2015 (2) TMI 401 - AT - Income Tax

Accrual of income or loss - Provision for FCNR fluctuation loss - Applicability of Accounting Standards 11 ('AS-11') - Held that - The liability has neither been ascertained nor crystallised as on the Balance Sheet date. Further, the transaction in 'question is not related to monetary items, as the underlying exposure behind the transaction is only foreign exchange. In this view of the matter, we are in agreement with the decision of the learned CIT (Appeals) that the decision of the Hon'ble Apex Court in the case of Woodward Governor India (P.) Ltd. (2009 (4) TMI 4 - SUPREME COURT) does not apply to the facts of the case on hand. Transactions entered into by the assessee were not hedging transactions, but the same were speculative and therefore the assessee's case is not covered by proviso (a) to section 43(5) of the Act. The transactions in question in the case on hand are speculative transactions and therefore, the learned CIT (Appeals) was right in upholding the decision of the Assessing Officer that the transaction entered into by the assessee is speculative in nature; the losses shown are notional in character and therefore the provision for loss claimed as a deduction is liable to be disallowed. As regards the alternate contention of the assessee that if the transaction in question is held to be speculative in nature, then the provision for loss should be allowed as a deduction from the gains reported from such transactions, we are unable to agree with the contention of the assessee in this regard. It is nobody's case that the assessee is engaged in the business of speculation. It has also been held that the loss shown is a notional loss only and such notional loss is not liable to be adjusted against the profit actually earned by the assessee. The stage for adjustment arises only when the loss/liability actually crystallises. - Decided against assessee.

Issues Involved:
1. Allowability of FCNR Loss as Revenue Expenditure
2. Classification of Foreign Currency Swap Option Transactions
3. Application of Accounting Standards
4. Determination of Transaction Nature (Speculative or Hedging)
5. Treatment of Notional Loss
6. Set-off of Speculative Loss against Speculative Income

Detailed Analysis:

1. Allowability of FCNR Loss as Revenue Expenditure
The primary issue was whether the FCNR loss of Rs. 1,79,99,380, claimed by the assessee as revenue expenditure in its revised return, was allowable. The Assessing Officer disallowed this claim, treating the loss as notional. The CIT (Appeals) upheld this decision, stating that the foreign currency swap options were speculative and not related to the business of the assessee. The Tribunal agreed with this view, concluding that the provision for loss did not constitute an ascertained liability and thus was not deductible.

2. Classification of Foreign Currency Swap Option Transactions
The assessee argued that the foreign currency swap options were entered into to reduce interest costs and should be treated as business transactions. However, the CIT (Appeals) and the Tribunal found that these transactions were speculative in nature and not part of the assessee's regular business activities. The Tribunal noted that the transactions did not involve actual delivery of foreign exchange, reinforcing their speculative nature.

3. Application of Accounting Standards
The assessee contended that the provision for losses was made according to Accounting Standard 11, which deals with the effects of changes in foreign exchange rates. The Tribunal, however, found that the liability was neither ascertained nor crystallized as on the balance sheet date. Therefore, the provision for loss did not meet the criteria for deduction under the Act.

4. Determination of Transaction Nature (Speculative or Hedging)
The Tribunal examined whether the transactions were speculative or hedging. It referred to the decision in S. Vinod Kumar Diamonds (P) Ltd., which outlined the characteristics of hedging transactions. The Tribunal concluded that the transactions in question were speculative because they did not involve actual delivery and were not related to specific imports or exports. This classification was crucial in determining the tax treatment of the losses.

5. Treatment of Notional Loss
The Tribunal held that the loss claimed by the assessee was notional and not eligible for deduction. It emphasized that notional losses do not qualify as expenditure under Section 37(1) of the Income Tax Act. The Tribunal also noted that the decision in Woodward Governor India (P.) Ltd., which the assessee relied upon, was not applicable as it pertained to monetary items with ascertained liabilities, unlike the speculative transactions in this case.

6. Set-off of Speculative Loss against Speculative Income
The assessee argued that if the losses were treated as speculative, they should be set off against speculative income earned during the year. The Tribunal rejected this contention, stating that the assessee was not engaged in the business of speculation. It further noted that the loss was notional and could not be adjusted against actual profits. The Tribunal concluded that the stage for adjustment arises only when the loss or liability crystallizes.

Conclusion:
The Tribunal dismissed the assessee's appeal, upholding the decisions of the Assessing Officer and the CIT (Appeals). It concluded that the FCNR loss was speculative and not deductible as revenue expenditure. The Tribunal also ruled that the notional loss could not be set off against speculative income, as it had not crystallized.

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