The Mumbai Income Tax Appellate Tribunal (ITAT) recently held that market to market loss in forex business has no notional loss which was allowable as expenditure.
Assesse JBF Industries Ltd Company is a limited company engaged in the business of manufacturing and trading in POY, PTY, Bulk drugs, etc.after filing the return assessee case was selected for scrutiny.
Further the assessing officer made a reference under section 92CA(1) of the Income Tax Act, 1961 to the Transfer Pricing Officer for computation of arm’s length price in relation to the international transactions of the assessee and also made an addition of Rs.29,28,34,962/- on account of ‘loss on derivative contracts’.
Against the assessment order assesee filed an appeal before the ITAT.
While the assessment proceedings assessingofficer found that,
In case of assessee derivative contract, assessee has entered into two derivative contracts amounting to Rs.100 crores in the nature of interest and principal currency swap transaction where Rs.100 crores was converted into dollar loan at a fixed rate of USD/INR with ICICI Bank.
As per the accounting standards, the derivative contracts are to be valued at the yearend as and when the interest settlement is made. The resultant impact has to be transferred to the profit and loss account and the necessary provision entries are made in the books of accounts to provide for ‘Marked to Market losses’.
Whereas The assessee is said to have reversed the provision of section of Rs.32,17,21,685/- reflected at the beginning of financial year and adjusted the actual losses and gains to the said derivative account. The assessee passed an entry by debiting Rs.14,34,05,142/- as closing provision for ‘marked to market losses’ at the year end and balance of Rs.2,47,52,748/- was treated as ‘net gain’ offered as ‘income’
K. Gopal counsel for the assessee submits that Assessing officer . has not considered the reversal of the opening provision and treated the closing provision of Rs.14,34,05,142/- as ‘loss’ and disallowed the same as ‘capital loss’.
Samruddhi Dhananjay Hande counsel for the revenue confirmed the decision of assessing officer.
After considering the contentions of both the parties the division bench of the ITAT comprising Prashant Maharishi, (Accountant Member) and Kavitha Rajagopal, (Judicial Member) allowed the appeal filed by the assessee and observed that “marked to market loss is not a notional loss and is, therefore, allowable expenditure”
Also assesse’s transaction was not a speculative transaction as per section 43(5) of the act and is merely a hedging transaction and thereby the same would fall under the exception to section 43(5) of the Income Tax Act 1961.
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