2011 (5) TMI 505 - AT - Income Tax

Reopening of the assessment -foreign exchange gain - additions - Once the Assessing Officer considered and examined the issue of foreign exchange fluctuation as manifest from the original assessment order, the assessment completed u/s 143(3) cannot be reopened on the same issue by taking a different view. - there was no tangible material before the AO to hold so income had escaped assessment within the meaning of s. 147 and that the reasons recorded for reopening the assessment constitute a mere change of opinion. Additions - Foreign exchange gain - Under the unamended s. 43A, actual payment was not a condition precedent for making necessary adjustment in the carrying cost of the fixed asset acquired in foreign currency, however, under amended s. 43A w.e.f. 1st April, 2003 such actual payment of the decreased/enhanced liability is made a condition precedent for making adjustment in the carrying amount of the fixed assets - This indicates a complete structural change brought about in s. 43A vide Finance Act, 2002. Therefore, the amended section is amendatory and not clarificatory in nature - Hence, the issue on merit is decided in faovur of the assessee.

Issues Involved: Validity of reopening of assessment under section 147, and addition of foreign exchange gain.

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment:

The primary issue revolves around the reopening of the assessment proceedings under section 147 of the Income Tax Act. The original assessment was completed under section 143(3) on 29.9.2006, determining a total loss of Rs. 4,95,28,863/-. The assessment was reopened by issuing a notice under section 148 on 17.2.2009, based on the ground that the assessee had reduced an amount of Rs. 1,00,38,101/- on account of foreign exchange fluctuation gain from the income, which was not added back, resulting in underassessment.

The assessee argued that the reopening was based on a mere change of opinion, as the Assessing Officer (AO) had already examined the foreign exchange fluctuation during the original assessment and accepted the explanations provided. The assessee relied on the Supreme Court's decision in CIT vs Kelvinator India Ltd (321 ITR 561) and the jurisdictional High Court's decision in Aventis Pharma Ltd vs ACIT (323 ITR 570), asserting that the AO cannot reopen an assessment based on a change of opinion.

The Department countered that the original assessment only examined the loss on foreign exchange fluctuation and not the gain. Therefore, there was no change of opinion, as the issue of gain was not addressed in the original assessment.

Upon reviewing the submissions and relevant material, it was noted that the AO had indeed considered the foreign exchange fluctuation during the original assessment, as evidenced by the detailed explanation provided by the assessee. The AO had accepted the assessee's explanation regarding the notional gain on foreign exchange fluctuation, as it was on capital account. The reopening of the assessment was thus deemed invalid, as it was based on a change of opinion, which is not permissible as per the Supreme Court's ruling in Kelvinator India Ltd and the jurisdictional High Court's decision in Aventis Pharma Ltd.

2. Addition of Foreign Exchange Gain:

On the merits of the case, the issue pertained to the addition of Rs. 99,78,719/- towards foreign exchange gain. The assessee contended that this gain was notional and accounted for as per Accounting Standard 11 issued by the Institute of Chartered Accountants of India. The CIT(A) had confirmed the addition based on the decision in Woodward Governor India Pvt Ltd (312 ITR 254).

The Tribunal observed that the gain on foreign exchange fluctuation related to the term loan and was not on revenue account. The Supreme Court, in the case of Woodward Governor India P Ltd, had held that adjustments in the actual cost of assets due to changes in exchange rates should be made on a cash basis as per the amended provisions of section 43A. Since the gain in question was on capital account and not on revenue account, it could not be treated as income.

The Tribunal concluded that the addition of Rs. 99,78,719/- towards foreign exchange gain was not justified, as the gain was on capital account and not on revenue account. The issue was thus decided in favor of the assessee.

Conclusion:

The Tribunal held that the reopening of the assessment was invalid as it was based on a change of opinion. Additionally, the addition of Rs. 99,78,719/- towards foreign exchange gain was not justified, as the gain was on capital account. Consequently, the appeal filed by the assessee was allowed. The order was pronounced on 13.5.2011.

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