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TMI Blog2022 (12) TMI 358X X X X Extracts X X X X X X X X Extracts X X X X ..... omalous if, on the one hand, debtors and creditors, in respect of current assets, are stated at the current value of foreign exchange and the corresponding loss on the hedging transaction is not accounted for. In essence, the Assessee has stated his income by taking into account the foreign exchange value as it stands on the due date. It is well settled that the CBDT Instructions and circulars which are contrary to law are not binding. This Court finds no fault with the order of the learned CIT(A) as well as the learned Tribunal in finding that the loss, on account of Forward Contracts, cannot be considered as speculative and the AO had erred in disallowing the same. The questions raised (Questions I and II) are thus, covered by the decision of the Supreme Court in CIT v. Woodword Governor India Pvt. Ltd. [ 2009 (4) TMI 4 - SUPREME COURT] . Disallowance u/s 14 A - determine the expenditure attributable to earning dividend income at 0.5% of the value of average investment in terms of Rule 8D of the Rules - HELD THAT:- It is not disputed that the AO can ascertain the expenditure attributable to earning tax-free income if he is not satisfied that the Assessee s allocation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /Del/2013) against the order dated 05.11.2012 (hereafter the appellate order ) passed by the learned Commissioner of Income Tax (Appeals) [hereafter CIT(A) . 2. The Assessee had also preferred an appeal before the learned Tribunal against the appellate order being ITA 555/Del/2013, which was partly allowed and disposed of along with the Revenue s appeal, by the impugned order. The learned CIT(A) had passed the appellate order dated 05.11.2012, in an appeal preferred by the Assessee, impugning the assessment order dated 06.12.2011 passed under Section 143(3) of the Act for the assessment year 2009-10. 3. The Revenue has framed the following questions for consideration of this Court: (I) Whether, on the facts and circumstances of the case, the Ld. ITAT was right in allowing the foreign exchange fluctuations loss on unmatured, matured and cancelled forward contracts? (II) Whether the losses on account of foreign exchange fluctuations on forward contracts are allowable undersection 37(1) of the Income Tax Act and covered as hedging transactions under Section 43(5)(a) of the Act or should be disallowed as speculation losses under Section 43(5) of the Act in view of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (₹51,20,000 +₹1,56,91,934) had closed before the due date. The loss of ₹7,12,50,292 related to unmatured Forward Contracts. 6.5 The appellate order also records that the Assessee had placed a Forward Contract dated 13.05.2008 with Canara Bank for USD 11,250,000 on record of the assessment proceeding as an illustrative case. The Assessee had placed the following contracts in proceedings before the learned CIT(A): a) Agreement dated 13.05.08 with Canara Bank for booking Forward Purchases Contract-Export for USD 12,50,000/- delivery on 30.04.09. b) Agreement dated 13.05.08 with Canara Bank for hooking Forward Purchases Contract-Export for USD 1,12,50,000/- delivery on 30.04.09 (already given to the AO, also enclosed with this appeal). c) Agreement dated 01.10.08 with Canara-Bank for booking Forward Purchase Contract-Export for USD 50,00,000/- delivery on 31.12.08 d) Agreement dated 18.08.08 with ING Vysya Bank for booking Forward Purchase Contract- Export for USD 10,00,000/- delivery on 31.07.09 The Assessment Order 7. The Assessing Officer (hereafter the AO ) held that the loss on Forward Contracts was a speculative loss and was lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he mean of the opening and the closing investment calculated at ₹17,07,83,341/-). The appellate order 12. The Assessee appealed the Assessment Order in respect of disallowance on the said two counts: disallowance of ₹9,20,62,226/- on account of loss claimed on Forward Contracts; and, ₹8,53,916/- under Section 14A of the Act. 13. The learned CIT(A) found that the AO had erred in disallowing the loss on account of forward cover against foreign exchange fluctuations on the basis that it was a speculative loss. The AO had erroneously proceeded on the basis that the Assessee had not furnished any contract or agreement on record; however, the Assessee had placed the contract with Canara Bank for USD 11,250,000/- as an illustrative case. 14. The learned CIT(A) found that the Forward Contracts were for exports and imports and the Contracts specifically mentioned the delivery period, the project exports and contract / order Letter of Credit number and date. The said Forward Contracts were to hedge against the risk of forward exchange fluctuations on account of project export realization and foreign exchange outflow. The learned CIT(A) specifically noted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds deployment of manpower for monitoring dividends from mutual funds and its subsequent re-development could not be ruled out. Considering the facts, the learned Tribunal reduced the disallowance from ₹8,53,916/- to ₹1,00,000/- on ad-hoc basis. Reasons Conclusions 22. It is relevant to mention that, apart from disallowing ₹9,20,62,226/-, being the forward cover transaction loss, the AO had also made an addition of ₹1,35,34,568/-. The said addition was deleted by rectifying the Assessment Order under Section 154 of the Act. 23. Mr. Zoheb Hossain, learned counsel appearing for the Revenue, submitted that the loss on Forward Contracts was booked on a Marked to Market basis and therefore was merely a notional loss in the relevant assessment year. And, it was not permissible for the Assessee to book such notional loss. 24. It is material to note that the only specific ground, stated by the Revenue in its appeal in respect of the deletion of loss on Forward Contracts, reads as under: (C) Because the losses on account of foreign exchange fluctuations on forward contracts are not allowable under Section 37(1) of the Income Tax Act and cover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... debit side of the P L account whereas the corresponding valuation Gains resulting on the valuation of the debtors is reflected on the credit side included as part of sales / exchange Gains and in respect of imports as reduction in the import price on the debit of the Profit Loss account. In other words, the entire transaction of either realization of debtors in foreign exchange / payment for imports in foreign exchange which are designated in foreign currency and the entering into Forward cover contract are integral part of the same transaction i.e. two sides of the same coin. By considering both sides of the P L the correct net profit is worked out. Therefore, in order to ascertain the correct taxable profits of the appellant the loss has to be allowed as a business loss because it is due to the business exigency the forward contracts are entered into to protect against any loss that might result due to foreign exchange currency fluctuation foreign currency fluctuation. 30. Undisputedly, the Forward Contracts, in the present case, are hedging transactions. The Assessee has reinstated its debits and credits from the underlying transactions on the value of the foreign exchan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the value of average investment in terms of Rule 8D of the Rules. 35. It is not disputed that the AO can ascertain the expenditure attributable to earning tax-free income if he is not satisfied that the Assessee s allocation of expenses for earning the said income or otherwise and or is otherwise dissatisfied with the Assessee s explanation. 36. A plain reading of the impugned order passed by the learned Tribunal indicates that the Tribunal also did not find, as a matter of fact, that the Assessee had devoted any of its resources for managing the said investments or had otherwise incurred any expenditure for the same. It is relevant to note that the Assessee s assertion, that its investment was monitored by a group of company without levying any charge or fee, was not found to be incorrect. 37. In the circumstances, the learned Tribunal did not accept the AO s determination of ₹8,53,916/- as expenditure incurred for earning the exempt income. Notwithstanding the above, the learned Tribunal held that the deployment of manpower for monitoring the dividends from mutual funds cannot be ruled out. On this basis the learned Tribunal had reduced the disallowance from S ..... X X X X Extracts X X X X X X X X Extracts X X X X
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