Tribunal Invalidates Assessment Reopening, Rules Against Foreign Exchange Gain Inclusion

The Tribunal deemed the reopening of the assessment invalid as it constituted a change of opinion. Furthermore, the addition of Rs. 99,78,719/- for foreign exchange gain was ruled unjustified as it pertained to capital account, not revenue account. Consequently, the appeal by the assessee was allowed, with the order issued on 13.5.2011.

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Issues Involved: Validity of reopening of assessment under section 147, and addition of foreign exchange gain.

Issue-wise Detailed Analysis:

1. Validity of Reopening of Assessment:

The primary issue revolves around the reopening of the assessment proceedings under section 147 of the Income Tax Act. The original assessment was completed under section 143(3) on 29.9.2006, determining a total loss of Rs. 4,95,28,863/-. The assessment was reopened by issuing a notice under section 148 on 17.2.2009, based on the ground that the assessee had reduced an amount of Rs. 1,00,38,101/- on account of foreign exchange fluctuation gain from the income, which was not added back, resulting in underassessment.

The assessee argued that the reopening was based on a mere change of opinion, as the Assessing Officer (AO) had already examined the foreign exchange fluctuation during the original assessment and accepted the explanations provided. The assessee relied on the Supreme Court's decision in CIT vs Kelvinator India Ltd (321 ITR 561) and the jurisdictional High Court's decision in Aventis Pharma Ltd vs ACIT (323 ITR 570), asserting that the AO cannot reopen an assessment based on a change of opinion.

The Department countered that the original assessment only examined the loss on foreign exchange fluctuation and not the gain. Therefore, there was no change of opinion, as the issue of gain was not addressed in the original assessment.

Upon reviewing the submissions and relevant material, it was noted that the AO had indeed considered the foreign exchange fluctuation during the original assessment, as evidenced by the detailed explanation provided by the assessee. The AO had accepted the assessee's explanation regarding the notional gain on foreign exchange fluctuation, as it was on capital account. The reopening of the assessment was thus deemed invalid, as it was based on a change of opinion, which is not permissible as per the Supreme Court's ruling in Kelvinator India Ltd and the jurisdictional High Court's decision in Aventis Pharma Ltd.

2. Addition of Foreign Exchange Gain:

On the merits of the case, the issue pertained to the addition of Rs. 99,78,719/- towards foreign exchange gain. The assessee contended that this gain was notional and accounted for as per Accounting Standard 11 issued by the Institute of Chartered Accountants of India. The CIT(A) had confirmed the addition based on the decision in Woodward Governor India Pvt Ltd (312 ITR 254).

The Tribunal observed that the gain on foreign exchange fluctuation related to the term loan and was not on revenue account. The Supreme Court, in the case of Woodward Governor India P Ltd, had held that adjustments in the actual cost of assets due to changes in exchange rates should be made on a cash basis as per the amended provisions of section 43A. Since the gain in question was on capital account and not on revenue account, it could not be treated as income.

The Tribunal concluded that the addition of Rs. 99,78,719/- towards foreign exchange gain was not justified, as the gain was on capital account and not on revenue account. The issue was thus decided in favor of the assessee.

Conclusion:

The Tribunal held that the reopening of the assessment was invalid as it was based on a change of opinion. Additionally, the addition of Rs. 99,78,719/- towards foreign exchange gain was not justified, as the gain was on capital account. Consequently, the appeal filed by the assessee was allowed. The order was pronounced on 13.5.2011.

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