TMI Blog2010 (8) TMI 578X X X X Extracts X X X X X X X X Extracts X X X X ..... round is dismissed Regarding addition on account of deferred guarantee commission - The fundamental principle of taxing the income under the mercantile system of accounting is time of its accrual - If the guarantee commission was refundable then it cannot be said that absolute right to the commission had accrued in favour of the assessee at the time of execution of contract for furnishing guarantee by it but if the guarantee commission was not depended upon the period of guarantee and, thus, had accrued in favour of the assessee on the date of execution of contract for furnishing guaratnee then the same has to be taxed in the year in which the guarantee was furnished irrespective of the period to which guarantee remained alive - Appeal is allowed by way of remand Regarding interest attributable to investment, dividends from which is exempt from tax - At the time of hearing, it was brought to the notice of both the parties that the issue is pending before the Hon’ble Bombay High Court in regard to 14A issue and, therefore, the appeal may be adjourned sine die till the disposal of the same by the Hon’ble High Court - Appeal is allowed by way of remand Regarding forward contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of India (FEDAI). The revenue s stand is that in view of the decision of the Hon ble Madras High court in the case of Indian Overseas Bank, 183 ITR 200(Mad), this method of accounting is not correct because the loss is incurred on the date of maturity of the contract and there cannot be any loss prior to such date. The assessee s stand is based on the decision of the Mumbai Tribunal in the case of Deutsche Bank A.G., 86 ITD 431(Mum) and FEDAI guidelines. In the reference order, it is pointed out that the decision in the case of Deutsche Bank A.G. (supra) proceeded on the basis that forward contract constitutes stock-in-trade, and, therefore, same could be valued at the end of the year, which may result into loss. It is further pointed out that in Deutsche Bank (supra) the decision of the Hon ble Madras High court was distinguished on the ground that the Court was concerned with the issue as to whether notional or anticipated loss could be allowed as deduction or not, while the Tribunal was concerned with the valuation of stock-in- trade. The Bench referred the matter, since the assessee, as a banker, only enters into contract to sell/buy the foreign currency at a future date but d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5. ld CIT (A) while partly allowing the assessee s appeals, has deleted the aforementioned disallowances made by the AO for both the assessment years. Being aggrieved with the decision of ld CIT (A), the department is in appeal before the Tribunal for both the assessment years. 6. Ground No.1 similar to both the assessment year is as under:- On the facts and circumstances of the case and in law, the ld CIT (A) has erred in holding that, income arising from securities and on debenture to the assessee is liable to be taxed on due basis and not on the basis of day to day. 7. Facts apropos this issue are that in the books of account, the assessee had recognized income from interest on securities on day to day accrual basis. However, in the return filed, the assessee had claimed that interest, which had not become due for payment during the previous year, should not be included as income. The AO did not agree with assessee s contention. After considering the various figures, he concluded that the assessee had not offered for tax Rs.67,20,565/- being interest accrued but not due. He noted that in earlier years also, the assesse was following same system of accounting but it w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... securities accrues only on fixed days, generally on a six monthly basis twice a year and does not accrue from day to day. Therefore, the owner of securities who is registered on the due dates is entitled to receive the entire six monthly interest, irrespective of the fact whether he held the said securities for the entire earlier six months period or not. The previous holder of the securities who has sold the securities has no right to receive from the disbursing authority any interest from the last due date upto the date of sale. Reliance was placed on the decision of the Hon ble Karnataka High Court in the case of Canara Bank, 195 ITR 66. 9. Ld CIT (A) referred to the decision of the Hon ble Karnataka High court in the case of Canara Bank, (Supra) wherein, it was held that the interest on Government Securities does not accrue before the stipulated date of payment and as such only such interest would be taxable in the assessment year under consideration which has fallen due for payment during the previous year. The SLP filed by the department against the decision of the Hon ble Karnataka High Court in the case of Canara Bank (supra) has been dismissed by the Hon ble Supreme Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s have been considered by the Tribunal in paragraphs 14 to 17 of the order cited above and it was held that these judgements are not applicable to the facts of Union Bank s case. In paragraphs 20 and 21, the Tribunal has also considered the objection of the department that the assessee cannot credit the interest on government securities in the profit loss account on day to day basis but contended that for purposes of income tax only the interest that accrued on the coupon dates can be assessed. The Tribunal noticed the judgement of the Supreme Court in the case of another bank, namely United Commercial Bank, 240 ITR 355. In this case, the Supreme Court has reversed the judgement of the Calcutta High Court, which held that the assessee cannot prepare the computation of its income for income tax purposes in a manner different from the method under which it keeps accounts. Applying this judgment of the Supreme Court, the Tribunal held that Union Bank of India cannot be prevented from urging in the return that the interest on govt. securities accrued only on the specified coupon dates notwithstanding that credit has been taken in the profit loss account for the interest on day to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od interest has not been allowed. Ld CIT D.R. pointed out that in the case of American Express International Banking Corporation, the decision of the Hon ble Supreme Court in the case of Vijay Bank (supra) was distinguished on account of the fact that in the case of American Express International Banking Corporation(supra), the securities were held as trading asset whereas in the case of Vijay Bank (supra), the securities were held as investment/capital asset. Therefore, the basic dispute is regarding the question of fact as to whether the securities are held as trading asset or capital asset. In this regard, he referred to CBDT Circular No.665 of 5.10.1993, wherein, it has been prescribed that the AO shall determine on the facts and circumstances of each case whether the securities constitute stock-in-trade or capital asset taking into account RBI guidelines in this regard from time to time. He referred to the annual report submitted alongwith return of income and pointed out that in the Schedule-8, government securities and other securities have been classified as investment and not as stock-in-trade. He clarified that the AO s observation in this regard for the A.Y. 1994-95 are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessee pointed out that the said classification is for the limited purposes of compliance with the Banking Regulation Act. He pointed out that these very arguments raised by Ld CIT D.R .in A.Y. 1992-93 have duly been considered by ITAT. In this regard, ld Counsel for the assessee placed reliance on the decision of the Hon ble Supreme Court in the case of United Commercial Bank,240 ITR 255 (SC), wherein, the Hon ble Supreme court observed that preparation of balance sheet in accordance with the statutory provisions would not disentitle the assessee in submitting the income tax return on real taxable income in accordance with the method of accounting adopted by the assessee consistently and regularly. He further pointed out that the entire interest received on the due date has been offered to tax and in fact taxed as income and, therefore, the broken period interest paid at the time of purchase had to be allowed as deduction. 19. We have considered the rival submissions and perused the record of the case. The only objection of ld CIT (DR) is that the securities had been classified as investments in Schedule -8 to the balance sheet. However, he has not controverted the findi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Hon ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd v CIT (225 ITR 802) , where while dealing with the issue of allowability of discount on debentures, the Hon ble Court held that the entire discount liability cannot be allowed as a deduction in one year and authorized spread over of the committed obligation to be discharged in later years He also referred to the decision of the Hon ble Calcutta High Court in the case of CIT v. Bank of Tokyo Ltd. (71 Taxman 85), wherein, the Hon ble High Court, inter alia, observed as under:- .. It may or may not fructify into an actual right to receive for the subsequent period of the term of the guarantee as determination of the guarantee is a contingency not ruled out by the agreement. It is only upon certain conditions being fulfilled, viz, the guarantee running the full course or period of the debt guaranteed, that the right to the entirety of the commission can be said to have accrued. 23. Ld CIT D.R.submitted that the bank provides bank guarantee to its customers to cover their liability and against this, charges its commission one time, which may or may not be refundable on revocation of guarantee bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The principle has been succinctly enunciated by the Hon ble Supreme Court in the case of E.D.Sasoon Co. and others (supra), wherein, after considering the observations of Hon ble Justice Mukerji,J in the case of Rogers Pyatt Shellac Co. v Secretary of State for India(1925) 1 ITC 363 at page 371 considered the term accrues, arises and is received and also the observations of Lord Justice Fry quoted by Hon ble Justice Mukerji, J in Colquhoun v Brooks and others decisions, observed as under:- It is clear therefore that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. In the light of above decision, the issue needs to be examined. Ld CIT (DR) has pointed out that the deciding factor would be whether the guarantee commission is refundable or not. If the guarantee commission was refundable then it cannot be said that absolute right to the commission had accrued in fav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. He also pointed out that section 14A has been inserted in the Act, which provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. 28. Ld CIT(A) after considering the assessee s statement showing the position of non interest bearing funds and the amount of investment in shares reproduced at page 16 of his order, observed that in the year of investment, the assessee had sufficient funds available which were interest free funds, which has not been examined by the AO. He, therefore, allowed the assessee s appeal, inter alia, observing that no nexus had been established between the investment in shares and interest bearing funds. 29. Ld CIT D.R.submitted that the Special Bench of ITAT Mumbai in the case of Daga Capital Management, 117 ITD 169 has held that section 14(2) and 14A(3) as well as Rule 8D are retrospective in effect and, therefore, the disallowance is to be computed as per Rule 8D. He, therefore, submitted that the matter may be restored back to the file of the AO. 30. Ld Counsel for the assessee reiterated the submissions made before the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange rate on that date and the contract rate was booked. He pointed out that for transactions which mature during the year, the notional profit or loss gets replaced by actual profit or loss. There is no dispute in this regard and the same has been treated as revenues profits/loss. However, since in the forward contracts, the liability to purchase or sale of foreign exchange arises only on the date of maturity of the contract, therefore, the loss or gain depends upon the rate prevailing on that date and the contracted rate. Thus, he was of the opinion that the date of maturity of the contract is the relevant date for determining the profit or loss, accruing to an assessee, in pursuance to the forward foreign exchange contract. The assessee pointed out that as per RBI s guidelines, the banks were required to revalue unmatured contracts as per rates of exchange notified by Foreign Exchange Dealer s Association of India (FEDAI). Accordingly, on the balance sheet date, based on the exchange rate on that date, provision of profit/loss substitutes the figures booked at the time of contract. Thus, revalued loss/profit was debited to the profit and loss account. Further, this treatment wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le, it is only a contingent liability as the assessee could not foresee the rate of exchange which would prevail on the date of maturity of the contract. The AO referred to the decision of the Hon ble Madras High Court in the case of Indian Overseas Bank(183 ITR 200) , wherein, similar issue was examined and it was held that before settlement of contracts in foreign currency, no actual profit could accrue. It was held that the amounts in question represented notional profits only. Drawing analogy from this decision, the AO disallowed the loss of Rs.12,42,648/- treating the same as notional loss. The AO, however, allowed the amount which was disallowed on this count in earlier years. 34. Before ld CIT (A), it was contended that the assessee was required to revalue its outstanding forward foreign exchange contracts as per the rates of exchange notified by the Foreign Exchange Dealer s Association of India on March 31, every year as per RBI guidelines. The gain or loss on revaluation of the outstanding contracts was booked in the profit and loss account as per the mandatory requirements of RBI guidelines. The assessee relied on the decision of the Hon ble Supreme Court in the case o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forward contract is concerned, the same is not stock-in-trade and, therefore, those decisions are not applicable. He pointed out that there is no material to prove that forward contract to buy or sell foreign currency itself constitutes the stock-in-trade as the assessee does not trade in such forward contract. He, therefore, submitted that the decision which proceeded on the basis of foreign currency being stock-in-trade cannot be relied upon in the present set of facts. He further pointed out that these transactions are not recorded in the books of account and hence, there cannot be any liability from income tax point of view. Thus, there cannot be any question of computing any notional loss for the purposes of income tax. He submitted that the foreign exchange contract cannot be considered on the same footing on which foreign exchange currency being stock-in-trade is considered. In this regard, Ld CIT D.R. referred to the decision of the Hon ble Supreme Court in the case of CIT v. Woodward Governor of India, 312 ITR 254 (SC) and pointed out that in para 18, while considering the applicability of AS-11, the Hon ble Supreme Court noted that exchange difference arising on foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the hands of the assessee and only contract with MMTC was there, therefore, the material contracted to be purchased could not be regarded as assessee s stock-in-trade and hence, could not be valued in the accounts as such. Accordingly, the anticipated loss was disallowed by the Hon ble High Court. Ld CIT D.R.relying on this decision submitted that this covers the issue before us and on same parity of reasoning; the forward foreign exchange contract remaining unsettled at the closing balance sheet date could not be treated as stock-in-trade. 36. Ld CIT D.R. further submitted that the decision in the case of Deutsche Bank A.G. (supra) relied upon by ld CIT (A) is not applicable as the same proceeds on a wrong premise that unsettled forward foreign exchange contracts as on balance sheet date constitute the stock-in-trade. Thus, the very premise is wrong on which the decision was delivered. He submitted that the circular No.664 dated 5.10.93 referred to in the case of Deutsche Bank (supra) talks only about securities and not forward contracts.Therefore, the said circular is not applicable in the present facts. Ld CIT D.R.further referred to the decision of the Hon ble Supreme Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e loan could not be repaid within the stipulated period and on account of devaluation of Rupee, there was increase in loan liability on account of sterling loan. It was held that increase in liability was inextricably connected with assessee s indebtedness and was capital in nature. Thus, in sum and sub stance, the arguments of Ld CIT D.R.are as under:- i) Unsettled forward foreign exchange contracts does not constitute stock-in- trade and, therefore, there is no question of its valuation. ii) No transaction has been recorded in the books of account in regard to unsettled forward foreign exchange contracts and, therefore, there is no question of its valuation being done at the end of the accounting year. iii) The anticipated loss is primarily in the nature of notional liability and, therefore, does not accrue/arise at the end of the previous year and hence, not allowable. iv) The liability accrues or arise only on the date of maturity of the contract and prior to that purely on the basis of estimated liability as per FEDAI guidelines it cannot be allowed under I.T.Act. v) Various decisions relied upon by ld CIT (A) relate to stock-in-trade and not to unsettled forward fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.2 at page 5, the AO observed as under: In case foreign exchange is a current asset, the easier method of accounting would be to book the sale when this is done and the purchase when it is executed. Ld Counsel further referred to page 1 of the assessment order and pointed out that the AO has taken note of the fact that the assessee was following mercantile system of accounting. He further pointed out that the assessment has been completed u/s.143(3) and, thus, it is clear that the assessee s books of account have not been rejected Ld Counsel for the assessee referred to the decision of the Hon ble Supreme Court in the case of Investment Ltd v CIT, 77 ITR 533 (SC), wherein, it has been held at pages 537 to 538 that the method of accounting consistently and regularly followed by the assessee cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping account or of valuation. The method of accounting regularly employed may be discarded only if, in the opinion of the taxing authorities, income of the trade cannot be properly deduced therefrom. He further referred to the decision of the Hon ble Bombay High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in the case of United Commercial Bank vs. CIT (1999) 156 CTR (SC) 380 : (1999) 240 ITR 355 (SC). Therefore, the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the AO comes to the conclusion for reasons to be given that system does not reflect true and correct profits. As stated, there is no finding given by the AO the correctness of the Accounting Standard followed by the assessee(s) in this batch of civil appeals. 40.1 Ld Counsel also relied on the decision of the ITAT Delhi Bench in the case of DCIT v Maruti Udyog Ltd., 99 ITD 666 (Del) and ONGC v DCIT, 83 ITD 151 (Del)(SB), wherein also, it was, inter alia, held that additional liability incurred by the assessee on account of variation in foreign exchange rate was an allowable trading liability where borrowed foreign currency was utilized to meet need of working capital. Ld Counsel for the assessee submitted that there is no distinction between the loan transaction and foreign contract and these decisions are squarely applicable to the present set of facts because the contract had already been entered into in the relevant previous year. (2) T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved as under:- Before concluding, we would like to point out that the assessee s claim for loss arising as a result of fluctuation in foreign exchange rates on the closing day of the year has been disallowed by the AO, inter alia, on the ground that this liability was a contingent liability and the loss was a notional one.The main ingredient of a contingent liability is that it depends upon happening of a certain event. We are of the considered opinion that in the case of the assessee, the event i.e. the change in the value of foreign currency in relation to Indian currency has already taken place in the current year. Therefore, the loss incurred by the assessee is a fait accompli and not a notional one. 40.3 Ld Counsel for the assessee pointed out that in these cases also, the loans were payable at some future date but the liability was allowed on the basis of revaluation of foreign exchange on the date of balance sheet. Ld counsel pointed out that the decision in the case of ONGC (supra) and Maruti Udyog (supra) was affirmed by the Hon ble Delhi High Court in the case of Woodward Governor India (P)Ltd. (supa) and it has been held that the additional liability on accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he addition on account of notional profit on unsettled forward exchange contract had been taxed the loss claimed by the assessee on the same count was held allowable. iv) Deutsche Bank A.G. v DCIT, 86 ITD 431(Mum), wherein also, similar view was taken. v) Shree Capital Services Limited, 121 ITD 498(Kol)(SB), wherein, it has been observed that the derivative derives its value from the underlying assets. In other words, the underlying assets are represented by derivatives. When the underlying asset of any derivative is share or stock for all practical purposes, the treatment given to such derivatives should be similar to stock and securities. Ld Counsel for the assessee, therefore, pointed out that as there is no dispute that foreign currency is bank s stock-in-trade and since in the forward foreign exchange contract, the underlying security is foreign currency, therefore, it should be taken as stock-in-trade. 4) The loss has to be allowed on the matching principle laid down by the Supreme Court in the case of Madras Industrial Investment Corporation. Ld Counsel for the assessee referred to the following hypothetical example which is reproduced herein-below: A the Bank s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vered in the context whether Government securities can be treated as stock-in-trade or not. v) Mashreque bank, 18 SOT 233 (Mum). his case proceeded on wrong assumption that forward foreign exchange contracts constitute stock- in- trade. vi) United Commercial Bank, 240 ITR 355 (SC). The question was whether government securities held by bank are stock- in- trade or not. vii) Brockhoven BV (ITA No.8344/B/90. In this case, the question before the Hon ble Bombay High court was loss on account of difference in foreign exchange rate in respect of amount due by the assessee to its head office, which was held to be allowable. 42. We have considered the rival submissions and perused the record of the case. There is no dispute that if the date of maturity of the contract 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 31 st March in respect of unmatured forward foreign exchange contract on account of fluctuation in rate of foreign currenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n briefly be summed up as under:- i) The income is to be accounted for only when right to receive the same has accrued in favour of a person thereby creating realizable debt in his favour. A legally enforceable right should have accrued in favour of assessee. ii) All the anticipated losses though not ascertainable with precise accuracy, which have accrued on the date of balance sheet, have to be accounted for as per prudent accounting policy. iii) Stock-in-trade is valued at the end of the previous year in accordance with the principle of matching in order to find out true profit/loss accruing to the assessee. iv) The method of accounting consistently followed by the assessee should not be discarded casually without giving strong reasons for the same. Merely because the AO feels that other method of accounting would be better, the assessee s method of accounting cannot be rejected. 43. The assessee s contention is that this contract has to be revalued in accordance with FEDAI guidelines as notified by RBI and, therefore, the assessee had no option but to determine the profit/loss in regard to unmatured forward foreign exchange contracts in accordance with the currency rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Woodward Governor of India Pvt.Ltd. (supra). The revenue s main contention is that liability can arise only when the contract matures. This plea, in our humble opinion, is completely divorce of the principles of commercial accounting and, therefore, cannot be accepted. Both legal obligation and commercial principles have to be taken into consideration for deciding such issues. 44. From the above discussion, it is evident that the anticipated losses on account of existing obligation as on 31 st March, determinable with reasonable accuracy, being in the nature of expenditure/accrued liability, have to be taken into account while preparing financial statements. In this regard we may refer to the observations of Hon ble Supreme Court in the case of Bharat Earth Movers, 245 ITR 428 (SC): . The law is settled; if a business liability has definitely arisen in the accounting year, the deduction should be allowed although the liability may have to be quantified and discharged at a future date. What should be certain is the incurring of the liability. It should also be capable of being estimated with reasonable certainty though the actual quantification may not be possible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT (1959) 37 ITR 1 (SC) : TC 16R.197 wherein this Court has held that the liability on the assessee having been imported, the liability would be an accrued liability and would not convert into a conditional one merely because the liability was to be discharged at a future date. There may be some difficulty in the estimation thereof but that would not convert the accrued liability into a conditional one; it was always open to the tax authorities concerned to arrive at a proper estimate of the liability having regard to all the circumstances of the case. 45.One more aspect which needs to be discussed with reference to commercial accounting principles is with reference to the arguments of Ld CIT D.R. that no transaction has been recorded in the books of account before the date of maturity of contract and, therefore, there is no question of any liability accruing on 31 st March. The elements of financial statement can be broadly divided into following five groups, viz; assets, liabilities, equity, income/gains expenses/loss. These items are recognized in a financial statement if both the following criteria are met: a) Future economic benefit will be there from the said event ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any class of income. 48. The Hon ble Supreme Court in the case of Woodward Governor of India (P) Ltd.,((supra) has observed at page 265 para 17 that the Central Government has made AS-11 mandatory. Therefore, compliance with this has to be made. 49. We find that in AS-11 in paras 9 to 12, it has been observed as under: 9. Exchange differences arising on foreign currency transactions should be recognized as income or as expense in the period in which they arise, except as stated in paras 10 and 11 below. 10. Exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which are carried in terms of historical cost, should be adjusted in the carrying amount of the fixed assets. The carrying amount of such fixed assets should, to the extent not already so adjusted or otherwise accounted for, also be adjusted to account for any increase or decrease in the liability of the enterprise, as expressed in the reporting currency by applying the closing rate, for making payment towards the whole or a part of the cost of the assets or for repayment of the whole or a part of the monies borrowed by the enterprise from any person, direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of commercial accounting requires that in the profit and loss account the value of the stock-in-trade at the beginning and at the end of the year should be entered at cost or market price, whichever is the lower. This is how business profits arising during the year need to be computed. This is one more reason for reading section 37(1) with section 145. For valuing the closing stock at the end of a particular year, the value prevailing on the last date is relevant. This is because profits/loss is embedded in the closing stock.While anticipated loss is taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into account, as no prudent trader would care to show increased profits before actual realization. This is the theory underlying the rule that closings stock is to be valued at cost or market price, whichever is the lower. As profits for income tax purposes are to be computed in accordance with ordinary principles of commercial accounting, unless such principles stand superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of the accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eference to the decision in the case of Indian Overseas Bank (supra), we find that the said decision was rendered with reference to taxing of notional profits and not with reference to anticipated losses, as is the case before us. The department is trying to draw analogy from the said decision but the said decision cannot be applied as the considerations are entirely different in regard to the issue relating to notional profits vis- -vis anticipated losses. Profits are considered only when actual debt is created in favour of assessee but in case of anticipated losses, if an existing binding obligation, though dischargeable at a future date, is determinable with reasonable certainty, then the same is allowable. 53. Ld CIT D.R. has also heavily relied on the decision of the Hon ble Bombay High Court in the case of CIT v. Kamani Metals and Alloys Ltd (supra). This decision, in our opinion, is of little help to the department inasmuch as the same has been rendered with reference to contract for purchase of raw material. The contracted price was more than the market price as the price went down and the material had not been received at the end of the accounting year. Under these facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that the liability in praesenti is an allowable deduction but a liability in futuro, which for the time being is only contingent, is not allowable. As already pointed out this principle is to be applied keeping in view the principles of prudence and applicable Accounting Standards. In our opinion, the complete answer has been given long back by the Hon ble Supreme Court in the case of Bharat Earth Movers Ltd, 245 ITR 428 (SC), wherein, it was held that the provision made by the assessee for meeting the liability incurred by it under the leave encashment scheme proportionate with the entitlement earned by the employees of the company was entitled to deduction out of the gross receipts of the accounting year in which the provisions were made. 55. Ld CIT D.R. has also relied on the decision of the Hon ble Calcutta High Court in the case of Bestobell India Ltd ((supra), which decision has been considered in detail by the Hon ble Delhi High Court in the case of Woodward Governor India (P)Ltd (supra), wherein, it has been observed as under:- The revenue relied upon the decision of the Calcutta High Court in Bestobell (India) Ltd.,(1979) 117 ITR 789 in support of the submission th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g forward foreign exchange contracts for A.Ys.2002-03 and 2003-04. There is no dispute on this count and, therefore, we refrain from referring the details. 58. In view of the above discussion, we allow the assessee s appeal for the following reasons:- i) A binding obligation accrued against the assessee the minute it entered into forward foreign exchange contracts. ii) A consistent method of accounting followed by assessee cannot be disregarded only on the ground that a better method could be adopted. iii) The assessee has consistently followed the same method of accounting in regard to recognition of profit or loss both, in respect of forward foreign exchange contract as per the rate prevailing on March 31. iv) A liability is said to have crystalised when a pending obligation on the balance sheet date is determinable with reasonable certainity. The considerations for accounting the income are entirely on different footing. v) As per AS-11, when the transaction is not settled in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting period. vi) The forward foreign exchange contracts have all the trappings ..... X X X X Extracts X X X X X X X X Extracts X X X X
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