Mark-To-Market Loss, Loss On Forward Contracts, Loss On Forward Premium Account Not Speculative In Nature, ITAT Deletes Addition

The Delhi Bench of Income Tax Appellate Tribunal (ITAT) has deleted the income tax addition and held that mark-to-market losses, losses on forward contracts, and losses on forward premium accounts are not speculative in nature.

The bench of Yogesh Kumar U.S. (Judicial Member) and Pradip Kumar Kedia (Accountant Member) has observed that CIT(A) has committed no error in deleting the addition, observing that the forward mark contracts on foreign currency are incurred during the normal course of business and the losses incurred are part and parcel of the business activity of the assessee, which are allowable as business expenditure and not speculative in nature, thus any expenditure incurred for such premium account computed as the difference between the forward rate and the spot rate in such contract is also to be treated as business expenditure incurred in the course of business by the assessee.

The appellant/assessee filed a return declaring a current year loss; the assessee also declared book profit, and the tax has been paid on book profits. The assessment order came to be passed by assessing the income of the assessee by making additions on account of differences in foreign exchange (M2M), on account of losses on forward contracts being speculative in nature, and on account of losses on forward premium accounts being speculative in nature.

The assessee preferred an appeal before the CIT (A), and the CIT (A) deleted the addition made by the AO.

The department contended that the CIT(A) committed error in deleting the addition being speculative in nature but erroneously treated the same as business loss which requires interference at the hands of the Tribunal.

The assessee contended that the losses incurred on cancellation of the forward contract were treated as business losses; therefore, the CIT(A) rightly held that the expenditure claimed under the forward premium account is also treated as business expenditure, which requires no interference at the hands of the Tribunal.

The ITAT noted that the assessee is not a dealer of foreign exchange, and contracts in foreign exchange were to safeguard the business interests of the assessee and were conducted in the regular course of business; therefore, they cannot be termed speculative in nature as no motive or action in this regard exists.

The ITAT, while upholding the deletion of the addition, dismissed the department's appeal.

Counsel For Appellant: Rajesh Mahajan, Sr. DR

Counsel For Respondent: Neeraj Jain, Adv & Sh. Himanshu Goel, CA

Case Title: DCIT Versus J. K. Techno soft Ltd.

Case No.: ITA No. 6160/Del/2016

Click Here To Read The Order