under section 37(1) was agreed upon, the assessee failed to provide necessary evidence to substantiate its claim. The Tribunal emphasized that the MTM losses were not actual trading liabilities but speculative transactions, and thus not allowable.

5. Alleged malafide manner of the Assessing Officer in passing the order:
The assessee claimed that the AO passed the order in a malafide manner without considering the material furnished on record. The Tribunal did not find merit in this argument and upheld the disallowance.

6. Reliance on CBDT Instruction No. 3/2010 by the DRP/AO:
The assessee argued that the reliance on CBDT Instruction No. 3/2010 was misplaced as it was issued after the year under consideration and was not applicable to the assessee. The Tribunal did not specifically address this issue but upheld the disallowance based on the nature of the transactions.

7. Charging of interest under sections 234B and 244A of the Act:
The assessee challenged the charging of interest under sections 234B and 244A, which the Tribunal dismissed as consequential and not requiring adjudication.

8. Initiation of penalty proceedings under section 271(1)(c) of the Act:
The assessee challenged the initiation of penalty proceedings, which the Tribunal dismissed as premature since no penalty had been levied by the AO in the impugned order.

Conclusion:
The Tribunal upheld the disallowance of INR 21,80,46,325 on account of MTM losses, stating that these were not actual trading liabilities but speculative transactions. The grounds related to limitation, charging of interest, and initiation of penalty proceedings were dismissed as not pressed, consequential, and premature, respectively. The appeal of the assessee was dismissed in its entirety.

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