Cyient Limited (Formerly Infotech Enterprises Limited), HydHyd, Hyderabad V. DCIT, Circle-1(2), Hyd, Hyderabad

ITA 597/HYD/2016

• Counselvise Citation: [2018] 126 COUNSELVISE.COM (IT) 2457 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 10 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-02-2018
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 27-04-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: DR K SRINIVAS REDDY
• Keywords: Transfer pricing; International transaction; Rule of consistency; Retrospective amendment
• Section: 143(3); 92B; 37(1); 37; 92

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER ITA NO. 474/HYD/2015 ASSESSMENT YEAR: 2010-11 DY. COMMISSIONER OF INCOME- TAX, CIRCLE 2(1), HYDERABAD. VS. CYIENT LTD. (FORMERLY INFOTECH ENTERPRISES LTD.), HYDERABAD PAN AAACI4487J (APPELLANT) (RESPONDENT) ITA NOS. 475/HYD/2015 AND 597/HYD/2016 ASSESSMENT YEARS: 2010-11 & 2011-12 CYIENT LTD. (FORMERLY INFOTECH ENTERPRISES LTD.), HYDERABAD. PAN AAACI4487J VS. DY. COMMISSIONER OF INCOME- TAX, CIRCLE 1(2), HYDERABAD. (APPELLANT) (RESPONDENT) REVENUE BY : SHRI DR. K. SRINIVAS REDDY ASSESSEE BY : SHRI VIJAY MEHTA DATE OF HEARING 21/02/2018 DATE OF PRONOUNCEMENT 28/02/2018 O R D E R PER S. RIFAUR RAHMAN, A.M.: APPEAL NOS. 474 & 475/H/2015 ARE CROSS APPEALS FIL ED BY THE ASSESSEE AND REVENUE DIRECTED AGAINST THE ORDER DA TED 27/02/2015 PASSED U/S 143(3) RWS 144C(13) OF THE INCOME TAX AC T (IN SHORT THE ACT) FOR AY 2010-11. APPEAL NO. 597/H/2016 FILED B Y THE ASSESSEE AGAINST THE ORDER DATED 29/02/2016 PASSED U/S 143(3 ) R.W.S. 144C OF THE ACT FOR AY 2011-12. 2 ITA NOS. 474 & 475 /HYD/2015 AND 597/HYD/2016 CYIENT LTD. ITA NO. 474/HYD/2015 BY THE REVENUE 2. IN THIS APPEAL, THE REVENUE HAS RAISED THE FOLLO WING GROUND OF APPEAL: 1. THE DRP ERRED ON FACTS AND IN LAW IN GRANTING RELIE F TO THE ASSESSEE. 2. WHETHER THE COMMUNICATION CHARGES SHALL NOT BE E XCLUDED FROM EXPORT TURNOVER ESPECIALLY WHEN SUCH EXPENDITU RE CANNOT BE PART OF THE EXPORT TURNOVER DEFINED IN CLAUSE [I V] OF EXPLANATION 2 TO SECTION 10A OF THE INCOME TAX ACT 1961, WHICH CLEARLY STATES THAT THEY NEED TO BE EXCLUDED. 3.ANY OTHER GROUND THAT MAY BE TAKEN UP AT THE TIME OF HEARING. 3. ON VERIFICATION OF THE DETAILS IN FORMS 56F, THE AO NOTICED THAT THE ASSESSEE DID NOT EXCLUDE COMMUNICATION CHARGES, PAYMENTS MADE ABROAD TO FOREIGN SUBSIDIARIES AND FOREX REALI ZATION BEYOND 6 MONTHS IN 1 CASE RELATED TO UNIT 3 FROM THE EXPOR T TURNOVER. THE AO, THEREFORE, EXCLUDED FROM THE EXPORT TURNOVER WHILE COMPUTING DEDUCTION U/S 10A. 3.1 WHEN THE ASSESSEE OBJECTED THE SAME BEFORE THE DRP, THE DRP DIRECTED THE AO TO REDUCE TELECOMMUNICATION CHA RGES NOT ONLY FROM EXPORT TURNOVER BUT ALSO FROM THE TOTAL TURNOV ER FOR THE PURPOSE OF COMPUTING DEDUCTION U/S 10A. 4. AGGRIEVED BY THE ORDER OF DRP, THE REVENUE IS IN APPEAL BEFORE US. 5. CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL FACTS ON RECORD. THE HONBLE COURTS AND THE COORDINATE BE NCHES OF ITAT HAVE CONSISTENTLY HELD THAT THE INTERNET CHARGES HA VE TO BE EXCLUDED BOTH FROM THE EXPORT TURNOVER AS WELL AS FROM THE T OTAL TURNOVER WHILE COMPUTING DEDUCTION U/S 10A OF THE ACT. THE HONBLE BOMBAY HIGH 3 ITA NOS. 474 & 475 /HYD/2015 AND 597/HYD/2016 CYIENT LTD. COURT IN CASE OF CIT VS. GEM PLUS JEWELLERY (330 IT R 175) AS WELL AS DIFFERENT BENCHES OF TRIBUNAL INCLUDING ITAT, CHENN AI BENCH (SB) IN THE CASE OF ITO VS. SAK SOFT (313 ITR (AT) 853) HAV E HELD THAT COMMUNICATION CHARGES ATTRIBUTABLE DIRECTLY TO THE EXPORT OF ARTICLE OR THING OUTSIDE INDIA HAS TO BE EXCLUDED BOTH FROM EXPORT TURNOVER AS WELL AS TOTAL TURNOVER WHILE COMPUTING EXEMPTION U /S 10A OF THE ACT. IN VIEW OF THE ABOVE, WE ARE IN AGREEMENT WITH THE ORDER OF DRP AND DIRECT THE AO TO EXCLUDE THE COMMUNICATION CHARGES FROM THE EXPORT TURNOVER AS WELL AS TOTAL TURNOVER WHILE COMPUTING 10A DEDUCTION. ACCORDINGLY, THE GROUNDS RAISED BY THE REVENUE ON T HIS ISSUE ARE DISMISSED. 6. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSE D. ITA NO. 475/HYD/2015 BY THE ASSESSEE FOR AY 2010-11 7. IN THIS APPEAL, THE ASSESSEE HAS RAISED THE FOLL OWING GROUNDS OF APPEAL: 1) THE ORDER OF THE DY. COMMISSIONER OF INCOME TAX, CIRCLE - (2)(1), PASSED UNDER SECTION 143(3) R.W.S 144C OF T HE I.T. ACT IS ERRONEOUS / UNJUST AND CONTRARY TO THE FACTS AND LA W OF THE CASE. 2) THE TPO AND ID DRP AND THE ASSESSING OFFICER ERR ED IN MAKING THE TRANSFER PRICING ADJUSTMENTS AGGREGATING TO RS.58,95,082/- ON ACCOUNT OF CORPORATE GUARANTEES G IVEN BY THE APPELLANT TO THE CITY NATIONAL BANK, USA AND OR DINANCE SURVEY, UK IN FAVOUR OF ITS FOREIGN SUBSIDIARIES IN USA AND UK. AT ANY RATE, THE ADDITION MADE IS EXCESSIVE AND UNR EASONABLE. 3) THE ID DRP AND ASSESSING OFFICER ERRED IN DENYIN G THE DEDUCTION FOR THE AMOUNT OF RS. 9,04,8,526/- BEING THE UNREALIZED GAIN ON FOREIGN EXCHANGE FORWARD CONTRAC TS WHICH HAS BEEN REDUCED BY THE APPELLANT IN THE COMPUTATIO N OF INCOME. I) THE ID DRP AND ASSESSING OFFICER OUGHT TO HAVE R EALIZED THAT THE CLAIM FOR THE DEDUCTION OF RS. 9,04,81,526/- IS IN CONFORMITY WITH THE METHOD OF ACCOUNTING CONSISTENTLY FOLLOWED BY THE APPELLANT. THE APPELLANT HAS BEEN ADDING BACK THE P ROVISIONS FOR LOSSES AND OFFERING TO TAX THE FINAL GAINS ON S ETTLEMENT. 4 ITA NOS. 474 & 475 /HYD/2015 AND 597/HYD/2016 CYIENT LTD. 4) ANY OTHER GROUND THAT MAY BE TAKEN WITH THE PERM ISSION OF THE COURT. 8. GROUND NO. 1 AND 4 ARE GENERAL IN NATURE, HENCE, NEED NO ADJUDICATION. 9. AS REGARDS GROUND NO. 2 RELATING TO TRANSFER PRI CING ADJUSTMENT ON ACCOUNT OF CORPORATE GUARANTEE, THE ASSESSEE HAD GIVEN TWO CORPORATE GUARANTEES, NAMELY, THE FIRST ONE IS FOR US $ 3.5 MILLION TO CITY NATIONAL BANK, USA ON BEHALF OF ITS ASSOCIATED ENTERPRISE, INFOTECH ENTERPRISES AMERICA INC. THE TPO CONSIDERE D THIS AS AN INTERNATIONAL TRANSACTION AND PROPOSED TO DETERMINE ITS ARMS LENGTH PRICE AT RS. 35,66,500/-WORKED OUT @ 2% ON THE OUTS TANDING BALANCE OF THE LOAN AS ON 1.4.2009 OF RS. 17,83,25,009/- AS COMMISSION FOR PROVIDING BANK GUARANTEE. THE SECOND GUARANTEE WAS GIVEN ON BEHALF OF ITS AE, INFOTECH ENTERPRISES LIMITED, UK IN FAVO UR OF ORDINANCE SURVEY, UK FOR AN AMOUNT OF GBP 1.6 MILLION. THE TP O CONSIDERED THIS ALSO AS AN INTERNATIONAL TRANSACTION AND PROPO SED TO DETERMINE ITS ARM'S LENGTH PRICE AT RS. 23,31,552/- WORKED OUT @ 2% AS COMMISSION ON THE OUTSTANDING BALANCE OF THE LOAN A S ON 1.4.2009 OF RS. 11,65,77,600/-. 9.1 BEFORE THE DRP, THE ASSESSEE SUBMITTED THE ITAT IN CASE OF GLENMARK PHARMACEUTICAL CASE UPHELD THE GUARANTEE C OMMISSION RATE @ 0.53%. HE, THEREFORE, SUBMITTED THAT SINCE THE RA TE ADOPTED BY THE TPO @ 2% IS TOO HIGH, THE RATE MAY BE REDUCED SUITA BLY. 9.2 THE DRP, HOWEVER, CONFIRMED THE ACTION OF THE T PO. 9.3 CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED TH E MATERIAL FACTS ON RECORD. ASSESSEE HAS PROVIDED CORPORATE GUARANTE E TO ITS AE IN THE CURRENT AY WITHOUT CHARGING ANY FEES FOR THE SA ME. THE TERM GUARANTEE WAS INSERTED IN THE DEFINITION OF INTER NATIONAL TRANSACTION BY INSERTING AN EXPLANATION IN THE FINANCE ACT, 201 2 WITH RETROSPECTIVE EFFECT FROM 01/04/2012. THERE IS NO D ISPUTE THAT THE CORPORATE GUARANTEE IS AN INTERNATIONAL TRANSACTION AND DIFFERENT 5 ITA NOS. 474 & 475 /HYD/2015 AND 597/HYD/2016 CYIENT LTD. ASSESSEES ARE ADOPTING DIFFERENT METHODS OF TREATME NT. SOME ASSESSEES CHARGES NOMINAL RATE TO THE AES, WHEREAS OTHER ASSESSEES ARE TREATING THIS AS SHAREHOLDER SERVICE. HERE, THE ASSESSEE HAS OBJECTED TO INCLUDE THIS TRANSACTION AS INTERNATION AL TRANSACTION FOR THE REASON THAT THE FINANCE ACT, 2012, WHICH HAS INSERT ED AN EXPLANATION, WHICH WILL BE APPLICABLE PROSPECTIVELY FROM AY 2013 -14 AND THE CORPORATE GUARANTEE TRANSACTION WILL NOT BE APPLICA BLE TO THE CURRENT AY. THE SAME VIEW WAS UPHELD BY THE COORDINATE BENC H IN THE CASE OF DR. REDDY LABORATORIES AND OTHER BENCHES OF TRIBUNA L. THE FINDINGS GIVEN BY THE COORDINATE BENCH IN THE CASE OF DR. RE DDY LABORATORIES (SUPRA) ARE EXTRACTED BELOW: 29. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND PERUSED THE RECORD. THE ITAT, DELHI BENCH IN THE CA SE OF BHARATI AIRTEL LTD. (SUPRA) HAS CONSIDERED AN IDENT ICAL ISSUE WHICH WAS RE-AFFIRMED IN THE CASE OF SIRO CLINPHARM A PVT. LTD., VS. DCIT (ORDER DATED 31 ST MARCH, 2016). THE BENCH OBSERVED THAT TRANSFER PRICING IS A LEGISLATION SEEKING THE TAX-PAYERS TO ORGANISE THEIR AFFAIRS IN A MANNER COMPLIANT WITH T HE NORMS SET- OUT. IN SHORT, IT IS AN ANTI ABUSE LEGISLATION WHIC H TELLS YOU AS TO WHAT IS THE ACCEPTABLE BEHAVIOUR BUT IT DOES NOT TR IGGER LEVY OF TAX IN A RETROSPECTIVE MANNER BECAUSE NO PARTY CAN BE ASKED TO DO AN IMPOSSIBILITY.. ANALYSING FURTHER THE BENCH O BSERVED THAT THOUGH EXPLANATION TO SECTION 92B IS STATED TO BE C 1ARIFICATORY, IT HAS TO BE NECESSARILY TREATED AS EFFECTIVE FROM THE A.Y. 2013- 2014 AND IN THIS REGARD, RELIED UPON THE OBSERVATIO NS OF THE HON'BLE DELHI HIGH COURT IN THE CASE OF SKIES SATEL LITE. WE HAVE ALSO ANALYSED THE CASE LAW RELIED UPON BY THE LD. D .R. AND ALSO THE PROVISIONS OF THE ACT. IN OUR CONSIDERED OPINIO N, THE VIEW TAKEN BY THE DELHI BENCH OF ITAT IN THE CASE OF BHA RATI AIRTEL LTD., (SUPRA) IS ONE OF THE POSSIBLE VIEWS ON THE M ATTER AND SO LONG AS THERE IS NO BINDING DECISION OF ANY OTHER H IGHER FORUM TAKING A CONTRARY VIEW, THE ONE WHICH IS FAVOURABLE TO THE ASSESSEE HAS TO BE ADOPTED EVEN THOUGH OTHER BENCHE S HAVE TAKEN A DIFFERENT VIEW. WE, THEREFORE, HOLD THAT TH E EXPLANATION TO SECTION 92B CANNOT BE APPLIED RETROSPECTIVELY AN D FOR THE YEARS UNDER CONSIDERATION THE ASSESSEE HAVING NOT I NCURRED ANY COSTS IN PROVIDING CORPORATE GUARANTEE IT WOULD NOT CONSTITUTE 'INTERNATIONAL TRANSACTION' WITHIN THE MEANING OF S ECTION 92B OF THE ACT AND CONSEQUENTLY, ALP ADJUSTMENT IS NOT WAR RANTED ON THIS ASPECT. RESPECTFULLY FOLLOWING THE ABOVE DECISION, WE REJEC T THE TREATMENT OF CORPORATE GUARANTEE AS INTERNATIONAL TRANSACTION AN D CONSEQUENTLY, 6 ITA NOS. 474 & 475 /HYD/2015 AND 597/HYD/2016 CYIENT LTD. ALP ADJUSTMENT IS NOT WARRANTED ON THIS ASPECT. ACC ORDINGLY, THE GROUND RAISED BY ASSESSEE IS ALLOWED. 10. AS REGARDS GROUND NO. 3 REGARDING UNREALIZED GA IN ON FOREIGN EXCHANGE FORWARD CONTRACTS OF RS. 9,04,81,526/-, TH E ASSESSEE DEDUCTED THIS AMOUNT IN THE COMPUTATION OF INCOME. HOWEVER, THE AO ADDED BACK THE SAID AMOUNT TO THE INCOME OF THE ASS ESSEE ON THE GROUND THAT THERE WAS NO REASON TO DEDUCT THE SAME IN COMPUTATION. 10.1 BEFORE THE DRP, THE ASSESSEE ARGUED THAT THIS GAIN REPRESENTS UNREALIZED GAIN AND THAT IT WAS ARRIVED AT ONLY BY MAKING THE CONTRACT TO MARKET AND IT IS BEING A NOTIONAL GAIN, THE SAME WAS REDUCED FROM THE COMPUTATION OF INCOME, THOUGH, IT WAS TAKEN INT O ACCOUNTS IN THE BOOKS AND CREDITED TO THE PROFIT AND LOSS ACCOUNT. 10.2 THE DRP, HOWEVER, UPHELD THE ACTION OF THE AO. 10.3 THE LD. AR FILED WRITTEN SUBMISSIONS, WHEREIN THE FOLLOWING SUBMISSIONS WERE MADE: GROUND 3: UNREALISED GAINS ON FOREIGN EXCHANGE FOR WARD CONTRACTS 16. THIS GROUND DEALS WITH THE DENIAL OF THE DEDUCT ION BY THE ASSESSING OFFICER FOR THE AMOUNT OF RS.9,04,81,526/ - BEING THE UNREALIZED GAIN ON FOREIGN EXCHANGE FORWARD CONTRAC TS WHICH HAS BEEN REDUCED BY THE ASSESSEE IN THE COMPUTATION OF ITS INCOME. 17. THE ASSESSEE DEVELOPS SOFTWARE FOR ITS FOREIGN CLIENTS AND SO IT HAS FOREIGN EXCHANGE RECEIVABLES. FOR PROTECT ING ITSELF AGAINST FOREIGN EXCHANGE FLUCTUATIONS, IT ENTERS IN TO FOREIGN EXCHANGE FORWARD CONTRACTS. EVEN BEFORE THE FORWARD CONTRACTS MATURE, THE LOSS/GAIN ON THE CONTRACTS IS BOOKED IN ITS ACCOUNTS BY MARKING THEM TO MARKET (MTM) AS PER THE PRESCRIB ED ACCOUNTING STANDARDS. HOWEVER, THE UNREALIZED LOSSE S BOOKED IN THE ACCOUNTS ON OUTSTANDING CONTRACTS ARE NOT CL AIMED FOR DEDUCTION WHILE COMPUTING INCOME TAXABLE UNDER THE ACT. IN OTHER WORDS, SUCH LOSSES ARE ADDED BACK IN THE COMP UTATION OF INCOME FOR TAX PURPOSES. SIMILARLY, THE UNREALIZED OR MTM GAINS BOOKED IN THE ACCOUNTS ARE ALSO NOT OFFERED TO TAX. SUCH GAINS ARE REDUCED FROM INCOME FOR TAX PURPOSES. THE AMOUN T OF RS. 7 ITA NOS. 474 & 475 /HYD/2015 AND 597/HYD/2016 CYIENT LTD. 9,04,81,526/- IS A NOTIONAL OR UNREALIZED GAIN AND IN CONSISTENCE WITH ITS METHOD OF COMPUTING TAXABLE IN COME UNDER THE ACT, THE APPELLANT REDUCED THE GAINS WHILE COMP UTING ITS TAXABLE INCOME FOR A.Y.2010-11 EVEN THOUGH IT WAS C REDITED IN THE P&L ACCOUNT. 18. THE APPELLANT HAS BEEN CONSISTENTLY FOLLOWING T HE METHOD OF ADDING BACK PROVISION FOR LOSSES AND CLAIMING DEDUC TION FOR GAINS ON OUTSTANDING CONTRACTS. IT HAS BEEN OFFERIN G TO TAX GAINS AND CLAIMING DEDUCTION FOR LOSSES ON SETTLED CONTRA CTS. 19. THE LD. DRP REJECTED THE CLAIM FOR THE DEDUCTIO N OF THE UNREALIZED GAIN OF RS. 9,04,81,526/- WITH THE FOLLO WING REMARKS: '10.4 WITH REGARD TO ADDITION OF RS. 9,04,81,526/- RELATED TO THE FORWARD CONTRACTS, IT IS ARGUED THAT THIS GA IN REPRESENTS UNREALIZED GAIN AND IT HAS BEEN ARRIVED ONLY BY MAKING THE CONTRACTS TO MARKET IT BEING A NOTIONAL GAIN THE SAME IS REDUCED FROM THE COMPUTATION OF INCOME THOUGH IT IS TAKEN INTO ACCOUNTS IN THE BOOKS AND C REDITED TO THE PROFIT AND LOSS ACCOUNT 10.5 ON THIS ISSUE, THE PANEL IS OF THE VIEW THAT S INCE ASSESSEE COMPANY IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING REGULARLY, ANY GAIN OR LOSS ON FORWARD CONTRACTS HAS TO BE CONSIDERED IN THE COMPUTATION O F TOTAL INCOME. AS PER ACCOUNTING STANDARDS ON THIS ITEM BO TH LOSS AND GAIN ARE TO BE RECKONED AS AN END OF ACCOU NTING PERIOD THE AO HAS NO OPTION EXCEPT TO FOLLOW THE PRESCRIBED PROCEDURE AS PER LAW. THE PANEL DO NOT INTERFERE IN HIS ACTION AS THERE IS NO INFIRMITY. A CCORDINGLY, THE ASSESSEE'S OBJECTION IS REJECTED' 20. IT IS SUBMITTED THAT THERE IS A FALLACY IN THE ABOVE DECISION OF THE HON'BLE DRP. THE DRP HAVING DIRECTED TO ALLOW L OSS ON REVALUATION IN A.Y.2010-11 WHICH WAS NOT CLAIMED IN EARLIER YEAR, BY FOLLOWING THE METHOD OF COMPUTING TAXABLE INCOME AS PER RULE OF CONSISTENCY, THE DRP OUGHT TO HAVE DIRE CTED TO EXCLUDE PROFIT/GAIN ON FOREIGN EXCHANGE TRANSACTION S WHICH WERE VALUED ON 'MARK TO MARKET' BASIS. NOTIONAL LOSSES AS WELL AS GAINS SHOULD NOT BE TAKE N INTO ACCOUNT WHILE COMPUTING TAXABLE INCOME 21. IN THE CASE OF CIT VS. INDIAN OVERSEAS BANK [15 1 ITR 446], THE HON'BLE MADRAS HIGH COURT HELD THAT THE UNREALI ZED LOSSES ON OUTSTANDING FOREIGN EXCHANGE CONTRACTS ARE NOT A LLOWABLE. SIMILARLY, IT HELD THAT UNREALIZED GAINS ON SUCH OU TSTANDING CONTRACTS ARE NOT TAXABLE. IN THIS CASE THE UNREALI ZED LOSS ON 8 ITA NOS. 474 & 475 /HYD/2015 AND 597/HYD/2016 CYIENT LTD. OUTSTANDING CONTRACTS WAS HELD ALLOWABLE BY THE TRI BUNAL BUT THE HON'BLE MADRAS HIGH COURT DID NOT AGREE WITH TH E TRIBUNAL. IT OBSERVED AS UNDER: THE LEVY OF INCOME TAX IS ON INCOME AND THOUGH THE INCOME TAX ACT HAS TAKEN NOTE OF THE TWIN POINTS OF TIME AT WHICH THE LIABILITY TO TAX IS ATTRACTED VIZ; THE AC CRUAL OF INCOME OR ITS RECEIPT YET THE SUBSTANCE OF THE MATT ER IS INCOME AND IF INCOME DOES NOT RESULT AT ALL THERE C ANNOT BE A TAX, EVEN THOUGH FOR PURPOSES OF BOOK KEEPING, AN ENTITY IS MADE ABOUT AN HYPOTHETICAL INCOME WHICH D OESN'T MATERIALIZE AND A MERE BOOK KEEPING ENTRY CANNOT BE INCOME UNLESS INCOME HAS ACTUALLY RESULTED. THE QUE STION WHETHER THERE IS A LOSS OR PROFIT ON FOREIGN EXCHAN GE TRANSACTIONS CAN BE ASCERTAINED AFTER THE SETTLEMEN T OF THE FORWARD CONTRACTS AND NOT BEFORE AND SO LONG AS THAT STAGE HAS NOT BEEN REACHED THE LOSS CAN ONLY BE NOT IONAL AND NOT ACTUAL OR REAL AND NOTIONAL LOSS CANNOT BE CLAIMED AS A DEDUCTION. WHETHER A LOSS OR PROFIT, THE PRINC IPAL APPLICABLE WOULD BE THE SAME AND THE ESTIMATED PROF IT, TILL THE STATEMENT OF THE FORWARD FOREIGN EXCHANGE CONTR ACTS. COULD BE REGARDED ONLY AS NOTIONAL AND NOT ACTUAL O R REAL AND SUCH NOTIONAL PROFITS CANNOT BE ASSESSED' THEREFORE, WE ARE NOT IN A POSITION TO AGREE WITH T HE TRIBUNAL THAT THE SAID SUM OF RS. 9,20,125/- REPRES ENTED LOSS ARISING OUT OF THE OUTSTANDING UNSETTLED CONTR ACTS AND THEREFORE, IT COULD BE CLAIMED AS A DEDUCTION. BUT AS ALREADY POINTED OUT THE CONTRACTS WERE NOT SETTLED AND WHETHER THEY WOULD RESULT IN A PROFIT OR LOSS CAN O NLY BE KNOWN AT THE TIME OF SETTLEMENT. SO LONG AS THAT ST AGE HAS NOT REACHED THE LOSS CAN ONLY BE NOTIONAL AND NOT R EAL OR ACTUAL. SUCH NOTIONAL LOSS CANNOT BE CLAIMED AS A DEDUCTION. ' (EMPHASIS SUPPLIED) 22. THE ABOVE CASE WAS FOLLOWED BY THE HON'BLE MADR AS HIGH COURT IN ITS SUBSEQUENT DECISION IN THE CASE OF THE SAME PARTY REPORTED AT INDIAN OVERSEAS BANK VS CIT 183 ITR 200 . IN THIS CASE, UNREALIZED GAINS ON OUTSTANDING CONTRACTS WER E HELD AS NOT TAXABLE. IT WAS OBSERVED AS UNDER: THE LEVY OF INCOME TAX IS ON INCOME AND THOUGH THE INCOME TAX ACT HAS TAKEN NOTE OF THE TWIN POINTS OF TIME AT WH ICH THE LIABILITY TO TAX IS ATTRACTED VIZ, THE ACCRUAL OF I NCOME OR ITS RECEIPT, YET, THE SUBSTANCE OF THE MATTER IS INCOME AND IF INCOME DOES NOT RESULT AT ALL, THERE CANNOT BE A TA X- EVEN THOUGH FOR PURPOSES OF BOOK KEEPING, AN ENTRY IS MA DE ABOUT AN HYPOTHETICAL INCOME WHICH DOESN'T MATERIALIZE AND A MERE BOOK KEEPING ENTRY CANNOT BE INCOME UNLESS INCOME HAS AC TUALLY 9 ITA NOS. 474 & 475 /HYD/2015 AND 597/HYD/2016 CYIENT LTD. RESULTED. THE QUESTION WHETHER THERE IS A LOSS OR P ROFIT ON FOREIGN EXCHANGE TRANSACTIONS CAN BE ASCERTAINED AF TER THE SETTLEMENT OF THE FORWARD CONTRACTS AND NOT BEFORE AND SO LONG AS THAT STAGE HAS NOT BEEN REACHED THE LOSS CAN ONL Y BE NOTIONAL AND NOT ACTUAL OR REAL AND NOTIONAL LOSS C ANNOT BE CLAIMED AS A DEDUCTION. WHETHER A LOSS OR PROFIT, T HE PRINCIPLE APPLICABLE WOULD BE THE SAME AND THE ESTIMATED PROF IT, TILL THE SETTLEMENT OF THE FORWARD FOREIGN EXCHANGE CONTRACT S, COULD BE REGARDED ONLY AS NOTIONAL AND NOT ACTUAL OR REAL AN D SUCH NOTIONAL PROFITS CANNOT BE ASSESSED' (EMPHASIS SUPP LIED) 23. IT MAY KINDLY BE OBSERVED THAT THE MADRAS HIGH COURT HAS CLEARLY HELD NOTIONAL PROFIT ON OUTSTANDING CONTRAC TS CANNOT BE BROUGHT TO TAX. TILL CONTRACTS ARE SETTLED, THERE I S NO TAXABLE GAIN NOR ALLOWABLE LOSS. 24. A SIMILAR VIEW WAS TAKEN BY THE CSOT IN INSTRUC TION NO. 03/2010 DATED 23/03/2010. IN THIS INSTRUCTION, THE CSOT CONSIDERED THE ISSUE OF ALLOWABILITY OF LOSSES CONS EQUENT TO MARKING THE FOREIGN EXCHANGE FORWARD CONTRACTS TO M ARKET AND IT HAS OBSERVED AS UNDER: A MARKED TO MARKET' LOSS MAY BE GIVEN DIFFERENT ACCOUNTING TREATMENT BY DIFFERENT ASSESSES. SOME MA Y REFLECT SUCH LOSS AS A BALANCE SHEET ITEM WITHOUT M AKING ANY CORRESPONDING ADJUSTMENT IN THE PROFIT AND LOSS ACCOUNT OTHER MAY BOOK THE LOSS IN THE PROFIT AND L OSS ACCOUNT WHICH MAY RESULT IN THE REDUCTION OF BOOK P ROFIT IN CASES WHERE NO SALE OR SETTLEMENT HAS ACTUALLY TAKE N PLACE AND THE LOSS ON MARKED TO MARKET BASIS HAS RESULTED IN REDUCTION OF BOOK PROFITS SUCH A NOTION AL LOSS WOULD BE CONTINGENT IN NATURE AND CANNOT BE ALLOWED TO BE SET OFF AGAINST THE TAXABLE INCOME. THE SAME SHO ULD THEREFORE BE ADDED BACK FOR THE PURPOSE OF COMPUTIN G THE TAXABLE INCOME OF AN ASSESSEE. ' 25. THE ABOVE CIRCULAR IS BASED ON THE PRINCIPLE TH AT A LOSS ARISING BECAUSE OF MARKING A CONTRACT TO MARKET IS NOTIONAL, THE GAIN IN SUCH CIRCUMSTANCES IS ALSO NOTIONAL. IT IS SUBMITTED THAT IF CBDT HAS INSTRUCTED BY APPLYING THE PRINCIPLE TH AT A NOTIONAL LOSS CANNOT BE ALLOWED WHILE COMPUTING TAXABLE INCO ME/ THEN BY APPLYING THE SAME PRINCIPLE THE NOTIONAL GAIN ALSO SHOULD NOT BE BROUGHT TO TAX. 26. IT IS FURTHER SUBMITTED THAT THE INSTRUCTIONS I SSUED BY THE CBDT ARE BINDING ON THE DEPARTMENT AND THEREFORE/ T HE ASSESSING OFFICER OUGHT TO FOLLOWED THE ABOVE CIRCU LAR AND ALLOWED THE CLAIM FOR DEDUCTION OF RS. 9,04,81,526/ -. 10 ITA NOS. 474 & 475 /HYD/2015 AND 597/HYD/2016 CYIENT LTD. MARK TO MARKET LOSSES ARE ALLOWABLE AS DEDUCTION AN D HENCE, THE SAME SHOULD BE ALLOWED AS DEDUCTION IF T HE GAIN ON MARK TO MARKET TRANSACTION ARE SUBJECTED TO TAX 27. THE VIEW TAKEN BY THE MADRAS HIGH COURT IN ITS TWO DECISIONS IN THE CASE OF INDIAN OVERSEAS BANK (SUPR A) AND THE VIEW TAKEN BY THE CBDT IN THE ABOVE INSTRUCTION ARE PARTLY REVERSED BY THE APEX COURT IN ITS DECISION IN THE C ASE OF CIT VS. WOODWARD GOVERNOR INDIA (P) LTD [312 ITR 254]. IN THIS CASE/ THE APEX COURT HAS HELD THAT LOSS SUFFERED BY AN ASSESSEE ON ACCOUNT OF FOREIGN EXCHANGE DIFFERENCE AS ON DATE OF BALANCE SHEET IS AN ITEM OF EXPENDITURE ALLOWABL E U/S, 37 OF THE IT ACT. IT WAS ALSO HELD THAT INCOME HAS TO BE COMPUTED IN THE LIGHT OF THE ACCOUNTING STANDARD (AS) - 11. AS PER THE RELEVANT PORTION OF THE HEAD NOTE OF THIS DECISION/ IT WAS OBSERVED AS UNDER: 'AS-11 DEALS WITH GIVING OF ACCOUNTING TREATMENT FO R THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES. IN CA SE OF THE REVENUE ITEMS FALLING UNDER SECTION 37(1) PARA 9 OF AS-11, WHICH DEALS WITH RECOGNITION OF EXCHANGE DIFFERENCES, NEEDS TO BE CONSIDERED. UNDER THIS PAR A, EXCHANGE DIFFERENCES ARISING ON FOREIGN CURRENCY TRANSACTIONS HAVE TO BE RECOGNIZED AS INCOME OR AS EXPENSE IN THE PERIOD IN WHICH THEY ARISE. THE IMPO RTANT POINT TO BE NOTED IS THAT AS-11 STIPULATES EFFECT O F CHANGES IN EXCHANGE RATE VIS-A-VIS MONETARY ITEMS DENOMINATED IN A FOREIGN CURRENCY TO BE TAKEN INTO ACCOUNT FOR GIVING ACCOUNTING TREATMENT ON THE BALA NCE SHEET DATE. THEREFORE, AN ENTERPRISE HAS TO REPORT THE OUTSTANDING LIABILITY RELATING TO IMPORT OF RAW MAT ERIALS USING CLOSING RATE OF EXCHANGE. ANY DIFFERENCE, LOS S OR GAIN ARISING ON CONVERSION OF THE SAID LIABILITY AT THE CLOSING RATE, SHOULD BE RECOGNIZED IN THE PROFIT AN D LOSS ACCOUNT FOR THE REPORTING PERIOD [PARA 18]. ' GAINS ON MARK TO MARKET TRANSACTIONS ARE REQUIRED T O BE IGNORED UNDER WELL RECOGNIZED 'CONCEPT OF PRUDENCE II / 'CONVENTION OF CONSERVATISM' OF FOLLOWED IN MERCANT ILE SYSTEM OF ACCOUNTING 28. EVEN IF UNREALIZED LOSSES ON OUTSTANDING FOREIG N EXCHANGE CONTRACTS ARE ALLOWABLE AS DEDUCTION IN VIEW OF THE APEX COURT DECISION IN THE CASE OF WOODWARD GOVERNOR INDIA (P) LTD (SUPRA), IT DOES NOT FOLLOW THAT UNREALIZED GAINS O N OUTSTANDING CONTRACTS ARE NECESSARILY TO BE TAXED. 29. EVEN UNDER THE MERCANTILE SYSTEM OF ACCOUNTING, UNREALIZED LOSSES AND UNREALIZED GAINS ON OUTSTANDING FOREIGN EXCHANGE 11 ITA NOS. 474 & 475 /HYD/2015 AND 597/HYD/2016 CYIENT LTD. FORWARD CONTRACTS DO NOT STAND ON THE SAME FOOTING. THEY HAVE TO BE TREATED SEPARATELY BECAUSE OF THE 'PRUDENCE C ONCEPT' IN THE ACCOUNTING. THE CONCEPT OF PRUDENCE DICTATES TH E RECOGNITION OF UNREALIZED LOSSES BUT DOES NOT STIPU LATE THAT UNREALIZED/ANTICIPATED PROFITS SHOULD ALSO BE RECOG NIZED AS 'REVENUE'/'INCOME' OF THE ACCOUNTING PERIOD. IN OTH ER WORDS, UNLESS AND UNTIL INCOME IS 'ACCRUED', THE SAME SHOU LD NOT BE TREATED AS 'REVENUE'/'INCOME' OF THE ACCOUNTING PER IOD. IN ACCOUNTING, THE CONVENTION OF CONSERVATISM, ALSO KN OWN AS THE DOCTRINE OF PRUDENCE, IS A POLICY OF RECOGNIZING TH E ANTICIPATING POSSIBLE FUTURE LOSSES BUT NOT FUTURE GAINS. IT IS REITERATED THAT PRINCIPLE OF PRUDENCE DOES NOT DICTATE THE RECOGNIT ION OF UNREALIZED GAINS. THE 'ACCRUAL CONCEPT' IN ACCOUNTI NG MEANS THAT EXPENSES AND REVENUES ARE RECORDED IN THE PERI OD THEY OCCUR, WHETHER OR NOT CASH IS INVOLVED. THE BENEFIT OF THE ACCRUAL APPROACH IS THAT FINANCIAL STATEMENTS REFLE CT ALL THE EXPENSES ASSOCIATED WITH THE REPORTED REVENUES FOR AN ACCOUNTING PERIOD. THEREFORE, IN CASE OF TRANSACTIO NS INVOLVING FOREIGN EXCHANGE, THE ASSETS AND LIABILITIES ARE RE QUIRED TO BE RESTATED AS PER AS-II AND THE INCOME HAS TO BE RECO GNIZED AS PER PRINCIPLE OF PRUDENCE. THIS IS THE RATIO OF THE DECISION OF THE HON'BLE MUMBAI BENCH OF TRIBUNAL IN THE CASE OF MIL I CONSULTANTS & INVESTMENT (P.) LTD VS. DCIT [2016] 7 2 TAXMANN.COM 141. IN THIS CASE IT WAS HELD THAT LOSS ES ON OPEN DERIVATIVE CONTRACTS ARRIVED AT BY MARKING THEM TO MARKET WERE ALLOWABLE AS DEDUCTION BUT THE UNREALIZED GAIN ON S UCH CONTRACTS WOULD STAND TO BE TAXED ONLY ON SETTLEMEN T AND NOT BEFORE. THE HON'BLE TRIBUNAL CAME TO THIS CONCLUSIO N AFTER DULY CONSIDERING THE DECISION OF THE APEX COURT IN THE C ASE OF CIT VS WOODWARD GOVERNOR INDIA (P) LTD. [2009] 312 ITR 254 /179 TAXMAN 326. THE REVENUE CANNOT ADOPT DUAL STANDARDS WHILE TAXIN G LOSSES AND PROFIT ARISING OUT OF VALUATION OF LIABI LITIES FOR TRANSACTIONS INVOLVING FOREIGN EXCHANGE 30. IT IS SUBMITTED THAT AS LAID DOWN BY THE HON'BL E APEX COURT IN THE CASE OF WOODWARD GOVERNOR INDIA (P.) LTD. [3 12 ITR 254] IN PARA 10 TO 17 (PAGES 260265 OF ITR), THE DEPARTM ENT HAVING ACCEPTED THE METHOD CONSISTENTLY ADOPTED BY THE APP ELLANT IN EARLIER YEARS, IT CANNOT BE PERMITTED TO ADOPT DIFF ERENT VIEW FOR THE YEAR UNDER CONSIDERATION TO ADD ONLY GAINS ON R EVALUATION BUT IGNORE LOSSES ON REVALUATION. IN THIS CASE, THE APEX COURT HAS HELD THAT A METHOD OF ACCOUNTING FOLLOWED BY TH E ASSESSEE CONTINUOUSLY FOR A GIVEN PERIOD OF TIME HAS TO BE P RESUMED TO BE CORRECT TILL AO COMES TO A CONCLUSION FOR REASON S TO BE GIVEN THAT THE SAID SYSTEM DOESN'T REFLECT TRUE AND CORRE CT PROFITS. IT HAS OBSERVED IN PARA 10 OF ITS ORDER AS UNDER: 12 ITA NOS. 474 & 475 /HYD/2015 AND 597/HYD/2016 CYIENT LTD. '10. AS STATED ABOVE, ON FACTS IN THE CASE OF M/S W OODWARD GOVERNOR INDIA (P) LTD THE DEPARTMENT HAS DISALLOWE D THE DEDUCTION/DEBIT TO THE P&L ACCOUNT MADE BY THE ASSE SSEE IN THE SUM OF RS. 29-49-088/- BEING UNREALIZED LOSS DU E TO FOREIGN EXCHANGE FLUCTUATION. AT THE VERY OUTSET IT MAY BE STATED THAT THERE IS NO DISPUTE THAT IN THE PREVIOUS YEARS WHEN EVER THE DOLLAR RATE STOOD REDUCED THE DEPARTMENT HAD TAXED THE GAINS WHICH ACCRUED TO THE ASSESSEE ON THE BASIS OF ACCRU AL AND IT IS ONLY IN THE YEAR IN QUESTION WHEN THE DOLLAR RATE S TOOD INCREASED RESULTING IN LOSS THAT THE DEPARTMENT HAS DISALLOWED THE DEDUCTION/DEBIT THIS FACT IS IMPORTANT IT INDIC ATES THE DOUBLE STANDARDS ADOPTED BY THE DEPARTMENT' (EMPHASIS SUPP LIED) WHILE DETERMINING TAXABLE INCOME 'RULE OF CONSISTEN CY' SHOULD PREVAIL OVER OTHER FACTORS. 31. EVEN BEFORE AND AFTER THE DECISION OF THE APEX COURT IN THE CASE OF MRS WOODWARD GOVERNOR INDIA (P) LTD (SUPRA) , THERE ARE VARIOUS AUTHORITIES IN SUPPORT OF THE PROPOSITI ON THAT A METHOD OF ACCOUNTING AS WELL AS COMPUTATION OF INCO ME CONSISTENTLY FOLLOWED BY THE ASSESSEE HAS TO BE RES PECTED BY THE REVENUE AUTHORITIES. 32. IN THE CASE OF ITO VS CHOKSHI HIRACHAND & BROS 37 TTJ 415 (AHMEDABAD), IT WAS HELD BY THE TRIBUNAL THAT VALUA TION OF CLOSING STOCK ACCORDING TO ACCOUNTING SYSTEM CONSIS TENTLY FOLLOWED AND ACCEPTED BY REVENUE IN EARLIER YEARS C ANNOT BE REJECTED. 33. IN THE CASE OF CIT V JAGATJIT INDUSTRIES LTD (3 39 ITR 382), THE HON'BLE DELHI HIGH COURT ALSO HELD THAT A METHO D OF ACCOUNTING CONSISTENTLY FOLLOWED HAS TO BE RESPECTE D. IN THIS CASE, PRIOR PERIOD EXPENSES ARE HELD TO BE ALLOWABL E EVEN UNDER THE MERCANTILE SYSTEM OF ACCOUNTING. THE RELE VANT PORTION OF THE HEAD NOTE OF THIS DECISION READS AS UNDER: 'ON A SCRUTINY OF THE FACTS, THAT HAD BEEN BROUGHT ON RECORD, IT WAS DISCERNIBLE THAT THE ASSESSEE HAD BE EN CLAIMING PRIOR PERIOD EXPENSES ON THE GROUND THAT T HE VOUCHERS OF SUCH EXPENSES FROM THE EMPLOYEES/BRANCH EMPLOYEES WERE RECEIVED AFTER 31ST MARCH OF THE FIN ANCIAL YEAR. IT HAD ALSO COME AS A MATTER OF FACT THAT THE ASSESSEE HAD BRANCH OFFICES THROUGHOUT THE COUNTRY. THE ASSESSEE HAD BEEN DEBITING THE EXPENDITURE SPILLOVE R TO THE SUBSEQUENT YEARS AND THE ASSESSING OFFICER HAD BEEN ALLOWING THE SAME. THE SAID ACCOUNTING PRACTICE HAD BEEN CONSISTENT~V FOLLOWED ~V THE ASSESSEE AND ACCEPTED BY THE DEPARTMENT IF A PARTICULAR ACCOUNTING SYSTEM HA S BEEN FOLLOWED AND ACCEPTED AND THERE IS NO ACCEPTAB LE 13 ITA NOS. 474 & 475 /HYD/2015 AND 597/HYD/2016 CYIENT LTD. REASON TO DIFFER WITH THE SAME, THE DOCTRINE OF CON SISTENCY WOULD COME INTO PLAY. IN THE INSTANT CASE, THE SAID ACCOUNTING SYSTEM HAD BEEN FOLLOWED FOR A NUMBER OF YEARS AND THERE WAS NO PROOF THAT THERE HAD BEEN AN Y MATERIAL CHANGE IN THE ACTIVITIES OF THE ASSESSEE A S COMPARED TO THE EARLIER YEARS. NOTHING HAD BEEN BRO UGHT ON RECORD TO SHOW THAT THERE HAD BEEN DISTORTION OF PROFIT OR THE BOOKS OF ACCOUNT DID NOT REFLECT THE CORRECT PICTURE. IN THE ABSENCE OF ANY REASON WHATSOEVER, THERE WAS NO WARRANT OR JUSTIFICATION TO DEPART FROM THE PREVIOU S ACCOUNTING SYSTEM WHICH WAS ACCEPTED BY THE DEPARTMENT IN RESPECT OF THE PREVIOUS YEARS. [PARA 16] THEREFORE, THERE WAS NO MERIT IN THE INSTANT APPEAL AND THE SAME WAS TO BE DISMISSED' (EMPHASIS SUPPLIED) 34. IN THE CASE OF CIT V MARGADARSI CHIT FUND PRIVA TE LIMITED (155 ITR 442), IT HAS BEEN HELD THAT BEFORE REJECTI NG THE SYSTEM OF ACCOUNTING CONSISTENTLY FOLLOWED BY THE ASSESSEE BY SEVERAL YEARS AND ACCEPTED BY DEPARTMENT IN THE PAST, IT MU ST REFER TO INHERENT DEFECTS IN THE SYSTEM AND RECORD A CLEAR F INDING THAT THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE I S SUCH THAT CORRECT PROFITS CANNOT BE DEDUCED FROM BOOKS OF ACC OUNT MAINTAINED BY THE ASSESSEE. 35. IN THE CASE OF CIT VS. BILAHARI INVESTMENT (P) LTD (299 ITR 0001), IT WAS HELD AS PER THE HEAD NOTE, AS UNDER: 'EVERY ASSESSEE IS ENTITLED TO ARRANGE ITS AFFAIRS AND FOLLOW THE METHOD OF ACCOUNT WHICH THE DEPARTMENT H AS EARLIER ACCEPTED IT IS ONLY IN THOSE CASES WHERE TH E DEPARTMENT RECORDS A FINDING THAT THE METHOD ADOPTE D BY THE ASSESSEE RESULTS IN DISTORTION OF PROFITS THAT THE DEPARTMENT CAN INSIST ON SUBSTITUTION OF THE EXISTI NG METHOD': 36. THE APPELLANT HAS BEEN QUITE FAIR TO THE REVENU E BY NOT CLAIMING DEDUCTION FOR MTM LOSSES AND OFFERING TO T AX MTM GAINS. IT IS SUBMITTED THAT THE APPROACH ADOPTED BY THE DEPARTMENT TO COMPUTE TAXABLE INCOME BY IGNORING MT M LOSSES BUT TO SUBJECT MTM GAINS TO TAX IS SELF-CONTRADICTO RY. IT SI SUBMITTED THAT IF THE DEPARTMENT WANTS TO TAX MTM G AIN ON THE BASIS OF MERCANTILE METHOD OF ACCOUNTING THEN UNDER SAME PRINCIPLE THE DEPARTMENT OUGHT TO ALLOW MTM LOSSES. ONLY REAL INCOME CAN BE BROUGHT TO TAX AND NOT NOTI ONAL INCOME. 14 ITA NOS. 474 & 475 /HYD/2015 AND 597/HYD/2016 CYIENT LTD. 37. IT IS WELL SETTLED IN LAW THAT ONLY REAL OF THE ASSESSEE SHOULD BE SUBJECTED TO TAX IRRESPECTIVE OF THE ENTRIES PAS SED IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. AS SUCH, UNREALIZ ED GAIN CANNOT BE BROUGHT TO TAX IN THE LIGHT OF THE 'REAL INCOME' THEORY. IN THE CASE OF GODHRA ELECTRICITY COMPANY V CIT (22 5 ITR 746), THE APEX COURT, AS PER THE HEAD NOTE, HAS HELD AS U NDER: 'INCOME-TAX IS A LEVY ON INCOME. NO DOUBT THE INCOM E TAX ACT TAKES INTO ACCOUNT TWO POINTS OF TIME AT WHICH THE LIABILITY TO TAX IS ATTRACTED VIZ, THE ACCRUAL OF T HE INCOME OR ITS RECEIPT BUT THE SUBSTANCE OF THE MATTER IS THE INCOME. IF INCOME DOES NOT RESULT AT ALL THERE CANNOT BE TE X EVEN THOUGH IN BOOK-KEEPING, AN ENTRY IS MADE ABOUT A HYPOTHETICAL INCOME, WHICH DOES NOT MATERIALIZE'. 38. IN THE CASE OF CIT V V.T.C. LEASING AND FINANCE LTD (323 ITR 514) THE HON'BLE RAJASTHAN HIGH COURT REFERRED TO THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE O F ANDHRA BANK V CIT (225 ITR 447) WHEREIN IT WAS HELD THAT T HERE CANNOT BE A TAX IF NO INCOME RESULTED, DESPITE THE ENTRY I N THE BOOK KEEPING AND HELD THAT BOOK ENTRIES ARE NOT CONCLUSI VE AND REAL INCOME WHICH ALONE CAN BE BROUGHT TO TAX HAS TO BE CONSIDERED WITH REFERENCE TO COMMERCIAL AND BUSINESS REALITIES OF THE SITUATION. 39. THE MTM LOSSES AND GAINS ON FORWARD CONTRACTS A RE NOT REAL LOSSES OR INCOMES. THERE IS NO ACCRUAL OF INCOME IN SUCH CASES TILL THE CONTRACT IS SETTLED. 40. IN THE CASE OF HINDUSTAN HOUSING LAND DEVELOPME NT TRUST LIMITED (161 ITR 524), THE APEX COURT LAID DOWN THE FOLLOWING PRINCIPLE: 'INCOME MAY ACCRUE TO AN ASSESSEE WITHOUT THE ACTUA L RECEIPT OF THE SAME. IF THE ASSESSEE ACQUIRES A RIG HT TO RECEIVE THE INCOME THE INCOME CAN BE SAID TO HAVE ACCRUED TO HIM THOUGH IT MAY BE RECEIVED LATER ON B EING ASCERTAINED, THE BASIC CONCEPTION IS HE MUST HAVE ACQUIRED A RIGHT TO RECEIVE THE INCOME. THERE MUST BE A DEBT OWED TO HIM BY SOMEBODY THERE MUST BE OTHERWIS E EXPRESSED DEBITUM IN PRESENTI SOLVENDUM IN FUTURE U NLESS AND UNTIL THERE IS CREATED IN FAVOUR OF THE ASSESSE E A DEBT DUE BY SOMEBODY, IT CANNOT BE SAID THAT HE ACQUIRED A RIGHT TO RECEIVE THE INCOME OR THAT INCOME HAS ACCR UED TO HIM. 41. AS PER THE ABOVE DECISION OF SUPREME COURT, ONL Y THE ACCRUED GAINS CAN BE BOUGHT TO TAX. IN THIS CASE, T HE ASSESSEE WAS AWARDED COMPENSATION FOR THE LAND ACQUIRED FROM HIM BY 15 ITA NOS. 474 & 475 /HYD/2015 AND 597/HYD/2016 CYIENT LTD. THE GOVERNMENT BY THE ARBITRATOR BUT THE GOVERNMENT WENT IN APPEAL AGAINST THE AWARD. AS THE MATTER WAS PENDING BEFORE THE COURT, THE SUPREME COURT HELD THAT THE PARTY COULD NOT BE TAXED ON THE AMOUNT AWARDED TO IT. IN OTHER WORDS, EVEN A FTER THE AWARD OF THE ARBITRATOR, IT WAS HELD THAT THE GAINS DID NOT ACCRUE AS THE MATTER WAS IN DISPUTE BEFORE THE COURT. 42. SIMILARLY, IN THE PRESENT CASE THE MATURITY PER IOD OF THE CONTRACT IS NOT OVER AND THE LOSS/GAIN IS NOT ACTUA LLY ASCERTAINED. WHETHER A CONTRACT IN QUESTION WOULD Y IELD PROFIT OR LOSS AND QUANTUM THEREOF ARE MATTERS IN THE WOMB OF FUTURE. SO, THERE IS NO BASIS FOR THE MAKING ADDITION OF RS. 9, 04,81,526/- WHICH IS NOTIONAL GAIN ARISING OUT OF VALUATION OF FOREIGN EXCHANGE. ACTUAL VALUE OF THE GAIN WOULD ARISE ON M ATURITY OF CONTRACT. THEREFORE, NOTIONAL GAIN ADDED BY THE ASS ESSING OFFICER ON REVALUATION OF FOREX LIABILITY MAY KINDL Y BE DELETED. INCOME CAN BE SAID TO HAVE ARISEN ONLY WHEN THE RIG HT TO RECEIVE ACCRUES 43. IN THE CASE OF CIT V DINESH KUMAR GOYAL (331 IT R 10), THE HON'BLE DELHI HIGH COURT HELD THAT EVEN WHEN THE AC COUNTING SYSTEM FOLLOWED IS MERCANTILE, THERE CAN BE ACCRUAL OF INCOME ONLY IF THE RIGHT TO RECEIVE ACCRUES. TILL A FORWAR D EXCHANGE CONTRACT IS SETTLED, THERE IS NO RIGHT TO RECEIVE T HE GAIN OR LIABILITY TO DISBURSE THE LOSS. 10.4 THE LD. DR SUBMITTED THAT SINCE ASSESSEE COMPA NY IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING REGULARLY, ANY GAIN OR LOSS ON FORWARD CONTRACTS HAS TO BE CONSIDERED IN THE COMPUTATION O F TOTAL INCOME. AS PER ACCOUNTING STANDARDS ON THIS ITEM BOTH LOSS AND GAIN ARE TO BE RECKONED AT THE END OF ACCOUNTING PERIOD. HE, THERE FORE, SUBMITTED THAT THE AO HAS NO OPTION EXCEPT TO FOLLOW THE PRES CRIBED PROCEDURE AS PER LAW. 10.5 CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED T HE MATERIAL FACTS ON RECORD. IT WAS BROUGHT TO THE NOTICE BY THE LD. AR THAT ASSESSEE IS CONSISTENTLY FOLLOWING ACCOUNTING POLICY ON FOREIGN CURRENCY TRANSACTIONS, WHICH IS PLACED ON RECORD AT PAGE 105 OF THE PAPER BOOK, AS PER WHICH, ALL THE DERIVATIVE EXCHANGE CON TRACTS ARE VALUED AT MARK TO MARKET BASIS AND ANY GAIN/LOSS ON MARK T O MARKET CHANGES 16 ITA NOS. 474 & 475 /HYD/2015 AND 597/HYD/2016 CYIENT LTD. ON SETTLEMENT IS RECOGNIZED IN THE PROFIT & LOSS A/ C AND OTHER FORWARD EXCHANGE CONTRACTS OR ANY OTHER FINANCIAL INSTRUMEN TS, ANY EXCHANGE DIFFERENCE ON SUCH FORWARD EXCHANGE CONTRACTS ARE R ECOGNIZED IN THE STATEMENT OF P&L A/C IN THE REPORTING PERIOD IN WHI CH THE EXCHANGE ARE CHANGE. THEREFORE, THE ASSESSEE IS REGULARLY FO LLOWING ITS ACCOUNTING POLICIES OVER A PERIOD OF TIME AND IT DO ES NOT CHARGE ANY GAIN/LOSS OF FOREIGN EXCHANGE ON NOTIONAL BASIS. FU RTHER, WE HAVE NOTICED THAT DRP WHILE ADJUDICATING THE PROVISION O F LOSS ON FORWARD CONTRACTS WRITTEN BACK BY THE ASSESSEE IN THE EARLI ER AY, DRP HAS ALLOWED THE CONTENTION OF THE ASSESSEE AND AT THE S AME TIME, REFUSED TO GRANT UNREALIZED GAIN ON FORWARD CONTRACT. IN OT HER WORDS, THE DRP HAS ACCEPTED WITH REGARD TO LOSS WRITTEN BACK AND R EFUSED TO RECOGNIZE THE ACCOUNTING METHOD FOLLOWED BY THE ASS ESSEE IN THE CASE OF UNREALIZED GAIN ON FOREX. AS FAR AS THE TRE ATMENT OF GAIN/LOSS ON FOREX DIFFERENCE, ASSESSEE FOLLOWED CONSISTENT M ETHOD OF ACCOUNTING POLICIES. IT IS A FACT THAT THE GAIN/LOS S DETERMINED BY THE ASSESSEE BASED ON THE CLOSING RATES BASED ON MARK T O MARKET ARE NOTIONAL AND NOT REAL LOSS OR GAIN AS THE FORWARD C ONTRACTS WERE NOT CONCLUDED. REAL GAIN/LOSS IS ONLY WHEN THE CONTRACT S ARE CONCLUDED. THEREFORE, RECOGNITION OF THIS NOTIONAL GAIN OR LOS S DEPENDS UPON ACCOUNTING POLICIES OR METHOD OF ACCOUNTING REGULAR LY FOLLOWED BY THE ASSESSEE, SINCE THE ASSESSEE IS FOLLOWING MERCANTIL E SYSTEM OF ACCOUNTING, RECOGNITION OF GAIN/LOSS ARE TRACEABLE OVER THE YEARS. SINCE, ALL THE NOTIONAL GAIN/LOSS ARE REGULARLY DEC LARED BY THE ASSESSEE IN ITS FINANCIAL ACCOUNTS. THEREFORE, IN O UR OPINION, ASSESSEE IS CONSISTENTLY FOLLOWING A METHOD OF ACCO UNTING AND ALSO DISCLOSES FOREIGN CURRENCY TRANSACTIONS IN ITS BOOK S OF ACCOUNT AND CONSISTENTLY FOLLOWING THE SAME METHOD OF ACCOUNTIN G OVER A PERIOD OF TIME. FURTHER, THE INSTRUCTION NO. 03/2010 DATED 23 /03/2010 ISSUED BY CBDT WHEREIN IT IS CLEARLY OBSERVED AS UNDER: A MARKED TO MARKET' LOSS MAY BE GIVEN DIFFERENT A CCOUNTING TREATMENT BY DIFFERENT ASSESSES. SOME MAY REFLECT S UCH LOSS AS A BALANCE SHEET ITEM WITHOUT MAKING ANY CORRESPONDI NG ADJUSTMENT IN THE PROFIT AND LOSS ACCOUNT OTHER MAY BOOK THE 17 ITA NOS. 474 & 475 /HYD/2015 AND 597/HYD/2016 CYIENT LTD. LOSS IN THE PROFIT AND LOSS ACCOUNT WHICH MAY RESUL T IN THE REDUCTION OF BOOK PROFIT IN CASES WHERE NO SALE OR SETTLEMENT HAS ACTUALLY TAKEN PLACE AND THE LOSS ON MARKED TO MARKET BASIS HAS RESULTED IN REDUCTION OF BOOK PROFITS SUC H A NOTIONAL LOSS WOULD BE CONTINGENT IN NATURE AND CANNOT BE AL LOWED TO BE SET OFF AGAINST THE TAXABLE INCOME. THE SAME SHOULD THEREFORE BE ADDED BACK FOR THE PURPOSE OF COMPUTING THE TAXA BLE INCOME OF AN ASSESSEE. ' AS PER THE ABOVE INSTRUCTION, NOTIONAL LOSSES ARE N OT ALLOWED TO SET OFF AGAINST TAXABLE INCOME. SIMILARLY, NOTIONAL GAIN AL SO SHOULD NOT BE ADDED TO THE TAXABLE INCOME. THEREFORE, IN OUR CON SIDERED VIEW, ASSESSEE IS ALLOWED TO FOLLOW ITS METHOD OF ACCOUNT ING FOLLOWED BY IT CONSISTENTLY OVER THE PERIOD AND, THEREFORE, NOTION AL GAIN ON FOREX TRANSACTION SHOULD BE ALLOWED TO REDUCE FROM THE N ET PROFIT, WHICH IS ARRIVED FOR TAX PURPOSE. ACCORDINGLY, GROUND RAISED BY THE ASSESSEE IS ALLOWED. 11. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ITA NO. 597/HYD/2016 BY THE ASSESSEE FOR AY 2011-12 12. ON PERUSAL OF RECORD, WE FIND THAT AO HAS PASSE D DRAFT ASSESSMENT ORDER AFTER CONSIDERING THE ORDER U/S 92 CA(3) OF THE I.T. ACT, 1961. THE ASSESSEE HAS FILED AN OBJECTION AGAI NST THE DRAFT ASSESSMENT ORDER BEFORE DRP WITH A COPY TO AO. THE DRP, VIDE ITS LETTER DATED 09/02/2016, DECLINED TO ADJUDICATE THE OBJECTIONS FILED BY THE ASSESSEE SINCE THE OBJECTIONS WERE FILED BELATE DLY BEYOND THE TIME ALLOWED U/S 144C(2) OF THE ACT. THEREFORE, AO PASSED THE FINAL ASSESSMENT. SINCE, THE ASSESSEE HAS FAILED TO FILE OBJECTION BEFORE THE DRP AND THE ASSESSMENT ORDER IS PASSED NOT AS P ER DIRECTIONS OF THE DRP, ASSESSEE HAS NO JURISDICTION TO FILE APPEA L BEFORE US. HENCE, APPEAL FILED BY THE ASSESSEE IS NOT MAINTAINABLE AN D ACCORDINGLY DISMISSED. 18 ITA NOS. 474 & 475 /HYD/2015 AND 597/HYD/2016 CYIENT LTD. 13. IN THE RESULT APPEAL IS DISMISSED. 14. TO SUM UP, APPEAL IN ITA NO. 474/HYD/2015 BY TH E REVENUE AND APPEAL IN ITA NO. 597/HYD/2016 BY THE ASSESSEE ARE DISMISSED AND THE APPEAL IN ITA NO. 475/HYD/2015 BY THE ASSESSEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 28 TH FEBRUARY, 2018. SD/- SD/- (P. MADHAVI DEVI) (S. RIFAUR RAHM AN) JUDICIAL MEMBER A CCOUNTANT MEMBER HYDERABAD, DATED: 28 TH FEBRUARY, 2018 KV COPY TO:- 1) M/S CYIENT LTD., 4 TH FLOOR, A WING, PLOT NO. 11, SOFTWARE UNITS LAYOUT, INFOCITY, MADHAPUR, HYD. 500 082. 2) DCIT, CIRCLE 1(2), IT TOWERS, AC GUARDS, HYDERABAD. 3) DRP, HYD. 4) CIT, INTERNATIONAL TAXATION, HYD. 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD. 6) GUARD FILE