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2017 (2) TMI 911 - AT - Income TaxAddition made on account of speculation income on forward contract - CIT(A) deleted the addition - Held that - As decided in assessee s own case for the Assessment Year 2011-2012 deleting the addition made on account of notional gain on forward contract the CIT(A) had taken note of the fact that in case of Woodward Governor India Pvt. Ltd., (2009 (4) TMI 4 - SUPREME COURT) dealt with the loss suffered by assessee in respect of revenue liability on account of exchange difference as on the date of balance sheet. Thereafter, considering the decision of Madras High Court in case of Indian Overseas Bank 1990 (2) TMI 43 - MADRAS High Court , CIT(A) concluded that estimated, anticipated income arrived at on the basis of rate of exchange which prevailed on the last date of forward contract in foreign currencies only represents notional profit and could not be subject to tax. Respectfully following the proposition laid down by Madras High Court, we do not find any infirmity in the order of CIT(A) for deleting the addition made by AO on account of notional gain on forward contract. However, AO is at a liberty to verify that this gain has been offered for taxation in the subsequent years when it actually arose. - Decided against revenue
Issues involved: Appeal by Revenue against CIT(A) order for assessment year 2010-11 regarding deletion of addition made on speculation income on forward contract.
Analysis: 1. Speculation Income on Forward Contract: The Revenue's grievance was the deletion of the addition made on speculation income on a forward contract. The AO added the notional gain on forward contracts to the total income of the assessee, considering it as speculative business income. However, the CIT(A) deleted the addition after noting the appellant company's practice of not debiting or crediting notional gains or losses on forward contracts until settlement. The CIT(A) referred to judicial decisions, including the Hon'ble Supreme Court's ruling in Woodward Governor India Pvt. Ltd., and the Madras High Court's decision in Indian Overseas Bank vs. CIT, emphasizing that notional profits based on exchange rates at the end of the contract period cannot be taxed. The Tribunal, following these precedents, upheld the CIT(A)'s decision to delete the addition, emphasizing the accrual principle under the mercantile system of accounting. 2. Judicial Precedents: The Tribunal considered the decisions of the Hon'ble Supreme Court and the Madras High Court cited by the lower authorities. The Woodward Governor India Pvt. Ltd. case highlighted that losses on revenue liabilities due to exchange differences at the balance sheet date are allowable as expenditure under Section 37(1). The Madras High Court's ruling in Indian Overseas Bank vs. CIT emphasized that estimated profits based on exchange rates before actual settlement of forward contracts are notional and cannot be taxed. The Tribunal, in line with these decisions, dismissed the Revenue's appeal, underscoring that notional gains on forward contracts should not be subject to tax until actual realization, as per the mercantile system of accounting. 3. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s deletion of the addition on speculation income from forward contracts. The Tribunal directed the AO to ensure that any such gains are offered for taxation in subsequent years when they actually arise. By following the principles laid down in the judicial precedents and considering the accrual principle of income under the mercantile system of accounting, the Tribunal concluded that the notional gains on forward contracts should not be taxed until realization, thereby affirming the CIT(A)'s decision in favor of the assessee. This detailed analysis highlights the key legal aspects and reasoning behind the Tribunal's decision in the case involving speculation income on forward contracts for the assessment year 2010-11.
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