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2023 (11) TMI 75 - AT - Income TaxMark to market loss - Unrealized foreign exchange forward contract losses treated as contingent in nature - AO noted that the aforesaid loss on account of exchange fluctuation on forward cover contracts not crystallised and is in the nature of notional loss - Assessee said such mark to market (MTM) gains arising in the subsequent A.Y. 2013-14 has also been offered for taxation in tune with accounting policy and claimed that such fluctuation losses are a fait accomopli and not a notional loss of contingent nature - HELD THAT - The issue is squarely covered in favour of the assessee by plethora of judgments which in unequivocal terms have held that mark to market loss on such future and forward contracts are not a notional loss of contingent nature and the loss stands crystallized at the end of the year notwithstanding the continuance and spilling over of the contract to next year. We also simultaneously take note of the plea of the assessee that the claim has been made in consonance with Accounting Standards prescribed by ICAI. Besides, the gains arising in A.Y. 2013-14 due to devaluation of foreign exchange has also been similarly offered for taxation. Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd. 2009 (4) TMI 4 - SUPREME COURT has considered such losses as allowable and not of contingent in nature. Similar view has been taken by the Co-ordinate Bench in the case of Investmentor Securities Limited 2018 (5) TMI 2161 - ITAT AHMEDABAD and M/s. SAL Steel Ltd. 2017 (1) TMI 1822 - ITAT AHMEDABAD We thus concur with the view taken by the CIT(A) that loss occurred due to such fluctuation in forward contract is a ordinary business loss and not merely a notional loss of provisional nature. We thus decline to interfere with the first appellate order.
Issues Involved:
1. Disallowance of unrealized foreign exchange forward contract losses amounting to Rs. 161.37 lakhs, treating it as contingent in nature. Summary: Issue 1: Disallowance of Unrealized Foreign Exchange Forward Contract Losses The Revenue filed an appeal against the order of the CIT(A) which allowed the assessee's claim of foreign exchange fluctuation losses amounting to Rs. 161.37 lakhs. The Assessing Officer (AO) had disallowed these losses, treating them as contingent liabilities and notional losses arising from assigning closing rates of foreign exchange on forward contracts that had not matured by the end of the financial year. The assessee, engaged in software development and IT solutions, argued that these losses were incurred in the ordinary course of business and were recorded in adherence to Accounting Standards issued by ICAI, specifically on a 'mark to market' (MTM) basis. The CIT(A) found merit in the assessee's claim, referencing the jurisdictional High Court's decision in Munjan Showa Ltd. vs DCIT and the Special Bench decision in DCIT vs Bank of Bahrain, which supported the allowance of losses on unmatured derivative contracts. The Tribunal noted that the issue was covered by multiple judgments favoring the assessee, including the Supreme Court's decision in CIT vs. Woodward Governor India Pvt. Ltd., which held that MTM losses on forward contracts are not notional or contingent but crystallized at the year's end. The Tribunal also observed that the assessee's method was consistent with ICAI's Accounting Standards and that similar gains were offered for taxation in subsequent years. Consequently, the Tribunal concurred with the CIT(A)'s view that the foreign exchange fluctuation loss is an ordinary business loss and not merely a provisional or notional loss. The appeal by the Revenue was dismissed, affirming the CIT(A)'s decision. Order was pronounced in the open court on 16.10.2023.
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