2014 (5) TMI 668 - HC - Income Tax

Validity of notice for reopening of assessment Income escapement Loss arisen due to fluctuation in rate of exchange Deduction in computation of business income - Held that - Following CIT Versus M/s Woodward Governor India P. Ltd. & M/s Honda Siel Power Products Ltd 2009 (4) TMI 4 - SUPREME COURT - the loss suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance sheet is an item of expenditure u/s 37(1) of the Act - under the mercantile system of accounting, what is due is brought into credit before it is actually received - it also brings into debit an expenditure for which a legal liability has been incurred before it is actually disbursed - the assessment years being prior to the amendment in Section 43A of the Act with effect from 1st April, 2003 the Assessee would be entitled to adjust the actual cost of the imported capital assets, acquired in foreign currency, on account of fluctuation in the rate of exchange at each of the relevant balance sheet dates pending actual payment of the varied liability thus, the notice is set aside Decided in favour of Assessee.

Summary

Issues:
Challenge to notice seeking to reopen assessment for the assessment year 1999-2000.

Analysis:
The petitioner, a company, filed its return for the assessment year 1999-2000, which was accepted without scrutiny under section 143(1) of the Act. The Assessing Officer sought to reopen the assessment based on the belief that income chargeable to tax had escaped assessment. The reasons for reopening included discrepancies related to foreign currency liabilities and depreciation claimed on assets. The petitioner objected to the reopening process, but the objections were rejected.

The Assessing Officer recorded supplementary reasons after issuing the notice, which is not in line with the requirement that reasons must be recorded before issuing the notice for reopening. The court emphasized that the validity of the notice must be judged based on the reasons recorded before issuance. The court referred to previous judgments to highlight the necessity for the Assessing Officer to have a valid reason to believe that income has escaped assessment, regardless of whether the return was accepted under section 143(1) or after scrutiny under section 143(3).

In a related case involving the same assessee, the court examined the Assessing Officer's belief that income had escaped assessment. The court analyzed the treatment of foreign exchange fluctuations and the deduction claimed by the assessee. Referring to previous Supreme Court decisions, the court concluded that the Assessing Officer's belief was not valid. Consequently, the court quashed the notice dated 27.1.2003, allowing the petition and ruling in favor of the petitioner. No costs were imposed in this judgment.