2018 (12) TMI 1320 - AT - Income Tax

Reopening of assessment - reopening based upon audit objection - addition on account of loss exchange fluctuation - as per revenue assessee is a reseller of Government lottery tickets and there were no foreign currency transaction which could have been entered by the assessee which could have resulted in loss on account of foreign exchange rate fluctuation - Held that - The entire foundation of re-opening of the concluded assessment u/s 148 based on audit objections was on wrong footing based on the premise that the assessee is engaged only in the business of government lottery resellers , while the fact of the matter is that the assessee was also engaged in the business of manufacturing of moulds and dies and plastic containers and goods. Now, it is established beyond doubt that the AO proceeded on the aforesaid wrong footing despite the assessee bringing in evidence to contrary. There is no rebuttal by the AO to demolish the version of the assessee. The learned CIT(A) has also given finding of fact that the assessee is engaged in the business of manufacturing of moulds and dies apart from government lottery resellers. The said finding has not been challenged by Revenue as no appeal is filed nor CO is filed by Revenue. The only question left to be answered is that if the entire premise/foundation on which the edifice of reopening of the concluded assessment is found to be erroneous , then in that situation will the proceedings conducted u/s 148 itself will be sustainable in the eyes of law or not, even if Revenue has a strong case on merits so much so the assessee has conceded that it has no case on merits keeping in view provisions of Section 43A of the 1961 Act the answer is emphatic No as on jurisdictional ground itself the proceedings are required to be quashed because the Revenue proceeded on the entire wrong presumption and footing based on erroneous audit objections raised by Sr. Audit Officer, despite the assessee bringing to the notice of the AO in response to reasons supplied for reopening, the correct factual matrix which was conveniently ignored by the AO and no reasons were supplied by the AO to demolish the contentions of the assessee. - Decided in favour of assessee.

Issues Involved:
1. Legality of reopening the assessment under Section 147 of the Income Tax Act, 1961.
2. Validity of the addition of ?51,13,894/- under Section 69C of the Income Tax Act, 1961, on account of "loss on exchange fluctuation."

Detailed Analysis:

1. Legality of Reopening the Assessment:

The primary issue was whether the reopening of the assessment for AY 2009-10 under Section 147 of the Income Tax Act, 1961, was valid. The assessee contended that the reopening was invalid because it was based on an audit objection and amounted to a change of opinion. The original assessment was completed under Section 143(3), and the reopening notice under Section 148 was issued within four years from the end of the assessment year.

The assessee argued that the reopening was based on a misconception that the assessee was only a reseller of government lottery tickets and had no foreign transactions, thus questioning the validity of the foreign exchange loss claimed. However, the assessee provided evidence that it was also engaged in the manufacturing of moulds and dies, and the foreign exchange loss was due to the repayment of a foreign currency loan taken for importing machinery.

The CIT(A) upheld the reopening, stating that the AO had recorded valid reasons to believe that income had escaped assessment. The AO's reasons were based on the belief that the assessee's business did not involve foreign transactions, thus disallowing the foreign exchange loss.

The tribunal, however, found that the entire premise of reopening was based on an erroneous assumption that the assessee was only engaged in the lottery business. The tribunal noted that the assessee had provided sufficient evidence to show that it was also involved in manufacturing activities. The tribunal concluded that the reopening was invalid as it was based on a change of opinion and an incorrect understanding of the assessee's business activities.

2. Validity of the Addition under Section 69C:

The second issue was the addition of ?51,13,894/- under Section 69C, which pertains to unexplained expenditure. The AO disallowed the foreign exchange loss claimed by the assessee, invoking Section 69C, on the grounds that the assessee's business did not involve foreign transactions.

The assessee argued that the foreign exchange loss was legitimate and arose from the repayment of a foreign currency loan taken for importing machinery used in its manufacturing business. The assessee provided detailed accounts and evidence to support this claim.

The CIT(A) upheld the addition, stating that the assessee had not provided sufficient bifurcation of sales and purchases to prove its manufacturing activities. The CIT(A) referred to Section 43A, which mandates that any change in the value of a capital asset due to foreign exchange fluctuations should be adjusted in the cost of the asset.

The tribunal noted that the assessee had conceded that it did not have a case on the merits of the issue under Section 43A, which required the foreign exchange loss to be capitalized. However, the tribunal emphasized that the reopening itself was invalid due to the incorrect premise on which it was based. Therefore, the addition under Section 69C was also invalid as it stemmed from an invalid reopening.

Conclusion:

The tribunal concluded that the reopening of the assessment under Section 147 was invalid as it was based on an erroneous assumption that the assessee was only engaged in the lottery business. Consequently, the addition of ?51,13,894/- under Section 69C was also invalid. The appeal was allowed in favor of the assessee, and the proceedings initiated under Section 147/148 were quashed.

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