Devashree Ispat (P) Ltd., Kolkata V. ITO Ward - 3(4), Kolkata

ITA 2113/KOL/2018

• Counselvise Citation: [2019] 118 COUNSELVISE.COM (IT) 1432 (ITAT-KOLKATA)
• Duration Of Justice: 5 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-03-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 06-03-2019
• Assessment Year: 2010-2011
• Appeal Filed On: 08-10-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: C J SINGH JCITSRDR
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH SMC KOLKATA BEFORE SHRI S.S, GODARA, JUDICIAL MEMBER ITA NO.2113/KOL/2018 ASSESSMENT YEAR:2010-11 DEVASHREE ISPAT (P) LTD., C/O SRI S.L KOCHAR, ADVOCATE, 5, ASHUTOSH CHOUDHURY AVENUE, KOLKATA-19 [ PAN NO.AACCD 0753 E ] / V/S . INCOME TAX OFFICER, WARD-3(4), AAYAKAR BHAWAN, POORVA, KOLKATA-107 /APPELLANT .. /RESPONDENT /BY APPELLANT SHRI ANIL KOCHAR, ADVOCATE /BY RESPONDENT SHRI C.J. SINGH, JCIT, SR-DR /DATE OF HEARING 06-03-2019 /DATE OF PRONOUNCEMENT 22-03-2019 /O R D E R THIS ASSESSEES APPEAL FOR ASSESSMENT YEAR 2010-11 , ARISES AGAINST THE COMMISSIONER OF INCOME-TAX (APPEALS)-22, KOLKATAS ORDER DATED 20.07.2018 PASSED IN CASE NO.109/CIT(A)-22/10-11/15-16/KOL, INVOLVIN G PROCEEDINGS U/S. 143(3) OF THE INCOME TAX ACT, 1961; IN SHORT THE ACT. HEARD BOTH THE PARTIES. CASE FILE PERUSED. 2. THE ASSESSEES SOLE SUBSTANTIVE GROUND CHALLENGE S 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 T O THIS EFFECT READS AS UNDER:- 06. FINDINGS & DECISION: 1. I HAVE CAREFULLY CONSIDERED THE ACTION OF THE LD. A O 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 AVAIL ABLE ON THE SUBJECT. IN AO HAS DISCUSSED HIS REASONS FOR MAKING THE ADDITION ON AC COUNT OF MARKED TO MARKET FOREIGN EXCHANGE GAIN OF RS.4,61,966/-. IN THE AUDI T REPORT ACCOMPANYING THE ACCOUNTS, THE AUDITOR HAD CATEGORICALLY MENTIONED T HAT 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 ITA NO.2113/KOL/2018 A.Y. 20 10-11 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/- ARI SING 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. 2. AFTER GIVING A THOUGHTFUL CONSIDERATION TO THE FAC TS 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 TA XED IN THE RELEVANT YARE TO WHICH IT PERTAINS AND HAS ACCRUED ON THE SPACIOUS P LEA THAT IT HAS BEEN OFFERED TO TAX IN THE SUBSEQUENT YEAR. HAVING SAID THAT, IN TH E 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 ACTUAL LY BEEN CREDITED AND OFFERED TO TAX IN THE SUBSEQUENT YEAR. 3. IN TERMS OF THE ACCOUNTING STANDARD-II ISSUED BY T HE ICAI, THE ASSESSEE BEING A COMPANY WAS MANDATORILY REQUIRED TO ACCOUNT FOR THE OUTSTANDING / UNSETTLED FOREIGN CURRENCY FORWARD CONTRACTS AT THE PREVAILIN G 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 O R GAINS ARISING AND/OR ACCRUING FROM RE-STATEMENT OF THE ASSETS AND LIABIL ITIES IN FOREIGN CURRENCY. IN TERMS OF THE SAID AS, THE GAIN/LOSS ARISING ON REST ATEMENT OF FORWARD CONTRACTS WAS REQUIRED TO BE RECOGNIZED IN THE P&L A/C. THE HON'B LE 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 LOSS ES ARISING ON RE-ALIGNMENT OF FOREIGN CURRENCY DENOMINATED ASSETS & LIABILITIES H ELD 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 AR ISING ON RE-ALIGNMENT OF FOREIGN CURRENCY FORWARD CONTRACTS IS ALSO A REAL GAIN, TAX ABLE IN THE HANDS OF THE APPELLANT. 4. IN VIEW OF THE ABOVE, I HOLD THAT THE LD AO WAS JU STIFIED IN REACHING HIS DECISION IN THE FACTS OF THE APPELLANT-COMPANYS CASE, AND W AS 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 REPRES ENTED REAL LOSS OR INCOME AND IT WAS NOT A NOTIONAL ONE. I THEREFORE FIND MERIT I N THE LD. AOS 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.4,61,96 6/- IS CONFIRMED, AND THE GROUND OF APPEAL IS REJECTED. 3. I HAVE GIVEN MY THOUGHTFUL CONSIDERATION TO RIVA L CONTENTIONS. THERE IS NO DISPUTE BETWEEN THE PARTIES THAT ASSESSEE HAS RECOG NIZED THE IMPUGNED SUM AS INCOME IN SUCCEEDING ASSESSMENT YEAR WHEREAS THE REVENUES CASE IS THAT SAME OUGHT TO BE ASSESSED IN THE IMPUGNED ASSESSMENT YEAR. IT TRANSP IRES DURING THE COURSE OF HEARING THAT ALTHOUGH THE SUM IN ISSUE PERTAINED TO RELEVAN T PREVIOUS YEAR, THE ASSESSEES AUDITOR HAD MADE IT CLEAR THAT THE SAME COULD BE CR YSTALLIZED / REALIZED ONLY IN THE ITA NO.2113/KOL/2018 A.Y. 20 10-11 DEVASHREE ISPAT (P) LTD VS. ITO WD-3(4), KOL . PAGE 3 SUCCEEDING ASSESSMENT YEAR. MR. SINGH STRONGLY EMPH ASIZES THAT ASSESSEE FOLLOWS MERCANTILE SYSTEM OF ACCOUNTING AND THEREFORE BOTH THE LOWER AUTHORITIES HAVE RIGHTLY MADE THE IMPUGNED ADDITION IN ASSESSEES CASE. I FI ND NO MERIT IN REVENUES ARGUMENTS. THE FACT REMAINS THAT THE SUM IN QUESTIO N COULD ONLY TO BE CRYSTALLIZED / REALIZED IN THE PREVIOUS YEAR RELEVANT TO SUCCEEDIN G YEAR FOR THE SUFFICIENT BASIS FOR THE TAXPAYER FOR NOT RECORDING THE SAME AS INCOME OF AS SESSMENT YEAR IN ISSUE HON'BLE APEX COURTS LANDMARK DECISION IN CHAINRUP SAMAPATRAM VS. CIT (1953) 24 ITR 481 (SC) HOLDS THAT PROFITS MERELY ON ANTICIPATION CANN OT BE RECORDED AS INCOME TILL REALIZATION THEREOF AND AT THE SAME TIME AN ANTICIP ATION 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 UNS OLD STOCK IS TO BALANCE THE COST OF THOSE GOODS ENTERED ON THE OTHER SIDE OF THE ACCOUN T 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 A CTUALLY REALIZED ON THE YEARS TRADING. AS POINTED OUT IN PARAGRAPH 8 OF THE REPOR T OF THE COMMITTEE ON FINANCIAL RISKS ATTACHING TO THE HOLDING OF TRADING STOCKS, 1 919, AS THE ENTRY FOR STOCK WHICH APPEARS IN A TRADING ACCOUNT IS MERELY INTEND ED TO CANCEL THE CHARGE FOR THE GOODS PURCHASED WHICH HAVE NOT BEEN SOLD, IT SH OULD NECESSARILY REPRESENT THE COST OF THE GOODS. IF IT IS MORE OR LESS THAN T HE COST, THEN THE EFFECT IS TO STATE THE PROFIT ON THE GOODS WHICH ACTUALLY HAVE BEEN SO LD AT THE INCORRECT FIGURE FROM THIS RIGID DOCTRINE ONE EXCEPTION IS VERY GENE RALLY 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 LE SS, THAN COST. IT IS OF COURSE AN ANTICIPATION OF THE LOSS THAT MAY BE MADE ON ITA NO.902/AHD/15 [PROGRESSIVE MERCANTILE CO-OP. BANK LTD. VS. ACIT] A.Y 2011-12-5 - THOSE GOODS IN THE FOLLOWING YEAR, AND MAY EVEN HAV ES THE EFFECT, IF PRICES RISE AGAIN, OF ATTRIBUTING TO THE FOLLOWING YEARS RESULTS A GR EATER AMOUNT OF PROFIT THAN THE DIFFERENCE BETWEEN THE ACTUAL SALE PRICE AND THE AC TUAL COST PRICE OF THE GOODS IN QUESTION. ( EXTRACTED IN PARAGRAPH 281 OF THE 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 VALU E OF THE CLOSING STOCK IS NOT BROUGHT INTO THE ACCOUNT, AS NO PRUDENT TRADER WOULD CARE T O SHOW INCREASED PROFIT BEFORE ITS ACTUAL REALISATION. THIS IS THE THEORY UNDERLYING T HE 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 PRACT ICE AND ACCOUNTANCY. AS PROFITS FOR INCOME-TAX PURPOSES ARE TO BE COMPUTED IN CONFO RMITY WITH THE ORDINARY PRINCIPLES OF COMMERCIAL ACCOUNTING, UNLESS OF COUR SE, SUCH PRINCIPLES HAVE BEEN SUPERSEDED OR MODIFIED BY LEGISLATIVE ENACTMENTS, U NREALIZED PROFITS IN THE SHAPE OF APPRECIATED VALUE OF GOODS REMAINING UNSOLD AT THE END OF AN ACCOUNTING YEAR AND CARRIED OVER TO THE FOLLOWING YEARS ACCOUNT IN A B USINESS THAT IS CONTINUING ARE NOT ITA NO.2113/KOL/2018 A.Y. 20 10-11 DEVASHREE ISPAT (P) LTD VS. ITO WD-3(4), KOL . PAGE 4 BROUGHT INTO THE CHARGE AS A MATTER OF PRACTICE, TH OUGH, AS ALREADY STATED, LOSS DUE TO A FALL IN PRICE BELOW COST IS ALLOWED EVEN IF SUCH LOSS HAS NOT BEEN ACTUALLY REALIZE. (EMPHASIS, BY UNDERLINING, SUPPLIED BY US) 17. THE PRINCIPLE IS THUS UNAMBIGUOUS. THE PRINCIPL ES OF CONSERVATISM, AND CONSIDERATIONS OF PRUDENCE, IN THE ACCOUNTING TREAT MENT REQUIRE THAT NO ANTICIPATED PROFITS BE TREATED AS INCOME UNTIL THE PROFITS ARE REALIZED, AND, AT THE SAME TIME, AN ANTICIPATED LOSS TO BE DEDUCTED FROM COMMERCIAL PRO FITS, AT THE FIRST SIGN OF ITS REASONABLE POSSIBILITY. ACCOUNTING STANDARD 2, WHIC H IS MANDATORY ACCOUNTING STANDARD UNDER SECTION 145(2), ALSO STATES THAT IN VENTORIES SHALL BE VALUED AT COST, OR NET REALIZABLE VALUE, WHICHEVER IS LOWER. THERE MAY SEEM TO BE, AT FIRST SIGHT, AN ELEMENT OF DICHOTOMY IN THIS APPROACH INASMUCH AS ANTICIPATED LOSSES ARE TAKEN INTO ACCOU NT AND ANTICIPATORY PROFITS ARE IGNORED, BUT THAT IS THE IMPACT OF ACCOUNTING PRINC IPLES SANCTIONED BY THE STATUTE AND THE LAW LAID DOWN BY HON'BLE SUPREME COURT. I ADOPT THE ABOVE DETAILED DISCUSSION MUTATIS MUTAN DIS TO HOLD THAT BOTH THE LOWER AUTHORITIES HAVE ERRED IN MAKING THE IMPUGNED ADDIT ION OF 4,61,966/- RELATING TO EXCHANGE DIFFERENCE. THE SAME STAND DELETED. 4. THIS ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 22/03/2019 SD/- (S.S. GODARA) JUDIC IAL MEMBER KOLKATA, *DKP/SR.PS - 22/03/2019 / COPY OF ORDER FORWARDED TO:- 1. /APPELLANT-DEVASHREE ISPAT (P) LTD., C/O SRI S.L.KO CHAR, ADVOCATE, 5 ASHUTOSH CHOWD HURY AVENUE, KOLKATA-19 2. /RESPONDENT-ITO WARD-3(4), AAYAKAR BHAWAN, POORVA, KOLKATA-107 3. ' % / CONCERNED CIT 4. % - / CIT (A) 5. & ))' , ' / DR, ITAT, KOLKATA 6. + / GUARD FILE. BY ORDER/ , /TRUE COPY/ ',