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TMI Blog2023 (11) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... unting Standards prescribed by ICAI. Besides, the gains arising in A.Y. 2013-14 due to devaluation of foreign exchange has also been similarly offered for taxation. Supreme Court in the case of CIT vs. Woodward Governor India Pvt. Ltd. [ 2009 (4) TMI 4 - SUPREME COURT ] has considered such losses as allowable and not of contingent in nature. Similar view has been taken by the Co-ordinate Bench in the case of Investmentor Securities Limited [ 2018 (5) TMI 2161 - ITAT AHMEDABAD] and M/s. SAL Steel Ltd. [ 2017 (1) TMI 1822 - ITAT AHMEDABAD] We thus concur with the view taken by the CIT(A) that loss occurred due to such fluctuation in forward contract is a ordinary business loss and not merely a notional loss of provisional nature. We thus decline to interfere with the first appellate order. - Sh. Chandra Mohan Garg, Judicial Member And Sh. Pradip Kumar Kedia, Accountant Member For the Assessee : Shri Neeraj Jain, Adv. And Shri Himanshu Goel, C.A. For the Revenue : Shri Anuj Garg, Sr. D.R. ORDER PER PRADIP KUMAR KEDIA, AM : The captioned appeal has been filed by the Revenue against the First Appellate Order of the Learned Commissioner of Income Tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee broadly reiterated that such losses has arisen in the ordinarily course of business and the losses incurred on valuation of forward foreign exchange contract are on mark to market (MTM) basis in adherence with recommendation as per the Accounting Standards issued by the ICAI in this regard. The Accounting Standard recognises the difference between the year end exchange rate and the spot rate on the date on which the transactions were entered in respect of forward exchange contracts lying at the end of the year. Consequently, the loss due to fluctuation difference has been recorded in the books of accounts as ordinary business expenditure. It was also pointed out that such mark to market (MTM) gains arising in the subsequent A.Y. 2013-14 has also been offered for taxation in tune with accounting policy. The assessee thus claimed that such fluctuation losses are a fait accomopli and not a notional loss of contingent nature. The MTM method is ultimately a revenue neutral exercise. 5.1 The CIT(A) took note of the detailed submissions made on behalf of the assessee and found merit in the claim of the assessee. 5.2 The relevant operative para of the appellate orde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the date of balance sheet, of an amount of Rs. 12,42,648/-. He noted that the assessee enters into forward contracts with clients to buy or sell foreign exchange at an agreed price on a future date. This future price was estimated according to certain norms such as forward premium rates for certain currencies. He noted that when such contract was entered into, the bank normally booked loss or profit depending upon the difference between the prevailing exchange rate on that date and contract rate. On the maturity Bank of Bahrain Kuwait BSE of contract, the same profit or loss booked earlier was reversed and the actual profit or loss incurred based on the difference between the exchange rate on that date and the contract rate was booked. He pointed out that for transactions which mature during the year, the notional profit or loss gets replaced by actual profit or loss. There is no dispute in this regard and the same has been treated as revenues profits/loss. However, since in the forward contracts, the liability to purchase or sale of foreign exchange arises only on the date of maturity of the contract, therefore, the loss or gain depends upon the rate prevailing on that date and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The expenditure which is deductible for income tax purposes is one which is towards a liability actually existing at the time, but the putting aside of money which may become expenditure on the happening of an event is not expenditure. 5.2.7.1 As regards the assessee's contention that bank was recording its income and expenditure on accrual basis, which was as per the provisions of Section 145 and the same could be disputed only if the profits or gains were not properly deducible from the same, the AO pointed out that the accounting method followed does not have much relation to the accrual basis of accounting. He observed that in forward contracts, liability arises only on the date contract matures. He pointed out that before the sale, it is only a contingent liability as the assessee could not foresee the rate of exchange which would prevail on the date of maturity of the contract. The AO referred to the decision of the Hon'ble Madras High Court in the case of Indian Overseas Bank (183 ITR 200), wherein, similar issue was examined and it was held that before settlement of contracts in foreign currency, no actual profit could accrue. It was held that the amounts i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty is said to have crystallized when a pending obligation on the balance sheet date is determinable with reasonable certainty. The considerations for accounting the income are entirely on different footing. v) As per AS-11, when the transaction 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 stockin- trade. vii) In view of the decision of Hon'ble Supreme Court in the case of Woodward Governor India (1) 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. 59. 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 Bank of Bahrain Kuwait BSE evaluation of the contract on the last date of the accounting period i.e. before the date of maturity of the forward contract. 5.2.8 It is clear from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered Accountants of India (ICAI), on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet was an item of expenditure under section 37(1) of the Act, notwithstanding that the liability had not been discharged in the year in which the fluctuation in the rate of foreign exchange occurred. We are of the opinion that the ratio of the said decision, with which we are in respectful agreement, squarely applies to the facts at hand and. therefore, the loss claimed by the assessee on account of fluctuation in the rate of foreign exchange as on the date of balance-sheet is allowable as expenditure under section 37(1) of the Act. 5.2.9 The other judgements quoted by the AO were discussed in detail in the order and the Special Bench in DCIT vs Bank of Bahrain. In view of the aforesaid legal position, the loss on unconcluded contract is treated to allowable expenditure u/s 37 of the Income Tax Act. It is further seen that the basic issue in question here is only on account of the year of allowability or the time of allowability of the said deduction. In principle, it is accepted that loss arising from a concluded contract is allowable. The profit risi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issue at hand is only with reference to the year of allowability of the loss from forward contracts. The time of taxability is in fact tax neutral. The decisions of the H'ble Delhi High Court and the special bench also substantively suggest that a liability which can be reasonable ascertained at the close of the year is required to be allowed. The addition made is therefore not sustainable in the present case. The CIT(A) accordingly reversed the disallowance carried out in the assessment order on the point in issue. 6. Aggrieved by relief granted by the CIT(A), the Revenue is in appeal before the Tribunal. 7. We have heard the rival submissions and perused the assessment order and the first appellate order and also the documents referred to relying upon and case laws cited. The grievance of the Revenue concerns disallowance of mark to market losses of Rs. 161.37 lakhs being unrealized losses arising from foreign exchange forward contract owing to foreign exchange fluctuation. 8. We straight away observe that the issue is squarely covered in favour of the assessee by plethora of judgments which in unequivocal terms have held that mark to market loss on such futu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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