2021 (1) TMI 578 - AT - Income Tax

Tribunal allows loss on FC revaluation, stresses accounting consistency, overturns CBDT instruction.

The Tribunal overturned the disallowance of the loss on FC revaluation, emphasizing consistency in accounting methods and the inapplicability of the CBDT ... Loss on account of FC revaluation which was a marked to market (MTM) loss - Addition as such loss as a notional loss and contingent in nature - CIT (A), relying on the CBDT instruction dated 23.03.2010, held that the MTM losses on account of foreign derivatives were a difference between the purchase price and the value as on the valuation date, which is a notional loss and therefore, not an allowable expenditure and thus upheld the disallowance - HELD THAT:- In this case, the pending forward contracts were restated on the basis of foreign exchange rate as on 31.03.2013. There is no dispute on the details furnished by the assessee. The losses are booked by the assessee in compliance of mandatory accounting standard AS-11 from AY 2011-12 onwards and it admitted the corresponding profits as income in the respective year. Since, the facts of this case are similar to the case decided in EMMSONS INTERNATIONAL LTD.[2019 (10) TMI 761 - ITAT DELHI] following it, we hold that the addition is unsustainable. We, accordingly direct the AO to delete the same. - Decided in favour of assessee. Issues:1. Disallowance of loss on account of FC revaluation as a notional loss.2. Applicability of CBDT instruction dated 23.03.2010.3. Treatment of losses on Foreign Currency utilization, cancellation, and revaluation in the assessment.Analysis:1. The appeal was filed against the order disallowing the loss on account of FC revaluation, treated as a notional loss by the AO. The AO allowed other losses but disallowed the revaluation loss. The CIT (A) upheld the disallowance citing CBDT instruction dated 23.03.2010. The assessee contended that the loss was quantified as per AS-11 and consistently followed accounting methods. The Tribunal referred to previous decisions and held that the addition of the loss was unsustainable, directing the AO to delete it.2. The CBDT instruction dated 23.03.2010 was crucial in determining the treatment of MTM losses on foreign derivatives. The CIT (A) relied on this instruction to disallow the loss as notional. However, the Tribunal, based on precedents and judicial views, concluded that CBDT instructions cannot override judicial decisions, especially when the facts align with established principles. Therefore, the Tribunal found the addition of the loss unsustainable and directed its deletion.3. The assessee, engaged in tobacco trading and exports, incurred losses on FC utilization, cancellation, and revaluation. The AO disallowed the loss on FC revaluation, considering it notional and contingent. The CIT (A) upheld this disallowance based on the CBDT instruction. However, the Tribunal, after considering the accounting standards followed by the assessee and previous decisions, found the disallowance unsustainable and allowed the appeal, directing the AO to delete the addition.In conclusion, the Tribunal overturned the disallowance of the loss on FC revaluation, emphasizing the consistency in accounting methods and the inapplicability of the CBDT instruction in contravention of established judicial decisions. The appeal was allowed in favor of the assessee, highlighting the importance of aligning tax assessments with accounting standards and legal precedents.