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2016 (4) TMI 706 - AT - Income TaxMTM losses disallowed - loss in respect of cancellation of forward contracts disallowed being speculative in nature - treatment of forex losses or gains - Held that:- Assessee had recognized a loss of ₹ 2,13,43,725/- on forward foreign exchange contract of $83,45,000/- which were made in order to cover the loss due to fluctuation in exchange rate and were pending for maturity at the close of the year. At the same time the assessee also booked a gain of ₹ 4,48,05,788/- on the outstanding export receivable of $1,01,18,500/- following the same accounting system and accounting standard 11 which deals with the treatment of forex losses or gains which were not actually realized but a likely gain if the value of receivables are realized at the yearend. The same practice was being followed in the earlier year and was also accepted by the Revenue. The need to hedge is a commercial expediency and necessity which is practically followed in all the business houses engaged in import/export and these days specially the exchange rate is highly volatile. The special bench decision in case of DCIT Vs Bank of Bahrain and Kuwait (2010 (8) TMI 578 - ITAT, MUMBAI ) the special bench held that MTM losses in respect of forward foreign exchange contract debited to the profit and loss account are allowable and further held (i) a binding obligation is accrued against the assessee the moment it entered into forward foreign exchange contract(ii) consistent accounting method followed by the assessee to account for the forex gain and loss at the yearend based upon the current exchange rate cannot be disregarded(iii) the liability is said to have crystallized when a pending obligation on the date of balance sheet is determinable with reasonable certainty(iv) as per AS-11 when the transaction is not settled in the same accounting year as that in which it occurred , the exchange difference arises over more than one accounting period (v)in the ultimate analysis , there is no revenue effect and it is only timing of taxation of loss/profit. Following the decision of apex court in the case of Woolward Governor India Pvt. Ltd (2009 (4) TMI 4 - SUPREME COURT ) and special bench decision in the case of Bank of Bahrain and Kuwait(supra) , we are of the considered view that case of the assessee is fully covered by the decisions of the coordinate note benches and we therefore respectfully following the same allow the appeal of the assessee on the issue of MTM losses by deleting the disallowance - Decided in favour of assessee.
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