M2M loss arising on valuation of forward contract on closing date of accounting year allowable as business loss: ITAT

Case Details: VVF (India) Ltd. v. ACIT - [2021] 130 taxmann.com 285 (Mumbai - Trib.)

Judiciary and Counsel details

• • Saktijit Dey, Judicial Member and Manoj Kumar Aggarwal, Accountant Member
  • Madhur Aggarwal, AR for the Appellant. Usha Gaikwad, DR for the Respondent.

Facts of the Case

Assessee was an importer of raw material from foreign vendors and exporter of finished products to foreign customers. It had entered into forward contracts as a hedge against loss arising due to fluctuation in foreign currency rates and claimed unrealized loss in respect of said contracts.

Assessing Officer (AO) in view of CBDT Instruction No. 3 of 2010 disallowed loss claimed by assessee holding that same being marked to market loss (M2M) was speculative and notional in nature. The CIT(A) upheld the order of the AO. Aggrieved-assessee filed the instant appeal before the Mumbai Tribunal.

ITAT Held

The Mumbai Tribunal held that there was no dispute between the assessee and the revenue that the forward contracts entered by the assessee with banks were in respect of underlying import/export transactions. Thus, they were in the nature of hedging contracts to safeguard against loss, if any, arising on account of fluctuation in foreign currency.

It was a fact that as per the consistent method of accounting followed by the assessee and applying Accounting Standard-11, the assessee restates the value of debtors, creditors, borrowings, and unsettled forward contracts at the yearend applying closing rate of the foreign currency.

It is also uncontroverted fact that on such restatement, if there is any gain, the assessee offers it as income, and in case there is a loss, the assessee claims it as deduction. The Departmental Authorities had also not disputed that the aforesaid accounting method was consistently followed by the assessee and accepted by the Department.

On a careful perusal of CBDT Instruction No. 3/2010, it can be found that the instruction clearly speaks about foreign exchange derivatives contracts and not hedging transactions. Thus, said CBDT instruction would not be applicable to the assessee. Accordingly, marked to market loss arising on valuation of forward contract on the closing date of accounting year was to be allowed as business loss under section 28(i).

Case Review

• • CIT v. Woodward Governor India (P.) Ltd. [2009] 179 Taxman 326/312 ITR 254 (SC) (para 9)
  • CIT v. Badridas Gauridu (P.) Ltd. [2004] 134 Taxman 376/[2003] 261 ITR 256 (Bom.) (para 9) followed.

List of Cases Referred to

• • Bechtel India (P.) Ltd. v. Asstt. CIT [2017] 82 taxmann.com 301/165 ITD 282 (Delhi – Trib.) (para 3)
  • CIT v. Woodward Governor India (P.) Ltd. [2009] 179 Taxman 326/312 ITR 254 (SC) (para 4)
  • CIT v. Badridas Gauridu (P.) Ltd. [2004] 134 Taxman 376/[2003] 261 ITR 256 (Bom.) (para 4)
  • CIT v. D. Chetan & Co. [2016] 75 taxmann.com 300/243 Taxman 356/[2017] 390 ITR 36 (Bom.) (para 4)
  • Pr. CIT v. International Gold Co. Ltd. [IT Appeal No. 1827 (Bom.) of 2016] (para 4)
  • Pr. CIT v. Vishinda Diamonds [IT Appeal No. 1841 (Bom.) of 2016] (para 4)
  • Pr. CIT v. Osia Gems [IT Appeal No. 1221 (Bom.) of 2016] (para 4)
  • Essel Propack Ltd. v. Dy. CIT [IT Appeal No. 5312 (Mum.) of 2015] (para 4)
  • ACIT v. Shree Balkrishna Exports [IT Appeal No. 4185 (Mum.) of 2014] (para 4)
  • S. Vinodkumar Diamonds (P.) Ltd. v. Dy. CIT [2020] 118 taxmann.com 317 (Mum. – Trib.) (para 4)
  • Dy. CIT (International Taxation) v. Bank of Bahrain & Kuwait [2010] 41 SOT 290 (Mum.) (SB) (para 4)
  • Everest Industries Ltd. v. Jt. CIT [2018] 90 taxmann.com 330 (Mum.) (para 4).