2002 (6) TMI 158 - AT - Income Tax

Summary

Issues Involved:

1. Addition of Rs. 1,90,07,000 towards unrealised profits on unexecuted forward foreign exchange contracts as on 31st March, 1991.

Summary:

Issue 1: Addition of Rs. 1,90,07,000 towards unrealised profits on unexecuted forward foreign exchange contracts as on 31st March, 1991

During the assessment proceedings, the AO observed that the assessee claimed a loss of Rs. 64,98,677 on foreign exchange transactions but did not include unrealised profits of Rs. 3,03,40,000. The AO, referencing the guidelines from the Foreign Exchange Dealers Association of India and the Supreme Court decision in CIT v. British Paints India Ltd., added Rs. 2,38,42,323 to the income after setting off the loss.

Before the CIT(A), the assessee argued that the unrealised profits were overstated by Rs. 1,13,33,000 and should be Rs. 1,90,07,000. The CIT(A) agreed with the AO's approach, referencing Rule 115 of the I.T. Rules and the RBI-approved procedure, and confirmed the addition, directing the AO to verify and substitute the figure.

The assessee's counsel contended that the method of accounting was consistent with the principles laid down by the Institute of Chartered Accountants of India and cited various case laws supporting the valuation of stock at cost or market price, whichever is lower. The counsel argued that the assessee correctly valued the stock and computed income accordingly.

The DR argued that the method suggested by the RBI should take precedence and that both profits and losses should be treated alike. The DR cited several case laws and guidelines supporting the inclusion of both unrealised profits and losses in the books.

The Tribunal, after considering submissions and reviewing relevant documents and case laws, concluded that the method adopted by the assessee for valuing the closing stock was not in line with accounting principles. The Tribunal held that the entire stock should be valued either at cost or market price, whichever is lower, and that the assessee's method of valuing part of the stock at cost and the remaining at market value was erroneous. The Tribunal upheld the CIT(A)'s findings and confirmed the addition of Rs. 1,90,07,000. The alternative ground raised by the assessee was not considered due to the specific findings.