2022 (12) TMI 432 - AT - Income Tax

Tribunal Confirms PCIT's Order: AO's Assessment Deemed Erroneous for Insufficient Inquiry on Foreign Fluctuation Loss Claim.

The Tribunal upheld the PCIT's order under section 263, concluding that the AO's assessment under section 143(3) was erroneous and prejudicial to the ... Revision u/s 263 - PCIT held assessment framed u/s 143(3) as erroneous in so far prejudicial to the interest of Revenue - assessee has claimed foreign fluctuation loss with respect to foreign currency loan which was converted into the shares of the company - assessee in the revised return of income has claimed such loss as revenue in nature by virtue of the provision of section 43AA which was brought by Finance Act, 2018 with retrospective effect from the Assessment Year 2017-18 i.e. the year under consideration - HELD THAT:- We note that all the necessary details with respect to the deduction claimed by the assessee under the provisions of section 43AA of the Act were available before the AO during the assessment proceedings. The revised return wherein the deduction was claimed was filed before the AO which was duly accepted by the AO in the assessment proceedings after raising the questions to the assessee. This fact can be verified from the question raised in the notice issued u/s 142(1). There was no question raised by the AO to the assessee for the deduction claimed by the assessee in the revised return of income. Thus, in the absence of any inquiry by the AO, we are of the view that it is a case of nonapplication of mind. At the time of hearing, a query was also raised to the AR to justify whether any inquiry has been made by the AO with respect to the claim made by the assessee. AR failed to make any satisfactory reply. Thus it can be safely concluded that there was no enquiry made by the AO during the assessment proceedings despite the fact that all the necessary details were available before the AO. PCIT has made reference to the explanation 2 of section 263 of the Act in holding the assessment order as erroneous in so far prejudicial to the interest of revenue. In this regard we find that the PCIT has not made any reference to the explanation 2 of section 263 of the Act in the notice issued u/s 263 of the Act, thus we are of the view that no reference to the explanation 2 of section 263 of the Act cannot be made while holding the order of the assessment as erroneous in so far prejudicial to the interest of the Revenue. See M/S. SHREEJI PRINTS PVT. LTD. [2021 (9) TMI 108 - SUPREME COURT] Hon’ble Court in the series of cases held that the order is erroneous in so far prejudicial to the interest of revenue if the inquiry has not been conducted during the assessment proceeding - Thus AO has not conducted inquiry with respect to loss claimed by the assessee in the revised return of income by virtue of amended provision of section 43AA of the Act which was made applicable retrospectively. Thus, the ground of appeal of the assessee is not allowed. Issues Involved:1. Whether the assessment framed under section 143(3) of the Income Tax Act, 1961, was erroneous and prejudicial to the interest of the Revenue.2. The treatment of foreign fluctuation loss claimed by the assessee under section 43AA of the Act.Issue-wise Detailed Analysis:1. Erroneous and Prejudicial Assessment:The assessee, a limited company engaged in manufacturing industrial gears coupling and Wind Turbine Generators (WTG), filed its return of income for the Assessment Year 2017-2018. The Principal Commissioner of Income Tax (PCIT) examined the assessment records and found that the assessee had claimed a foreign fluctuation loss of Rs. 1,14,10,638/- related to a foreign currency loan converted into shares. Initially, this loss was disallowed as capital in nature in the original return based on the tax audit report. However, in the revised return, the assessee claimed this loss as revenue in nature under section 43AA of the Act, which was retrospectively applicable from the Assessment Year 2017-18. The PCIT noted that the Assessing Officer (AO) did not verify these facts and allowed the loss without inquiry, proposing to revise the assessment order under section 263 due to non-verification.2. Treatment of Foreign Fluctuation Loss:The assessee responded to the show-cause notice, asserting that the loss was initially treated as capital based on the tax audit report dated 30/11/2017. However, following the amendment by the Finance Act, 2018, the loss was claimed as revenue under section 43AA of the Act in the revised return. The assessee argued that the AO considered the revised return and the Tax Auditor's clarificatory letter during the assessment proceedings. Despite this, the PCIT disagreed, stating that the AO allowed the loss without considering the tax audit report, which specified the loss as capital in nature. The PCIT held the assessment order as erroneous and prejudicial to the interest of revenue due to non-verification.Tribunal's Findings:The Tribunal noted that all necessary details regarding the deduction under section 43AA were available with the AO during the assessment proceedings. The AO accepted the revised return after raising questions to the assessee, but there was no specific inquiry regarding the deduction claimed under section 43AA. The Tribunal observed that the absence of inquiry indicated non-application of mind by the AO. The PCIT's reference to explanation 2 of section 263 in the order was also noted, but it was not mentioned in the show-cause notice, making its application inappropriate.The Tribunal cited precedents, including the judgment in PCIT vs. Shreeji Prints (P.) Ltd., where invoking explanation 2 of section 263 without prior notice was deemed unsustainable. Additionally, the Himachal Pradesh High Court's judgment in Vidharba Singh (HUF) vs. PCIT supported the view that lack of inquiry by the AO renders the assessment order erroneous and prejudicial to the revenue.Conclusion:The Tribunal concluded that the AO failed to conduct an inquiry regarding the loss claimed under section 43AA, leading to non-application of mind. Consequently, the appeal filed by the assessee was dismissed, upholding the PCIT's order under section 263. The assessment framed under section 143(3) was deemed erroneous and prejudicial to the interest of the revenue due to the lack of verification and inquiry by the AO.Order Pronouncement:The appeal was dismissed, and the order was pronounced in the Court on 16/11/2022 at Ahmedabad.