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DCIT-4 (1) , Mumbai Versus M/s IDBI Capital Market Services Limited

2015 (11) TMI 1200 - ITAT MUMBAI

Addition made on account of mark to market loss - CIT(A) deleted the addition - Held that:- The assessee is consistently following the cost or Mark to Market value, whichever is lower for valuation of outstanding interest rate swap on each balance sheet date. Furthermore, a liability is said to have crystalised when a pending obligation on the balance sheet date is determinable with reasonable certainty. The detailed findings recorded by CIT(A) in this regard have not been controverted by ld. DR .....

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evenue is aggrieved for deleting the addition made on account 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 outstan .....

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ng 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 early 1990s. The use of fair value measurements has increased steadily over the past decade, primarily in response to investor demand for relevant and timely financial statements that will aid in making better informed decisions. Mark to market is a concept .....

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0 by surrendering those . 200 shares to bank then today the bank will be facing shortfall in its security value-as it has advanced ₹2000 against a security of ₹ 1000 only (present value). So in that case, the bank will immediately call the balance (the margin) from me and I have to make provision out of my present income for the call of my bank. If I am not paying my loan and the bank is forced to sell my share. in the market then, the bank will incur a loss of ₹1000 and the ba .....

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adopted. This is made clear by defining the word "paid", in s. 43(2), which is used in several s. 30 to 43C,as meaning actually paid or incurred according to the method of accounting upon the basis on which profits or gains are computed under s. 28/29. That is why in deciding the question as to whether the word "expenditure" in s. 37(1) includes the word "loss" one has to read s. 37(1) with s. 28, s. 29 and s. 145(1). One more principle needs to be kept in mind. Acc .....

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ring 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 modifie .....

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the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under s. 37(1). 3.3(c) The Hon'ble Mumbai ITAT following the decision of Special bench in the case of DCIT (International Taxation) vs. Bank of Bahrain and Kuwait, held that no addition can be made where a forward contract is entered into by the assessee to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period, the loss is .....

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nes, etc. The assessee claimed deductions on the basis of loss sustained because of variation in the Foreign Exchange rate. Both the Assessing Authority as well as Appellate Authority disallowed the said loss. On appeal, the Tribunal held that the assessee was following mercantile accounting' system and also followed settled principles of accounting and taxation laws. From the year-end statement of liabilities, due to fluctuation in rate of foreign currency, loss was allowable on a year to y .....

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tled to allowance of the said loss sustained. On appeal before the High Court the Revenue assailed the Tribunal's decision by referring to the Apex Court decision in Woodward Governor India (P) Ltd. The counsel for the Revenue contended that though the 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, h .....

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oodward 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 Tribunal on appreciating the material on recor .....

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Joss amounting to RS.98,27,032 on un-matured foreign exchange contracts CIT(A) confirmed the order of the AD. In appeal it was contended by the assessee that the appellant maintained the accounts on mercantile system where liability already accrued though discharged at a future date and was a proper deduction accepting the principles of commercial practice and accountancy. 3.3(f) In the case of ClT vs. Wipro Finance Ltd. 2010-TIOL-766-HC-KAR-IT, the assessee avails loan in foreign currency and .....

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efore amendment and after amendment. The Court was in fact examining the deductibility of Roll over premium in respect of foreign exchange forward contracts. The- Court has held that wherever the foreign exchange loans-were availed for securing capital assets, the decrease or increase would affect the capital asset. If the foreign exchange loan was acquired for working capital or other revenue commitments, the fluctuation effect shall be adjusted in Revenue account. Till the amendment brought in .....

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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 .....

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ost of imported capital assets acquired in foreign currency on account of fluctuation at each . balance-sheet date, pending actual payment of the varied liability. AO disallowed the claim and Ld. CIT(A) goes with the AO on the assessee's claim for foreign exchange loss in revenue account but accepts the assessee's stand relating to capital account. Tribunal disagrees with the AD but High Court reverses the Tribunal's order - held, in view of the Apex Court decision in the Woodward Go .....

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ney Market Derivatives Association of India). It has also been submitted by the appellant that valuation is made contract wise and mark to market loss is netted against mark to. market profit, wherever available within the basket. Further if the value after netting' results in loss, the appellant is debiting equivalent amount to the P&L Alc. Further, in case provision for mark to market loss made by debiting P&L Alc. in a particular year found to be in excess than the amount required .....

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method could be adopted. A liability is said to have crystallised when a pending obligation on the balance sheet date is determinable with reasonable certainty. The considerations for accounting the income are entirely' on different footing; The derivative contracts have. all the trappings of stock-in-trade. Therefore, in view of the decision of Hon'ble Supreme Court in the case of Woodward Governor India (P) Ltd., the assessee's claim is allowable. Further, in the ultimate analysis, .....

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