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2023 (2) TMI 515 - AT - Income TaxRevision u/s 263 by CIT - notional foreign exchange loss - As per CIT AO not having duly verified assesses claim of foreign exchange loss on notional entries in the computation of its income returned for taxation, despite no expense of foreign exchange loss being debited in its Books of accounts and it was a artificial loss not allowable otherwise. HELD THAT - What we have gathered from contents of the ledger account of foreign exchange fluctuation, which were produced before us, we find that what the assessee was probably attempting to state was that it was following the practice of claiming only actual gain or loss on foreign exchange fluctuation, but in the ledger account it had debited both actual and notional gain or loss on foreign exchange following probably the Accounting Standards prescribed by the Institute of Chartered Accountants of India, AS-11, as per which it was mandatorily required to maintain its books of accounts. In the return of income, since the assessee wanted to restrict its claim only on the actual amount gain or loss on foreign exchange, it had netted off the notional gain or loss so booked in the account which accordingly was claimed in the return of income. But we find that this explanation was not clearly given by the assessee to the AO nor to the Ld.Pr.CIT, and even before us. The ld.counsel for the assessee did not explain likewise and did not come out in clear terms even before us. No infirmity in the order of the ld.Pr.CIT holding that vis- -vis the issue of claim of notional foreign exchange fluctuation loss the claim apparently relating to notional loss which otherwise is not allowable under the Act and the issue being not examined by the AO, therefore there was an error in the order of the AO causing prejudice to the Revenue by allowing such claim to the assessee. The order of the ld.Pr.CIT is accordingly upheld on this count. Discrepancy in the claim of imported purchases as per the books and as per the CBEC data - There has to be a finding of error in the order of the AO for the PCIT to exercise his revisionary powers ,as also the error causing prejudice to the Revenue. On the impugned issue of mismatch in purchase as per CBEC data and that booked by the assessee, the Ld.PCIT finding the assesses explanation for the same to be prima facie correct he was largely satisfied with the explanation of the assessee, and therefore clearly there is no error in the order of the AO as per the Ld.PCIT also. When all facts and evidences were there before the Ld.PCIT ,he was required to go through the same and thereafter arrive at his finding of error. Subject to the verification of the evidences by the AO, clearly as per the Ld.PCIT there was no error in the order of the AO. In view of the same, on the issue of discrepancy in the claim of import purchases, we find there is no error in the claim of the assessee, and therefore, the assessment order cannot be said to be erroneous for not having examined the said claim of the assessee. To this extent, the order of the ld.Pr.CIT is set aside. PCIT has stated that the issue of mismatch in CBEC data of export sales and that booked by the assessee has also remained unexplained to the AO and even to him. But we find that this issue was never confronted to the assessee during revisionary proceedings - assessee was only put to notice about the mismatch in import purchases. The issue of mismatch in export sales never being confronted to the assessee, the Ld.PCIT s order holding the assessment order erroneous on this count is against all principles of natural justice and accordingly is set aside on this count. Appeal of assessee partly allowed.
Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act, 1961. 2. Claim of Foreign Exchange Loss on Notional Entries. 3. Discrepancy in Purchase Figures between Income Tax Return and CBEC Data. 4. Mismatch in Export Sales between CBEC Data and Books of Accounts. Issue-wise Detailed Analysis: 1. Jurisdiction under Section 263 of the Income Tax Act, 1961: The assessee challenged the jurisdiction of the Principal Commissioner of Income Tax (Pr.CIT) under Section 263 of the Income Tax Act, 1961, arguing that the assessment order was neither erroneous nor prejudicial to the interest of the revenue. The Pr.CIT had issued a show cause notice and passed an order under Section 263, asserting that the Assessing Officer (AO) failed to make proper inquiries regarding certain issues, which rendered the assessment order erroneous and prejudicial to the revenue. 2. Claim of Foreign Exchange Loss on Notional Entries: The Pr.CIT found the assessment order erroneous due to the AO's failure to verify the assessee's claim of a "foreign exchange loss on notional entries" amounting to Rs. 68,11,120/-. The Pr.CIT noted that the assessee had not debited any expenses under the head "Foreign Exchange Rate Fluctuation" in its books of accounts, and the claimed loss was an artificial one created through journal entries. The assessee contended that the AO had examined this issue in depth during the assessment proceedings. However, the Pr.CIT found that the explanation provided by the assessee was not clear and that there was no cogent justification for claiming a notional loss, which is not allowable under the Income Tax Act. The tribunal upheld the Pr.CIT's order on this count, agreeing that the AO had erred in allowing the claim without proper verification. 3. Discrepancy in Purchase Figures between Income Tax Return and CBEC Data: The Pr.CIT identified a discrepancy between the purchase figures shown in the income tax return and the invoice value of imports as per CBEC data. The AO had not sought clarification or made inquiries regarding certain errors and omissions in the CBEC data. The assessee provided a reconciliation during the revisionary proceedings, explaining that the difference arose due to the purchase of a capital item, which was reflected in the books as capital work-in-progress. The Pr.CIT found this explanation prima facie acceptable but directed the AO to verify the documents. The tribunal held that revisionary powers cannot be exercised merely for verification purposes and that the Pr.CIT should have arrived at a finding of error. Since the Pr.CIT was largely satisfied with the assessee's explanation, the tribunal set aside the Pr.CIT's order on this count, finding no error in the AO's assessment order. 4. Mismatch in Export Sales between CBEC Data and Books of Accounts: The Pr.CIT also noted a mismatch in export sales figures between the CBEC data and the books of accounts, which remained unexplained. However, the tribunal found that this issue was never confronted to the assessee during the revisionary proceedings. Since the assessee was not given an opportunity to explain this discrepancy, the tribunal set aside the Pr.CIT's order on this count, citing a violation of the principles of natural justice. Conclusion: The tribunal partly allowed the appeal of the assessee. It upheld the Pr.CIT's order regarding the claim of foreign exchange loss on notional entries but set aside the order concerning the discrepancy in purchase figures and the mismatch in export sales, finding no error in the AO's assessment order on these counts. The tribunal emphasized that revisionary powers should not be exercised merely for verification and that the principles of natural justice must be adhered to.
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