2018 (11) TMI 866 - AT - Income Tax

Revision u/s 263 - allowability of the claim of business loss on currency swap - allowable revenue expenditure - expenditure i.e. foreign exchange fluctuation related to capital assets - Held that - Admittedly the loss on currency swap is an event subsequent to the acquisition and put to use of the asset for business and therefore, following the ratio of the Supreme Court decision in Tata Iron Steel Co. Ltd 1997 (12) TMI 5 - SUPREME COURT , which has been relied by coordinate bench of Pune Tribunal in Cooper Corporation (P) Ltd 2016 (5) TMI 809 - ITAT PUNE , such loss cannot alter the cost of asset and is rather allowable as revenue expenditure. Thus, the ratio of the judgment of Hon ble Sutlej Cotton Mills Ltd 1978 (9) TMI 1 - SUPREME COURT is not applicable in the instant case and the assessment order cannot be erroneous in law. Therefore, clause (d) of Explanation 2 of section 263 is not fulfilled. The loss claimed by assessee on account of fluctuation loss is revenue loss and the assessee is entitled for its deduction. Therefore, the order passed by assessing officer is not erroneous. Considering the fact that the twin condition as enunciated by Hon ble Apex Court in case of Malabar industrial companies Ltd 2000 (2) TMI 10 - SUPREME COURT are not fulfilled, therefore, the order passed by assessing officer cannot be subject matter of revision. Therefore, the revision order passed by learned PCIT is not sustainable - Decided in favour of assessee.

Issues Involved:
1. Validity of the revision order under Section 263 of the Income Tax Act.
2. Whether the Assessing Officer's (AO) order was erroneous and prejudicial to the interest of revenue.
3. Allowability of business loss on account of currency swap.

Issue-wise Detailed Analysis:

1. Validity of the Revision Order under Section 263 of the Income Tax Act:

The appeals were filed by the assessee against the order of the Principal Commissioner of Income Tax (PCIT) under Section 263 of the Income Tax Act for the Assessment Years 2011-12 and 2012-13. The PCIT had issued a notice to the assessee to revise the assessment order passed by the AO, claiming that the AO had not followed the Supreme Court's decision in the case of M/s Sutlej Cotton Mills vs. CIT, thereby making the order erroneous and prejudicial to the interest of revenue. The assessee contended that the PCIT's revision order was invalid as the AO had made adequate inquiries and applied his mind while passing the original assessment order. The Tribunal noted that for the PCIT to exercise jurisdiction under Section 263, the order must be both erroneous and prejudicial to the interest of revenue, as established in the case of Malabar Industrial Co. Ltd. vs. CIT.

2. Whether the AO's Order was Erroneous and Prejudicial to the Interest of Revenue:

The Tribunal examined whether the AO's order was erroneous and prejudicial to the revenue. The assessee argued that the AO had examined the issue of currency swap loss during the assessment proceedings and had allowed the loss based on detailed inquiries and application of mind. The Tribunal referred to the Supreme Court's decision in Malabar Industrial Co. Ltd., which stated that an order is erroneous if it is not in accordance with law or if it is passed without applying the principles of natural justice or without application of mind. The Tribunal also referred to the Delhi High Court's decision in ITO vs. DG Housing Projects Ltd., which held that the Commissioner must record a finding that the order is erroneous and cannot merely direct the AO to reconsider the issue.

3. Allowability of Business Loss on Account of Currency Swap:

The core issue was whether the business loss on account of currency swap was allowable as a deduction. The assessee had entered into a currency swap agreement to hedge against foreign exchange fluctuation risk. The PCIT contended that the AO had not followed the Supreme Court's decision in M/s Sutlej Cotton Mills vs. CIT, which held that profit or loss on foreign currency held as a capital asset would be of capital nature. The Tribunal noted that the currency swap loss was debited to the Profit & Loss Account in line with AS-11 and was allowable under Section 37(1) of the Income Tax Act. The Tribunal also referred to the Pune Tribunal's decision in Cooper Corporation Pvt. Ltd. vs. DCIT, which held that foreign exchange fluctuation loss on revenue account was allowable as expenditure. The Tribunal concluded that the loss on currency swap was a revenue loss and allowable as a deduction, and the AO's order was not erroneous.

Conclusion:

The Tribunal held that the revision order passed by the PCIT under Section 263 was not sustainable as the AO's order was neither erroneous nor prejudicial to the interest of revenue. The Tribunal allowed the appeals filed by the assessee for both the Assessment Years 2011-12 and 2012-13, stating that the loss on currency swap was a revenue loss and allowable as a deduction. The Tribunal emphasized that the twin conditions for invoking Section 263, as laid down by the Supreme Court in Malabar Industrial Co. Ltd., were not fulfilled in this case.

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