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TMI Blog2019 (11) TMI 703X X X X Extracts X X X X X X X X Extracts X X X X ..... provision for doubtful debts. Now, the argument of the Ld. AR that in case of limited scrutiny assessment, the Pr. CIT could not exercise jurisdiction u/s. 263 of the Act, is devoid of merit. Accordingly, the ground relating to challenging of the exercise of jurisdiction by the Pr. CIT u/s. 263 is rejected. Whether gain on account of foreign exchange fluctuation can be reduced from the cost of assets as per the provisions of section 43(1)? - main contention of the Ld. AR is that loss arising on account of fluctuation of exchange rate with regard to loan availed for acquisition of fixed assets is a revenue loss and not a capital loss - HELD THAT:- In view of revision made in AS-11, now treatment shall be as per revised AS-11 (2003). Exchange gain or loss on foreign currency fluctuations in respect of foreign currency loan acquired for acquisition of fixed asset should be allowed as revenue expenditure. However, in the Preamble of AS-11 (Revised 2003), it was stated that the Revised Standard supersedes AS-11 (1994) except that in respect of accounting for transactions in foreign currencies entered into by the reporting enterprise before the date of AS-11 (2004) comes into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore him and he verified the entire details and the supporting evidences on various dates mentioned in para 1 of the assessment order and only thereafter the limited scrutiny assessment was completed by him. 4) The Principal CIT should have noted that proper enquiry as mentioned in ground No. 2 above was conducted by the ACIT and therefore there was no failure or omission on the part of the AO to conduct proper enquiry in respect of reason mentioned in CASS in the case of limited scrutiny case. 5) The Principal CIT did not apply his mind properly in passing the Order u/s 263. In the proposal send to the Appellant he has proposed to apply the provisions of Section 37(1) for disallowing the loss on account of difference in exchange rate on foreign currency loss availed for the construction of the new block and equipments which were commissioned during the asst years 2011-2012 2013- 2014 itself. So the expenditure claimed was perfectly allowable u/s 36(i)(iii) of the I. T. Act. 6) The CIT has also relied on Supreme Court Decision in case of M/s Sutlej Cotton Mills Ltd which had no applicability in the Appellant' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... planation 1 to section 115JB(2), the provision for doubtful debts being provision for diminution in value of trade receivables, had to be added to profit for computation of book profit for calculation of income under Minimum Alternate Tax. 3.2 The Pr. CIT observed that the Assessing Officer had not considered or had applied his mind to the facts of the case and with regard to the provisions of the Act in respect of the above issues. Therefore, the Pr. CIT set aside the assessment for the assessment year 2014-15 and invoked the provision of section 263 of the I.T. Act for the limited purpose of verifying whether the foreign exchange loss qualifies for being a revenue expenditure and secondly to rework MAT income after adding back the provision for doubtful debts, as necessary examination/verification has not been made during the assessment. 4. Against this, the assessee is in appeal before us. The Ld. AR submitted that this was a limited Scrutiny assessment and the reasons for which the case was selected for scrutiny for furnishing of details specific to the CASS reasons. It was submitted that the details were furnished in response to notice issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT could not have exercised his powers u/s 263 of the I.T. Act directing the A.O. to pass assessment making disallowance. The above view taken by the Tribunal was upheld by the Hon ble High Court. 4.4 The learned AR further submitted that when the assessment is taken up for `limited scrutiny , the Pr.CIT / CIT cannot hold the assessment order as erroneous and prejudicial to the interest of the revenue in respect of an issue which was not a reason for selection of the case for `limited scrutiny . In this context, the learned AR had relied on the following Tribunal orders:- (i) The Deccan Paper Mills Co. Ltd. v. CIT [1013 1035/Pun/2014 order dated 10.10.2017], ITAT Pune Benches. (ii) M/s.Aggarwal Promoters v. Pr.CIT [1708/Chd/2017 order dated 16.04.2019] ITA Chandigarh Benches. (iii) Sanjeev Kr. Khemka v. Pr.CIT [1361/Kol/2016 order dated 02.06.2017] ITAT Kolkata Benches. (iv) Rakesh Kumar v. CIT [6187/Del/2015 order dated 20.12.2018] ITAT New Delhi Benches. (v) M/s. R H Property Developer Pvt.Ltd. v. Pr.CIT [1906/Mum/2019 order dated 30.07.2019] ITAT Mumbai Benches. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n currency loan need not be added to the cost of the new asset u/s 43 (1) of the I. T Act once the asset is put to use. It was submitted that the assessee was also mandatorily required to follow AS -11 of the Accounting Standards. The Ld. AR relied on the judgment of the Supreme Court in the case of CIT Vs. Woodland Governor India Pvt Ltd (312 ITR 254) wherein it was held that loss arising on foreign exchange fluctuation has to be treated as revenue expenditure as per AS 11. The Ld. DR stated that the judgment of the Supreme Court in Woodland Governor case has two parts which deals with Revenue account cases and the other part with Capital Account cases. According to the Ld. DR, the Capital Account cases dealt with adjustment of the cost of the asset on account of exchange fluctuation at each balance sheet date which was not applicable to the assesee s case since no assets were acquired from foreign country. The Ld. DR stated that for determining whether devaluation loss is Revenue Loss or Capital Loss what is relevant is utilization of the amount at the time of devaluation and not the object for which the loan has been utilized. The Ld. AR submitted that since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... far exceeding ₹ 10 lakh prescribed under the above mentioned CBDT Instructions.. Therefore, the Assessing Officer could have converted the limited scrutiny assessment into a complete scrutiny assessment by obtaining approval from the Pr.CIT / DIT concerned. According to the Ld. DR, the Assessing Officer failed to convert the limited scrutiny into a complete scrutiny and thereby, there was escapement of income of more than ₹ 10 lakhs. As such the order of the Assessing Officer is erroneous and prejudicial to the interest of revenue for the Pr.CIT to invoke his jurisdiction u/s 263 of the I.T.Act. 6.2 Further, the Ld. DR submitted that the CBDT Instruction relevant for the period as regards the limited scrutiny assessment is Instruction No.7/2014 dated 26.09.2014. Instruction No.7/2014 reads as follow:- Subject: - Scope of enquiry in cases selected for scrutiny during the Financial Year 2014- 2015 on basis of mis-match-regarding- It has come to the notice of the Board that during the scrutiny assessment proceedings some of the AOs are routinely calling for information which is not relevant, for enquiry into the issues t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 10 lakhs (for non-metro charges, the monetary limit shall be ₹ 5 lakhs) on any other issue(s) apart from the information based on which the case was selected under CASS requiring substantial verification, the case may be taken up for comprehensive scrutiny with the approval of the Pr.CIT/DIT concerned. However, such an approval shall be accorded by the Pr. CIT/DIT in writing after being satisfied about merits of the issue(s) necessitating wider and detailed scrutiny in the case. Cases so taken up for detailed scrutiny shall be monitored by the Jt. CIT/Addl. CIT concerned. 5. The contents of this Instruction should be immediately brought to the notice of all concerned for strict compliance. 6.3 It was submitted that the above Instructions have been modified subsequently vide Instruction No.20/2015 dated 29.12.2015 and Instruction No.5/2016 dated 14.07.2016. From para 4 of the above Instruction, it is clear that when potential escapement of income exceeds ₹ 10 lakh on issues other than selected under CASS, the Assessing Officer has the power to take up the assessment for comprehensive scrutiny with the approval of the Pr.CIT / DIT co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neness of the claim which resulted in loss of revenue. 7.1 In the present case, the first issue for our consideration is whether the Assessing Officer having failed to convert limited scrutiny into a complete scrutiny, the assessment order would be rendered erroneous and prejudicial to the interests of the Revenue. 7.2 The Pr. CIT invoked the provisions of section 263 of the Act for considering the following two issues: The assessee had claimed an amount of ₹ 2,08,09,140/- being foreign exchange loss was allowed in assessment The foreign exchange loss on account of foreign currency loan taken for the construction of new and additional equipment. The loss was recognized translating the liabilities at exchange rate in effect at the balance sheet date. The loss on devaluation of rupees on account of loan utilized for fixed capital not deductible u/s. 37(1) of the Act, since the expenditure is capital in nature. Assessee debited an amount of ₹ 15,83,130/- in its P L account towards provision for doubtful debts. This being provision for diminution in value of trade receivables in the balance sheet, had to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 43(1) of the I.T. Act. As per the provisions of section 43(1) of the Act, actual cost means actual cost of the capital assets of the assessee reduced by that portion of the cost of the capital assets as has been met directly or indirectly by any other person or authority. The section also has Explanations. However, the section nowhere specifies that any gain or loss on foreign currency loans acquired for purchase of indigenous assets will have to be reduced or added to the cost of assets. 8.1 In the case of CIT Vs. Tata Iron and Steel Co. Ltd. (1998) 231 ITR 285 (SC), it was held that cost of an asset and cost of raising money for purchase of asset are two different and independent transactions and events subsequent to acquisition of assets cannot change price paid for it. Therefore, fluctuations in foreign exchange rate while repaying installments of foreign loan raised to acquire asset cannot alter actual cost of assets for computing depreciation. Hence, it restricted assessee's right to add such loss incurred on account of currency fluctuations to the cost of asset. Thereby, the decision given by Sutlej and Tata Iron and Steel (supra) are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is taxable or not, that it has to be decided in accordance with the provisions of law and not in accordance with the accounting practice, has no substance as there is no inconsistency between the said accounting practice and any provisions of the Act. 8.3 Further, the nature of expenditure being capital or revenue does not depend on the purpose for which foreign currency loan was obtained or on nature of ultimate utilization of loan amount. The same was also affirmed by Apex court in case of India Cements Limited vs. CIT (1966) (SC) 60 ITR 52. 8.4 It is to be noted that liability to pay or to provide for loss on account of foreign currency fluctuation does not arises at the time of obtaining/raising foreign currency loan but the same was incurred subsequently on devaluation of currency which is an independent event having no control over it by the assessee. The same currency fluctuation may result into gain or loss which is not ascertainable at the time of taking funds. Hence it cannot be said as capital expenditure. The liability to pay or to provide for foreign currency fluctuation arises only on devaluation of currency and there may not be an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gly decided by apex court in the manner laid down in AS-11 (Revised 1994) at Para-10. 8.7 The revised treatment provided at Para 13 of AS-11 (Revised 2003) is given below: Exchange differences arising on the settlement of monetary items or on reporting an enterprise's monetary items at rates different from those at which they were initially recorded during the period, or reported in previous financial statements, should be recognized as income or as expenses in the period in which they arise, with the exception of exchange differences dealt with in accordance with paragraph 15. 8.8 In view of the revision made in AS-11 in 2003, it can be said that treatment of foreign exchange loss arising out of foreign currency fluctuations in respect of fixed assets acquired through loan in foreign currency shall required to be given in profit and loss account. Said exchange loss should be allowed as revenue expenditure in view of amended AS-11 (2003). It may be noted that apex court had followed treatment of exchange loss or gain as per AS-11 (1994). In view of revision made in AS-11, now treatment shall be as per revised AS-11 (2003). ..... X X X X Extracts X X X X X X X X Extracts X X X X
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