TaxTMI 
TaxTMI 
2011 (6) TMI 812
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....gaged in the business of banking. The assessee did not offer to tax interest income of Rs. 84,71,62,630/- on the ground that interest income received on investments was alone added to the total income. Income accrued on the investment on the balance sheet date which was not due nor received was not offered to tax. The printed balance sheet of the assessee, as per schedule XVII-6 the principle accounting policies in case of revenue recognition was given as under: "Income Recognition: Income by way of interest and discount on performing assets has been recognized on accrual basis and on non-performing assets the same is accrued on the basis of realization. Income on Govt. securities, debentures and other fixed income securities has been recognized as accrual basis." As per the tax audit report, method of accounting followed was given in Annexure III which was as follows: "Method of Accounting: Method of accounting employed by the bank is generally Mercantile except item No.6.1 and 6.3 mentioned in Schedule XVII to Final Accounts for which the method of accounting is on cash basis." 4. The Assessing Officer for the reasons discussed on an iden....
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....sment years 1992- 93, 1993-94, 1995-96 and 1996-97. In A.Y. 1996-97, the Tribunal has allowed the assessee's appeal, inter alia, observing as under:- "We have carefully perused the order of the Tribunal cited above. In that case also, the issue was identical, namely, whether in the case of Government securities, interest accrues on day to day basis or only on the coupon dates. The Tribunal held that interest accrues only on the coupon dates and not on day to day basis. In coming to this conclusion, the Tribunal placed reliance on the judgment of the Lahore High court in Haveli Shah Sardarilal v CIT,Punjab, 4 ITR 297, the Full Bench of the Patna High Court in Ranjit Prasad Singh v CIT, Bihar & Orissa (4 ITC 264) and the Karnataka High Court judgment in Addl CIT, Mysore v. The Vijay Bank Ltd., Mangalore (1976) Tax LR 524. It was also noticed by the Tribunal that the contention advanced on behalf of the revenue before Tribunal in that case was totally contradictory to the contention advanced by the revenue before the Karnataka High court in the case of Vijay Bank(supra) before the Tribunal. The department had placed reliance on the judgement of the Hon'ble Bombay High court i....
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....ide the issue in favour of the assessee. This ground is allowed." 7. Respectfully following the aforesaid decision of the Tribunal we direct that the addition made be deleted. Ground No.1 is accordingly allowed. 8. Ground No.2 was not pressed and the same is dismissed as not pressed. 9. Ground No.3 raised by the assessee reads as follows: "On the facts and in the circumstances of the case and in law the learned CIT(A) erred in confirming the disallowance of loss amounting to Rs. 8,74,029/- on unmatured foreign exchange contracts and ignoring the fact that the appellant maintains the accounts on mercantile system, where liability already accrued though discharged at a future date is a proper deduction regard being had to the accepted principle of commercial practice and accountancy. Without prejudice, the CIT(A) further erred in not accepting the assessee's contention that Rs. 1,70,90,159 being the profit on unmatured forward contracts be reduced from the taxable income by the same principle on which loss on forward exchange contract is disallowed." 10. The assessee had booked a net profit of Rs. 1,70,90,159/- as forward profit as per the chart filed al....
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....ract falls within the same financial year then the difference between the exchange rate as prevailing on the balance sheet date and contracted rate is an allowable deduction. The moot point for consideration is whether keeping in view the nature of contract, can it be said that a liability accrued on 31st March in respect of unmatured forward foreign exchange contract on account of fluctuation in rate of foreign currency or not. Therefore, it is necessary to first examine the nature of contract entered into by the assessee. Forward Foreign exchange contract means an agreement to exchange different currencies at a forward rate. Forward rate is a specified rate for exchange of currency at a specified date. The assessee enters into forward contract with clients to buy or sell foreign exchange at an agreed price at a future date in order to hedge against the possible future financial loss on account of wide fluctuation in the rate of foreign currency. Thus, firstly, forward foreign exchange contract creates a continuing binding obligation on the date of contract against the assessee to fulfill the same on the date of maturity and secondly, it is in the nature of hedging contract becaus....
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....the same basis of valuation at the year end which had changed during the year pursuant to the mandatory Reserve Bank of India (RBI) guidelines issued in October 2000. She ought to have appreciating the fact that the change in categorization and valuation of securities was bonafide, the valuation policy cannot be applied retrospectively as it is not mandated by the guidelines as well as by the accepted accounting principles." 11. As per the Tax Audit Report in point 11 it was mentioned by the Auditor that Reserve Bank of India vide their statement on Mid-term Review of Monetary and Credit policy dated 10th October, 2001 advised certain modifications in classification and valuation of investment portfolio of the Bank. The Bank has accordingly complied with these guidelines (Refer Para 3.2 of Schedule XVII to Final Accounts). Pursuant to this change, the profit for the year was lower by Rs. 82,90,204/-. Vide order sheet entry dated 26.12.2004 the AO called upon the Assessee to explain and justify the change method of valuation of investment portfolio which has lead to declaration of profits lower by Rs. 82,90,204/-. Vide letter dated 06.01.2004 the assessee submitted as un....
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.... Regulation Act and valuing very same investments 'at cost' or 'market value' whichever was lower for income-tax purposes. Method followed consistently was valid and could not be rejected. In the present case the change in accounting policy is a bona fide change necessitated due to change in the RBI guidelines that the appellant has to mandatorily follow and also which the Appellant has continued to follow in the subsequent year. The AO is, therefore, directed to allow the revaluation of securities. However, for the computation of depreciation allowable, the AO is also directed to revalue the securities in the same manner in the beginning of the year also. In the result, the appeal is partly allowed." 14. Aggrieved by the direction given by the CIT(A) to revalue the securities in the beginning of the year also, the assessee has raised ground No.4 before the Tribunal. Aggrieved by the order of the CIT(A) upholding changed method of valuation of investment the revenue has raised Ground No.5.1 to 5.3 in its appeal and these grounds read as follows: "5.1 The CIT(A) erred in holding that the sum of Rs. 82,90,204/- being the depreciation on revaluation of securities due to th....
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....stock is not required to be valued when the assessee has been permitted to change the method of valuation of closing stock as the value of closing stock will become the value of opening stock of next year." 16. Thus according to the ld. Counsel for the assessee the method of accounting followed by the assessee has to be accepted. The change in the method of accounting became necessary because of the RBI guidelines and therefore it cannot be said that the change in the method of valuation was not bonafide. The direction to change the value of opening stock will result in distortion of profits and no real effect being given to the changed method of valuation. With regard to the provisions of section 145A on which the ld. D.R placed his reliance, the ld. Counsel for the assessee submitted that section 145A is a statutory compulsion with regard to valuation of inventory which would necessarily include the opening stock also. According to the ld. Counsel for the assessee as far as the case of the assessee is concerned it falls within the ambit of section 145. In terms of section 145A the method of accounting and the change in the method of accounting regularly followed can be allowed....
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....method of accounting followed by an Assesse, especially when such change is necessitated by reason of the policy decision of the Regulator, Reserve Bank of India. We are therefore, of the view that the direction of the CIT(A) to revalue the security as at the beginning of the year should be deleted and we direct accordingly. 18. As far as grievance projected by the revenue in its grounds of appeal is concerned we are of the view that the changed method of accounting is baona fide and is necessitated by the Banks Regulator, Reserve Bank of India. We, therefore, confirm the order of the CIT(A) in so far as it relates to accepting the change in the valuation of securities by different method( valuation on the balance sheet date). Thus Ground No.5.1 to 5.3 of the revenue is dismissed while Ground No.4 of the assessee is allowed. 19. In the result, the appeal by the assessee is partly allowed. ITA NO.4535/MUM/05:REVENUE'S APPEAL: 20. Ground No.1 to 3.2 of the revenue's grounds of appeal read as follows: "1. The CIT(A)'s order is opposed to law and facts of the case in relation to the grounds hereunder. 2.1 The CIT(A) erred in holding that no disallowance u/....
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....e vide letter dated 19.12.2003 submitted that "The bank has in the previous accounting year changed its method of accounting for broken period interest in that the same was included in the acquisition of cost of securities the broken period interest was debited to the P&L A/c. in accordance with the directions from the Reserve Bank of India addressed to the Bank in this behalf. However, the AO in the previous year has disallowed the change in the method of accounting and added back a sum of Rs. 14.92 crores to the income of our clients in the previous year which needs to be deducted from current year's income as the same as already formed a part of taxable income of the current year. In the current year broken period interest on the securities outstanding as at the end of previous year amount of Rs. 11,67,04,653/-. It is our client's contention that the same cannot be considered as capital cost as the entire portfolios of securities owned by our client is in the current category and the change in the method of accounting of broken period interest was a bona fide change manded by RBI." 24. The AO however did not agree with the submissions of the Assessee. He held that th....