Gain/Loss arising out of Foreign Exchange Fluctuation is Recognised as Profit or Loss Accrued During Relevant Previous Year: ITAT reinstates Income Tax Addition [Read Order]

The Mumbai Bench of Income Tax Appellate Tribunal (ITAT) held that the gain arising on account of revaluation of the outstanding forward contract as on the last of the previous year as per the provisions of Accounting Standard 11 would have to be recognized as profits of the relevant previous year.

The Assessee Standard Chartered Bank is a foreign corporate body being a bank incorporated by the Royal Charter under the laws of England and Wales and registered in India under the Companies Act, 1956. The Assessee was engaged in the business of banking financial services and allied activities in India and filed return of income for the Assessment Year 1993-94 declaring loss of INR 1,645.85 Crores.

The Assessee entered in to foreign exchange transaction on behalf of and with the customer including forward foreign exchange contracts. During the relevant previous year the assessee earned net profit of INR 1,15,75,022 on account of revaluation of the outstanding forward contracts which were credited to the Profit & Loss Account.

The assessee has been consistently offering to tax the income on forward contracts on the basis of actual realization on maturity of the contract. The credit to the Profit & Loss Account was made only for accounting purposes and in order for closely monitoring the outstanding forward contracts what is chargeable to tax is the real income, whereas the income arising on revaluation of the forward contract as on the last day of the previous year represents notional income which has not yet accrued and/or become due to the Assessee.

Assessment was framed on the assessee vide Assessment order, passed under Section 143(3) of the Income Tax Act,1961 made an addition of INR 1,15,75,022/-.

Being aggrieved, the assessee preferred appeal before Commissioner of Income Tax (Appeal) [CIT(A)] which allowed the appeal of the assessee observing that AO(Assessing Officer) erred in not granting deduction of Rs.1,22,75,320/- being the amount of forward profit unrealized offered for tax by the Appellant in the year under appeal, but taxed in the assessment for Assessment Year 1992-93, does not survive since as per the appellant.

Being aggrieved, the Revenue filed an appeal before the Tribunal.

The Bench comprising of Prashant Maharishi, Accountant Member and Rahul Chaudhary, Judicial Member relied on the decision of Supreme Court Commissioner of Income Tax, Delhi Vs. Woodward Governor India Pvt. Ltd. where it was held that the loss/gain arising on account of foreign exchange fluctuation is to be recognized in the Profit & Loss Account for the relevant previous year.

Accordingly, the gain arising on account of revaluation of the outstanding forward contract as on the last of the previous year as per the provisions of Accounting Standard 11 would have to be recognized as profits of the relevant previous year, as per the accounting policy followed by the assessee the gains/loss arising out of foreign exchange fluctuation is recognized as profit or loss accruing to the assessee during the relevant previous year.

Thus the Bench reversed the order passed by the CIT (A) and reinstated the addition on account of foreign exchange fluctuation gains with the directions to the AO to recompute the quantum of addition on foreign exchange gain/loss on outstanding forward contracts after taking into account the profit/loss offered to tax by the assessee on the date of actual settlement of the aforesaid forward contracts in order to avoid double taxation of the same foreign exchange gain or loss.

Hence, the Ground raised by the Revenue was allowed.

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