2014 (8) TMI 1051 - AT - Income Tax

ITAT Mumbai allows mark-to-market losses as business expenditure in landmark ruling.

The ITAT Mumbai allowed the appellant's appeal regarding the disallowance of mark to market losses as business expenditure in the assessment year 2009-10. ... Disallowance of Mark to Market loss are notional losses - Held that:- Facts emerging out of the assessment record show that assessee is in the business of import and export of diamonds substantial portion of its transaction are denominated in US dollars and accordingly current assets and liabilities are also denominated in US dollars to hedge itself against risk out of fluctuation in foreign exchange. The assessee was entering into forward contract to hedge itself. Forward contract in foreign exchange are booked in the assessee’s regular course of business, which are always denominated in foreign currency. Whenever there is a gain the assessee is recognizing the same in its P & L Account. Hedging is a commercial necessity being followed by all engaged in import & export line because of the highly volatile currency fluctuation. As relying on the decision of DCIT vs. Bank of Bahrain and Kuwait (2010 (8) TMI 578 - ITAT, MUMBAI) to hold that the liabilities for foreign exchange was incurred during the normal course of assessee’s business and in fact the gain earned on such revaluation having been accepted and brought to tax in the respective years, there is no reason to arrive at a different conclusion in this year merely because there is a loss. Thus directing the AO to delete the addition - Decided in favour of assessee. Issues involved: Disallowance of mark to market losses as expenditure in assessment year 2009-10.Detailed Analysis:1. Issue of Disallowance of Mark to Market Losses: The appellant, engaged in diamond manufacturing, importing, and exporting, claimed mark to market losses of Rs. 32,95,500 during scrutiny assessment. The Assessing Officer (AO) disallowed this claim, considering it a notional loss and contingent liability. The appellant challenged this disallowance before the CIT(A) but was unsuccessful. The appellant then appealed to the ITAT Mumbai. The ITAT noted that the appellant's business involved substantial transactions in US dollars, necessitating forward contracts to hedge against foreign exchange risks. The ITAT observed that mark to market losses were consistently allowed in similar cases by the Tribunal and were supported by judicial decisions such as CIT vs. Woodward Governor India P. Ltd. The ITAT also referenced a Special Bench decision in the case of Bank of Behrain and Kuwait. Considering these precedents and the facts of the case, the ITAT set aside the CIT(A)'s findings and directed the AO to allow the mark to market losses as a business loss. Consequently, the appeal by the assessee was allowed, and the disallowance was overturned.2. Judgment and Decision: The ITAT Mumbai, comprising Shri N.K. Billaiya, AM, and Shri Sanjay Garg, JM, analyzed the appellant's claim of mark to market losses disallowance. The ITAT reviewed the business operations of the appellant, the nature of mark to market losses, and the legal precedents supporting the allowance of such losses as business expenditures. The ITAT emphasized the commercial necessity of hedging against currency fluctuations in import and export businesses, particularly in transactions denominated in foreign currency. By referencing previous Tribunal decisions and the Supreme Court ruling in CIT vs. Woodward Governor India P. Ltd., the ITAT concluded that mark to market losses were allowable as business losses in this case. The ITAT's decision overturned the CIT(A)'s ruling and directed the AO to permit the mark to market losses claimed by the appellant. The judgment was pronounced in open court on 06/08/2014, with the appeal filed by the assessee being allowed.