2022 (7) TMI 1463 - HC - Income Tax

High Court upholds assessee's foreign exchange loss deduction & Marked to Market Loss treatment

PRINCIPAL COMMISSIONER OF INCOME TAX (CENTRAL-1), KOLKATA Versus M/s. HIMADRI CHEMICALS & INDUSTRIES LTD.

The High Court of Calcutta dismissed the revenue's appeal challenging the deduction of foreign exchange fluctuation loss on an ECB loan and the treatment ... Revision u/s 263 - validity of assessment order u/s 143(3) - deduction of amount in assessment order u/s 143(3) which was claimed by the assessee-company on account of foreign exchange fluctuation loss on O/S ECB loan in the computation of income made as per provision of Income Tax Act - Whether ITAT has erred in terming the Marked to Market Loss on foreign currency swaps is a “ascertained liability” which is contrary to facts and law in view of clause 17(k) of the Tax Audit Report? - HELD THAT:- It is not disputed before the revenue that the substantial questions of law which have been suggested by the revenue were considered by this Court in the case of Principal Commissioner of Income Tax-I, Kolkata vs. Price Waterhouse Coopers Pvt. Ltd. 2021 (12) TMI 1400 - CALCUTTA HIGH COURT] allowing the assessee’s claim of foreign exchange fluctuation loss on mark to market basis. Decided against revenue. Issues:1. Deduction of foreign exchange fluctuation loss on ECB loan.2. Treatment of Marked to Market Loss on foreign currency swaps.Issue 1: Deduction of foreign exchange fluctuation loss on ECB loanThe appeal filed by the revenue under Section 260A of the Income Tax Act, 1961 challenges the order of the Income Tax Appellate Tribunal regarding the deduction of Rs. 27,46,16,665 claimed by the assessee-company on account of foreign exchange fluctuation loss on O/S ECB loan. The revenue contends that the assessing officer did not consider this issue while allowing the deduction, leading to an erroneous order prejudicial to the revenue's interest. The Court considered the arguments presented by both parties and referred to a previous case involving similar issues. The Court noted that the facts were not in dispute, the loss arose from forward contracts, and the assessee followed the mercantile system of accounting. Relying on the decision in a specific case, the Court concluded that the assessee was eligible for the deduction, and the appeal by the revenue was dismissed.Issue 2: Treatment of Marked to Market Loss on foreign currency swapsThe second substantial question of law raised in the appeal pertains to the treatment of Marked to Market Loss on foreign currency swaps as an 'ascertained liability.' The revenue questioned the ITAT's decision regarding this treatment, arguing that it was contrary to facts and law, citing a specific clause in the Tax Audit Report. The Court referred to a case involving a similar issue where the Tribunal's decision to delete the disallowance of notional loss on outstanding foreign derivative contracts was upheld by the High Court and subsequently approved by the Supreme Court. The Court highlighted that the decision in this case was in line with the precedent set by the Supreme Court in a previous judgment. Consequently, the Court dismissed the appeal filed by the revenue, answering the substantial questions of law against the revenue and closing the connected application for stay.This judgment by the High Court of Calcutta involved two main issues: the deduction of foreign exchange fluctuation loss on an ECB loan and the treatment of Marked to Market Loss on foreign currency swaps. The Court carefully analyzed the arguments presented by both parties, referred to relevant precedents, and ultimately dismissed the revenue's appeal, upholding the decisions made by the Income Tax Appellate Tribunal.