Indian Overseas Bank vs Commissioner of Income Tax

Ratnam, J.—In these tax case references u/s 256(1) of the Income Tax Act, 1961 (hereinafter referred to as ""the Act""), at the instance of

the assessees, the following common question of law for the assessment years 1972-73 and 1973-74 has been referred to this court for its opinion:

Whether, on the facts and in the circumstances of the case, the provision made towards estimated profits on exchange amounting to Rs. 1,72,911

for the assessment year 1972-73 and Rs. 15,57,022.40 for the assessment year 1973-74 is taxable?

The assessee is a nationalised bank and one of the main items of its business is to deal in foreign currencies on behalf of its constituents. During

the assessment years in question, the forward exchange contracts entered into by the assessee remained unsettled and as the contracts entered into

by the assessee related to different foreign currencies, the assessee estimated the profit recoverable on these outstanding contracts on the basis of

the rates of exchange as at the end of the accounting period in respect of the two assessment years 1972-73 and 1973-74. The profits so

estimated for the assessment years 1972-73 and 1973-74 were Rs. 1,72,911 and Rs. 15,57,022.40, respectively. Before the Income Tax

Officer, the assessee contended that these amounts were only in the nature of provision and did not represent profits actually realised by the

assessee and hence should not be included in the taxable income. The Income Tax Officer, however, did not accept the claim of the assessee that

these amounts represented only provisions and did not represent profits actually realised and, in that view, subjected these amounts to tax. On

appeal before the Appellate Assistant Commissioner by the assessee, relying upon an earlier decision of the Tribunal in I. T. A. No.

1864/Mds./1974-75 for the assessment year 1968-69 in respect of the same assessee, the assessment to tax of the aforesaid amounts by the

Income Tax Officer was upheld. On further appeal to the Tribunal, it took the view that as in I. T. A. No. 1864/Mds./1974-75 for the assessment

year 1968-69, it has been held that the provision for loss on exchange was considered as an admissible deduction, the provision for profits for the

two assessment years in question should also be accorded a similar treatment and, therefore those amounts were assessable. It is thus that the

aforesaid common question of law has come up before us.

Learned counsel for the assessee submitted, relying upon Commissioner of Income Tax, Tamil Nadu-I Vs. Indian Overseas Bank, , that the

decision of the Tribunal in I. T. A. No. 1864/Mds./1974-75 in respect of the

assessment year 1968-69 was the subject-matter of a reference before this court in the decision relied on and that it had been held that the

notional profit or loss could not be taken note of for purposes of assessment under the provisions of the Act and actual loss or profit alone could

be considered for assessment purposes. Reference in this connection was also made to Commissioner of Income Tax, Bombay City I Vs. Shoorji

Vallabhdas and Co., to contend that though under the provisions of the Act, the two points of time at which the liability to tax is attracted are taken

note of, viz., the accrual of the income or its receipt, yet the hypothetical income or loss, though entered in the books, cannot be income or loss,

unless such income or loss had actually resulted. On the other hand, learned counsel for the Revenue made a feeble attempt to sustain the order of

the Tribunal on its reasoning.

We may point out that, in respect of the very same assessee for the assessment years 1968-69 and 1969-70, the question arose whether the

assessee is entitled to a deduction of Rs. 9,20,125 being the provision against profit on exchange and Rs.4,32,152 being the provision for

anticipated loss on outstanding forward exchange contracts respectively. In deciding this question, in I. T. A. No. 1864/Mds./1974-75, for those

assessment years, the Tribunal, after noticing the nature of the forward transactions carried on by the assessee in foreign exchange, was of the view

that the profit or loss in each year has to be determined with reference to the events that had taken place in the accounting year, that merely

because they may change by the time the contract is settled, there is no warrant for postponing the determination and, therefore, the loss claimed

by the assessee was admissible as a deduction. The correctness of this view was the subject-matter of a reference dealt with in Commissioner of

Income Tax, Tamil Nadu-I Vs. Indian Overseas Bank, . The contention urged by the Revenue in that case was that neither the national profit nor

the national loss can taken in to account and whether a future settlement of the outstanding contract will result in a loss or profit will become known

only when outstanding contracts are settled and that national profit or loss, without a settlement of the outstanding foreign exchange contracts,

cannot be subjected to tax treatment and, therefore, the deductions accepted as allowable by the Tribunal were not in order. This contention ofthe

Revenue was accepted and it was held that whether there is a loss or profit on foreign exchange transactions can be ascertained only after

settlement of the forward contracts and not before and that so long as that stage had not been reached, the loss can only be notional and not actual

or real and a notional loss cannot be claimed as a deduction. Whether a loss or profit, the principle applicable would be the same and the

estimated profit, till the settlement of the forward foreign exchange contracts, could be regarded only as notional and not actual or real and such

notional profits cannot also be assessed. Though the principle laid down in CIT v. Indian Overses Bank [1985] 151 ITR related to a case of

notional loss, in view of the applicability of the same principle even to a case of notional profit, we hold that the amounts of Rs. 1,72,911 and Rs.

15,57,022.40 represented notional profit only and not actual profit for the assessment years 1972-73 and 1973-74 and could not be subjected to

tax. We may also in this connection usefully refer to Commissioner of Income Tax, Bombay City I Vs. Shoorji Vallabhdas and Co., , where the

Supreme Court pointed out that the levy of Income Tax is on income and though the Act had taken note of the twin points of time at which the

liability to tax is attracted, viz., the actual of the income or its receipt, yet the substance of the matter is the income and if income does not result at

all, there cannot be a tax, even though, for purposes of book-keeping, an entry is made about a hypothetical income which does not materialise

and a mere book-keeping entry cannot be income unless an income has actually resulted. The amounts in these references were only estimated

anticipated income arrived at on the basis of the rates of exchange which prevailed, presumably on the last day of the accounting year, without an

actual settlement of the forward contracts in foreign currencies having been brought about and in that sense, the amounts in question represented

merely notional profits and could not have been subjected to tax treatment in the hands of the assessee. We are unable to accept the reasoning of

the Tribunal that the events in the accounting year have to be taken note of in determining the profit or loss in each year and that the changes that

may be brought about on a settlement of the forward contracts in foreign exchange would not in any manner affect the assessability of the amounts

to tax. We are also unable to accept the contention of learned counsel for the Revenue that the amounts in question are assessable, based on the

reasoning of the Tribunal. We, therefore, answer, the common question referred to us in the negative and in favour of the assessee, with costs to

the assessee. Counsel''s fee Rs. 500.