2020 (7) TMI 37 - AT - Income Tax

Tribunal directs AO to re-examine tax issues independently

The Tribunal partially allowed the appeal, directing the Assessing Officer (AO) to re-examine two issues independently. Firstly, the AO must determine the ... Revision under section 263 - computation of book profit under Explanation 1(f) to section 115JB - disallowance under section 14A read with Rule 8D - treatment of foreign exchange fluctuation loss as capital or revenue - application of Accounting Standards for restatement of foreign currency loansComputation of book profit under Explanation 1(f) to section 115JB - disallowance under section 14A read with Rule 8D - revision under section 263 - Whether the assessment order was erroneous and prejudicial to the interests of revenue for failing to apply clause (f) of Explanation 1 to section 115JB in computing book profit, and whether the Pr. CIT was justified in exercising powers under section 263 on that ground. - HELD THAT: - The assessing officer accepted the assessee's book profit declared under section 115JB without examining applicability of clause (f) of Explanation 1, which requires adding back expenditure relatable to exempt income to net profit for computing book profit. Although a notional disallowance under section 14A read with Rule 8D had been worked out while computing normal income, the Tribunal observed that clause (f) requires computation from the profit and loss account and cannot be mechanically imported from the section 14A computation. Failure to consider clause (f) thus amounted to omission to apply a provision of the Act and rendered the assessment order erroneous within the scope of section 263, but the correct course is to have the assessing officer independently examine and compute any addition under clause (f) from the books of account without reliance on the section 14A quantification.The assessment order was rendered erroneous for omission to examine clause (f) of Explanation 1 to section 115JB; the Tribunal set aside the Pr. CIT's view that section 14A computation must be adopted and directed the AO to independently examine and compute any addition under clause (f) with opportunity to the assessee.Treatment of foreign exchange fluctuation loss as capital or revenue - application of Accounting Standards for restatement of foreign currency loans - revision under section 263 - Whether the assessment order was erroneous and prejudicial to revenue for not properly examining the claim of foreign exchange fluctuation loss on restatement of outstanding foreign currency loans and whether that loss is allowable as revenue expenditure or requires different treatment. - HELD THAT: - The assessee had restated outstanding foreign currency loans at year end in accordance with accounting standards, resulting in a marked-to-market loss which was capitalized in the books but claimed as deduction for tax purposes. The AO accepted the assessee's explanations on record but did not examine whether the loss was of capital or revenue nature, or whether section 43A applied. The Pr. CIT treated the marked-to-market loss as notional and disallowed it, but the Tribunal found that the authorities cited do not uniformly support the Pr. CIT's categorical view. Given that the question of classification (capital v. revenue) and the effect of accounting treatment are factual and legal questions that the AO had not addressed, the Tribunal held that the assessment is erroneous for lack of proper examination and remitted the matter to the AO for fresh inquiry and decision on merits, directing the AO to consider relevant accounting treatment and precedents but without being influenced by the Pr. CIT's views.The Pr. CIT was justified in setting aside the assessment for want of proper examination, but the Tribunal rejected the Pr. CIT's categorical conclusion that the marked-to-market loss is notional and not capitalizable; the matter is remitted to the AO for fresh examination on whether the loss is capital or revenue and for decision in accordance with law.Final Conclusion: The Tribunal partly allowed the appeal: (i) directed the AO to independently examine and compute any addition under clause (f) of Explanation 1 to section 115JB for assessment year: 2013-14, without importing the section 14A computation; and (ii) upheld restoration of the foreign exchange fluctuation claim to the file of the AO for fresh factual and legal adjudication on whether the loss is capital or revenue, rejecting the Pr. CIT's broad view that the loss is merely notional. Issues Involved:1. Addition under Explanation-1(f) to Section 115JB of the IT Act.2. Deduction of foreign exchange fluctuation loss.Issue-wise Detailed Analysis:1. Addition under Explanation-1(f) to Section 115JB of the IT Act:The assessee challenged the revision order passed by the Principal Commissioner of Income Tax (Pr.CIT) under Section 263 of the IT Act for the assessment year 2013-14. The Pr.CIT found the assessment order erroneous and prejudicial to the interests of revenue, particularly for not adding the disallowance under Section 14A to the book profit as per Explanation-1(f) to Section 115JB. The assessee argued that no exempt income was earned, and thus, no expenditure related to such income was incurred, making Explanation-1(f) inapplicable. The Pr.CIT disagreed, stating that the amount disallowed under Section 14A should be added to the book profit. The Tribunal, however, noted that the Special Bench of the ITAT in the case of Vireet Investments (P) Ltd had held that disallowance under Section 14A for normal provisions cannot be imported for book profit computation under Section 115JB. The Tribunal directed the AO to independently examine and compute the addition under Explanation-1(f) without regard to Section 14A.2. Deduction of Foreign Exchange Fluctuation Loss:The second issue was the assessee's claim of a Rs. 22.93 crore foreign exchange fluctuation loss on the restatement of outstanding foreign currency loans. The assessee argued that the loans were converted to US Dollar loans for lower interest rates and that the loss, though capitalized in books, should be deductible as revenue expenditure. The Pr.CIT disagreed, noting that the loss was not debited to the Profit & Loss account and cited the Supreme Court's decision in Woodward Governor India Pvt. Ltd, which allows such losses as revenue expenditure only if debited to the P&L account. The Tribunal found that the AO did not properly examine whether the loss was on capital or revenue account, as guided by the Supreme Court in Sutlej Cotton Mills. The Tribunal upheld the Pr.CIT's decision to restore the issue to the AO for re-examination but set aside the Pr.CIT's view that marked-to-market losses are notional and thus not deductible.Conclusion:The Tribunal partly allowed the appeal, directing the AO to re-examine both issues independently, without being influenced by the Pr.CIT's views. The AO must determine the applicability of Explanation-1(f) to Section 115JB and the nature of the foreign exchange fluctuation loss, ensuring compliance with relevant legal precedents and accounting standards.