2000 (7) TMI 218 - AT - Income Tax

Summary

Issues Involved:
1. Legitimacy of the foreign exchange loss claimed by the assessee.
2. Jurisdiction of the Commissioner under section 263 of the Income-tax Act, 1961.
3. Applicability of the principle of res judicata in income-tax proceedings.
4. Method of accounting and its impact on the allowability of foreign exchange loss.
5. Interpretation of "erroneous and prejudicial to the interest of Revenue" under section 263.

Issue-wise Detailed Analysis:

1. Legitimacy of the Foreign Exchange Loss Claimed by the Assessee:
The primary issue revolves around the foreign exchange loss of Rs. 98,65,051 claimed by the assessee under the sub-head 'foreign exchange loss' in the profit & loss account for the year ending 31-3-1992. The assessee argued that the loss was due to the steep devaluation of the Indian rupee vis-`a-vis the US dollar, which increased the liability for the purchase of zinc made in 1988. The Commissioner of Income-tax (CIT), Meerut, noted that although the expenditure was allowable, it should only be allowed in the year the liability arose due to payment. Since no payment was made in the year under consideration, the CIT considered the loss to be notional and thus not allowable.

2. Jurisdiction of the Commissioner under Section 263:
The CIT invoked section 263, arguing that the Assessing Officer (AO) erroneously allowed the foreign exchange loss claim, which was prejudicial to the interest of Revenue. The assessee contended that the AO's decision was based on a permissible view supported by precedents, making the CIT's invocation of section 263 unjustified. The Tribunal held that the AO's order was one of the possible views permissible in law, and hence, it could not be deemed erroneous and prejudicial to the interest of Revenue.

3. Applicability of the Principle of Res Judicata in Income-tax Proceedings:
The learned Departmental Representative (D.R.) argued that the principle of res judicata does not apply to income-tax proceedings, implying that the CIT was not bound by the AO's decisions in previous years. The Tribunal, however, noted that the AO had consistently allowed similar claims in previous and subsequent years, reinforcing the legitimacy of the assessee's claim for the year under consideration.

4. Method of Accounting and Its Impact on the Allowability of Foreign Exchange Loss:
The assessee followed the mercantile system of accounting. The Tribunal referred to the ITAT Delhi Bench's decision in Telemecanique & Controls (India) Ltd., which held that under the mercantile system, the assessee could claim foreign exchange loss on revenue account even if the amount was not actually paid in the relevant year. The Tribunal concluded that the increased trading liability due to foreign exchange fluctuation was not notional but a real liability under the mercantile system.

5. Interpretation of "Erroneous and Prejudicial to the Interest of Revenue" under Section 263:
The Tribunal referenced the Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT, which clarified that an order is not erroneous and prejudicial to the interest of Revenue if the AO adopts one of the permissible views in law. The Tribunal found that the AO's decision to allow the foreign exchange loss was a permissible view supported by legal precedents, and therefore, the CIT's order under section 263 was unsustainable.

Conclusion:
The Tribunal quashed the CIT's order under section 263, holding that the AO's decision to allow the foreign exchange loss was a permissible view supported by legal precedents and consistent with the assessee's method of accounting. The appeal was allowed, and the order under section 263 was canceled.