Gujarat H.C : Where Assessing Officer initiated reassessment proceedings on ground that assessee had claimed deduction of certain sum on account of fluctuation of rate of foreign exchange, in view of fact that in terms of order passed by Supreme Court in case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326, loss suffered by assessee on account of fluctuation in rate of foreign exchange as on date of balance-sheet was an item of expenditure allowable under section 37(1), impugned reassessment proceedings deserved to be quashed

High Court Of Gujarat

India Gelatine And Chemicals Ltd. vs. ACIT

Assessment Year : 1998-99

Section : 37(1), 115JA, 147

Akil Kureshi And Ms. Sonia Gokani, JJ.

Special Civil Application No. 12552 Of 2002

April 23, 2014

JUDGMENT

Akil Kureshi, J. – The petitioner has challenged a notice dated 11.10.2002 issued by the respondent Assessing Officer seeking to reopen the petitioner’s completed assessment for the assessment year 1998-99.

2. Brief facts are as under :

2.1 The petitioner is a company registered under the Companies Act and is assessed to tax regularly. For the assessment year 1998-1999, the petitioner filed its return of income on 27.11.1998. Such return was taken in scrutiny. The Assessing Officer framed scrutiny assessment on 14.9.2000. The assessee had declared loss of Rs.1.44 crores(rounded off) after availing various deductions, depreciations and exemptions. The Assessing Officer computed the petitioner’s total income at Rs.2.89 crores(rounded off) under section 115JA of the Act and taxed the petitioner accordingly.

2.2 It is this scrutiny assessment, which the returning officer seeks to reopen in which the impugned notice within a period of four years from the end of relevant assessment year came to be issued. The petitioner was supplied the reasons recorded by the Assessing Officer for issuing such notice which read as under :

“As per Schedule 19 of notes annexed and forming part of the accounts for the year ended 31st March 1998-5(B) of Annual Report of 1997-98, India Gelatine and Chemicals Ltd. the term liability incurred in foreign currency for acquisition of fixed assets has been translated at the year and exchange rate and the resultant deficit amounting to Rs. 116.86 lakh was charged to Revenue Account.

The allowance of this expenditure under Revenue account is not to be allowed in view of clarification made by the Ministry of Law. The Ministry of Law clarified in October 1984 that exchange loss arrived at on the basis of fluctuation in the rate of exchange and not backed by actual remittance cannot be allowed as deduction in computing the total income under the Income Tax Act.

As the expenditure of Rs.116.86 lakh debited to Revenue Account was not backed by the actual remittance and loss arisen due to fluctuation on the first and the last day of accounting year the allowance of exchange loss as deduction in the computation of the business income has resulted in underassessment of income of Rs.116.86 lacs.

The above is handed over to the AR(Shri A.S. Parikh -M.N. Shah and Co.) of the Assessee Company personally.”

2.3. The petitioner thereupon filed the petition challenging the notice itself.

3. Learned counsel Shri Manish Shah for the petitioner raised two contentions. Firstly, he submitted that the ground on which the Assessing Officer desires to tax the petitioner’s income is not valid. Drawing our attention to the reasons recorded, he submitted that the reference is to para 5(C) of the annual report and not para 5(B) as erroneously typed in the reasons recorded. It is in para 5(C) that the amount of Rs.116.86 lakhs is reflected and charged to revenue account. In this context, the objection of the Assessing Officer is that such amount is not to be allowed in the revenue account by virtue of circular of Ministry of law on the ground that the exchange loss calculated on the basis of fluctuation in foreign exchange rate was not supported by actual remittance. Same therefore, cannot be allowed as deduction in computing total income under the Act. Counsel submitted that the view of the Assessing Officer is incorrect in view of decision of Supreme Court in case of CIT v. Woodward Governor India (P.) Ltd. [2009] 312 ITR 254/179 Taxman 326 (SC) and in case of Oil and Natural Gas Corpn. Ltd. v. CIT [2010] 322 ITR 180/189 Taxman 292 (SC).

3.1 The second contention of the petitioner is that even if the addition proposed by the Assessing Officer is sustained, it would make no difference to the ultimate tax liability of the assessee since on the computation of book profit under section 115JA of the Act, the assessee had paid tax on much higher income of Rs.2.89 crores.

3.2 We may recall that under normal computation the assessee had declared a loss of Rs.1.44 crores (rounded off). Even if the disallowance of Rs.116.86 lakhs is made, there would be no difference in the assessee’s tax liability under section 115JA of the Act. Counsel would therefore, contend that the Assessing Officer’s belief that income chargeable to tax has escaped assessment is also erroneous. In this context, he relied on decision of this Court in case of PKM Advisory Services (P.) Ltd. v. ITO [2011] 339 ITR 585/[2012] 21 taxmann.com 86 (Guj).

4. On the other hand, learned counsel Shri Bhatt for the Revenue opposed the petition contending that the decision of Supreme Court cited by the petitioner would not cover the present situation and further that whether income chargeable to tax has escaped assessment or not cannot be considered at this stage and no conclusive opinion can be rendered. The Assessing Officer must be allowed to carry out reassessment.

5. In our opinion on both counts the petition must succeed.

6. On the first aspect, we notice that it is wrongly referred to in the reasons recorded as para 5(B) of the annual report of the company, the correct reference would be to para 5(C) where there is a reference to a sum of Rs.116.86 lakhs which was charged by the assessee to the revenue account. In that context, the question is whether the Assessing Officer’s belief that the income chargeable to tax has escaped assessment, is valid. He formed such belief on the premise that the assessee had claimed deduction of such sum on mere fluctuation of the rate of foreign exchange and the loss computed was without actual remittances. In this context, the Supreme Court in case of Woodward Governor India (P.) Ltd. (supra) held that the loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet is an item of expenditure under section 37(1) of the Act and further that under the mercantile system of accounting, what is due is brought into credit before it is actually received. It also brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed. This decision was latter followed and reiterated in case of Oil and Natural Gas Corpn. Ltd.(supra) by the Supreme Court as can be seen from the following discussion :

“Opining that the amendment of Section 43A of the Act by the Finance Act, 2002 with effect from 1st April, 2003 is amendatory and not clarificatory and would thus, apply prospectively, the Court explained that under the unamended Section 43A, adjustment to the actual cost takes place on the happening of change in the rate of exchange, whereas under the amended Section 43A, the adjustment in the actual cost is made on cash basis. In other words, under the unamended Section 43A, “actual payment” was not a condition precedent for making necessary adjustment in the carrying cost of the fixed asset acquired in foreign currency but under the amended Section 43A, with effect from 1st April, 2003, such payment of the decreased/enhanced liability on account of fluctuation in foreign exchange rate has been made a condition precedent for making adjustment in the carrying amount of the fixed asset.

We are of the opinion that the decision of this Court in Woodward’s case (supra) settles the second issue as well. We respectfully concur with the same and hold that all the assessment years in question being prior to the amendment in Section 43A of the Act with effect from 1st April, 2003 the Assessee would be entitled to adjust the actual cost of the imported capital assets, acquired in foreign currency, on account of fluctuation in the rate of exchange at each of the relevant balance-sheet dates pending actual payment of the varied liability.”

7. Coming to the second contention of the petitioner, we may recall that in the original assessment order, against the loss of Rs.1.44 crores under normal computation, the assessment was framed on book profit of Rs. 2,89 crores under section 115JA of the Act. Even if therefore, expenditure of Rs. 116.86 lakhs is disallowed, there would be no resultant change in the petitioner’s tax liability since the petitioner has already paid much higher tax. In somewhat similar situation, this Court in case of PKM Advisory Services (P.) Ltd. (supra), observed as under :

“7. Having regard to the submissions advanced by the learned advocates for the respective parties and considering the reasons recorded, it is apparent that the assessee has been assessed under the provisions of section 115JB of the Act and has paid tax of Rs.4,72,967/- at the rate of 7.5% of Rs.63,06,232/- as determined under the said section. According to the Assessing Officer, the income chargeable to tax that has escaped assessment by way of excess depreciation is Rs.8.59.944/-. Adding the said amount to the amount computed under the ordinary provisions of the Income Tax Act, the aggregate amount even as per the Assessing Officer comes to Rs.4,05,930/- which is less than the amount of tax paid by the petitioner on being assessed under section 115JB of the Act. In the circumstances, when the tax payable as per the reasons recorded is less than the tax paid by the petitioner under the assessment framed under section 143(3) of the Act, the question of any income having escaped assessment does not arise. The order recording reasons, itself indicates that in fact no income has escaped assessment and as such there is no basis for the formation of belief that income has escaped assessment. In the circumstances, the basic pre-condition for reopening assessment under section 147 of the Act, namely that the Assessing Officer should have reason to believe that income has escaped assessment is not satisfied. In the circumstances, the assumption of jurisdiction by the Assessing Officer by issuing notice under section 148 of the Act is without jurisdiction and as such the impugned notice under section 148 of the Act as well as all proceedings pursuant thereto cannot be sustained.”

8. In the result, impugned notice dated 11.10.2002 is quashed. The petition is allowed and disposed of. Rule made absolute. No costs.

[Citation : 364 ITR 649]