TaxTMI 
TaxTMI 
2020 (10) TMI 983
X X X X Extracts X X X X
X X X X Extracts X X X X
....er, cast iron spun pipe and certain chemicals. The return of income for the year under consideration was filed by the assessee on 30.09.2011 declaring a loss of Rs.369,67,31,212/- under the normal provision of the Act and book loss of Rs.96,00,77,348/- u/s 115JB of the Act. In the said return, total income of Rs.5,32,68,132/- received from dividend on the shares during the year under consideration was claimed to be exempt by the assessee-company u/s 10(34) of the Act. A disallowance of Rs.1.20 lakhs was also offered by the assessee on account of expenses incurred in relation to earning of the said exempt income as required by the provision of u/s 14A of the Act. Not satisfied with the said disallowance offered by the assessee on estimated basis, the Assessing Officer invoked Rule 8D of the Income Tax Rules, 1962 and worked out the disallowance to be made u/s 14A of the Act at Rs.2,80,64,837/-as under:- As per Rule 8D(2)(i) of the Income Tax Rule, 1962 expenditure directly related to earning of exempt income of Rs.6,873/-. As per Rule 8D(2)(ii) interest expenditure attributable to the earning of exempt income Rs.2,51,26,736/- As per Rule 8D(2)(iii) 0.5% of average value of inv....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the circumstances of the case, the order of the Ld. CIT(A) without dealing with the grounds of appeal relating to disallowance u/s 14A on merits be held unsustainable and be therefore cancelled and/or set aside." 6. We have heard the arguments of both the sides and also perused the relevant material available on record. As argued by the ld. Representatives of both the sides, this issue is squarely covered by the order of the tribunal dated 26.04.2010 (supra) passed in assessee's own case for AYs. 2008-09 & 2009-10 wherein the similar issue was decided by the tribunal vide paragraph 10 to 12 as under:- "10. Now coming to the disallowance of Rs. 19,17,487/- made under rule 8D(2)(iii), we find force in the alternate argument of learned AR that only dividend bearing investment of scrips are to be considered for making disallowance under section 14A of the Act. In this regard, reliance was placed by the learned AR on the decision of the Tribunal in the case REI Agro Ltd. reported in 143 ITD 141 Kolkata which we note is very well founded wherein it was held: "(8.1) Thus, not all investments become the subject-matter of consideration when computing disallowance under section 14A rea....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e the Tribunal. Even the learned counsel for the assessee has not raised any objection in this regard. The delay of 51 days on the part of the Revenue in filing this appeal before the Tribunal is accordingly condoned. The case is now taken up for adjudication on merits. 8. Now we shall take up the appeal of the Revenue which involves a solitary issue relating to the deletion by the ld. CIT(A) of the addition made by the Assessing Officer by disallowing the assessee's claim for deduction on account of provision for future loss on derivative due to foreign exchange fluctuation. 9. In the profit and loss filed alongwith the return of income, a sum of Rs.3,67,22,220/- was debited by the assessee on account of derivative loss under the head miscellaneous expenses. In this regard, it was explained on behalf of the assessee-company before the Assessing Officer that the market to market loss had been booked on net basis on foreign exchange fluctuation at the year-end on mercantile accounting basis and the same was therefore alloweable. This explanation of the assessee was not found acceptable by the Assessing Officer. According to him, the assessee-company had undergone hedging and loss ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....DT, wherein marked to market loss in respect of unrealised forward derivatives entered into in the course of trading was directed to be considered as a notional loss. 5.3 On the other hand the appellant has placed on record sufficient material to substantiate the argument that the loss which the appellant accounted in its books was quantified in a scientific manner. the same cannot be called a notional loss as alleged by the AO The appellant relied on Accounting Standard-11 issued by the ICAI In terms of which the appellant was mandatorily required to account for the outstanding foreign currency forward contracts at the prevailing exchange rate at the time of drawing annual financial statements, Referring to Section 211(3) of the Companies Act, 1956 it was submitted that following of AS-11 was mandatory for the appellant The AR of the appellant further pointed out that in terms of Section 145 of the Act, the Central Government had to prescribe that any other accounting standard for income computation which was contrary to AS-11 prescribed by the ICAI, in terms of which MTM loss was accounted for by the appellant in its books, Referring to AS-11, it was submitted that the said sta....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rrency forward contracts In order to protect against exchange fluctuation risks involved in foreign currency transactions involving import of raw materials. The AO has not disputed the appellant's contention that it was carrying on substantial transactions involving import of materials and export of goods and these transactions were conducted in foreign currency In relation to the international transactions involving import and export of goods the appellant had substantial exposure to foreign currency transactions and consequently the appellant was exposed to foreign currency exchange losses/gains. In order to mitigate its exposure to foreign currency fluctuations, the appellant had undertaken forward contracts in foreign exchange to guard itself against anticipated losses. That the appellant entered into forward contracts during the relevant year with regard to its foreign currency transactions against purchase and/or export of goods has not been denied or doubted by the AO in the emergent circumstances. I find that the underlying transactions with reference to which forward contracts in foreign currency were executed related to revenue operations of the assessee The forward c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble Supreme Court in the cases of Woodward Governor India Ltd (Supra) & ONGC (supra) are equally applicable to appellant's case as well. 5.7 I also do not find any force in the AO's reliance on the Board Instruction No. 3/2010 dated 23.3.2010. From perusal of the said Instruction, it is noted that this Instruction was issued in respect of loss on account of trading in foreign exchange derivatives. In the present case however the assessee had entered into derivative contracts in order to hedge its exchange risk in respect of export proceeds receivable by it in foreign exchange. The forward contracts entered into by the assessee were not by way of trading per se in foreign exchange derivatives In my considered view therefore Instruction No, 3/2010 had no relevance in the facts of the instant case 5.8 The facts on record demonstrate that the foreign exchange forward contracts were entered into by the appellant with reference to underlying which were import/export bills In the ordinary course of its business, In my considered view therefore any gain or loss arising on restatement of such foreign exchange forward contracts also arose in the ordinary course of assessee's ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o far as the reliance on Accounting Standard-11 is concerned, it would not by itself determine whether the activity was the Respondent-assessee's regular business transaction or it was a speculative transaction. On present facts, it was never the Revenue's contention that the transaction was speculative but only disallowed on the ground that it was notional. Lastly, the reliance placed on the decision in S Vinod Kumar Diamonds (P) Ltd. (supra) in the Revenue's favour would not by itself govern the issues arising herein. This is so as every decision is rendered in the of the facts which arise before the authority for adjudication. Mere conclusion in favour of the Revenue in another case by itself would not entitle a party to have an identical relief case In fact, if the Revenue was of the view that the facts in S Vinod Kumar (supra) are identical/similar to the present facts, then reliance would have been placed by the Revenue upon It at the hearing before the Tribunal The impugned order does not indicate any such reliance. It appears that in S Vinod Kumar Diamonds (P) Ltd. (supra), the Tribunal held the forward contract on facts before it to be speculative in nature In ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee ,in this year. This ground of the assessee is allowed." 5.11 For this reasons set out above and respectfully following the decisions of the Hon'ble Supreme Court. Hon'ble Bombay High Court and the Hon'ble ITAT, Delhi, the MTM loss of Rs.3,67,22,220/- recognized at the year-end with reference to unrealized forward contracts is held to be in the nature of real loss and therefore allowable as deduction from the profits of the business. The AO is therefore directed to delete the disallowance of Rs.3,67,22,220/-. Ground No.2 therefore stands allowed." Aggrieved by the relief given by the ld. CIT(A) to the assessee on this issue, the Revenue has preferred this appeal before the Tribunal. 11. We have heard the arguments of both the side and also perused the relevant materials available on record. The Ld. DR has mainly relied on the order of the Assessing Officer in support of the Revenue's case on this issue. The Ld. Counsel for the assessee on the other hand, has submitted that this issue involved in the Revenue's appeal is squarely covered, besides the judicial pronouncements/referred to and relied upon by the ld. CIT(A) in his impugned order, by the various deci....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of the Respondent assessee that the activity of entering into forward contract was in the regular course of its business only to safe guard against the loss on account of foreign exchange variation. Even before the Tribunal, we find that there was no submission recorded on behalf of the Revenue that the Respondent assessee should be called upon to explain the nature of its transactions. Thus, the submission now being made is without any foundation as the stand of the assessee on facts was never disputed. So far as the reliance on Accounting Standard-II is concerned, it would not by itself determine whether the activity was a part of the Respondent-assessee's regular business transaction or it was a speculative transaction. On present facts, it was never the Revenue's contention that the transaction was speculative but only disallowed on the ground that it was notional. Lastly, the reliance placed on the decision in S. Vinodkumar Diamonds (P) Ltd. (supra) in the Revenue's favour would not by itself govern the issues arising herein. This is so as every decision is rendered in the context of the facts which arise before the authority for adjudication. Mere conclusion in f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Tribunal was upheld by the Hon'ble High Court. On further appeal by the department, the Hon'ble Supreme Court held that the loss suffered by the assessee is on revenue account towards foreign exchange difference as on the date of balance sheet and is an item of expenditure deductible u/s 37(1). It further observed than an enterprise has to report outstanding liability relating to import of raw material using closing rate of foreign exchange and any difference, loss or gain, arising on conversion of said liability at closing rate should be recognized in profit and loss account for reporting period. From the judgment of the Hon'ble Supreme Court it can be clearly deduced that unrealized loss due to foreign exchange fluctuation in foreign currency transactions on revenue item as on the last the accounting year is deductible." 7.5.2. We also find that the co-ordinate bench of Delhi Tribunal supra had rendered a decision in favour of the assessee on an identical issue after considering the Instruction No. 3/2010 wherein it was held that :- "8. Coming to the corporate additions i.e. disallowance of loss, it clearly emerges from the record that the assessee in respect of f....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Hon'ble Delhi High Court was delivered much earlier whereas the Instruction No. 3/2010 was issued dated 23.03.2010. Thus the instruction issued by the CBDT was not considered by the Hon'ble Delhi High Court. However, we find that the instructions issued by the CBDT are not binding on the Courts. So there is no value in the argument of the ld. DR. However, we disagree with the view of the AO on the ground that the adjustment was made by the assessee in terms of AS 11 issued by ICAI and in pursuance of mercantile system of accounting as notified u/s 145 of the Act. The relevant extract of Accounting Standard 11 is reproduced below:- "3.6 The Accounting Standards (A) 11, the Effects of changes in Foreign Exchange Rates (revised 2003), issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1- 4-2004. Relevant extract of the Accounting Standard is reproduced as follows:- '9. A foreign currency transactions should be recorded on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign ....