TMI Blog2015 (12) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... nt footing. 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. The contract for derivative in foreign currency have all the trappings of stockin- trade. In the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit and in case the derivative contract is squared off/settled in the succeeding year, the difference in loss/profit will be brought to tax in the succeeding assessment year and hence its allowability in the current year is tax neutral. Hence, we order that loss incurred by the assessee company on the contract for transaction in un-expired contracts as on the date of Balance Sheet as at 31st March 2009 in derivatives in foreign currency complies with the provisions of Section 43(5) of the Act read with proviso (d) and explanation 1 of the Section 43(5) of the Act and is exempt to be categorised as speculation loss and further hold that the said loss as at the date of financial statement as at 31st March 2009 arising due to adverse movement in exchange rate between United States Dollars vis-avis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following decisions which are distinguishable on facts :- (i) M/s Sanjiv Woolen Mills V/s. CIT 279 ITR 434 (SC) (ii) CIT Vs. Oriental Motor Car Co. P. Ltd. (1980) 124 ITR 74 And not following the following recent decisions of Honourable Supreme Court and ITAT on similar facts which fully support the contentions of appellant on this issue. (i) CIT V/s. Woodward Governor India Pvt. Ltd. 312 ITR 254 (SC) (ii) Shree Capital Services Vs. ACIT 318 ITRI (ITAT Kolkatta) (iii) Oil and Natural Gas Corporation Ltd. Vs. DCIT 261 ITRI (ITAT Delhi). (iv) DCIT V/s. Bank of Bahrin Kuwait 132 TTJ 550 (ITAT Mumbai Bench 'C') (B) Disallowance of Stamp Duty ₹ 2,59,000/- and fees paid to Ministry of Corporate Affairs ₹ 7,45,280/-. On the facts and in the- circumstances of the case the learned CIT (Appeals) in confirming the disallowance of stamp duty of ₹ 2,59,000/- and fees to Ministry of Corporate Affairs ₹ 7,45,280/- holding them as expenses of capital nature although the same have not resulted in any advantage of enduring nature in capital field nor in acquisition of any capital asset to appellant. 2. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y disproportionate as compared to turnover and the accounts receivables and has not been entered into by the assessee company to hedge its foreign exchange positions. The assessing officer held these transactions of foreign exchange as speculative in nature and held that it falls within the ambit of section 43(5) of the Income Tax Act,1961(Hereinafter called the Act ) and does not enjoys the benefit of provisio to section 43(5) of the Act. The assessing officer held that it is for the assessee company to bring on record that this transaction is an 'eligible transaction' provided under Explanation 1 to section 43(5) of the Act and the same being a beneficial provision the onus is on the assessee company to bring on record cogent material to prove that its case falls with in the four corners of the beneficial provisions. The assessing officer relied upon the Judgments of Hon'ble Supreme Court in the cases of Bacha F. Guzdar v. CIT 27 ITR 1 (SC) CIT v. Ramkrishna Deo 35 ITR 312 (SC). Relying upon the Judgment of Hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals Fertilizers Ltd v. CIT 227 ITR 172 (SC), the assessing officer held that accounting standa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see company submitted that loss was neither speculative nor contingent and relied upon the following decisions:- 1. Shree Capital Services v. ACIT 318 ITR 1 2. CIT v.. Woodword Governor India Pvt. Ltd. 312 ITR 254 3. Oil and Natural Gas Corpn Ltd. v. DCIT 261 ITR 1 4. DCIT v.Bank of Bahrain Kuwait 132 TTJ 505 The assessee company further submitted that these transactions are hedging transactions against the foreign currency loss on account of receivables in foreign currency and are not speculative transactions and they are mainly marked to market loss on these foreign exchange derivative contracts as on 31.03.2009. The assessee company submitted that the said loss is not speculative as the same is carried on the recognized stock exchange and are not deemed to be speculative in view of provisio (d) to Section 43(5) of the Act. The CIT(A) held that these mark to market losses are notional losses as the amount of loss will not be known till the forward contract of foreign currency expires and hence the same cannot be allowed as deduction for the purpose of Income Tax Act even though the same may have to be provided in the books of accounts as per prescribe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeding assessment year. Through hedging it covered the anticipated receipts of not only the outstanding debtors but also the expected volumes of business. The assessee company submitted that loss was neither speculative nor contingent and relied upon the following decisions:- 1. Shree Capital Services v. ACIT 318 ITR 1 2. CIT v. Woodword Governor India Pvt. Ltd. 312 ITR 254 3. Oil and Natural Gas Corpn Ltd. v. DCIT 261 ITR 1 4. DCIT v. Bank of Bahrain Kuwait 132 TTJ 505 The assessee company further submitted that these transactions are hedging transactions against the foreign currency loss on account of receivables in foreign currency and are not speculative and they are mainly marked to market loss on these foreign exchange derivative contracts as on 31.03.2009. The assessee company submitted that the said loss is not speculative as the same is carried on the recognized stock exchange and are not deemed to be speculative in view of proviso (d) to Section 43(5) of the Act and also having complied with explanation 1 to section 43(5) of the Act. The assessee company contended that these forward foreign exchange derivative contract were made to hedge agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he unique client identity number and PAN allotted under the Act as per mandate of Section 43(5) of the Act. The assessee company also relied upon the decision of Hon'ble Supreme Court in the case of CIT v. Woodword Governor India Pvt. Ltd. (supra) and contended that these losses should be allowed to be set off against nonspeculative business income being on revenue account as derivative contracts have foreign currency as underlying asset and these contracts are in the nature of stock-in-trade. 7. Ld. DR on the other hand relied upon the orders of the authorities below. The Ld. DR submitted that these forward foreign exchange contracts are not backed by any business transactions and these are not hedging transactions and marked to market transaction cannot be allowed as per Instruction of CBDT no. 3/2010 dated 23th March 2010. The Ld DR relied upon the orders of Tribunal Mumbai in ITA no. 5631/Mum/2012 in Araska Diamond Private Limited to contend that these losses are speculative in nature and cannot be allowed to be set off against business income other than speculative income. 8. We have heard the rival submissions and carefully perused the relevant material on record an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15 of 1992) in accordance with the provisions of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992) or the Depositories Act, 1996 (22 of 1996) and the rules, regulations or bye-laws made or directions issued under those Acts or by banks or mutual funds on a recognised stock exchange; and (B) which is supported by a time stamped contract note issued by such stock broker or sub-broker or such other intermediary to every client indicating in the contract note the unique client identity number allotted under any Act referred to in sub15 clause (A) and permanent account number allotted under this Act; (ii) recognised stock exchange means a recognised stock exchange as referred to in clause (f) of section 292 of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) and which fulfils such conditions as may be prescribed and notified93 by the Central Government for this purpose;] Section 43(5) of the Act provides that a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by actual ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s 43(5) of the Act provided other conditions as contained in proviso (d) read with explanation 1 to Section 43(5) of the Act are fulfilled. Our view is fortified by the Memorandum explaining the provisions in the Finance Bill, 2005 which introduced clause (d) ((2005) 194 CTR(St.) 147, the purpose of introduction of clause (d) has been explained, which reads as under: Measures to rationalize the tax treatment of derivative transaction Under the existing provisions (cl.(5) of s.43) a transaction for the purchase and sale of any commodity including stocks and shares is deemed to be a 'speculative transaction', if it is settled otherwise than by actual delivery. However, certain categories of transactions are excluded from the purview of said provision. Further, the unabsorbed speculation losses are allowed to be carried forward for eight years for set-off against speculation profits in subsequent years. These restrictions were essentially designed as an antievasion measure to prevent claims of artificially generated losses in the absence of an appropriate institutional infrastructure. Recent systemic and technological changes introduced by stock markets h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee company duly fulfill all the conditions as specified u/s 43(5) of the Act read with proviso (d) and explanation 1 to Section 43(5) of the Act. We further hold that these transactions are covered by the exception as contained in proviso (d) to Section 43(5) of the Act and hence are not speculative transactions as defined under Section 43(5) of the Act. Thus, we hold that loss of ₹ 1,09,98,560/- incurred by the company on derivative transactions in foreign currency in the instant appeal is not a speculative loss within the definition as contained in Section 43(5) of the Act. Regarding contention of the Revenue that, these marked to market loss of ₹ 1,09,98,560/- as at 31st March 2009 is a notional or contingent loss and cannot be allowed as revenue expenditure as in view of Revenue the assessee company has claimed the losses on unexpired derivative transactions in foreign currency based on the prevailing exchange rates of United States Dollar vis - vis in relation to Indian Rupee as on the date of Balance Sheet as at 31st March 2009 while the actual loss has not yet crystallized in the view of revenue because the derivative transactions had not yet been square ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 was as per principles of accounting which required the current assets to be marked to the market rate. The assessing officer did not agree with this modus operandi in regard to unmatured forward contracts. He further pointed out that in case foreign exchange is a current asset, the easier method of accounting would be to book the sale when it was done and the purchase when it was executed, which will determine gain or loss of the transaction. He further observed that the method followed by the assessee may be fair accounting principle to estimate the net worth but the principles of taxation required that actual profit or loss was brought to tax. He also observed that there are number of provisions in the I.T. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... however, allowed the amount which was disallowed on this count in earlier years. 34. Before ld Commissioner (Appeals), 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 of United Commercial bank v CIT, 240 ITR 355 and also on following decisions:- 1. Bank of Tokyo v Inspecting Assistant Commissioner, 13 ITD 32 2. State bank of Mysore v CIT, 114 ITR 704 (Kerala) 3. CIT v. Canara Bank, 63 ITR 328 (sc) 4. ONGC v DCIT, 83 ITD 151 (Delhi) Ld Commissioner (Appeals) allowed the assessee's appeal, inter alia, observing that the assessee was offering profits resulting from such revaluation as and when they so arise and the assessing officer had never objected to the profits which was shown on revaluation of outstanding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 currency transaction have to be recognized as income or as expenses in the period for which they arise, except as stated in paras 10 11, which deals with exchange difference on repayment of liabilities incurred for the purpose of acquiring fixed asset. It was, inter alia, observed that AS-11 stipulates effect of changes in exchange rate vis-a-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Commissioner (Appeals) 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 5-10-1993 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 Court in the case of Indian Molasses Co. Ltd v CIT, 37 ITR 66 (SC), wherein, the Hon'ble Supreme Court, inter alia, observed that income tax law does not allow as expenses all the deductions a prudent trader would make in computing his profits. It was further held that in finding out what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Commissioner (Appeals) relate to stock-in-trade and not to unsettled forward foreign exchange contract. (vi) The issue is squarely covered by the following decisions:- (a) Indian Overseas bank Ltd., 246 ITR 206 (Mad) (b) Indian Overseas bank Ltd., 151 ITR 446 (Mad) (c) Kamani Metals Alloys Ltd., 208 ITR 1017 (Bom) (d) Bank of India, 21 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the purchase when it is executed. Ld counsel further referred to page 1 of the assessment order and pointed out that the assessing officer 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 the case of CIT v. TISCO, 106 ITR 363 (Bom), wherein also, similar view was taken. In support of this proposition, he also relied on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the assessing officer 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 assessing officer 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) The loss claimed by the assessee is not a notional/contingent loss, but is an actual l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessing officer, 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. (supra) and it has been held that the additional lia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal taking note of the fact that in assessee's own case the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Mysore, 114 ITR 704 (Kar) - delivered in respect of foreign currency held by bank. (iv) Nedungadi bank ltd., 264 ITR 545 (Ker)- delivered in the context whether Government securities can be treated as stock-in-trade or not. (v) Mashreque bank, 18 SOT 233 (Mum). This 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns on 31st March or not. In order to find answer to this intricate issue, we have to keep in mind certain settled accounting propositions which have received judicial recognition. They can 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 assessing officer 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onomic resources in settlement of present obligation can be anticipated with reasonable accuracy then it is to be recognized as crystalised liability. This is in consonance with the principle of prudence as considered by the Hon'ble Supreme Court in 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 31st 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r year may properly deduct not only the payments actually made to his employees but also the present value of any payments in respect of their services in that year to be made in a subsequent year if it can be satisfactorily estimated. So is the view taken in Calcutta Co. Ltd. v. 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 31st March. The elements of financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... timate in the light of available information. The Accounting Standard issued by ICAI which are mandatory for preparation of financial statements and have to be followed inasmuch as the deviation from the same is to be reported in the audit report. Section 145(2) gives power to the Central Government to notify the accounting standards to be followed by any class of assesses or in respect 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 shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sheet, is an item of expenditure u/s.28(i) of the I.T. Act. Hon'ble Supreme Court observes as under:- Under section 28(i), one needs to decide the profits and gains of any business which is carried on by the assessee during the previous year. Therefore, one has to take into account stock-intrade for determination of profits. The 1961 Act makes no provision with regard to valuation of stock. But the ordinary principle 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. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bstance, it cannot be said that the forward contract had no trappings of the stockin- trade. Ld counsel has rightly relied upon the decision of the Calcutta ITAT (SB) in the case of Shree Capital Services Limited (supra) in this regard and, therefore, the various decisions relied upon by ld counsel for the assessee as discussed in his submissions are applicable to the facts of the case. 52. Now coming to the argument of ld CIT (DR) with reference 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 al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision proceeded on the premise that till the date of retirement of Managing Director, the assessee company itself had dominion over the sum paid through trustees and insurance society and there was no irrecoverable liability created. Thus, the impugned amounts were treated as part of profits set apart to meet a contingency by the assessee without any corresponding liability being there as the liability was only contingent in nature. There cannot be any quarrel with the proposition 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 accountin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here italicized in print, supplied) 57. At the end we may further observe that when profits are being taxed by the department in respect of such unmatured forward foreign exchange contracts then there was no reason to disallow the loss as claimed by assessee in respect of same contracts on the same footing. In this regard, we may refer to the details furnished by assessee vide their letter dated August 05, 2010 to establish that the department has assessed the B ank in respect of the profit shown by the bank on restatement of outstanding 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... currency contracts as at the end of accounting period is to be accounted for in the books of accounts prepared for the afore-stated accounting period. The reliance of the DR on instruction no 17/2008 dated 26th November 2008 is misconceived as in the instant case under appeal it is not a contingent or notional liability rather it is an ascertained liability which has crystallized and can be determined with reasonable certainty based upon the adverse exchange rate prevailing between United States Dollars vis- -vis in relation to Indian Rupees as on the date of Balance Sheet as at 31st March 2009. Hence, We hold that the said loss of ₹ 1,09,98,560/- incurred by the assesee company on account of marked to market loss arising on the date of Balance Sheet as at 31st March 2009 on account of un-expired derivative transactions in foreign currency entered by the assessee company arising due to the adverse movement in the exchange rate prevailing between United State Dollar vis- -vis in relation to Indian Rupee as on the date of Balance Sheet as at 31st March 2009 can not be considered as notional or contingent loss rather it is an ascertained loss which has already occurred during t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... movement in exchange rate between United States Dollars vis-avis in relation to Indian Rupee as on the date of Balance Sheet as at 31st March 2009 is not a notional or contingent loss rather it is a ascertained liability which has crystallized on the date of Balance Sheet as at 31st March 2009 and can be computed with reasonable certainty and accuracy, hence allowable as non-speculation loss.We order accordingly. 10. Insofar as, ground no. B is concerned. We observe that assessee company has paid ₹ 10,31,096/- towards stamp duty and fee to Ministry of Corporate Affairs, New Delhi towards increase in authorized capital of the assessee company which was held to be capital expenditure and disallowed as revenue expenditure as claimed by the assessee company by the authorities below. We have observed that Hon'ble Supreme Court in the case of Brooke Bond India Ltd. v. CIT (Supra) and Punjab State Ind. Corp. Ltd. v. CIT (supra) has clearly held that these stamp duties/fees to Ministry of Corporate Affairs, GOI paid towards the increase in authorized capital of the company is held to be for expansion of capital base of the company and hence these are capital expenditure and ca ..... X X X X Extracts X X X X X X X X Extracts X X X X
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