2024 (8) TMI 532 - AT - Income Tax

Validity of assessment order as time-barred - HELD THAT - There is no dispute of assessment order being passed on 23 December 2016 before time barring date. If there was any discrepancy in mentioning the address due to which the demand notice along with the assessment order was not served on the assessee that can only help the assessee to claim that the period of limitation for filing the appeal would be from the date when assessee actually receives the demand notice or assessment order. There is no force in the contention of learned AR that for the purpose of section 143(3) r.w.s. 153 of the Act, the assessment order shall be considered to be passed beyond the limit prescribed, for the only reason that though assessment order was passed before the time barring date but was not served upon the assessee, due to inadvertent mistake in mentioning the house number. In fact, it is for such purposes the act provides that discrepancy in notices will not affect the proceedings. We find no error in the findings of the learned CIT(A). The ground no. 2 has no substance. Disallowance of foreign exchange fluctuation loss on reinstatement of the ECB loans borrowed near the end of FY 2011-12 - HELD THAT - It comes from the order of AO that he considered disallowance u/s 37 of the exchange fluctuation only for the reason that ECB loan was utilized for purpose of acquiring capital asset which has enduring benefit. Contrary to the same CIT(A) has made the disallowance by relying section 43A. We are in agreement with AR that disallowance u/s 37 and u/s 43A of the Act, both operate in different spheres. Section 43A is a deeming provision for adding or deducting, the fluctuation loss or profit, from the cost of asset. Disallowance u/s 37 is however for the reasons that capital expenditures are specifically disallowed. Thus, we are of the opinion that the additional grounds raised have substance, more so as it does not appear from the order of CIT(A) that any notice was given to the assessee to contest the addition to the cost of asset u/s 43A. Even otherwise there was merely reinstatement of losses as per accounting standards and there was no actual payment or remittance so as to invoke Section 43A. It also comes admittedly that the issue has some sort of consistency. The aforesaid go to show that except in the present assessment year otherwise the reinstatement of income or loss from fluctuation of currency has been accepted as per the accounting done by the assessee. Appeal filed by the assessee is allowed.

Summary

Issues:
1. Validity of assessment order delivery and time-barring
2. Disallowance of provision for exchange fluctuation
3. Application of Section 43A on capital expenditure
4. Principle of Consistency in accounting treatment
5. Treatment of provision as Capital Expenditure

Analysis:

Issue 1: Validity of assessment order delivery and time-barring
The appellant challenged the assessment order's validity, claiming it was not received within the statutory time limit due to incorrect address. The appellant argued that non-delivery of the order within the stipulated time renders it time-barred. However, the tribunal found that the order was passed before the time-barring date, and any discrepancy in address only affects the appeal filing deadline, not the order's validity. The tribunal upheld the Commissioner's decision, ruling against the appellant.

Issue 2: Disallowance of provision for exchange fluctuation
The appellant contested the addition towards the provision for exchange fluctuation, citing compliance with Accounting Standard 'AS 11'. The Assessing Officer disallowed a significant amount, attributing it to foreign exchange fluctuation loss on ECB loans. The tribunal noted the different treatment under sections 37 and 43A, concluding that the disallowance under section 43A was incorrect. The tribunal accepted the appellant's arguments, emphasizing the consistency in accounting treatment over the years.

Issue 3: Application of Section 43A on capital expenditure
The tribunal deliberated on the applicability of Section 43A to the reinstatement of losses as per accounting standards. It differentiated between disallowance under section 37 and section 43A, emphasizing that section 43A pertains to fluctuation loss or profit adjustments in asset costs. The tribunal agreed with the appellant's contentions, highlighting the absence of actual payment or remittance to invoke Section 43A.

Issue 4: Principle of Consistency in accounting treatment
The tribunal considered the principle of consistency in the treatment of exchange fluctuation income and expenses over multiple assessment years. It reviewed the appellant's past accounting practices and accepted the consistency in treatment, except for the current assessment year. The tribunal acknowledged the appellant's adherence to accounting standards and upheld the grounds related to consistency in accounting treatment.

Issue 5: Treatment of provision as Capital Expenditure
The tribunal examined the treatment of the provision for exchange fluctuation as a capital expenditure without allowing depreciation. It found merit in the appellant's argument that the provision should not be treated as a capital expenditure, leading to the allowance of the appeal. The tribunal emphasized the need to align the treatment of provisions with their appropriate classification to ensure accurate financial reporting.

In conclusion, the tribunal allowed the appeal, addressing various issues related to the validity of the assessment order, disallowance of provisions, application of tax provisions, consistency in accounting treatment, and classification of expenditures. The detailed analysis of each issue provided clarity on the tribunal's decision, ensuring a comprehensive review of the legal judgment.