Court denies deductions for notional losses on forward exchange contracts, rules in favor of Revenue

The court ruled against the assessee, a nationalized bank, in a case concerning deductions for notional losses on unsettled forward exchange contracts for the assessment years 1968-69 and 1969-70. The court held that only actual losses, not anticipated ones, are deductible. The Tribunal's decisions allowing the deductions were deemed legally untenable. Consequently, the court answered both issues in the negative, denying the deductions and awarding costs to the Revenue.

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Issues Involved:
1. Deduction of Rs. 9,20,125 as provision against profit on exchange for the assessment year 1968-69.
2. Deduction of Rs. 4,32,152 as provision for anticipated loss on outstanding forward exchange contracts for the assessment year 1969-70.

Summary:

Issue 1: Deduction of Rs. 9,20,125 as Provision Against Profit on Exchange for the Assessment Year 1968-69
The assessee, a nationalized bank, filed its return for the assessment year 1968-69, which was completed on March 17, 1972. The ITO reassessed the income based on an audit note and included Rs. 9,20,125 shown by the assessee as provision against profit on exchange. The AAC upheld the reassessment u/s 147(b) but allowed the deduction on merits, which the Tribunal confirmed. The Tribunal's decision on the applicability of s. 147(b) became final as the assessee did not contest it further. The court examined whether the assessee is entitled to the deduction of Rs. 9,20,125 as a provision against profit on exchange.

The court noted that the assessee estimated the loss on outstanding forward exchange contracts based on the exchange rates as on the closing date. The ITO rejected the claim, stating it was an anticipated loss, not an actual one. The AAC and Tribunal treated the outstanding contracts as stock-in-trade, valuing them at market value to determine true profits. However, the court held that the deduction claimed was for a notional loss, not an actual one, as the contracts were unsettled. The court cited precedents emphasizing that only actual losses can be claimed, not anticipated ones. Therefore, the court concluded that the Tribunal's view was not legally tenable and answered the question in the negative, against the assessee.

Issue 2: Deduction of Rs. 4,32,152 as Provision for Anticipated Loss on Outstanding Forward Exchange Contracts for the Assessment Year 1969-70
The facts and legal principles applied for the assessment year 1968-69 were substantially the same for the assessment year 1969-70. The assessee claimed a deduction of Rs. 4,32,152 as a provision for anticipated loss on outstanding forward exchange contracts. The court reiterated that the deduction was for a notional loss, not an actual one, as the contracts were unsettled. The court emphasized that only actual losses can be claimed, not anticipated ones, and cited relevant case law to support this view. Consequently, the court answered the question in the negative, against the assessee.

Conclusion:
The court concluded that the assessee could not claim deductions for notional losses on unsettled forward exchange contracts for both assessment years 1968-69 and 1969-70. The questions referred were answered in the negative, against the assessee, and costs were awarded to the Revenue.

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