2023 (4) TMI 1048 - AT - Income Tax

Revision u/s 263 - forward contract receivable shown under short term loans and advances - HELD THAT - As the assessment order passed u/s 143(3) r.w.s. 92CA is not correct. The issue is such a complicated and it needs detailed verification with regard to the accounting standard followed by the assessee, the law applicable to the subject matter, etc. By considering the decision of Woodward Governor India P. Ltd. 2009 (4) TMI 4 - SUPREME COURT PCIT was of the opinion that the method followed by the assessee was inconsistence, any difference, loss or gain arising on conversion of the liability at the closing rate, should be recognised in P L account for the reporting period. AO, without examining, simply accepted the explanation of the assessee, which is erroneous and prejudicial to the interest of the Revenue. That apart, the ld. PCIT, directed the AO to verify and pass the assessment order afresh in accordance with law after affording an opportunity to the assessee. Thus, we find no reason to interfere with the order passed by the ld. PCIT. Decided against assessee.

Summary

Issues Involved:
1. Condonation of Delay in Filing Appeal
2. Assessment of Income from Forward Contracts
3. Applicability of Accounting Standards and Taxation
4. Revision of Assessment Order under Section 263

Summary:

1. Condonation of Delay in Filing Appeal:
The appeal for the assessment year 2014-15 was delayed by six days. The assessee filed a petition for condonation of delay, to which the Departmental Representative (DR) did not object. The Tribunal condoned the delay and admitted the appeal for adjudication.

2. Assessment of Income from Forward Contracts:
The assessee, engaged in BPO services, had credited the hedge reserve with Rs. 1,01,08,500 for the financial year 2012-13. The Principal Commissioner of Income Tax (PCIT) observed that this amount, arising from forward contracts, was accounted directly under reserves and surplus without routing through the Profit & Loss (P&L) account. According to the Supreme Court's decision in CIT Vs. Woodward Governor India P. Ltd. (312 ITR 254), any gain or loss from foreign exchange fluctuations should be recognized in the P&L account. Thus, the income of Rs. 1,01,08,500 should be assessed for the assessment year 2013-14.

3. Applicability of Accounting Standards and Taxation:
The assessee followed Accounting Standard (AS) 11 and AS-30 for preparing financial statements. AS-30 allows hedging instruments' fair value changes to be recognized in shareholders' funds until the forecasted transaction occurs. However, as per Section 145 of the Income Tax Act, income should be computed as per the cash or mercantile system of accounting. The PCIT noted that the exchange difference gain on forward contracts credited to the hedge reserve was not offered to tax, which should be recognized for tax purposes when the gain/loss is recognized in the P&L account.

4. Revision of Assessment Order under Section 263:
The PCIT found the assessment order under section 143(3) r.w.s. 92CA dated 12.12.2016 to be erroneous and prejudicial to the Revenue's interest, as the Assessing Officer (AO) did not properly examine the foreign exchange gains. The PCIT directed the AO to make a complete verification and pass a fresh assessment order after granting the assessee an opportunity to be heard. The Tribunal upheld the PCIT's order, noting that the AO had not conducted a detailed verification of the accounting standards and applicable laws.

Conclusion:
Both appeals filed by the assessee for the assessment years 2013-14 and 2014-15 were dismissed. The Tribunal found no reason to interfere with the PCIT's order, which directed a fresh assessment after proper verification.

Order Pronounced:
The order was pronounced on 21st April 2023 at Chennai.