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TMI Blog2019 (4) TMI 1228X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 same set of facts available with the department at the time of original assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT 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 offered to tax on realized basis as per the consistent stand taken by the company and accepted by department since AY 2005-06. Further, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 assessee offers a consulting-led , integrated portfolio of IT and IT Enabled services. The assessee filed its return of income with the total income of Rs. 1998.64 crores under normal provision of Act and book profit of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 2012-13. Our attention was also drawn to page no. 90 of the paper book wherein assessment order dated 29.12.2008 passed by the AO u/s 143(3) of the 1961 Act for AY 2005-06 is placed and it was contended that assessee's policy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed 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, Mumbai in the case of Reliance Communications Ltd. v. ACIT in ITA No. 2915/Mum/2012, dated 05.02.2013. The assessee also placed reliance on decision of ITAT, Mumbai in the case of Mili Consultants and Investment Private Lim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew . 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 also placed on the decision of Hon'ble Supreme Court in the case of CIT v. Greenworld Corporation (2009) 314 ITR 81(SC). It was submitted that the consistent policy is followed by assessee to bring to tax losses/gains on forei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 market basis on the date of Balance Sheet based on closing rates and the assessee also made comprehensive disclosure during assessment proceedings before the AO as to the policy followed by the assessee for computing income charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 same is mandatorily applicable from the accounting period starting from 1st April 2011 while presently we are concerned with AY 2011-12. We have observed that AS 30 'Financial Instruments: Recognition and Measurement' was mandatorily a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 counsel for the assessee from 01.04.2016 but it was Indian Accounting Standards Ind-AS who will then henceforth hold field in lieu thereof. However, we are presently concerned with AY 2011-12. Thus, for us AS-11 issued by ICAI is relevant as we are dealing with AY 2011-12. The AS 11 - 'Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tained 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 contracts. *** *** Recognition of Exchange Differences 15.13. Exchange differences arising on the settlement of monetary items or on reporting an enterprise's monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognised as income or as expenses in the perio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption 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 for trading or speculation purposes, the premium or discount on the contract is ignored and at each balance sheet date, the value of the contract is marked to its current market value and the gain or loss on the contract is recognised. *** ***" The companies are mandatorily required to follow mercantile system of accounting as provided u/s 209 of The Companies Act, 1956. When Accountant Standards are issued by ICAI and they are notified by Ministry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to mean the currency used in presenting the financial statements. Similarly, the words "monetary items" are defined to mean money held and assets and liabilities to be received or paid in fixed amounts, e.g., cash, receivables and payables. The word "paid" is defined under section 43(2). This has been discussed earlier. Similarly, it is important to note that foreign currency notes, balance in bank accounts denominated in a foreign currency, and receivables/payables and loans deno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... $. 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 on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be a trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset or as a part of circulating capital embarked in the business. But; if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. . . ." (p. 13) [Emphasis supplied] 21. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 speaks of valuing inventory on the closing date at cost or market value which ever is less, while AS-11 did not speak of only accounting for losses owing to exchange rate fluctuations but it speaks of both losses or gains to be accounted for on exchange rate fluctuations on the reporting date. Thus, assessee was bound by law to follow AS-11 which stipulated that unrealized gains/losses on open forward contract in foreign exchange is to be duly accounted for based upon the closing rate of foreign exchange at the date of balance sheet on mark to market basis. Thus in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 view cannot be followed. Even Hon'ble Supreme Court in the case of Woodward Governor India Private Limited(supra) has held that an enterprise has to report the outstanding liability relating to import of raw material using closing rate of exchange and any difference , loss or gain arising on conversion of the said liability at the closing rate , should be recognised in the P & L Account for the reporting period. The said instruction dated 23.03.2010 is not in consonance with the spirit of aforesaid decision of Hon'ble Supreme Court in the case of Woodward Governor I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contracts in foreign exchange , the liability to pay tax can be indefinitely postponed. Thus, we hold that assessment order passed by the AO was not only erroneous but was also prejudicial to the interest of Revenue and the learned CIT has rightly invoked provisions of Section 263 of the 1961 Act . We have noted that learned CIT relied on AS 30 but it is AS 11 which is applicable for the year under consideration and method adopted by assessee to compute income chargeable to tax does not satisfy mandate of Section 145 of the 1961 Act. At the same breath, we are agreeable with the contention of learned counsel for the assessee that there cannot be double taxation of the same income which will result into double jeopardy which is impermissible as the same income cannot be taxed twice which is cardinal rule of taxation. We direct the AO to re-compute income of the succeeding year after verification so that the same income is not taxed twice. The assessee fails in this appeal in the manner indicated above. We order accordingly. 6. In the result, appeal of the assessee in ITA no. 2794/Mum/2018 for AY 2011-12 stand dismissed as detailed above. Order pronounced in the open court on 18.0 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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