Notional Loss on foreign exchange fluctuation is allowable as deduction u/s 37 as per the decision of the Hon’ble Supreme Court even if there was contrary instruction issued by CBDT
Emmsons International Ltd. (the Assessee) is engaged in the business of international trading in commodities. The Assessee had the practice of hedging substantial part of its foreign currency losses through forward contracts in foreign exchange. For AY 2012-13, the Assessee filed its return of income wherein it claimed the notional loss on foreign exchange fluctuation in accordance with AS-11 on the foreign exchange forward contracts as allowable deduction u/s 37 of the Income Tax Act, 1961 (the Act) by placing its reliance the decision of the Hon’ble Apex Court in the case of CIT vs Woodward Governor India Ltd 312 ITR 254 (SC).
The return of the Assessee was taken up for scrutiny assessment wherein the Ld. AO rejected the claim of the Assessee and disallowed the notional loss by placing its reliance the CBDT instruction No.03/2010 dated 23.03.2010. Ld. AO was of the view that since CBDT instruction came after the judgment of Apex Court, the above CBDT instruction takes preference to the judgment of Hon’ble Apex Court to disallow the claim of notional loss. The same was affirmed by the CIT(A).
The matter went to ITAT to decide whether the Ld. AO was right in its contention and the instruction issued by CBDT over-rules the decision of the Hon’ble Apex Court in the case of CIT vs Woodward Governor India Ltd 312 ITR 254 (SC) andaccordingly the notional loss should not be treated as allowable expenditure u/s 37 of the Act.
Hon’ble ITAT held that the Ld. AO cannot be permitted to contend that there is a CBDT instruction No. 03/2010 dated 23/3/2010 to the contrary of the decision of Hon’ble Apex Court. No CBDT circular or instruction can be contrary to the decision of the Hon’ble Apex Court, even if the same was issued subsequent to the decision of the Hon’ble Apex Court. Accordingly, the Assessee was right in its contention and CIT vs Woodward Governor India Ltd (supra) shall apply to the Assessee and the notional loss should be allowed as deduction u/s 37 of the Act.
Subsequently, Ld. AO appealed before the High Court wherein it was contended that Hon’ble ITAT has erroneously held that the CBDT Circular/Instruction is contrary to the decision of the Supreme Court in the case of Woodward Governor India Ltd (supra). The High Court did not delve into the CBDT Instructions since the said CBDT Instruction has been issued in respect of loss on account of trading in foreign exchange derivativeshowever, 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. Consequently, CBDT instruction No.3/2010 dated 23rd March, 2010 has no application to the facts of the case of the Assessee.
Further, the Ld. AO filed the SLP before Hon’ble Supreme Court against the decision of High Court wherein the Hon’ble Supreme Court has enunciated the law settled by the ITAT and affirms the order passed ITAT as well as High Court.
SW Point of View:Notional foreign exchange loss is allowable as expenditure u/s 37(1) of the Act as per the law of land settled by the Hon’ble Apex Court in the case of CIT vs Woodward Governor India Ltd 312 ITR 254 (SC). Accordingly, the matter was decided in the favour of the Assessee however, the question that whether notification, circular or instruction issued by the CBDT can over-rule the decision of Hon’ble Apex Court if the same was issued subsequent to the decision of the Hon’ble Apex Court is still remains open as it doesn’t find any relevance in the present case.
SUPREME COURT OF INDIA Principle CIT v. Emmsons International Ltd.
