2016 (2) TMI 1212 - AT - Income Tax

Reopening of assessment - correctness of the Reasons to believe - addition on account of notional foreign exchange gain - Held that - There was full discloser on the part of the assessee in accounts filed with the return of income. The AO recorded the Reasons on the basis of information disclosed by the assessee in his return accounts and audit report. Thus the reopening is clearly barred by limitation and beyond the provisions of law in view of aforesaid proviso to section 147. no fresh tangible material has come into the possession of the AO at the time of the recording of the Reasons . It is settled law that in absence of a fresh tangible material coming into the possession of the AO no belief can be formed about escapement of income. It is further noted by us that Reasons have been recorded on the ground that foreign exchange fluctuation gain was taxable on notional basis. The belief of escapement of income is without any legal basis the AO has not even analysed the facts properly before recording the Reasons . It has not been mentioned in the Reasons whether the impugned foreign exchange fluctuation gain sought to be taxed on notional basis was on account of revenue or capital transactions. It could be brought to tax as income if at all it was feasible under the law only when the resultant gain was on account of revenue transactions. If underlying transactions leading to foreign exchange fluctuation gain were on capital account then it could not be treated as income. Thus in our considered view the impugned Reasons are factually and legally invalid in the eye of law - Decided in favour of assessee

Summary

Issues:
1. Validity of reopening of assessment u/s 147 of the Income Tax Act.
2. Whether notional foreign exchange gain can be added as income.
3. Compliance with the provisions of section 43A of the Act.
4. Limitation for reopening assessment u/s 147.
5. Legal basis for belief of escapement of income.

Analysis:

Issue 1: Validity of reopening of assessment u/s 147
The appeal was filed by the Revenue against the order of the Ld. CIT(A) quashing the reopening of the assessment u/s 147 of the Act. The AO reopened the assessment based on the auditors' report mentioning exchange fluctuation gain. However, the Ld. CIT(A) held that the reopening was invalid as no new details were provided and all information was disclosed during the original assessment. The AO's reasons were based on the audit objection, leading to the conclusion that the reopening was unjustified and incorrect, as per the decision in Purity Techtextile Pvt. Ltd. vs. ACIT. The Ld. CIT(A) annulled the assessment order, and the reopening was found to be beyond the limitation period and lacking fresh tangible material.

Issue 2: Whether notional foreign exchange gain can be added as income
The AO added notional foreign exchange gain as income during reassessment, which was contested by the assessee. The Ld. CIT(A) held that recognizing notional income was not justified, as the appellant had substantial losses. It was noted that the gain was not income for tax purposes, and the addition made by the AO was deleted based on the AS-11 compliance and the audit report's findings.

Issue 3: Compliance with the provisions of section 43A of the Act
The AO reopened the assessment to take remedial action regarding the taxability of exchange fluctuation gain, citing instructions from the Board. However, the Ld. CIT(A) found the reopening unjustified and incorrect, as it was solely based on audit objections without proper legal basis. The provisions of section 43A were analyzed, concluding that the gain should only be recognized upon actual payment, which was not the case here.

Issue 4: Limitation for reopening assessment u/s 147
The reopening was done after four years from the end of the assessment year, raising questions about the validity under the limitation period provided in the law. The Ld. CIT(A) found that no failure in disclosure of material facts was alleged, and the reopening was beyond the limitation period without fresh tangible material, rendering it legally invalid.

Issue 5: Legal basis for belief of escapement of income
The AO's belief of escapement of income based on foreign exchange fluctuation gain was found to be without a legal basis, as it was not properly analyzed whether the gain was from revenue or capital transactions. The Ld. CIT(A) upheld the judgment that the reasons for reopening were factually and legally invalid, leading to the dismissal of the Revenue's appeal.

In conclusion, the appeal filed by the Revenue was dismissed, and the decision of the Ld. CIT(A) quashing the reopening of assessment was upheld.