2013 (1) TMI 621 - AT - Income Tax

Validity of assessment made u/s 263 by CIT - Order of A.O. sought to be revised is erroneous and also prejudicial to the interests of the Revenue Held that - The role of the Assessing Officer under the Income-tax Act, is not only that of an adjudicator, but also of an investigator. He cannot remain passive in the face of a return which apparently may be in order but calls for further enquiry. He must discharge both the roles effectively. The assessment order passed by the A.O. should reveal that there is proper investigation and enquiry made by the A.O. and he has applied his mind to the material available before him before coming to his conclusions. In favour of revenue Tonnage Taxation - Chapter XIIG Whether gain on account of foreign exchange fluctuation is related to the activity of operating qualifying ships has to be taxed under the Tonnage Tax Scheme or income from other sources - Held that - Following the decision in case of Dredging Corporation of India Ltd. (2011 (7) TMI 584 - ITAT VISAKHAPATNAM) the gains realized on the foreign exchange fluctuation normally take the colour of the primary transactions. The assessee has entered into certain transactions in foreign currency in connection with its core activity. Accordingly the exchange difference arising out of such activities should be treated as related to the core activity In favour of assessee Disallowance of Gratuity CIT doubting the credibility of the report of the actuary Revenue argued that there is no evidence of accrual of the liability by the close of the relevant accounting year, the expenditure cannot be allowed in terms of Sec.43B Assessee had deposit said amount in gratuity fund with bank before the due date of filling of return - Held that - The CIT was not justified in discarding the evidences produced before him, on doubts and presumptions only without properly verifying them. If the fact of payment of gratuity is established from the evidence available on record, then the deduction claimed by the assessee cannot be disallowed invoking the provisions of Sec.43B. Direct the A.O. to verify the bank account Remand back in favour of assessee Disallowance of expenses for issuing Foreign Currency Convertible Bonds (FCCB) Revenue or capital expenditure - Assessee has issued the FCCBs giving an option to the bond-holders for converting the bonds into shares Held that - A.O. has enquired about the issue of FCCB and the expenditure claimed in that regard, however, in the assessment order there is not even a whisper on this issue. Nothing is also available on record before us which reveals that the Assessing Officer has applied his mind to this issue and has made an in depth enquiry to find out the exact nature of the expenses claimed - Remand back to A.O.

Summary

Issues Involved:
1. Legality and validity of proceedings initiated under S.263 of the Income-tax Act.
2. Assessment of difference in exchange of Rs.15,46,428 as income from other sources.
3. Directions for disallowance of gratuity of Rs.1,32,95,577.
4. Disallowance of expenses amounting to Rs.2,64,26,757 for issuing Foreign Currency Convertible Bonds (FCCB).

Detailed Analysis:

Legality and Validity of Proceedings under S.263:
The assessee challenged the initiation of proceedings under S.263, arguing that the assessment order was neither erroneous nor prejudicial to the interests of the Revenue. The contention was that the Assessing Officer (AO) had already applied his mind to the issues, and two views were possible on these issues. The Tribunal observed that the AO's assessment order lacked detailed discussion or evidence of application of mind on the issues raised by the Commissioner of Income-tax. The Tribunal held that the Commissioner of Income-tax was justified in invoking S.263 as the AO failed to conduct a proper enquiry or investigation, making the assessment order erroneous and prejudicial to the interests of the Revenue.

Assessment of Difference in Exchange of Rs.15,46,428 as Income from Other Sources:
The assessee argued that the foreign exchange fluctuation gain was part of the shipping business income and should be taxed under the Tonnage Tax Scheme. The Tribunal referred to the details of the foreign exchange fluctuation gains and losses related to the operation of qualifying ships and found that the gain was indeed part of the shipping business. Citing the decision of the Visakhapatnam Bench of the Tribunal in the case of Dredging Corporation of India Ltd., the Tribunal held that the gain from foreign exchange fluctuations should be taxed under the Tonnage Tax Scheme and not as income from other sources. Consequently, the Tribunal did not sustain the Commissioner of Income-tax's order on this issue.

Directions for Disallowance of Gratuity of Rs.1,32,95,577:
The assessee contended that the gratuity liability was correctly quantified and paid, thus allowable under S.43B of the Act. The Tribunal noted that the Commissioner of Income-tax doubted the credibility of the actuary's report and inferred that the liability did not accrue by the end of the accounting year. The Tribunal examined the provisions of S.43B, which allow deductions for actual payments made within the financial year or before the due date for filing the return. The Tribunal found evidence supporting the assessee's claim of payment towards gratuity and directed the AO to verify the bank account and other evidence to determine the allowability of the claim. The directions of the Commissioner of Income-tax were modified accordingly.

Disallowance of Expenses for Issuing FCCB:
The assessee claimed that the expenses incurred for issuing FCCB were for business purposes and should be treated as revenue expenditure. The Commissioner of Income-tax directed the AO to disallow the expenses, treating them as capital expenditure. The Tribunal noted that the AO's assessment order did not discuss this issue in detail. The Tribunal referred to the Supreme Court's decisions in India Cements Ltd. and Brooke Bond India Ltd., which differentiate between capital and revenue expenditure based on the purpose of the expenditure. The Tribunal found that the Commissioner of Income-tax did not consider the relevant case laws and directed the AO to re-examine the issue in light of the applicable legal principles. The directions of the Commissioner of Income-tax were modified to this extent.

Conclusion:
The appeal was partly allowed and partly allowed for statistical purposes. The Tribunal upheld the initiation of proceedings under S.263 but provided specific directions for re-examination of the issues related to gratuity and FCCB expenses. The Tribunal also ruled that the foreign exchange fluctuation gain should be taxed under the Tonnage Tax Scheme.