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2022 (12) TMI 358 - HC - Income TaxForeign exchange fluctuations loss on unmatured, matured and cancelled forward contracts - loss on Forward Cover Purchase Contracts for foreign exchange (hereafter ‘Forward Contracts’) - allowable as a deduction from the income chargeable to tax for the relevant assessment year notwithstanding that the Forward Contracts have not closed - 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 u/s 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? - HELD THAT:- Undisputedly, the Forward Contracts, in the present case, are hedging transactions. 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 to law are not binding. This Court finds no fault with the order of the learned CIT(A) as well as the learned Tribunal in finding that the loss, on account of Forward Contracts, cannot be considered as speculative and the AO had erred in disallowing the same. The questions raised (Questions I and II) are thus, covered by the decision of the Supreme Court in CIT v. Woodword Governor India Pvt. Ltd. [2009 (4) TMI 4 - SUPREME COURT]. Disallowance u/s 14 A - determine the expenditure attributable to earning dividend income at 0.5% of the value of average investment in terms of Rule 8D of the Rules - HELD THAT:- It is not disputed that the AO can ascertain the expenditure attributable to earning tax-free income if he is not satisfied that the Assessee’s allocation of expenses for earning the said income or otherwise and or is otherwise dissatisfied with the Assessee’s explanation. A plain reading of the impugned order passed by Tribunal indicates that the Tribunal also did not find, as a matter of fact, that the Assessee had devoted any of its resources for managing the said investments or had otherwise incurred any expenditure for the same. It is relevant to note that the Assessee’s assertion, that its investment was monitored by a group of company without levying any charge or fee, was not found to be incorrect. Tribunal did not accept the AO’s determination of ₹8,53,916/- as expenditure incurred for earning the exempt income. Notwithstanding the above, the learned Tribunal held that the deployment of manpower for monitoring the dividends from mutual funds cannot be ruled out. On this basis the learned Tribunal had reduced the disallowance from ₹8,53,916/- to ₹1,00,000/-per month on ad-hoc basis. As submitted on behalf of the Revenue that reduction on ad-hoc basis is not permissible. We are of the view that once the Revenue Authorities have found no reason to doubt the Assessee’s claim that the investments have been managed by a group company without levy of charge, it may not be open for the tribunal to disallow expenditure on the basis that some deployment of manpower for managing the investment cannot be “ruled out”. Assessee has not appealed against the said decision. As noted above, the present appeal has been filed against the impugned order passed whereby the learned Tribunal had dismissed the appellant’s appeal. The Revenue’s appeal before learned Tribunal was confined to disallowance of loss on account of Forward Contracts.
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