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TMI Blog2011 (6) TMI 812X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee. Disallowance of Loss on Unmatured Forward Contracts - HELD THAT:- We find that this issue is also squarely covered by the Special Bench decision in the case of DCIT VERSUS BANK OF BAHRAIN KUWAIT [ 2010 (8) TMI 578 - ITAT, MUMBAI] in assessee s favour, wherein, it was held that where a forward contract is entered into by the assessee to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period, the loss is incurred to the assessee on account of evaluation of the contract on the last date of the accounting period i.e. before the date of maturity of the forward contract. Respectfully following the aforesaid decision of the Tribunal we hold that loss on unmatured foreign exchange contract have to be allowed as deduction - Decision in Favour of Assessee. Change in Valuation of Securities as per RBI guidelines - Statutory Compulsion u/s 145A - Assessee made changes in valuation policy as per RBI guidelines which was not accepted by AO - CIT(A) held that the change in valuation policy was bonafide but it cannot be applied retrospectively and asked assessee to revalue the security as at the beginning of the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and (2) balance of the price and interest should be allowed as revenue expenditure in the year of purchase provided the bank follow such a practice. In view of the above, we do not find any infirmity in the order of the CIT(A). - ITA NO.4343/MUM/2005 And ITA NO.4535/MUM/2005 - - - Dated:- 17-6-2011 - SHRI N.V.VASUDEVAN(J.M) SHRI R.K.PANDA (A.M) For the Petitioner : Shri B.P.Bapat For the Respondent : Shri Goli Srinivas Rao ORDER PER BENCH, ITA No.4343/M/05 is an appeal by the assessee while ITA No.4535/M/05 is an appeal by the revenue. Both these appeals are directed against the order dated 24/3/2005 of CIT(A) XXXIII, Mumbai relating to the assessment year 2001-02. ITA No.4343/M/05-Assessee s Appeal: 2. Ground No.1 raised by the assessee reads as follows: On the facts and circumstances of the case and in law, the learned CIT(A) erred in confirming an amount of ₹ 84,71,62,630/- representing accrued interest on securities but not falling due for payment. Such interest, which is in the process of accrual, is at the incipient and inchoate stage, maturing into taxable income only when it becomes due and payable in terms of issue o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atter in appeal but without any success. 4. At the time of hearing, learned counsel for the assessee contended that this issue is covered by the decision of the ITAT Mumbai (SB) in the case of DCIT (International Taxation) vs. Bank of Bahrain and Kuwait, 41 SOT 290 (Mum)(SB). On the other hand, learned Departmental Representative relied upon the Hon ble Supreme Court judgement in the case of Ramabai v.CIT, 181 ITR 400(SC) and contended that income has to be taken on accrual basis. 5. Having heard both the sides, we find that the issue is squarely covered by the decision of the ITAT (SB) in the case of DCIT v. Bank of Bahrain and Kuwait (supra), wherein, it was held as follows:- 11.Ld Counsel for the assessee submitted that this issue is covered in assessee s own case for the assessment years 1992- 93, 1993-94, 1995-96 and 1996-97. ld Counsel submitted that interest on Government Securities does not accrue on day to day basis but on fixed dates and the entry made in the books are not relevant for income tax purposes. 12. We have heard both the sides and perused the records of the case. We find that the issue is covered by the decision of the Tribunal in asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest on govt. securities accrued only on the specified coupon dates notwithstanding that credit has been taken in the profit loss account for the interest on day to day basis. Thus, the issue has been decided in favour of the view that the interest accrues only on the specified coupon dates and not on day to day basis. Since the facts of the present are identical, following the order of the Tribunal in the case of Union Bank of India (supra), we uphold the action taken by the CIT (Appeals) and dismiss the appeal. Consistent with the precedents, we dismiss this ground of the revenue. We see no reasons to take any other view of the matter than the view so approved by the Special Bench. As regards, Hon ble Supreme court s judgement in the case of Ramabai (supra), the ratio of this judgement would not apply on interest on securities, since, as noted by the Tribunal in the above case, in the case of Government securities, interest does not accrue on day to day basis but only on the fixed dates. That situation is materially different from interest on compensation awards which were deal with by Hon ble Supreme Court. Respectfully following the decision of the Special b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange rate on the date of balance sheet and rate prevailing on the date of contract viz., contract rate. On the maturity of contract, the same profit or loss booked earlier is reversed and the actual profit or loss incurred based on the difference between the exchange rate on that date and delivery rate of the contract rate is booked. In the case of unmatured forward contracts, the profit or loss is booked as on the balance sheet date based on the exchange rate on that date. The exchange as on the date of contract is substituted by the exchange rate prevailing as on the date of the balance sheet and loss is booked. The Assessing Officer as well as the CIT(A) were however of the view that the loss was notional and cannot be allowed as a deduction. 9. Before us it is not in dispute that identical issue had come up for consideration in assessee s own case in A.Y. 2000-01 in ITA No.931/M/04 and this Tribunal held as follows: 7. Apropos Ground No.3, learned counsel contended that this issue is also squarely covered by the decision of the ITAT (SB) in the case of Bank of Bahrain Kuwait (supra). However, learned D.R. relied upon the order of the authorities below. 8. Having hear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion is not settled in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting period. vi) The forward foreign exchange contracts have all the trappings of stock-in-trade. vii) In view of the decision of Hon ble Supreme Court in the case of Woodward Governor India (I) P.Ltd., the assessee s claim is allowable. viii) In the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit. We, accordingly, hold that where a forward contract is entered into by the assessee to sell the foreign currency at an agreed price at a future date falling beyond the last date of accounting period, the loss is incurred to the assessee on account of evaluation of the contract on the last date of the accounting period i.e. before the date of maturity of the forward contract. Respectfully following the decision of the Special Bench (supra) we allow this ground of appeal of the assessee. 10. Respectfully following the aforesaid decision of the Tribunal we hold that loss on unmatured foreign exchange contract have to be allowed as deduction. Ground No.3 is accordingly all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. The Assessing Officer accordingly made addition of ₹ 82,90,204/- to the total income of the assessee. 13. On appeal by the assessee the CIT(A) held as follows: 15.3 The appellant has submitted that being a bank, it is governed by the RBI guidelines and so had to make a bona fide change in its valuation policy. It is following this new method of valuation consistently ever since this financial year 2000-2001. And that it is well settled by the Court that a bona fide change in method of valuation of stock cannot be disregarded. So, the adjustment on change in valuation policy is deductible. In this regard, the appellant has relied on the following decisions: CIT v. Atul Products [2002] 125 Taxman 727 (Guj) CIT v. Mopeds India Ltd. [1988] 173 ITR 347 (AP) Harinagar Sugar v. CIT 207 ITR 901 Garden Reach v. CIT 132 ITR 814 CIT v. Carborundum Universal 149 ITR 759 Indo-Comm Bank v. CIT 44 ITR 22 (34-35) 16. I have considered the rival submission and above facts of the case. The Hon ble Supreme Court in the case of United Commercial Bank Vs. CIT 240 ITR 355 reversing the decision of the High Court held that Nationalised bank gove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n it was held as follows: The two principles applicable with regard to the valuation of stock are that the assessee is entitled to value the closing stock either at cost price or market value, whichever is lower, and that the closing stock must be the value of the opening stock in the succeeding year. It is, thus clear that irrespective of the basis adopted for valuation in the earlier years, the assessee has the option to change the method of valuation of the closing stock at cost or market price, whichever is lower, provided the change in bona fide and followed regularly thereafter. Thus, the value of the closing stock of the preceding year must be the value of the opening stock of the next year. The change, therefore, has to be effected by adopting the new method for valuing the closing stock which will, in its turn, become the value of the opening stock of the next year. If, instead, a procedure is adoped for changing the value of the opening stock, it will lead to a chain reaction of changes in the sense that the closing value of the stock of the year preceding will also have to change and correspondingly the value of the opening stock of that year and so on.- CIT v. Carb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee is concerned, the change in method of accounting falls within the ambit of section 145 of the Act. In terms of section 145 of the Act, the method of accounting and the change in the method of accounting, if it is bonafide, and if it is regularly followed thereafter has to be accepted as it is. The revenue in such circumstances cannot place any condition that the opening value of securities should also be changed. If securities as on the beginning of the year is also revalued the then changed method of accounting will become meaningless. We, therefore, hold that in a case of voluntary change in the method of accounting followed by the assesse, all that has to be seen is as to whether the change is bona fide and regularly followed thereafter. If the above condition is satisfied, then the changed method of accounting has to be accepted. In such an even there is no need to revalue the securities as on the beginning of the year. The ld. D.R sought to place reliance on the decision of the Privy Counsel in the case of CIT vs. Ahmedabad New Cotton Mill Company Ltd.,AAR 1930 PC 56. In that case there was a mistake in valuation of stock and, therefore, it was held that the mistake ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ombay High Court in the case of Godrej Boyce Manufacturing Company Ltd. ITA 626 of 2010 dated 12/8/2010. We accordingly set aside the order of the CIT(A) on this issue and remand the same to the Assessing Officer for fresh consideration in the light of the direction of the Tribunal given in the earlier year referred to above. 22. Ground No.4.1 to 4.3 raised by the revenue read as follows: 4.1 The CIT(A) erred in deleting the disallowance of the claim for payment of broken period interest on ₹ 11,67,04,653/-. 4.2 The CIT(A) ought to have appreciated that the broken period interest forming part of the cost of the securities that were held not as stock in trade but as investments, could not be considered for deduction under the head Profits and gains of business or profession , but can be deducted only as part of purchase consideration of such securities under the head Capital Gains when such securities are actually disposed of. 4.3 The CIT(A) ought to have further appreciated that the cases relied upon by her are not applicable to the facts of this case whereas the ratio of the decision of the Supreme Court in the case of Vijaya Bank (187 ITR 541) squarel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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