2023 (1) TMI 203 - AT - Income Tax

Revision u/s 263 by CIT - difference on account of fair value measurement of the operating financial assets (OFA) - HELD THAT - We find that no such view has been formed by Ld. AO during the course of regular assessment proceedings. Regarding show-cause notice, Hon ble Court further held that the requirement is that a notice proposing the revisional exercise is to be given to the assessee indicating therein broadly or even specifically the grounds on which the exercise is felt necessary. But there is nothing in the Section 263 to raise the said notice to the status of a mandatory show-cause notice affecting the initiation of the exercise in the absence thereof or to require the Commissioner to confine himself to the terms of the notice and foreclosing consideration of any other issue or question of fact. This is not the purport of Section 263. Of course, there can be no dispute that while the Commissioner is free to exercise his jurisdiction on consideration of all relevant facts, a full opportunity to controvert the same and to explain the circumstances surrounding such facts, as may be considered relevant by the assessee, must be afforded to him by the Commissioner prior to the finalization of the decision. We find that this requirement has duly been fulfilled by the revisional authority in the present case and adequate opportunity has been granted to the assessee to state its case. The decision of Hon ble High Court of Madras in Shri Ravi Kannan 2020 (7) TMI 818 - MADRAS HIGH COURT as referred to by Ld. AR, is a case wherein it was a finding by Hon ble Court that the notice was a vague statement. PCIT agrees that the verifications were done, however, it was stated that proper verification was not done. In such a case, PCIT was bound to disclose in the show-cause notice as to why he considers the verification to be not proper. However, the case before us falls under the category wherein Ld. AO has not applied his mind to the issue. Further, the notice clearly states the reasons as to why the order is being subjected to revision u/s 263. In the replies to show-cause notice, it was nowhere the case of the assessee that the notice was vague or the same did not disclose the reasons for revision. The case law of CIT V/s PVP Ventures Ltd. 2012 (7) TMI 696 - MADRAS HIGH COURT is factually distinguishable since in para-26 of the decision, it is a fact that there was no proper initiation of proceedings u/s 263 and there was no ground for shifting in stand by the Commissioner which were different from the one which prompted him to initiate proceedings u/s 263. Therefore, this case law is also distinguishable. The decision of Mumbai Tribunal in M/s Tata Motors Ltd. 2021 (4) TMI 473 - ITAT MUMBAI is a case wherein the view formed by Ld. AO was one of the possible views while framing the assessment based on the laws prevailing at that relevant point of time (para 3.13) and therefore, revision was held to be unjustified. This is not the case here. Finally, considering the entirety of facts and circumstances of the case, the revisional jurisdiction u/s 263 as exercised by Ld. Pr. CIT could not be faulted with and the same could not be held to be bad-in-law as urged by Ld. AR. We order so. However, our aforesaid view would not be construed as any expression on the merits of the case, in any manner, which is left open for consideration of lower authorities. In this appeal, we have only examined the validity of revisional proceedings. Appeal stands dismissed.

Summary

Issues Involved:
1. Legality of revisional jurisdiction under Section 263.
2. Examination of the assessment order under Section 143(3).
3. Applicability of Section 43AA.
4. Adequacy of inquiries and verification by the Assessing Officer (AO).
5. Impact of Ind-AS on revenue recognition.
6. Treatment of forex gains and financial instruments.
7. Applicability of judicial precedents and statutory provisions.

Detailed Analysis:

1. Legality of Revisional Jurisdiction Under Section 263:
The assessee contested the legality of the revisional jurisdiction exercised by the Principal Commissioner of Income Tax (Pr. CIT) under Section 263. The assessee argued that the assessment order passed by the AO was neither erroneous nor prejudicial to the interest of the revenue. The Tribunal noted that the power of revision under Section 263 is to be exercised with utmost precaution after examining the issues from all angles, subject to the satisfaction of the twin conditions that the order was erroneous and prejudicial to the interest of the revenue. The Tribunal found that both conditions were satisfied in this case.

2. Examination of the Assessment Order Under Section 143(3):
The assessment order under Section 143(3) was scrutinized. The assessee, engaged in the generation and sale of power, had paid taxes under Section 115JB (Book Profits). The AO had called for various details during the assessment proceedings, which were duly responded to by the assessee. The AO accepted the returned income without making any adjustments. The Tribunal observed that the AO had not made adequate inquiries or verification regarding the impact of the new accounting standards (Ind-AS) on revenue recognition.

3. Applicability of Section 43AA:
The Pr. CIT initially referenced Section 43AA in the show-cause notice but later withdrew this reference, acknowledging that Section 43AA was applicable from AY 2017-18 and not relevant for AY 2016-17. The Tribunal noted that the revision was based on the issue of forex gains and financial instruments, independent of Section 43AA.

4. Adequacy of Inquiries and Verification by the AO:
The Tribunal found that the AO had raised an initial query regarding the adjustments made under Ind-AS but did not make further inquiries to understand the impact on revenue recognition. The Tribunal concluded that the AO's lack of application of mind and failure to make requisite inquiries rendered the assessment order erroneous and prejudicial to the interest of the revenue.

5. Impact of Ind-AS on Revenue Recognition:
The assessee adopted Ind-AS for financial statements, leading to the derecognition of fixed assets and recognition of operating financial assets (OFA). The Tribunal noted that the new accounting standards mandated a specific treatment for revenue recognition, which the AO failed to adequately scrutinize. The Tribunal emphasized that the adjustments made under Ind-AS had a significant impact on revenue recognition and should have been thoroughly examined by the AO.

6. Treatment of Forex Gains and Financial Instruments:
The assessee had excluded forex gains and fair value gains on financial instruments from taxable income under normal provisions while including them in book profits under Section 115JB. The Tribunal found that the AO did not adequately verify the tax treatment of these items. The Tribunal referred to the Supreme Court's decision in CIT v. Woodward Governor Private Ltd., which held that forex gains should be recognized in the Profit & Loss Account.

7. Applicability of Judicial Precedents and Statutory Provisions:
The Tribunal referred to various judicial precedents, including CIT v. Fine Jewellery India Ltd., CIT v. Vikas Polymers, and CIT v. Gabriel India Ltd., to support the principle that non-mentioning of an issue in the assessment order does not imply non-application of mind by the AO. The Tribunal also referred to Explanation-2 to Section 263, which deems an order to be erroneous if it is passed without making necessary inquiries or verification.

Conclusion:
The Tribunal upheld the exercise of revisional jurisdiction under Section 263 by the Pr. CIT, finding that the assessment order was erroneous and prejudicial to the interest of the revenue due to inadequate inquiries and verification by the AO. The appeal was dismissed, and the matter was remanded to the AO for re-examination of the issues related to forex gains and financial instruments. The Tribunal's decision emphasized the importance of thorough scrutiny and application of mind by the AO in assessment proceedings.