|COURT:||Bombay High Court|
|CORAM:||A. K. Menon J., M. S. Sanklecha J|
|CATCH WORDS:||derivatives, foreign exchange loss, speculative loss|
|COUNSEL:||Aasifa Khan, Satish Mody|
|DATE:||August 11, 2016 (Date of pronouncement)|
|DATE:||August 20, 2016 (Date of publication)|
|FILE:||Click here to download the file in pdf format|
|S. 37(1): Foreign exchange loss is not a "notional" or "speculation" loss and is allowable as a deduction. CBDT's Instruction No. 3 of 2010 which deals with foreign exchange derivative transactions (forward contracts) is not applicable to cases of losses in dealings with foreign exchange|
The assessee claimed an expenditure / loss of Rs.62.62 lakhs and Rs. 34.37 lakhs as gain on account of foreign exchange fluctuation related to purchase and sales transactions outstanding as on 31st March, 2009 in its Return filed for A.Y. 2009-10.The Assessing Officer did not allow the expenditure / loss of Rs.62.62 lakhs holding it to be a contingent liability while not disturbing the gain of Rs.34.37 lakhs offered for tax by the assessee. In appeal, the CIT(A) upheld the order of the Assessing Officer. On further appeal, the Tribunal allowed the assessee’s appeal holding that the claim of expenditure of Rs.62.62 lakhs is permissible under Section 37 of the Act. The Tribunal placed reliance upon the decision of the Apex Court in Commissioner of Income Tax Vs. Woodward Governor India (P) Ltd. 312 ITR 254 to hold that where the loss suffered by an assessee due to fluctuation of foreign exchange as on the date of balance sheet in respect of purchase and sales of goods (payment have to be made / received) is allowable as expenditure under Section 37(1) of the Act.
The Department filed an appeal before the High Court claiming that Instruction No. 3 of 2010 dated 31st March, 2010 issued by the CBDT in respect of loss on account of foreign exchange derivatives is subsequent to the Apex Court’s decision in Woodward Governor India (P) Ltd. (supra) and was not considered by the Tribunal. It was claimed that this instruction would govern the issue. HELD by the High Court dismissing the appeal:
The loss was not on account of derivatives but are in fact losses and gains in foreign exchange relating to the purchase and sales transactions i.e. creditors and debtors outstanding as on 31st March, 2010. Therefore, Instruction No.3 of 2010 issued by the CBDT would have no application to the facts of the present case. In fact, the issue arising herein would be covered by the principles laid down by the Apex Court in Woodward Governor India (P) Ltd. (supra). Accordingly, as the impugned order of Tribunal followed by the decision of the Apex Court in Woodward Governor India (P) Ltd. (supra) which governs the issue, the question as proposed does not give rise to any substantial question of law. Thus, not entertained.
hon court is absolutely right. I wonder what kind of people are in revenue right from AO on wards, if they cannot rule of law per CBDT circulars, so i think our tax payers moneys are just wasted on useless so called public servants, does it mean Ministry of finance and the UPSC is just out of tune with very tax payers.very sad, what kind of economic development we speak of, when you don’t know what is foreign exchange and fluctuations. great economic development.
Instant (based on a tentative study)
To quickly think of a common sense analogy, quite appropriate or not: genuine holder of a train ticket, paid for though, being denied, midway, his entitlement to complete the journey; that is, unto his charted destination. To put it differently, this is one more instance, in the series of such instances, in which, the stance of the Revenue is tantamount to, obnoxiously so, creating a void between accepted standards / principles governing financial accounting (books) brought in by no less than the apex accounting regulatory body on one hand, and revenue’s own brain child named, ‘tax accounting’, on the other.
Looking way back long ago, one remembers a similar controversy came to surface. That was because of the view sought to be advocated on taxpayers’ behalf, on the ground of the so called ‘real income concept’, Despite the substantial merits thereof, the then claim eventually was failed to succeed; rather not allowed to succeed by then ushering an amendment of the law. However, as is to be noted, later realising the apparent aberration and incongruity, that was set right by insertion of section 43 A (rtw its predecessor – amendments).
Be that as it may, the HC has, in the instant case, giving weight age, as rightly due, to the submissions forcefully made on taxpayers’ behalf, and following among others the cited SC judgment in re. https://indiankanoon.org/doc/978278/, so also the earlier judgment in the leading case of Sutlej Cotton Mills Ltd. v. CIT (reported in 116 ITR 1), yet again settled the correct position in law; nay taken pains to reiterate yet again the judicial opinion holding the field.
In short, there is no gainsaying that the Revenue can only be regarded to have committed a gross error in once more attempting, in vain, to keep the controversy still alive and kicking, by simply relying on its own misconceived ‘Instruction’ issued in the interim, for so long.
The ball is now in Revenue’s court ; and sooner it decides and puts an end to this and several other like in-fructuous disputes, better for one and all concerned- in short, for the future of administration and adjudication in the tax regime itself.