2016 (8) TMI 1041 - HC - Income Tax

Foreign exchange fluctuation loss - whether the Tribunal is justified by allowing foreign exchange fluctuation loss to set off against the taxable income without considering the CBDT s instruction No.3 of 2010 dated 23.03.2010? - Held that - In the present facts, we find that 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, the Instruction no.3 of 2010 issued by 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. (2009 (4) TMI 4 - SUPREME COURT ). 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.

Summary

Issues:
1. Whether foreign exchange fluctuation loss can be set off against taxable income without considering CBDT's instruction?
2. Allowability of expenditure under Section 37 of the Income Tax Act, 1961.

Detailed Analysis:
1. The appeal challenges the Income Tax Appellate Tribunal's order regarding the allowability of a foreign exchange fluctuation loss of ?62.62 lakhs against taxable income for Assessment Year 2009-10. The Revenue questions the Tribunal's decision to allow this set off without considering CBDT's instruction No. 3 of 2010. The respondent claimed the loss and gain related to foreign exchange fluctuations in its return, but the Assessing Officer disallowed the loss as a contingent liability. The CIT(A) upheld this decision, leading to the appeal before the Tribunal.

2. The Tribunal allowed the respondent's appeal, citing Section 37 of the Act to support the claim of expenditure. It referred to the Supreme Court's decision in Commissioner of Income Tax Vs. Woodward Governor India (P) Ltd. to establish that foreign exchange losses related to purchase and sales transactions are allowable as expenditure under Section 37(1) of the Act. The Revenue contended that CBDT's instruction issued in 2010 should apply, but the Court found that the losses were not from derivatives but from transactions like creditors and debtors outstanding, making the instruction inapplicable. The Court concluded that the issue was covered by the principles laid down in the Woodward Governor India case.

3. The Court dismissed the appeal, stating that the Tribunal's decision aligned with the Supreme Court's ruling in Woodward Governor India, which governed the issue at hand. As the losses were not from derivatives and the CBDT instruction did not apply, the question raised by the Revenue did not give rise to any substantial legal issue. Therefore, the appeal was dismissed, and no costs were awarded.