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2016 (6) TMI 283 - ITAT MUMBAI

2016 (6) TMI 283 - ITAT MUMBAI - TMI - Disallowance of loss - whether the unrealized gain, i.e., as may stand to arise on the basis of the market values (of the underlying shares) as at the close of the year on open contracts, prior to the settlement date, could be taken into account for the purpose of closing accounts and recognizing income for the relevant year? - Held that:- The question of booking ‘gain’, i.e., on an appreciation of the contract value/s, as would be apparent, does not arise. .....

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have crystallized or its amount may not be quantifiable with exactness and, therefore, represents only an estimate thereof, based on the best available information. Such estimates are called accounting estimates, which inform and permeate the preparation and presentation of final accounts, the background facts with regard to which are generally communicated through the notes to the accounts.

The price/s obtaining on the settlement date/s, subsequent to the valuation (balance-sheet) d .....

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e in this context may also be made to AS-9 (Recognition of income) issued by Institute of Chartered Accountants of India, which again assumes legal status in view of section 209 of the Companies Act, 1956. The statement of a trade liability, at current value, is on an entirely different footing.

Finally, before parting, we may add that the loss on the basis of ‘mark to market’ open derivative contracts, standing thus to be allowed in the facts and circumstances of the case, the A.O. s .....

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For the Appellant : Shri K. Gopal For the Respondent : Shri D. Prabhakar Reddy ORDER Per Sanjay Arora, A. M. This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-9, Mumbai ( CIT(A) for short) dated 20.01.2012, dismissing the Assessee s appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ( the Act hereinafter) for the assessment year (A.Y.) 2008- 09 vide order dated 20.12.2010. 2. The facts in brief are that the assessee-com .....

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746 (SC); CIT vs. Birla Gwalior (P) Ltd. [1973] 89 ITR 266 (SC); R. B. Jodha Mal Kuthiala vs. CIT [1971] 82 ITR 570; Poona Electric Supply Co. Ltd. vs. CIT [1965] 57 ITR 521 (SC); CIT vs. Shoorji Vallabhdas and Co. [1962] 46 ITR 144 (SC); and H. M. Kashiparekh and Co. Ltd. vs. CIT [1960] 39 ITR 706 (Bom). Reliance was also placed on the Accounting Standard (AS-I) notified by the Board u/s. 145(2) of the Act, which requires adoption of the accounting policies as would represent a true and fair v .....

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d. vs. Dy. CIT [2002] 83 ITD 151 (Del) (SB), the Tribunal per its larger bench had held that forex losses, i.e., arising out of foreign exchange fluctuation in respect of trading transactions, made with reference to the balance-sheet date, is not a contingent liability or a contingent loss but fait aaccompli and, accordingly, admissible as a deduction. In view of the A.O., the derivative contracts are not acquired at a cost and, further, do not constitute stock-in-trade, so as to attract the pri .....

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ck-in-trade , it s cost being nil, there was no scope for valuing it below the same. Such a loss is not allowable, and is accordingly not allowed even in the case of foreign exchange derivatives. The loss was, accordingly, disallowed. In appeal, the ld. CIT(A) was of the view that open unsettled derivative contracts held by the assessee as at the close of the year formed part of the current assets, i.e., held on revenue account, or as a trading asset. The same is, in terms of the decisions by th .....

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- which was in respect of import of raw material, by applying such closing rate of exchange lead to stating it at a lower or higher amount, i.e., resulted in a gain or loss. A listing of all such contracts (as on 31.3.2008) revealed that the assessee had unobsorbed profit of ₹ 15,29,983/- on such open contracts on the basis of their market value/s as at the year-end, i.e., marking them to market, and which (profit) had been ignored by the A.O. The method of valuation has to be fair and re .....

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begin with, we note, even as observed by the Bench during hearing, that the ld. CIT(A) has allowed the assessee s claim for loss (for ₹ 11.54 lacs) and, therefore, the assessee s Ground No. 1 challenging the confirmation of it s disallowance and, again, Ground # 3 toward not observing consistency, would not survive. The only question before us; the Revenue being not in appeal, is if the corresponding gain of ₹ 15.30 lacs is assessable for the current year, having been brought to tax .....

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py on record), to find that the view taken by the ld. CIT(A) is not consistent with those decisions, at least in-so-far as the accrual of income is concerned; the principle of prudence impacting it differently. The gist of the decision in the case of ONGC (supra), rendered after considering its earlier decision in Woodward Governor India (P) Ltd. (supra), is vide para 10 of the Judgment, which reads as under: 10. Having carefully perused the decision of this Court in Woodward's case (supra), .....

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h brings in the debits of the amount of expenditure for which a legal liability has been incurred even before it is actually disbursed and credits, what is due, immediately it becomes due even before it is actually received; (ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bona fide; (iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may acc .....

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t was held that the "loss" suffered by the Assessee, maintaining accounts regularly on mercantile system and following accounting standards prescribed by the Institute of Chartered Accountants of India (ICAI), on account of fluctuation in the rate of foreign exchange as on the date of balancesheet was an item of expenditure under Section 37(1) of the Act, notwithstanding that the liability had not been discharged in the year in which the fluctuation in the rate of foreign exchange occu .....

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premise that the enterprise following accrual method of accounting, the loss had accrued even though the liability may not have crystallized or its amount may not be quantifiable with exactness and, therefore, represents only an estimate thereof, based on the best available information. Such estimates are called accounting estimates, which inform and permeate the preparation and presentation of final accounts, the background facts with regard to which are generally communicated through the note .....

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