Disallowance of mark to market loss claimed by the appellant

This Income Tax Appellate Tribunal ruling concerns a company that claimed a significant unrealised loss on forward contracts due to foreign currency fluctuations. The Assessing Officer disallowed this loss, citing a CBDT instruction regarding notional and speculative losses. While the lower appellate authority upheld this disallowance, the Tribunal ultimately allowed the company's claim. They reasoned that disallowing the loss would be prejudicial, especially as the loss was reversed in the subsequent year when the contracts matured and similar gains had been accepted as income.

IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES “F”, MUMBAI
 

BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND
SHRI MANOJ KUMAR AGGARWAL, ACCOUNTANT MEMBER
 

ITA No. 7834/MUM/2019
Assessment Year: 2016-17

VVF (India) Ltd.,
Plot 109, Sion Fort Garden,
Sion (East),
Mumbai - 400022
PAN: AADCV4970G

(Appellant)

Vs

ACIT- Circle (3)(2),
Aayakar Bhavan, M.K. Road,
Churchgate,
Mumbai - 400020

Respondent

Assessee by : Madhur Aggarwal (AR)
Revenue by : Usha Gaikwad (DR)
 

Date of Hearing: 20/05/2021
Date of Pronouncement: 26/07/2021
 

O R D E R

Captioned appeal by the assessee is against the order dated 23.10.2019 of learned Commissioner of Income Tax (Appeals)–14, Mumbai for the assessment year 2016-17.

2. Briefly the facts are, the assessee, a resident company, is stated to be engaged in the business of manufacturing of toilet soaps, fatty acids and fatty alcohols. For the assessment year under dispute, assessee filed its return of income on 26.11.2016 declaring total loss of Rs.119,75,64,719/-. In course of assessment proceedings, the Assessing Officer (AO) while verifying the audit report of the assessee noticed that assessee has claimed unrealized loss in respect of forward contracts due to foreign currency fluctuation. Noticing the above, he called upon the assessee to explain why the loss claimed by the assessee should not be disallowed in view of instruction no. 3 of 2010 dated 23.03.2010 issued by Central Board of Direct Taxes (CBDT). In response to the query raised,the assessee filed a detailed submission on 21.12.2018 justifying its claim. Further, the assessee submitted that CBDT instruction no. 3/2010 would not be applicable to assessee. The AO however did not accept the submissions of the assessee and proceeded to disallow the unrealized foreign exchange loss of Rs. 4,04,22,093/-, following CBDT instruction no. 3/2010. Though, assessee contested the aforesaid disallowance before learned Commissioner (Appeals), however, relying upon the decision of the Tribunal in case of Bechtal India (P) Ltd. vs. ACIT (2017) 82 taxmann.com 301 (Delhi), learned Commissioner (Appeals) sustained the disallowance.

3. The learned Departmental Representative strongly relying upon the observations of the AO and learned Commissioner (Appeals) submitted, the fact on record clearly reveal that the forward contracts have remained outstanding at the end of the year. Therefore, the loss computed by the assessee is purely notional and speculative loss. She submitted, since such loss is not allowable as per CBDT instruction no. 3/2020, which is binding on the departmental authorities, loss claimed by the assessee was correctly disallowed.

4. Thus, the aforesaid observations of the Hon’ble jurisdictional High Court definitely clinches the issue in favour of the assessee.

5. Pertinently, when the AO is accepting the gain offered as income by theassessee following similar accounting method, there is no justifiable reason todisallow the loss. It is also relevant to observe, the contention of the assessee that the loss determined on restatement of forward contract as on 31.03.2016 was reversed on 01.04.2016 i.e. on the first day of the succeeding assessment year, wherein, the forward contracts matured has not been controverted. Thus, any disallowance in the impugned assessment year would be prejudicial to the assessee, as, it would amount to double disallowance of the same amount. Thus, respectfully following the decisions of the Hon’ble Supreme Court and Hon’ble jurisdictional High Court cited before us, we allow assessee’s claim of loss. The disallowance is hereby deleted. Grounds are allowed.

6. In the result, appeal is allowed.

Order pronounced in the open court on 26th July, 2021.

Please find attached the enclosed file for the full judgement