Tribunal overturns disallowance, allows appellant's claimed loss for consistent accounting method

The Tribunal allowed the appeal, deleting the disallowance of Rs. 4,04,22,093/- claimed by the appellant for the assessment year 2016-17. The Tribunal held that the appellant's consistent accounting method, supported by judicial decisions, justified the allowance of the loss. The Tribunal found the AO's reliance on CBDT instruction no. 3/2010 misplaced, as it did not apply to the appellant's hedging transactions. Disallowing the loss would result in double disallowance, which was deemed prejudicial to the appellant. Consequently, the disallowance was overturned, and the appeal was successful.

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Issues Involved:
1. Disallowance of mark to market loss claimed by the appellant.
2. Application of the decision of Hon'ble Delhi ITAT in the case of Bechtal India (P) Ltd. vs. ACIT.
3. Lack of reasonable opportunity for the appellant to explain its case.
4. Double disallowance due to reversal of the loss in subsequent financial year.
5. Consistency in the method of accounting followed by the appellant.

Issue-wise Detailed Analysis:

1. Disallowance of Mark to Market Loss Claimed by the Appellant:
The appellant, engaged in manufacturing toilet soaps, fatty acids, and fatty alcohols, filed a return declaring a total loss of Rs. 119,75,64,719/- for the assessment year 2016-17. The Assessing Officer (AO) disallowed the unrealized foreign exchange loss of Rs. 4,04,22,093/- on forward contracts due to foreign currency fluctuation, following CBDT instruction no. 3/2010. The appellant argued that the forward contracts were hedging transactions to mitigate risks from currency fluctuations, not speculative or trading activities. The consistent accounting method applied, including Accounting Standard (AS)-11, was used to restate monetary items at the closing rate, with gains/losses charged to the profit and loss account. The appellant cited several judicial decisions supporting the allowance of such losses, including CIT vs. Woodward Governor India (P) Ltd. (312 ITR 254) and CIT vs. Badridas Gauridas (P) Ltd. (261 ITR 256).

2. Application of the Decision of Hon'ble Delhi ITAT in the Case of Bechtal India (P) Ltd. vs. ACIT:
The Commissioner of Income Tax (Appeals) relied on the decision in Bechtal India (P) Ltd. vs. ACIT (2017) 82 taxmann.com 301 (Delhi) to sustain the disallowance. However, the appellant contended that this decision was factually distinguishable and did not consider relevant judgments from the Hon'ble Bombay High Court. The appellant emphasized that the consistent accounting method used was accepted by the Department in previous years, including gains from similar transactions.

3. Lack of Reasonable Opportunity for the Appellant to Explain its Case:
The appellant claimed that it was not given a reasonable opportunity to explain its case and demonstrate how it differed factually from Bechtal India (P) Ltd. The appellant argued that the loss was based on a consistent accounting method, and the AO's selective acceptance of gains while disallowing losses was unjustified.

4. Double Disallowance Due to Reversal of the Loss in Subsequent Financial Year:
The appellant highlighted that the disallowed loss was reversed in the subsequent financial year when the forward contracts matured. Disallowing the loss in the impugned year would result in double disallowance, as the same loss would be accounted for twice. This argument was not controverted by the Departmental Representative.

5. Consistency in the Method of Accounting Followed by the Appellant:
The appellant consistently followed an accounting method that restated monetary items at the year-end closing rate, as per AS-11. This method was consistently accepted by the Department in previous years, including the gain on restatement of unsettled forward contracts. The appellant argued that the CBDT instruction no. 3/2010, which pertains to foreign exchange derivatives contracts, was not applicable to hedging transactions. The Tribunal agreed with this view, noting that the instruction did not apply to the appellant's hedging transactions.

Conclusion:
The Tribunal found that the AO's reliance on CBDT instruction no. 3/2010 was misplaced, as it did not apply to hedging transactions. The consistent accounting method followed by the appellant, accepted in previous years, warranted the allowance of the loss. The Tribunal cited several judicial decisions supporting the appellant's position, including the Hon'ble Supreme Court's decision in CIT vs. Woodward Governor India (P) Ltd. and the Hon'ble Bombay High Court's decision in CIT vs. Badridas Gauridas (P) Ltd. The Tribunal concluded that disallowing the loss would be prejudicial to the appellant, resulting in double disallowance. Therefore, the disallowance was deleted, and the appeal was allowed.

Order:
The appeal was allowed, and the disallowance of Rs. 4,04,22,093/- was deleted. The Tribunal's decision was pronounced in the open court on 26th July 2021.

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