Scope of appellate power of court under Section 260A Income Tax Act: High Court of Delhi
The power invested in this Court under Section 260A of the Income Tax Act is to adjudicate upon the substantial questions of law. The court is not inclined to admit questions of law, which are no longer res integra as per the Court. This was held in COMMISSIONER OF INCOME TAX, Delhi V. HCL COMNET SYSTEMS &amp; SERVICES LTD[ITA 81/2021] in the High Court of Delhi by division bench consisting of JUSTICE RAJIV SHAKDHER and JUSTICE TALWANT SINGH. Facts of the case are that an appeal against the order passed by the Income Tax Appellate Tribunal concerning the assessment year 2010-2011 was  preferred under Section 260A of the Income Tax Act, 1961. The revenue in its appeal suggested six substantial questions to be adjudicated. In respect of sixth substantial question which was, revenue’s contention that the disallowance of loss on account foreign fluctuation should not have been deleted by the Tribunal. The counsel for the revenue referred to, Commissioner of Income-tax, Delhi vs. Woodward Governor India (P.) Ltd, he contented the issue was whether the Tribunal had fulfilled conditions stated under the above mentioned precedent. The court made reference to the Karnataka High Court judgement, with respect to non fulfillment of conditions, in Commissioner of Income-tax, Central Circle vs. Wipro Finance Ltd, wherein it was held that, “The view taken by the Supreme Court in this judgment is to the effect that while even a notional loss can be claimed by way of a business loss and as a deductible item in computing the income of the assessee for the year, as it is a computation on notional basis, it is made dependent on the manner of conduct of the assessee in respect of the earlier assessment period and particularly as to the assessee has been following this uniformly over a period of years and the test being when there was a notional gain as to whether it had been offered for tax.”
11 IN THE HIGH COURT OF DELHI AT NEW DELHI Decision delivered on: 24.03.2021 ITA 81 2021 PR. COMMISSIONER OF INCOME TAX 4 New Delhi Through: Mr. Raghvendra Kishore Singh Sr. Standing Counsel for Revenue. HCL COMNET SYSTEMS & SERVICES LTD ..... Respondent Through: Mr. Ajay Vohra Sr. Advocate. with Mr. Aditya Vohra Adv. HON BLE MR. JUSTICE RAJIV SHAKDHER HON BLE MR. JUSTICE TALWANT SINGH RAJIV SHAKDHER J. rendered in ITA 4808 Del 2016 concerning the assessment year 2010 2011. The appeal is preferred under Section 260A of the Income Tax Act 1961Whether in the facts and circumstances of the case and in law ITAT misinterpreted the scope of Section 14A(1) of the Act and errored in holding that Section 14(A) can only be invoked if the Respondent has earned exempted income during the assessment year ignoring the fact that Section 14A doesn’t lay down such requirement and the only precondition for invoking Section 14A is that there ITA 81 2021 Pg. must be “expenditure incurred in relation to such income which does not form part of the total income under this Act” b) Whether in the facts and circumstances of the case and in law ITAT errored in interpreting the Circular No. 5 of 2014 of the CBDT which clarifies the true scope and meaning of Section 14A of the Act c) Whether in the facts and circumstances of the case and in law ITAT failed to appreciate that the AO having regard to the accounts of the Respondent was not justified with the correctness of such claim of the Respondent in respect of such expenditure in relation to income which does not form part of the total income under this Act d) Whether in the facts and circumstances of the case and in law ITA T errored in deciding upon the true nature of the license fee paid to the Department of telecommunication by the assessee which clearly established that the expenditure was a capital expenditure and wrongly relied upon the decision in CIT V Bharti Hexacom Limited 221 Taxman 323(Delhi) e) Whether in the facts and circumstances of the case and in law ITAT errored in holding that the exemption under section 10A of the Act should not be computed after telecommunication expenses and currency expenditure from the export turnover Whether in the facts and circumstances of the case and in the disallowance of law ITAT erred loss on account of unrealized foreign exchange Rs.15 97 25 873 ignoring the fact that this is a notional loss and not allowable to be set off against the taxable income in view of the CBDT’s instruction no. 3 of 2010 dated 23.03.2010 ” in deleting Insofar as the first three questions of law i.e.(b) andas suggested by the revenue are concerned Mr. Raghvendra Kishore Singh who appears for the revenue fairly submits that they are ITA 81 2021 Pg. covered by the judgement of the coordinate Bench of this Court rendered in Joint InvestmentsLtd. vs. Commissioner of Income tax 372 ITR 694above as suggested by the revenue is concerned once again Mr. Singh submits that the same is covered by the judgement of the coordinate Bench of this Court in Commissioner of Income tax vs. Bharti Hexacom Ltd. 221 Taxman 323above as suggested by the revenue is concerned the same according to Mr. Singh is covered by the judgement of the Supreme Court rendered in Commissioner of Income tax Central III vs. HCL Technologies Ltd. 404 ITR 719above is concerned as would be evident upon a perusal of the question of law suggested by the revenue it appears to be the revenue’s contention that the disallowance of loss on account foreign fluctuation should not have been deleted by the Tribunal in view of CBDT’s instruction no. 10 dated 23.03.2010. Besides this Mr. Singh submits that although the principle enunciated by the Supreme Court in Commissioner of Income tax ITA 81 2021 Pg. Delhi vs. Woodward Governor India Ltd. 312 ITR 254 SC) would apply what ought to have been considered by the authorities below was whether or not the six conditions adverted to in the said judgement were in fact fulfilled. In support of this view Mr. Singh has relied upon the judgement of the Division Bench of the Karnataka High Court in Commissioner of Income tax Central Circle vs. Wipro Finance Ltd. 2013] 351 ITR 153Whether the same system is followed by the assessee from the very beginning and if there was a change in the system whether the change was bona fide iv) Whether the assessee has been consistent and definite in making entries in the account books in respect of losses and 9. Mr. Ajay Vohra learned senior counsel who appears on advance notice on behalf of the assessee emphatically states that all the conditions stipulated in Woodward Governor IndiaLtd. by the Supreme Court stand fulfilled. In support of his contention Mr. Vohra has drawn our attention to the relevant paragraphs of the order passed by the Commissioner of Income Tax Appeals). In particular he has drawn our attention to the contentions raised by the assessee before the CIT(A) concerning this issue and the discussion qua the same by the CIT(A). 9.2 Mr. Vohra goes on to say that the Tribunal has noticed the findings of fact returned by the CIT(A) and thereafter concluded that both on principle and on facts the judgment of the Supreme Court rendered in Woodward ITA 81 2021 Pg. Governor IndiaLtd.would apply. 10. Having heard the counsel for the parties and perused the record we find that the assessing officer has raised no concern as to the non fulfilment of the conditions stipulated in the judgment of the Supreme Court rendered in Woodward Governor IndiaLtd.or the Tribunal. The record shows that the CIT(A) after perusing the record and hearing the contentions raised before him has made the following “(i) The additional liability arising on account of fluctuation in the rate of exchange in respect of loans taken for revenue purposes was allowable as deduction u s 37(1) in the year of fluctuation in the rate of exchange and not in the year of repayment of such loans and a) The term "expenditure" in s.37 covers an amount which is a "loss" even though the said amount has not gone out from the pocket of the assessee. The "loss" suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure u s 37(1) b) Profits and gains are required to be computed in accordance with commercial principles and accounting standardsc) Accounts and the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the AO comes to the conclusion for reasons to be given that the system does not reflect true and correct profits d) The fact that the department taxed the gains on fluctuation on the basis of accrual in appellant s own case for AY 2009 10 ITA 81 2021 Pg. while disallowing the loss is important shall amount to the double standards adopted by the Department e) U s 43Athe change in the rate of exchange subsequent to the acquisition of asset triggers the adjustment in the actual cost of the assets. Actual payment of the liability as a consequence of the exchange variation is not required. The amendment of s.43A by the FA 2002 w.e.f. 1.4.2003 is not Note: The judgement of the ITAT Special Bench in ONGC vs. ITO 83 ITD 151 has been approved by the Hon. Supreme Court in the case of CIT vs Woodward Governor India Pvt Ltd 312 ITR 254. Respectfully following the order of the Hon. Supreme Court in 312 ITR 254 the decided in favour of the appellant. The AO is directed to allow the consequential relief” 10.2. We may also add that in the appeal filed before us no such ground has been taken as is articulated across the bar by Mr. Singh. 10.3. What is important is that in the AY 2009 2010 on account of fluctuation in the currency the gain which accrued to the assessee was concededly offered to tax. As a matter of fact the judgment of the Karnataka High Court relied upon by Mr. Singh uses this indicia almost as a litmus test to ascertain as to whether conditions stipulated in Woodward Governor India P. Ltd.stand fulfilled. For the sake of convenience the relevant observations made by the Karnataka High Court in Wipro Finance Ltd.are extracted hereafter: “4. The view taken by the Supreme Court in this judgment is to the effect that while even a notional loss can be claimed by way of a business loss and as a deductible item in computing the income of the assessee for the year as it is a computation on notional basis it is made dependent on the manner of conduct of the assessee in respect of the earlier assessment period and particularly as to the assessee has been following this uniformly over a period of years and the test being when there was a notional gain as to whether it had been offered for tax ITA 81 2021 Pg. etc. The Supreme Court took the view that such claim can be entertained subject to fulfillment of the following six conditions: i) whether the system of accounting followed by the assessee is the mercantile system which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due immediately it becomes due and before it is actually received ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system whether the change was bona fide iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it iv) whether the assessee has been consistent and definite in making entries in the account books in respect of losses and gains v) whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation.” 11. Given these circumstances we have to remind ourselves that the power invested in this Court under Section 260A of the Act is to adjudicate upon the substantial question(s) of law. The revenue having not laid an edifice concerning the purported non fulfilment of any of the conditions stipulated by the Supreme Court in Woodward Governor India P. Ltd. supra) cannot for the first time without even taking a ground in the instant appeal argue before us that the loss which accrued to the assessee on account of the foreign currency fluctuation cannot be claimed by it as a ITA 81 2021 Pg. business loss. 11.1. Therefore for the reasons stated hereinabove we are not inclined to admit the question of law set out either in clause or any of the other clauses i.e. to toare no longer res integra insofar as this Court is concerned. 12. Given the aforesaid position we are not inclined to entertain the appeal. The appeal is accordingly dismissed. RAJIV SHAKDHER J MARCH 24 2021 pmc TALWANT SINGH J Click here to check corrigendum if any ITA 81 2021 Pg. 