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Income Tax Appellate Tribunal, KOLKATA BENCH “SMC” KOLKATA
Before: Shri S.S, Godara
O R D E R This assessee’s appeal for assessment year 2010-11, arises against the Commissioner of Income-tax (Appeals)-22, Kolkata’s order dated 20.07.2018 passed in case No.109/CIT(A)-22/10-11/15-16/Kol, involving proceedings u/s. 143(3) of the Income Tax Act, 1961; in short ‘the Act’. Heard both the parties. Case file perused.
2. The assessee’s sole substantive ground challenges correctness of both the lower authorities action adding excess difference of ₹4,61,966/- as income of the impugned assessment year. The CIT(A)’s detailed discussion to this effect reads as under:- “06. FINDINGS & DECISION: 1. I have carefully considered the action of the Ld. AO as also the reasons recorded for such action, as well as the arguments advanced by the appellant/Ld. ARs. I have carefully perused the judicial decisions available on the subject. In AO has discussed his reasons for making the addition on account of marked to market foreign exchange gain of Rs.4,61,966/-. In the audit report accompanying the accounts, the auditor had categorically mentioned that unrealized foreign exchange gain on the open forward contracts at the year-end amounted to Rs.4,61,966/-. Upon being questioned by the Ld AO as to why this gain was not Devashree Ispat (P) Ltd vs. ITO Wd-3(4), Kol. Page 2 recognized as income of the relevant year, the only argument which the appellant could come up with is that the gain was recognized in the subsequent year. The Ld AO however was not agreeable to this contention of the appellant, particularly in view of the fact that the gain of Rs.4,61,966/- arising on re-aligment of open forward contracts as on 31.03.2010 pertained to the relevant financial year and hence taxable in this year alone.
After giving a thoughtful consideration to the facts of the case, I am not agreeable to the contentions put forth by the appellant,. It is settled in law that income arising to a person is taxable in the year in which accrues. An assessee cannot take a plea that an item of income should not be taxed in the relevant yare to which it pertains and has accrued on the spacious plea that it has been offered to tax in the subsequent year. Having said that, in the present case, the Ld AR of the appellant was also unable to bring any evidence to record to establish his bald assertion that the foreign exchange gain had actually been credited and offered to tax in the subsequent year.
In terms of the Accounting Standard-II issued by the ICAI, the assessee being a company was mandatorily required to account for the outstanding / unsettled foreign currency forward contracts at the prevailing exchange rate at the time of drawing annual financial statements. The AS-II also prescribed the accounting method to be adopted for accounting of the losses or gains arising and/or accruing from re-statement of the assets and liabilities in foreign currency. In terms of the said AS, the gain/loss arising on restatement of forward contracts was required to be recognized in the P&L A/c. The Hon'ble Apex Court in the case of Woodward Governor India Ltd. (supra) & ONGC (supra), has accorded judicial recognition to the AS-II and in the context of losses arising on re-alignment of foreign currency denominated assets & liabilities held that the loss arising on mark-to-market as on 311st March is a real loss and hence deductible from the profits of the business. As a corollary the gain arising on re-alignment of foreign currency forward contracts is also a real gain, taxable in the hands of the appellant.
In view of the above, I hold that the Ld AO was justified in reaching his decision in the facts of the appellant-company’s case, and was supported by emergent principle in the ratio decidendi in the above cited judgments of the Hon'ble Apex Court. In the opinion of the Hon'ble Supreme Court the liability arising from such restatement of foreign currency transactions represented real loss or income and it was not a notional one. I therefore find merit in the Ld. AO’s action of assessing sum of Rs.4,61,966/- as the income of the relevant year. For the reasons set out in the foregoing therefore, the addition of Rs.4,61,966/- is confirmed, and the ground of appeal is rejected.”
3. I have given my thoughtful consideration to rival contentions. There is no dispute between the parties that assessee has recognized the impugned sum as income in succeeding assessment year whereas the Revenue’s case is that same ought to be assessed in the impugned assessment year. It transpires during the course of hearing that although the sum in issue pertained to relevant previous year, the assessee’s auditor had made it clear that the same could be crystallized / realized only in the Devashree Ispat (P) Ltd vs. ITO Wd-3(4), Kol. Page 3 succeeding assessment year. Mr. Singh strongly emphasizes that assessee follows mercantile system of accounting and therefore both the lower authorities have rightly made the impugned addition in assessee’s case. I find no merit in Revenue’s arguments. The fact remains that the sum in question could only to be crystallized / realized in the previous year relevant to succeeding year for the sufficient basis for the taxpayer for not recording the same as income of assessment year in issue hon'ble apex court’s landmark decision in Chainrup Samapatram vs. CIT (1953) 24 ITR 481 (SC) holds that profits merely on anticipation cannot be recorded as income till realization thereof and at the same time an anticipation losses can be allowed to be deducted from commercial profits at the first sign of reasonable possibility. Their lordships detailed discussion to this effect reads as under:- “… .. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realized on the year’s trading. As pointed out in paragraph 8 of the Report of the Committee on Financial Risks attaching to the holding of Trading Stocks, 1919, “As the entry for stock which appears in a trading account is merely intended to cancel the charge for the goods purchased which have not been sold, it should necessarily represent the cost of the goods. If it is more or less than the cost, then the effect is to state the profit on the goods which actually have been sold at the incorrect figure… From this rigid doctrine one exception is very generally recognized on prudential grounds and is now fully sanctioned by customs, viz., the adoption of market value at the date of making up accounts, if that value is less, than cost. It is of course an anticipation of the loss that may be made on [Progressive Mercantile Co-Op. Bank Ltd. vs. ACIT] A.Y 2011-12-5- Those goods in the following year, and may even haves the effect, if prices rise again, of attributing to the following year’s results a greater amount of profit than the difference between the actual sale price and the actual cost price of the goods in (extracted in paragraph 281 of the question.” Report of the Committee on the Taxation of Trading Profits presented to British Parliament in April, 1951). While anticipated loss in thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account, as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock is too be valued at cost or market price whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy. As profits for income-tax purposes are to be computed in conformity with the ordinary principles of commercial accounting, unless of course, such principles have been superseded or modified by legislative enactments, unrealized profits in the shape of appreciated value of goods remaining unsold at the end of an accounting year and carried over to the following year’s account in a business that is continuing are not