Loss sustained by the assessee due to fluctuation in foreign exchange while implementing export contract is incidental to assessee’s course of business, therefore, such a loss is not a speculative loss but a business loss: HC
KARNATAKA HIGH COURT
THE COMMISSIONER OF INCOME-TAX, BANGALORE, THE DEPUTY COMMISSIONER OF INCOME-TAX CIRCLE-12 (2) , BANGALORE VERSUS M/S. QUEST GLOBAL ENGINEERING SERVICES PVT. LTD.
I.T.A. NO.133 OF 2015
Short Overview :
Disallowance on provision of loss on derivative contracts
AO made the additions on the ground that, provision for loss cannot be allowed when the actual sales had not even taken place and maturity date of the derivatives contracts has not arisen and the notional loss or notional income and deduction of liabilities which are unascertained does not come within the purview of the I.T. Act
Tribunal deleted the addition
Issue before HC was whether Tribunal is right in law in allowing carry forward of loss on derivatives contracts?
HC observed as under:
Revenue has not questioned / doubted the genuineness and reasonableness of the transaction. Similarly, the revenue has not disputed the fact that the estimation was made on reasonable basis and not on adhoc basis which is evident from Paragraph 6.1 of the order of CIT(Appeals).
The loss which is claimed by the assessee, is claimed as deductible business expenditure and therefore, provision for loss has to be allowed at the close of the year in accordance with Paragraphs 3 to 39 of the Accounting Standard 11, which deals with foreign exchange contract.
It is not disputed by the revenue that forward contracts were entered to protect the assessee from foreign exchange fluctuation in respect of consideration for export proceeds.
The tribunal, therefore, rightly relied on the decision in WOODWARD GOVERNOR INDIA [2009 (4) TMI 4 – SUPREME COURT] while allowing the market to market loss as relating to forward exchange contract as deduction.
The loss sustained by the assessee due to fluctuation in foreign exchange while implementing export contract is incidental to assessee’s course of business, therefore, such a loss is not a speculative loss but a business loss.
The aforesaid findings have not been demonstrated to be perverse. For the aforementioned reasons, the substantial questions of law No.1 and 3 are answered against the revenue and in favour of the assessee.
On Disallowance u/s 14A
HC HELD THAT:-
From perusal of the relevant extract of the Supreme Court, it is evident that the decision in MAXOPP INVESTMENT LTD. [2018 (3) TMI 805 – SUPREME COURT] deals with applicability of Section 14A of the Act.
Therefore, the observations made with regard to applicability of Section 14A in M/S NOVEL SOFTWARE INDIA (P) LTD. are factually incorrect and we hasten to clarify the same.
However, from relevant extract of Paragraph 40, it is evident that only expenses proportionate to earning of exempt income could be disallowed under Section 14A of the Act and the decision of MAXOPP INVESTMENT LTD is an authority for the aforesaid proposition that the provision is relatable to earning of actual income. The object of Section 14A is to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income.
It is also clarified by us that while recording the conclusion in KINGFISHER FINVEST LTD. [2020 (10) TMI 518 – KARNATAKA HIGH COURT]that disallowance under Section 14A has to be made even taxpayer has not earned any exempt income, this court has misread the ratio of the decision of the Supreme Court in MAXOPP INVESTMENT LTD supra and therefore, the aforesaid view being contrary to the law laid down by the Supreme Court is not a binding precedent. – Decided in favour of assessee
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