Mark to Market Losses cannot be disallowed unless incurred in respect of speculative contracts

Brief of the case:

• The Hon’ble Bombay HC in the above-cited case held that mark to market loss in respect of forward contracts claimed as loss from Business income cannot be disallowed as the forward contracts were secured for to cover variation in the foreign exchange rate which would impact its business of import and export of diamonds.
• Therefore, unless the revenue proves that the same is speculative such mark to market losses cannot be disallowed simply treating the same notional.
  

Facts of the case:

• The assessee was engaged in the business of import and export of diamonds. During the assessment proceedings, the AO found that assessee claimed Rs. 78.10 as mark to market loss on account of having entered into hedging transactions to safeguard variation in exchange rates affecting its transactions of import and export by entering into forward contracts.
• The AO disallowed the claim on the ground that it is a notional loss of a Contingent liability debited to Profit and Loss Account which was added to assessee’s total income.
• CIT(A) allowed the assessee’s appeal found that the transaction of forward contract was entered into during the course of its business. It held it was not speculative in nature nor was it the case of the Assessing Officer that it was so. Thus the loss incurred as forward contract was allowed as a business loss.
• Tribunal also concurred with the view taken by CIT(A) and dismissed revenue’s appeal. Aggrieved revenue is now in appeal before Hon’ble High Court.
  

Held by Hon’ble Bombay HC:

• HC observed that the hedging transactions were entered into so as to cover variation in foreign exchange rate which would impact its business of import and export of diamonds. In fact, the Assessing Officer also in the Assessment Order does not find that the transaction entered into by the assessee was speculative in nature.
• As far as reliance on Accounting Standard 11 is concerned, it would not by itself determine whether the activity was a part of the assessee’s regular business transaction or it was a speculative transaction.
• Further, the reliance placed on the decision in S. Vinodkumar (supra) in the Revenue’s favour would not by itself govern the issues arising herein. This is so as every decision is rendered in the context of the facts which arise before the authority for adjudication. Mere conclusion in favour of the Revenue in another case by itself would not entitle a party to have an identical relief in this case.
• As such, the question of law, as formulated by the Revenue, does not give rise to any substantial of law. Thus, not entertained.

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