The ITAT deleted a ₹6.98 crore disallowance on revaluation loss of unexpired foreign exchange forward contracts, holding that contractual obligations existed at year-end and the bank’s accounting method was consistent.
ITAT Deletes ₹6.98 Crore Disallowance on FX Loss
The Income Tax Appellate Tribunal (ITAT) has deleted an addition of ₹6.98 crore made by the Assessing Officer (AO) on account of revaluation loss arising from unexpired foreign exchange forward contracts. The decision hinges on the recognition of contractual obligations outstanding at the balance sheet date and the consistency in the taxpayer’s accounting method.
The AO had disallowed the revaluation loss, arguing it did not represent an actual liability. However, the ITAT noted that the forward contracts were binding and enforceable at year-end, and the bank had followed a uniform practice of marking-to-market such contracts in line with AS 30 (Financial Instruments: Recognition and Measurement). The tribunal held that the loss, though not crystallized, was linked to a present obligation and formed part of prudent financial reporting.
The mere fact that the liability is not settled during the year does not negate its recognition if it arises from a valid contractual obligation existing on the balance sheet date.
Practitioners should note that this decision reinforces the acceptability of revaluation losses under accepted accounting standards where enforceable obligations exist. Assessments involving forex derivatives must now reckon with the substance of contractual terms and established accounting policies, reducing arbitrary additions under Section 14A or on revenue account grounds.
Citations
- Section 14A, Income Tax Act, 1961
