Income Tax Appellate Tribunal - Mumbai
Cnp Cotton , Mumbai vs Principal Commissioner Of Income Tax - ... on 26 December, 2018
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ITA No. 933/Mum/2018 A.Y. 2014-15
M/s CNP Cotton Vs. Pr. CIT-33
IN THE INCOME TAX APPELLATE TRIBUNAL
"C" Bench, Mumbai
Before Shri Shamim Yahya, Accountant Member
and Shri Ravish Sood, Judicial Member
ITA No. 933/Mum/2018
(Assessment Year: 2014-15)
M/s CNP Cotton Pr. CIT-33
C-9 Plot No. 811, C-12, Room No. 501,
Atharva CHS, Sector 8, Vs. Pratyakshakar Bhavan,
Charkop Kandivali (W) Bandra Kurla Complex, Bandra (E),
Mumbai-400067 Mumbai-400051
PAN - AAIFC5376P
(Appellant) (Respondent)
Appellant by: Shri Nirav Vora, A.R.
Respondent by: Shri Abi Rama Kartikiyen, D.R
Date of Hearing: 19.12.2018
Date of Pronouncement: 26.12.2018
ORDER
PER RAVISH SOOD, JM
The present appeal filed by the assessee is directed against the order passed by the Principal Commissioner of Income Tax-33, Mumbai (for short „Pr. CIT‟) under Sec. 263 of the Income Tax Act 1961 (for short „I.T. Act‟), dated 16.01.2018. The assessee assailing the order of the Pr. CIT has raised before us the following grounds of appeal:
"1. The Hon'ble Pr. Commissioner of Income Tax -33, Mumbai had erred in initiating revisionary proceedings u/s 263 of the Income T ax Ac t, 1961 on the g round that Assessing Officer had passed assessment order which is erroneous and prejudicial to the Interest of the revenue without appreciating the fact that he Ld. AO had P a g e |2 ITA No. 933/Mum/2018 A.Y. 2014-15 M/s CNP Cotton Vs. Pr. CIT-33 verified all the details during the course of assessment proceedings with minutest details.
2. The Hon'ble Pr. Commissioner 6f Income Tax -33, Mumbai had erred in law and in facts by pas s ing order u/s 263 of the Inco me T ax Ac t, 1961 d ire c ting AO to add Rs. 54, 01, 605/- on account of foreign exchange conversion loss without appreciating the f act as pe r Acco un ting S tand ard -11, th e assessee f irm h ad re po r te d mo ne tary ite ms at the closing rate prevailing on the balance sheet date and claimed loss on foreign exchang e conversion but in subsequent year i.e . A.Y 2015-16 w h e n a c t u a l r e c e i p t / p ay men t has been made it had als o reporte d f ore ig n exchange g ain on such transaction. Hence the entire act of again making addition in A.Y.2014-15 again would amount to double taxation.
The appellant craves leave to add to and/or amend and/or delete and/or modif y and 1 or aforesaid grounds of appeal as and when the occasion demands."
2. Briefly stated, the assessee firm which is engaged in the business of trading in raw cotton and other agro commodities had e-filed its return of income for A.Y. 2014-15 on 30.09.2014, declaring total income at Rs.85,81,060/-.The A.O framed assessment under Sec.143(3) on 20.12.2016 determining the total income of the assessee at Rs.85,81,060/-.
3. Subsequently, the Pr. CIT called for the records of the assessee pertaining to the assessment proceedings for the year under consideration i.e A.Y. 2014-15. It was observed by the Pr. CIT that the assessee firm had paid advance to M/s Cashcot Industries Pte. Ltd., Singapore for purchase of cotton. It was noticed by him that the Opening balance of M/s Cashcot Industries Pte. Ltd. in the books of accounts of the assessee on 01.04.2013 stood reflected at Rs.54,22,431/-(Cr.). Further, an amount of Rs.22,59,43,898/- was paid by the assessee during the year to the said concern viz. M/s Cashcot Industries. It was observed by the Pr. CIT that pursuant to repayment of Rs.4,69,21,270/- by M/s Cashcot Industries Pte. Ltd. during the year the balance of the said concern in the books of account of the assessee stood reflected at Rs.17,36,00,197/-(Dr). On a perusal of the account of M/s Cashcot Industries Pte. Ltd. it was observed by him that the assessee had credited the account of the said party by an amount of Rs.8,04,390/- on 02.12.2013 and Rs.71,12,078/- on 31.03.2014 on P a g e |3 ITA No. 933/Mum/2018 A.Y. 2014-15 M/s CNP Cotton Vs. Pr. CIT-33 account of the fluctuation gain/loss. The Pr. CIT observed that the A.O had failed to verify as to why the aforementioned credit entries were made in the account of the said party alongwith its impact on the profit earned by the assessee during the year. The Pr. CIT before issuing a notice under Sec.263 of the I.T Act called for a report from the A.O about the aforesaid transactions of the assessee with M/s Cashcot Industries Pte. Ltd. The A.O in his reply submitted that the assessee had in the course of the assessment proceedings clarified that it had paid advance to M/s Cashcot Industries Pte. Ltd., Singapore for purchase of cotton, which transaction on account of certain legal constraints on the import license of the assessee firm did not crystallize and the import of cotton could not be made, therein resulting to refund of the said amount. It was submitted by the A.O that since the entire money was advanced to M/s Cashcot Industries Pte. Ltd. in convertible foreign exchange, hence the assessee had recognized the foreign exchange gain/loss in its Profit & loss account. The Pr. CIT after deliberating on the explanation of the A.O did not find favour with his explanation. The Pr. CIT was of the view that the A.O on the basis of incorrect assumption of facts and misconceiving the law laid down by the Hon‟ble Supreme Court in the case of CIT Vs. Woodward Governor India (P) Ltd. (2009) 312 ITR 0254 (SC), had without application of mind accepted the foreign exchange loss of monies advanced by the assessee to M/s Cashcot Industries Pte. Ltd. and accepted the debit on the said count in the profit and loss account of the assessee. The Pr. CIT observing that as the acceptance of the returned income of the assessee by the A.O without making any inquiry in context of the issue under consideration had rendered his order both erroneous and prejudicial to the interest of the revenue, therefore, invoked his revisional jurisdiction and issued a „Show Cause‟ notice (for short „SCN‟) and called upon the assessee to explain as to why the order passed by the A.O under Sec.143(3), dated 20.12.2016 may not be revised.
4. The assessee in the course of the revisional proceedings assailed the validity of assumption of jurisdiction by the Pr. CITunder Sec. 263 on the ground that in the absence of a cumulative satisfaction of both the P a g e |4 ITA No. 933/Mum/2018 A.Y. 2014-15 M/s CNP Cotton Vs. Pr. CIT-33 conditions as contemplated under Sec.263 of the I.T. Act, viz. (i) the order should be erroneous; and (ii) it should be prejudicial to the interest of the revenue, the assessment framed by the A.O was not amenable for revision by the Pr. CIT. It was the contention of the assessee that as the A.O had called for an explanation of the assessee in context of the foreign exchange loss, and only after perusing its reply had arrived at a possible and a plausible view, therefore, the very exercise of jurisdiction by the Pr. CIT under Sec.263 was ousted. However, the Pr.CIT after deliberating on the explanation of the assessee was not persuaded to subscribe to the same. It was observed by the Pr. CIT that the Hon‟ble Supreme Court in the case of Woodward Governor India (P) Ltd.. (supra) observing that valuation is a part of the accounting system, had therein concluded that the business loss emerging therefrom was deductible on the basis of ordinary principles of commercial accounting under Sec. 37(1) of the I.T Act. It was observed by the Pr. CIT that the Central Government had made Accounting Standard-11 (AS-11), which contemplated the accounting treatment for the effects of changes in foreign exchange rates, as mandatory. The Pr. CIT observed that in case of revenue items falling under Sec.37(1), Para-9 of AS-11 contemplates that the exchange differences arising on foreign currency transactions have to be recognised as income or as expense in the period in which they arise, with the exception of exchange differences arising on repayment of liabilities incurred for the purpose of acquiring „fixed assets‟, as stated in Para 10 & Para 11 of AS-11, which were governed by Sec.43A of the I.T. Act. The Pr. CIT was of the view that an assessee has to report the outstanding amount payable or receivable relating to import or export of raw materials using closing rate of exchange. Any difference, loss or gain, arising on conversion of the said sum payable or receivable at the closing rate was to be recognized in the profit and loss account for the reporting period. However, the Pr. CIT observed that as per the books of accounts of the assessee the amount outstanding in the account of M/s Cashcot Industries Pte. Ltd. was on account of monies advanced by the assessee to the said concern to buy cotton, hence it was not a sum consequential to import of cotton. The Pr. CIT was of the view that as the assessee had given advance P a g e |5 ITA No. 933/Mum/2018 A.Y. 2014-15 M/s CNP Cotton Vs. Pr. CIT-33 to import cotton and what it would receive was cotton and not amount, therefore, it could not be said that the aforesaid amount was receivable by the assessee. It was further observed by him that in case of business transactions of revenue account unless the amount is not receivable or payable, the foreign exchange gain or loss could not be credited or debited to the profit and loss account. The Pr. CIT observed that though in the case of the assessee the cotton was neither imported from nor exported to M/s Cashcot Industries Pte. Ltd., however, neither in the assessment proceedings before the A.O nor during the course of the revision proceedings before him the assessee had represented that it was a known fact that the import of cotton was not to take place. It was thus observed by the Pr. CIT that in absence of specific knowledge that money advanced by the assessee would be received back, the assessee could not have debited the profit and loss account with foreign exchange conversion loss on the basis of subsequent years developments. On the basis of his aforesaid observations the Pr. CIT concluded that the loss of Rs.54,01,605/- which was debited by the assessee in its Profit and loss account for the year under consideration i.e A.Y 2014-15 was not allowable as a deduction in the hands of the assessee.
5. Apart therefrom, it was observed by the Pr. CIT that the parties from whom advances were stated by the assessee to have been received during the year viz. (i) M/s K.P. Cotton (Rs.14.18 crore); M/s Prakash Cotton (Rs.15.23 crore); and M/s Bhadresh Cotton (Rs.28.15 crore) had not been examined by the A.O, and as such the genuineness of the transaction of having received advances from the said parties had remained unverified.
6. The Pr. CIT on the basis of his aforesaid deliberations directed the A.O to add the amount of Rs.54,01,605/- on account of disallowed foreign exchange conversion loss claimed by the assessee and allowed by him in the assessment framed by him under Sec. 143(3), dated 20.12.2016. Apart therefrom, the Pr. CIT observed that as the assessee was well aware that the foreign exchange conversion loss in respect of advances given to M/s Cashcot Industries Pte. Ltd. were not allowable as a deduction, had however P a g e |6 ITA No. 933/Mum/2018 A.Y. 2014-15 M/s CNP Cotton Vs. Pr. CIT-33 still claimed the same as a deduction in its Profit and loss account, therefore, directed the A.O to initiate penalty proceedings under Sec.271(1)(c) of the I.T Act for concealing its particulars of income in the said context. Further, in respect of the advances which were claimed by the assessee to have been received from the aforementioned parties, viz. (i) M/s K.P. Cotton; (ii) M/s Prakash Cotton; and (iii). M/s Bhadresh Cotton, the A.O was directed to pass on the information to the A.O‟s concerned so that the genuineness of the source of advances which were made to the assessee could be verified. In the backdrop of his aforesaid observations the Pr. CIT revised the assessment order passed by the A.O under Sec.143(3), dated 20.12.2016.
7. The assessee being aggrieved with the order of the Pr. CIT has carried the matter in appeal before us. The ld. Authorized Representative (for short „A.R‟) for the assessee submitted that as the A.O while framing the assessment had arrived at a possible and a plausible view in context of the issue under consideration, therefore, the Pr.CIT had exceeded his jurisdiction and had wrongly revised the order passed by him under Sec.143(3), dated 20.12.2016. The ld. A.R submitted that though the assessee as per AS-11 had on the reporting date i.e 31.03.2014 recognized the loss on account of fluctuation in the foreign exchange and claimed the same as a deduction in its Profit & loss a/c for the year under consideration i.e A.Y 2014-15, however in the succeeding year the gain arising therefrom had been brought to tax. In sum and substance, it was the contention of the ld. A.R that as the gain on account of foreign exchange fluctuation had been subjected to tax in the succeeding year, therefore, the order passed by the A.O allowing the loss on account fluctuation in foreign exchange had not caused any prejudice to the revenue. The ld. A.R taking support from his aforesaid contention submitted that as the order passed by the A.O was neither erroneous nor prejudicial to the interest of the revenue, therefore, the Pr. CIT stood divested of his jurisdiction to have revised the order passed by him under Sec.143(3) of the I.T. Act. Per contra, the ld. Departmental Representative (for short „A.R‟) relied on the order passed by the Pr. CIT.
P a g e |7 ITA No. 933/Mum/2018 A.Y. 2014-15 M/s CNP Cotton Vs. Pr. CIT-33
8. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record. The issue involved in the present appeal lies in a narrow compass, that as to whether the loss on account of fluctuation in foreign currency amount advanced by the assessee to a foreign party viz. M/s Cashcot Industries Pte. Ltd., Singapore for import of cotton was rightly booked by the assessee in its Profit and loss account for the year under consideration, keeping in view the fact that the said import transaction did not fructify and the amount was refunded to the assessee in the succeeding year. We have deliberated at length on the issue under consideration and are unable to persuade ourselves to subscribe to the aforesaid claim of loss on account of fluctuation of foreign currency raised by the assessee in respect of the amount that was advanced by it for import of cotton to a foreign party viz. M/s Cashcot Industries Pte. Ltd., Singapore. We are of the considered view that the Hon‟ble Supreme Court in the case of CIT Vs. Woodward Governor India (P) Ltd. (2009) 312 ITR 0254 (SC) had observed that a loss suffered by an assessee in respect of a revenue liability on account of exchange difference as on the date of the „balance sheet‟ is an item of expenditure allowable as a deduction under Sec.37(1) in the year of accrual. Apart therefrom, it was also observed that in case of increase or decrease in liability for repayment of foreign loan interest on acquisition of an asset, the figure of actual cost of such asset would consequentially be increased or decreased on account of fluctuation in the rate of exchange in terms of under Sec.43A of the I.T. Act. The Hon‟ble Apex Court in its aforesaid judgement while deliberating on the scope and gamut of Accounting Standard-11, had observed that the words "monetary item" would take within its sweep foreign currency notes, balance in bank accounts denominated in a foreign currency, and receivable/payables and loans denominated in a foreign currency, as well as sundry creditors, which all have to be valued at the closing rate under AS-11. As per Para 9 of AS-11, in case of revenue items falling under Sec. 37(1), the exchange difference arising in respect of foreign currency transactions have to be recognized as income or as an expense in the period in which they arise. It was observed P a g e |8 ITA No. 933/Mum/2018 A.Y. 2014-15 M/s CNP Cotton Vs. Pr. CIT-33 that AS-11 stipulates that the effect of changes in exchange rate vis-a-vis monetary items denominated in a foreign currency have to be taken into account for giving accounting treatment on the date of the „balance sheet‟. Resultantly, any difference, loss or gain arising on conversion of the said liability on the closing rate should be recognized in the Profit and loss account for the reporting period. In the backdrop of the aforesaid observations as regards the scope and gamut of AS-11, we shall now deliberate upon the facts of the case before us. Admittedly, the assessee had advanced an amount to M/s Cashcot Industries Pte. Ltd., Singapore for importing cotton. As observed by the Pr. CIT, it was not a sum consequential to import of cotton. It was observed by the Pr. CIT that what the assessee would receive against the amount advanced was cotton and not any amount. In our considered view the Pr. CIT had rightly observed that no amount was receivable by the assessee as on the date of the „balance sheet‟ i.e on. 31.03.2014. We are persuaded to subscribe to the view taken by the Pr. CIT that in case of business transactions of revenue account unless the amount is receivable or payable the foreign exchange gain or loss cannot be credited or debited to the Profit and loss account. In the case before us, though it is a matter of fact that the assessee had neither imported nor exported cotton from or to M/s Cashcot Industries Pte. Ltd., but then at the same time we cannot also remain oblivious of the fact that the assessee had neither in the assessment proceedings before the A.O nor in the course of the revision proceedings before the Pr. CIT ever represented that it was a known fact that the import of cotton against the aforementioned amount so advanced was not to take place. We find ourselves to be in agreement with the view taken by the Pr. CIT, that in the absence of specific knowledge that the money advanced by the assessee for import of cotton to the aforementioned party, viz. M/s Cashcot Industries Pte Ltd., Singapore would be received back, the assessee on the basis of subsequent years developments could not have debited its Profit and loss account by the amount of loss on account of fluctuation of foreign exchange on the date of drawing of „balance sheet‟ for the year under consideration i.e. on 31.03.2014. We thus are of the considered view that as the amount P a g e |9 ITA No. 933/Mum/2018 A.Y. 2014-15 M/s CNP Cotton Vs. Pr. CIT-33 advanced by the assessee to M/s Cashcot Industries Pte. Ltd., Singapore was for import of cotton and not in the nature of a simpliciter advance receivable or a loan denominated in a foreign currency to the aforementioned party, thus the same did not fall within the purview of "monetary items" as defined in Para 2 of AS-11, and resultantly the loss on fluctuation of foreign currency could not have been debited by the assessee in its profit and loss account on 31.03.2014. We thus finding ourselves to be in agreement with the view taken by the Pr. CIT, therein conclude that the assessee was not entitled to have debited the loss of Rs.54,01,605/- on account of fluctuation in foreign exchange in its profit and loss account for the year under consideration. The order passed by the Pr. CIT in context of the issue under consideration is upheld. However, we do not find ourselves to be in agreement with the observations of the Pr. CIT that the aforesaid claim of loss on fluctuation of foreign exchange by the assessee would justify initiation of penalty under Sec. 271(1)(c) for alleged concealment of income. In our considered view the assessee had furnished complete details as regards the aforesaid claim of loss that was raised in its „return of income‟. Admittedly, the claim of deduction raised by the assessee is not found to be in order and is liable to be dislodged. However, we are of a strong conviction that the said claim of deduction of loss on account of foreign exchange fluctuation on not being found to be sustainable in law, by itself, will not amount to levy of penalty under s. 271(1)(c). Our aforesaid view is fortified by the judgment of the Hon'ble Supreme Court in the case of CIT Vs. Reliance Petroproducts (P) Ltd. (2010) 322 ITR 158 (SC). We thus in terms of our aforesaid observations vacate the direction of the Pr. CIT that penalty proceedings under Sec. 271(1)(c) be initiated in the hands of the assessee.
9. We are further of the considered view that the Pr. CIT observing that as the A.O in the course of the assessment proceedings had failed to verify the genuineness and veracity of the advances that were received by the assessee from three parties, viz. (i) M/s K.P. Cotton: Rs.14.18 crore; (ii) M/s Prakash Cotton: Rs.15.23 crore; and (iii) M/s Bhadresh Cotton: Rs. 28.15 P a g e | 10 ITA No. 933/Mum/2018 A.Y. 2014-15 M/s CNP Cotton Vs. Pr. CIT-33 crore, therefore, the order passed by him without applying his mind and verifying the genuineness of the said respective transactions had rendered his order amenable for revision under Sec. 263. We are persuaded to be in agreement with the aforesaid observations of the Pr. CIT and are of the considered view that he had rightly directed the A.O to pass on the information to the assessing officers having jurisdiction over the cases of the aforementioned parties in order to facilitate examining of the genuineness of the source of advances made by them to the assessee. We do not find any infirmity in the aforesaid direction of the Pr. CIT and uphold the same.
10. The appeal filed by the assessee is partly allowed.
Order pronounced in the open court on 26.12.2018
Sd/- Sd/-
(Shamim Yahya) (Ravish Sood)
Accountant Member Judicial Member
भुंफई Mumbai; ददन ुंक 26.12.2018
Ps. Rohit
आदे श की प्रतिलऱपि अग्रेपिि/Copy of the Order forwarded to :
1. अऩीर थी / The Appellant
2. प्रत्मथी / The Respondent.
3. आमकय आमक्त(अऩीर) / The CIT(A)-
4. आमकय आमक्त / CIT
5. विब गीम प्रतततनधध, आमकय अऩीरीम अधधकयण, भुंफई / DR, ITAT, Mumbai
6. ग र्ड प ईर / Guard file.
सत्म वऩत प्रतत //True Copy// आदे शानुसार/ BY ORDER, उि/सहायक िंजीकार (Dy./Asstt. Registrar) आयकर अिीऱीय अधिकरण, भुंफई / ITAT, Mumbai P a g e | 11 ITA No. 933/Mum/2018 A.Y. 2014-15 M/s CNP Cotton Vs. Pr. CIT-33