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CBDT Circular or Instructions cant be inconsistent with SC Decisions: ITAT
January, 06th 2020

In a recent case, the Income Tax Appellate Tribunal ( ITAT) Delhi held that No CBDT circular or instruction can be contrary to the decision of the Hon’ble Supreme Court, even subsequent to the decision of the Hon’ble Supreme Court. Disallowances of foreign travel expenses incurred in respect of the family members of the directors are sustainable.

The appellant is a company engaged in the business of international trading in commodities. For the Assessment Year 2012-13, it filed its return of income on declaring net taxable income. The appellant had suffered the total loss of foreign exchange fluctuation loss, out of which there was the loss of a particular amount on account of MTM losses in accordance with AS-11 on the foreign exchange forward contracts. In the preceding two years there had been gain from forwarding contracts that have been offered to tax. The AO treated the above losses on forwarding contracts as notional and contingent in nature and thus not allowed by relying on the CBDT instruction No.03/2010. AO, therefore, made an addition on account of MTM losses on account of foreign exchange fluctuation and on account of disallowance of foreign travel expenses incurred in respect of the family members of the directors and on account of the cessation of liability. Challenging the assessment order making these additions, assessee preferred an appeal before the Ld. CIT(A). Ld. CIT(A) also confirmed the addition made by the AO but deleted the addition made on account of the cessation of liability. Aggrieved by the impugned order assessee preferred this appeal.

The appellant submitted in the light of judgments in cases CIT vs Woodward Governor India Ltd 312 ITR 254 (SC), ONGC vs CIT 322 ITR 180 (SC), Silicon Graphics Systems (India) Pvt Ltd vs DCITin ITA No.2976/Del/2013 that the authorities ignored the fact that the loss claimed on forward contracts is allowable and the same has been upheld by various judicial authorities and, therefore, the Revenue is not justified in treating the loss claimed on forward contracts as notional loss and not allowable under the provisions of income tax.

The DR submitted that in view of CBDT instructions, the MTM losses on account of forwarding contract/derivatives are not allowable and in the marked to market methodology financial instruments are valued at market rate so as to report their actual value on the reporting date; and that where companies make such adjustment through the trading or profit and loss account, the book loss in their accounts and such loss is notional loss as no sale had actually taken place and the assets continue to be owned and possessed by the company.

While allowing the appeal, the Tribunal bench comprising of Shri K. Narasimha Chary, Judicial Member And Shri B.R.R. Kumar, Accountant Member held that the decision in the case of Woodward Governor P Ltd and ONGC vs CIT is applicable, and the line of judicial view is that the Revenue cannot be permitted to contend that there is a CBDT circular or instruction No. 03/2010 to the contrary. No CBDT circular or instruction can be contrary to the decision of the Hon’ble Supreme Court, even subsequent to the decision of the Hon’ble Supreme Court. So, therefore, accept the contention of the assessee and hold that the addition is unsustainable and directing the AO to delete the same. In respect of addition made on the foreign travel expenses of the wives, minor children and others, that fail the test of commercial expediency and there are no valid reasons to interfere with the findings of the authorities below on the disallowance of the foreign travel expense relatable to the wives and minor children of the directors, management trainees and overseas employees of the assessee company.

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