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TMI Blog2019 (4) TMI 1228X X X X Extracts X X X X X X X X Extracts X X X X ..... ow 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 - I.T.A. No.2794/Mum/2018 - - - Dated:- 18-4-2019 - Shri Mahavir Singh, Judicial Member And Shri Ramit Kochar, Accountant Member F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) explanation 2 are not satisfied in the present case and therefore the said order should be quashed and annulled. Without prejudice to the above, it is submitted that the above explanation 2 is not applicable to the present assessment year since the same is on statue books only w.e.f. 1st June 2015. 7. Without prejudice to the above, the learned C1T erred in not considering the fact that the unrealized gain is reversed in the subsequent year and as such it is not prejudicial to the interest of the revenue. 8. Without prejudice to the above, the learned C1T erred in not directing that the unrealized gain should be allowed on reversal in the subsequent year. 9. The appellant reserves the right to amend, alter or add to the grounds of appeal. 3. The brief facts of the case are that the assessee is engaged in the business as provider of Information Technology Services, business solutions and an IT consulting organisation. The assessee filed its return of income with Revenue on 23.11.2011 which was scrutinised by Revenue wherein assessment order dated 29.01.2016 was passed by the AO u/s. 143(3) r.w.s. 144C(13) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t since AY 2005-06. Further, the unrealized gain or loss as the case may be is reversed by the company in the immediate following year and therefore if the unrealized gain is added to the income of the year then the reversal of the same income in the subsequent year should be allowed to the company. In light of the above fact, there is no loss of revenue to Income Tax Department. Accordingly, the assessment order passed by the AO cannot be said to be prejudicial to the interest of the revenue and hence revision under section 263 cannot be made. In this regard, reliance is placed on following judicial precedents: CIT v. G. R. Thangamaligai (259 ITR 129) (Mad. HC) Dr. B.A. Rajakrishnan (113 Taxman 405) (Kerala HC) The company has excluded the exchange fluctuation gain of ₹ 25,19,50,837 on derivatives which was unrealized as at Balance Sheet date while computing the taxable income for the year under consideration, as the same would be offered to tax on realized basis as per the consistent stand taken by the Company and accepted by the department. The unrealized gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 21.03.2018 passed by learned CIT u/s 263 of the 1961 Act , the assessee has filed an first appeal with tribunal. The Ld. Counsel for the assessee has at the outset submitted that the assessee is provider of I.T. services, business solutions and an I.T. consultancy organisation. It was explained that the assessee offers a consulting-led , integrated portfolio of IT and IT Enabled services. The assessee filed its return of income with the total income of ₹ 1998.64 crores under normal provision of Act and book profit of ₹ 4849.54 crores u/s. 115JB of the Act. It was submitted by learned counsel for the assessee that while computing total income chargeable to income-tax under the provisions of the 1961 Act, the assessee had reduced unrealized mark to market gain on open forward contracts in foreign exchange of ₹ 25.20 crores as at Balance Sheet date. It was submitted that these foreign exchange forward contracts were entered into by the assessee to cover export receivable under export contracts. It was submitted that the assessment was framed by the AO u/s. 143(3) r.w.s. 144C(13) of the 1961 Act vide assessment order dated 29.01.2016 wherein after making detailed i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ack by the assessee for the year ending 31.03.2010 (AY 2010-11) to compute income chargeable to tax. Our attention was also drawn to page no. 129 of the paper book wherein unrealised mark to market losses on open forward contract in foreign exchange to the tune of ₹ 150.07 crores were added back to compute income chargeable to tax for AY 2012-13. Our attention was also drawn to page no. 90 of the paper book wherein assessment order dated 29.12.2008 passed by the AO u/s 143(3) of the 1961 Act for AY 2005-06 is placed and it was contended that assessee s policy of offering to tax only realised gains/losses on foreign exchange open forward contracts was accepted by Revenue consistently from year to year. Our attention was also drawn to page no. 47 of the paper book wherein it was submitted that for the impugned assessment year AY 2011-12 , the learned AO vide notice dated 13.11.2014 u/s. 142(1) of the 1961 Act, vide question no. 5 had asked the assessee to furnish details of losses on account of foreign exchange fluctuation and to explain its allowability keeping in view provisions of Section 43(5) of the Act. Our attention was also drawn to page no. 52 of the paper book wherein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee also placed reliance on the decision of ITAT, Mumbai in the case of Addl. CIT v. C.J. Exporters (2007) 50 CCH 0274(Mum-trib.). The assessee also relied upon the decision of ITAT, Mumbai in the case of Reliance Industries Ltd. v. CIT in ITA no. 7223/Mum/2011, order dated 20.11.2013. The assessee also placed reliance on the decision of ITAT, Mumbai in the case of Reliance Communications Ltd. v. ACIT in ITA No. 2915/Mum/2012, dated 05.02.2013. The assessee also placed reliance on decision of ITAT, Mumbai in the case of Mili Consultants and Investment Private Limited v. DCIT reported in (2016) 160 ITD 0072(Mum-trib) in ITA no. 2792/Mum/2012. It was submitted that assessee is consistently following this policy for bringing to tax gains/losses on foreign exchange forward contracts which was accepted by Revenue in the past which should not be unsettled as one of the possible and plausible view was taken by the AO in all these years while framing assessment and Ld. CIT cannot substitute her view by invoking her revisionary powers u/s 263 of the 1961 Act unless the view of the AO is held to be clearly a perverse view. It was submitted that on identical facts mark t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aced on the decision of Hon ble Supreme Court in the case of CIT v. Max India Ltd. (2007) 295 ITR 282(SC) and it was submitted that when two views are possible and the AO has adopted one of the possible and plausible view, learned CIT in exercise of its revisionary powers u/s 263 cannot substitute its view in place of the view adopted by the AO. The reliance was also placed on the decision of Hon ble Supreme Court in the case of CIT v. Greenworld Corporation (2009) 314 ITR 81(SC). It was submitted that the consistent policy is followed by assessee to bring to tax losses/gains on foreign exchange forward contract on realisation basis instead of bringing to tax unrealised gains/losses on mark to market basis on the Balance Sheet date. It is also submitted that there is no loss to Revenue as the due taxes have been duly paid in subsequent year and it is a case of only timing difference in payment of taxes and hence no prejudice is caused to Revenue. 4.2 On the other hand Ld. CIT-DR relied upon the decision of Hon ble Supreme Court in the case of Woodward Governor India Limited(supra) and it was submitted that the learned CIT has rightly invoked provision of Section 26 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by way of deduction being made to its income chargeable to income-tax of unrealised gains of ₹ 25.20 crores in open forward contracts in foreign exchange on mark to market basis. It is also matter of record as we have seen in preceding para s of this order that during assessment proceedings , the AO did make an inquiry as to these unrealised gains arising from open forward contracts in foreign exchange on mark to market basis on the date of Balance Sheet based on closing rates and the assessee also made comprehensive disclosure during assessment proceedings before the AO as to the policy followed by the assessee for computing income chargeable to income-tax by reducing such gains from exchange rate difference in open forward contracts in foreign exchange on mark to market basis on Balance Sheet date based on closing rates while computing income chargeable to tax(pb/page 46-61). It was also explained before the AO that this policy is consistently followed by the assessee Thus, it is a matter of record that while preparing its books of accounts under the Companies Act , the assessee has duly credited these gains of ₹ 25.20 crores in Profit and Loss Account but while com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 crores in foreign exchange as on the date of Balance Sheet is to be brought to tax in the impugned assessment year itself. The learned CIT has held 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 of the 1961 Act. The learned counsel for the assessee has contested that AS 30 has no application for the impugned assessment year as the same is mandatorily applicable from the accounting period starting from 1st April 2011 while presently we are concerned with AY 2011-12. We have observed that AS 30 Financial Instruments: Recognition and Measurement was mandatorily applicable from accounting period starting from 1st April 2011 but the same was applicable from accounting period commencing from 1st April 2009 being recommendatory in initial two years viz. accounting period commencing on or after 1st April 2009. However, prior to AS 30 , it was AS 11 issued by ICAI which held the field. Later, the ICAI withdrew the recommendatory as well as mandatory status of AS 30, AS 31 and AS 32 in March 2011 by means of an announcement. The announcement clarified that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es, and retaining these Accounting Standards will create confusion. Accordingly, the Council decided to withdraw Accounting Standards (AS) 30, Financial Instruments: Recognition and Measurement, (AS) 31, Financial Instruments: Presentation, (AS) 32, Financial Instruments: Disclosures. An announcement Application of (AS) 30, Financial Instruments: Recognition and Measurement issued by ICAI in March 2011 on status of AS 30, AS 31 and AS 32 also stands withdrawn. Later AS-30 was withdrawn as contended by learned counsel for the assessee from 01.04.2016 but it was Indian Accounting Standards Ind-AS who will then henceforth hold field in lieu thereof. However, 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 Sch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of AS-11 dealing with forward contracts and the manner in which accounting is to be done for fluctuation in foreign exchange as at the date of Balance Sheet with respect to forward contracts in foreign exchange, is reproduced hereunder: Accounting Standard(AS) 11 The Effect of Changes in Foreign Exchange Rates Scope 1. This Standard should be applied: (a) in accounting for transactions in foreign currencies; and (b) **** 2. This Standard also deals with accounting for foreign currency transactions in the nature of forward exchange contracts. *** *** Recognition of Exchange Differences 15.13. Exchange differences arising on the settlement of monetary items or on reporting an enterprise s monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognised as income or as expenses in the period in which they arise, with the exception of exchange differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reign currency amount translated at the latter of the date of inception of the forward exchange contract and the last reporting date. 38. A gain or loss on a forward exchange contract to which paragraph 36 does not apply should be computed by multiplying the foreign currency amount of the forward exchange contract by the difference between the forward rate available at the reporting date for the remaining maturity of the contract and the contracted forward rate for the forward rate last used to measure a gain or loss on that contract for an earlier period. The gain or loss so computed should be recognised in the statement of profit and loss for the period. The premium or discount on the forward exchange contract is not recognised separately. 39. In recording a forward exchange contract intended for trading or speculation purposes, the premium or discount on the contract is ignored and at each balance sheet date, the value of the contract is marked to its current market value and the gain or loss on the contract is recognised. *** *** The companies are mandatorily required to follow mercantile system of acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Supreme Court in the case of CIT v. Woodward Governor India Private Limited(supra) had also held that AS-11 is mandatory in nature and gains or losses on reported date are to be included while computing income by holding as under: 17. Having come to the conclusion that valuation is a part of the accounting system and having come to the conclusion that business losses are deductible under section 37(1) on the basis of ordinary principles of commercial accounting and having come to the conclusion that the Central Government has made Accounting Standard-11 mandatory , we are now required to examine the said Accounting Standard ( AS ). 18. AS-11 deals with giving of accounting treatment for the effects of changes in foreign exchange rates. AS-11 deals with effects of Exchange Differences. Under para 2, reporting currency is defined to mean the currency used in presenting the financial statements. Similarly, the words monetary items are defined to mean money held and assets and liabilities to be received or paid in fixed amounts, e.g., cash, receivables and payables. The word paid is defined under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge rate was ₹ 46 per US $. The company records the transaction at that rate. The payment for the imports is made on 15-4- 2002 when the exchange rate is ₹ 49 per US $. However, on the balance sheet date, 31-3-2002, the rate of exchange is ₹ 50 per US $. In such a case, in terms of AS-11, the effect of the exchange difference has to be taken into P L account. Sundry creditors is a monetary item and hence such item has to be valued at the closing rate, i.e., ₹ 50 at 31-3-2002, irrespective of the payment for the sale subsequently at a lower rate. The difference of ₹ 4 (50-46) per US $ is to be shown as an exchange loss in the P L account and is not to be adjusted against the cost of raw materials. 20. In the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1 this Court has observed as under : The law may, therefore, now be taken to be well-settled that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, on conversion into another currency, such profit or loss would ordinarily be a t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to time accounting standards to be followed by any class of assessees or in respect of any class of income. (3) Where the Assessing Officer is not satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided in sub-section (1) or accounting standards as notified under sub-section (2), have not been regularly followed by the assessee, the Assessing Officer may make an assessment in the manner provided in section 144. ] It is also pertinent to mention that AS-11 as well various judgments including decisions of Hon ble Supreme Court in the case of Woodward Governor India Private Limited(supra) has consistently held that both gains or losses on account of exchange rate fluctuations on the reporting date is to be accounted for to bring to tax while computing income chargeable to tax and it does not only refer to losses sustained on the reporting date owing to exchange rate fluctuations to be taken into account while computing income chargeable to tax. It is unlike in AS-2 which dealt with valuation of inventories which speaks of valuing inventory on the closing dat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax . The view of the learned counsel for the assessee that consistency has to be followed can also be not accepted in the instant case because principle of res judicata are not applicable to income-tax proceedings and hence decision relied upon by the assessee cannot be accepted in view of incorrect method of accounting followed by assessee in computing income. We are aware otherwise that principle of consistency is to be followed keeping in view decision of Hon ble Supreme Court in the case of Radhasoami Satsang v. CIT reported in (1992) 193 ITR 321(SC) but peculiar facts of the case has led us to taking the decision in the instant case in favour of Revenue. In our considered view Ld. CIT has rightly invoked her revisionary powers under Section 263 of 1961 Act, and direction were correctly issued by Ld. CIT to AO to bring to tax said income on mark to market basis on the date of balance sheet based on closing rate of foreign exchange on reporting date. The instruction no. 3 of 2010 dated 23.03.2010 holding such mark to market losses as notional loss being contingent in nature which cannot be allowed to be set off against taxable income in our considered view can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... judice to the Revenue. Merely because the assessee has included such income in succeeding year on settlement of forward contract cannot remove the prejudice caused to Revenue as it has postponed the collection of taxes which are in fact public money meant for use in public interest for public purposes. The Revenue is entitled to its share in income by way of income-tax on all the income which has crystallized during the previous year and it cannot be postponed by following incorrect method of accounting/policies . 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 fo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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