2012 (11) TMI 900 - AT - Income Tax

Validity of Order u/s 263 - Taxability of Foreign Exchange Fluctuation Reserve - CIT found that this issue was not reflected in the assessment order by AO - Order passed by the AO as far as the issue is concerned, is erroneous and prejudicial to the interests of the Revenue Held that - It is necessary, to examine the components of the assets and holdings re-stated by the assessee in terms of Indian rupee so as to see whether any revenue item is re-stated and if so, whether the gains would be eligible to tax. AO has not at all discussed anything in his order on this important issue. Therefore, it is not possible to hold at present that whether the AO had in fact examined this aspect of the case. Hence, the assessment order is erroneous and prejudicial to the interests of the Revenue as far as the addition to the foreign currency fluctuation reserve account is concerned. Appeal decides in favour of revenue

Issues:
1. Revision order passed by the Commissioner of Income Tax under section 263 of the Income Tax Act.
2. Treatment of foreign exchange fluctuation gains in the Profit and Loss Account.
3. Applicability of Accounting Standard-11 in finalizing accounts.
4. Jurisdiction of the Commissioner of Income Tax in revising the assessment order.
5. Compliance with Section 145 of the Income Tax Act.

Analysis:

Issue 1: Revision order under section 263
The appeal was filed against the revision order passed by the Commissioner of Income Tax, Chennai, under section 263 of the Income Tax Act, pertaining to the Assessment Year 2007-08. The Commissioner found that the assessee had added a sum to its Foreign Exchange Fluctuation Reserve (FFR) without reflecting it in the Profit and Loss Account, leading to the order being set aside for verification and tax implications.

Issue 2: Treatment of foreign exchange fluctuation gains
The Commissioner relied on a judgment of the Supreme Court, stating that foreign exchange fluctuation gains on revenue items should be treated as income. The appellant argued that the adjustment was made in compliance with Accounting Standard-11 for disclosure purposes. However, the assessing authority did not discuss this issue, leading to the conclusion that the assessment order was erroneous and prejudicial to the Revenue's interests.

Issue 3: Applicability of Accounting Standard-11
Accounting Standard-11 mandates maintaining foreign exchange fluctuation reserves for a true and fair disclosure of an assessee's financial state. The disclosure exercise is crucial for assessing tax implications, especially for investment companies like the appellant. The lack of discussion by the assessing authority on this issue contributed to the decision that the assessment order was flawed.

Issue 4: Jurisdiction of the Commissioner
The appellant contended that the Commissioner's exercise under section 263 was without jurisdiction, but the Tribunal upheld the revision order, emphasizing the need for proper examination and discussion of relevant issues in the assessment order to avoid errors prejudicial to Revenue.

Issue 5: Compliance with Section 145
The appellant argued that the Commissioner failed to consider Section 145, which governs the computation of business profits based on the accounting system employed by the assessee. The Tribunal found that the assessing authority's failure to address critical issues necessitated the revision order, highlighting the importance of thorough examination and compliance with relevant provisions.

In conclusion, the Tribunal dismissed the appeal, affirming the Commissioner's revision order under section 263 due to the erroneous and prejudicial nature of the assessment order concerning the treatment of foreign exchange fluctuation gains, emphasizing the need for proper examination and compliance with accounting standards and legal provisions in income tax assessments.

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