2015 (11) TMI 1200 - AT - Income Tax

ITAT upholds CIT(A) decision favoring assessee on mark-to-market loss addition

The ITAT upheld the CIT(A)'s decision, ruling in favor of the assessee regarding the deletion of the addition made on account of mark-to-market loss. The ... 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. Accordingly, we do not find any infirmity in the order of CIT(A) for allowing Mark to Market loss. - Decided against revenue. Issues Involved:1. Deletion of addition made on account of mark-to-market loss.2. Consistency in accounting practices regarding valuation of outstanding interest rate swap contracts.3. Applicability of judicial precedents on mark-to-market losses.Issue-wise Detailed Analysis:1. Deletion of Addition Made on Account of Mark-to-Market Loss:The core issue in this appeal is whether the CIT(A) was justified in deleting the addition made by the AO on account of mark-to-market loss amounting to Rs. 1,65,75,342/-. The AO had disallowed the loss, arguing that the assessee had not consistently offered gains on similar transactions, thus questioning the reliability of the assessee's accounting practices. However, the CIT(A) deleted the addition, emphasizing that mark-to-market or fair value accounting is a recognized accounting standard, which involves assigning a value to a financial instrument based on its current market price. The CIT(A) referenced several judicial precedents, including the Supreme Court's decision in CIT vs. Woodward Governor India (P) Ltd, which held that losses due to exchange differences as on the balance sheet date are allowable as expenditure under Section 37(1) of the I.T. Act.2. Consistency in Accounting Practices Regarding Valuation of Outstanding Interest Rate Swap Contracts:The CIT(A) observed that the assessee had consistently followed the principle of valuing outstanding interest rate swaps at cost or market value, whichever is lower, on each balance sheet date. This method is in line with the Fixed Income & Money Market Derivatives Association of India (FIMMDA) guidelines. The CIT(A) noted that the assessee netted mark-to-market losses against profits within the same basket and adjusted the profit and loss account accordingly. If the provision for mark-to-market loss was found excessive in subsequent years, the excess amount was written back and offered for tax. The CIT(A) concluded that the assessee's consistent accounting method could not be disregarded by the revenue merely because a different method might be preferable.3. Applicability of Judicial Precedents on Mark-to-Market Losses:The CIT(A) cited multiple judicial precedents to support the allowance of mark-to-market losses. The decision in CIT vs. Woodward Governor India (P) Ltd. was particularly influential, establishing that losses due to exchange rate fluctuations as on the balance sheet date are allowable as business expenditure. The CIT(A) also referenced the Mumbai ITAT's decision in DCIT vs. Bank of Bahrain and Kuwait, which held that losses on forward contracts evaluated on the last date of the accounting period are allowable. Other relevant cases included CIT vs. Motorola India Pvt. Ltd., Indusind Bank Ltd vs. Addl. CIT, and CIT vs. Wipro Finance Ltd., all supporting the principle that losses due to currency fluctuations or forward contracts are deductible if they meet certain criteria, such as consistency in accounting practices and the bona fide nature of the transactions.Conclusion:The ITAT upheld the CIT(A)'s decision, agreeing that the assessee's method of accounting for mark-to-market losses was consistent and in line with recognized accounting standards and judicial precedents. The tribunal found no infirmity in the CIT(A)'s order, emphasizing that a liability crystallizes when a pending obligation on the balance sheet date is determinable with reasonable certainty. The appeal of the revenue was dismissed, affirming the deletion of the addition made on account of mark-to-market loss.Order Pronouncement:The order was pronounced in the open court on 07/10/2015, dismissing the revenue's appeal.