2021 (12) TMI 1400 - HC - Income Tax

Deduction of marketed-to-market loss - unexpired/unmatured for forex derivative contracts - Whether instruction given by CBDT dated 23.03.2010 can have a retrospective effect thereby negativity the effect of the judgement? - AO held that fees receivable in foreign exchange have been duly hedged by way of taking forward contract and such loss claimed by the assessee is a notional loss and contingent in nature - mercantile system of accounting on regular basis and the loss was recognised in its books of accounts, which is deductible under Section 37 1 - HELD THAT - As on perusal of the circular, we find that it is not a possible direction by the Board to the AO rather Board under law cannot issue any such possible direction as the settled legal principle. AO is an independent authority and none can dictate him as to how and in what manner he is to complete the assessment. Conscious of this legal position, the Board in the instruction dated 23.3.2010 had stated that the Assessing Officer may follow the guidelines given in the said instruction. This is one more indication to say that the Assessing Officer is not bound over the instruction given by the Board. Thus, the only contention of the revenue appears to be based upon instruction issued by the CBDT which cannot override a decision of the Hon ble Supreme Court. Therefore, we are of the considered view that there is no error in the order passed by the Tribunal. That apart, it is rather doubtful as to whether such instruction given by CBDT dated 23.03.2010 can have a retrospective effect thereby negativity the effect of the judgement. Respondent pointed out that identical issue was considered in the case of Principal Commissioner of Income Tax vs. Suzlon Energy Ltd. 2018 (2) TMI 1789 - GUJARAT HIGH COURT and the Court held that the decision of the Tribunal in so far as deleting the disallowance being notional loss on outstanding foreign derivative contracts was approved by holding that the decision is in-conformity with the decision of the Hon ble Supreme Court in Woodward Governor India P Ltd. Ors. 2009 (4) TMI 4 - SUPREME COURT . The revenue had filed a Special Leave Petition in Special Leave which was dismissed by order 2020 (1) TMI 1505 - SC ORDER dated 17.01.2020. In the case of the same assessee, namely Suzlon Energy Limited, the Hon ble Supreme Court in Principal Commissioner of Income Tax vs. Suzlon Energy Ltd. 2020 (2) TMI 1559 - SC ORDER approved the decision of the High Court upholding the order of the Tribunal allowing the assessee s claim of foreign exchange fluctuation loss on mark to market basis. We find no grounds to interfere with the order passed by the Tribunal. Decided against the revenue.

Summary

Issues:
1. Deduction of marked-to-market loss in forex derivative contracts for assessment year 2008-09.
2. Applicability of CBDT instruction post judgment of the Hon'ble Apex Court.
3. Allowability of loss on account of foreign exchange fluctuation under Section 37[1] of the Income Tax Act.

Analysis:
1. The appeal before the Calcutta High Court concerned the deduction of marked-to-market loss in forex derivative contracts for the assessment year 2008-09. The assessee, a consultancy company, claimed a loss on account of foreign exchange fluctuation, which the Assessing Officer treated as a notional loss. The CIT(A) allowed the deduction, emphasizing the mercantile system of accounting and compliance with accounting standard no.11. The Tribunal, noting the mercantile system followed by the assessee, allowed the deduction, relying on the decision in Woodward Governor India [P] Ltd. & Ors. The High Court upheld the Tribunal's decision, emphasizing that the CBDT instruction cannot override the Supreme Court's decision and that the Assessing Officer is not bound by such instructions.

2. The second issue revolved around the applicability of CBDT instruction post the judgment of the Hon'ble Apex Court. The revenue contended that the CBDT circular issued after the Supreme Court's decision should bind the authorities. However, the High Court held that while the circular may bind the authority, it cannot override the Supreme Court's decision. The Court emphasized that the Assessing Officer is an independent authority not bound by such instructions, and the circular cannot have a retrospective effect to nullify the effect of a judgment.

3. The final issue addressed the allowability of loss on account of foreign exchange fluctuation under Section 37[1] of the Income Tax Act. The High Court referred to the case of Principal Commissioner of Income Tax vs. Suzlon Energy Ltd., where the Tribunal's decision to allow the claim of foreign exchange fluctuation loss was upheld by the Supreme Court. Citing this precedent, the High Court dismissed the revenue's appeal, affirming the Tribunal's decision and answering the substantial questions of law against the revenue.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing the independence of the Assessing Officer, the precedence set by the Supreme Court's judgments, and the non-retrospective effect of CBDT instructions. The Court's detailed analysis and reliance on legal principles and precedents ensured a thorough examination of the issues at hand, leading to the dismissal of the revenue's appeal.