Gujarat H.C : Assessee would be entitled to adjust actual cost of imported capital asset acquired in foreign currency, on account of fluctuation in rate of exchange pending actual payment of varied liability

High Court Of Gujarat

India Gelatine And Chemicals Ltd. vs. ACIT (No. 2)

Assessment Year : 1999-2000

Section : 43A, 147

Akil Kureshi And Ms. Sonia Gokani, JJ.

Special Civil Application No. 954 Of 2004

April 23, 2014

JUDGMENT

Akil Kureshi, J. – The petitioner has challenged a notice dated January 27, 2003, issued by the respondent-Assessing Officer seeking to reopen the assessment of the petitioner for the assessment year 1999-2000.

2. The facts are as under :

2.1 The petitioner is a company registered under the Companies Act and is assessed to tax regularly. For the said assessment year, the petitioner filed its return of income in due course declaring total income of Rs. 2.76 crores (rounded off). Such return was accepted under section 143(1) of the Act without any scrutiny. It is this return the Assessing Officer desired to reopen for which the impugned notice came to be issued.

2.2 At the request of the petitioner, he supplied the reasons recorded for issuing such notice. Such reasons are rather elaborate. We may, however, note the concluding portion of the reasons which is the gist of the Assessing Officer’s belief that the income chargeable to tax has escaped assessment. Such conclusions read as under :

“It can be seen that as per schedule 19 of the notes annexed and forming part of the accounts for the year ended March 31, 1998-5(b) of annual report of 1998-99, 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. 84.84 lakhs was charged to the revenue account.

As the expenditure of Rs. 84.84 lakhs debited to the revenue account was not backed by the actual remittance and loss arisen due to fluctuation on the first and last day of the accounting year the allowance of exchange loss as a deduction in the computation of the business income has resulted in underassessment.

In view of the above, I am of the firm belief that substantial income has escaped assessment within the meaning of section 147, for which assessments need to be reopened.”

2.3 The petitioner raised objections to the process of reopening under communication dated August 7, 2003. Such objections were rejected by the Assessing Officer by order dated September 15, 2003. Hence, this petition.

3. We may also notice that on March 31, 2003, the Assessing Officer recorded further reasons titled as supplementary reasons which read as under :

“It can also be seen that the assessee-company has claimed depreciation on the portion of loan used for acquisition of fixed assets. The depreciation claimed on account of exchange fluctuation added to the cost of fixed assets has also to be disallowed after due quantification during the assessment. The same has to be quantified as the assessee has claimed depreciation on the term liability incurred in the foreign currency for the acquisition of the fixed assets at the year end exchange rate and the foreign exchange fluctuation amounting to Rs. 100.66 lakhs has been added to the actual cost to the assets as per the note 5(c) of schedule 19, i.e., notes annexed to and forming part of the accounts for the year ended March 31, 1999. The depreciation on the account of the addition such amount to the fixed assets in the earlier assessment year, i.e., 1998-99 has to be calculated and, accordingly, disallowed.”

4. We are conscious that, in the present case, the original assessment was not after scrutiny. In view of the decision of the Supreme Court in case of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316 (SC), the Revenue would, therefore, have considerable latitude in reopening the assessment after issuing notice for such purpose. However, in our judgment in the case of Inductotherm (India) (P.) Ltd. v. M. Gopalan, Dy. CIT [2013] 356 ITR 481/217 Taxman 132 (Mag.)/36 taxmann.com 401 (Guj.), it was held that even in case where a return which is accepted under section 143(3) of the Act without scrutiny, to reopen the same the basic requirement of section 147 of the Act that the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment, is not done away with. It was observed as under (page 490) :

“Despite such difference in the scheme between a return which is accepted under section 143(1) of the Act as compared to a return of which scrutiny assessment under section 143(3) of the Act is framed, the basic requirement of section 147 of the Act that the Assessing Officer has reason to believe that income chargeable to tax has escaped assessment is not done away with. Section 147 of the Act permits the Assessing Officer to assess, reassess the income or recompute the loss or depreciation if he has reason to believe that any income chargeable to tax has escaped assessment for any assessment year. This power to reopen the assessment is available in either case, namely, while a return has been either accepted under section 143(1) of the Act or a scrutiny assessment has been framed under section 143(3) of the Act. A common requirement in both of cases is that the Assessing Officer should have reason to believe that any income chargeable to tax has escaped assessment.”

5. In this context, we may note that the supplementary reasons were recorded on March 31, 2003, and, therefore, well after issuance of the notice. It is well settled that the validity of notice for reopening must be judged on the basis of the reasons recorded. Such reasons in terms of section 148(2) of the Act have to be recorded before issuance of the notice. The Assessing Officer, therefore, would not be in a position to support the notice of reopening on the basis of any reasons recorded subsequent to the notice itself.

6. In this light, we need to judge the validity of the Assessing Officer’s belief that income chargeable to tax has escaped assessment on the strength of the reasons recorded before issuance of the notice for reopening. In the case of this very assessee in Special Civil Application No. 12552 of 2002, India Gelatine & Chemicals Ltd. v. Asstt. CIT (No. 1) [2014] 364 ITR 649/46 taxmann.com 282 (Guj.) this issue had come up for consideration. In a separate judgment passed today it was held as under (page 653) :

“On the first aspect, we notice that it is wrongly referred to in the reasons recorded as paragraph 5(B) of the annual report of the company, the correct reference would be to paragraph 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 CIT v. Woodward Governor India P. Ltd. [2009] 312 ITR 254 (SC) 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 the case of Oil and Natural Gas Corporation Ltd. v. CIT [2010] 322 ITR 180 (SC) by the Supreme Court as can be seen from the following discussion (page 187 of 322 ITR) :

‘Opining that the amendment of section 43A of the Act by the Finance Act, 2002, with effect from April 1, 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 April 1, 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 April 1, 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. In the result, the impugned notice dated January 27, 2003, is quashed. The petition is allowed and disposed of. Rule made absolute. No costs.

[Citation : 364 ITR 655]