Unrealised loss on outstanding interest rate swaps would be allowable as business deduction

In brief :-In a recent ruling, the Mumbai Income-tax Appellate Tribunal (the “Tribunal”) in the case of J P Morgan Chase Bank Vs. ADIT [2010-T11-185-ITAT-DEL-INTL, held that unrealized loss on outstanding interest rate swap transactions at year end would be allowed as a deduction, when the assessee had been following the same method of accounting consistently in accordance with the mandatory requirement under the Reserve Bank of India (the “RBI”) guidelines.

Facts

•  The assessee had debited to the profit and loss account a certain amount as loss incurred on revaluation of interest rate swap transactions. It marked-to-market (“MTM”) the entire outstanding trading swap by comparing present value of floating interest cash flow with present value of cash flows on the fixed rate. The difference between the two amounts i.e. MTM gain or loss was recorded in the profit and loss account.

• The assessing officer (“AO”) disallowed the claim for deduction of the loss on these transactions.

• The assessee contended that its claim should be allowed since the profit on revaluation of interest rate swaps arrived at in the same manner was taxed in earlier years, and the method of accounting system followed was in terms of the guidelines on Interest Rates Swap issued by the RBI.

Please become a Premium member. If you are already a Premium member, login here to access the full content.