2020 (9) TMI 1297 - AT - Income Tax

Revision u/s 263 - eligibility of deduction claimed on account of foreign exchange loss - As per CIT AO had not enquired this issue from the angle of allowability of notional foreign exchange fluctuation loss on restatement of allowability at the year ending and further the applicability of section 43A was not considered as per which the loss on account foreign exchange loss was to be allowed at the time of making payment and not on year to year basis - HELD THAT - We find that the ld. Pr. CIT has recorded a categorical finding that the AO did not examine this issue at all in the assessment order. The Hon ble Supreme Court in Malabar Industrial Company Ltd. 2000 (2) TMI 10 - SUPREME COURT has held that CIT can revise an assessment order where the AO does not apply his mind before finalising the assessment. In an earlier judgment in Tara Devi Aggarwal 1972 (11) TMI 2 - SUPREME COURT has also laid down similar proposition. Similar view has been taken in Gee Vee Enterprises 1974 (10) TMI 29 - DELHI HIGH COURT . Since it is evident from the facts and circumstances of the instant case that the AO did not consider this issue and simply allowed the deduction, we are satisfied that the assessment order turned out to be erroneous and prejudicial to the interest of revenue, rightly warranting interference at the hands of Pr. CIT u/s.263 of the Act. Decided against assessee.

Summary

Issues:

1. Assessment order challenged under section 263 of the Income-tax Act, 1961.
2. Allowability of notional foreign exchange fluctuation loss.
3. Examination of foreign exchange fluctuation loss by Assessing Officer.
4. Impact of Finance Act, 2002 amendment on foreign exchange loss deduction.
5. Revision of assessment order by Principal Commissioner of Income-tax.
6. Prejudicial nature of assessment order to revenue interest.

1. Assessment order challenged under section 263 of the Income-tax Act, 1961:

The appeal was against the order passed by the Principal Commissioner of Income-tax under section 263 of the Income-tax Act, 1961 for the assessment year 2012-13. The assessee did not appear for multiple hearings, leading to the disposal of the appeal ex parte.

2. Allowability of notional foreign exchange fluctuation loss:

The Principal Commissioner observed that the assessee claimed foreign exchange fluctuation loss as revenue expenditure, resulting in an increase in the loan liability. The issue was not examined by the Assessing Officer from the perspective of section 43A of the Act, which disallows such notional losses as deductions.

3. Examination of foreign exchange fluctuation loss by Assessing Officer:

The Assessing Officer did not investigate the allowability of the notional foreign exchange fluctuation loss on a year-to-year basis. The Principal Commissioner found the assessment order erroneous due to the lack of scrutiny on this issue, leading to the revision under section 263 of the Act.

4. Impact of Finance Act, 2002 amendment on foreign exchange loss deduction:

The Finance Act, 2002 amendment to section 43A restricted the allowance of foreign exchange fluctuation loss as a deduction only at the time of payment, not on a year-to-year basis. This change unsettled the previous practice of claiming such deductions despite nonpayment.

5. Revision of assessment order by Principal Commissioner of Income-tax:

Citing precedents like the Malabar Industrial Company Ltd. case and Tara Devi Aggarwal case, the Principal Commissioner revised the assessment order as it was found to be erroneous and prejudicial to the revenue's interest due to the lack of examination of the foreign exchange fluctuation loss issue by the Assessing Officer.

6. Prejudicial nature of assessment order to revenue interest:

The failure of the Assessing Officer to consider and examine the foreign exchange fluctuation loss issue led to the assessment order being deemed prejudicial to the revenue's interest. The appeal was ultimately dismissed by the Tribunal.

The judgment highlighted the importance of thorough assessment scrutiny, adherence to legal provisions, and the impact of amendments on deductions, ultimately upholding the revision of the assessment order under section 263 of the Income-tax Act, 1961.