2025 (6) TMI 1147 - HC - Income Tax

Marked to market losses on currency derivative contracts allowed as deduction following Suzlon Energy precedent

PRINCIPAL COMMISSIONER OF INCOME TAX 1, AHMEDABAD Versus M/s. ADANI POWER MAHARASHTRA LTD.

The Gujarat HC allowed the assessee's appeal regarding disallowance of marked to market losses on currency derivative contracts. The court held that the ... Disallowance of marked to market loss in respect of currency derivative contracts - Whether M to M loss is a notional loss or contingent in nature? - HELD THAT:- Issue arising in these tax appeals is squarely covered by decision of this Court in case of Suzlon Energy Limited [2018 (2) TMI 1789 - GUJARAT HIGH COURT] also confirmed by SC [2020 (1) TMI 1505 - SC ORDER] - Assessee appeal allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in these Tax Appeals under section 260A of the Income Tax Act, 1961 relate to the treatment of marked to market (M to M) losses on currency derivative contracts for Assessment Years 2015-2016 and 2016-2017. Specifically, the issues are:(i) Whether the Income Tax Appellate Tribunal (ITAT) erred in deleting the disallowance of marked to market loss of Rs. 51,29,56,469/- for AY 2015-2016 on the ground that M to M loss is a notional and contingent loss;(ii) Whether the ITAT erred in deleting the disallowance of marked to market loss of Rs. 25,45,18,097/- for AY 2016-2017 on similar grounds.Both issues essentially question the tax treatment of notional losses arising from foreign exchange derivative contracts, and whether such losses are allowable deductions or must be disallowed as contingent and unrealized losses.2. ISSUE-WISE DETAILED ANALYSISIssue: Allowability of Marked to Market Losses on Currency Derivative ContractsRelevant Legal Framework and Precedents:The Income Tax Act, 1961 governs the assessment and allowance of losses and expenses for tax purposes. Marked to market losses on derivative contracts are notional losses reflecting unrealized fluctuations in market value. The key legal question is whether such notional losses qualify as allowable deductions under the Act.Precedents relied upon include the decision of this Court in Principal Commissioner of Income Tax-4 v. Suzlon Energy Limited, where the Court held that notional losses on foreign exchange derivatives are allowable deductions. This decision was upheld by the Supreme Court by dismissal of Special Leave Petitions, thus attaining finality.Other relevant precedents include the Supreme Court decision in Commissioner of Income Tax vs. Woodward Governor India P. Ltd, which supports the allowance of such notional losses, and the Gujarat High Court decision in Nirma Industries Ltd vs. Deputy Commissioner of Income Tax, which was followed by the Tribunal.Court's Interpretation and Reasoning:The Tribunal and the High Court have consistently held that marked to market losses on currency derivative contracts represent real economic losses and are allowable for tax purposes. The Court noted that such losses are not merely contingent or hypothetical but reflect the true financial position as per accounting standards and market realities.The Tribunal relied on a prior decision in the case of a sister concern (Adani Petronet (Dahej) Port Pvt. Ltd) where identical issues were decided in favor of the assessee, with no material placed on record by the Revenue to distinguish that case or to show that the decision was overruled by any higher authority.The Court emphasized that the Revenue failed to produce any binding contrary decisions or demonstrate any factual distinctions that would warrant a different conclusion.Key Evidence and Findings:The assessee had declared substantial losses based on marked to market valuation of currency derivative contracts, which were initially disallowed by the Assessing Officer. The CIT(Appeals) deleted the disallowance, and the Tribunal upheld this deletion. The Revenue was unable to produce evidence or legal authority to support the disallowance of notional M to M losses.Application of Law to Facts:The Court applied the settled legal principle that marked to market losses on foreign exchange derivatives are allowable deductions, as they represent real economic losses and are recognized under accounting and tax laws. The Revenue's argument that such losses are contingent and notional was rejected based on binding precedents and the absence of any distinguishing facts.Treatment of Competing Arguments:The Revenue contended that M to M losses are contingent and notional, hence disallowable. However, the Court found this argument untenable in light of authoritative precedents and consistent judicial treatment of such losses as allowable deductions. The Revenue's failure to cite any binding contrary authority or factual differentiation led to dismissal of its contentions.Conclusions:The Court concluded that the ITAT rightly deleted the disallowance of marked to market losses on currency derivative contracts. The Revenue's appeals lacked merit and were dismissed accordingly.3. SIGNIFICANT HOLDINGSThe Court held, preserving verbatim reasoning from the Tribunal:'Before us, no material has been placed on record by the Revenue to demonstrate that the decision of Tribunal as discussed above has been set aside / stayed or overruled by the Higher Judicial Authorities. Before us, Revenue has not placed any material on record to point out any distinguishing feature in the facts & circumstances of the case of the assessee and fact & circumstances in case of sister concern nor has placed any contrary binding decision in its support. Thus, respectfully following the order this tribunal in the case as discussed above, we uphold the finding of the learned CIT(A). Thus, the ground of appeal raised by the Revenue is hereby dismissed.'The Court reaffirmed the principle that marked to market losses on foreign exchange derivatives are allowable deductions for income tax purposes, as established in the decision of Principal Commissioner of Income Tax-4 v. Suzlon Energy Limited and upheld by the Supreme Court.It was further held that no substantial question of law arises from the impugned order of the Tribunal, and the Tax Appeals filed by the Revenue are devoid of merit and are accordingly dismissed.