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IN THE HIGH COURT OF DELHI
Vibhu Bakhru, Purushaindra Kumar Kaurav, JJ.
Principal Commissioner of Income Tax, Delhi-2 - Appellant
Versus
Simon India Ltd. - Respondent
ITA 67 of 2018
Decided On : 02-12-2022
Losses from Forward Contracts are not speculative and should be recognized as allowable deductions under the Income Tax Act, aligning with the principles of hedging transactions and consistent accounting practices.
Headnote:(A) Income Tax Act, 1961 - Sections 37(1) and 43(5) - Appeal filed under Section 260A against the Income Tax Appellate Tribunal's order regarding allowance of foreign exchange fluctuation losses on Forward Contracts - Issues include whether the loss is speculative or allowable as a deduction and the appropriateness of disallowance under Section 14A. (Paras 3, 4, 5)
(B) The revenue argued that the losses from Forward Contracts were speculative and should be disallowed, relying on CBDT Instruction No. 3/2010, which pertains to notional losses. (Paras 23, 24)
(C) The Tribunal upheld the CIT's decision stating that the Forward Contracts were legitimate hedging transactions, not speculative, thus the losses should be recognized for tax purposes. (Paras 20, 26, 31)
(D) The Tribunal reduced the disallowance under Section 14A to Rs.1,00,000/- based on the Assessee's claims of no costs incurred for managing investments. (Paras 18, 36)
Findings of Court:
The court dismissed the appeal, agreeing with the Tribunal's findings that the loss on Forward Contracts was allowable and the disallowance under Section 14A was arbitrary. (Paras 39, 40)
Issues: The main issues addressed were whether losses from Forward Contracts constitute speculative losses and the validity of disallowance under Section 14A. (Paras 3, 6, 39)
Ratio Decidendi: The court held that the Forward Contracts were hedging transactions under Section 43(5)(a) and therefore, the corresponding losses should be recognized for tax purposes, reinforcing the principle that true business losses cannot be disregarded. (Paras 26, 31)
Result: Appeal dismissed.
| Table of Content |
|---|
| 1. revenue appeal against tribunal's order (Para 1 , 2) |
| 2. questions raised for court's consideration (Para 3 , 4) |
| 3. loss on forward contracts issue (Para 5 , 6) |
| 4. ao's rationale for disallowance (Para 7 , 8 , 9) |
| 5. assessee's claims on dividend income (Para 10 , 11 , 12) |
| 6. cit(a) finds ao in error (Para 14 , 15) |
| 7. tribunal's agreement with cit(a) (Para 18 , 19 , 20 , 21) |
| 8. court's view on notional losses (Para 22 , 23) |
| 9. forward contracts allowance reasoning (Para 25 , 26) |
| 10. no substantial question of law arises (Para 32 , 40) |
JUDGMENT
Vibhu Bakhru, J.
1. The Revenue has filed the present appeal under Section 260A of the Income Tax Act, 1961 (hereafter `the Act') impugning an order dated 30.05.2017 (hereafter `the impugned order') passed by the Income Tax Appellate Tribunal, Delhi (hereafter `the Tribunal') in an appeal preferred by the Revenue (being ITA No.976/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 CBDT Instruction No. 3/2010 dated 23.03.2010?
(III) Whether the Ld. ITAT was right in restricting the disallowance under Section 14A on adhoc figures of Rs.l lakh when the disallowance under rule 8D comes to Rs.853,916/-?
(IV) Whether the finding given by the Ld. ITAT is perverse, in the facts and circumstances of the case?"
4. At the outset, it is relevant to note that question no. (III), as noted above, does not arise for consideration in this appeal, because that was not the subject matter of appeal by the Revenue's appeal (ITA No.976/Del/2013) before the learned Tribunal. And as noted above, the Revenue has appealed the learned Tribunal's decision in ITA No. 976/Del/2013 and not the decision in ITA No. 555/Del/2013.
5. The sole controversy in ITA No.976/Del/2013 relates to whether the loss on Forward Cover Purchase Contracts for foreign exchange (hereafter `Forward Contracts') is allowable as a deduction from the income chargeable to tax for the relevant assessment year notwithstanding that the Forward Contracts have not closed.
6. Briefly stated, the relevant context in which the controversy arises is as under:
6.1. The Assessee is engaged in the business of providing engineering consultancy and related services like engineering designing, construction and commissioning of plants and installations.
6.2. The Assessee had filed its income tax return for the previous year 2008-09 on 25.09.2019, relevant for the assessment year 2009-10, declaring a taxable income of Rs.3,94,83,380/-. The said return was initially processed under Section 143(1) of the Act, however, was subsequently picked up for scrutiny.
6.3. The Assessee claimed a sum of Rs.9,20,62,226/- as loss against a Forward Contract, entered into to hedge the risk against foreign exchange fluctuations to cover the exports and imports. The Assessee had entered into a contract with Saudi Basic Industries Corporation, King
