2017 (11) TMI 457 - AT - Income Tax

Revision u/s 263 - Commissioner observed that the Mark to Market loss booked by the assessee company is broadly a Notional loss and is, at the best, a contingent liability which can neither be claimed in the book profit nor in the computation of income - Held that - The case of the assessee is on better footing, the assessee has not claimed loss on forward derivative contracts but claimed loss on the existing loan liability for Wind Mill at Gujarat. Thus, the treatment of charging of exchange loss on account of ECB loan availed for Wind Mill for ₹ 3,19,30,000/- to profit and loss account is in accordance with the accepted accounting principles as mandated under Accounting Standard (AS-11) as revised up to date (revised in 2003) and at such the book profit should be computed in accordance with the order dated final accounts and provisions of section 115JB of the Act. The perusal of Circular No. 3 issued by CBDT dated 23 March 2010 relied by learned CIT relates to Foreign Exchange Derivative transaction only. Further, we have seen that the assessing officer during the seeking explanation from the assessee along with the details submitted, the assessing officer taken one of the possible views and accepted the contention of the assessee while passing the assessment order regarding Forex Loss. The Hon ble Bombay High Court in case of Gabriel India Ltd (1993 (4) TMI 55 - BOMBAY High Court) has held that Commissioner cannot initiate proceeding with a view to starting fishing and roving enquiries in matters or orders which are already concluded. There must be material on record to show that tax which was lawfully exigible has not been imposed if claim was allowed by the Income tax officer. On being satisfied with the explanation of the assessee, such decision of the Income tax Officer cannot be held to be erroneous simply because in his order he did not make an elaborate decision in that record. The Hon ble High Court further held that when Commissioner himself, even after initiating proceeding for revision and hearing of the case, could not say that the disallowance of the claim of the assessee was erroneous and simply ask the assessing officer to re-examine the matter, which was not permissible. Exercising the power under section 263 the learned Commissioner should be able to demonstrate that the decision taken by the assessing officer was not possible being legally unsustainable and incorrect and this finding must be recorded. Mere conclusion of learned Commissioner that order of assessing officer is erroneous and direction to the assessing officer to recompute the income by is not correct. Even in cases where there is inadequate enquiry but not lake of enquiry, the learned Commissioner must give and record finding that order/enquiry made by assessing officer is erroneous. This can happen if any enquiry and verification is conducted by the learned Commissioner and his able to establish and show the error or mistake make by assessing officer making the order unsustainable in law. The matter cannot be remitted for fresh decision to the assessing officer to conduct further enquiries without a finding that order is erroneous and the learned Commissioner further must also satisfied the second limb of provision that the order is also prejudicial to the interest of revenue. The Hon ble Apex Court in case of Malabar Industrial Co. (2000 (2) TMI 10 - SUPREME Court) relied by learned AR of the assessee held that where two views are possible and the AO adopts one of the view possible in law, then the order cannot be treated as erroneous or prejudicial to the interest of revenue, unless the view taken by assessing officer is unsustainable and in law. In view of the above discussion, the assessing officer in the course of assessment proceeding has taken one of the possible view thus the revision proceeding initiated by learned Commissioner under section 263 is invalid. Thus the ground of appeal raised by assessee is allowed.

Summary

Issues Involved:
1. Validity of the order passed under section 263 of the Income Tax Act.
2. Adjustment of ?3,19,30,000/- in respect of forex loss on ECB Loan in computing book profit under section 115JB of the Act.

Issue-wise Detailed Analysis:

1. Validity of the order passed under section 263 of the Income Tax Act:
The appeal was filed by the assessee against the order of the Commissioner of Income Tax (CIT) under section 263 of the Income Tax Act, which deemed the original assessment order as erroneous and prejudicial to the interest of revenue. The CIT had revised the assessment order, directing the Assessing Officer (AO) to disallow the forex loss on ECB loan, considering it a notional loss and a contingent liability. The Tribunal analyzed the provisions of section 263(1) of the Act, which allows the Commissioner to revise an order if it is erroneous and prejudicial to the interest of revenue. The Tribunal emphasized that the Commissioner must provide an opportunity of being heard to the assessee and make necessary inquiries. The Tribunal found that the AO had duly examined the forex loss during the assessment proceedings, and the decision taken by the AO was one of the possible views. It was held that the Commissioner cannot initiate proceedings under section 263 merely to start a fishing and roving inquiry. The Tribunal cited various judicial precedents, including the Hon’ble Supreme Court's decision in Malabar Industrial Co. Ltd., which held that if two views are possible and the AO adopts one, the order cannot be treated as erroneous unless it is unsustainable in law. Consequently, the Tribunal concluded that the revision proceedings initiated by the Commissioner under section 263 were invalid.

2. Adjustment of ?3,19,30,000/- in respect of forex loss on ECB Loan in computing book profit under section 115JB of the Act:
The assessee had claimed a forex loss of ?3,19,30,000/- on an ECB loan availed for financing the installation of a windmill, which was accounted for as per Accounting Standard-11 (AS-11). The AO allowed the claim, but the CIT later disallowed it, arguing that it should be capitalized and not charged to the profit and loss account. The Tribunal noted that the forex loss was a result of exchange rate fluctuations, which were recognized as per the revised AS-11. The Tribunal referred to the Hon’ble jurisdictional High Court's decision in Apollo Tyres Ltd., which held that the AO cannot question the correctness of the profit and loss account prepared and certified as per the Companies Act while computing income under section 115JB. The Tribunal observed that the assessee’s treatment of the forex loss was in accordance with accepted accounting principles and AS-11. It was further noted that the CBDT Circular No. 3 of 2010, relied upon by the CIT, pertained to foreign exchange derivative transactions and not to the forex loss on existing loan liability for the windmill. The Tribunal held that the AO had taken one of the possible views based on the details furnished by the assessee, and thus, the CIT's direction to recompute the income by disallowing the forex loss was not justified. The Tribunal concluded that the order passed by the AO was not erroneous or prejudicial to the interest of revenue, and the adjustment of the forex loss in computing book profit under section 115JB was correctly allowed.

Conclusion:
The Tribunal allowed the appeal of the assessee, setting aside the order passed by the Commissioner under section 263 of the Income Tax Act. The Tribunal held that the AO's decision to allow the forex loss on ECB loan was one of the possible views and was in accordance with the accounting standards and judicial precedents. The revision proceedings initiated by the Commissioner were deemed invalid, and the adjustment of the forex loss in computing book profit under section 115JB was upheld.