March 2023
Business deduction — Loss — Loss on forward contracts for foreign exchange — Transactions to hedge against risk of foreign exchange fluctuations falling within exceptions of proviso (a) to section 43(5) — Loss not speculative and to be allowed
K. B. Bhujle, Advocate
80 Principal CIT vs. Simon India Ltd
[2023] 450 ITR 316 (Del)
A. Y.: 2009-10
Date of order: 2nd December, 2022
Sections 37(1) and 43(5) proviso (A) of ITA 1961
Business deduction — Loss — Loss on forward contracts for foreign exchange — Transactions to hedge against risk of foreign exchange fluctuations falling within exceptions of proviso (a) to section 43(5) — Loss not speculative and to be allowed
The assessee provided engineering consultancy and related services such as engineering designing, construction and commissioning of plants and installations. For the A.Y. 2009-10, the AO was of the view that the loss on forward contracts claimed by the assessee was a speculative loss under section 43(5) and was liable to be disallowed in terms of the CBDT Instruction No. 3 of 2010, dated 23rd March, 2010. He held that since the forward contracts had not matured, the losses were required to be considered as notional losses and accordingly made a disallowance.
The Commissioner (Appeals) set aside the disallowance. The Tribunal held that the loss on account of forward contracts was allowable under section 37(1) and was covered as a hedging transaction under proviso (a) to section 43(5).
On appeal by the Department the Delhi High Court upheld the decision of the Tribunal and held as under:
“i) In terms of the CBDT Instruction No. 3 of 2010, dated March 23, 2010 Assessing Officers were instructed to examine the “marked to market” losses. The 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 losses and are required to be added back for the purposes of computing taxable income under the Income-tax Act, 1961. The CBDT also instructed Assessing Officers to examine whether such transactions were speculative transactions where losses on account of foreign exchange derivative transactions arise on actual transaction. However, it is well settled that the CBDT instructions and circulars which are contrary to law are not binding.
ii) In CIT v. Woodward Governor India P. Ltd. [2009] 312 ITR 254 (SC) the Supreme Court referred to Accounting Standard-11 in terms of which exchange rate differences arising on foreign currency transactions are to be recognized as income or expenses in the period in which they arise, except in cases of exchange differences arising on repayment of liabilities for acquiring fixed assets.
iii) The forward contracts were entered into by the assessee to hedge against foreign exchange fluctuations resulting from inflows and outflows in respect of the underlying contracts for provisions of consultancy and project management. Concededly, the assessee did not deal in foreign exchange. The transactions fell within the exceptions of proviso (a) to
[2023] 450 ITR 316 (Del)
A. Y.: 2009-10
Date of order: 2nd December, 2022
Sections 37(1) and 43(5) proviso (A) of ITA 1961
Business deduction — Loss — Loss on forward contracts for foreign exchange — Transactions to hedge against risk of foreign exchange fluctuations falling within exceptions of proviso (a) to section 43(5) — Loss not speculative and to be allowed
The assessee provided engineering consultancy and related services such as engineering designing, construction and commissioning of plants and installations. For the A.Y. 2009-10, the AO was of the view that the loss on forward contracts claimed by the assessee was a speculative loss under section 43(5) and was liable to be disallowed in terms of the CBDT Instruction No. 3 of 2010, dated 23rd March, 2010. He held that since the forward contracts had not matured, the losses were required to be considered as notional losses and accordingly made a disallowance.
The Commissioner (Appeals) set aside the disallowance. The Tribunal held that the loss on account of forward contracts was allowable under section 37(1) and was covered as a hedging transaction under proviso (a) to section 43(5).
On appeal by the Department the Delhi High Court upheld the decision of the Tribunal and held as under:
“i) In terms of the CBDT Instruction No. 3 of 2010, dated March 23, 2010 Assessing Officers were instructed to examine the “marked to market” losses. The 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 losses and are required to be added back for the purposes of computing taxable income under the Income-tax Act, 1961. The CBDT also instructed Assessing Officers to examine whether such transactions were speculative transactions where losses on account of foreign exchange derivative transactions arise on actual transaction. However, it is well settled that the CBDT instructions and circulars which are contrary to law are not binding.
ii) In CIT v. Woodward Governor India P. Ltd. [2009] 312 ITR 254 (SC) the Supreme Court referred to Accounting Standard-11 in terms of which exchange rate differences arising on foreign currency transactions are to be recognized as income or expenses in the period in which they arise, except in cases of exchange differences arising on repayment of liabilities for acquiring fixed assets.
iii) The forward contracts were entered into by the assessee to hedge against foreign exchange fluctuations resulting from inflows and outflows in respect of the underlying contracts for provisions of consultancy and project management. Concededly, the assessee did not deal in foreign exchange. The transactions fell within the exceptions of proviso (a) to
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