2015 (2) TMI 808 - HC - Income Tax

Reopening of assessment - exchange loss calculated on the basis of fluctuation in foreign exchange rate was not supported by actual remittance, thus cannot be allowed as deduction in computing the total income under the Act - Held that - Supreme Court in case of Woodward Governor India P. Ltd. (2009 (4) TMI 4 - SUPREME COURT) held that 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 under section 37(1) of the Act and further that 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. As in the original assessment order, against the loss of ₹ 1.44 crores under the normal computation, the assessment was framed on book profit of ₹ 2.89 crores under section 115JA of the Act. Even if, therefore, expenditure of ₹ 116.86 lakhs is disallowed, there would be no resultant change in the petitioner's tax liability since the petitioner has already paid much higher tax. - Reopening quashed - Decided in favor of assessee.

Summary

Issues:
Challenge to notice seeking to reopen completed assessment for the assessment year 1998-99 based on incorrect grounds and potential tax liability impact.

Analysis:
1. The petitioner challenged a notice issued by the Assessing Officer seeking to reopen the assessment for the year 1998-99. The petitioner, a company, filed its return of income for the year, which was scrutinized, and the assessment was completed. The Assessing Officer computed the total income under section 115JA of the Act and taxed the petitioner accordingly. The notice to reopen the assessment was based on an alleged discrepancy in the treatment of a liability incurred in foreign currency for fixed assets. The petitioner contended that the ground for reopening was invalid as the reference in the notice was to an incorrect paragraph in the annual report.

2. The petitioner raised two main contentions. Firstly, the petitioner argued that the Assessing Officer's belief that the income chargeable to tax had escaped assessment was incorrect. The petitioner cited Supreme Court decisions to support its position that the loss due to fluctuation in foreign exchange rate is an expenditure under the Act and can be accounted for under the mercantile system of accounting. Secondly, even if the addition proposed by the Assessing Officer was sustained, it would not impact the ultimate tax liability of the assessee as tax had already been paid on a higher income under section 115JA of the Act. The petitioner relied on a previous court decision to support this contention.

3. The Revenue opposed the petition, arguing that the Supreme Court decisions cited by the petitioner did not apply to the present situation. The Revenue contended that the question of whether income chargeable to tax had escaped assessment could not be conclusively determined at this stage, and reassessment by the Assessing Officer was necessary.

4. The Court held in favor of the petitioner on both counts. Regarding the first aspect, the Court noted the incorrect reference in the reasons recorded by the Assessing Officer and clarified the correct paragraph in the annual report. The Court relied on Supreme Court decisions to support the petitioner's position on the treatment of loss due to foreign exchange rate fluctuation. Concerning the second contention, the Court observed that even if the disallowance of the amount in question was made, it would not affect the tax liability of the assessee under section 115JA of the Act, as tax had already been paid on a higher income. The Court referred to a previous court decision to support this conclusion.

5. Consequently, the Court quashed the impugned notice seeking to reopen the assessment for the year 1998-99. The petition was allowed, and no costs were awarded in the matter.