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Income Tax Appellate Tribunal, “B(SMC
Before: Shri A. T. Varkey, JM]
This is an appeal preferred by the assessee against the order of Ld. CIT(A)-2, Kolkata dated 29-08-2019 for the assessment year 2009-10.
2. The sole grievance of the assessee is against the action of the Ld. CIT(A) in disallowing loss of Rs.4,30,709/- on F&O derivatives.
At the outset, Shri A. K. Jain, director of the assessee company drew our attention to the fact that the lis before us is squarely covered in assessee’s favour in assessee’s own case. It is noted that in assessee’s own case for the AY 2008-09 in this Tribunal “C” Bench, Kolkata vide its order dated 06.09.2019 on similar issue has given relief to the assessee by holding as under:
“5. Ground No. 2 raised by the assessee relates to addition on account of loss of Rs. 19,39,257/- incurred by the assessee on account of forward and option derivative contract.
Brief facts qua the issue are that during the assessment year under consideration the assessee has claimed loss in derivative trading. The assessing officer observed thatin the derivative trading the general practice is that profit or loss booked on Marked to Market Basis, which is profit or loss books on the basis of market rate of a particular sauda. However, the assessee also booked profit or loss on Marked to Market basis for the sauda which has remained unexpired/outstanding at the end of the financial year, as on 31.03.2008. So even though actual loss/profit has not been realized by the assessee, entry in the books has been made. The AO noted that "Marked to Market" is in substance a methodology of assigning value to a position held in a financial instrument based on its market price on the closing day of the accounting or reporting record. Essentially, 'Marked to Market' is a Stenly Securities Ltd, AY- 2009-10 concept under which financial instruments are valued at market rate so as to report their actual value on the reporting date. This is required from the point of view of transparent accounting practices for the benefit of the shareholders of the company and its other stakeholders. The AO further noted that where companies make such an adjustment through their Trading or Profit/Loss Account, they book a corresponding loss (i.e. the difference between the purchase price and the value as on the valuation date) in their accounts. Therefore, AO noted that this loss is a notional loss as no sale/conclusion/settlement of contract has taken place and the asset continues to be owned by the company. The loss booked is a notional loss and is contingent in nature and cannot be allowed to be set off against the taxable income. In the case of this assessee, it has debited loss of Rs.19,39,257/- in relation to the outstanding sauda on futures/options contracts on ‘Marked to Market’ basis, therefore the loss booked is notional and not actual. Even in the case of share trading, profit or loss is booked on actual basis and not on notional basis. Considering the above facts, the loss of Rs.19,39,257/- debited on account of outstanding futures/options contracts had been disallowed by AO.
7. Aggrieved by the stand so taken by the AO, the assessee carried the matter in appeal before the ld CIT(A), who has confirmed the disallowance made by AO. Aggrieved, the assessee is in appeal before us.
We heard both the parties and carefully gone through the submission put forth on behalf of the assessee along with the documents furnished and the case laws relied upon, and perused the fact of the case including the findings of the ld CIT(A) and other materials brought on record. We note that assessee, being a share trading company, had entered into futures contracts for purchase/sale of shares and the contracts remained unexpired as on 31st March,2008. As per the Accounting Standard 30 issued by the Institute of Chartered Accountants of India, the assessee company accounted for the difference between the contract price of these shares and the prevailing market rates as on 31.03.08 in its books of accounts. These contracts were to mature beyond the end of the financial year and therefore the Ld. AO treated such loss as notional in nature and disallowed the same. The term 'Marked to Market' losses' (MTM) refers to losses computed as on a particular date with reference to prevailing market rate in respect of contracts that have not yet matured. We note thatthe assessee company had entered into a binding obligation by contracting to purchase/sell shares at a future date at a predetermined price. Moreover, a liability is said to have accrued when a pending obligation on the balance sheet date was determinable with reasonable certainty. Hence, the loss of Rs. 19,39,257/- on account of unexpired future contracts should be allowed by the Ld. A.O. We note that the assessee company follows method of valuation of stock in trade as 'lower of cost or market price'. This method is consistently followed by the company. Futures and options in the share trading business are derivatives in the nature of stock-in-trade which are required to be valued at the method of valuation adopted by the Company by using accounting standards and therefore accordingly loss arising from 'Marked to Market' valuation is allowable as deduction. Such loss is not considered as notional as per accounting standard-30 (Now, as per Ind AS 109 which is applicable to big companies in India).
However, we note that ld. DR has primarily reiterated the stand taken by the Assessing Officer which we have already noted in our earlier para and the same is not being repeated for the sake of brevity. We note that this issue is squarely covered by the judgment of the Co-ordinate Bench of ITAT Kolkata in the case of Nagreeka Exports Ltd. in & 578/Kol/2013, for A.Y 2008-09, order dated 03/08/2016, wherein it was held as follows: “4. Ground No.1.Forex Derivatives amounting to Rs.1,58,94,821/- treating the same as unascertained liability and notional loss. As per Notes to accounts No. 14(b) (Schedule “O”), the company has charged an amount of Rs.1,58,94,821/- to the Profit & Loss a/c. in respect of derivative contracts outstanding as on 31st March, 2008. The Ld. AO did the addition of Rs. 1,58,94,821/- holding that mark to market loss on account of forex derivative is a notional loss, the date of settlement of the forex derivative falls beyond
Stenly Securities Ltd, AY- 2009-10 31/03/2008 and the contract was not matured as on 31/03/2008. The Learned Assessing Officer completely ignored the submissions made before him by the assessee and disallowed the loss alleging it to be notional loss on unexpired contract. Aggrieved from the order of the Assessing Officer, the assessee filed an appeal before the Ld. CIT (A) –VI, Kolkata, who has confirmed the action of the Ld. Assessing Officer. Not being satisfied with the order of the Ld. CIT(A), the assessee is in further appeal before us.
The Ld. A.R. for the assessee has submitted that as per Accounting Standard-11 “The Effects of Changes in Foreign Exchange Rates” the company is under mandate to account gain or loss of forward contract. Accounting Standard - 30 “Financial Instruments” deals with various derivative products. Normally, a company which is engaged in the import and export of goods takes a forward contract to lock the prices against fluctuation of foreign exchange rates. The company may also enter into an option or cross currency swap to protect the risk of fluctuations in the interest rate and foreign exchange rates in respect of an underlying asset, and liability. In the instant case the company has entered into these forex derivative contracts to hedge the risk of interest in respect of Rupee Loan, therefore the underlying liability in the instant case is Rupee Loan. The Ld. AR for the revenue has relied on the decision of Hon`ble ITAT Kolkata Bench `B` in wherein the similar identical issues were adjudicated, vide para 25 and 26 of the said decision which are reproduced below:
“25. Applying the above observations to the facts and circumstances of present case, we find that the claimed loss under consideration occurred to the assessee on account of five unexpired forex forward contracts i.e a loss incurred on account of revaluation on contract on last day of accounting period before date of maturity of forward contract. The Ld. CIT-A observed that the assessee has been following a consistent accounting policy for determining loss under AS-11 and AS-30 as required under Companies Act and it is to be noted that the accounting standards were issued by the ICAI which has received judicial recognition. Accordingly, the assessee, the gain or loss on revaluation of the outstanding contracts was booked in the P.& L, a/c as per the mandatory requirements of RBI guidelines. The Hon`ble Supreme Court in the case of Woodward Governor India (P) Ltd. (supra) has observed at P.265 para 17 that the Central Government has made AS-11 mandatory. During the course of first appellate proceedings that the CIT-A noticed that the AO allowed the loss of Rs. 85,70,425/- for 2010-11 which supports to show that the assessee has been following consistently accounting standards and the liability has been accrued for a pending obligation for every year i.e. the difference was arising for more than one accounting period.
We, accordingly, hold that disallowance made by AO treating the impugned amount of Rs. 54,23,955/- for A.Y. 2009-10 as contingent and notional loss is not justified and that the loss incurred to the assessee on account of five unexpired forex forward contracts on the last date of accounting period i.e. before the date of maturity of the forward contract isnot contingent and it is a actual loss, is allowable. Thus, respectfully, following the observations made by the Special Bench supra, the ground no2 raised by the appellant Revenue fails and the order of CIT-A is justified, consequently ground no-2 is dismissed.”
5.1 The Ld. AR for the assessee has vehemently submitted that the above cited decision of Hon`ble ITAT ,Kolkata is identical to the facts of the assessee under consideration. The treatment followed by the assessee company is in line with the matching concept of expenditure and liability since as at the close of the accounting year there was a liability
Stenly Securities Ltd, AY- 2009-10 which cannot be ignored or else the financial statements would not reflect a true and fair view of the assets and liabilities and corresponding profit for the year. In addition to this, the Ld. AR has also placed reliance on the following judgments:
In the case of - Bank of Bahrain & Kuwait (J 32 TTJ 505) (Mumbai ITAT SB) wherein it has been held that Loss on account of valuation of forward contracts on the last day of accounting period is an allowable business loss.
Woodward Governor India (P) Ltd. (2009) 312 ITR 254 (SC).
5.2 The Ld. AR for the assessee stated that in view of detailed submissions made and case law cited above, it is clear that the business loss of Rs..1,58,94,821/- on account of Mark to Market of Unexpired Forex Derivatives Contracts is allowable and prayed that addition made on this account may be deleted.
6. On the other hand, the ld. Departmental Representative for the Revenue has primarily reiterated the stand taken by the Ld. AO and the Ld. CIT(A) and cited before us the CBDT Circular No.3/2010 dated 23rd March, 2010, wherein the CBDT has instructed to the department that mark to market losses which are in the nature of speculation should not be allowed as a business expenditure. Ld. DR stated that it is a notional loss which will be actually deductible from the income of the assessee on the maturity of the contract. The issue under consideration is in respect of unsettled contracts and moreover there is no any underlying assets and liability to hedge the risk. He further submitted that loss arising from mark to market position of financial instruments is different and cannot be considered allowable as deduction as such loss has not arisen so far in the normal course of business operation of the assessee. The exchange rates are still liable to fluctuate of the market in future, therefore, it is kind of a speculative transaction which settles otherwise than by the actual delivery within the meaning of sub-section 5 of Section 43 of the Income Tax Act, 1961. The Ld. DR also relied on the following judgments.
1). ACIT-vs- K. Mohan & Company Private Ltd., Bangalore ITAT 126 ITD 59 2) D. Kishore Commercial & Company, Mumbai ITAT, 2 SOT 769 3) S. Vinod Kumar –vs- ACIT, Mumbai ITAT in All the Judgments cited above speak about the speculative transactions which do not have any underlying assets and liabilities to hedge and these transactions settle in future without actual delivery of goods.
Having heard the rival submissions, we are of the view that there is merit in the submissions of the Ld. AR for the assessee, since the proposition canvassed by Ld AR is supported by Hon`ble ITAT-Kolkata, cited supra. There is an underlying liability ( Loan) to hedge the risk and hence the derivative contract under consideration is for the purpose of business and not for the purpose to speculate the transaction without and underlying assets and liabilities. In the instant case there is an underlying liability and purpose of this derivative contract is to minimise the business risk by way of hedging therefore it is not a speculative transaction as Ld. DR has pointed out (supra), hence we direct the Ld. CIT (A) to delete the addition”.
Stenly Securities Ltd, AY- 2009-10 Respectfully following the judgment of the Co-ordinate Bench in the case of M/s Nagreeka Exports (supra), we allow the ground raised by the assessee.” Respectfully following the decision of the coordinate bench as well as taking note of the Hon’ble Supreme Court decision reported in Woodward Governor India (P) Ltd. (2009) 312 ITR 254 (SC), I allow the ground of appeal raised by the assessee and direct the AO to delete the addition.
In the result, the appeal of assessee is allowed.
Order is pronounced in the open court on 18th March, 2020.