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TMI Blog2023 (4) TMI 1048X X X X Extracts X X X X X X X X Extracts X X X X ..... ich, the ld. DR has not objected. Since the assessee was prevented by reasonable cause, we hereby condone the delay of six days in filing the appeal and admit the appeal for adjudication. 3. Brief facts the case are that the assessee company M/s. AGS Health Private Limited is engaged in providing BPO services in Healthcare Industry and filed its Return of Income for the assessment year 2013-14 on 29.11.2013 admitting a total income of Rs..15,15,74,721/-. The case was selected for scrutiny and notice under section 143(2) of the Act dated 03.09.2014 was served on the assessee. A reference is made to the TPO to determine the Arms Length Price for the International Transactions the assessee had with its associated enterprises to the tune of Rs..60,77,04,100/-. The TPO-1(1) vide order dated 20.09.2016 had held that no adjustments was required to be made to the International Transactions of the assessee company. Accordingly, the assessment was completed under section 143(3) r.w.s. 92CA of the Act on 12.12.2016 assessing total income of Rs..8,98,83,670/-. 3.1 On perusal of the assessment record for the assessment year 2013-14, the ld. PCIT has noted from the reserves and surplus account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2013-14. 3.3 Further, the ld. PCIT has observed that M/s. AGS Health Private Limited hedges its risks associated with foreign currency fluctuations relating to certain firm commitments and highly probable forecast transactions using forward contracts. The assessee considers these hedging instruments as cash flow hedges. Any changes in fair value of these forward contracts are recognised directly in shareholders' fund (hedge fluctuation reserve) until the forecasted transaction occurs. This accounting is in accordance with Accounting Standard - 30. 3.4 However, the Accounting Standard-11 on "the Effects of Changes in Foreign Exchange Rates" is applicable only to exchange differences on all forward exchange contracts entered into to hedge the foreign currency risks arising from existing assets and liabilities and is not applicable to the exchange difference arising on forward exchange contract entered into to hedge foreign currency risks from future transactions in respect of which firm commitments are made or which are highly probable forecast transactions. 3.5 Further as per Accounting Standard-30 on "Financial Instruments Recognition and Measurement" a hedged item is an asset, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e difference arising on forward exchange contract entered into to hedge foreign currency risks of future transactions in respect of which firm commitments are made or which are highly probable forecast transactions which should be treated as income/ expense only on actual settlement basis. 3.10 Consistent with hedge principle the amount lying as credit balance in reserves is not permitted to be declared as dividend. This also supports that such gain is not treated as realised reserve. 3.11 Considering the principles in the case of Woodward Governor supra, provisions for AS-30, ICDS and draft tax AS, the hedge gain/loss of revenue Items accounted in reserves pertaining to forward contracts on highly probable forecast transactions is not taxable/deductible and has to be recognised for tax purposes in accordance with the accounting treatment in the year when the said gain/loss is finally recognised in P & L account. 3.12 In view of the above detailed observations of the ld. PCIT, the income of Rs..1,01,08,500/- should be assessed to tax for assessment year 2013-14. Since the Assessing Officer has not made proper examination/verification before passing the assessment order under sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the Assessing Officer has called for explanation and the assessee gave the reply. However, without examining the details, the Assessing Officer has simply accepted the reply of the assessee and passed the assessment order which is erroneous and prejudicial to the interest of the Revenue and strongly supported the revision order passed by the ld. PCIT under section 263 of the Act. 6. We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. The issue involved in this appeal relates to forward contract receivable shown under short term loans and advances. As per notice under section 142(1) of the Act, the Assessing Officer has asked the assessee to file the details in respect of forward contract receivable shown under short term oans and advances and the assessee also filed reply by stating that an amount of Rs..1,01,08,500/- was shown as "forward contract receivable" under Short term loans and advances and contra shown as "Hedge reserve" under "reserves & surplus" and moreover, this amount was recorded both as asset and liability in the books, just to represent the ineffectiveness in hedging of our forward contract ..... X X X X Extracts X X X X X X X X Extracts X X X X
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