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2021 (3) TMI 434 - HC - Income TaxDisallowance on provision of loss on derivative contracts - AO made the additions on the ground that, provision for loss cannot be allowed when the actual sales had not even taken place and maturity date of the derivatives contracts has not arisen and the notional loss or notional income and deduction of liabilities which are unascertained does not come within the purview of the I.T. Act - Tribunal deleted the addition - whether Tribunal is right in law in allowing carry forward of loss on derivatives contracts? - HELD THAT - Revenue has not questioned / doubted the genuineness and reasonableness of the transaction. Similarly, the revenue has not disputed the fact that the estimation was made on reasonable basis and not on adhoc basis which is evident from Paragraph 6.1 of the order of CIT(Appeals). The loss which is claimed by the assessee, is claimed as deductible business expenditure and therefore, provision for loss has to be allowed at the close of the year in accordance with Paragraphs 3 to 39 of the Accounting Standard 11, which deals with foreign exchange contract. It is not disputed by the revenue that forward contracts were entered to protect the assessee from foreign exchange fluctuation in respect of consideration for export proceeds. The tribunal, therefore, rightly relied on the decision in WOODWARD GOVERNOR INDIA 2009 (4) TMI 4 - SUPREME COURT while allowing the market to market loss as relating to forward exchange contract as deduction. The loss sustained by the assessee due to fluctuation in foreign exchange while implementing export contract is incidental to assessee's course of business, therefore, such a loss is not a speculative loss but a business loss. The aforesaid findings have not been demonstrated to be perverse. For the aforementioned reasons, the substantial questions of law No.1 and 3 are answered against the revenue and in favour of the assessee. Disallowance u/s 14A - HELD THAT - From perusal of the relevant extract of the Supreme Court, it is evident that the decision in MAXOPP INVESTMENT LTD. 2018 (3) TMI 805 - SUPREME COURT deals with applicability of Section 14A of the Act. Therefore, the observations made with regard to applicability of Section 14A in M/S NOVEL SOFTWARE INDIA (P) LTD. are factually incorrect and we hasten to clarify the same. However, from relevant extract of Paragraph 40, it is evident that only expenses proportionate to earning of exempt income could be disallowed under Section 14A of the Act and the decision of MAXOPP INVESTMENT LTD is an authority for the aforesaid proposition that the provision is relatable to earning of actual income. The object of Section 14A is to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. It is also clarified by us that while recording the conclusion in KINGFISHER FINVEST LTD. 2020 (10) TMI 518 - KARNATAKA HIGH COURT that disallowance under Section 14A has to be made even taxpayer has not earned any exempt income, this court has misread the ratio of the decision of the Supreme Court in MAXOPP INVESTMENT LTD supra and therefore, the aforesaid view being contrary to the law laid down by the Supreme Court is not a binding precedent. - Decided in favour of assessee.
Issues Involved:
1. Deletion of disallowances on provision of loss on derivative contracts. 2. Deletion of addition under Section 14A read with Rule 8D. 3. Allowing carry forward of loss on derivatives contracts as speculative transactions. Detailed Analysis: Issue 1: Deletion of Disallowances on Provision of Loss on Derivative Contracts The Tribunal deleted the disallowances made by the Assessing Officer on the provision of loss on derivative contracts. The Tribunal held that the forward contracts were revalued in accordance with Accounting Standards 11, and the assessee had no option but to determine profit/loss on unmatured foreign exchange contracts based on the currency rates as of the valuation date, i.e., 31st March. The Tribunal found that the forward contracts were entered into to protect against fluctuations in foreign currency for export proceeds, which are revenue items. The Tribunal concluded that: - A binding obligation accrued against the assessee when it entered into foreign exchange forward contracts. - The forward contracts were for consideration of export proceeds, which are revenue items. - The liability was determinable with reasonable certainty and was not contingent. - The accounting treatment was as per Accounting Standards and ICAI Guidelines. - The principles from the Supreme Court decision in Woodward Governor India Pvt. Ltd. were applicable. The Tribunal's findings were not disputed by the revenue, and the estimation was made on a reasonable basis. The Tribunal rightly relied on the decision in Woodward Governor India while allowing the market-to-market loss as a deduction. Instruction No. 3 of 2010 was issued on 23.03.2010 and was not applicable for Assessment Years 2008-09 and 2009-10. The loss due to foreign exchange fluctuation in implementing export contracts was incidental to the assessee's business and was not speculative but a business loss. Issue 2: Deletion of Addition Under Section 14A Read with Rule 8D For Assessment Year 2009-10, the assessee did not earn any dividend income, which was not disputed by the revenue. Circular No. 5/2014 dated 11.02.2014 was not applicable as the case pertained to Assessment Year 2009-10. The court in Commissioner of Income Tax vs. Kingfisher Finvest India Ltd. held that disallowance under Section 14A read with Rule 8D should be made even if no exempt income was earned. However, this decision was reconsidered in Principal Commissioner of Income Tax vs. Novell Software Development, where it was held that Section 14A does not apply if no exempt income has accrued. The Supreme Court in Maxopp Investment Ltd. clarified that only expenses proportionate to earning of exempt income could be disallowed under Section 14A, and the provision is related to actual income, not notional or anticipated income. Therefore, the conclusion in Novell Software Development was affirmed, and the view in Kingfisher Finvest Ltd. was not binding. Issue 3: Allowing Carry Forward of Loss on Derivatives Contracts The Tribunal allowed the carry forward of loss on derivatives contracts, considering it not speculative. The Tribunal noted that the loss was due to foreign exchange fluctuation while implementing export contracts, which was incidental to the assessee's business. The loss was not speculative but a business loss. The Tribunal's findings were based on the principles from the Supreme Court decision in Woodward Governor India. The revenue did not demonstrate the findings as perverse. Conclusion: The substantial questions of law were answered against the revenue and in favor of the assessee. The appeal was dismissed.
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