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TMI Blog2018 (12) TMI 1320X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - I.T.A. No.6120/Mum/2016 - - - D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year . The following reasons was recorded by AO u/s 148(2) for reopening of the concluded assessment as under:- The assessee filed return of income on 18/09/2009 for the AY 2009-10 declaring total income of ₹ 20277250/-. The assessment was completed on 22/12/2011 u/s 143(3) of the Act determining loss of ₹ 20277253/-. It is observed that the assessment of the above assessee was done in a scrutiny manner in October 2011 determining total income at ₹ 20277250/-. It was observed from the profit and loss account that assessee firm has debited ₹ 5113894/- on account of loss exchange fluctuation. As assessee firm was engaged in the business of Reseller government Lottery tickets and from profit and loss account it was seen that all income derived from the lottery trading, interest and rental income. There was not any foreign transaction reflects in the books therefore loss on exchange fluctuation cannot arise., In view of above same should have been disallowed and added back to the income. However, this was not done. Omission resulted in under assessment of income by like amount with consequent short levy of tax of ₹ 1738212/- including surch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uctuations. Thus it was submitted that the whole contention of the revenue that assessee is engaged only in the business of reseller of government lottery ticket and has derived income from lottery trading , interest and rental income was not correct, as the assessee claimed that it is also manufacturer of dies and moulds . The assessee claimed that it offered income from manufacturing of dies and moulds as well lottery sales . It was also claimed that expenditure and purchases related to lottery business and manufacturing business were debited to the P L account. The assessee submitted that rental income was from rent received against the part use of factory premises at Vasai and depreciation was also claimed on the Plant Machinery used for manufacturing of dies moulds which was allowed by Revenue in the assessment framed u/s 143(3) of the 1961 Act. It was submitted that Plant Machinery includes one machine namely EOS laser machine which was imported by the assessee in AY 2006-07 by taking foreign currency loans to the tune of Euros 3,34,460 from Vijaya Bank, Chira Bazar, Mumbai-400002 on 22.06.2005 at the then prevailing foreign currency rate of ₹ 53.42 per Euro i.e. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5.1. PER CONTRA: The appellant has submitted during appellate proceedings that the appellant is a Partnership Firm engaged in the business of reselling of Government Lottery Tickets, Manufacturing of Moulds, Dies Plastic Articles. The appellant firm derives income from business. The appellant had filed its return of income for AY 2009-10 on 18th September 2009, reporting total income of ₹ 2,02,77,250/-. The return of income of the appellant was selected for scrutiny and the assessment order under section 143(3) was passed on 22th December 2011, determining the total income at ₹ 2,02,77,250/-. Subsequently, an audit objection was raised by the Internal audit team of the Department, in the month of January 2014 as regards the Loss on exchange fluctuation of ₹ 51,13,894/-. The appellant made a submission vide the letter dated 6 January 2014 in response to the audit query. The case of the appellant was reopened under section 148 of the Act by issuing a notice under section 147 of the Act dated 27 March 2014. The appellant has claimed Loss on Exchange Fluctuation of ₹ 51,13,894/-in its return of income. The learned AO was of the belief the appellant is engage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supplied). Further, the same thing has been reiterated by the learned AO in his assessment order passed under section 143(3) r.w.s. 147 of the Act. Further, addition to the income is also made only for the aforesaid reason without looking into the facts of the case that the Exchange fluctuation loss was on the face of Profit Loss account which was subject to scrutiny earlier and there is no new tangible material on record. The reassessment and addition to the income is done only on the basis that the appellant is only a reseller of government lottery tickets. The very reason for reopening is incorrect and given without looking into the facts of the case. The learned AO in his last line to the reason for reopening has stated that the loss should have been disallowed and hence, reopened. This is clearly a mere change of opinion which is bad in law and not permissible. Similar point was raised as an audit objection and the learned AO has reopened the assessment just on that basis without applying his mind. The learned AO should have 'reason to believe' that income has escaped assessment. The Appellant wishes to submit that through various judicial pronouncements, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng activity. The learned AO has in his reasons for reopening has recorded that the appellant has earned rental income, but failed to appreciate that the rental income is earned against the part use of the factory premises at Vasai wherein the Manufacturing business is run by the appellant. According, it is crystal clear that the reopening is done without any reference to the documents on record. The learned AO failed to appreciate that the appellant has claimed depreciation and additional depreciation on Plant Machinery used for the purpose of manufacturing of Dies, Moulds etc and same is allowed by the learned AO during the course of reassessment proceedings. As per provisions of the Act, it is to be appreciated that additional depreciation under section 32(1}(iia) of the Act is only allowed to industries in the manufacturing sector. This itself contradicts the stand of the learned AO and proves that the appellant is into manufacturing business as well and the very basis for reopening the assessment is unwarranted and bad in law. As discussed in above, it is clear that the Appellant had made full and true disclosures of the material facts during the course of the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome failure or omission on the part of the assessee to disclose fully all relevant or material facts. In the second situation the AO has the right under Explanation 2, sub-clause(c) of section 147 of the Act, which empowers the AO to reopen a completed assessment. The AO can resort to reopening under clause (c) of section 147 of the Act notwithstanding the fact that there was no omission or failure on the part of the assessee, either to make a return or to disclose fully and truly all material facts, but the AO in consequence of information in his possession subsequent to the first assessment, has reason to believe that income chargeable to tax has been under assessed and consequently has escaped assessment. 5.4. In the instant case, the AO noticed that appellant firm was engaged in the business of Reseller Government Lottery tickets during the year and profit and loss account reveals that all income has been derived from the lottery trading, interest and rental income only. AO further pointed out that there was not any foreign transaction reflected in the books of accounts therefore loss on exchange fluctuation cannot arise. In view of the above claim of loss on exchange fluc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt that If the AO honestly comes to a conclusion that a mistake has been made, it matters nothing so far as his jurisdiction to initiate the proceedings under s, 147 is concerned, that he may have come to an erroneous conclusion whether on law or on facts. His jurisdiction to initiate proceedings under s. 147 for assessment and reassessment is, even in such case correctly and rightly exercised, though he may have taken an erroneous view of the law with regard to the mistake committed at the first assessment proceedings that he has found out. Therefore, unless it is shown that the AO never enquired into the matter at all or that he never honestly believed that a mistake has been made, the result of his investigation and initiation of the proceedings under s. 147 cannot be challenged on the ground of want of jurisdiction. The AO has to determine the facts and the law in order to give him jurisdiction to proceed and if in the determination of this he goes wrong, the proper remedy for the assesses would be to go up in appeal and to have the case referred to the High Court under the provisions of the Act. 5.8. Mere production of books/documents/evidence will not suffice- Af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is trite that a matter in issue can be validly determined only upon application of mind by the authority determining the same. Application of mind is, in turn, best demonstrated by disclosure of mind, which is best done by giving reasons for the view which the authority is taking. In the cases where the order passed by a statutory authority is silent as to the reasons for the conclusion it has drawn, it can well be said that the authority has not applied its mind to the issue before it nor formed any opinion. The principle that a mere change of opinion cannot be a basis for reopening completed assessments would be applicable only to situations where the Assessing Officer has applied his mind and taken a conscious decision on a particular matter in issue. It will have no application where the order of assessment does not address itself to the aspect which is the basis for reopening of the assessment- Consolidated Photo Finvest Ltd. V. Asstt. CIT[2006] 151 Taxman 41 (Delhi). 5.8.2. Mere production of evidence before the ITO is not enough. There may be omission or failure to make a true and full disclosure. Is some material for the assessment lay embedded in the evidence wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly argued that the firm is engaged in the business of reselling of Government Lottery tickets, Manufacturing of Moulds, Dies Plastic Articles during the year. Though, at no point of time appellant has given bifurcation of sales as well as purchases to prove his point but the profit and loss account strongly indicates that business of manufacturing of Moulds, Dies Plastic Articles is also conducted during the year when we see the nature of expenses claimed by appellant and allowed by the AO for example Wages, Stores Consumables, Contract Labour Charges, packaging material, designing charges, freight forwarding, business promotion, Depreciation and additional depreciation on Plant Machinery etc. Therefore, there is no nexus to the inference drawn by the learned AO that the appellant is only carrying out lottery business. Moreover, the AO has not brought on record any contrary evidence. 6.4. Now, the only issue left is whether appellant has suffered a loss on account of the loss on exchange fluctuation to the tune of ₹ 51,13,894/-. On perusal of audit report and balance sheet it is clear that the appellant is following Mercantile System of accounting. Profit loss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o the liability existing at the time of acquisition of the asset) at the time of making payment- a) Towards the whole or a part of the cost of the asset; or b) Towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any, the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making the payment, irrespective of the method of accounting adopted by the assesses, shall be added to, or, as the case may be, deducted from- (i) the actual cost of the asset as defined in clause (1) of section 43: or (ii) the amount of expenditure of a capital nature referred to in clause (iv) of sub-section (1) of section 35; or (in) the amount of expenditure of a capital nature referred to in section 35A: or (iv) the amount of expenditure of a capital nature referred to in clause (ix) of sub-section (1) of section 36: or (v) the cost of acquisition of a capital asset (not being a capital asset referred to in section 50) for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for discharging the liability aforesaid, be computed with reference to the rate of exchange specified therein.] 6.7 By plain reading of the provision of this section, it is crystal clear that any change in the value of the capital asset is to be affected in the cost of asset and the amount of expenditure of the capital nature. The above provisions of section 43A of the Income Tax Act are summarized hereunder; Where the assessee has acquired any assets from a country outside India The assets are acquired for the purpose of business or profession. Consequent to change in rate of exchange, there is increase / decrease in the liability of the assessee expressed in Indian currency towards cost of the assets or repayment of money borrowed for acquiring capital asset along with interest in foreign currency. Such increase or reduction in the liability shall be added or deducted from the actual cost of assets as and when paid or received. 6.8. Further, the treatment of foreign exchange loss arising on revaluation of External Commercial Borrowing (ECB) for assets acquired within India, whether such loss can be capitalized with the cost of assets or ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital, of which at para 5 of said principles which says as follow: loss resulting from depreciation of the foreign currency which is utilised or intended to be utilised in business and is part of the circulating capital, would be trading loss, but depreciation of fixed capital on account of alteration in exchange rate would be capital loss The above principles have been followed by various courts in deciding whether particular exchange loss or gain is of capital nature or revenue nature. 6.10. The above cited case laws and the provisions of the Act clearly establish that the depreciable assets are capital in nature and the appellant ought to have adjusted the fluctuation in the currency value in the cost of the asset. As already discussed above the appellant has claimed ₹ 1,14,61,057/- against depreciation and has been claiming the interest paid against the loan for all the years. Moreover, appellant imported the Plant Machinery EOS Laser Machine in A.Y. 2006-07 by taking the foreign currency loan of Euros 3,34,460 from Vijaya Bank on 22.06.2005. The said loan was repaid by the appellant firm not in installments but in lump sum on 15.07.2008 that resulted i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drawn to para 6.3 of ld. CIT(A) orders. It is also submitted that Revenue has not come in appeal against the said finding of learned CIT(A) nor CO was filed by Revenue and hence said finding of learned CIT(A) has become conclusive. These losses pertains to import of machine on which foreign currency loan was taken from Vijaya Bank in AY 2006-07 and the loss occurred at the time of repaying said foreign currency loan in the impugned assessment year due to adverse movement of exchange rate of Euro vis-a-vis Indian Rupee. It was claimed that the revenue allowed the said loss under scrutiny assessment framed u/s. 143(3) of the Act. It was submitted that the genesis of this reopening of the concluded assessment u/s 147 is audit objection which is placed at page no. 31 of the paper book filed with the tribunal. It was submitted that detailed reply was submitted in response to the audit objection which are placed in paper book /page no. 32 to 36. It was submitted by ld. Counsel for the assessee that reopening notice was issued on 27.03.2014 u/s. 148 of the Act which is placed in paper book / page no. 37. Our attention was drawn to paper book/ page no 38 and 39 wherein notice u/s 142(1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated by tax-auditors that assessee‟s factory is situated at Plot no. 6, NH 8 Sativali, Vasai(East), Thane-410208. Our attention was also drawn to page no 60 /para 28(b) which is part of tax-audit report in form no. 3CD is placed wherein there is a mention of manufacturing activities carried on by the assessee. Our attention was also drawn to page no. 65 of the paper book wherein at para 2 which is annexure to tax audit report where there is a mention to closing stock of engineering goods. Our attention was also drawn to paper book /page 67 wherein profit loss account of the assessee is placed. Our attention was also drawn to page no. 71 to 72 of the paper book wherein the schedule of fixed asset is placed to contend that the assessee is owning several machines which are used for manufacturing activity. Thus, main bone of contention of the assessee is that the entire reopening of the concluded assessment u/s 147 is bad in law and it is based on audit objection wherein the AO misconstrued in believing that the assessee is only engaged in the business as resellers of government lottery ticket while fact of the matter is that the assessee is also engaged in manufacturing act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A) upheld the reopening of the concluded assessment u/s 147 of the 1961 Act. The learned DR rely on the appellate order passed by learned CIT(A). 11. The learned counsel for the assessee submitted in rejoinder that it is accepted that Section 43A is applicable so far as merits of the issue under instant appeal is concerned . It was again conceded that the assessee does not have any case on the merits of the issue under consideration before the Bench. It was submitted that learned CIT(A) only mentioned about applicability of Section 43A in his appellate order while the assesssee was never confronted during assessment/appellate proceedings. 12. We have carefully considered rival contentions and we have perused the material on record including relevant orders of authorities, paper book filed by the assessee and cited case laws. We have observed that the assessee is reseller of government lottery tickets and manufacturer of moulds and dies and plastic goods. The assessee filed return of income on 18.09.2009 declaring total income of ₹ 2,02,77,250/- . The assessee case was selected for scrutiny and assessment was originally framed u/s. 143(3) vide assessment orders dated 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oncluded assessment u/s 147 was duly furnished to the assessee as an enclosure to the notice dated 13.08.2014 issued u/s 142(1) of the 1961 Act(pb/page 38-39). The genesis to this reopening of the concluded assessment u/s 148 was audit objection dated 30.04.2013 raised by Senior Audit Officer/LAP-XVI (pb/page 31). The assessee duly objected to the audit objection by giving detailed explanations vide letter dated 06.01.2014 wherein the assessee explained that it borrowed foreign currency loans from Vijaya Bank which were utilised for purchasing machinery in AY 2006-07(pb/page 32 to 36) . It was submitted by the assessee that on repayment of the said foreign currency loan during the impugned assessment year, there was a foreign exchange fluctuation loss due to variation in foreign currency rates of Euro vis-a-vis Indian Rupee. Copies of ledger accounts to that effect of M/s P.H.Polyplast (Prop. Mahalaxmi Enterprises) were filed with the authorities below which are placed in paper book /page 32-36). As could be seen that the whole foundation and the premise of re-opening of the concluded assessment as contained in audit objections as well reason recorded by the AO u/s 148(2) is that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income. However, this was not done. In view of the above facts of the case I had a reason to believe that the in the order u/s. 143(3) the AO has given wrong treatment which resulted in under assessment chargeable tax has escaped assessment. Thus , despite the assessee replying elaborately again that it is engaged in the business of manufacturing of moulds and dies apart from being engaged in the business of reseller of the government lottery tickets, the same line of reasoning was adopted by the AO in holding that the assessee is engaged in the business as resellers of government lottery tickets and earned income from lottery trading, interest and rent, while disposing of the objections of the assessee to the reopening of the concluded assessment , vide orders dated 16.10.2014 and concluded that the assessee is engaged in the business of reseller of government lottery ticket only and hence there could not be any loss of foreign exchange fluctuation as assessee has not entered into any foreign exchange dealings as per books of accounts , but the AO while disposing of objections filed by the assessee did not demolish with reasoning as to how the contentions of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reight forwarding, business promotion, Depreciation and additional depreciation on Plant Machinery etc. Therefore, there is no nexus to the inference drawn by the learned AO that the appellant is only carrying out lottery business. Moreover, the AO has not brought on record any contrary evidence. This finding of fact as recorded by learned CIT(A) has attained finality as Revenue did not file any appeal with the tribunal against the said finding of fact recorded by learned CIT(A) nor any cross objections were filed by Revenue before the tribunal. The assessee has claimed that its concern M/s P H Polyplast of which the assessee is proprietor is engaged in manufacturing of moulds and dies. There are other ample evidences on record which indicates that the assessee was also engaged in manufacturing of moulds and dies apart from being engaged in business as government lottery reseller, which are as under: a) Original Assessment order dated 27.10.2011 passed by the AO u/s 143(3) of the 1961 Act, wherein the AO has recorded nature of business of the assessee as under :- Resellers of Govt. Lottery Tickets and Manufacturers of Moulds Dies, Plastic Containers Plastic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cy loan was availed in AY 2006-07 on which loss arose on account of foreign exchange fluctuation in rates of foreign currency Euro vis-a-vis Indian Rupee while making repayment in the impugned assessment year. Thus, 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. Now, the only question left to be answered is that if the entire premise/foundation on which the edifice of reopening ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wherein returned income was accepted. The Revenue itself accepted while framing original assessment u/s 143(3) that the assessee is engaged in the business of resellers of government lottery tickets and manufacturers of moulds and dies , plastic containers and plastic goods. The Revenue made enquiries while framing original assessment u/s 143(3) as to the business activities of the assessee as well about this loss incurred by the assessee on foreign exchange fluctuation due to currency rate variations while making repayment of foreign currency loan earlier taken in AY 2006-07 from Vijaya Bank for import of machinery used for manufacturing of moulds and dies, plastic containers and goods which stood repaid during the impugned AY. The assessee duly submitted all replies and after consideration of the assessee reply , the Revenue framed assessment u/s 143(3) accepting the business of the assessee to be reseller of government lottery tickets as well manufacturing of moulds and dies and plastic containers and plastic goods. Now, the revenue has changed its opinion on an altogether erroneous ground that the assessee cannot incur any foreign exchange loss based on fluctuation in foreign c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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