TaxTMI 
TaxTMI 
2013 (2) TMI 387
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....stablish the name and address, genuineness and creditworthiness of the actual subscribers to such FCCBs in terms of Section 68 of the Act. (2) Out of the proceeds of the said FCCB funds, an amount of Rs.5142 crore was given to M/s. Reliance Info Investments Ltd., (RIIL), which was invested by this company on which interest income of Rs.157.95 crores was earned. Such granting of interest free funds would be deemed to be transfer of an asset and in view of the provisions of section 60 to 63 of the Act, the the AO failed to club such interest income with the assessee's total income. (3) The assessee acquired derivative instruments for hedging and recognized losses on the settlement day or the reporting day, whichever is earlier. The said Mark to market losses (MTM) as on the reporting day were notional losses and hence contingent in nature not allowable for set off against the total income. The AO was wrong in allowing such set off. 3. On being show caused as to why the assessment order be not revised in view of the above reasons, the assessee submitted detailed arguments which have been summarized by the ld. CIT in the impugned order. Not conv....
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....s of the subscribers to the three tranches of FCCBs and the corresponding amounts were duly indicated by showing name and address of the subscribers such as DB HK for the FCCB USD 500 million. The details of the bank in which the proceeds of FCCBs were parked in the foreign countries and from where these were transferred to Indian Bank, were also furnished. Along with the said reply, the assessee submitted copies of Offer Memorandum of the FCCBs issued, Global Certificate along with the Registrar's confirmation of entries of the Bondholder in Register, Foreign Inward Remittance Certificate and the details of FCCBs as per the Offer documents and Global Certificates. 5.3. Both the sides are in agreement that the facts and circumstances of the three FCCB issues are similar. For the sake of convenience and on representative basis, the parties chose to take up the FCCB issue of USD 500 million with DB HK as Lead Manager for making their respective submissions. The assessee entered into a Subscription Agreement with DB HK on 21.3.2006, as per which DB HK agreed to subscribe to the FCCB issue of USD 500 million. As per Clause-1 of the Agreement, the assessee agreed to issue the Bonds and....
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....yment and thereafter to hold it for the subscriber, that is, DB HK. Payment of USD497.500 million (net after deduction of expenses and commission) was made by DB HK, that is, the subscriber, on the instructions of the assessee. Copies of the letter authorizing payment and the cross receipt in respect of USD 497,500,000 are available at pages 61 and 62 of PB. The assessee received such payment on 09.05.2006 which was reflected in its books of account. The assessee duly informed the Reserve Bank of India (RBI) about such issues of FCCBs from time to time at the relevant stages. It can be noticed from letter dated 28.3.2005 issued by RBI authorizing the assessee to issue FCCBs under Automatic Approval Route. 5.4. The case of ld. CIT is that the AO should have examined the identity, capacity and credit worthiness of the 'actual subscribers' to the FCCB issue in terms of section 68. In his opinion, the acceptance by the AO of the assessee's contention that the amount was eventually received from DB HK, the subscriber, was not appropriate. Now the question arises as to whether the ld. CIT was justified in holding that the onus u/s 68 of the Act could have been discharged only on proving....
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....which it, in fact, received. The fact that Global Certificate was issued in the name of nominee of DB HK amply proves that it was the obligation of DB HK to pay towards FCCB issue of USD 500 million. The ld. CIT has not referred to any material which indicates that the assessee had details of the 'actual subscribers' at the time of issuance of FCCB or it was obliged to keep such details. No material has been brought to our notice even by the ld. DR to show that at that stage the assessee had any direct contact with the actual subscribers to the FCCB, different from DB HK. It can be observed from the details of the shares issued, on conversion of FCCB at a much later stage, that DB HK itself opted to subscribe for a certain part of the FCCB and issued a portion thereof to other customers who also happen to be international financial institutions only. At the stage of issuance of Bonds, there was privity of contract between the assessee and DB HK on one hand and between DB HK and actual subscribers on the other. It was the duty of DB HK to eventually get the shares allotted or refund granted to itself and other international financial institutions at the relevant point of time. It wa....
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.... of DB HK, who eventually partly subscribed to the Bonds itself and partly issued these to the international financial institutions. In view of these facts, we are of the considered opinion that ld. CIT was not justified in putting obligation on the assessee to prove the identity, capacity and creditworthiness of the actual subscribers, which fact was beyond its reach at the relevant time. We, therefore, do not approve the stand taken by ld. CIT on this issue. 6.1. The learned Departmental Representative lent support to the impugned order from one more angle. While referring to a Circular issued by Reserve Bank of India dated 02.07.2012 with subject matter "Master circular on educational, commercial borrowings and trade credits", she submitted that the Assessing Officer miserably failed to examine the factum of the compliance or otherwise of the RBI Guidelines in connection with its FCCB issue. This, in her opinion, also constituted a solid defect making the assessment order erroneous and also prejudicial to the interests of the revenue. 6.2. A perusal of the impugned order indicates the conclusion drawn by the learned CIT on this aspect is contained in para 4.3.5. He opined that....
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....e appeal and to set aside the order of the CIT. The Tribunal cannot uphold the order of the CIT on any other ground which, in its opinion, was available to the CIT as well but was not relied upon by CIT in his order. It further held that if the tribunal is allowed to find out the grounds available to the CIT to pass an order u/s 263(1), then it will amount to sharing of the exclusive jurisdiction vesting in the CIT, which is not warranted under the Act. The nutshell of this judgment is that the tribunal in an appeal against revision order cannot substitute the grounds which the Commissioner did not find proper to form the basis of his order. This judgment has been followed by the Hon'ble Kerala High Court in the case of CIT v. Chandrika Educational Trust [(1994) 207 ITR 108 (Ker.)]. In view of the foregoing precedents it is abundantly clear that the Tribunal can vet only the reasons recorded by the CIT for determining as to whether the order u/s 263 is sustainable or not. 6.4. It is out of place for the ld. DR to rely on the RBI guidelines in the present proceedings for bringing home the point that the A.O. did not examine the aspect of compliance of such guidelines. It has been n....
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.... the assessment order erroneous and prejudicial to the interests of the revenue. 7.2. We have heard the rival submissions and perused the relevant material on record. In this regard, it is observed that the AO enquired about this aspect of the matter during the course of the assessment proceedings. The assessee, vide its letter dated 20.5.2009 addressed to the AO, explained that out of the proceeds of the FCCB, a sum of Rs.1,343 crore was utilized for capital expenditure and the balance amount of Rs.5,142 crore was temporarily held in various nationalized banks by RIIL, a wholly owned subsidiary of the assessee company. The assessee further intimated that RIIL earned interest income of Rs.157.95 crore on the said fixed deposit and accounted for the same in its Profit and loss account. Copy of accounts of RIIL for the year ending 31.3.2007 was also furnished to the AO with further details of fixed deposits given through Annexures 4 & 5 of assessee's letter. 7.3. Now we turn to the applicability of the provisions of sections 60 to 63 to the present factual position. Firstly, it is relevant to note that the ld. CIT has referred to sections 60 to 63 in a composite manner without part....
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....fer is always present. If the provision of re-transfer is obliterated in a money transaction, then it becomes a case of gift. In every case of loan, she submitted, that the provisions of section 63(a)(i) will be attracted to make it a case of revocable transfer and consequently the interest income earned by the borrower shall become eligible for clubbing in the hands of the lender. On a pointed query, the ld. DR failed to draw our attention towards any precedent in support of her contention. 7.5. Though, ex facie, we find some force in the submissions advanced on behalf of the Revenue in this regard, we equally find that the Ahmedabad Bench of the Tribunal in the case of ITO v. Nalinbhai M.Shah [(2000) 93 TTJ (Ahd) 107] has held that income earned by family members of the assessee by employing interest free loan advanced to them by the assessee out of his funds cannot be made subject matter of addition u/s 60. In the light of the above, it is clear that the question as to whether income earned by the borrower from the interest free loan advanced by the lender be clubbed in the hands of the lender, is definitely debatable and not conclusive. Suffice to say, we are dealing with proc....
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....ss on foreign exchange derivatives which was included by the assessee under the head Foreign currency exchange fluctuation loss/gain (net) in Schedule O, that is, Financial charges. The said MTM loss as on the reporting date was held by the ld. CIT to be only notional and contingent in nature not eligible for set off against taxable income. In reaching this conclusion, the ld. CIT took assistance from CBDT Instruction No.3 /2010, which provides that no benefit of adjustment of income or gain should be given against such losses. He noticed that it was not clear, in the absence of details of gains amounting to Rs.21.89 crores, that how much component was of loss set off against the income. As this issue was not examined by the AO, the ld. CIT held the assessment order to be erroneous and also prejudicial to the interests of the revenue. 8.2. We have heard the rival submissions and perused the relevant material on record. Mark-to-market or fair value accounting refers to accounting for the "fair value" of an asset or liability based on the current market value on the last business day of the year, and any gain or loss is taken into account for that year. We find that the AO examined ....
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....on of said liability at closing rate should be recognized in profit and loss account for reporting period. In para 21 of the report, the Hon'ble Supreme Court summed up its conclusion by observing that in order to find out if an expenditure is deductible certain factors, inter alia, the following should be taken into consideration: "whether the assessee has been consistent and definite in making entries in the account book in respect of losses and gains; whether the method adopted by the assessee for making entries in the books of account in respect of losses and gains is as per nationally accepted Accounting Standards." From the judgment of the Hon'ble Summit Court it can be clearly deduced that unrealized loss due to foreign exchange fluctuation in foreign currency transactions on revenue items as on the last date of the accounting year is deductible. A further important factor which needs consideration is that the same treatment needs to be given to losses as well as gains accruing to the assessee on account of fluctuations in foreign currency rate as at the end of the year. 8.4. Reverting to the facts of the instant case, it is seen that the assessee showed net 'Unrealised For....
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....count of forex derivatives. This fact has also been admitted by ld CIT in para 6.3 of the impugned order. When there is a net gain of Rs.21.89 crores, which the assessee included in its total income, we fail to appreciate the reason for charging the gross gain of forex derivatives to tax but ignoring the loss on account of such forex derivatives. As the ultimate net figure on account of forex derivatives in the given facts and circumstances of the case is that of gain which was offered for taxation, it is manifest that the assessment order in accepting said figure of gain as chargeable to tax, cannot be described as prejudicial to the interests of the revenue. We are, therefore, unable to countenance the view canvassed in the impugned order on this issue. 9. Now we shall espouse the cases relied by the ld. DR to accentuate on the validity of the revision proceedings. First in this line is the order passed by the Mumbai Bench of the Tribunal in the case of Arvee International v. Addl.CIT [(2006) 101 ITD 495 (Mum.)]. In this case a loss return filed by the assessee was accepted in the assessment completed u/s 143(3). The CIT found that since the value of import licences had already ....
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....nd to conduct proper inquiry as regards the application of provisions of section 72. The Tribunal quashed the order u/s 263 by holding that the A.O. adopted plausible view. Setting aside the order passed by the Tribunal, the Hon'ble Delhi High Court held that the A.O. failed to apply his mind to issue as to whether dividend income could be given character of business income for purposes of set off and there was no question of a plausible view existing on this issue. From the above narration of facts of the case before the Hon'ble Delhi High Court, it is obvious that the Assessing Officer wrongly allowed set off of the dividend income falling under the head 'Income from other sources' against the brought forward business loss, which is not possible as per the provisions under the Act. When we revert to the facts of the instant case, it is noticed that the Assessing Officer did not commit any mistake. All the three issues taken note of by the learned CIT in the impugned order are such on which either the A.O. took the correct view or chose to follow one of the possible views. It is, therefore, clear that the said judgment is also of no assistance to buttress the case of the Revenue. ....
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.... High Court. In CIT v. Gabrial India Ltd. [(1993) 203 ITR 108 (Bom.)] the assessee claimed deduction of a particular sum described as "plant re-lay-out expenses". On a query by the A.O., it was stated by the assessee that this expenditure was incurred in connection with the merger of two existing plants. The case of the assessee was that as the lay out of two plants was not conducive, the management decided to merge these two plants and re-lay-out the same according to the flow of operations conducive to more production. Accordingly the assessee claimed that it was deductible business expenditure. The A.O. accepted the explanation and allowed the deduction. The CIT issued notice u/s 263 of the Act on the ground that the order of the Assessing Officer was erroneous and prejudicial to the interests of revenue on the question of allowance of deduction of the expenditure. The expenditure was capital in nature in the opinion of the CIT. The assessee appeared before the CIT and explained its position, who turned down the assessee's contention by observing that the order of the A.O. did not contain any discussion on the allowability of this claim. The assessee's view point was accepted by....
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....a certain level. The CIT, on verification of the records, observed that some expenses having bearing on the profits of the units eligible for the above deductions, were not considered for allocation. As such the assessment order was revised. The Tribunal set aside the order u/s 263. Reversing the order of the Tribunal, the Hon'ble Bombay High Court, inter alia, noticed that though the A.O. had in letter dated 30.01.2001 sought an explanation as to why capital expenditure on research and development and on scientific capital expenditure should not be allocated, the assessee's reply contained virtually no material or details to establish that there was no direct nexus between the expenditure incurred under the head in question and the business of the undertakings with reference to which the deductions were claimed. It was noticed that during the course of proceedings u/s 263 the assessee came out with another explanation that research was not undertaken at the units, but that the products which were being manufactured by the units were those in respect of which the company already possessed the requisite know-how. In reaching the conclusion that the assessment order was both erroneou....
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....order was passed without application of mind. On all other aspects, the judgment in Gabriel India Ltd.(supra) stands undiluted and still holds precedent value. Going by another aspect dealt with in the case of Gabriel India Ltd. (supra) as a necessary condition for invoking the power u/s 263, we find that the CIT must in the first instance show as to how the assessment order was erroneous on a particular issue. It follows that where the AO conducted enquiry on a particular matter, which is evident either from the assessment order or the assessment record, revision is not possible unless the CIT shows the assessment order to be erroneous. 15. On a bird's eye view of the the ratio decidendi of the above judgments, both for and against the exercise of power u/s 263, the following legal propositions are discernible :- 15.1. While finalizing assessment, it is the duty of the AO to examine each and every aspect of the return except tiny or inconsequential items. However, it is not necessary to incorporate all the aspects examined by him in the assessment order. An assessment order ordinarily contains discussion on the aspects with which the AO does not agree with the assessee and propo....
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....dly assume authority u/s 263. 15.2.i. Then comes the category of cases, in which the AO made enquiry on all the relevant aspects of the assessment and the assessee also furnished the required details, but the AO failed to reach a logical conclusion. Such cases enable the CIT to validly assume power u/s 263 of the Act. This would embrace two broader categories viz., first, where the AO did not appreciate the facts in right perspective; and second, where he failed to correctly apply the relevant legal provisions to the factual position obtaining before him. First category, being the failure to appreciate the facts correctly could contemplate various situations, such as, (a) Where full information, as demanded, was furnished by the assessee but the AO failed to take note of certain glaring inconsistencies apparent to naked eye in such information. For example, where the AO demanded balance confirmation of a party, which was made available by the assessee, but the AO failed to notice that the balance as confirmed by such party did not tally with the balance shown by the assessee in its books of account and further the assessee failed to submit any reconciliation. A....
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....er case, the CIT can set aside the assessment order and ask the AO to redo the assessment in the light of the observations made by him in showing the inaccuracy of the AO's action. However, in both the cases it is of paramount importance for the CIT to show that the assessment order is wrong in categories of cases mentioned in 15.2.i and ii. above. He cannot set aside the assessment in such cases by merely mentioning that the possibility of something wrong with the assessment order cannot be ruled out without showing as to where the AO went off the track. In case the CIT fails to point out the mistake of the AO in such categories of the cases, no revision is possible. The assessee escaped revision in Gabrial India Ltd.(supra) because the AO had conducted enquiry on the aspect taken note of in the revision but the CIT could not point out as to how the assessment order was erroneous on this issue. It goes without saying that an assessment order can be construed as wrong only where the AO adopts a view which is not sustainable in law or, in other words, is not a possible view. 16. Adverting to the facts of the instant case, we find that the Assessing Officer made enquiry about the ab....