2015 (4) TMI 324 - AT - Income Tax

Revision u/s 263 - currency Swap Loss on account of hedging of Rupee loan with Dollar loan through OTC contracts with Banks was speculative in nature not excluded as per clause (d) to section 43(5) and was not allowable against income from non-speculative business - Held that - Currency swap loss of ₹ 6.04 Crores was directly covered in favour of assessee by the decision of the jurisdictional High court in the case of CIT v. Friends and Friends Shipping Pvt. Ltd 2013 (5) TMI 458 - GUJARAT HIGH COURT , wherein assessee had entered into forward contracts with banks to hedge against any loss arising to fluctuation in foreign currency. In some cases, export could not be executed and assessee had to pay certain charges to banks. Assessee treated said charges as business loss and claimed deduction. However, Assessing Officer disallowed said loss holding it to be speculative in nature. Matter travelled up to Hon ble High Court, wherein it was held that foreign exchange contracts as incidental to assessee s export business and incurred loss in said contracts, said loss was not in nature of speculative loss but same was allowed as business loss. Thus, matter was decided in favour of assessee. In such situation, order passed by Assessing Officer cannot be said to be erroneous so as to be prejudicial to the interest of revenue. In response to query raised by Bench whether currency loss of ₹ 6.04 Crores consists of all the losses or any profit earned in this currency swap agreements. The Learned Authorized Representative drew our attention to pages 29 and 30 of the compilation where ledger account of currency swap was compiled. He also pointed out that in certain currency swap transactions, profit is also earned and hence, sum of ₹ 6.04 Crores is net figure of loss. Thus case on merit also tilt in favour of assessee. There is no dispute to the proposition that Assessing Officer s order can be revised in case of assessee made no inquiry in the assessment order. But in case before us enquiry has been done. So it can not be said that Assessing Officer has passed order without any enquiry or application of mind. So, the cases relied by learned Departmental Representative does not help the Revenue. In view of above discussion, CIT was not justified in setting aside the order of Assessing Officer by invoking provision of 263 of Act because Assessing officer has decided the issue after making enquires as discussed above. Moreover, on merit also case tilt in favour of assessee. So order of CIT u/s. 263 is quashed. - Decided in favour of assessee.

Summary

Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act.
2. Assessment order being erroneous and prejudicial to the interest of revenue.
3. Cancellation of the assessment order and direction for fresh assessment.

Issue-wise Detailed Analysis:

1. Jurisdiction under Section 263 of the Income Tax Act:
The assessee argued that the Commissioner of Income Tax (CIT) erred in assuming jurisdiction under Section 263 of the Income Tax Act, 1961, as the mandatory conditions for such jurisdiction were absent. The CIT issued a notice under Section 263(1), questioning the appropriateness of the assessment order dated 24.02.2012. The CIT observed that the assessment order was erroneous and prejudicial to the interest of the revenue, particularly concerning a currency swap loss of Rs. 6.04 crores, which was treated as a speculative loss.

2. Assessment order being erroneous and prejudicial to the interest of revenue:
The CIT found that the Assessing Officer (AO) had not conducted proper inquiries regarding the currency swap loss claimed by the assessee. The AO had accepted the assessee's claims without adequate examination, which the CIT deemed as a failure to make necessary inquiries. The CIT emphasized that the AO is duty-bound to verify the truth of the facts stated in the return and that the lack of such inquiry rendered the order erroneous.

3. Cancellation of the assessment order and direction for fresh assessment:
The CIT concluded that the transaction in question was speculative under Section 43(5) and that the resultant loss could not be set off against non-speculative business profits as per Section 73(1). Consequently, the CIT directed the AO to pass a fresh assessment order after proper examination and inquiry.

Detailed Analysis:

Jurisdiction under Section 263:
The power of revision under Section 263 is supervisory and can be exercised if the order is both erroneous and prejudicial to the interest of the revenue. The CIT invoked this power, arguing that the AO had not conducted proper inquiries into the currency swap loss, thus making the assessment order erroneous and prejudicial.

Assessment Order:
The AO had issued a notice under Section 142(1) and received detailed submissions from the assessee, including explanations and documentary evidence regarding the currency swap loss. The assessee argued that the AO had thoroughly examined the issue and that the loss was allowable under Section 37 of the Act. The assessee cited several judicial pronouncements, including the Supreme Court's decision in Sutlej Cotton Mills Ltd. v. CIT, which supported the claim that the currency swap loss was a legitimate business expense.

Cancellation and Fresh Assessment:
The CIT observed that the AO had not properly analyzed the speculative nature of the currency swap transactions. The CIT held that the AO's failure to make proper inquiries resulted in a substantial loss of revenue, as the speculative loss was unduly allowed against normal business income. The CIT directed the AO to conduct a fresh assessment, allowing the assessee an opportunity to present its case.

Conclusion:
The Tribunal found that the AO had indeed conducted a detailed inquiry and that the assessment order was passed after due application of mind. The Tribunal noted that the AO had raised specific queries, and the assessee had provided detailed replies with supporting documents. The Tribunal held that the CIT's observation that no inquiry was conducted was incorrect. The Tribunal emphasized that if the AO adopts one of the permissible views in law, even if it results in a loss of revenue, it cannot be deemed erroneous or prejudicial to the interest of the revenue. The Tribunal quashed the CIT's order under Section 263, concluding that the AO's order was neither erroneous nor prejudicial to the interest of the revenue. The assessee's appeal was allowed.