Facts of the Case

The present Income Tax Appeal was filed by the Appellant challenging the order dated 14th October 2019 passed by the Income Tax Appellate Tribunal (ITAT) for Assessment Year 2012-13.

The Assessing Officer had disallowed a notional foreign exchange loss amounting to ₹8,95,40,121/-. The ITAT deleted the said disallowance by relying upon the judgment of the Supreme Court in CIT vs Woodward Governor India Ltd.

The Revenue contended that the reliance on the said judgment was erroneous as it related to actual transactions, whereas the present case involved notional transactions.

Issues Involved

  1. Whether notional foreign exchange loss is allowable as deduction under the Income Tax Act.
  2. Whether the ITAT erred in relying on Supreme Court judgments applicable to actual transactions.
  3. Whether CBDT Circular No. 3/2010 is applicable to derivative contracts entered for hedging purposes.

Petitioner’s Arguments (Revenue)

  • The ITAT erred in deleting the disallowance of notional forex loss.
  • Reliance on CIT vs Woodward Governor India Ltd. was misplaced as the said judgment pertained to actual transactions.
  • The ITAT wrongly held that CBDT Circular/Instruction was contrary to Supreme Court decisions.

Respondent’s Arguments (Assessee)

  • The loss arising due to fluctuation in foreign exchange rates is allowable under the mercantile system of accounting.
  • The assessee consistently followed accounting standards prescribed by ICAI.
  • The transactions were entered into for hedging purposes and not for speculative trading.

Court’s Findings / Order

  • The Court held that the issue is conclusively settled by the Supreme Court in:
    • CIT vs Woodward Governor India Ltd.
    • Oil and Natural Gas Corporation Ltd. vs CIT
  • It reaffirmed that foreign exchange fluctuation losses are allowable if:
    • The assessee follows the mercantile system
    • Accounting standards are consistently applied
    • The liability has accrued, even if not discharged
  • The Court observed that all conditions laid down by the Supreme Court were satisfied in the present case.
  • It further held that CBDT Circular No. 3/2010 was not applicable since:
    • The transactions were hedging contracts
    • They were not speculative trading in derivatives
  • Final Order:
    No substantial question of law arose; hence, the appeal was dismissed.

Important Clarification

  • Hedging transactions in foreign exchange are distinct from speculative derivative trading.
  • CBDT Circular No. 3/2010 applies only to trading in derivatives and not to genuine hedging contracts.
  • Notional loss based on accounting standards can be allowable if it reflects accrued liability.

Sections Involved

  • Section 37(1) of the Income Tax Act, 1961
  • Principles relating to mercantile system of accounting

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:3626-DB/MMH12092022ITA3182022_180632.pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools.