2018 (9) TMI 528 - AT - Income Tax

Tribunal overturns CIT's decision, rules in favor of assessee.

The Tribunal held that the Principal Commissioner of Income Tax was unjustified in invoking revisionary jurisdiction under Section 263 of the Income Tax ... Revisionary jurisdiction under section 263 - Allowability of foreign exchange fluctuation loss vis-a -vis capitalization and section 43A - Mark-to-market (MTM) provision on foreign currency swaps - ascertainment and treatment for book profits under section 115JB - Stage of deduction under Chapter IV (section 10AA/10B) vis-a -vis aggregation under sections 70/71 - Twin conditions for exercise of jurisdiction under section 263: erroneous order and prejudice to revenue - Consistency of accounting treatment and relevance of books of account for tax computationStage of deduction under Chapter IV (section 10AA/10B) vis-a -vis aggregation under sections 70/71 - Deduction versus exemption - treatment of SEZ income - Whether deduction claimed in respect of SEZ unit income was correctly treated under Chapter IV and whether revision under section 263 was justified on this ground. - HELD THAT: - The Tribunal examined the material on record including Form No.56F and the parties' contentions and held that the assessee had claimed deduction under section 10AA (SEZ) and not an exemption under section 10B as suggested by the revising officer. Reliance was placed on judicial exposition that the entitlement under section 10AA/10B is a deduction to be given while computing gross total income of the eligible undertaking under Chapter IV and not by aggregating under Chapter VI after sections 70/71. The Revenue itself in the revision order accepted granting the deduction under Chapter IV. On these facts the Tribunal found that the revisional exercise on this ground was not sustainable. [Paras 5]Revision under section 263 in respect of the claim under section 10AA/10B was not justified; deduction as claimed is to be allowed.Allowability of foreign exchange fluctuation loss vis-a -vis capitalization and section 43A - Revisionary jurisdiction under section 263 - Twin conditions for exercise of jurisdiction under section 263: erroneous order and prejudice to revenue - Relevance of enquiry by assessing officer and settled/debatable issues - Whether the Assessing Officer's allowance of foreign exchange fluctuation loss (on ECB utilized for acquisition of assets) was an erroneous order prejudicial to revenue warranting revision under section 263. - HELD THAT: - The Tribunal noted that the assessee utilized ECBs for purchase of assets in India, adopted the option under para 46A of AS-11 in its accounts, and had furnished party-wise workings, tax-audit report entries and detailed responses to specific enquiries raised by the AO under section 142(1). The AO after making enquiries accepted the deduction; the revising officer proceeded on assumptions (for example, sample invoices) without demonstrating that the AO had not made requisite enquiries or had based his conclusion on incorrect facts or law. The Tribunal further observed that the issue was debatable and had been the subject of contrary decisions of co-ordinate benches; where the AO takes a possible view after enquiries, the order cannot be characterised as erroneous for purposes of section 263. The Tribunal also recorded that the revisional proceedings were initiated and concluded in an unduly truncated timeframe, indicating non-application of mind by the CIT. [Paras 6]No case for invoking revisionary jurisdiction under section 263 in respect of allowability/capitalisation of foreign exchange fluctuation loss; the AO's order is sustained.Mark-to-market (MTM) provision on foreign currency swaps - ascertainment and treatment for book profits under section 115JB - Accounting Standards (AS) and mandatory provisions under Companies Act for recognition of provisions - Definition of contingent/unascertained liability for purpose of Explanation to section 115JB(2) - Self-contained code under section 115JB and scope of additions to book profit - Revisionary jurisdiction under section 263 - Whether the provision for MTM losses on foreign currency swaps is a contingent/unascertained liability requiring add-back while computing book profits under section 115JB, and whether the AO's allowance was erroneous and prejudicial to revenue under section 263. - HELD THAT: - The Tribunal analysed the accounting announcement/standards mandating marking-to-market of derivatives, the fact that the provision was reflected in profit and loss account and certified by statutory auditors, and the tax auditor's specific explanations during assessment that the provision was not treated as contingent. The Tribunal held that MTM losses represented an ascertained liability (loss on an onerous contract existing on the balance sheet date) and were not contingent merely because settlement might occur later. Further, section 115JB is a self-contained code prescribing specific additions; where no clause of Explanation 1 requires add-back of such a provision, non-addition in book profit computation was permissible. The AO had examined the matter and taken a conscious view; hence the two cumulative conditions for invoking section 263 were not satisfied. [Paras 7]Revision under section 263 in respect of the MTM provision and computation of book profits under section 115JB is not sustainable; the AO's computation is upheld.Final Conclusion: The Tribunal held that the revisional exercise under section 263 was not justified in respect of the contested matters: the SEZ deduction was correctly treated under Chapter IV and allowed, the foreign exchange fluctuation loss was allowable/correctly examined by the AO and not amenable to revision, and the MTM provision on foreign currency swaps was an ascertained liability not requiring add-back to book profits under section 115JB; the assessee's appeal is allowed. Issues Involved:1. Justification of invoking revisionary jurisdiction under Section 263 of the Income Tax Act.2. Deduction claim under Section 10B of the Income Tax Act.3. Allowability of Foreign Exchange Fluctuation Loss.4. Allowability of Mark to Market Loss on foreign currency swaps under Section 115JB of the Income Tax Act.Issue-Wise Detailed Analysis:1. Justification of Invoking Revisionary Jurisdiction Under Section 263:The primary issue is whether the Principal Commissioner of Income Tax (CIT) was justified in invoking revisionary jurisdiction under Section 263 of the Income Tax Act. The CIT issued a show-cause notice to the assessee on grounds including Foreign Exchange Fluctuation Loss, Provision for Marked to Market Loss on foreign currency swaps, and Exemption under Section 10B of the Act. The CIT concluded that the Assessing Officer's (AO) order was erroneous and prejudicial to the interests of the revenue, thereby setting aside the AO’s order and restoring it for reconsideration.2. Deduction Claim Under Section 10B of the Income Tax Act:The CIT initially questioned the exemption claimed under Section 10B by the assessee. However, it was clarified that the assessee claimed exemption under Section 10AA, not 10B, supported by Form No. 56F. The CIT, agreeing with the Supreme Court's decision in CIT vs. Yokogawa India Ltd, acknowledged that the deduction should be computed at the stage of gross total income under Chapter IV, not Chapter VI. Consequently, the CIT directed the AO to grant the deduction under Section 10AA as claimed by the assessee, thus resolving this issue in favor of the assessee.3. Allowability of Foreign Exchange Fluctuation Loss:The assessee had availed External Commercial Borrowings (ECB) for purchasing assets in India and claimed a deduction for foreign exchange fluctuation loss as per Accounting Standard 11 (AS-11). The CIT contended that since the ECB was for capital assets, the fluctuation loss should be capitalized, not deducted. However, the Tribunal noted that the AO had thoroughly examined the allowability of this loss during the assessment, and the assessee had consistently claimed such losses in the past. The Tribunal held that the AO’s decision was based on proper enquiry and was not erroneous, thus rejecting the CIT’s invocation of Section 263 on this ground.4. Allowability of Mark to Market Loss on Foreign Currency Swaps Under Section 115JB:The assessee made a provision for Mark to Market (MTM) losses on foreign currency swaps, which was not added back while computing book profits under Section 115JB. The CIT argued that MTM losses are contingent liabilities and should be added back. However, the Tribunal highlighted that the provision for MTM losses was made as per the mandatory accounting standards issued by ICAI and certified by statutory auditors, thus constituting an ascertained liability. The Tribunal emphasized that the AO had duly examined this issue during the assessment, and the provision did not fall under any specific items in Explanation 1 to Section 115JB. Therefore, the Tribunal concluded that the AO's order was neither erroneous nor prejudicial to the interests of the revenue, invalidating the CIT’s revisionary jurisdiction under Section 263.Conclusion:The Tribunal found that the CIT's invocation of revisionary jurisdiction under Section 263 was unjustified for all the issues raised. The AO had conducted appropriate enquiries and made decisions based on correct appreciation of facts and law. Consequently, the appeal of the assessee was allowed, and the CIT’s order under Section 263 was set aside.