2019 (4) TMI 1228 - AT - Income Tax

Revision u/s 263 - possible view - change in opinion - taxing the marked to market income on realized basis - assessee has claimed deduction for mark to market gains on open forward foreign exchange contracts as on the Balance Sheet date which was allowed by the AO. - CIT was of the view 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 - AS 11 - assessee has submitted that the AO made necessary inquiries for gain or loss on foreign exchange fluctuation - HELD THAT - 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 The Effects of Changes in Foreign Exchange Rates dealt with manner in which changes occurring in foreign exchange rates as on the date of Balance Sheet are to be accounted for . The said Accounting Standard AS 11 is mandatory in nature and it was also notified by MCA and the companies are required to follow accounting treatment as specified in AS-11 rather than following Schedule VI of the Companies Act, 1956. 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 of Corporate Affairs , it has a binding force of law on companies and if the accounts are prepared in violation of notified Accounting Standards, then it could not be said that the accounts reflect true and fair view. AS-11 was duly notified by Ministry of Corporate Affairs, Government of India. The assessee has rightly accounted for said unrealised gains on mark to market basis on open forward contracts in foreign exchange on the date of Balance Sheet in its audited financial statements prepared for the year under consideration under the Companies Act. But the assessee erred in deducting these gains while computing income chargeable to tax under provisions of the 1961 Act because there is no other contrary provision in the 1961 Act stipulating the manner in which such losses/gains are to be brought to tax. When the expert body like ICAI issue Accounting Standards prescribing manner in which accounts are to be prepared and later it is notified by Government of India, Ministry of Corporate Affairs as mandatorily to be followed, it has force of law and it cannot be simply brushed aside while computing income chargeable to tax unless there are express provision in the 1961 Act to the contrary. There is no provision in the 1961 Act to contrary brought to our notice explaining in the manner how to bring to tax unrealised gains/losses of open forward contracts in foreign exchange on mark to market basis on the date of Balance Sheet. Perusal of AS-11 clearly stipulates that it is applicable to forward contracts in foreign exchange and the gains/losses on the reported date are to be taken to profit and loss account by converting on the rate of exchange prevailing on the reporting date. Thus in our considered view the accounting policy followed by the assessee for computing income by not bringing to tax unrealised gains/loss on the foreign exchange fluctuation on open forward contracts on mark to market basis on date of Balance Sheet based on the foreign currency rates prevailing on the reporting date was not a correct policy dehors binding force of AS-11 as well decision of Hon ble Supreme Court in the case of Woodward Governor India Private Limited 2009 (4) TMI 4 - SUPREME COURT and will not result in computing correct income chargeable to tax within provisions of the 1961 Act. The decision of Hon ble Supreme Court in the case of Woodward Governor India Private Limited (supra) was rendered on 08.04.2009 while we are presently concerned with AY 2011-12. There cannot be any estoppel against law and method of accounting/policy followed by tax-payer which is contrary to law even if accepted by the AO after due enquiry cannot be said to be a view which could be said to be one of the possible or a plausible view and hence the view of the Ld. CIT cannot be held to be merely a change of opinion as learned CIT cannot be said to be substituting her view to the view of the AO rather what learned CIT through her revisionary powers u/s 263 was intending to be bring to tax income based on correct view in bringing to tax income chargeable to tax under the provisions of the 1961 Act which is supported by binding force of AS-11 and judgment of Hon ble Apex Court in the case of Woodward Governor India Private Limited(supra). Further, with the rollovers of these forward 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 - appeal dismissed in the manner indicated above

Issues Involved:
1. Invocation of Section 263 of the Income Tax Act, 1961.
2. Taxation of Unrealized Mark to Market Gain on Open Forward Contracts.
3. Consistency in Accounting Policy.
4. Applicability of Accounting Standards (AS-11 and AS-30).
5. Jurisdiction and Validity of the CIT's Revisionary Order.
6. Double Taxation and Revenue Neutrality.

Issue-wise Detailed Analysis:

1. Invocation of Section 263 of the Income Tax Act, 1961:
The appeal was filed against the revisionary order passed by the CIT under Section 263 of the Income Tax Act, 1961. The CIT invoked Section 263, claiming that the assessment order was erroneous and prejudicial to the interests of the Revenue due to the allowance of deduction for unrealized Mark to Market Gain on open forward contracts by the Assessing Officer (AO).

2. Taxation of Unrealized Mark to Market Gain on Open Forward Contracts:
The primary issue was whether the unrealized Mark to Market Gain on open forward contracts should be included in the computation of income for the assessment year. The CIT argued that such gains should be taxed in the year they accrue, while the assessee contended that these gains were consistently taxed on a realized basis in subsequent years. The tribunal noted that the AO had accepted the assessee's method of computing income by excluding unrealized gains during the assessment proceedings.

3. Consistency in Accounting Policy:
The assessee argued that it had consistently followed the policy of taxing unrealized gains on a realized basis since AY 2005-06, which was accepted by the Revenue in previous years. The tribunal acknowledged this consistent practice but emphasized that consistency alone does not justify an incorrect method of accounting.

4. Applicability of Accounting Standards (AS-11 and AS-30):
The CIT relied on AS-30, but the tribunal clarified that AS-11 was applicable for the relevant assessment year. AS-11 mandates that unrealized gains or losses on forward contracts should be accounted for based on the closing rate of foreign exchange on the balance sheet date. The tribunal held that the assessee's method of excluding unrealized gains while computing taxable income was incorrect and contrary to AS-11 and the Supreme Court's decision in CIT v. Woodward Governor India Private Limited.

5. Jurisdiction and Validity of the CIT's Revisionary Order:
The tribunal upheld the CIT's jurisdiction to invoke Section 263, stating that the AO's acceptance of the assessee's method without proper application of AS-11 made the assessment order erroneous and prejudicial to the Revenue's interest. The CIT's revisionary powers were deemed valid as they aimed to correct the method of accounting to ensure accurate computation of taxable income.

6. Double Taxation and Revenue Neutrality:
The assessee argued that taxing unrealized gains in the current year and realized gains in subsequent years would lead to double taxation. The tribunal acknowledged this concern and directed the AO to ensure that the same income is not taxed twice by adjusting the computation in the succeeding year. The tribunal concluded that while the method followed by the assessee was incorrect, the CIT's revisionary order should not result in double jeopardy.

Conclusion:
The tribunal dismissed the assessee's appeal, upholding the CIT's revisionary order under Section 263. The tribunal directed the AO to re-compute the income for the succeeding year to avoid double taxation, thereby ensuring that the same income is not taxed twice. The tribunal emphasized the importance of following the correct accounting standards and methods to compute income chargeable to tax accurately.

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