TaxTMI 
TaxTMI 
2019 (4) TMI 1228
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....llowing the deduction of "Unrealized Mark to Market Gain on open forward contracts" in the computation of Income treating it as erroneous and prejudicial to the interest of the revenue. 2. The learned CIT erred in law, on facts and in circumstances of the case in wrongly concluding that the Assessing Officer "under assessed" income in allowing the deduction of unrealized Mark to Market Gain on open forward contracts in the computation of Income. 3. The learned CIT erred in law, on facts and in circumstances of the case in not appreciating the fact that the appellant has taken the consistent position of taxing the marked to market income on realized basis which is accepted by the Income tax Department all the previous years. 4. The learned CIT erred in law, on facts and in circumstances of the case in not appreciating that where two views are possible and the assessing officer has taken one of the possible view the provision of section 263 of the Income Tax Act cannot be invoked . 5. The learned CIT erred in law, on facts and in circumstances of the case in passing the order under section 263 of the Act merely upon the change in opinion on the sam....
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....he assessee in reply to aforesaid notice issued by learned CIT u/s 263 of the 1961 Act submitted before the Ld. CIT as under:- " 5 The assessee has submitted that the AO made necessary inquiries for gain or loss on foreign exchange fluctuation. In this context kindly refer to AO letter dated November 13, 2014 and our letter dated January 8, 2015 containing the submission on gain or loss foreign exchange fluctuation wherein it was submitted that exchange gain of Rs. 25.20 crores on derivatives which was unrealized has been excluded while computing the taxable income and the same shall be offered to tax on realized basis as per consistent stand taken by company and accepted by department which establishes the fact of application of mind by the AO. In the light of the above, it can be deduced with certainty that the AO has applied his mind and adopted a view (and correctly so) that unrealized mark to market gain must be allowed as deduction in normal computation. It should be noted that, without prejudice to the above, the company reduces the unrealized mark to market gain and disallows mark to market loss on the open forward contracts and the same is offere....
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....that in view of Accounting Standard AS-30 issued by Institute of Chartered Accountant of India(ICAI) and keeping in view provisions of Section 145 of the 1961 Act , the assessee should have offered for taxation income from mark to market gain or loss on open forward contracts in foreign exchange on the Balance Sheet date in the year in which the same has accrued. It was held by learned CIT that the contentions of the assessee that the AO had seen it and allowed the deduction of mark to market gains on foreign exchange open forward contract as at the date of Balance Sheet does not hold good, and hence the order of the AO is erroneous and prejudicial to the interest of Revenue. The learned CIT directed the AO to enhance the assessment accordingly, vide revisionary order dated 21.03.2018 passed by learned CIT u/s 263 of the 1961 Act. 4. Being aggrieved by revisionary order dated 21.03.2018 passed by learned CIT u/s 263 of the 1961 Act , the assessee has filed an first appeal with tribunal. The Ld. Counsel for the assessee has at the outset submitted that the assessee is provider of I.T. services, business solutions and an I.T. consultancy organisation. It was explained that the ass....
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....ns on open forward contracts in foreign exchange be brought to tax in this year itself although these gains were unrealised gains and have already been offered for tax in subsequent years on being realised. It was submitted that the assessee has offered for tax gains/losses on these open forward contracts in foreign exchange on settlement on actual realisation basis in the succeeding year. It was claimed that Revenue has not suffered any loss as in any case , Revenue got the due taxes albeit in the subsequent year and hence it was claimed that no prejudice was caused to Revenue although there is deferment of payment of taxes to subsequent years. Our attention was drawn to page no. 113 of the paper book wherein the amount of unrealised mark to market losses on open forward contract in foreign exchange to the tune of Rs. 2.59 crores were added back by the assessee for the year ending 31.03.2010 (AY 2010-11) to compute income chargeable to tax. Our attention was also drawn to page no. 129 of the paper book wherein unrealised mark to market losses on open forward contract in foreign exchange to the tune of Rs. 150.07 crores were added back to compute income chargeable to tax for AY 201....
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....ngs and this method of computing income by excluding unrealised gains/losses on open forward contract in foreign exchange as on the date of Balance Sheet from the income chargeable to income-tax has been consistently followed and accepted by the revenue. It is submitted that from AY 2005-06 to 2010-11 and also in AY 2012-13, this method of computing income is accepted by Revenue and it is only in AY 2011-12 , that revisionary powers u/s 263 are invoked by learned CIT to unsettle the settled issue which was otherwise accepted by Revenue consistently over years. It was also submitted that this method of accounting followed by assessee while computing income chargeable to tax has judicial backing. The assessee relied upon decision of Hon'ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. (2009) 312 ITR 254(SC). The assessee also placed reliance on the decision of ITAT, Mumbai in the case of Addl. CIT v. C.J. Exporters (2007) 50 CCH 0274(Mum-trib.). The assessee also relied upon the decision of ITAT, Mumbai in the case of Reliance Industries Ltd. v. CIT in ITA no. 7223/Mum/2011, order dated 20.11.2013. The assessee also placed reliance on the decision of ITAT,....
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....orts Ltd. (2011) 198 taxman 324(Del. HC) and it was submitted that rule of consistently should be followed unless there are additional facts or fresh material coming into possession of the AO warranting taking a different view . It was submitted that the AO has examined the matter and then followed the earlier year in allowing deduction for mark to market unrealised gains on open forward contracts in foreign exchange. It was submitted that neither such losses has been claimed as deduction nor gain has been offered to taxation in the earlier years as well as in the subsequent years which was been accepted by the revenue and it is only for this year unrealised gains on open forward contract in foreign exchange is sought to be tax by learned CIT by invoking revisionary powers u/s 263 of the 1961 Act. The reliance was also placed on the decision of Hon'ble Supreme Court in the case of CIT v. Max India Ltd. (2007) 295 ITR 282(SC) and it was submitted that when two views are possible and the AO has adopted one of the possible and plausible view, learned CIT in exercise of its revisionary powers u/s 263 cannot substitute its view in place of the view adopted by the AO. The reliance was al....
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....e of Balance Sheet while preparing audited financial statements under the Companies Act in Profit and Loss Account under the Companies Act, 1956. However, the assessee while computing total income chargeable to income-tax under the provisions of the 1961 Act had reduced unrealized mark to market gain on open forward contracts in foreign exchange of Rs. 25.20 crores as at Balance Sheet date. The assessee had claimed that these forward contracts in foreign exchange were entered into by the assessee to hedge against losses owing to fluctuation in foreign exchange rates with respect to export receivables under export contracts. The Revenue has not controverted this position even before us. The assessee while filing return of income has duly made disclosure of the adjustment by way of deduction being made to its income chargeable to income-tax of unrealised gains of Rs. 25.20 crores in open forward contracts in foreign exchange on mark to market basis. It is also matter of record as we have seen in preceding para's of this order that during assessment proceedings , the AO did make an inquiry as to these unrealised gains arising from open forward contracts in foreign exchange on mark to ....
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....25.20 crores. The assessee has claimed that effect of this policy followed by it is revenue neutral as Revenue did not lose any taxes, because in any case such gains were offered to tax on realisation basis in succeeding year when the forwards contracts in foreign exchange were settled and gains are realised or losses were booked, which were duly considered while computing income chargeable to tax of the year of settlement of forward contracts in foreign exchange . Thus, it is claimed that there is only timing difference in payment of taxes and no prejudice is caused to Revenue. The learned CIT had invoked revisionary powers u/s 263 of the 1961 Act to hold that the unrealised gains on open forward contracts of Rs. 25.20 crores in foreign exchange as on the date of Balance Sheet is to be brought to tax in the impugned assessment year itself. The learned CIT has held that the assessment order passed by the AO as erroneous so far as is prejudicial to the interest of revenue keeping in view Accounting Standard AS 30 and provisions of Section 145 of the 1961 Act. The learned counsel for the assessee has contested that AS 30 has no application for the impugned assessment year as the s....
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....e Contracts. 4. Apart from the above, the Council at its 360th meeting held on November 7-9, 2016, noted that with implementation of Indian Accounting Standards (Ind AS) in India, many companies will be preparing their financial statements as per Ind AS, which includes Indian Accounting Standards on financial instruments which are based on current IFRS/ IAS issued by International Accounting Standards Board (IASB). 5. In view of the above, the Council noted that there may not be any users of (AS) 30, Financial Instruments: Recognition and Measurement, (AS) 31, Financial Instruments: Presentation and (AS) 32, Financial Instruments: Disclosures, and retaining these Accounting Standards will create confusion. Accordingly, the Council decided to withdraw Accounting Standards (AS) 30, Financial Instruments: Recognition and Measurement, (AS) 31, Financial Instruments: Presentation, (AS) 32, Financial Instruments: Disclosures. An announcement 'Application of (AS) 30, Financial Instruments: Recognition and Measurement' issued by ICAI in March 2011 on status of AS 30, AS 31 and AS 32 also stands withdrawn." Later AS-30 was withdrawn as contended by learned coun....
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....ent on 'Treatment of exchange differences under Accounting Standard (AS) 11 (revised 2003), The Effects of Changes in Foreign Exchange Rates vis-à-vis Schedule VI to the Companies Act, 1956', published in 'The Chartered Accountant' of November 2003. Accordingly, the accounting treatment of exchange differences contained in AS 11 notified as above is applicable and not the requirements of Schedule VI to the Act, in respect of accounting periods commencing on or after 7th December, 2006." The said AS-11 dealt with the effects of changes in foreign exchange rates. The Relevant portion of AS-11 dealing with forward contracts and the manner in which accounting is to be done for fluctuation in foreign exchange as at the date of Balance Sheet with respect to forward contracts in foreign exchange, is reproduced hereunder: "Accounting Standard(AS) 11 The Effect of Changes in Foreign Exchange Rates Scope 1. This Standard should be applied: (a) in accounting for transactions in foreign currencies; and (b) **** 2. This Standard also deals with accounting for foreign currency transactions in the nature of forward exchange ....
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....e of the inception of the forward exchange contract and the forward rate specified in the contract. Exchange difference on a forward exchange contract is the difference between (a) the foreign currency amount of the contract translated at the exchange rate at the reporting date, or the settlement date where the transaction is settled during the reporting period, and (b) the same foreign currency amount translated at the latter of the date of inception of the forward exchange contract and the last reporting date. 38. A gain or loss on a forward exchange contract to which paragraph 36 does not apply should be computed by multiplying the foreign currency amount of the forward exchange contract by the difference between the forward rate available at the reporting date for the remaining maturity of the contract and the contracted forward rate for the forward rate last used to measure a gain or loss on that contract for an earlier period. The gain or loss so computed should be recognised in the statement of profit and loss for the period. The premium or discount on the forward exchange contract is not recognised separately. 39. In recording a forward exchange contract intended f....
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....zed on the reporting date which could be computed with reasonable accuracy and certainty . The decision of ITAT , Mumbai in the case on Inventurus Knowledge Services Private Limited v. ITO reported in (2016) 156 ITD 727(Mum.-trib.) to which one of us being Accountant Member being part of Division Bench, is relevant. The decision of Hon'ble Supreme Court in the case of CIT v. Woodward Governor India Private Limited(supra) had also held that AS-11 is mandatory in nature and gains or losses on reported date are to be included while computing income by holding as under: "17. Having come to the conclusion that valuation is a part of the accounting system and having come to the conclusion that business losses are deductible under section 37(1) on the basis of ordinary principles of commercial accounting and having come to the conclusion that the Central Government has made Accounting Standard-11 mandatory, we are now required to examine the said Accounting Standard ("AS"). 18. AS-11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. AS-11 deals with effects of Exchange Differences. Under para 2, reporting currency is defined ....
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....ny difference, loss or gain, arising on conversion of the said liability at the closing rate, should be recognized in the P&L account for the reporting period. 19. A company imports raw material worth US $ 250,000 on 15-1-2002 when the exchange rate was Rs. 46 per US $. The company records the transaction at that rate. The payment for the imports is made on 15-4- 2002 when the exchange rate is Rs. 49 per US $. However, on the balance sheet date, 31-3-2002, the rate of exchange is Rs. 50 per US $. In such a case, in terms of AS-11, the effect of the exchange difference has to be taken into P&L account. Sundry creditors is a monetary item and hence such item has to be valued at the closing rate, i.e., Rs. 50 at 31-3-2002, irrespective of the payment for the sale subsequently at a lower rate. The difference of Rs. 4 (50-46) per US $ is to be shown as an exchange loss in the P&L account and is not to be adjusted against the cost of raw materials. 20. In the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 this Court has observed as under : "The law may, therefore, now be taken to be well-settled that where profit or loss arises to an assessee....
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....assessee. (2) The Central Government may notify in the Official Gazette from time to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144.]" It is also pertinent to mention that AS-11 as well various judgments including decisions of Hon'ble Supreme Court in the case of Woodward Governor India Private Limited(supra) has consistently held that both gains or losses on account of exchange rate fluctuations on the reporting date is to be accounted for to bring to tax while computing income chargeable to tax and it does not only refer to losses sustained on the reporting date owing to exchange rate fluctuations to be taken into account while computing income chargeable to tax. It is unlike in AS-2 which dealt with valuation of inventories which spea....
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....g income chargeable to tax . The view of the learned counsel for the assessee that consistency has to be followed can also be not accepted in the instant case because principle of res judicata are not applicable to income-tax proceedings and hence decision relied upon by the assessee cannot be accepted in view of incorrect method of accounting followed by assessee in computing income. We are aware otherwise that principle of consistency is to be followed keeping in view decision of Hon'ble Supreme Court in the case of Radhasoami Satsang v. CIT reported in (1992) 193 ITR 321(SC) but peculiar facts of the case has led us to taking the decision in the instant case in favour of Revenue. In our considered view Ld. CIT has rightly invoked her revisionary powers under Section 263 of 1961 Act, and direction were correctly issued by Ld. CIT to AO to bring to tax said income on mark to market basis on the date of balance sheet based on closing rate of foreign exchange on reporting date. The instruction no. 3 of 2010 dated 23.03.2010 holding such mark to market losses as notional loss being contingent in nature which cannot be allowed to be set off against taxable income in our considered ....