2019 (11) TMI 703 - AT - Income Tax

Revision u/s 263 - limited scrutiny case - foreign exchange loss claimed as revenue expenditure is to be disallowed - whether the AO having failed to convert limited scrutiny into a complete scrutiny, the assessment order would be rendered erroneous and prejudicial to the interests of the Revenue? - HELD THAT - In a case of limited scrutiny assessment, the Assessing Officer is duty bound to make a prima facie enquiry as to whether there is any other item which requires examination and in the assessment, the potential escapement of income thereof exceeded ₹ 10 lakhs. He ought to have sought the permission of CIT/DIT to convert the limited scrutiny assessment into a complete scrutiny assessment . If there is no escapement of income, which would have been more than ₹ 10 lakhs, the Pr. CIT could not exercise jurisdiction u/s. 263 of the I.T. Act. In the present case, the assessee itself agreed that the Pr. CIT is justified in giving direction to rework MAT income after adding back the provision for doubtful debts. Now, the argument of the Ld. AR that in case of limited scrutiny assessment, the Pr. CIT could not exercise jurisdiction u/s. 263 of the Act, is devoid of merit. Accordingly, the ground relating to challenging of the exercise of jurisdiction by the Pr. CIT u/s. 263 is rejected. Whether gain on account of foreign exchange fluctuation can be reduced from the cost of assets as per the provisions of section 43(1)? - main contention of the Ld. AR is that loss arising on account of fluctuation of exchange rate with regard to loan availed for acquisition of fixed assets is a revenue loss and not a capital loss - HELD THAT - In view of revision made in AS-11, now treatment shall be as per revised AS-11 (2003). Exchange gain or loss on foreign currency fluctuations in respect of foreign currency loan acquired for acquisition of fixed asset should be allowed as revenue expenditure. However, in the Preamble of AS-11 (Revised 2003), it was stated that the Revised Standard supersedes AS-11 (1994) except that in respect of accounting for transactions in foreign currencies entered into by the reporting enterprise before the date of AS-11 (2004) comes into effect, AS 11 (1994) will continue to be applicable. In our opinion, sec. 43A is only relating to the foreign exchange rate fluctuation in respect of assets acquired from a country outside India by using foreign currency loans which is not applicable to the indigenous assets acquired out of foreign currency loans. Further, the Revised Standard supersedes AS 11 (1994), except that in respect of accounting for transactions in foreign currencies entered into by the assessee before the date of AS-11 (2004) comes into effect, AS-11 (1994) will continue to be applicable. Foreign exchange loss arising out of foreign currency fluctuations in respect of loan in foreign currency used for acquiring fixed assets should be allowed as revenue expenditure by charging the same into the Profit and Loss account and not as capital expenditure by deducting the same from the cost of the respective fixed assets. Hence, in our opinion, there is no potential escapement of income on the issue relating to allowability of foreign exchange loan taken for the construction of new building and additional equipment. Accordingly, this ground of appeal of the assessee is allowed.

Summary

Issues Involved:
1. Legitimacy of the order passed under Section 263 of the Income Tax Act by the Principal Commissioner of Income Tax (Pr. CIT).
2. Applicability of Section 37(1) and Section 36(1)(iii) of the Income Tax Act concerning the foreign exchange loss.
3. Treatment of provision for doubtful debts under Minimum Alternate Tax (MAT) computation.
4. Scope of limited scrutiny assessment and its conversion to complete scrutiny.

Issue-wise Detailed Analysis:

1. Legitimacy of the Order Passed Under Section 263:
The appellant contended that the order passed by the Pr. CIT under Section 263 was against the law, facts, and circumstances of the case. The Pr. CIT noticed that the assessment order was erroneous and prejudicial to the interest of the revenue. The Pr. CIT found that the foreign exchange loss claimed by the assessee was on account of a foreign currency loan taken for the construction of new building and additional equipment, which should be treated as capital expenditure and not deductible under Section 37(1). Additionally, the provision for doubtful debts was not added back for MAT computation, leading to a short assessment of income. The Tribunal upheld the Pr. CIT's jurisdiction under Section 263, stating that the Assessing Officer (AO) should have made further inquiries before accepting the claims made by the assessee.

2. Applicability of Section 37(1) and Section 36(1)(iii):
The assessee argued that the foreign exchange loss was allowable under Section 36(1)(iii) as the loan was used for acquiring assets already put to use, and the loss was in the nature of interest. The Pr. CIT, however, treated the loss as capital expenditure, disallowing it under Section 37(1). The Tribunal referred to various judgments, including CIT vs. Tata Iron & Steel Ltd. and CIT vs. Woodward Governor India Pvt Ltd, which held that exchange differences arising on the settlement of monetary items should be recognized in the profit and loss account. The Tribunal concluded that the foreign exchange loss should be allowed as revenue expenditure and not as capital expenditure, thereby allowing the assessee's claim.

3. Treatment of Provision for Doubtful Debts Under MAT Computation:
The Pr. CIT noticed that the provision for doubtful debts amounting to ?15,83,130/- was not added back for MAT computation, resulting in a short assessment of income. The Tribunal acknowledged that the assessee agreed to rework the MAT income after adding back the provision for doubtful debts. Hence, the Tribunal upheld the Pr. CIT's direction on this matter.

4. Scope of Limited Scrutiny Assessment and Its Conversion to Complete Scrutiny:
The assessee argued that the AO, in a limited scrutiny assessment, should restrict himself to the issues raised and cannot expand the scope without prior approval from the Pr. CIT. The Tribunal referred to various instructions and circulars from the CBDT, which allowed the AO to convert limited scrutiny into complete scrutiny with the approval of the Pr. CIT if the potential escapement of income exceeded ?10 lakh. The Tribunal held that the AO failed to convert the limited scrutiny into complete scrutiny, leading to escapement of income, thereby justifying the Pr. CIT's invocation of Section 263.

Conclusion:
The Tribunal partly allowed the appeal filed by the assessee. It upheld the Pr. CIT's jurisdiction under Section 263 concerning the rework of MAT income but allowed the assessee's claim regarding the foreign exchange loss, treating it as revenue expenditure. The order was pronounced on 08th November 2019.