Court Overturns ITAT Decision: 'Marked to Market' Losses on Currency Fluctuations Recognized as Business Losses Under Tax Law.

The HC ruled in favor of the appellant, overturning the ITAT's order disallowing 'marked to market' losses on foreign currency fluctuations for hedging forward contracts. The court recognized these losses as business losses under Section 37(1) of the Income Tax Act, emphasizing the importance of consistent accounting practices and aligning with business exigencies. The appellant was granted consequential relief, affirming the legality of recognizing such losses and the significance of adhering to established accounting standards in foreign currency transactions. The appeal was disposed of, reinforcing the applicability of Section 43AA for post-2017 transactions.

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Issues:
Whether ITAT was right in upholding the disallowance of 'marked to market' losses on account of fluctuation in foreign currency for hedging of forward contracts.
Whether the ITAT erred in contradicting and reviewing its own order in the first round of litigation.
Whether the ITAT ignored the principle of consistency by disregarding the settled law in the appellant's own case in AY 2008-09.

Analysis:
The appellant challenged the ITAT's decision disallowing 'marked to market' losses on foreign currency fluctuation for hedging forward contracts. The High Court referred to the case of Pr. Commissioner of Income Tax vs Simon India Ltd., where it was established that losses on forward contracts for hedging foreign exchange fluctuations are allowable under Section 37(1) and fall within the exceptions of Section 43(5)(a) of the Income Tax Act. The court emphasized that the appellant consistently followed accounting practices and recognized the losses on forward contracts as necessary. The court also highlighted the importance of recognizing exchange differences in foreign currency transactions as per AS-11. The appellant's actions were deemed to be in line with business exigencies, and the losses were allowed as business losses to ascertain correct taxable profits.

The High Court noted legislative amendments introduced post the Supreme Court's decision in Commissioner of Income Tax vs Woodward Governor India Private Limited, leading to the introduction of Section 43AA of the Income Tax Act. This section treats gains or losses arising from foreign exchange rate changes as income or loss and mandates their computation in accordance with income computation and disclosure standards. The amendments clarified that forward exchange contracts were not covered under the previous provisions before 01 April 2017.

In conclusion, the High Court ruled in favor of the appellant, setting aside the ITAT's order dated 29 May 2017. The appellant was granted consequential relief, and the appeal was disposed of accordingly. The judgment emphasized the legality of recognizing losses on forward contracts for hedging foreign exchange fluctuations and highlighted the significance of consistent accounting practices in such transactions.

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