The Pr. Commissioner Of Income Tax-3 v. Emmsons International Ltd

$~S-39 IN THE HIGH COURT OF DELHI AT NEW DELHI +ITA 318/2022 THE PR. COMMISSIONER OF INCOME TAX-3..... AppellantThrough:Mr.RuchirBhatia,Sr.StandingCounselwithMs.MansieJain,Advocate. versus EMMSONS INTERNATIONAL LTD...... Respondent Through:None. %Date of Decision: 12[th]September, 2022 CORAM: HON'BLE MR. JUSTICE MANMOHANHON'BLE MS. JUSTICE MANMEET PRITAM SINGH ARORA J U D G M E N T MANMOHAN, J (Oral): 1.Present Income Tax Appeal has been filed challenging the Orderdated 14[th]October, 2019 passed by the Income Tax Appellate Tribunal(‘ITAT’) in ITA No.4603/Del/2019 for the Assessment Year 2012-13. 2.Learned Counsel for the Appellant states that the ITAT has erred indeleting the Notional Forex Loss of Rs.8,95,40,121/- disallowed by theAssessing Officer by relying upon the decision of Supreme Court in the caseof CIT Vs. Woodward Governor India Ltd., 312 ITR 254(SC) which wasrendered in respect of actual transactions in contradiction to notionaltransactions in the case of Assessee. 3.He further submits that the ITAT has erroneously held that the CBDTCircular/Instruction is contrary to the decision of the Supreme Court in thecase of CIT Vs. Woodward Governor India Ltd (supra). 4.This Court is of the opinion that the issue of law raised by thepetitioner has been conclusively settled by the Supreme Court in CIT Vs.Woodward Governor India Ltd (supra) and Oil and Natural GasCorporationLtd.,DehradunthoughManagingDirectorVs.TheCommissioner of Income Tax, Dehradun, AIR 2010 SC 1927. The relevantportion of the latter judgment, wherein the earlier judgment has beenfollowed, is reproduced hereinbelow:- “Having carefully perused the decision of this Court in Woodwardcase , we are of the opinion that both the issues stand concluded by thesaid decision. Dealing with the said issues extensively, speaking for theBench, S.H. Kapadia, J, summarised the following factors which shouldbe taken into account in order to find out if an expenditure on accountof fluctuation in the foreign currency rates, when the Assessee isfollowing the mercantile system of accounting, is deductible: (i) whether the system of accounting followed by the assessee isthe mercantile system, which brings in the debits of the amount ofexpenditure for which a legal liability has been incurred evenbefore it is actually disbursed and credits, whatis due,immediately it becomes due even before it is actually received;(ii) whether the same system is followed by the assessee from thevery beginning and if there was a change in the system, whetherthe change was bona fide;the mercantile system, which brings in the debits of the amount ofexpenditure for which a legal liability has been incurred evenbefore it is actually disbursed and credits, whatis due,immediately it becomes due even before it is actually received;(ii) whether the same system is followed by the assessee from thevery beginning and if there was a change in the system, whetherthe change was bona fide; (iii) whether the assessee has given the same treatment to lossesclaimed to have accrued and to the gains that may accrue to it;(iv) whether the assessee has been consistent and definite inmaking entries in the account books in respect of losses and gains;(v) whether the method adopted by the assessee for making entriesin the books both in respect of losses and gains is as per nationallyaccepted accounting standards;claimed to have accrued and to the gains that may accrue to it;(iv) whether the assessee has been consistent and definite inmaking entries in the account books in respect of losses and gains;(v) whether the method adopted by the assessee for making entriesin the books both in respect of losses and gains is as per nationallyaccepted accounting standards; (vi) whether the system adopted by the assessee is fair andreasonable or is adopted only with a view to reducing theincidence of taxation. (vi) whether the system adopted by the assessee is fair andreasonable or is adopted only with a view to reducing theincidence of taxation. Applying these factors on the facts of that case, it was held that the“loss” suffered by the assessee, maintaining accounts regularly onmercantile system and following accounting standards prescribed bythe Institute of Chartered Accountants of India (ICAI), on account offluctuation in the rate of foreign exchange as on the date of balancesheet was an item of expenditure under Section 37(1) of the Act,notwithstanding that the liability had not been discharged in the year inwhich the fluctuation in the rate of foreign exchange occurred. “ 5.In fact, in view of the factual findings of the ITAT, this Court is of theopinion that all the aforesaid conditions stipulated by the Supreme Courtstand satisfied in the present case. 6.As far as the finding of the ITAT that the CBDT Circular No.3/2010dated 23[rd]March, 2010 is contrary to the judgment of the Supreme Court inOil and Natural Gas Corporation Ltd., Dehradun though ManagingDirector Vs. The Commissioner of Income Tax, Dehradun (supra) and CITVs. Woodward Governor India Ltd (supra), this Court is of the view that thesame was not called for, as the said CBDT Instruction has been issued inrespect of loss on account of trading in foreign exchange derivatives. In thepresent case, however, the assessee had entered into derivative contracts inorder to hedge its exchange risk in respect of export proceeds receivable byit in foreign exchange. Forward contracts entered into by the assessee werenot by way of trading per se in foreign exchange derivatives. Consequently,CBDT Circular No.3/2010 dated 23[rd]March, 2010 has no application to thefacts of the present case. 7.In view of the aforesaid, this Court is of the opinion that nosubstantial question of law arises for consideration in the present case. Withthe aforesaid clarification, the present appeal is dismissed. MANMOHAN, J SEPTEMBER 12, 2022TS MANMEET PRITAM SINGH ARORA, J