Losses on forward foreign exchange contracts maturing after year-end are deductible when measured at the balance-sheet date

ITAT, MUMBAI held that losses on forward foreign exchange contracts maturing after year-end are allowable when measured at the balance-sheet date, because a binding obligation accrues on entering the contract and the liability is crystallised when determinable with reasonable certainty. The tribunal accepted the assessee's consistent accounting treatment, applied AS-11 principles on multi-period exchange differences, and treated forward contracts as akin to stock-in-trade for timing of taxation. Consequently the assessee's claim was allowed; appeals by the revenue were partly allowed for statistical purposes.

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Issues Involved:
1. Taxation of income from securities and debentures.
2. Disallowance of broken period interest on securities.
3. Deferred guarantee commission.
4. Interest attributable to investments in shares.
5. Loss on forward exchange transactions.

Detailed Analysis:

1. Taxation of Income from Securities and Debentures:
The primary issue was whether the income arising from securities and debentures should be taxed on a due basis or on a day-to-day accrual basis. The assessee recognized income from interest on securities on a day-to-day basis in its books but claimed that interest not due for payment during the previous year should not be included as income. The Assessing Officer (AO) disagreed, stating that income accrues as and when the right to receive it becomes vested. The CIT(A) allowed the assessee's appeal, relying on the Karnataka High Court's decision in Canara Bank and the ITAT Jaipur Bench's decision in State Bank of Bikaner and Jaipur, which held that interest on government securities does not accrue from day to day but only on fixed dates. The Tribunal upheld the CIT(A)'s decision, noting that the issue was covered by precedents in the assessee's own case for previous years.

2. Disallowance of Broken Period Interest on Securities:
The AO disallowed the broken period interest on securities lying in stock-in-trade, treating it as part of the capital cost of the asset. The CIT(A) allowed the assessee's appeal, distinguishing the facts from the Vijay Bank case and aligning with the American Express International Banking Corporation case. The Tribunal upheld the CIT(A)'s decision, noting that the securities were held as trading assets and the profit on their sale was taxed as business profit, not capital gain.

3. Deferred Guarantee Commission:
The AO treated the entire guarantee commission as income in the year the guarantee was given, while the assessee spread it over the period of the guarantee. The CIT(A) allowed the assessee's appeal, relying on the Supreme Court's decision in Madras Industrial Investment Corporation Ltd. and the Calcutta High Court's decision in Bank of Tokyo Ltd., which supported spreading the commission over the guarantee period. The Tribunal restored the matter to the AO to verify if the commission was refundable on premature revocation of the guarantee, which would determine whether it should be spread over the period or taxed in the year of the guarantee.

4. Interest Attributable to Investments in Shares:
The AO disallowed proportionate interest on borrowed funds used for investments in shares, as the dividend income was exempt from tax. The CIT(A) allowed the assessee's appeal, noting that the investment was made from non-interest-bearing funds. The Tribunal restored the issue to the AO for reconsideration in light of the Special Bench decision in Daga Capital Management, which held that section 14A and Rule 8D are retrospective.

5. Loss on Forward Exchange Transactions:
The AO disallowed the loss on revaluation of unmatured forward foreign exchange contracts, treating it as notional. The CIT(A) allowed the assessee's appeal, relying on the ITAT Mumbai's decision in Deutsche Bank A.G., which held that such losses are not notional and should be considered for tax purposes. The Tribunal upheld the CIT(A)'s decision, noting that a binding obligation accrued against the assessee on entering the contracts, and the consistent method of accounting followed by the assessee could not be disregarded. The Tribunal also emphasized that the anticipated losses on account of existing obligations, determinable with reasonable accuracy, should be accounted for as per prudent commercial accounting principles and AS-11.

Conclusion:
The Tribunal's judgment addressed each issue comprehensively, considering relevant precedents and accounting principles. The appeals filed by the revenue were partly allowed for statistical purposes, with some matters restored to the AO for further verification.

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