2013 (10) TMI 1364 - AT - Income Tax

Market to market loss arising on valuation of forward exchange contracts on the closing date of accounting year - Hedl that - Hon ble Supreme Court in case of ONGC vs. CIT (2010 (3) TMI 81 - SUPREME COURT ) following the earlier decision in the case of CIT vs. Woodward Governor India (P.) Ltd. (2009 (4) TMI 4 - SUPREME COURT ) have held that the Assessee having maintained account on mercantile system of accounting loss claimed by the Assessee on account fluctuation in the rate of foreign exchange as on the date of balance sheet in respect of loans taken for Revenue purpose is allowable as expenditure u/s. 37(1) notwithstanding the fact that liability has not been actually discharged in the year in which the fluctuation rate of foreign exchange is accrued. Therefore we find no infirmity in the order passed by the ld. CIT(A) holding that Market to market loss of Rs. 1, 06, 47, 416/- arising on valuation of forward exchange contracts on the closing date of accounting year is not a notional loss and therefore allowable - Decided in favour of assessee

Summary

Issues:
1. Allowability of market to market loss on valuation of forward exchange contracts as a deduction under the Income Tax Act.

Analysis:
1. The appeal was filed by the Revenue against the order of CIT(A) for the assessment year 2008-09, challenging the allowance of a market to market loss of &8377;1,06,47,416 on the valuation of forward exchange contracts. The Assessing Officer disallowed the loss, considering it a notional loss for which liability had not been crystallized. The CIT(A), however, relying on various decisions, including those in the cases of CIT vs. Woodward Governor India and ONGC vs. CIT, held in favor of the assessee, stating that the loss was allowable as it was in accordance with AS-11 and consistently claimed by the Assessee over the years.

2. The Authorized Representative contended that the CIT(A) had correctly decided the issue in line with the aforementioned decisions, while the Departmental Representative supported the AO's order disallowing the loss.

3. The ITAT, after hearing both parties, upheld the CIT(A)'s decision, stating that the claim of the Assessee for the fluctuation in the rate of foreign exchange as on the balance sheet date was allowable as expenditure under section 37(1) of the Income Tax Act. Citing the Supreme Court's decision in ONGC vs. CIT and the precedent in CIT vs. Woodward Governor India, it was concluded that the Assessee, following the mercantile system of accounting, was entitled to claim the loss even if the liability had not been discharged in the same year. Therefore, the ITAT found no error in the CIT(A)'s order and dismissed the appeal filed by the Revenue.

4. The judgment was delivered by the ITAT Mumbai, with Shri I.P. Bansal, Judicial Member, and Shri Rajendra, Accountant Member presiding over the case. The order was pronounced on 21st October 2013, confirming the allowance of the market to market loss on forward exchange contracts for the Assessee.