Case Law Details
Facts of the case
• The taxpayer, a non- resident company carrying on banking business in India, entered into forward contracts with its clients to buy or sell foreign exchange at an agreed price on a future date. In cases where the date of maturity of the contract falls beyond the end of the accounting period, the taxpayer evaluates the unmatured forward contracts on the last day of the accounting period on the basis of rate of foreign exchange prevailing on that date and books the loss or profit accordingly. Accordingly the taxpayer booked losses of INR 1.2 million.
• However, the Assessing Officer (AO) observed that the principles of taxation require that actual profit or loss was to be brought to tax and not contingent losses. And since in a forward contracts, liability arises only on the date on which the contracts mature such losses should not be allowed as a deduction..
• The AO also referred to the Madras High Court’s decision in the case of Indian Overseas Bank v. CIT [1990] 246 ITR 206 (Mad) wherein it was held that before settlement of contracts in foreign currency, no actual profit could accrue and the amount in question represented notional profits only. Accordingly, the AO disallowed the loss of INR 1.2 million treating the same as notional loss.
Taxpayer’s contentions
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