TATA CONSULTANCY SERVICES LIMITED,MUMBAI vs. COMMISSIONER OF INCOME TAX - LARGE TAXPAYER'S UNIT, MUMBAI

आदेश / O R D E R

PER RAMIT KOCHAR, Accountant Member:

raised by assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:- “1. The learned CIT erred in law, on facts and in circumstances of the case in invoking the provisions of section 263 of the Income Tax Act, 1961, ("Act") in respect of assessing officer allowing the deduction of "Unrealized Mark to Market Gain on open forward contracts" in the computation of Income treating it as erroneous and prejudicial to the interest of the revenue.

2. The learned CIT erred in law, on facts and in circumstances of the case in wrongly concluding that the Assessing Officer "under assessed" income in allowing the deduction of unrealized Mark to Market Gain on open forward contracts in the computation of Income.

3. The learned CIT erred in law, on facts and in circumstances of the case in not appreciating the fact that the appellant has taken the consistent position of taxing the marked to market income on realized basis which is accepted by the Income tax Department all the previous years.

4. The learned CIT erred in law, on facts and in circumstances of the case in not appreciating that where two views are possible and the assessing officer has taken one of the possible view the provision of section 263 of the Income Tax Act cannot be invoked .

5. The learned CIT erred in law, on facts and in circumstances of the case in passing the order under section 263 of the Act merely upon the change in opinion on the same set of facts available with the department at the time of original assessment.

6. The order passed by the learned CIT is bad in law , illegal and without jurisdiction since conditions set out in section 263(1) 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 2 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) of the 1961 Act. The Ld. CIT observed from the records that while computing its income chargeable to income-tax , the assessee has claimed deduction for mark to market gains on open forward foreign exchange contracts of Rs. 25,19,50,837/- as on the Balance Sheet date which was allowed by the AO while framing aforesaid assessment order dated 29.01.2016. The Ld. CIT was of the view that the said mark to market gains on open forward contracts in foreign exchange as on the date of Balance Sheet should have been offered to taxation by the assessee and the omission thereof had led to an under assessment of income to the tune of Rs. 25,19,50,837/- and consequently short levy of taxes to the tune of Rs. 8,36,91,869/- excluding interest u/s 234B of the 1961 Act. Thus, the learned CIT formed a prima facie satisfaction that assessment order passed by the AO is erroneous so far as prejudicial to the interest of the Revenue which led to issuance of notice u/s. 263 dated 01.02.2018 by learned CIT to the assessee. 3.2 The assessee in reply to aforesaid notice issued by learned CIT u/s 263 of the 1961 Act submitted before the Ld. CIT as under:- “ 5 The assessee has submitted that the AO made necessary inquiries for gain or loss on foreign exchange fluctuation.

In this context kindly refer to AO letter dated November 13, 2014 and our letter dated January 8, 2015 containing the submission on gain or loss foreign exchange fluctuation wherein it was submitted that exchange gain of Rs.25.20 crores on derivatives which was unrealized has been excluded while computing the taxable income and the same shall be offered to tax on realized basis as per consistent stand taken by company and accepted by department which establishes the fact of application of mind by the AO. In the light of the above, it can be deduced with certainty that the AO has applied his mind and adopted a view (and correctly so) that unrealized mark to market gain must be allowed as deduction in normal computation. It should be noted that, without prejudice to the above, the company reduces the unrealized mark to market gain and disallows mark to market loss on the open forward contracts and the same is offered to tax on realized basis as per the consistent stand taken by the company and accepted by department 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 Rs. 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 or loss has been reversed by the company in the immediate following year. Therefore the unrealized gain or loss that is reduced or added to the income is after considering reversal of the previous year. The details and computation of unrealized gain or loss for AY 2011-12 and AY 2012-13 is as below: Particulars AY 2011 -12 AY 2012-13 (4,67,14,007) (29,86,64,843) Reversal of Unrealized Gain/(Loss) of last year

(120,20,80,563) Add: Unrealised Gain/(Loss) during the year 29,86,64,843 Reduced/ (Added) to Computation of Income 25,19,50,836 (1,50,07,45,406)

Thus in view of the above, the unrealized mark to market gain of AY 2011-12 has been reversed in AY 2012-13 and accordingly been disallowed in the computation of income and offered to tax for AY 2012-13. Without prejudice to the above, it is submitted that if addition of unrealized mark to market gain of Rs. 25.20 Crores is made during AY 2011-12 then the allowance in respect of unrealized mark to market loss must also be allowed in the respective assessment years.”

3.3 The Ld. CIT rejected the contentions of the assessee by holding that in view of Accounting Standard AS-30 issued by Institute of Chartered Accountant of India(ICAI) and keeping in view provisions of Section 145 of the 1961 Act , the assessee should have offered for taxation income from mark to market gain or loss on open forward contracts in foreign exchange on the Balance Sheet date in the year in which the same has accrued. It was held by learned CIT that the contentions of the assessee that the AO had seen it and allowed the deduction of mark to market gains on foreign exchange open forward contract as at the date of Balance Sheet does not hold good, and hence the order of the AO is erroneous and prejudicial to the interest of Revenue. The learned CIT directed the AO to enhance the assessment accordingly, vide revisionary order dated 21.03.2018 passed by learned CIT u/s 263 of the 1961 Act.

4. Being aggrieved by revisionary order dated 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 Rs. 1998.64 crores under normal provision of Act and book profit of Rs. 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 Rs. 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 inquiry , the AO had allowed deduction of Rs. 25.20 crores of mark to market gains on open forward contracts in foreign exchange which was unrealized as on the balance sheet date. It was submitted by learned counsel for the assessee that the said gain on foreign exchange contracts was offered to tax in succeeding year(s) when the actual settlement took place of these forward contracts in foreign exchange on actual realisation of gain/loss on the transaction. It was submitted that there is no loss to revenue as these unrealized gain on foreign exchange forward contract on being realized was offered to taxation in the subsequent year. It is also submitted that the assessee is consistently following the same policy since assessment year 2005-06 which has been accepted by revenue from year to year from AY 2005-06 to 2010-11 and also in AY 2012-13 vide assessment framed u/s. 143(3) of the 1961 Act. Our attention was drawn to para 22 of the fact sheet filed by the assessee. It was submitted that this policy is consistently followed wherein loss/gains on foreign exchange open forward contracts were offered to tax on realization basis on the settlement of forward contracts in foreign exchange and hence mark to market unrealised gains/loss on the date of Balance Sheet were not offered to taxation. It was submitted that it‟s in this assessment year i.e. AY 2011-12 only that the Revenue has invoked revisionary powers u/s 263 of the Act and it has been held that unrealised gains arising on mark to market gains on open forward contracts in foreign exchange be brought to tax in this year itself although these gains were unrealised gains and have already been offered for tax in subsequent years on being realised. It was submitted that the assessee has offered for tax gains/losses on these open forward contracts in foreign exchange on settlement on actual realisation basis in the succeeding year. It was claimed that Revenue has not suffered any loss as in any case , Revenue got the due taxes albeit in the subsequent year and hence it was claimed that no prejudice was caused to Revenue although there is deferment of payment of taxes to subsequent years. Our attention was drawn to page no. 113 of the paper book wherein the amount of unrealised mark to market losses on open forward contract in foreign exchange to the tune of Rs. 2.59 crores were added back 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 Rs. 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 the assessee vide its reply dated 08.01.2015 ( filed on 12.01.2015 ) at para 5 ( 5-5.28/page 52- 61) filed before the AO during assessment proceedings had submitted complete details of the loses on foreign exchange fluctuation and its justification for allowability u/s 43(5) of the 1961 Act. It is submitted that in this reply dated 08.01.2015, the assessee has categorically stated before the AO that the foreign exchange gains of Rs. 25.20 crore on open forward contract were unrealised gains as on the date of balance sheet and has been excluded while computing income and same will be offered to tax on realisation basis in the year when foreign exchange contracts are settled , as per consistent stand taken by the assessee and accepted by the revenue from year to year. It is claimed that the assessee has also explained in this reply dated 08.01.2015 filed before the AO that these are not speculative gains or losses as these unrealised gains/losses arises out of hedging of export contracts to cover risks that may arise due to foreign exchange fluctuation in realisation of export proceeds. It was submitted that these open forward contracts in foreign exchange to hedge against fluctuation in foreign exchange rates are entered into through banks and were not entered into thorough stock exchanges, for the purpose of hedging the loss due to fluctuation in foreign exchange rates while implementing the export contracts. The Ld. Counsel for the assessee submitted that inquiry was made by the AO during the course of assessment proceedings and this method of computing income by excluding unrealised gains/losses on open forward contract in foreign exchange as on the date of Balance Sheet from the income chargeable to income-tax has been consistently followed and accepted by the revenue. It is submitted that from AY 2005-06 to 2010-11 and also in AY 2012-13, this method of computing income is accepted by Revenue and it is only in AY 2011-12 , that revisionary powers u/s 263 are invoked by learned CIT to unsettle the settled issue which was otherwise accepted by Revenue consistently over years. It was also submitted that this method of accounting followed by assessee while computing income chargeable to tax has judicial backing. The assessee relied upon decision of Hon‟ble Supreme Court in the case of CIT v. Woodward Governor India (P.) Ltd. (2009) 312 ITR 254(SC). The 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 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 to market unrealised gains on open forward contracts in foreign exchange are excluded while computing income in the case of Mili Consultants and Investment Private Limited(supra) by following rule of prudence wherein tribunal was of the view that such losses be allowed as deduction while gains be excluded keeping in view prudence. It is claimed that the assessee is rather more conservative wherein both such losses as well gains are not considered while computing income chargeable to income-tax. It was submitted by learned counsel for the assessee that AS-30 issued by ICAI was relied upon by learned CIT in proceedings u/s 263 which is not applicable for the year under consideration as the same was applicable from accounting year starting from 1st April 2011. Our attention was drawn to page no 305 of the paper book wherein the Accounting Standard AS-30 is placed to show that the same was not applicable for the impugned assessment year. It was also submitted that ICAI withdrew AS-30 from accounting period beginning from 1st April 2016 . Reliance was also placed by learned counsel for the assessee on ITAT, Hyderabad decision in the case of DCIT v. Cyient Ltd. (2018) 91 taxmann.com 353(Hyd.-trib.) and it was submitted that Hyderabad Tribunal duly considered department instruction no. 3/2010 dated 23.03.2010 and held that notional gains on foreign exchange transactions should be allowed to reduce from the net profit , which is arrived for tax purpose. The reliance was also placed on the decision of Hon‟ble Delhi High Court in the case of CIT v. Escorts Ltd. (2011) 198 taxman 324(Del. HC) and it was submitted that rule of consistently should be followed unless there are additional facts or fresh material coming into possession of the AO warranting taking a different view . It was submitted that the AO has examined the matter and then followed the earlier year in allowing deduction for mark to market unrealised gains on open forward contracts in foreign exchange. It was submitted that neither such losses has been claimed as deduction nor gain has been offered to taxation in the earlier years as well as in the subsequent years which was been accepted by the revenue and it is only for this year unrealised gains on open forward contract in foreign exchange is sought to be tax by learned CIT by invoking revisionary powers u/s 263 of the 1961 Act. The reliance was also placed 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 263 of the 1961 Act as there is violation of Accountant Standard AS-30 and provisions of Section 145 of the Act. The learned CIT DR would rely upon decision of Hon‟ble Supreme Court in the case of CIT v. Amitabh Bachchan (2016) 384 ITR 200(SC). 4.3 In rejoinder , the Ld. Counsel for the assessee drew our attention to para 21 of the said judgment of Hon‟ble Supreme Court in the case of Amitabh Bachchan (supra) and submitted that if the AO has taken one of the plausible and possible view, learned CIT cannot invoke revisionary powers u/s 263 to substitute her view as against the view taken by the AO. It was submitted that so far as gains are concerned which are unrealised on mark to market basis on open forward contract in foreign exchange as on the date of Balance Sheet, they were credited in the books of accounts but the same were deducted while computing income chargeable to income-tax.

consultancy. The assessee offers a consulting-led , integrated portfolio of IT and IT Enabled services. The assessee filed its return of income with Revenue declaring total income of Rs. 1998.64 crores under normal provision of Act and book profit of Rs. 4849.54 crores u/s. 115JB of the Act. The assessee has duly included unrealised gains on mark to market basis on open forward contracts in foreign exchange based upon closing foreign currency rates on the reporting date i.e. date of Balance Sheet while preparing audited financial statements under the Companies Act in Profit and Loss Account under the Companies Act, 1956. However, the assessee while computing total income chargeable to income-tax under the provisions of the 1961 Act had reduced unrealized mark to market gain on open forward contracts in foreign exchange of Rs. 25.20 crores as at Balance Sheet date. The assessee had claimed that these forward contracts in foreign exchange were entered into by the assessee to hedge against losses owing to fluctuation in foreign exchange rates with respect to export receivables under export contracts. The Revenue has not controverted this position even before us. The assessee while filing return of income has duly made disclosure of the adjustment by way of deduction being made to its income chargeable to income-tax of unrealised gains of Rs. 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 Rs. 25.20 crores in Profit and Loss Account but while computing income chargeable to income-tax under the provisions of the 1961 Act, the assessee reduced these gains of Rs. 25.20 crores. After due enquiry and considering replies filed by the assessee during assessment proceedings, the AO has accepted the accounting policy followed by the assessee in offering to tax gains or losses on these open forward contracts in foreign exchange in the year when these gains/losses are actually realised on settlement of these forward contracts. Thus, all unrealised gains/losses on these open forward contracts in foreign exchange were albeit duly accounted for by the assessee in its books of accounts prepared under the Companies Act,1956 but while computing income chargeable to income-tax under the provisions of the 1961 Act, the said unrealised gains/losses are accordingly adjusted from the income so as to not to bring to tax unrealised gains/losses on these open forward contracts in foreign exchange on mark to market basis on the date of Balance Sheet. This policy was undisputedly consistently followed by assessee since AY 2005-06 and also accepted by Revenue till AY 2010-11 and as well in AY 2012-13 . In the impugned assessment year AY 2011-12 also, the AO accepted this method of accounting employed by the assessee of reducing such unrealised gains for computing income chargeable to tax under the provisions of the 1961 Act while framing scrutiny assessment vide assessment order dated 29.01.2016 u/s 143(3) read with Section 144C(13) of the 1961 Act and it is only the learned CIT who later invoked revisionary powers u/s 263 to bring to tax said unrealised gains of Rs. 25.20 crores. The assessee has claimed that effect of this policy followed by it is revenue neutral as Revenue did not lose any taxes, because in any case such gains were offered to tax on realisation basis in succeeding year when the forwards contracts in foreign exchange were settled and gains are realised or losses were booked, which were duly considered while computing income chargeable to tax of the year of settlement of forward contracts in foreign exchange . Thus, it is claimed that there is only timing difference in payment of taxes and no prejudice is caused to Revenue. The learned CIT had invoked revisionary powers u/s 263 of the 1961 Act to hold that the unrealised gains on open forward contracts of Rs. 25.20 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 considering that International Accounting Standard (IAS) 39, Financial Instruments: Recognition and Measurement, issued by the International Accounting Standards Board (IASB), on which AS 30 was based, was under revision by the IASB. AS 30 was not expected to be continued in its present form, i.e., was expected to be revised. Further, the status of AS 30, AS 31 and AS 32 was clarified as below:

(i) To the extent of accounting treatments covered by any of the existing notified Accounting Standards (e.g. AS 11, AS 13 etc.), 14 the existing Accounting Standards would continue to prevail over AS 30, AS 31 and AS 32. (ii) In cases where a relevant regulatory authority has prescribed specific regulatory requirements (e.g. Loan impairment, investment classification or accounting for securitisations by the RBI, etc.), the prescribed regulatory requirements would continue to prevail over AS 30, AS 31, AS 32. (iii) The preparers of the financial statements are encouraged to follow the principles enunciated in the accounting treatments contained in AS 30, AS 31 and AS 32 subject to (i) and (ii) above.

4. Apart from the above, the Council at its 360th meeting held on November 7-9, 2016, noted that with implementation of Indian Accounting Standards (Ind AS) in India, many companies will be preparing their financial statements as per Ind AS, which includes Indian Accounting Standards on financial instruments which are based on current IFRS/ IAS issued by International Accounting Standards Board (IASB).

5. In view of the above, the Council noted that there may not be any users of (AS) 30, Financial Instruments: Recognition and Measurement, (AS) 31, Financial Instruments: Presentation and (AS) 32, Financial Instruments: Disclosures, 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 Schedule VI of the Companies Act, 1956. The ICAI made following announcement as to applicability of AS-11 “Withdrawal of the Announcement issued by the Council on „Treatment of exchange differences under Accounting Standard (AS) 11 (revised 2003), The Effects of Changes in Foreign Exchange Rates vis-à -vis Schedule VI to the Companies Act, 1956‟ 1.The Council of the Institute of Chartered Accountants of India had issued an Announcement on „Treatment of exchange differences under Accounting Standard (AS) 11 (revised 2003), The Effects of Changes in Foreign Exchange Rates vis-à-vis Schedule VI to the Companies Act, 1956‟, which was published in the November 2003 issue of „The Chartered Accountant‟ (pp. 497)1 2. Subsequent to the issuance of the above Announcement, the Ministry of Company Affairs (now known as the Ministry of Corporate Affairs) issued the Companies (Accounting Standards) Rules, 2006, by way of Notification in the Official Gazette dated 7th December, 2006. As per Rule 3(2) of the said Rules, the Accounting Standards shall come into effect in respect of accounting periods commencing on or after the publication of these accounting standards under the said Notification.

3. AS 11, as published in the above Government Notification, carries a footnote that “it may be noted that the accounting treatment of exchange differences contained in this Standard is required to be followed irrespective of the relevant provisions of Schedule VI to the Companies Act, 1956”.

The said AS-11 dealt with the effects of changes in foreign exchange rates. The Relevant portion 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 differences dealt with in accordance with paragraph 15.14. An exchange difference results when there is a change in the exchange rate between the transaction date and the date of settlement of any monetary items arising from a foreign currency transaction. When the transaction is settled within the same accounting period as that in which it occurred, all the exchange difference is recognised in that period. However, when the transaction is settled in a subsequent accounting period, the exchange difference recognised in each intervening period up to the period of settlement is determined by the change in exchange rates during that period *** *** Forward Exchange Contracts 36. An enterprise may enter into a forward exchange contract or another financial instrument that is in substance a forward exchange contract, which is not intended for trading or speculation purposes, to establish the amount of the reporting currency required or available at the settlement date of a transaction. The premium or discount arising at the inception of such a forward exchange contract should be amortised as expense or income over the life of the contract. Exchange differences on such a contract should be recognised in the statement of profit and loss in the reporting period in which the exchange rates change. Any profit or loss arising on cancellation or renewal of such a forward exchange contract should be recognised as income or as expense for the period.

*** ***” 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 18 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 prescribing manner in which accounts are to be prepared and later it is notified by Government of India, Ministry of Corporate Affairs as mandatorily to be followed, it has force of law and it cannot be simply brushed aside while computing income chargeable to tax unless there are express provision in the 1961 Act to the contrary. There is no provision in the 1961 Act to contrary brought to our notice explaining in the manner how to bring to tax unrealised gains/losses of open forward contracts in foreign exchange on mark to market basis on the date of Balance Sheet. Perusal of AS-11 clearly stipulates that it is applicable to forward contracts in foreign exchange and the gains/losses on the reported date are to be taken to profit and loss account by converting on the rate of exchange prevailing on the reporting date. In catena of judgments, it is consistently held that these gains/losses owing to exchange rate differences on the date of Balance Sheet are not contingent liability but rather an ascertained liability which had crystallized on the reporting date which could be computed with reasonable accuracy and certainty . The decision of ITAT , Mumbai in the case on Inventurus Knowledge Services Private Limited v. ITO reported in (2016) 156 ITD 727(Mum.-trib.) to which one of us being Accountant Member being part of Division Bench, is relevant. The decision of Hon‟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 (

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., Rs. 50 at 31-3-2002, irrespective of the payment for the sale subsequently at a lower rate. The difference of Rs. 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.

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 date at cost or market value which ever is less, while AS-11 did not speak of only accounting for losses owing to exchange rate fluctuations but it speaks of both losses or gains to be accounted for on exchange rate fluctuations on the reporting date. Thus, assessee was bound by law to follow AS-11 which stipulated that unrealized gains/losses on open forward contract in foreign exchange is to be duly accounted for based upon the closing rate of foreign exchange at the date of balance sheet on mark to market basis. Thus in our considered view the accounting policy followed by the assessee for computing income by not bringing to tax unrealised gains/loss on the foreign exchange fluctuation on open forward contracts on mark to market basis on date of Balance Sheet based on the foreign currency rates prevailing on the reporting date was not a correct policy dehors binding force of AS-11 as well decision of Hon‟ble Supreme Court in the case of Woodward Governor India Private Limited(supra) and will not result in computing correct income chargeable to tax within provisions of the 1961 Act. The decision of Hon‟ble Supreme Court in the case of Woodward Governor India Private Limited (supra) was rendered on 08.04.2009 while we are presently concerned with AY 2011-12. There cannot be any estoppel against law and method of accounting/policy followed by tax-payer which is contrary to law even if accepted by the AO after due enquiry cannot be said to be a view which could be said to be one of the possible or a plausible view and hence the view of the Ld. CIT cannot be held to be merely a change of opinion as learned CIT cannot be said to be substituting her view to the view of the AO rather what learned CIT through her revisionary powers u/s 263 was intending to be bring to tax income based on correct view in bringing to tax income chargeable to tax under the provisions of the 1961 Act which is supported by binding force of AS-11 and judgment of Hon‟ble Apex Court in the case of Woodward Governor India Private Limited(supra). Thus, the decisions relied upon by learned counsel for the assessee that learned CIT cannot substitute her view to the view taken by the AO are not applicable as we have held that the AO has not taken correct view in allowing deduction of gains on open forward contract on mark to market basis while computing income chargeable to 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 cannot be followed. Even Hon‟ble Supreme Court in the case of Woodward Governor India Private Limited(supra) has held that an enterprise has to report the outstanding liability relating to import of raw material using closing rate of exchange and any difference , loss or gain arising on conversion of the said liability at the closing rate , should be recognised in the P & L Account for the reporting period. The said instruction dated 23.03.2010 is not in consonance with the spirit of aforesaid decision of Hon‟ble Supreme Court in the case of Woodward Governor India Private Limited(supra) which was rendered earlier on 08.04.2009 which was prior to issue of said CBDT instruction which were issued on 23.03.2010. There was no amendment in statute to dislodge aforesaid decision of Hon‟ble Supreme Court in the case of Woodward Governor India Private Limited(supra) and CBDT cannot dislodge the said decision of Hon‟ble Supreme Court vide instructions. It is also observed that in large number of judicial decisions, the Court/tribunal has chosen to consistently allow mark to market losses on the reporting date on open forward contracts in foreign exchange computed based on closing rate of foreign currency on reporting date despite instructions issued by CBDT on 23.03.2010. Under these circumstances and factual matrix as we have elaborated above, we are of the view that the assessee ought to have included unrealised gains on open forward contracts in foreign exchange on the date of Balance Sheet on mark to market basis based on closing rate of foreign exchange on the date of reporting keeping in view Accounting Standard AS-11 which was