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Income Tax Appellate Tribunal, MUMBAI BENCHES “A”, MUMBAI
Before: SHRI G.S. PANNU (VP) & SHRI RAM LAL NEGI (JM)
O R D E R
PER RAM LAL NEGI, JM
This appeal has been filed by the assessee against order dated 31/10/2012 passed by the Ld. Commissioner of Income Tax (Appeals)-17, Mumbai, for the assessment year 2008-09, whereby the Ld. CIT (A) has dismissed the appeal filed by the assessee against assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short ‘the Act’) and further directed the AO to disallow the net provision for loss of Rs. 51,515/-.
Brief facts of the case are that the assessee an exporter engaged in the business of supply of agriculture commodities industrial chemical and food additives, textiles and engineering goods etc., filed its return of income for the assessment year under consideration declaring the total income of Rs. 5,34,39,100/-. Since, the case was selected for scrutiny, the AO issued notice u/s 143 (2) and 142 (1) of the Act. In response thereof the Finance Manager of 2 Assessment Year: 2008-09 the assessee company appeared before the AO and furnished the details called for. Since, the assessee had entered into international transaction with Associated Enterprises (AEs) the said issues was referred to the Ld. Transfer Pricing Officer for determining the arms length price, however no adjustment was made and the arm’s length price shown by the assessee was accepted. It was further noticed that the company had booked notional loss on forward contracts where the contractual rate on maturity are unfavorable as compared to the closing date. The assessee was accordingly asked to submit the details of mark to market loss and show cause as to why the sum of Rs. 9,04,265/- (for mark to market loss) should not be disallowed in terms of provisions of section 143 (5) of the Act. The assessee submitted the details of outstanding forward contract as on 31.03.2008 showing forex loss of Rs. 9,04,265/- and gain of Rs. 8,52,750/-. The assessee further submitted that though the loss has been booked in the accounts but no effect has been given for gains. The AO however rejected the contention of the assessee and added back the said amount to the income of the assessee and determined the total income of the assessee at Rs. 5,43,43,370/-. In the first appeal, the Ld. CIT (A) reduced the loss to Rs. 51,515/- and enhance the income of the assessee. 3. Aggrieved by the order of Ld. CIT (Appeals), the assessee has preferred this appeal before the Tribunal on the following effective grounds:-
1. “In the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeal) (CIT (A) erred in directing the Assessing Officer to disallow the net provision for loss of Rs. 51,515/- (i.e. Net of loss of Rs. 9,04,265/- and gain of Rs. 8,52,750/-) on “Mark-to Market (MTM) basis on forward contracts in currency. 2. “In the facts and circumstances of the case and in law, the learned Commissioner of Income Tax (Appeal) (CIT (A) erred in not realizing the fact that the provision for loss of Rs. 9,04,265/- debited to profit and loss account by appellant was made in accordance with the Accounting Standards 3 Assessment Year: 2008-09 (AS) notified by Central Government vides notification 69 (E) dated 25/01/1996. 3. In the facts and circumstances of the case and in law, the learned CIT (A) erred in ignoring the ratio of the decision of the Supreme Court in the case of Challapally Sugars Ltd. Vs. CIT, 98 ITR 167 where the Hon’ble Supreme Court has laid down that the rule of accountancy laid down by ICAI should be adopted in the absence of any statutory or other indication to the contrary. 4. Without prejudice to above, the learned CIT (A) erred on facts and in law that the forward contracts are akin to/in the nature of stock-in-trade and just as the loss incurred on valuation of the stock-in-trade ha to be allowed as deduction as laid down by the CBDT in Circular No. 599 dated 24th April, 2001 so also are the MTM losses. 5. “In the facts and circumstances of the case and in law, the learned CIT (A) erred on facts and in law in ignoring the ratio of the decision of Supreme Court in the case of CIT v. Woodward Governor India P. Ltd., 312 ITR 254 (SC), where the Hon’ble Supreme Court has laid down that the additional liability on account fluctuation in foreign currency as on 31st March, of foreign currency loans outstanding on that date was an allowable revenue loss and was not notional or contingent one. 6. The Appellant prays to your honour to consider each of the above grounds without prejudice to one another and delete the disallowance wrongly made by the AO and allow the claim of the Appellant as claimed in the return.”
There is a delay of 16 days in filing the present appeal. The assessee has filed an application for condonation of delay stating that the assessee could not file the present appeal within the prescribed period due to sudden hospitalization of its Chief Executive Officer. In the light of the aforesaid facts, the Ld. counsel for the assessee submitted that the since the assessee was prevented by sufficient cause from filing the present appeal within the prescribed period, the request of the assessee may be allowed and delay of 16 4 Assessment Year: 2008-09 days may be condoned and the assessee may be permitted to argue its case on merits.
Per contra, the Ld. DR opposed the application for condonation of delay on the ground that since the assessee has failed to prove sufficient cause for condoning delay in filing the present appeal, the prayer of the assessee is liable to be rejected. 6. We have heard the rival submissions and also gone through the material on record including the case relied upon by the parties. Sub-section 5 of section 253 of the Income Tax Act provides that the Tribunal may admit appeal or permit filing of memorandum of cross- objection of respondent after expiry of relevant period of limitation referred to in sub-section 3 and 4 section 253, if it is satisfied that there was sufficient cause for not presenting the appeal within the limitation period. Expression “sufficient cause” appearing in this section has also been used in section 5 of Indian Limitation Act, 1961. This expression has come for consideration before the Hon’ble High Courts as well as before the Hon’ble Supreme Court, and the Hon’ble Courts are unanimous in observing that whenever such issue comes for consideration before adjudicating authority, then “sufficient cause” should be considered with justice oriented approach. In the case of Collector Land Acquisition vs. Mst. Katiji & Others, 1987 AIR 1353, the Hon’ble Supreme Court has held as under: “1. Ordinarily a litigant does not stand to benefit by lodging an appeal late. 2. Refusing to condone delay can result in a meritorious matter being thrown out at the very threshold and cause of justice being defeated. As against this when delay is condoned the highest that can happen is that a cause would be decided on merits after hearing the parties. 3. "Every day's delay must be explained" does not mean that a pedantic approach should be made. Why not every hour's delay, every second's delay? The doctrine must be applied in a rational common sense pragmatic manner.
5 Assessment Year: 2008-09
4. When substantial justice and technical considerations are pitted against each other, cause of substantial justice deserves to be preferred for the other side cannot claim to have vested right in injustice being done because of a non-deliberate delay.
5. There is no presumption that delay is occasioned deliberately, or on account of culpable negligence, or on account of mala fides. A litigant does not stand to benefit by resorting to delay. In fact he runs a serious risk. 6. It must be grasped that judiciary is respected not on account of its power to legalize injustice on technical grounds but because it is capable of removing injustice and is expected to do so.”
Similarly, in the case of Improvement Trust Ludhiana vs. Ujagar Singh and others (Civil Appeal No 2395 of 2009), the Hon’ble Supreme Court has held that unless mala fides are apparent on the conduct of the parties, as a general rule delay should be condoned and an attempt should be made to allow the matter to be contested on merits rather than to through it on technical grounds. In the present case we do not find any mala fides on the part of the assessee in not filing the appeal within the limitation period. Hence, respectfully following the ratio laid down by the Hon’ble Supreme Court in the cases discussed above, we allow the application for condonation of delay filed by the assessee in the interest of justice and permitted the Ld. counsel for the assessee to argue the case of the assessee on merits.
Before us, the Ld. counsel for the assessee submitted that during the financial year relevant to the assessment year under consideration, the assessee entered into a number of forward contracts. The provision was made as per the accounting policy followed by the appellant in accordance with accounting standards notified by Central Government. Following the accounting standard, the assessee adopted the accounting policy to provide losses arising on market to market basis in respect of outstanding contracts in the light of available information. Without prejudice, the Ld. counsel submitted that there is no loss of revenue as due to the said provision the cost gets 6 Assessment Year: 2008-09 substituted and a new lower cost is carried forward and at the time of completion of contract either due to lower opening cost there will be higher profit or a lower loss. Since, the tax rates in both the years were same, there was no loss to the revenue. The Ld. counsel further relying on the decision of the Hon’ble Supreme Court in the case of Challapally Sugar Ltd. vs. CIT 98 ITR submitted that in the absence of any statutory provisions, the assessee is bound to follow the rule of accountancy laid down by ICAI. The Ld. counsel further submitted that in the light of the aforesaid facts, the provisional amount is an allowable deduction. The Ld. counsel further pointed out that in the subsequent assessment year 2009-10, the Ld. CIT (A) allowed the identical ground of appeal
of the assessee and deleted the addition made by the AO. Since, the impugned order is inconsistent with the order passed by the Ld. CIT (A) in assessee’s own case for the AY 2009-10, the same is liable to be set aside. The Ld. counsel relied on the decision of the ITAT Mumbai rendered in the case of Multi Consultants & Investment Pvt. Ltd. vs. DCIT, in which the tribunal has allowed the identical ground of the appeal.
9. On the other hand, the Ld. Departmental Representative (DR) admitted the fact that the Ld. CIT (A) has decided the identical issue in favour of the assessee in assessee’s own case for the A.Y. 2009-10, however supported the order passed by the Ld. CIT (A) and submitted that generally the assessee follow the principle of netting of such notional gain with such notional losses and the net profit/loss is booked to the profit and loss account. In the present case, since the assessee had a loss of Rs. 9,04,265/- and gain of Rs. 8,52,750/-, the net loss was only Rs. 51,515/-, the Ld.CIT (A) has rightly revised the loss to the difference between gain and the loss and enhance the income of the assessee.
10. We have heard the rival submissions of the parties. The only issue raised by the assessee is that the Ld. CIT (A) has erred in directing the AO to disallow 7 Assessment Year: 2008-09 the net provision for loss of Rs. 51,515/- on mark to market basis on forward contracts in currency. As pointed out by the Ld. in the subsequent assessment year the AO had disallowed the claim of assessee in respect of difference in the foreign exchange as on the date of booking of sale and as on the date of sale of accounts. The assessee challenged the assessment order before the CIT(A). The Ld. CIT(A) after hearing the assessee allowed the appeal and directed the AO to delete the addition holding as under: “2.3.1 I have carefully considered the submissions and contention of the Ld. AR of the appellant and also carefully gone through the facts and records. I find that the Ld. AO has disallowed the claim of the appellant in respect of difference in the foreign exchange as on the date of booking of sale and as on the date of closing of accounts. According to him the said losses are disallowable in view of the Instruction No. 03/2010, dated 23-3-2010 and also Instruction No.17/2008 dated 26- 11-2008. According to both these instructions the losses on account of inconclusive transaction are contingent in nature and hence not allowable. Instruction No. 03/2010 mainly deals with 'Marked to Market Losses' which in substance a methodology of assigning value to a position held in a financial instrument based on its market price on the closing day of the accounting or reporting record. Essentially, 'Marked to Market' is a concept under which financial instruments are valued at market rate so as to report their actual value on the reporting date. This is required from the point of view of transparent accounting practices for the benefit of the shareholders of the company and its other stakeholders. Where companies make such an adjustment through their Trading or Profit/Loss Account, they book a corresponding loss (i.e the difference between the purchase price and the value as on the valuation date) in their accounts. This loss is a notional loss as no sale/conclusion/settlement of contract has taken place and the asset continues to be owned by the company. It was further stated in this instruction that as the revenue implications of such transaction are large, the Assessing Officers need to examine the statements of accounts and the notes to accounts with a view t3 find out any reference to any loss on account of forex-derivatives. In some cases, these losses may be camouflaged under the 'financial charges' 'foreign exchange loss' or some similar head which may make it difficult to detect them. In such cases, the Assessing Officers should make a specific query asking the assessee to give a break up of any 'Marked to Market' loss on a forex- derivatives included in the Profit and Loss Account and examine 8 Assessment Year: 2008-09 whether such transactions are 'eligible transaction' in terms of Sec.43(5)(d). An adjustment to the taxable income may therefore be made, if necessary, keeping in view the provisions of law referred to above. In short the CBDT has instructed to add back Mark to Market loss recognised by Company assessees on Forex Derivatives. MTM loss is a notional loss recognized based on the closing price on closing day of accounting or reporting period. The CBDT has also asked to treat loss on forex derivatives arising on actual settlement/conclusion of contract as business loss. Assesses can do this only where the contracts fail within the scope of exclusion provided for eligible derivative transactions [Sec 43(5)] in the definition of 'speculative transaction' under the income tax law. Such loss can be set off only against speculative profit. 2.3.2 Accounting Standard (AS) 11, The Effects of Changes in Foreign Exchange Rates (revised 2003), issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-2004 and is mandatory in nature from that date. The revised Standard supersedes Accounting Standard (AS) 11,Accounting for the Effects of Changes in Foreign Exchange Rates (1994), except that in respect of accounting for transactions in foreign currencies entered into by the reporting enterprise itself or through its branches before the date this Standard comes into effect, AS 11 (1994) will continue to be applicable. AS-11 (revised, 2003), Inter aha, deals with accounting for forward exchange contracts, both under hedging situation and speculation situation. The main principle is that forward exchange contracts are treated as separate foreign currency transactions. In case of hedging situation, accounting treatment has been prescribed for existing exposed items only like foreign currency receivables/payables. Forward exchange contracts entered into to hedge firm commitments or highly probable forecast transactions are not addressed in AS-11 (revised, 2003). For existing exposed position, the approach to be followed is as below: (i Foreign currency receivable/payable under the forward exchange contract will be debited/credited at the spot rate on the date of the cover. Amount due to/from the bank will be credited/debited at the forward rate. The difference will be accounted for as deferred premium/discount. The deferred premium/discount will be taken to profit and loss account on a time proportion basis. (ii) At the end of each reporting period and also on the date of settlement, foreign currency receivable/payable under the forwardexchange contract will be restated at the prevailing spot rate and resulting exchange difference will be accounted.
9 Assessment Year: 2008-09
(iii) At end of each reporting period and also on the date of settlement, the underlying foreign currency asset/liability ('exposed item) will also be restated at the prevailing spot rate and resulting exchange difference will be accounted. (iv) Settlement of the exposed item will also be at spot rate only. Amount due to/from bank will be settled at forward rate. 2.3.3 Exchange difference mentioned in (U) and (iii) above will match and cancel out, if the cover is for 100 per cent and in the same currency in which the underlying is denominated and is utilised for settlement of the 'exposed item'. Premium is the real impact on profit and loss account. The above is the requirement of AS-11 (revised, 2003). For speculation situation, there will be no separate accounting of premium. Instead, exchange difference will be calculated on 'forward-forward' difference basis i.e. difference between the original forward rate and the forward rate for the balance maturity period on the reporting date or in case of more than one reporting period, difference between the forward rate used for measuring exchange difference at the last reporting date and the forward rate for the balance maturity period at the current reporting date. On the date of settlement, obviously, forward rate for the balance maturity period will be nothing but spot rate. From the above, it is evident that premium/discount plus exchange difference on forward cover for hedging situation will be equal to exchange difference on forward cover for speculation situation under AS-11 (revised, 2003). 2.3.4 The issue has been subject matter of Intense legal debate however several judicial decisions has came in favour of the appellant holding that mark to market is not contingent liability. In the case of DCIT vs. Bank of Bahrain & Kuwait (2010) 132 TTJ) (Mumbai)(SB) 505, the Hon'ble Special Bench ITAT, Mumbai concluded that where a forward contract is entered into by the assessee to buy or sell theexchange contract will be restated at the prevailing spot rate and resulting exchange difference will be accounted. (iii) At end of each reporting period and also on the date of settlement, the underlying foreign currency asset/liability ('exposed item) will also be restated at the prevailing spot rate and resulting exchange difference will be accounted. (iv) Settlement of the exposed item will also be at spot rate only. Amount due to/from bank will be settled at forward rate. 2.3.3 Exchange difference mentioned in (ii) and (iii) above will match and cancel out, if the cover is for 100 per cent and in the same currency in which the underlying is denominated and is utilised for settlement of the 'exposed item'. Premium is the real impact on profit and loss account. The above is the requirement of AS-11 (revised, 2003). For speculation 10 Assessment Year: 2008-09 situation, there will be no separate accounting of premium. Instead, exchange difference will be calculated on 'forward-forward' difference basis i.e. difference between the original forward rate and the forward rate for the balance maturity period on the reporting date or in case of more than one reporting period, difference between the forward rate used for measuring exchange difference at the last reporting date and the forward rate for the, balance maturity period at the current reporting date. On the date of settlement, obviously, forward rate for the balance maturity period will be nothing but spot rate. From the above, it is evident that premium/discount plus exchange difference on forward cover for hedging situation will be equal to exchange difference on forward cover for speculation situation under AS-11 (revised, 2003). 2.3.4 The issue has been subject matter of intense legal debate however several judicial decisions hascame in favour of the appellant holding that mark to market is not contingent liability. In the case of OCIT vs. Bank of Bahrain & Kuwait (2010) 132 TTJ (Mumbai)(SB) 505, the Hon’ble Special Bench ITAT, Mumbai concluded that where a forward contract is entered into by the assessee to buy or sell theforeign currency at an agreed price at a future date falling beyond the last date of the accounting period, loss incurred by the assessee on account of evaluation of the contract on the last date of the relevant accounting period i.e., before the date of maturity of the forward contract, is allowable as deduction. It was held that forward foreign exchange contract means an agreement to exchange different currencies at a forwardrate. Forward rate is a specified rate for exchange of currency at a specified date. The assessee enters into forward contract with clients to buy or sell foreign exchange at an agreed price at a future date in order to hedge against the possible future financial loss on account of wide fluctuation in the rate of foreign currency. Thus, firstly, forward foreign exchange contract creates a continuing binding obligation on the date of contract against the assessee to fulfill the same on the date of maturity and secondly, it is in the nature of hedging contract because it is a contract entered into against possible financial losses. 2.3.5 The Bench applying the law, laid down in the cases of CIT vs. Woodward Governor India (P) Ltd. (2009) 312 ITR 254 (SC) and Bharat Earth Movers vs. CII (2000) 245 ITR 428 (SC), further held that it is settled principle that deduction is allowable tinder the IT Act in respect of those liabilities which crystallise during the previous year. Therefore, the concept of crystallisation of liability under IT Act assumes significance vis-à-vis commercial principles in vogue. As per the commercial principles of policy of prudence, all anticipated liabilities have to be accounted for but as per IT Act, only that liability will be 11 Assessment Year: 2008-09 allowed which has actually accrued. As a matter of fact, Courts have time and again given due weightage to commercial principles in deciding such issues. However, those anticipated liabilities are not allowable which are contingent in nature but, if an anticipated liability is coupled with present obligation and only quantification can vary depending upon the terms of contract, then a liability is said to have crystallised on the balance sheet date. It is in conformity with the principles of prudence also. A contingent liability depends purely onthe happening or not happening of an event whereas if an event has already taken place, which, in the present case, is of entering into the contract and undertaking of obligation to meet the liability, and only consequential effect of the same is to be determined, then, it cannot be said that it is in the nature of contingent liability. In case of loss/expense, it is the concept of reasonable certainty to meet an existing obligation which comes into play which in legal terminology is said to be 'crystallisation of liability'. When outflow of economic resources in settlement of present obligation can be anticipated with reasonable accuracy then it is to be recognized as crystallised liability. The Revenue's main contention that liability can arise only when the contract matures is completely divorced of the principles of commercial accounting and, therefore, cannot be accepted. Both legal obligation and commercial principles have to be taken into consideration for deciding such issues. Anticipated losses on account of existing obligation as on 31st March, determinable with reasonable accuracy, being in the nature of expenditure/accrued liability, have to be taken into account while preparing financial statements. 2.3.6 The Special Bench held that the Accounting Standards issued by the ICAI required that accounting policies must be governed by the principle of prudence. Accounting Standards are prepared by ICAI keeping in view of the principle of prudence and this principle has received judicial recognition. In other words, provisions should be made for loan liabilities and losses even though the amount cannot be determined with certainty and represents only the basic estimate in the light of available information. The Accounting Standards issued by ICA! which are mandatory for preparation of financial statements have to be followed in as much as the deviation from the same is to be reported in the audit report. AS-11 mandates that in a situation like in the present case, since the transaction is not settled in the same accounting period, the effect of exchange difference has to be recorded on 31st March. 2.3.7 The Bench further held that admittedly, the assessee has not shown any closing stock of unmatured forward foreign exchange contracts as on balance sheet date and has only booked the profit and 12 Assessment Year: 2008-09 loss in that regard. There Is no dispute that the foreign exchange currency held by the assessee bank is Its stock-in-trade and the assessee had entered into forward foreign exchange contracts in order to protect its interest against the wide fluctuation in the foreign currency itself. Therefore, this contract was incidental to assessee's holding of the foreign currency as current asset and in substance, it cannot be said that the forward contract had no trappings of the stock-in-trade. When profits are being taxed by the Department in respect of such unmatured forward foreign exchange contracts then there was no reason to disallow the loss as claimed by assessee in respect of same contracts on the same footing. The Department has assessed the assessee bank in respect of the profit shown by the bank on restatement of outstanding forward foreign exchange contracts for asst. yrs. 2002-03 and 2003-04. There is no dispute on this count. 2.3.8 The Bench allowed the appeal of the assessee for thefollowing reasons (i) A binding obligation accrued against the assessee the minute it entered into forward foreign exchange contracts. (ii) A consistent method of accounting followed by assessee cannot be disregarded only on the ground that a better method could be adopted. (iii) The assessee has consistently followed the same method of accounting in regard to recognition of profit or loss both, in respect of forward foreign exchange contract as per the rate prevailing on 31st March. (iv) A liability is said to have crystallised 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 stock-in-trade. (vii) In view of the decision ofHon'ble Supreme Court in the case of Woodward Governor India (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. Accordingly, 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. 2.3.9 Adverting to the facts of the appellant case, the Appellant is a merchant exporter and is engaged in the supply of agricultural commodities and also engaged in the supply of industrial chemical and food additives as well as textiles, engineering goods, leather etc. During the year under consideration appellant had entered in to a number of 13 Assessment Year: 2008-09 currency forward contracts which was done by the appellant on National Stock Exchange(NSE) through their currency dealer MIs AnandRathi Shares and Stockbrokers Ltd and as an evidence the appellant submitted the contract notes received for contract outstanding as on 31 March 2009. The appellant debited an amount to the Profit and Loss Account due to the decrease in value of the currency on the outstanding contracts as on 31st March 2009 which was Rs,35,48,920/-. This amount was debited in the books as on March 31, 2009 in view of accounting policy consistently followed by the appellant, which was in tune with Accounting Standards notified by Central Government vide notification no. 69(E) dated25/01/1996. The said Accounting Standard requires that the accounting policy adopted by appellant should be adopted on the basis of following major consideration, namely, Prudence, Substance over form, and Materiality. From above, it was seen that Accounting Standard notified by Central Government/CBDT requires every assessee to make provision for all known liabilities even though the amount cannot be determined with certainty. Further, Institute of Chartered Accountant of India (ICAI) also issued guidance note titled"Guidance Note on Accounting for Equity Index and Equity stock Futures and options". In the said guidance note it was clearly stated that a provision for the anticipated loss in respect of open futures contracts should be made. Thus as per the Accounting Standard 30 issued by the ICAI , companies were required to account for the mark to market losses in their books despite the fact that the contract has not yet matured as at the balance sheet date. The above Accounting Standard issued by Central Government /CBDT was binding on appellant. In view of the foregoing, the Ld.AO was wrong in construing that it was a contingent liability or an ascertained liability which cannot be allowed. 2.3.10 In the case of CIT vs. Woodward Governor India (P) Ltd (2009) 312 LW (SC) 254, the Hon'ble Supreme Court held that the quantum of allowances permitted to be deducted under diverse heads under ss. 30 to 43C from the income, profits and gains of a business would differ according to the system adopted. This is made clear by defining the word "paid' in s. 43(2), which is used in several ss. 30 to 43C, as meaning actually paid or incurred according to the method of accounting upon the basis on which profits or gains are computed under s. 28/29. That is why in deciding the question as to whether the word 'expenditure" in s. 37(1) includes the word "loss" one has to read s. 37(1) with s. 28, s. 29 and s. 145(1). One more principle needs to be kept in mind. Accounts regularly maintained in the course of business are to be taken as correct unless there are strong and sufficient reasons to 14 Assessment Year: 2008-09 indicate that they are unreliable. The 1961 Act makes no provision with regard to valuation of stock. But the ordinary principle of commercial accounting requires that in the P&L a/c the value of the stock-in- trade at the beginning and at the end of the year should be entered at cost or market price, whichever is the lower. This is how business profits arising during the year needs to be computed. This is one more reason for reading s. 37(1) with s.
Under s. 145(2), the Central Government is empowered to notify from time to time the Accounting Standards to be followed by any class ofassessees or in respect of any class of income. Accordingly, under s. 209 of the Companies Act, mercantile system of accounting Is made mandatory for companies. In other words, Accounting Standard which is continuously adopted by an assessee can be superseded or modified by legislative intervention. However, but for such intervention or in cases falling under s. 145(3), the method of accounting undertaken by the assessee continuously is supreme. In the present batch of cases, there is no finding given by the AO on the correctness or completeness of the accounts of the assessee. Equally, there is no finding given by the AO stating that the assessee has not complied with the Accounting Standards. For the reasons given hereinabove, the 'loss" suffered by the assessee on account of the exchange difference as on the date of the balance sheet is an item of expenditure under s. 37(1). 2.3.11 The Hon'ble Supreme Court further held that It is important to note that foreign currency notes, balance in bank accounts denominated in a foreign currency, and receivables/payables and loans denominated in a foreign currency as well as sundry creditors are all monetary items which have to be valued at the closing rate under AS-11. Under para 5, a transaction in a foreign currency has to be recorded in the reporting currency by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction. This is known as recording of transaction on initial recognition. Para 7 of AS-11 deals with reporting of the effects of changes in exchange rates subsequent to initial recognition. Para 7(a) inter-alia states that on each balance sheet date monetary items, enumerated above, denominated in a foreign currency should be reported using the closing rate. In case of revenue items falling under section 37(1), para 9 of AS-11 which deals with recognition of exchange differences, needs to be considered. Under that para, exchange differences arising on foreign currency transactions have to be recognized as income or as expense in the period in which they arise, except as stated in para10 and Para 11 which deals with exchange differences arising on repayment of liabilities Incurred for the purpose of 15 Assessment Year: 2008-09 acquiring fixed assets, which topic falls under s, 43A. Para 9 of AS-11 recognises exchange differences as income or expense. In cases where, e.g., the rate of dollar rises vis-à-vis the Indian rupee, there is an expense during that period. The important point to be noted is that AS- 11 stipulates effect of changes in exchange rate vis-à-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain, arising on conversion of the said liability at the closing rate, should be recognized in the P&L account for the reporting period. 2.3.12 Further, it is seen that the appellant has reversed the provision for MTM losses of Rs.35,48,920/- was reversed in the next financial year and in the AY 2010-11 the appellant had shown net profit of Rs.5,63,69,616/-. Therefore, in the ultimate analysis, there is no revenue effect and it is only the timing of taxation of loss/profit. Accordingly, 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 toss 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. it is evident that the appellant accounts on April 01st, 2009 and the actual profit/ loss after physical delivery of currency is then debited to accounts in the subsequent year (i.e 2009-10). The said accounting policies are consistently followed by appellant and department has accepted the said in early years. In view of the foregoing, I do not find any merit in the arguments of the Ld.AO that the liability on account of fluctuation in foreign currency derivative contract which are not closed as on that last day of accounting falls in the domain of contingent liability. As is held by the Hon’ble Supreme Court in the case of Woodward Governor (supra) and subsequent decisions of the various courts, the loss claimed by the appellant is allowable. Following the decisions of various courts as cited para, the addition made by the Ld. AO is accordingly deleted. This ground of appeal
is thus allowed.”
11. We have carefully gone through the order of the Ld. CIT(A) passed in assessee’s appeal for the assessment year 2009-10. We notice that the Ld. CIT(A) has allowed the appeal of the assessee keeping in view the relevant Accounting slandered and in the light of the decision of the coordinate Bench in case of DCIT vs. Bank of Bahrain and Kuwait (2010) 132 TTJ (Mumbai 16 Assessment Year: 2008-09