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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 ..... Expenses" in our P & L A/c along with supporting invoices / vouchers were required to be produced before 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bts 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 u/s. 142(1) of the Act dated 27/06/2016 and after verification the Asst. Commissioner had acce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 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. (vi) Mrs.Sonali Hemant Bhavsar v. Pr.CIT [742/Mum/2019 - order dated 17.05.2019] ITAT Mumbai Benches. 4.5 The learned AR had submitted that in response to the show cause notice u/s 263 of the I.T. Act, when the assessee has filed replies, the PCIT has to give positive finding on merits while setting asid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 loan was utilized for acquiring asset before the relevant asst year, the above arguments of the Ld. DR failed. 5.3 It was submitted that thereafter, the Pr. CIT invoked the provisions of section 263 to revise the assessment order dated 16/09/2016 stating that the foreign exchange loss is capital expenditure and not allowable as per provisions of Section 37(1) without considering the submissions of the assessee. The Ld. AR submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udicial 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 to be considered. This has been causing undue harassment to the taxpayers and has also drawn adverse criticism from several quarters. Further, feedback and analysis of such orders indicates that many times the core issues, which formed the basis of selection of the case for scrutiny were not examined properly. Such instances primarily occurred in cases selected for scrutiny under Computer Aided Scrutiny Selection ('CASS') for verification of specific information obtained from third party sources which apparently did not match with the details submi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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 concerned. In the instant case, the potential escapement of income is far exceeding Rs. 10 lakh prescribed under the above mentioned CBDT Instructions. Therefore, the Assessing Officer could have converted the limited scrutiny assessment in this case to a complete scrutiny assessment by taking approval / permission from the Pr.CIT / DIT concerned. On merit, the Ld. DR relied on the order of the Pr. CIT. 7. We have heard the rival submissions and perused the record and also gone through all the case laws cited by the parties. Section 263 of the Income-tax Act seeks to remove the prejudice caused to the revenue by the erroneous order passed by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 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 be added to profit for computation of book profit. This has resulted in short assessment of income under MAT." 7.3 On the above two issues, the Pr. CIT observed as follows: "The issue is that the AO has not considered or had applied his mind to the facts of the case and with relation to the provision of the Act in respect of the above issues. Therefore, the assessment for the AY 2014-15 is hereby set aside 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. 7.4 In this case, the assessment was based on limited scrutiny wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquire 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 contrary in view. In former mentioned case it restricted the assessee's right to claim such loss on currency fluctuations considering the same as attributable to capital account transactions and at the same time does not allow to add the same to cost of the asset by following principle laid down in Tata Iron and Steel (supra). 8.2 Schedule VI of Companies Act, suggests treatment of the 'gain/loss' as capital in nature and should be adjusted to the cost of relevant asset, whereas Accounting Standards 11 suggests that treatment of 'gain/loss' attributable to foreign borrowings should be reflected in profit and loss account. However, said conflict was resolved by MCA Circular it was clarified by MCA that accounting treatment of exchange differences will be made as per AS 11 and further categorically mentioned that provisions of AS-11 is required to be followed irrespective of the relevant pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able 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 any liability to pay for loss on currency fluctuation if currency value is inflated subsequently. 8.5 One of the issue involved in the case of CIT vs. Woodward Governor India (P) Ltd. 312 ITR 254 (SC) was "Whether the assessee is entitled to adjust the actual cost of imported assets acquired in foreign currency on account of fluctuation in the rate of exchange at each balance sheet date, pending actual payment of the varied liability?" The above mentioned decision had considered the implication of Para 10 of AS-11 along with section 43A of the Act. While deciding the issue, it was observed by Hon'ble apex court at para 17: "Having come to the conclusion that valuation is a part of the accounting system and having come to the conclusion that business losses are deductible under section 37(1) on the basis of ordinary principle of commercial accounting and having come to the conclusion that the Central Government has made Accounting Standard mandatory, we are now requi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 effect, AS 11 (1994) will continue to be applicable. 8.9 In our opinion, sec. 43A is only relating to the foreign exchange rate fluctuation in respect of assets acquired from a country outside India by using foreign currency loans which is not applicable to the indigenous assets acquired out of foreign currency loans. Further, the Revised Standard supersedes AS 11 (1994), except that in respect of accounting for transactions in foreign currencies entered into by the assessee before the date of AS-11 (2004) comes into effect, AS-11 (1994) will continue to be applicable. 9. In our opinion, foreign exchange loss arising out of foreign currency fluctuations in respect of loan in foreign currency used for acquiring f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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