2022 (9) TMI 659 - HC - Income Tax

Disallowance of Notional Forex Loss - ITAT deleted the addition relying upon the decision of CIT Vs. Woodward Governor India Ltd. 2009 (4) TMI 4 - SUPREME COURT - ITAT held that the CBDT Circular/Instruction is contrary to the decision of the Supreme Court in the case of CIT Vs. Woodward Governor India Ltd (supra) - HELD THAT - This Court is of the opinion that the issue of law raised by the petitioner has been conclusively settled by the Supreme Court in CIT Vs. Woodward Governor India Ltd (supra) and Oil and Natural Gas Corporation Ltd., Dehradun 2010 (3) TMI 81 - SUPREME COURT Validity of CBDT Circular No.3/2010 dated 23rd March, 2010 - CBDT Instruction has been issued in respect of loss on account of trading in foreign exchange derivatives. In the present case, however, the assessee had entered into derivative contracts in order to hedge its exchange risk in respect of export proceeds receivable by it in foreign exchange. Forward contracts entered into by the assessee were not by way of trading per se in foreign exchange derivatives. Consequently, CBDT Circular No.3/2010 dated 23rd March, 2010 has no application to the facts of the present case. This Court is of the opinion that no substantial question of law arises for consideration in the present case.

Summary

Issues:
Challenge to ITAT order regarding notional forex loss disallowed by Assessing Officer based on Supreme Court decision. Interpretation of CBDT Circular in relation to Supreme Court judgments.

Analysis:
The appellant filed an Income Tax Appeal against the ITAT's Order dated 14th October, 2019, concerning the Assessment Year 2012-13. The appellant argued that the ITAT erred in deleting the Notional Forex Loss disallowed by the Assessing Officer, citing the Supreme Court decision in CIT Vs. Woodward Governor India Ltd. The appellant contended that the CBDT Circular was wrongly interpreted by the ITAT in light of the Supreme Court's decision. The High Court noted that the issue raised by the appellant had already been conclusively settled by the Supreme Court in previous cases. Specifically, the Court referenced the decision in CIT Vs. Woodward Governor India Ltd and Oil and Natural Gas Corporation Ltd. The High Court highlighted the factors outlined by the Supreme Court to determine the deductibility of expenditure on fluctuation in foreign currency rates under the mercantile system of accounting.

The High Court found that all the conditions stipulated by the Supreme Court were satisfied in the present case based on the factual findings of the ITAT. Additionally, the High Court addressed the interpretation of the CBDT Circular in relation to the appellant's derivative contracts used to hedge exchange risks. The Court clarified that the CBDT Circular issued in 2010 was not applicable to the appellant's situation as the derivative contracts were for hedging purposes, not for trading in foreign exchange derivatives. Therefore, the High Court concluded that no substantial question of law arose for consideration in the present case and dismissed the appeal after providing the necessary clarification regarding the application of the CBDT Circular.

In summary, the High Court's judgment upheld the ITAT's decision regarding the notional forex loss disallowed by the Assessing Officer, based on the Supreme Court precedents. The Court also clarified the interpretation of the CBDT Circular in light of the appellant's derivative contracts, ultimately dismissing the appeal as no substantial question of law was found to arise in the case.