The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has allowed the foreign exchange fluctuation loss holding that the Market to Market (M2M) loss on future and forward contracts were not notional loss of contingent nature.
The assessee, Sopra India Pvt. Ltd was engaged in the business of development of software and providing IT solutions and software engineering services. In the course of assessment under Section 143(3) of the Income Tax Act, the Assessing Officer inter alia observed that the assessee had debited and claimed foreign exchange fluctuation expenses. The Assessing Officer noted that the aforesaid loss on account of exchange fluctuation on forward cover contracts not crystallised and was in the nature of notional loss.
The AO further noted the version of assessee that several foreign exchange forward contracts were entered to hedge its exposure to fluctuation in foreign exchange rates which were entered into on the basis of firm commitments and highly probable future transactions. The Assessing Officer observed that such forward contracts were neither closed nor matured till the end of F.Y. 2011-12 relevant to A.Y. 2012-13. Such forward contracts had been re-valued by the assessee at the exchange rate as on 31.03.2012 and the exchange differences on such contracts had been claimed as foreign exchange fluctuation loss during the year.
The Assessing Officer, however, expressed its disagreement with the claim of loss on the ground that such loss was contingent liability and had notionally arisen merely due to assigning closing rate of foreign exchange and creating artificial loss there-from. It was also observed that such forward contracts were in the nature of speculative contracts and loss arising had also not crystallised as the contracts had not matured at the end of the year. For such broad reasons, the Assessing Officer disallowed foreign exchange fluctuation loss claims.
Neeraj Jain, appeared on behalf of the assessee and Anuj Garg, appeared on behalf of the revenue. The grievance of the Revenue concerns disallowance of ‘mark to market losses being unrealized losses arising from foreign exchange forward contract owing to foreign exchange fluctuation.
The two-member Bench of Chandra Mohan Garg, (Judicial Member) and Pradip Kumar Kedia, (Accountant Member) observed that the issue was squarely covered in favour of the assessee by plethora of judgments which in unequivocal terms had held that ‘mark to market’ loss on such future and forward contracts were not a notional loss of contingent nature and the loss stands crystallised at the end of the year notwithstanding the continuance and spilling over of the contract to next year.
The Bench dismissed the appeal filed by the revenue holding that loss occurred due to such fluctuation in forward contract was an ordinary business loss and not merely a notional loss of provisional nature.
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