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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 ..... is engaged in the business of development of software and providing IT solutions and software engineering services. In the course of assessment under section 143(3) of the Act, the Assessing Officer inter alia observed that assessee has debited and claimed foreign exchange fluctuation expenses of Rs. 5,65,36,341/-. The Assessing Officer noted that the aforesaid loss on account of exchange fluctuation on forward cover contracts not crystallised and is in the nature of notional loss. The AO further noted the version of assessee that several foreign exchange forward contracts were entered to hedge its exposure to fluctuation in foreign exchange rates which are entered into on the basis of firm commitments and highly probable future transactions. The Assessing Officer observed that such forward contracts were neither closed nor matured till the end of F.Y. 2011-12 relevant to A.Y. 2012-13. Such forward contracts have been re-valued by the assessee at the exchange rate as on 31.03.2012 and the exchange differences on such contracts has been claimed as foreign exchange fluctuation loss during the year. The Assessing Officer, however, expressed its disagreement with the claim of loss on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent with the regular method of accounting followed by the Assessee. The Assessee has been following AS- 11 and AS-30 issued by the ICAI, in terms of which the loss/gains on outstanding derivatives contracts are to be recognized on mark to market basis. The Assessee is right in contending that CBDT Instruction No. 3 of 2010 cannot possibly override the existing decisions of the Supreme Court/ High Court on similar issues. The legal position in this regard has been explained in Ratan Melting (supra) and has been reiterated in CIT t NageshKnitwears (P) Ltd. [2012] 345 ITR 135 (Delhi) and CIT v. Indian Oil Co. Ltd., (2012) 254 CTR 113 (Bom)." 5.2.7.1 It is also seen from the submissions that a Special Bench of the Tribunal in the case of DCIT vs Bank of Bahrain has discussed the issue in detail in the said order. The Special Bench has clearly held that loss arising on unmatured derivative contracts is allowable to the assessee. Relevant extracts from the order are as under: "32. Ground No.2 for the AY 1998-99 and Ground No.3 for the AY 1999-2000 in regard to which reference has been made to the Special Bench reads as under: "Whether on facts and circumstances of the case, can it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her, this treatment was as per principles of accounting which required the current assets to be marked to the market rate. The AO did not agree with this modus operandi in regard to unmatured forward contracts. He further pointed out that in case foreign exchange is current asset, the easier method of accounting would be to book the sale when it was done and the purchase when it was executed, which will determine gain or loss of the transaction. He further observed that the method followed by the assessee may be fair accounting principle to estimate the net worth but the principles of taxation required that actual profit or loss was brought to the He also observed that there are number of provisions in the 1.T. Act which require the assessee to follow a different method than followed in its books of account. In this regard, the Assessing Officer referred to the decision in the case of CIT v. Motor Industries Company Limited (229 ITR 137), wherein, it has been held that the income tax law does not allow as expenses all the deductions a prudent trader would make in computing his profits. It is only the actual liability in present which is allowable and not liability in future which f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year. Bank of Bahrain & Kuwait BSE iii) The anticipated loss is primarily in the nature of notional liability and, therefore, does not accrue/arise at the end of the previous year and hence, not allowable. iv) The liability accrues or arise only on the date of maturity of the contract and prior to that purely on the basis of estimated liability as per FEDAL guidelines it cannot be allowed under 1.T.Act. v) Various decisions relied upon by ld CIT (A) relate to stock-in- trade and not to unsettled forward foreign exchange contract. vi) The issue is squarely covered by the following decisions:- a) Indian Overseas Bank Ltd., 246 ITR 206(Mad) b) Indian Overseas Bank Ltd., 151 ITR 446 (Mad) c) Kamani Metals & Alloys Ltd., 208 ITR 1017 (Bom) d) Bank of India, 218 ITR 371 (Bom) e) Eveready Industries (1) Ltd., 78 ITD175 (Cal) 1) Indian Molasses Co. Ltd., 37 ITR 66 (SC) 5.2.7.2 The Special Bench thereafter, has discussed in detail the entire set of arguments put forth by the Revenue. In the concluding part of the judgment the special bench has held: "In view of the above discussion, we allow the assessee's appeal for the following reasons:- i) A binding obligatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the said decision. Dealing with the said issues extensively, speaking for the Bench. S.H. Kavadia. J. summarised the following factors which should be taken into account in order to find out if an expenditure on account of fluctuation in the foreign currency rates, when the assessee is following mercantile system of accounting, is deductible: (i) whether the system of accounting followed by the assessee is the mercantile system, which brings in the debits of the amount of expenditure for which a legal liability has been incurred even before it is actually disbursed and credits, what is due, immediately it becomes due even before it is actually received; (ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bonafide; (iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; whether the assessee has been consistent and definite in making (iv) entries in the account books in respect of losses and gains; whether the method adopted by the assessee for making/ entries in the books both in respect of losses and gains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowable may be material when the rate of tax chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction in respect of bonus was granted in the assessment year 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the assessment year 1953-54, should be a matter of no consequence to the Department...... 13. The aforesaid observations of the Bombay High Court were reiterated by this Court in the case of Commissioner of Income Tax Vs. Shri Ram Pistons and Rings Ltd. [220 CTR 404], as under: "Finally, we may only mention what has been articulated by the Bombay High Court in Commissioner of Income Tax, Delhi, Ajmer, Rajasthan and Madhya Pradesh vs, Nagri Mills Co. Ltd. [1958] 33 ITR 681 as follows: In the reference that is before us there is no doubt that the Assessee had incurred an expenditure. The only dispute is regarding the date on which the liability had crystallized. It appears that there was no change in the rate of tax for the Assessment Year 1983-84 with which we are concerned. The question, therefore, is only with regard to the yea ..... X X X X Extracts X X X X X X X X Extracts X X X X
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