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

ITA 2794/MUM/2018

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 8061 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-04-2019
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: 2011-2012
• Appeal Filed On: 04-05-2018
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: R MANJUNATHA SWAMY
• Assessee Lawyers: R R VORA
• Keywords: Revision of order; Depreciation; Rule of consistency; Difference of opinion; Change of opinion
• Section: 143(3); 142(1); 234B; 115JB; 37(1); 43(5); 145; 263

Judgement Text

E IN THE INCOME TAX APPELLATE TRIBUNAL E BENCH, MUMBAI BEFORE SHRI MAHAVIR SINGH , JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ./ I.T.A. NO. 2794 / MUM/2018 ( / ASSESSMENT YEAR: 2011 - 12 ) TATA CONSULTANCY SERVICES LTD., 9 TH FLOOR, NIRMAL BUILDING, NARIMAN POINT, MUMBAI - 4000 21 / V. THE COMMISSIONER OF IN COME TAX - LARGE TAX PAYERS UNIT , 29 TH FLOOR, CENTRE ONE WORLD TRADE CENTRE, CUFFE PARADE, MUMBAI - 400 005 ./ PAN : AAACR4849R ( / APPELLANT ) .. ( / RESPONDENT ) ASSESSEE BY: SHRI. R. R. VORA & SHRI. NIKHIL TIWARI REVENUE BY: SHRI. R. MANJ UNATHA SWAMY ( CIT - DR) / DATE OF HEARING : 2 9.01.2019 / DATE OF PRONOUNCEMENT : 18 .04.2019 / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER: THIS APPEAL, FILED BY ASSESSEE, BEING ITA NO. 2794/MUM/2018 , IS DIRECTED AGAINST REVISIONARY ORDER DATED 21.03.2018 , PASSED BY LEARNED COMMISS IONER OF INCOME - TAX ( LTU ) , MUMBA I (HEREINAFTER CALLED THE CIT ) U/S 263 OF THE INCOME - TAX ACT,1961(HEREINAFTER CALLED THE ACT) , FOR ASSESSMENT YEAR (AY) 2011 - 12 . I.T.A. NO.2794/MUM/2018 2 2. THE GROUNDS OF APPEAL 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 BAS IS 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 I N 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. 1 ST JUNE 2015. 7. WITHOUT PREJUDICE TO THE ABOVE, THE LEARNED C1T ERRED IN NOT CONSIDERING THE FACT THAT THE UNREALIZED GAIN IS I.T.A. NO.2794/MUM/2018 3 REVERSED IN THE SUBSEQUENT YEAR AND AS SUCH IT IS NOT PREJUDICIAL TO THE INTEREST OF THE REVENUE. 8. WITHOUT PREJUDICE T O 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 AR E 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 GAIN S ON OPEN FORWARD FOREIGN EXCHANGE CONTRACT S 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 GAIN S ON OPEN FO RWARD 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 TAX ES 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 I SSUANCE 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. I.T.A. NO.2794/MUM/2018 4 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 DEP ARTMENT 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 D EDUCTION 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 CAN NOT 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. RAJAKRI SHNAN (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 T AX 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 RE DUCED OR ADDED TO THE I.T.A. NO.2794/MUM/2018 5 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 REV ERSAL OF UNREALIZED GAIN/(LOSS) OF LAST YEAR AY 2011 - 12 ( 4,67,14,007 ) AY 2012 - 13 (29,86,64,843) ADD: UNREALISED GAIN/(LOSS) DURING THE YEAR 29,86,64, 843 (120,20,80, 563) 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 UNREAL IZED MARK TO MARKET LOSS MUST AL SO BE ALLOWED IN THE RESPECTIVE ASSESSMENT YEARS. 3.3 THE LD. CIT REJECTED THE CONTENTION S OF THE ASSESSEE BY HOLDING THAT IN VIEW OF A CCOUN TING S TANDARD AS - 30 ISSUED BY INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA(ICAI) AND KEEPING IN VIEW PROVISIONS OF SECTION 145 OF THE 1961 ACT , T HE 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 CONTENTION S OF THE ASSESSEE THAT THE AO HAD SEEN IT AND ALLOW ED 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 ER RONEOUS AN D PREJUDICIAL TO THE INTEREST OF REVENUE. THE LEARNED CIT DIRECTED THE AO TO ENHANCE THE ASSESSMENT ACCORDINGLY , VIDE REVISIONARY ORDER D ATED 21.03.2018 PASSED BY LEARNED CIT U/S 263 OF THE 1961 ACT . I.T.A. NO.2794/MUM/2018 6 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 ASSESSE E 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 , INT EGRATED PORTFOLIO OF IT AND IT E NABLED SERVICES. THE ASS ESSEE FILED ITS RETURN OF INCOME WITH THE TOT AL INCOME OF RS. 1998.64 CRORES UNDER NORMAL PROVISION OF ACT AND BOOK PROFIT OF RS. 4849.54 CRORE S 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 PROVISION S OF THE 1961 ACT, THE ASSESSEE HAD REDUCED UNREALIZED MARK TO MARKET GAIN ON OPEN FORWARD CONTRACT S IN FOREIGN EXCHANGE OF RS. 25.20 CRORE S AS AT BALANCE SHEET DATE . IT WAS SUBMITTED THAT T HESE 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 AFT ER MAKING DETAILED INQUIRY , THE AO HAD ALLOWED DEDUCTION OF RS. 25.20 CRORE S 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 CONTRACT S WAS OFFER ED TO TAX IN SUCCEEDING YEAR(S) WHEN THE ACTUAL SETTLEMENT TOOK PLACE OF THE SE FORWARD CONTRACTS IN FOREIGN EXCHANGE ON ACTUAL REALISATION OF GAIN/LOSS ON THE TRANSACTION. IT WAS SUBMITTED THAT THERE I S NO LOSS TO REVENUE AS THESE UNREALIZED GAIN ON FOREIGN EXCHANGE FORWARD CONTRACT ON BEING REALIZED WAS OFFER ED TO TAXATION IN THE SUBSEQUENT YEAR. IT IS ALSO SUBMITTED THAT THE ASSESSEE IS CONSISTENTLY FOLLOWING THE SAME POLICY SINCE ASSESSMENT YEAR 200 5 - 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 I.T.A. NO.2794/MUM/2018 7 SUBMITTED THA T THIS POLICY IS CONSISTENTLY FOLLOWED WHEREIN LOSS/GAINS ON FOREIGN EXCHANGE OPEN FORWARD CONTRACTS WERE OFFER ED TO TAX ON REALIZATION BASIS ON THE SETTLEMENT OF FORWARD CONTRACTS IN FOREIGN EXCHANGE AND HENCE MARK TO MARKET UNREALISED GAIN S/LOSS ON THE DATE OF BALANCE SHEET WERE NOT OFFER ED TO TAXATION. IT WAS SUBMITTED THAT ITS IN THIS ASSESSMENT YEAR I.E. AY 2011 - 12 ON LY THAT THE R EVENUE HAS INVOKED REVISIONARY POWERS U/S 263 OF THE ACT AND IT HAS BEEN HELD THAT UNREALISED GAIN S AR I SING ON MA RK 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 ASSESS EE 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 ALBE IT 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 CRORE S 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 T HE PAPER BOOK WHEREIN UNREALISED MARK TO MARKET LOSSES ON OPEN FORWARD CONTRACT IN FOREIGN EXCHANGE TO THE TUNE OF RS. 150.07 CRORE S WERE ADDED BACK TO COMPUTE INCOME CHARGEABLE TO TAX FOR AY 2012 - 13 . O UR ATTENTION WAS ALSO DRAWN TO PAGE NO. 90 OF THE PAPE R 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 ASSES SEE S POLICY OF OFFERING TO TAX ONLY REALISED GAINS /LOSSES ON FOREIGN EXCHANGE OPEN FORWARD CONTRACTS WAS ACCEPTED BY R EVENUE CONSISTENTLY FROM YEAR TO YEAR . OUR ATTENTION WAS ALSO DRAWN TO PAGE NO. 47 OF THE PAPER BOOK WHERE IN IT WAS SUBMITTED THAT FOR THE I.T.A. NO.2794/MUM/2018 8 IMPUGNED ASSESSMENT YEAR AY 2011 - 12 , THE LEARNED AO VIDE NOTICE DATED 13.11.2014 U/S. 142(1) OF THE 19 61 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 KEEPIN G IN VIEW PROVISIONS OF S ECTION 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. 25.2 0 CRORE ON OPEN FORWARD CONTRACT WERE UNREAL ISED 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 ACCEPT ED 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 CONTRACT S 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 TH ROUGH 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 F OR THE ASSESSEE SUBMITTED THAT I NQUIRY WAS MADE BY TH E 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 CONSIST ENTLY FOLLOWED AND ACCEPTED BY THE REVENUE. IT IS SUBMITTED THAT FROM AY 2005 - 06 TO 2010 - 11 AND ALSO IN I.T.A. NO.2794/MUM/2018 9 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 LEARNE D 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 RELIE D UPON DECISION OF HONBLE 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 T HE CASE OF A DDL. CIT V. C.J. EXPORTERS (2007) 50 CCH 0274 (MUM - TRI B.). THE ASSESSEE ALSO RELIED UPON THE DECISION OF ITAT, MUMBAI IN THE CASE OF RELIANCE INDUSTRIES LTD. V. CIT IN ITA NO. 7223/MUM/2011 , ORDER DATED 20.11.2013. THE ASSESSEE ALSO PLACED RELIANCE ON THE DECISION OF ITAT, MUMBAI IN THE CASE OF RELIANCE COMM UNICATION S 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. I T 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 W AS 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 TH E AO IS HELD TO BE CLEARLY A PERVERSE VIEW . I T WAS SUBMITTED THAT ON IDE NTICAL 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 V IEW 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 I.T.A. NO.2794/MUM/2018 10 CHARGEABLE TO INCOME - TAX. I T WAS SUBMITTED BY LEARNED COUNSEL FOR THE ASSESSEE T HAT 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 FR OM 1 ST APRIL 2011. OUR ATTENTION WAS DRAWN TO PAGE NO 305 OF THE PAPER BOOK WHEREIN THE ACCOUNTING S TANDARD 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 ACCOU NTING PERIOD BEGINNING FROM 1 ST APRIL 2016 . R ELIANCE 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 DECISIO N OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT V . ES CORTS LTD. (2011) 19 8 TAXMAN 324(DEL. HC) AND IT WAS SUBMITTED THAT RULE OF CONSISTENTLY S HOULD BE FOLLOWED UNLESS THERE ARE ADDITIONAL FACTS OR FRESH MATERIAL COMING INTO POSSESSION OF THE AO WARRANT ING 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 SUC H LOSS ES HAS BEEN CLAIMED AS DEDUCTION NOR GAIN HAS BEEN OFFERED TO TAXATION IN THE EARLIER YEA R S 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 EX CHANGE 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 HONBLE SUPREME COURT IN THE CASE OF CIT V. MAX INDIA L TD. (2007) 295 ITR 282 (SC) AND IT WAS SUBMITTED THAT WH EN 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 I.T.A. NO.2794/MUM/2018 11 SUBSTITUTE ITS VIEW IN PLACE OF THE VIEW ADOPTED BY THE AO. THE RELIANCE WAS ALSO PLACED ON THE DECISI ON OF HONBLE SUPREME COURT IN THE CASE OF CIT V. GREENWORL D 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. I T IS ALSO SUBMITTED THAT THERE IS NO LOSS TO REVENUE A S 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 O N THE OTHER HAND LD. CIT - DR RELIED UPON THE DECISION OF HONBLE SUPREME COURT IN T HE CASE OF WOODWARD GOVERNOR INDIA LIMITED(SUPRA) AND IT WAS SUBMITTED THAT THE LEARNED CIT HAS RIGHTLY INVO KED PROVISION OF S ECTION 263 OF THE 1961 ACT AS THERE IS VIOLATION OF ACCOUNTANT STANDARD AS - 30 AND PROVISIONS OF S ECTION 145 OF THE ACT. THE LEARN ED CIT DR WOULD RELY UPON DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT V. AMITAB H BACH CH AN (2016) 384 ITR 200 (SC). 4.3 I N REJOINDER , THE LD. COUNSEL FOR THE ASSESSEE DREW OUR ATTENTION TO PARA 21 OF THE SAID JUDGMENT OF HONBLE SUPREME COURT IN T HE 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 CONCERN ED W HICH ARE UNREALISED ON MARK TO MARKET BASIS ON OPEN FO RWARD CONTRACT IN FOREIGN EXCHANGE AS ON THE DATE OF BALANCE SHEET , THEY WERE CREDIT ED IN THE BOOKS OF ACCOUNTS BUT THE SAME WERE DEDUCTED WHILE COMPUTING INCOME CHARGEABLE TO INCOME - TAX . 5 . WE HAVE CONSIDERED RIVAL CONTENTION S AND PERUSED THE MATERIAL ON RECORD INCLUDING CITED CASE LAWS. T HE ASSESSEE IS PROVIDER OF INFORMATION TECHNOLOGY SERVICES, BUSINESS S OLUTI ONS AND AN I.T. I.T.A. NO.2794/MUM/2018 12 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 BOO K 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 BALANC E SHEET WHILE PREPARING AUDITED FINANCIAL STATEMENTS UNDER THE COMPANIES ACT IN PROFIT AND LOSS ACCOUNT UNDER THE COMPANIES ACT, 1956 . HOWEVER, T HE ASSESSEE WHILE COMPUTING TOTAL INCOME CHARGEABLE TO INCOME - TAX UNDER THE PROVISIONS OF THE 1961 ACT HAD REDU CED 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 LOSS ES 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 UNREAL ISED GAINS OF RS. 25.20 CRORES I N OPEN FORWARD CONTRACTS IN FOREIGN EXCHANGE ON MARK TO MAR KET BASIS. IT IS ALSO MATTER OF RECORD AS WE HAVE SEEN IN PRECEDING PARAS 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 SU CH 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 I.T.A. NO.2794/MUM/2018 13 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 COMPUTI NG INCOME CHARGEABLE TO INCOME - TAX UNDER THE PROVISIONS OF THE 1961 ACT , THE ASSESSEE REDUCED THESE GAINS OF RS. 25.20 CRORES. A FTER DUE ENQUIRY AND CONSIDERING REPLIES FILED BY THE ASSESSEE DURING ASSESSMENT PROCEEDINGS , THE AO HAS ACCEPTED THE ACCOUNTIN G 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, A LL UNREALISED GAINS/LOSSES O N 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 UNDISPUTEDL Y 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 SU CH 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 WH O 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 I.T.A. NO.2794/MUM/2018 14 BOOKED , WHICH WERE DULY CONSIDERED WHILE COMPUTING INCOME CHARGEABLE TO TAX OF THE YEAR OF SETTLE MENT 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. T HE LEARNED CIT HAD INVOKED REVISIONARY POWERS U/S 263 OF THE 1961 ACT TO HOLD THAT THE UNR EALISED 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 INTER EST OF REVENUE KEEPING IN VIEW ACCOUNTING S TANDARD 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 1 ST 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 1 ST APRIL 2011 BUT THE SAME WAS APPLICABLE FROM ACCOUNTING PERIOD COMMENCING FROM 1 ST APRIL 2009 BEING RECOMMENDATORY IN INITIAL TWO YEARS VIZ. ACCOUNTING PERIOD COMMENCING ON OR AFTER 1 ST 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 CONSI DERING 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 B E 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.), I.T.A. NO.2794/MUM/2018 15 THE EXISTING ACCOUNTING STANDARDS WOULD CONTINUE TO PREVAIL OVER AS 30, AS 31 AND AS 32. (II) IN CASES WHERE A RELEVANT REGUL ATORY 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. 3. THEREAFTER, THE ICAI ISSUED A GUIDANCE NOTE ON ACCOUNTIN G FOR DERIVATIVE CONTRACTS, IN JUNE 2015, EFFECTIVE FROM ACCOUNTING PERIODS BEGINNING ON OR AFTER 1ST APRIL, 2016; ITS EARLIER APPLICATION IS ALSO ENCOURAGED. THE GUIDANCE NOTE STATED THAT FROM THE DATE THIS GUIDANCE NOTE COMES INTO EFFECT, APPLICATION OF (AS) 30, FINANCIAL INSTRUMENTS: RECOGNITION AND MEASUREMENT, STANDS WITHDRAWN TO THE EXTENT OF THE GUIDANCE COVERED FOR ACCOUNTING FOR DERIVATIVES IS WITHIN THE SCOPE OF GUIDANCE NOTE ON ACCOUNTING FOR DERIVATIVE CONTRACTS. 4. APART FROM THE ABOVE, THE COU NCIL 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 ACCOUNTI NG STANDARDS IND - AS WHO WILL THEN HENCEFORTH HOLD FIELD IN LIEU THEREOF. HOWEVER, WE I.T.A. NO.2794/MUM/2018 16 ARE PRE SENTLY 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 T HE 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 - - 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 - - VIS SCHEDULE VI TO THE COMPANIES ACT, 1956, WHICH WAS PUBLISHED IN THE NOVEMBER 2003 ISSUE OF THE CHARTERED A CCOUNTANT (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 INT O 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. 4. IN VIEW OF THE ABOVE FOOTNOTE TO AS 11, THE COUNCIL OF THE INSTI TUTE OF CHARTERED ACCOUNTANTS OF INDIA HAS DECIDED AT ITS 269TH MEETING HELD ON JULY 18, 2007, TO WITHDRAW THE ANNOUNCEMENT ON TREATMENT OF EXCHANGE DIFFERENCES UNDER ACCOUNTING STANDARD (AS) 11 (REVISED 2003), THE EFFECTS OF CHANGES IN FOREIGN EXCHANG E RATES VIS - - VIS SCHEDULE VI TO THE COMPANIES ACT, 1956, PUBLISHED IN THE CHARTERED ACCOUNTANT OF NOVEMBER 2003. ACCORDINGLY, THE ACCOUNTING TREATMENT OF EXCHANGE DIFFERENCES CONTAINED IN AS 11 NOTIFIED AS ABOVE IS APPLICABLE AND NOT THE REQUIREMENT S OF SCHEDULE VI TO THE ACT, IN RESPECT OF ACCOUNTING PERIODS COMMENCING ON OR AFTER 7TH DECEMBER, 2006. 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 I.T.A. NO.2794/MUM/2018 17 (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 ENTERPRISES 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 WIT H 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 FORWA RD 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 I.T.A. NO.2794/MUM/2018 18 RENEWAL OF SUCH A FORWARD EXCHANGE CONTRACT SHOULD BE RECOGNISED AS INCOME OR AS EXPENSE FOR THE PERIOD. 37. THE RISKS ASSOCIATED WITH CHANGES IN EXCHANGE RATES MAY BE MITIGATED BY ENTERING INTO FORWARD EXCHAN GE CONTRACTS. ANY PREMIUM OR DISCOUNT ARISING AT THE INCEPTION OF A FORWARD EXCHANGE CONTRACT IS ACCOUNTED FOR SEPARATELY FROM THE EXCHANGE DIFFERENCES ON THE FORWARD EXCHANGE CONTRACT.THE PREMIUM OR DISCOUNT THAT ARISES ON ENTERING INTO THE CONTRACT IS MEASURED BY THE DIFFERENCE BETWEEN THE EXCHANGE RATE AT THE DATE OF THE INCEPTION OF THE FORWARD EXCHANGE CONTRACT AND THE FORWARD RATE SPECIFIED IN THE CONTRACT. EXCHANGE DIFFERENCE ON A FORWARD EXCHANGE CONTRACT IS THE DIFFERENCE BETWEEN (A) THE FOREIGN CURRENCY AMOUNT OF THE CONTRACT TRANSLATED AT THE EXCHANGE RATE AT THE REPORTING DATE, OR THE SETTLEMENT DATE WHERE THE TRANSACTION IS SETTLED DURING THE REPORTING PERIOD, AND (B) THE SAME FOREIGN CURRENCY AMOUNT TRANSLATED AT THE LATTER OF THE DATE OF INC EPTION OF THE FORWARD EXCHANGE CONTRACT AND THE LAST REPORTING DATE. 38. A GAIN OR LOSS ON A FORWARD EXCHANGE CONTRACT TO WHICH PARAGRAPH 36 DOES NOT APPLY SHOULD BE COMPUTED BY MULTIPLYING THE FOREIGN CURRENCY AMOUNT OF THE FORWARD EXCHANGE CONTRACT BY THE DIFFERENCE BETWEEN THE FORWARD RATE AVAILABLE AT THE REPORTING DATE FOR THE REMAINING MATURITY OF THE CONTRACT A ND THE CONTRACTED FORWARD RATE F OR THE FORWARD RATE LAST USED TO MEASURE A GAIN OR LOSS ON THAT CONTRACT FOR AN EARLIER PERIOD. THE GAIN OR LOSS SO COMPUTED SHOULD BE RECOGNISED IN THE STATEMENT OF PROFIT AND LOSS FOR THE PERIOD. THE PREMIUM OR DISCOUNT ON THE FORWARD EXCHANGE CONTRACT IS NOT RECOGNISED SEPARATELY. 39. IN RECORDING A FORWARD EXCHANGE CONTRACT INTENDED FOR TRADING OR SPECULATI ON PURPOSES, THE PREMIUM OR DISCOUNT ON THE CONTRACT IS IGNORED AND AT EACH BALANCE SHEET DATE, THE VALUE OF THE CONTRACT IS MARKED TO ITS CURRENT MARKET VALUE AND THE GAIN OR LOSS ON THE CONTRACT IS RECOGNISED. *** *** 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 I.T.A. NO.2794/MUM/2018 19 CORPORATE AFFAIRS, GOVERNMENT OF INDIA. THE AS SESSEE 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 REPO RTED 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 S HEET 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 HONBLE SUPR EME COURT IN THE CASE OF CIT V. WOODWARD GOVERNOR INDIA PRIVATE LIMITED(SUPRA) HA D 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: I.T.A. NO.2794/MUM/2018 20 17. HAVING COME TO THE CONC LUSION 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 CENTR AL GOVERNMENT HAS MADE ACCOUNTING STANDARD - 11 MANDATORY , WE ARE NOW REQUIRED TO EXAMINE THE SAID ACCOUNTING STANDARD ('AS'). 18. AS - 11 DEALS WITH GIVING OF ACCOUNTING TREATMENT FOR THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES. AS - 11 DEALS WITH EFFECTS OF EXCHANGE DIFFERENCES. UNDER PARA 2, REPORTING CURRENCY IS DEFINED TO MEAN THE CURRENCY USED IN PRESENTING THE FINANCIAL STATE MENTS. SIMILARLY, THE WORDS 'MONETARY ITEMS' ARE DEFINED TO MEAN MONEY HELD AND ASSETS AND LIABILITIES TO BE RECEIVED OR PAID IN FIXED AMOUNTS, E.G., CASH, RECEIVABLES AND PAYABLES. THE WORD 'PAID' IS DEFINED UNDER SECTION 43(2). THIS HAS BEEN DISCUSSED EA RLIER. SIMILARLY, 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 C URRENCY 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 O N 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 DIFFEREN CES, 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 PARA 10 AND PARA 11 WHICH DEALS WITH EXCHANGE D IFFERENCES ARISING ON REPAYMENT OF LIABILITIES INCURRED FOR THE PURPOSE OF ACQUIRING FIXED ASSETS, WHICH TOPIC FALLS UNDER SECTION 43A OF THE 1961 ACT. AT THIS STAGE, WE ARE CONCERNED ONLY WITH PARA 9 WHICH DEALS WITH REVENUE ITEMS. PARA 9 OF AS - 11 RECOGNI SES EXCHANGE DIFFERENCES AS INCOME OR EXPENSE. IN CASES WHERE, E.G., THE RATE OF DOLLAR RISES VIS - A - 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 VI S - A - 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. 19. A COMPANY IMPORTS RAW MATERIAL WORTH US $ 250,000 ON 15 - 1 - 2002 WHEN THE E XCHANGE RATE WAS RS. 46 PER US $. THE COMPANY RECORDS THE TRANSACTION AT THAT RATE. THE PAYMENT FOR THE IMPORTS IS MADE ON 15 - 4 - 2002 WHEN THE EXCHANGE RATE IS RS. 49 PER US $. HOWEVER, ON THE BALANCE SHEET DATE, 31 - 3 - 2002, THE RATE OF EXCHANGE IS RS. 50 PE R US $. I.T.A. NO.2794/MUM/2018 21 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. 20. IN THE CASE OF SUTLEJ COTTON MILLS LTD. V. CI T [1979] 116 ITR 1 THIS COURT HAS OBSERVED AS UNDER : 'THE LAW MAY, THEREFORE, NOW BE TAKEN TO BE WELL - SETTLED THAT WHERE PROFIT OR LOSS ARISES TO AN ASSESSEE ON ACCOUNT OF APPRECIATION OR DEPRECIATION IN THE VALUE OF FOREIGN CURRENCY HELD BY IT, ON CONVERSION INTO ANOTHER CURRENCY, SUCH PROFIT OR LOSS WOULD ORDINARILY BE A TRADING PROFIT OR LOSS IF THE FOREIGN CURRENCY IS HELD BY THE ASSESSEE ON REVENUE ACCOUNT OR AS A TRADING ASSET OR AS A PART OF CIRCULATING CAPITAL EMBARKED IN THE BUSINESS. BUT; IF ON THE OTHER HAND, THE FOREIGN CURRENCY IS HELD AS A CAPIT AL ASSET OR AS FIXED CAPITAL, SUCH PROFIT OR LOSS WOULD BE OF CAPITAL NATURE. . . .' (P. 13) [EMPHASIS SUPPLIED] 21. IN CONCLUSION, WE MAY STATE THAT IN ORDER TO FIND OUT IF AN EXPENDITURE IS DEDUCTIBLE THE FOLLOWING HAVE TO BE TAKEN INTO ACCOUNT ( I ) WHETH ER THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE IS MERCANTILE SYSTEM, WHICH BRINGS INTO DEBIT THE EXPENDITURE AMOUNT FOR WHICH A LEGAL LIABILITY HAS BEEN INCURRED BEFORE IT IS ACTUALLY DISBURSED AND BRINGS INTO CREDIT WHAT IS DUE, IMMEDIATELY IT BECOM ES DUE AND BEFORE IT IS ACTUALLY RECEIVED; ( II ) WHETHER THE SAME SYSTEM IS FOLLOWED BY THE ASSESSEE FROM THE VERY BEGINNING AND IF THERE WAS A CHANGE IN THE SYSTEM, WHETHER THE CHANGE WAS BONA FIDE ; ( III ) WHETHER THE ASSESSEE HAS GIVEN THE SAME TREATMENT T O LOSSES CLAIMED TO HAVE ACCRUED AND TO THE GAINS THAT MAY ACCRUE TO IT; ( IV ) WHETHER THE ASSESSEE HAS BEEN CONSISTENT AND DEFINITE IN MAKING ENTRIES IN THE ACCOUNT BOOKS IN RESPECT OF LOSSES AND GAINS; ( V ) WHETHER THE METHOD ADOPTED BY THE ASSESSEE FOR MA KING ENTRIES IN THE BOOKS BOTH IN RESPECT OF LOSSES AND GAINS IS AS PER NATIONALLY ACCEPTED ACCOUNTING STANDARDS; ( VI ) WHETHER THE SYSTEM ADOPTED BY THE ASSESSEE IS FAIR AND REASONABLE OR IS ADOPTED ONLY WITH A VIEW TO REDUCING THE INCIDENCE OF TAXATION. PERUSAL OF SECTION 145 OF THE 1961 ACT CLEARLY REVEALS THAT THE ASSESSEE IS REQUIRED TO FOLLOW SUCH METHOD OF ACCOUNTING WHEREIN IT ENABLES THE REVENUE TO COMPUTE INCOME UNDER THE PROVISIONS OF THE 1961 ACT CORRECTLY. THIS METHOD OF ACCOUNTING IS ALSO TO B E CONSISTENTLY FOLLOWED BY THE TAX - PAYER. SECTION 145 AS WAS APPLICABLE FOR IMPUGNED ASSESSMENT YEAR IS REPRODUCED HEREUNDER: [ METHOD OF ACCOUNTING. 145. (1) INCOME CHARGEABLE UNDER THE HEAD PROFITS AND GAINS OF BUSINESS OR PROFESSION OR INCOME FROM OTHER SOURCES SHALL, I.T.A. NO.2794/MUM/2018 22 SUBJECT TO THE PROVISIONS OF SUB - SECTION (2), BE COMPUTED IN ACCORDANCE WITH EITHER CASH OR MERCANTILE SYSTEM OF ACCOUNTING REGULARLY EMPLOYED BY THE ASSESSEE. (2) THE CENTRAL GOVERNMENT MAY NOTIFY IN THE OFFICIAL GAZETTE FROM TIME TO TIME ACCOUNTING STANDARDS TO BE FOLLOWED BY ANY CLASS OF ASSESSEES OR IN RESPECT OF ANY CLASS OF INCOME. (3) WHERE THE ASSESSING OFFICER IS NOT SATISFIED ABOUT THE CORRECTNESS OR COMPLETENESS OF THE ACCOUNTS OF THE ASSESSEE, OR WHERE THE METHOD OF ACCOUNTING PROVIDED IN SUB - SECTION (1) OR ACCOUNTING STANDARDS AS NOTIFIED UNDER SUB - SECTION (2), HAVE NOT BEEN R EGULARLY FOLLOWED BY THE ASSESSEE, THE ASSESSING OFFICER MAY MAKE AN ASSESSMENT IN THE MANNER PROVIDED IN SECTION 144. ] IT IS ALSO PERTINENT TO MENTION THAT AS - 11 AS WELL VARIOUS JUDGMENTS INCLUDING DECISIONS OF HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA PRIVATE LIMITED(SUPRA) HAS CONS ISTENTLY 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 I S 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 I.T.A. NO.2794/MUM/2018 23 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 HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA PRIVATE LIMITED (SUPRA) AND WILL NOT RESULT IN COMPUTING CORRECT INCOME CHARGEABLE TO T AX WITHIN PROVISIONS OF THE 1961 ACT . THE DECISION OF HONBLE 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. THE RE 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 CORRE CT 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 HONBLE APEX COURT IN THE CASE OF WOODWARD GOVERNOR INDIA PRIVATE LIMITED(SUPRA) . THUS, THE DECISIONS RELI ED 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 P ROCEEDINGS 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 HONBLE 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 I.T.A. NO.2794/MUM/2018 24 TAKING THE DECISION IN THE INSTANT CASE IN FAVOUR OF REVENUE. I N OUR CONSIDERED VIEW LD. CIT HAS RIGHTLY I NVOKED 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 BALANC E 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 HONBLE SUPREME COUR T 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 HONBLE 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 HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA PRIVATE LIMITED(SUPRA) AND CBDT CANNOT DISLODGE THE SAID DECISION OF HONBLE 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 MA TRIX 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 S TANDARD AS - 11 WHICH WAS I.T.A. NO.2794/MUM/2018 25 MANDATORY AS WELL DECISION OF HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA PRIVATE LIMITED(SUPRA), AS THE METHOD OF ACCOU NTING FOLLOWED BY THE ASSESSEE IN REDUCING UNREALISED GAINS ON OPEN FORWARD CONTRACTS IN FOREIGN EXCHANGE ON THE DATE OF BALANCE SHEET ON MARK TO MARKET BASIS WAS NOT A CORRECT METHOD OF ACCOUNTING WHICH HAD MADE AN ASSESSMENT ORDER AS ERRONEOUS . WE ARE ALSO OF THE VIEW THAT BY FOLLOWING SUCH POLICY WHICH WAS AGAINST T HE BINDING NATURE OF MANDATORY ACCOUNTING S TANDARD AS - 11 AS WELL HONBLE SUPREME COURT DECISION IN THE CASE OF WOODWARD GOVERNOR INDIA PRIVATE LIMITED(SUPRA) COULD NOT HAVE LED TO COMPUTING OF CORRECT INCOME CHARGEABLE TO TAX UNDER THE PROVISIONS OF THE 1961 ACT WHICH HAS INFACT CAUSED PREJUDICE TO THE REVENUE . MERELY BECAUSE THE ASSESSEE HAS INCLUDED SUCH INCOME IN SUCCEEDING YEAR ON SETTLEMENT OF FORWARD CONTRACT CANNOT REMOVE THE PREJUDICE CAUSED TO REVENUE AS IT HAS POSTPONED THE COLLECTION OF TAXES WHICH ARE IN FACT PUBLIC MONEY MEANT FOR USE IN PUBLIC INTEREST FOR PUBLIC PURPOSES . THE REVENUE IS ENTITLED TO ITS SHARE IN INCOME BY WAY OF INCOME - TAX ON ALL THE INCOME WHICH HAS CRYSTALLIZED DURING THE PREVIOUS YEAR AND IT CANNOT BE POSTPONED BY FOLLOWING INCORRECT METHOD OF ACCOUNTING/POLICIES . FURTHER, WITH THE ROLLOVERS OF THESE FORWARD CONTRACTS IN FOREIGN EXCHANGE , THE LIABILITY TO PAY TAX CAN BE INDEFINITELY POSTPONED. THUS, WE HOLD THAT ASSESSMENT ORDER PASSED BY THE AO WAS NOT ONLY ERRONEOUS BUT WAS ALSO PREJUDICIAL TO THE INTEREST OF REVENUE AND THE LEARNED CIT HAS RIGHTLY INVOKED PROVISIONS OF SECTION 263 OF THE 1961 ACT . WE HAVE NOTED THAT LEARNED CIT RELIED ON AS 30 BUT IT IS A S 11 WHICH IS APPLICABLE FOR THE YEAR UNDER CONSIDERATION AND METHOD ADOPTED BY ASSESSEE TO COMPUTE INCOME CHARGEABLE TO TAX DOES NOT SATISFY MANDATE OF SECTION 145 OF THE 1961 ACT. AT THE SAME BREATH, WE ARE AGREEABLE WITH THE CONTENTION OF LEARNED COUNSE L FOR THE ASSESSEE THAT THERE CANNOT BE DOUBLE TAXATION OF THE SAME INCOME WHICH WILL RESULT INTO DOUBLE JEOPARDY WHICH IS IMPER MI SSIBLE AS THE SAME INCOME CANNOT BE TAXED TWICE WHICH IS CARDINAL RULE OF TAXATION. WE DIRECT THE AO TO RE - COMPUTE INCOME OF T HE SUCCEEDING YEAR AFTER I.T.A. NO.2794/MUM/2018 26 VERIFICATION SO THAT THE SAME INCOME IS NOT TAXED TWICE. THE ASSESSEE FAILS IN THIS APPEAL IN THE MANNER INDICATED ABOVE . WE ORDER ACCORDINGLY. 6 . IN THE RESULT, APPEAL OF THE ASSESSEE IN ITA NO. 2794/MUM/2018 FOR AY 2011 - 12 STAND DISMISSED AS DETAILED ABOVE . ORDER PR ONOUNCED IN THE OPEN COURT ON 1 8 .04.2019. 1 8 .04.2019 S D / - S D / - ( MAHAVIR SINGH ) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 1 8 .04.2019 NISHANT VERMA SR. PRIVATE SECRETARY COPY TO 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) CONCERNED, MUMBAI 4. THE CIT - CONCERNED, MUMBAI 5. THE DR BENCH, 6. MASTER FILE // TUE COPY// BY ORDER DY/ASSTT. REGISTRAR ITAT, MUMBAI