TaxTMI 
TaxTMI 
2022 (12) TMI 358
X X X X Extracts X X X X
X X X X Extracts X X X X
....he 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rned 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 liable to be disallowed in terms of the Central Board of Direct Taxes (hereafter 'CBDT') Instruction no.3/2010. 8. In terms of the CBDT Instruction no.3/2010, the AOs were instructed to examine the 'Marked to Market' losses. The said Instruction explained 'Marked to Market' as a concept where financial instruments are valued at market rate to report their actual value on the date of reporting. Such 'Marked to Market' losses represent notional....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nge 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 that the Assessee had entered into a contract with Saudi Basic Industries Corporation, Kingdom of Saudi Arabia based on the Letter of Intent dated 19.04.2008. The underlying assets/liabilities in respect of which the forward cover was purchased, were debits and credits in respect of export realization, as well as for payments of imports for executing the projects. Admittedly, during the relevant previous year, the Assessee had suffered foreign exchange fluctuation loss of Rs.9,20,62....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 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." 25. Thus, according to the Revenue, the learned CIT(A) and the learned Tribunal had erred in finding that the loss on account of Forward Contracts is allowable under Section 37(1) of the Act and is covered as a hedging transaction under Section 43(5)(a) of the Act. The Revenue contends that the said loss is required to be disallowed as a speculative loss in terms....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in. 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 exchange on the due date. The corresponding losses/gains under the Forward Contracts, thus, were also required to be accounted for to arrive at the real profits. It would be anomalous 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 ....