JUDGMENT
Ratnam, J.
1. In these tax case references under section 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?”
2. 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.
3. Learned counsel for the assessee submitted, relying upon CIT v. Indian Overseas Bank [1985] 151 ITR 446 (Mad), that the decision of the Tribunal in I. T. A. No. 1864/Mds./1974-75 in respect of the
4. 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 CIT v. 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.
5. 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 CIT v. Indian Overseas Bank [1985] 151 ITR 446 (Mad). 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 (Mad) 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 CIT v. Shoorji Vallabhdas and Co. [1962] 46 ITR 144, 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.