ITAT allows mark to market losses as business losses for 2009-10

The ITAT Mumbai upheld the CIT(A)'s decision to allow mark to market losses as business losses for the assessment year 2009-10. The Tribunal emphasized the concept of "crystallization of liability" and rejected the Revenue's argument that liability only arises upon contract maturity. It noted that the appellant's forward contracts were hedged against debtors, following the precedent set by the ITAT Special Bench in a similar case. The appeal of the revenue was dismissed, affirming the allowance of mark to market loss as a business loss.

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Issues:

1. Disallowance of mark to market loss made by the AO.

Analysis:

The Appellate Tribunal ITAT Mumbai heard an appeal filed by the revenue against the order of CIT(A), Mumbai, for the assessment year 2009-10 regarding the disallowance of mark to market loss. The AO had disallowed the assessee's claim of mark to market loss, which was later allowed by the CIT(A). The CIT(A) considered the appellant's transactions as hedging activities and referred to a similar issue addressed by the Special Bench of ITAT Mumbai in the case of Bank of Bahrain and Kuwait. The Special Bench held that deductions are allowable under the Income Tax Act for liabilities that have crystallized during the previous year. It emphasized the concept of "crystallization of liability" when the outflow of economic resources in settlement of present obligations can be anticipated with reasonable accuracy. The Tribunal rejected the Revenue's contention that liability can only arise when the contract matures, emphasizing the consideration of legal obligations and commercial principles. As the department had accepted the appellant's accounting method for several years, the mark to market losses on foreign exchange forward contracts were allowed as business losses.

The ITAT Mumbai found that the forward contracts were hedged against debtors, and the resultant loss was claimed as mark to market loss. The Tribunal noted that the issue was squarely covered by the ITAT Special Bench's order in the Bank of Bahrain and Kuwait case, where it was established that mark to market loss on foreign contracts done to hedge exchange fluctuations is allowable as a business loss. The Tribunal upheld the CIT(A)'s decision, stating that the mark to market loss had been determined as per the assessee's regularly followed accounting method. Consequently, the Tribunal dismissed the appeal of the revenue, affirming the allowance of mark to market loss as a business loss.

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