TMI Blog2015 (11) TMI 1200X X X X Extracts X X X X X X X X Extracts X X X X ..... count of mark to market loss. 2. Rival contentions have been heard and record perused. During the course of assessment proceedings, the AO noticed that an amount of ₹ 1,65,75,342/- has been debited to loss on swaps being Mark to Market loss as on 31/03/2010. By observing that assessee has not offered gain on similar transactions, the AO disallowed the loss by observing that the assessee has never taxed the gain on valuation of outstanding interest rate swap contracts. As the assessee has not been consistent and definite in making entries in the account books in respect of losses and gain the deduction of ₹ 1,65,75,342/- was not allowed to the assessee. 3. By the impugned order the CIT(A) deleted the additions so made after observing as under :- 3.3(a) Before, I. take up the issue it is imperative to understand what is the concept of Mark-to-market . or fair value accounting refers to the accounting standards of assigning a value to .a position held in a financial instrument based on the current fair market price for the instrument or similar instruments. Fair value accounting has been a part-I of US Generally Accepted Accounting Principles (GAAP) since the ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re unreliable. The 1961 Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the P L a/c the value of the stock-in- trade at the beginning and at the end of the year should be entered at cost or market price, whichever is the lower. This is how business profits arising during the year needs to be computed. This is one more reason for reading s. 37(1) with s. 145. Under s. 145(2), the Central Government is empowered to notify from time to time the Accounting Standards to be followed by any class of assessees or in respect of any class of income. Accordingly, under s.209 of the Companies Act, mercantile system of accounting is made mandatory for companies. In other words, Accounting Standard which is continuously adopted by an assessee can be superseded or modified by legislative intervention. However but for such intervention or in cases falling under s. 145(3),the method of accounting undertaken by the assessee continuously is supreme. In the present batch of Gases, there is no finding given by the AO on the correctness or completeness of the accounts of the assessee. Equally, there is no finding given by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court had held that loss suffered by the assessee in respect of a revenue liability on account of exchange difference as on the date of the balance sheet is an item of expenditure allowable under Section 37(1) in the year of accrual, however, the Supreme Court also held that in order to find out if the expenditure was taxable, five tests had been prescribed. Therefore, only, if the said five tests were satisfied, the assessee would be entitled to said benefit. As in this case, none of the authorities have applied their mind, the Court may direct the authorities to consider whether those tests were fulfilled by the assessee before he was entitled to deduction. Relying on the decision of the Apex Court in the case of ClTI vs. Woodward Governor India (P) Ltd (2009) 312 ITR (SC) 254 , the Hon'ble High Court held that the first and foremost requirement of the. Apex Court decision is that he must be adopting mercantile system of accounting. Secondly, the said loss claimed should have been claimed not only in the year in dispute, but a continuous course of conduct to show that, that is the way said claim is reflected in the accounts. Thirdly, it should be bonafide one. The Tri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Court has further deliberated upon the capital nature and revenue nature of such adjustments arising out of foreign exchange fluctuation. Apart from the above general proposition of law, the Hon'ble Court further examined whether the Roll over premium in respect of foreign exchange forward contract is eligible for depreciation in the nature of expenditure to be added to the cost of the capital asset; or to be debited in the profit and loss account, if it is in the Revenue account. If Roll over premium 'on forward contract by itself is held to be admissible as a deduction or adjustment, then there is no doubt that the loss arises out of the forward contracts would be very much entitled for deduction or adjustment if it is a loss. 3.3:(h) Oil Natural Gas Corporation Ltd. Vs err (2010) 322 ITR 180(SC), the assessee is a public sector undertaking, engaged in exploration and prospecting oil. It largely depends on foreign loans to cover its capital and revenue expenses. Fluctuation in foreign currency rates results in loss and assessee claims deduction u/s 37(1) in the year of fluctuation apart from adjusting .the actual cost of imported capital assets acquir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s claim is allowable. Further, in the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit, as in the next year there is an actual settlement of the contracts. Accordingly, where an interest swap rate contract is entered into by the appellant to work out the interest rate at an agreed price at a future date falling beyond the last date of accounting period, the loss is incurred to the appellant on account of evaluation of the contract on the last date of the accounting period Le. before the date of maturity of the contract. Thus, what applies to forward exchange contract also applies to forward interest rate contracts and accordingly the mark-to-market loss of such nature is a business loss and the same is neither a provision against unascertained liability nor diminution of any asset. In view of the forgoing the claim of the appellant is allowed: This ground of appeal is allowed. 4. We have considered the rival contentions, carefully gone through the orders of the authorities below. The issue is covered by the various decision of the coordinate benches as well as decision of High Court and Supreme Court cited by the CIT(A) in ..... 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