6 Business expenditure – Mark to market loss – Loss suffered in foreign exchange transactions entered into for hedging business transactions – cannot be disallowed as being “notional” or “speculative” in nature: Section 37(1)

6.  Business
expenditure – Mark to market loss – Loss suffered in foreign exchange
transactions entered into for hedging business transactions – cannot be
disallowed as being “notional” or “speculative” in nature: Section 37(1)

CIT-4 vs. Walchandnagar Industries Ltd. [Income tax Appeal no. 352 of
2015 dated : 01/11/2017 (Bombay High Court)].

[Walchandnagar Industries Ltd. vs. ACIT. [ITA No. 3826/Mum/2013; Bench
: G ; dated 21/08/2014 ; AY 2009-10, Mum. ITAT ]

The
assessee is a manufacturer of engineering goods. During the course of the
assessment proceedings, the A.O noticed that the assessee has shown loss on
account of foreign exchange currency rate fluctuation. On perusing the details,
the A.O noticed that the loss was on account of marked to market loss.

The
assessee was show caused to explain why the exchange rate fluctuation loss
should not be treated as speculation loss. The assessee explained the
difference between forward contracts and option contracts. The AO did not
accept the detailed submission of the assessee. The AO was of the opinion that
the loss arising from revaluation as on 31.3.2009 is a notional loss and cannot
be allowed as expenditure u/s. 37(1) of the Act.

The
assessee carried the matter before the Ld. CIT(A) but without any success.

Before
ITAT, the assessee stated that the issue of disallowance on account of marked
to market loss is squarely covered in favour of the assessee by the decision of
the Hon’ble Supreme Court in the case of CIT vs. Woodward Governor India
Pvt. Ltd. 312 ITR 254.

The
ITAT find that the Hon’ble Supreme Court in the case of Woodward Governor
India (Supra) has held that loss suffered by the assessee on account
of fluctuation in the rate of foreign exchange as on the date of the balance
sheet is an item of expenditure u/s. 37(1) of the Act. Respectfully following
the decision of the Hon’ble Supreme Court, the AO is directed to delete the
disallowance of Rs. 2,28,01,707/-.

Being
aggrieved the Revenue filed an appeal to the High Court. The court perused the
said decision of this Court in the case of CIT vs. M/s. D. Chetan &
Co ( 2017) 390 ITR 36 (Bom.)(HC); the Court held that ; Loss
suffered in foreign exchange transactions entered into for hedging business
transactions cannot be disallowed as being “notional” or “speculative” in
nature.

Hence, no
substantial question of law arises and accordingly the appeal was dismissed.