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2025 (4) TMI 595 - AT - Income TaxReopening of assessment u/s 147 - assessment has been reopened beyond 4 years - income chargeable to tax had escaped assessment on account of under assessment of interest received from its Mexican subsidiaries and also incorrect computation of book profit u/s 115JB by making adjustment towards unrealized forex loss / gain and provision created for loss on inventory - HELD THAT - Arguments of the assessee that there is true and full disclosure of necessary facts in respect of interest income received from Mexican subsidiary is devoid of merit and cannot be accepted because the assessee has never furnished any details with regard to interest income either in its financial statements by way of notes to accounts and the accounting policies followed for accounting interest income from Mexican subsidiary in light of financial year followed by the assessee and calendar year followed by the Mexican subsidiary nor has explained this difference to the AO during the course of assessment proceedings. Therefore in our considered view there is no true and full disclosure of necessary facts in respect of interest income either in the financial statement or during the course of assessment proceedings. Although the assessee claims that it has furnished relevant financial statements and books of accounts in our considered view mere production of books of accounts and other evidence from which material evidence could with due diligence has been discovered by the AO will not necessarily amount to disclosure within the meaning of the proviso to section 147. Therefore there is no merit in the argument of the assessee on the issue of reopening of assessment in respect of interest income received from Mexican subsidiary. Computation of book profit u/s 115JB(2) - Although the assessee claims that it follows lower of cost or net realizable value but has made provision and the same has been debited under the head material consumed and from the above it is evident that the assessee has made separate provision for inventories on the basis of its own assessment of inventory but the said method followed by the assessee is not in accordance with the accounting standard issued by the Institute of Chartered Accountants of India for valuation of inventory. Since the assessee has reduced the value of inventory it is nothing but a diminution in the value of asset and the same falls under Explanation 1 to section 115JB of the Act and thus the same needs to be added back to the profit computed for the year under consideration. Therefore we are of the considered view that there is clear escapement of income on account of excess deduction towards loss of inventory in respect of obsolete stock and the same has not been properly explained by the assessee either in the notes to account in the financial statement or during the course of assessment proceedings and in our considered view there is valid ground for the AO to reopen the assessment u/s 147 of the Act. Interest received from Mexican subsidiary - assessee submitted that the CIT(A) erred in sustaining interest income even though the assessee has explained the reasons for difference in interest income offered to tax - HELD THAT - There is no dispute with regard to the fact that the assessee has received interest of Rs. 10, 06, 93, 540/- whereas offered interest income of Rs. 9, 72, 31, 723/-. The difference of Rs. 35, 89, 671/- could not be reconciled with relevant evidences except stating that due to difference in financial year followed by the assessee and the subsidiaries there is difference in interest income as reported by the subsidiaries. In our considered view whether the assessee follows financial year or calendar year but need to reconcile interest income with books of accounts of the assessee and interest income claimed to have been paid by the subsidiaries. Since the assessee failed to reconcile in our considered view Ld.CIT(A) rightly sustained the additions. Re-computation of book profit u/s 115JB by making addition towards provision for loss of inventory - Assessee could not explain as to how the amount has been debited under the head loss on inventory into material consumed account. Therefore going by the arguments of the assessee in light of the method of accounting followed for valuation of inventory in our considered view there is no merit in the claim of the assessee towards accounting policy and treatment given for reduction in value of assets therefore to this extent we cannot appreciate the reasons given by the assessee. Whether the provision for loss on inventory is an item which needs to be added back to the book profit in terms of section 115JB(2) and Explanation 1 of the Act? - As per section 115JB(2) Explanation 1 Clause (i) any amount or amounts as the provision for diminution in the value of any asset should be added back to book profit. In the present case the assessee has set apart a provision for loss of inventory and therefore in our considered view the said provision comes under Explanation 1 clause (i) of Section 115JB(2) of the Act under the head any amount or amounts set aside as provision for diminution in value of asset. Since the inventory is an asset any reduction in value of asset should be added back to book profit computed in terms of section 115JB(2) of the Act. Therefore we are of the considered view that there is no error in the reasons given by the AO and the Ld.CIT(A) to recompute the book profit by making addition towards diminution in value of asset being loss on inventory. there is no error in the reasoning given by the AO and the CIT(A) to recompute book profit by making adjustment towards provision for loss on inventory in terms of Explanation 1 to section 115JB(2) Assessee appeal dismissed.
ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment are: 1. Whether the reopening of the assessment under Section 147 of the Income Tax Act, 1961, beyond four years from the end of the relevant assessment year, was valid given the claim of no failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. 2. Whether the addition of Rs. 35,89,671/- towards interest income received from the Mexican subsidiary was justified. 3. Whether the re-computation of book profit under Section 115JB of the Act by adding Rs. 73,10,00,000/- towards provision for loss of inventory was correct. ISSUE-WISE DETAILED ANALYSIS 1. Validity of Reopening of Assessment under Section 147 Relevant Legal Framework and Precedents: The proviso to Section 147 of the Income Tax Act stipulates that no action can be taken after four years from the end of the relevant assessment year unless there is a failure to disclose fully and truly all material facts necessary for assessment. Various court decisions have upheld this principle. Court's Interpretation and Reasoning: The Tribunal noted that the assessment was reopened based on fresh tangible material received from the ADIT(I&CI) and DIT(I&CI), indicating escapement of income. The Tribunal emphasized that mere production of books of accounts does not amount to full disclosure if material evidence is embedded in such a manner that it cannot be discovered by the AO. Key Evidence and Findings: The AO had received information about interest income from Mexican subsidiaries that was not fully disclosed by the assessee. The Tribunal found that the assessee did not provide specific details about the interest income in its financial statements or during the assessment proceedings. Application of Law to Facts: The Tribunal concluded that there was no true and full disclosure of necessary facts regarding the interest income, justifying the reopening of the assessment. Treatment of Competing Arguments: The Tribunal rejected the assessee's argument that the reopening was invalid due to full disclosure, citing the lack of specific details in the financial statements. Conclusions: The Tribunal upheld the validity of the reopening of the assessment. 2. Addition of Rs. 35,89,671/- towards Interest Income Relevant Legal Framework and Precedents: The assessment of income must be based on accurate reconciliation of reported income with actual receipts. Court's Interpretation and Reasoning: The Tribunal noted that the assessee failed to reconcile the difference in interest income reported and received, despite being given the opportunity to do so. Key Evidence and Findings: The difference in interest income was attributed to the different financial years followed by the assessee and its subsidiaries, but the assessee could not provide evidence to reconcile the discrepancy. Application of Law to Facts: The Tribunal found that the partial reconciliation provided by the assessee was insufficient to account for the entire difference. Treatment of Competing Arguments: The Tribunal upheld the CIT(A)'s decision to restrict the addition to Rs. 35,89,671/- based on the reconciliation provided. Conclusions: The Tribunal upheld the addition of Rs. 35,89,671/- to the assessee's income. 3. Re-computation of Book Profit under Section 115JB Relevant Legal Framework and Precedents: Section 115JB(2) requires any provision for diminution in the value of any asset to be added back to book profit. Court's Interpretation and Reasoning: The Tribunal found that the provision for loss on inventory was a provision for diminution in the value of an asset, which should be added back to the book profit. Key Evidence and Findings: The assessee had debited Rs. 73,10,00,000/- to the material consumed account, claiming it was a reduction in value due to obsolete stock. However, this was not properly explained or disclosed in the financial statements. Application of Law to Facts: The Tribunal concluded that the provision for loss on inventory fell under Explanation 1 to Section 115JB(2) and needed to be added back to the book profit. Treatment of Competing Arguments: The Tribunal rejected the assessee's argument that the provision was not for diminution in value, citing lack of proper disclosure and accounting treatment. Conclusions: The Tribunal upheld the re-computation of book profit by adding Rs. 73,10,00,000/- for provision for loss on inventory. SIGNIFICANT HOLDINGS Preserve Verbatim Quotes of Crucial Legal Reasoning: "Mere production of books of account before the Assessing Officer will not necessarily amount to disclosure within the meaning of explanation 1 of proviso to section 147 of the Act." Core Principles Established: Full and true disclosure is required to prevent reopening of assessments beyond four years, and provisions for diminution in asset value must be added back to book profit under Section 115JB. Final Determinations on Each Issue: The Tribunal upheld the reopening of the assessment under Section 147, the addition of Rs. 35,89,671/- towards interest income, and the re-computation of book profit by adding Rs. 73,10,00,000/- for provision for loss on inventory.
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