High Court Affirms Forex Loss Deduction Decision for 2008-09 Assessment Year

The Calcutta High Court upheld the Tribunal's decision regarding the deduction of marked-to-market loss in forex derivative contracts for the assessment year 2008-09. The Court emphasized the independence of the Assessing Officer, the precedence set by the Supreme Court's judgments, and the non-retrospective effect of CBDT instructions. The decision affirmed the Tribunal's allowance of the deduction for the consultancy company, based on the mercantile system of accounting and compliance with accounting standard no.11, dismissing the revenue's appeal.

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Issues:
1. Deduction of marked-to-market loss in forex derivative contracts for assessment year 2008-09.
2. Applicability of CBDT instruction post judgment of the Hon'ble Apex Court.
3. Allowability of loss on account of foreign exchange fluctuation under Section 37[1] of the Income Tax Act.

Analysis:
1. The appeal before the Calcutta High Court concerned the deduction of marked-to-market loss in forex derivative contracts for the assessment year 2008-09. The assessee, a consultancy company, claimed a loss on account of foreign exchange fluctuation, which the Assessing Officer treated as a notional loss. The CIT(A) allowed the deduction, emphasizing the mercantile system of accounting and compliance with accounting standard no.11. The Tribunal, noting the mercantile system followed by the assessee, allowed the deduction, relying on the decision in Woodward Governor India [P] Ltd. & Ors. The High Court upheld the Tribunal's decision, emphasizing that the CBDT instruction cannot override the Supreme Court's decision and that the Assessing Officer is not bound by such instructions.

2. The second issue revolved around the applicability of CBDT instruction post the judgment of the Hon'ble Apex Court. The revenue contended that the CBDT circular issued after the Supreme Court's decision should bind the authorities. However, the High Court held that while the circular may bind the authority, it cannot override the Supreme Court's decision. The Court emphasized that the Assessing Officer is an independent authority not bound by such instructions, and the circular cannot have a retrospective effect to nullify the effect of a judgment.

3. The final issue addressed the allowability of loss on account of foreign exchange fluctuation under Section 37[1] of the Income Tax Act. The High Court referred to the case of Principal Commissioner of Income Tax vs. Suzlon Energy Ltd., where the Tribunal's decision to allow the claim of foreign exchange fluctuation loss was upheld by the Supreme Court. Citing this precedent, the High Court dismissed the revenue's appeal, affirming the Tribunal's decision and answering the substantial questions of law against the revenue.

In conclusion, the High Court upheld the Tribunal's decision, emphasizing the independence of the Assessing Officer, the precedence set by the Supreme Court's judgments, and the non-retrospective effect of CBDT instructions. The Court's detailed analysis and reliance on legal principles and precedents ensured a thorough examination of the issues at hand, leading to the dismissal of the revenue's appeal.

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