2007 (1) TMI 205 - AT - Income Tax

Summary

Issues Involved:
1. Notional income in respect of interest on Orissa Construction Corporation Ltd. (OCC).
2. Disallowance of foreign exchange fluctuation loss.
3. Allowing the carry forward of loss to succeeding assessment years.

Issue-wise Detailed Analysis:

1. Notional Income in Respect of Interest on OCC:
The first issue pertains to the upholding of Rs. 8 lakhs as notional income in respect of interest on OCC at 16% per annum on Rs. 50 lakhs. The Tribunal noted that the assessee had advanced Rs. 50,000 to OCC Ltd. as a temporary loan bearing 16% interest. The assessee follows the mercantile system of accounting, and thus, the interest should have been shown on an accrual basis. The Tribunal referenced AS-9, stating that revenue recognition is postponed when ultimate collection is uncertain. However, since the income had accrued to the assessee, the CIT(A) was justified in confirming the additions. The Tribunal dismissed the ground raised by the assessee, following the principle of precedence from the assessee's own case in preceding assessment years.

2. Disallowance of Foreign Exchange Fluctuation Loss:
The second issue involves the disallowance of Rs. 15,98,612 relating to foreign exchange fluctuation loss incurred on account of a contract with foreign buyers. The Tribunal referred to AS-11, which states that monetary items denominated in a foreign currency should be reported using the closing rate. The assessee follows the mercantile system of accounting and had considered the foreign exchange fluctuation loss to present a true and fair picture of the company's state of affairs. The Tribunal directed the AO to allow the amount as an allowable expenditure under Section 37(1) of the IT Act. This ground was allowed in favor of the assessee, following the Tribunal's previous decision in the assessee's own case.

3. Allowing the Carry Forward of Loss to Succeeding Assessment Years:
The third issue is related to the carry forward of the loss for the assessment year 1999-2000. The assessee filed its return on 28th Feb., 2000, before the extended time limit under Section 139(1), but without the auditor's report. The AO issued a deficiency notice and treated the return as 'invalid' under Section 139(9) due to the absence of the audited report. The AO disallowed the carry forward of the loss, citing that the return was treated as invalid and thus, the assessee failed to furnish the return as required under Sections 139(1) and 80 of the IT Act.

On appeal, the CIT(A) confirmed the AO's order. The assessee argued that the delay in filing audited accounts was beyond its control as it is a Government of Orissa undertaking and the audit is controlled by the Comptroller and Auditor General of India. The CBDT Instruction No. 1348 states that if the return indicates that the audit has not been completed, the return should not be treated as defective. The Tribunal noted that the AO was aware of the audit situation and that the assessee had previously filed returns based on provisional accounts, which were accepted by the Department. The Tribunal held that the original return filed under Section 139(1) was valid and directed the AO to allow the carry forward of the loss and unabsorbed depreciation.

Conclusion:
The Tribunal dismissed the first ground and allowed the second and third grounds of the assessee's appeal. The appeal was partly allowed, providing relief to the assessee on the issues of foreign exchange fluctuation loss and carry forward of loss.