Foreign Exchange Derivative Losses can be allowed for Deduction as it is Notional Loss: ITAT [Read Order]

The Ahmedabad Bench of Income Tax Appellate Tribunal (ITAT) comprising Shri P M Jagtap, accountant member and Shri Siddhartha Nautiyal, Judicial member has held that foreign exchange derivative losses can be allowed for deduction as it is notional loss and upheld the order allowing the claim of deduction by the assessee company Adani Petronet.

The assessee is engaged in the business of development, operation and maintenance of a solid cargo terminal at Dahej.  The return of income filed declaring a loss of (-) Rs.94,55,91,217/- which was subsequently revised to (-) Rs.94,24,26,666/- in the return filed on 27.09.2013. The Assessing Officer noticed that the assessee has continued to invest Rs.10 crores which were exempt from tax.  No disallowance on account of expenses incurred about the investment was offered by the assessee as required by the provisions of Section 14A of the Act read with Rule 8D.   The AO made disallowance of Rs.29,03,478/- under Section 14A of the Act on account of expenses incurred about the investment of Rs.10 crores by applying Rule 8D.  The assessee challenged the action of the learned CIT(A) in deleting the addition of Rs.32,50,27,494/- made by the Assessing Officer on account of Mark to Market Exchange Loss on Foreign Exchange Derivatives. 

The assessee debited a sum of Rs.32,50,27,494/- being lost on account of derivative transactions for conversion of foreign currency loan on the port. The assessee company contended that the provision for marked to market loss has been made to comply with the requirement of accounting standard 11. Further contended that the said M2M loss was not like a notional loss. The appellant should follow the same accounting policies for providing for M2M losses/gain and such losses are not notional. CIT(A) allowed the claim of the assessee for a deduction on account of Mark-to market Exchange Loss in respect of Foreign Currency Derivatives Contracts.

The Tribunal in light of the case of M/s. Adani Hazira Port Pvt. Ltd has observed that M2M loss on SWAP contract was allowable where loans were converted into foreign currency loans to take benefit of low-interest rate and loss recognized on account of foreign exchange fluctuation as per notified Accounting Standard 11 was an accrued and find no infirmity in the impugned order by the CIT(A). The appeals filed on various grounds by the revenue were dismissed.

Shri Vartik Chokshi & Shri Dhrunal Bhatt appeared for the assessee and Shri Mudit Nagpal appeared for the revenue.

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