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TMI Blog2021 (3) TMI 434X X X X Extracts X X X X X X X X Extracts X X X X ..... rdance 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 ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and in the circumstances of the case, the Tribunal is right in law in deleting the addition made by assessing authority under section 14A read with Rule 8D without appreciating the Board's Circular No.5 of 2014 dated 11.2.2014 and the provision of section 14A read with rule 8D of the I.T. Act? . 3. Whether on the facts and in the circumstances of the case, the Tribunal is right in law in allowing carry forward of loss on derivatives contracts without appreciating that the transaction was speculative in nature in terms of Board's Circular No.3/2010 and Section 73 does not allow setting off of speculation loss against any other income other than speculation income? 2. Facts leading to filing of this appeal briefly stated are that the assessee is a company engaged in the business of providing computer aided engineering analysis and software services. The assessee filed its return of income for the Assessment Year 2009-10 declaring a total income of ₹ 28,48,96,860/- and deduction of ₹ 75,000/- was claimed under Chapter VI-A of the Act. The return was processed under Section 143(1) of the Act and was subsequently taken up for scrutiny. The Assessing Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lace, the question of assuming any liability, consequently suffering any loss does not arise and otherwise, the entire purpose of entering into a derivative contract to protect a particular transaction will be defeated. 5. It is also urged that the Tribunal ought to haveappreciated that there was no existing obligation arising out of the contract and merely reflecting the loss in the books of accounts said to be in accordance with accounting standards is not the determinative factor of the liability. It is also submitted that Supreme Court while dealing with the issue of foreign exchange fluctuation by considering Accounting Standards 11 has recognized the concept of foreign exchange fluctuation and has held that in view of existing liability though foreign exchange is either notional gain or notional loss, the same treatment has to be given to both gain and loss. It is further submitted that system adopted by the assessee should be fair and reasonable and not with a view to reducing the incidence of taxation. It is further submitted that in case the decision of the Supreme Court in 'COMMISSIONER OF INCOME TAX Vs. WOODWARD GOVERNOR INDIA (P) LTD.' (2009) 312 ITR 0254 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Vs. JOSEPH JOHN' (1968) 67 ITR 74 (SC), 'COMMISSIONER OF INCOME TAX Vs. WOODWARD GOVERNOR, supra, 'SOUTHERN TECHNOLOGIES LTD. Vs. JOINT COMMISSIONER OF INCOME-TAX, COIMBATORE' (2010) 187 TAXMAN 346 (SC), 'MAXOPP INVESTMENT supra AS WELL AS CIRCULAR NO.5/2014 dated 11.02.2014 issued by the Central Board of Direct Taxes. 7. On the other hand, learned counsel for the assessee submitted that the assessee had entered into forward contracts with bankers to sell foreign currency at pre-determined rate and during the previous year there was a significant loss due to fall of Indian rupees against U.S. dollar. Therefore, the assessee debited ₹ 19,96,59,000/- as provision for loss of derivative contracts. It is further submitted that provision for loss on derivative contracts is charged to profit and loss account under operating another expenses and in financial statements it is stated that loss has been charged to profit and loss account as per requirements of Accounting Standards 11. It is further submitted that the authorities have accepted the fact that the assessee had taken the forward contract to cover diminishing in the value of export proceeds and serv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the fact that forward contracts were entered to protect its revenue against foreign exchange fluctuation in respect of consideration for export proceeds is not disputed. Therefore, it is submitted that the fact that a binding obligation has accrued, forward contracts are in the state of consideration of export proceeds which are revenue items, the liability is determinable with reasonable certainty and is not a contingent liability, treatment is as per accounting standard and ICAI guidelines and principles of WOODWARD GOVERNOR , supra are applicable, have not been disputed by the revenue. 10. It is also contended that notification No.3/2010 dated 23.03.2010 was issued on 23.03.2010 and is therefore, not applicable in respect of Assessment Years 2008-09 and 2009-10. It is also contended that a circular which is contrary to the statutory provision and decision of the Court has no existence in the eye of law and in several decisions, various High Courts have not followed the said instruction. It is also urged that speculative transactions which are incidental to assessee's main business cannot be treated as incidental loss. Explanation 2 to Section 28 provides that speculat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #39; (2018) 256 TAXMAN 349 (KAR). 11. We have considered the submissions made on bothsides and have perused the record. Substantial questions of law No.1 and 3 are interlinked, therefore, we proceed to deal with the same together. Before proceeding further it is apposite to take note of the relevant statutory provisions which are reproduced below for the facility of reference: Section 14A : Expenditure incurred in relation to income not includible in total income.-For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. . (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... closure standards notified under sub-section (2) of section 145. (2) For the purposes of sub-section (1), gain or loss arising on account of the effects of change in foreign exchange rates shall be in respect of all foreign currency transactions, including those relating to (i) monetary items and non-monetary items. (ii) translation of financial statements of foreign operations; (iii) forward exchange contracts; (iv) foreign currency translation reserved. 12. After having noticed the relevant statutory provisions, we may advert to the facts of the case in hand. The assessee has entered into forward contract with the bank to buy or sell foreign exchange at an agreed price at a specified future date in order to hedge against possible future financial loss due to fluctuation in the rate of foreign currency. The Tribunal, inter alia, has held that foreign exchange forward contract means an agreement to exchange different currencies at a forward rate. It has further been held that the aforesaid contract created a continuing binding obligation on the date of contract against the assessee to fulfill the same on the date of maturity and it is in the nat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sputed 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 supra while allowing the market to market loss as relating to forward exchange contract as deduction. It is pertinent to mention here that Instruction No.3 of 2010 was issued on 23.03.2010 and same is not applicable for the Assessment Years 2008-09 and 2009-10 in view of well settled legal position that a circular which is beneficial in nature applies retrospectively but a circular which is oppressive has to be applied prospectively ( SEE: CCE VS. MYSORE ELECTRICAL INDUSTRIES LTD (2006) 12 SCC 448). It is pertinent to note that the aforesaid has not been given effect o by several high courts namely in MUNJAL SHOVA LTD VS DCIT (2016) 382 ITR 555 (DELHI) and in CIT VS. VINERGY INTERNATIONAL PVT LTD ITA NO.376/2014 (BOMBAY HIGH COURT). 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s stage, we may refer to Paragraph 40 of the decision of the Supreme Court in MAXOPP supra, the relevant extract of which reads as under: It is to be kept in mind that in those cases where shares are held as 'stock-in-trade', it becomes a business activity of the assessee to the deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here istherefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retaincontrol over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even that the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are ..... X X X X Extracts X X X X X X X X Extracts X X X X
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