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

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 of Marked to Market Loss on foreign currency swaps. The Court upheld the decisions of the Income Tax Appellate Tribunal, ruling in favor of the assessee-company. The Court found that the assessee was eligible for the deduction based on the mercantile system of accounting and previous case law precedent. Additionally, the Court determined that the treatment of Marked to Market Loss on foreign currency swaps as an "ascertained liability" was consistent with established legal principles, leading to the dismissal of the revenue's appeal.

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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 loan

The 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 swaps

The 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.

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