2005 (10) TMI 240 - AT - Income Tax

Summary

Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act.
2. Treatment of foreign exchange fluctuation loss.
3. Setting aside assessments for re-examination.

Issue-Wise Detailed Analysis:

1. Jurisdiction under Section 263 of the Income Tax Act:
The primary issue is whether the CIT Bikaner (headquarter at Jaipur) correctly invoked jurisdiction under Section 263 of the Income Tax Act to pass an order that was deemed illegal and bad in law. The Tribunal held that the CIT's invocation of Section 263 was erroneous because the Assessing Officer (AO) had already taken a permissible view. The judgment relied on precedents such as Malabar Industrial Co. Ltd. vs. CIT, which established that when an AO adopts one of the possible views, it cannot be deemed erroneous just because the CIT disagrees. The Tribunal concluded that the CIT's order was not valid and should be quashed, thereby restoring the AO's original orders for the assessment years 1996-97 and 1997-98.

2. Treatment of Foreign Exchange Fluctuation Loss:
The issue here was whether the loss due to foreign exchange fluctuations should be allowed in the year of payment or on an accrual basis when the assessee follows the mercantile system of accounting. The CIT had argued that the loss should be allowed in the year of payment, citing the Supreme Court decision in Sutlej Cotton Mills Ltd. vs. CIT. However, the Tribunal referenced multiple cases, including CIT vs. Martin & Harris (P) Ltd. and CIT vs. U.B.S. Publishers & Distributors, which supported the view that such losses could be accounted for on an accrual basis. The Tribunal noted that the assessee consistently followed the mercantile system and that the foreign exchange fluctuation loss was allowable under nationally accepted accounting standards (AS-11). Therefore, the Tribunal found the CIT's view unsustainable and upheld the AO's treatment of the foreign exchange fluctuation loss.

3. Setting Aside Assessments for Re-Examination:
The CIT had set aside the assessments for the years 1996-97 and 1997-98, directing the AO to re-examine the issue of foreign exchange fluctuation loss. The Tribunal found that the CIT's action was unjustified because the AO had already examined the relevant documents and found the assessee's claims to be correct. The Tribunal emphasized that the AO's view was a possible and permissible one, and the CIT could not invoke Section 263 merely because he disagreed with it. Consequently, the Tribunal quashed the CIT's order and restored the AO's original assessments.

Conclusion:
The Tribunal concluded that the CIT's orders for the assessment years 1996-97 and 1997-98 were not valid and were liable to be quashed. The AO's original orders were restored, and the appeals of the assessee were allowed for both years. Ground Nos. 4 and 5 in both appeals were deemed general in nature and did not require adjudication.