1990 (2) TMI 43 - HC - Income Tax

Notional gains on unsettled foreign exchange forward contracts taxable only on actual settlement for relevant assessment years

HC held that the estimated profit booked on unsettled forward exchange contracts, computed with reference to prevailing exchange rates on the last day of ... Estimation of profit on unsettled forward exchange contracts - Whether, the provision made towards estimated profit on exchange for the assessment year 1972-73 and for the assessment year 1973-74 is taxable? - HELD THAT:- The amounts in these references were only estimated anticipated income arrived at on the basis of the rates of exchange which prevailed, presumably on the last day of the accounting year, without an actual settlement of the forward contracts in foreign currencies having been brought about and in that sense, the amounts in question represented merely notional profits and could not have been subjected to tax treatment in the hands of the assessee. We are unable to accept the reasoning of the Tribunal that the events in the accounting year have to be taken note of in determining the profit or loss in each year and that the changes that may be brought about on a settlement of the forward contracts in foreign exchange would not, in any manner affect the assessability of the amounts to, tax. We are also unable to accept the contention of learned counsel for the Revenue that the amounts in question are assessable, based on the reasoning of the Tribunal. We, therefore, answer the common question referred to us in the negative and in favour of the assessee, with costs to the assessee. Issues Involved:The judgment involves the tax case references u/s 256(1) of the Income-tax Act, 1961 regarding the taxability of provision made towards estimated profit on exchange for the assessment years 1972-73 and 1973-74.Assessment Year 1972-73:The assessee, a nationalized bank, estimated profit on unsettled forward exchange contracts. The Income-tax Officer taxed these amounts, which the Appellate Assistant Commissioner and Tribunal upheld. The assessee argued that these were provisions, not actual profits. Citing precedents, the assessee contended that notional profit cannot be taxed. The High Court agreed, stating that estimated profits were not actual and could not be taxed.Assessment Year 1973-74:Similar to the previous year, the assessee estimated profits on unsettled contracts. The Income-tax Officer taxed these amounts, upheld by the Appellate Assistant Commissioner and Tribunal. The assessee argued that these were provisions, not actual profits. Citing precedents, the assessee contended that notional profit cannot be taxed. The High Court agreed, stating that estimated profits were not actual and could not be taxed.Conclusion:The High Court held that the estimated profits made by the assessee on unsettled forward exchange contracts were not actual profits and could not be taxed. Citing precedents, the court emphasized that notional profits cannot be subjected to tax treatment. The court rejected the Revenue's argument and ruled in favor of the assessee, stating that the amounts represented notional profits and were not assessable for tax purposes.