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Income Tax Appellate Tribunal, “B” BENCH, MUMBAI
Before: SHRI PRASHANT MAHARISHI, AM
This appeal is filed by Baja Auto Limited [assessee /appellant] against the appellate order passed by the Commissioner of Income-tax (Appeals)-1, Mumbai [ The Ld CIT (A) ] dated 5th March, 2019, wherein the appeal filed by the assessee against the assessment order under Section 143(3) read with section 147 of the Income-tax Act, 1961 (The Act) dated 29th December 2017, passed by the Dy. Commissioner of income- tax (LTU-1), Mumbai, (the learned AO), was party allowed.
2. The assessee has raised 20 grounds in this appeal as under:-
“Validity of reopening of assessment:
2. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the fact that there was no failure on the part of the appellant to disclose truly and fully all material facts necessary for the assessment.
3. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the fact that all the necessary facts and related submissions/ notes were already filed by the appellant during the course of the original assessment proceedings under section 143(3), and there was no failure on the part of the appellant to disclose truly and fully all material facts necessary for the assessment.
4. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the fact that as per the reasons recorded for reopening of assessment, the reopening was based on the facts and submissions/ notes already on record during the course of the original assessment proceedings and there was no new tangible material on record for reopening the assessment.
Addition in respect of marked-to-market gain on foreign exchange fluctuations: Rs.76,08,00,000;
5. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the addition of Rs. 76,08,00,000 on account of marked-to-market gain on
6. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the fact that the method of accounting consistently followed by the appellant is based on the concept of prudence which does not allow for recognition of marked-to-market gains.
7. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the fact that the concept of prudence has been recognised in Accounting Standard 1 issued by the Institute of Chartered Accountants of India and in the Income- tax Accounting Standard-1 issued by the Central Government under section 145(2) of the Act 8 On the facts and in the circumstances of the case and in law, the CIT(A) erred in observing that the appellant has followed inconsistent method of accounting to suit its needs and reduce the tax liability.
9 Without prejudice to the above, the appellant prays that that if the aforesaid amount is taxed in AY 2010-11, then the said amount ought to be allowed as a deduction in the subsequent year, i.e., AY 2011-12, i.e. the year in which the aforesaid gain has been reversed upon utilization/ cancellation of the forward contract without any corresponding debit in its books of account.
Disallowance of expenditure incurred in respect of Omega project: Rs.1,77,69,266 and In respect of PV1500 project: Rs. 6,47,60,472:
10. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the disallowance of Rs. 1,77,69,266 being expenditure incurred in
11. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the disallowance of Rs. 6,47,60,472 being expenditure incurred in connection with the PV1500 project relating to development of four-wheeler goods carriers
12. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the fact that the expenditure in respect of the Omega project and the PV1500 project was incurred wholly and exclusively in connection with the business of the appellant of manufacture and sale of vehicles.
13. On the facts and in the circumstances of the case and in law, the CIT(A) erred in observing that the expenses incurred under the Omega project and the PV1500 project were for a new line of business and would give rise to a new source of revenue in the hands of the appellant.
14. On the facts and in the circumstances of the case and in law, the CIT(A) erred in observing that in the case of the appellant, it cannot be arrived that there could have been unity of control even for the new line of business.
15. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the fact that the expenditure incurred in respect of the Omega project and the PV1500 project comprises of revenue expenditure such as purchase of materials and components, labour cost, consumables, travelling, etc Allowability of expenditure incurred in respect of PV1500 project written-off during the year under consideration,
16. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the action of the Assessing Officer in not granting deduction under section 37(1) in respect of the expenditure of Rs. 15,41,08,719 incurred in connection with the PV1500 project relating to development of four-wheeler goods carriers, which was written-off during the year under consideration
17. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the fact that the expenditure in respect of the PV1500 project was incurred wholly and exclusively in connection with the business of the appellant of manufacture and sale of vehicles.
18. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the fact that the expenditure incurred in respect of the PV1500 project comprises of revenue expenditure such as purchase of materials and components, labour cost, consumables, travelling, etc.
19. On the facts and in the circumstances of the case and in law, the CIT(A) erred in observing that the write-off of the above expenditure incurred in respect of the PV1500 project is against the accounting policy of the appellant of amortising the expenditure on technical know- how acquired equally over a period of six years
20. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating that the aforesaid expenditure was written-off on account of change in design of four-wheeler goods carriers.”
4. Subsequently, the assessment was reopened under Section 147 of the Act by issuing notice under Section 148 of the Act on 29th March, 2017. The assessee responded vide letter dated 19th April, 2017, to provide reasons. Further, on 16th May, 2017, it filed an acknowledgement copy filed on 27th April, 2017. The reasons recorded by the learned Assessing Officer were supplied to the assessee on 19th May, 2017, which are as under:-
”1. The original return of income has been filed electronically on 13.10.2010 declaring total income of Rs.2054,74,27,010/- under normal provision and Book Profit of Rs. 2399,83,57,235/- u/s 115JB of the IT Act, 1961. The case was selected for scrutiny and order u/s 143(3) r.w.s, 144C(3) was passed on 25.02.2014 determining total income of Rs.2215,76,11,976/- under normal provision and Rs.2408,00,31,366/- under section 115JB of the Act.
Change in the method of accounting for not including the valuation difference in Derivative Hedging Instruments amounting to Rs.76,08,00,000/-.
2.1 It is seen from the Schedule 14 in note 9/h) to the Annual Report of the assessee and the P&L account that, during the year assessee has entered into a range of
Project expenses and advances written off pertaining to PV1500 project and Omega Project wrongly claimed as revenue expense:
3.1 During the year under consideration, the assessee has claimed the following:-
No. Project Nature of expense Amount in ₹ 1. Omega Project Prototype components 17769266 2. PV 1500 project Advances written off 64760472 3.3 In view of the above specific provisions, and the expenses written off being in the nature of capital expenses, the same is required to be disallowed u/s. 37(1) of the Act. This has resulted in under assessment of taxable income for the year of Rs.825,29,738/- and a resultant short levy of tax of Rs.280,51,858/-.
As there is a failure on part of assessee to disclose fully and truly all material facts necessary for its assessment during the year under consideration and considering the new credible information on record, I have reasons to believe that income of more than Rs.1 Lakh chargeable to tax has escaped assessment for this. assessment year i.e. A.Y. 2010-11, coming within the meaning of section 147 of the Income Tax Act, 1961.
The assessee raised an objection on 16 June 2017. The main objections were:-
i. That, there is no failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. ii. There is no new tangible material coming into the possession of the learned Assessing Officer. iii. Reopening is made merely on the change of opinion.
The objections of the assessee were disposed of by an order dated 14th November 2017, rejecting all the contentions raised by the assessee. Thereafter, notice under Section 143(2) of the Act was issued on 14th November 2017.
During the assessment proceedings, the learned Assessing Officer noted that as per schedule 14 in note no. 9(b) of the annual report stated that assessee has entered into forward contract on mark to market basis which are stated to be hedging contracts, to hedge future exports. The market value of such hedging instruments at the close of the year included a gain of ₹76.08 crores on account of forex fluctuations. These were not recognized as income in the profit and loss account but found from the profit and loss account in immediately preceding previous year, where it is known that assessee has recognized the valuation loss on this transaction as an expense. Thus, losses incurred by assessee were claimed as deduction in subsequent year but gain was not offered for taxation in this year.
The assessee submitted on 14th November, 2017 as under:-
“6.2 In response to the same, the assessee vide letter dated 28.12.2017 submitted as under:-
Allowability of foreign exchange loss on range forward contracts:
2.1) In the reasons recorded for reopening of assessment, it has been stated as under:
2.1 It is seen from Schedule 14 that in note 9(8) to the Annual Report of the assessee and the P&L account that, during the year assessee has entered into range forward contracts on Mark to Market (M2M) basis. These hedging contracts are stated to be entered to hedge future exports and to hedge highly probable forecast transactions. The market value of such derivative hedging instruments outstanding at the close of the year includes a gain of Rs. 76,08,00,000/- on account of foreign exchange fluctuation. The assessee has not recognized this gain as income in the P&L account. It is however found from the assessee's PSL a/c that, in the immediately preceding year i.e. AY 2009-10, the assessee has recognized the valuation loss on such transactions as an expense. Therefore, non- inclusion of the gains for the year under consideration in the income/receipts in P&L account is not in accordance with the regularly followed accounting practices of the assessee. The deviation from the regularly forward method of accounting by assessee has resulted in not showing of the profits for the year amounting to Rs. 76,80,00,000/-. Therefore, this amount is required to be added to the 2.2) In this regard, it may be noted that BAL has huge portfolio of export receivables considering that almost 30% of the company's net sales during the year were in export markets. Considering a huge portfolio of foreign exchange receivables, the company obtains range forward contracts to hedge the foreign exchange fluctuation risk. These contracts are in the nature of highly probable forecast transactions since there is no one-to- one underlying asset at the time when the contracts are entered into, and instead they are based on the past performance of exports of the company as certified by the auditors, as per the requirements of the Reserve Bank of India.
2.3) In this regard, attention is invited to Note no. 9(b) of Schedule 14 "Notes forming part of financial statements" which mentions the facts as under:
"The company has also entered into range forward contracts to hedge highly probable forecast transactions, where the export realizations of the company are protected below a minimum pre-determined foreign exchange rate whereas the realization advantages are available to the company does not benefit by rupee depreciating beyond the pre-determined foreign exchange rate. Though these instruments meet the management's Foreign exchange risk management objectives, they do not meet the test of effectiveness as per the principles of hedge accounting. The market value of instruments outstanding at the close of the year indicate a gain aggregating Rs. 760.8 million, which as a matter of produce has not been recognized, as against a loss 2.4) It is submitted that the assessee's stand of not recognising the mark-to-market gain of Rs. 76.08 crores is based on the concept of prudence which is recognised in AS-1 issued by the Institute of Chartered Accountants of India (ICAI) as follows:
"Prudence:
In view of the uncertainty attached to future events, profits are not anticipated but recognised only when realised though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information."[Para 17(a)] 2.5) The aforesaid concept of prudence is also recognised by Accounting Standard (Income-tax) -1 issued by the CBDT as follows:
"Prudence - Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information." [Para 4(i)] 2.6) In view of the above, it is submitted that the market- to-market gain of Rs. 76,08 crores ought not to be included in the total income of the year under consideration since the same is not in accordance with the concept of prudence recognised by the Accounting Standards issued by the ICAI and by the Income-tax Accounting Standards notified by the CBDT under section 145(2).
The learned Assessing Officer did not accept the explanation of the assessee stating that when there was a derivative loss for A.Y. 2009-10, the assessee debited and claimed such loss as deduction but when there is a gain in this year; assessee did not credit the same to the profit and loss account and also did not offer it for taxation. Therefore, he held that assessee has not followed the method of accounting regularly resulting into the less profit by the above sum.
The learned Assessing Officer also found that assessee has claimed the revenue expenditure of its PV 1500 project and Omega Project, which shows that these are capital loss on account of capital expenditure. The learned Assessing Officer noted that with respect to Omega Project, the assessee has claimed deduction of ₹1,77,69,266/- as proto type components and further for PV 1500 project, ₹6,47,60,472/- advance written off. Both these expenditures are related to the proto type of the new project, which were ultimately abandoned. Assessee itself has also disallowed ₹16.26 crores related to project PV 1500. Therefore, the above expenditure is not allowable.
In response to query of the ld AO, assessee replied on 28th December, 2017 as under:-
"3.2) In this regard, at the outset, attention is invited to the facts relating to the above projects/ expenses:
(a) Expenses in respect of Omega project: Rs. 1,77,69,266: During FY 2009-10, the assessee had decided to relaunch auto-geared scooters. The said project was named "Omega project. In order to develop the prototype of the scooters, the assessee had raised purchase orders on several vendors for acquiring the components to be used for manufacturing of the prototype (copies of debit notes raised by the vendors for the components used in the prototype are enclosed as Annexure 1). However, before the development of the prototype, the assessee decided to scrap the project considering the lack of likeliness of demand for such scooters. Thus, the project I was scrapped at the concept stage itself, and the expenditure incurred on the aforesaid project was written off to the Profit and Loss account (under the head "Miscellaneous Expenses") in accordance with Accounting Standard 26 on "Intangible Assets", which reads as under:
"4.1 No intangible asset arising from research (or from the research phase of an internal project) should be recognised. Expenditure on research (or on the research phase of an internal project) should be recognised as an expense when it is incurred.
4.2 This Standard takes the view that, in the research phase of a project, an enterprise cannot demonstrate that an intangible asset exists from which future economic The write-off of expenditure is therefore in accordance with the Accounting Standard issued by the Institute of Chartered Accountants of India.
(b) Expenses in respect of PV1500 project: Rs. 6,47,60,472:
During FY 2005-06, the erstwhile Bajaj Auto Limited had decided to enter into manufacturing of four-wheeler goods carrier under the project named "PV 1500". Under the said project, the assessee placed purchase orders with Genix Automotive Engineering Company Ltd., South Kora ('Genix) for acquiring prototype body-in-white (B/W) parts and fixtures and press tools.
The BIW parts were delivered by Genix to BAL over a period ranging from October 2006 upto November 2008. The materials received from Genix were shown under "Development in progress" (Schedule 6 of the Annual Accounts).
In FY 2009-10, the assessee decided to continue with the development of the four- wheeler goods carrier models with a modified design with little changes, and accordingly, the purchase orders for the balance BIW parts were cancelled. Accordingly, the advance payments made by the company in connection with the purchase orders, which were not refunded by Genix, were written off under the head "Miscellaneous Expenses. In this regard, we have enclosed herewith the following documents:
(i) Copy of the approval dated 18 February 2010 granted by the Reserve Bank of India for write-off of the advance paid to Genix (Refer Annexure 2)
The learned Assessing Officer stated that the above expenditure is capital in nature and does not accrue against business income. He further held that the above expenditure is pre operative and capital and therefore not allowable.
Accordingly, the assessment order under Section 143(3) read with section 147 of the Act was passed on 29th December, 2017, computing the income as per normal provision at ₹2300,09,41,710/-, wherein the addition of ₹76,08,00,000/- on mark to market adjustment and of ₹8,25,29,738/- of disallowance of pre operative expenditure was made.
The assessee aggrieved with the assessment order preferred the appeal before the learned CIT (A), challenging the validity of reopening of the assessment as well as the addition and disallowance, both. Several other grounds were also raised on short credit of TDS and non granting of foreign tax credit.
The learned CIT (A) vide paragraph no.6.3 has upheld the validity of the reopening of the assessment as under:-
“6.3 I have carefully considered the facts of the case, discussion of the AO in the assessment order, oral contentions and written submission of the appellant and material available on record. The assessee's submission in respect of the reasons recorded and whether there has been failure on its part to disclose fully and truly all material facts necessary for assessment are being analyzed here in under:
The appellant in their submission have primarily contended that the assessment has been reopened after the period of 4 years from the end of the relevant assessment year and assessment in this case was completed u/s 143(3) and further there being no failure on their part to disclose fully and truly all material facts necessary for assessment, the reopening done by the AO was bad in law. To support such contention, the appellant contends that they had submitted copy of the Annual Report to the AO where there is a specific reference relating to valuation difference at Note No.9(b) and that vide letter dated 19.09.2013 they had submitted a note in respect of claim deduction on foreign exchange valuation loss written back. In regard to such contention and submission of assessee it is stated that the explanation (1) of Sec.147 clarifies that production before the Assessing Officer of account books or other evidence from which material evidence could, with due diligence, have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the proviso to Sec. 147 of the Act. Accordingly, merely submitting copy of Annual Report, where in the shape of some note, the assessee seeks to have disclosed the relevant and material fact towards the valuation difference on foreign exchange hedging cannot be considered to be acceptable as proper disclosure made. It would also be important to actually seen what the assessee has mentioned in its notes to accounts. It is seen that the assessee in their annual report for F.Y.2009-10 relevant to the assessment year under consideration have at sub-para (3) of para 9(b) has mentioned as under :-
[Bold for emphasis] Further, in schedule 14 of note forming part of financial statement for F.Y. 2008-09 of the annual report pertains to changes in the accounting policies, at sub-para(3) of Para 10(b), it has been mentioned as under :-
The company has also, during the year, entered into range forward contracts to hedge highly probable forecast transactions, where the export realisations of the company are protected below a minimum pre-determined foreign exchange rate whereas the realisation advantages are available to the company therefrom up to a high pre-determined foreign exchange rate. Though these instruments meet the management's Foreign exchange risk management objectives, they do not meet the test of effectiveness as per the principles of hedge
[Bold for emphasis] It is seen that in the annual report for F.Y.2008-09 relevant to A.Y. 2009-10 the schedule 14 of notes forming part of the financial statement, clearly speak of changes in the accounting policy and at para 10(b) which has been reproduced herein above it has been mentioned that because the instrument in which the hedging has been done do not meet the test of effectiveness as per principles of hedge accounting, hence, the valuation loss aggregating to Rs.218 million have been recognised in the P&L Account. It is, however, curiously noted that precisely for the same reasoning and with the mention that the instrument in which the investments have been made for hedging do not meet the test of effectiveness as per the principles of hedge accounting, the gain aggregating to Rs.760.8 millions has not been recognised. It is noted and mentioned herein that assessee resorted to change in method of accounting in the accounting year 2008-09 to claim the loss on account of hedging to the tune of Rs.218 million and in the next year when there is a gain happened on account of similar transaction, the assessee has in its note to the final account, in its annual report has mentioned to have not recognised such gain. It clearly shows inconsistent method of accounting, resorted only to either claim the loss or not to offer gain to tax on account of its hedging transactions, in respective years. The assessee company tries to justify such accounting treatment on the basis of prudence. In regard to such submission of the assessee it is stated that there cannot 6.3.2 The assessee also has contended that vide letter dated 19.09.2013 they had submitted note in respect of claim deduction on foreign exchange loss written back. In regard to such contention of the assessee it is stated that the copy of the said note has been submitted at page No.120 of the paper book. This note is on allowability of foreign exchange loss and is in reference to the notice dated 01.07.2014 issued u/s 142(1) by the AO to explain the allowability of foreign exchange loss. The appellant in the said letter has submitted that there was a loss of Rs.21.8 crores in the previous year relevant to A.Y. 2009- 10 which was debited in the P&L Account and which was disallowed in the assessment completed u/s 143(3) for A.Y. 2009-10 dated 18.04.2013. The appellant therein has further mentioned that they have filed appeal in respect of said issue before CIT (A) and that during the previous year 6.3.3 In respect of expenses incurred for Omega project aggregating to Rs.1,77,69,266 and expenses incurred in connection with the PV1500 project aggregating to Rs 6,47,60,472:
The assessee has also objected similarly for the issue regarding the expenses incurred for Omega Project and PV1500 project and has stated that note on the allowability of the same was submitted on 06.12.2013 to the AO and therefore there was no failure on their part to disclose fully and truly all material facts necessary for assessment. In regard tosuch contention and submission of the assessee it is stated that the note submitted on the allowability of the aforesaid expenses vide their letter dated 06.12.2013 have been enclosed from page 121 to 124 of the paper book. It is seen from their note that they have given the detail in respect of nature of expenses and justification for their allowability u/s 37(1) of the Act. However, it is stated that the PV1500 project was started by the assessee in 2005-06 and expenses up till F.Y. 2008-09 was incurred by the assessee to the tune of 6.3.4 The assessee has also contended that reopening cannot be resorted to in the absence of new tangible material. In regard to such contention of the assessee and the reliance placed by the assessee in their submission, it is stated that this aspect would come into consideration only under the circumstances when all the material facts necessary for assessment were fully and truly disclosed by the assessee itself. If in the set of facts, it is held that the assessee has failed to truly and fully disclose all material facts necessary for assessment, so much portion of material which assessee has failed to fully and truly disclose would come within the ambit of "New tangible material" that has come to notice of the AO and reopening u/s 147 would be valid in respect of the same. In the foregoing discussion, it has been held that the assessee has failed to disclose truly and fully all the material facts 6.3.6 The appellant has also contended that despite their request to provide a copy of satisfaction recorded by the Commissioner in respect of reopening of the assessment, the same has not been provided till date. In regard to such submission of the assessee it is stated that the AO in the assessment order has clearly mentioned that approval of Ld. CIT(LTU), Mumbai was obtained on 27.03.2017 and notice u/s 148 of the Act dated 29.03.217 was issued and served on the assessee on the same day. In these facts there cannot be any reason to doubt the factum of granting of approval by the Ld. CIT(LTU), Mumbai as required u/s 150(1) of the Act. As per the procedure prescribed by the Hon'ble Supreme court in the case of 6.3.7 In view of the facts and circumstances of the case and discussion herein above the contentions and submissions of the assessee are not found to be acceptable. The reopening resorted to by the AO by way of issue of notice u/s 148 within the meaning of Sec.147 of the Act is found to be valid and consequent assessment completed u/s143(3) r.w.s. 147 of the Act is found to be good in law. Accordingly, the ground No.1 raised by the assessee is dismissed.”
On the merits of the addition of ₹76.08 crores, he decided the issue against assessee as per paragraph no.7.3 as under:-
“7.3 I have carefully considered the facts of the caso, discussion of the AO in the assessment order, oral contention and written submission of the assesseo and material available on record. The AO has made the addition observing that the assessco has adopted different accounting principles for different assessment years as per 1) F.Y. 2008-09
The company has also, during the year, entered into range forward contracts to hedge highly probable forecast transactions, where the export realisations of the company are protected below a minimum pre- determined foreign exchange rate whereas the realisation advantages are available to the company therefrom up to a high pre- determined foreign exchange rate. Though these instruments meet the management's Foreign exchange risk management objectives, they do not meet the test of effectiveness as per the principles of hedge accounting. Hence valuation losses aggregating Rs. 218 million, have been recognised in the profit and loss account.
2) F.Y.2009-10
The company has also entered Into range forward contracts to hedge highly probable forecast
[Bold for emphasis]
From the aforesaid portion of notes, more specifically the bold part, it can be seen that for the precisely similar reasoning and referring to the accounting standard 30, the assessee has taken contrary position to suit his requirement, i.e. in the accounting year 2008-09 to claim the loss of Rs.218 million and in the immediate next year i.e., in the accounting year 2009- 10 to not to offer a gain of Rs.760.8 million. It is further seen from the annual report of the appellant for accounting year 2008-09 that part 10 of schedule 14 deals with changes in the accounting policies. It clearly means that the assessee changed its accounting policies to claim loss arising out of hedging transaction of Rs.218 million. In the immediate next year despite it has gain, it has not offered the same to tax. The 7.3.1 In the submission the assessee has contended that since the AO has not allowed the loss claimed in the assessment year 2009-10 as also in A.Y. 2014-15, treating the same to be notional/ contingent in nature and therefore there should be no addition made in the year under consideration. In regard to such contention of the assessee it is stated that the AO may have taken such a position in the assessment but it is not the case that the assessee has accepted the same. It is submission of the assessee that they have filed appeal against such orders of the AO. What needs to be the case is that the stand of the assessee should not only be consistent from year to year, but also should be in line with the accounting standards and principles enshrined in accounting standards. Further thereto,
With respect to the disallowance of the expenditure of Omega project and PV1500 project, he decided the issue as per paragraph no.8.3 of the appeal against the assessee as under:-
“8.3 I have carefully considered the facts of the case, discussion of the AO in the assessment order, oral contention and written submission of the assessee and material available on record. The expenditure in question are of the nature which were incurred by the assessee under Omega Project for development of proto type for relaunching of auto-geared scooters and under the project named PV 1500 for manufacturing four wheeler goods carrier. It is mentioned that the assessee primarily is into the business of two wheeler motor cycles and three wheelers. Neither it manufactures auto geared scooters
With respect to the foreign tax credit of ₹28,89,364/-, the same was already allowed by the learned Assessing Officer. Hence, it is dismissed.
With respect to the short grant of credit of TDS he directed the learned Assessing Officer to verify and grant the same.
Thus, appellate order resulted in to upholding reopening of assessment and charging of mark to market gain as income and disallowance of project expenditure.
Assessee aggrieved with the appellate order has preferred the appeal before us.
The learned Authorized Representative challenging the reopening of the assessment has categorically stated that the reopening made by the learned Assessing Officer is not valid for the reason that assessee during the course of assessment proceedings has made full and true disclosure.
ii. With respect to the second addition, he referred to page no.116 of the Paper Book which is part of the notice dated 1st July, 2013, wherein as per paragraph no.45, iii. He submits that as the learned Assessing Officer was satisfied about the claim, there is no disallowance made in the assessment order and therefore, there is also a change of opinion. iv. He further referred to the copy of the reasons recorded at page no.72 of the Paper Book and the objections raised against the reopening placed at page no.74 of the Paper Book stating that there is no new credible evidence available in form of tangible material for reopening of the assessment. v. He further submitted that reopening has been made merely on the basis of change of opinion. He submits that it is reappraisal of note at schedule 14. vi. He further referred to the decision of Hon'ble Bombay High Court in case of paragraph number 20 of Hindustan lever Ltd 2004 (268 ITR 332) (Bombay), paragraph number 8t – 11 of the decision of the honourable High Court in case of sesa Goa Ltd (2007) 294 ITR 101 and Ananta landmark private limited versus Deputy Commissioner Of Income Tax in vii. The learned authorized representative also referred to the factual paper book containing 147 pages and a case law compilation where 6 case laws were listed down.
The learned departmental representative vehemently submitted that impugned assessment year is 2010 – 11 and the reopening has been made by issue of notice under section 148 of the act on 29/3/2017. Therefore, naturally the notice is issued beyond four years from the end of the assessment year in which the income was first assessed. Therefore, in such circumstances when the income is originally assessed by order under section 143 (3) on 25/2/2014, only based on the failure on part of the assessee to fully and truly disclose the material facts with respect to the computation of total income reopening can be made. He specifically referred that in the reasons recorded the learned assessing officer in paragraph number 4 has categorically held that there is a failure on part of the assessee to disclose fully and truly all material facts necessary for its assessment during the year under consideration and considering the new credible information on record for reopening of the assessment. He submitted that in the reason itself it is categorically recorded that on perusal of the annual accounts for assessment year 2009 – 10 the assessee has recognized the valuation loss in such transaction as an expenses whereas for assessment year 2010 – 11 when there is again of ₹ 76.08 crores the assessee has not disclosed the same as its income. The learned assessing officer has also categorically noted that there is a change in the method of accounting employed by the assessee with respect to the disclosure and computation of foreign exchange derivative
With respect to the expenses incurred for Omega Project and expenses incurred in connection with the PV 1500 project he referred to paragraph number 6.3.3 of the order of learned CIT – A. He specifically submitted that there is no reason whatsoever or correlation was submitted by the assessee as to why the expenses written off during the year to the extent of ₹ 6.47 crores were claimed on the project and why they had not been claimed the expenditure done on the same project in the earlier years totalling to ₹ 15.41 crores. Therefore lack of proper explanation and correlation of the claim during the year with reference to the expenses incurred on the same project in earlier years have given rise to the situation where material facts necessary for assessment were not fully and truly disclose by the assessee.
With respect to the tangible material he referred to paragraph number 6.3.4 of the order of the learned CIT – A he specifically stated that that the issue of tangible material will come into play only when the assessee has fully and truly
With respect to the argument of the change of opinion, he submitted that when the assessee has not offered any information with respect to the gain of ₹ 76.08 crore on account of hedging, there cannot be any opinion of the assessing officer during the course of original assessment proceedings.
Therefore, he supported the orders of the learned lower authorities on the issue of reopening of the assessment.
We have carefully considered the rival contention and perused the orders of the lower authorities. We have also considered the several judicial precedents relied upon by both the sides. Facts, at the cost of repetition, shows that the original return filed by the assessee on 13/10/2010 was assessed under section 143 (3) of the Act on 25/2/2014. The impugned assessment year is assessment year 2010 – 11. The reopening notice was issued under section 148 of The Income Tax Act on 29/3/2017. Therefore, naturally the reopening has been made after four years from the end of the assessment year but before six years. Therefore as per the first proviso to section 147 of the act, reopening could be done only if the assessee has failed to disclose fully and truly all material facts necessary for his assessment for that assessment year. Explanation 1 also provides that production before the assessing officer of account books or other evidences from which material evidences could with due diligence have been discovered by the assessing officer will not necessarily amount to disclosure within the meaning of the above proviso. However, it is mandatory that for reopening of the assessment, the assessing officer must be in possession of a ‘tangible material’. Such is
For the first issue of reopening with respect to the not including the valuation difference in derivative hedging instrument amounting to ₹ 76.08 crores, the learned assessing officer has mentioned that it was found from the assessee’s profit and loss account that in the immediately preceding year i.e. assessment year 2009 – 10, the assessee has recognized the valuation loss on such transaction as an expenses. He also referred to schedule 14 in note number 9 (b) to the annual report of the assessee and the profit and loss account. The assessment for the impugned assessment year [AY 2010-11] under section 143 (3) was passed on 25/2/2014. The assessment for assessment year 2009 – 10 has been passed on 18th/4/2013. Therefore, it is apparent that assessment for assessment year 2009 – 10 was already concluded when the assessment for assessment year 2010 – 11 was pending.
Honourable Supreme Court in New Delhi television Ltd versus Deputy Commissioner Of Income Tax (2020) 424 ITR 607 has categorically held that subsequent facts which come to the knowledge of the assessing officer can be taken into account to decide whether or not the assessment proceedings should be reopened. Thus, the information which comes to the notice of the assessing officer during the assessment proceedings for subsequent assessment year can definitely form tangible material with the assessing officer under section 147 of the act.
However the facts here shows that that the learned assessing officer is referring to the financial statements of assessment year 2009 – 10 which is already been assessed prior to the
It is in fact the reappraisal of the original material available before the assessing officer at the time of original assessment used by him for reopening of the assessment. There is no subsequent facts coming to the knowledge of the dl AO.
Honourable Supreme court in Commissioner of Income Tax, Delhi v. Kelvinator of India Ltd. MANU/SC/0047/2010 : 2010 (1) SCR 768 has held that after 1st April, 1989, Assessing Officer has power to re-open, provided there is "tangible material" to come to the conclusion that there is escapement of income from assessment. It is therefore, clear that the basis for a valid re-opening of assessment should be availability of tangible material, which can lead the AO to scrutinize the returns for the previous assessment year in question, to determine, whether a notice Under Section 147 is called for. Further, on careful reading of the above decision of Honourable supreme court and in Case New Delhi television limited, it is clear that such tangible material should come into the knowledge of the assessee only after completion of the original assessment proceedings; otherwise it would amount to reappraisal of the same material which was available with the assessing officer at the time of passing of the original assessment order. In the present case the assessment year 2009 – 10 was already completed by the assessing officer before completion of the assessment for assessment year 2010 – 11. The information of assessment year 2009 – 10 was already available before the assessing officer. Therefore, in the reasons recorded when the learned assessing officer has categorically stated that there is a difference in the treatment
With respect to the second issue the claim of the learned assessing officer at the time of recording of the reason that that the expenditure of ₹ 8.25 crores of make-up project NPV 1500 project are capital loss on account of capital expenses incurred and subsequently return of on account of non- commencement of the project. In the original computation of income, assessee himself has disallowed a sum of ₹ 16.26 crores and therefore there is no reason to differentiate between those expenses and these expenses. Therefore, same are not allowable and therefore the reasons were recorded to reopen the assessment. On reading the reasons for this item, we do not find that the learned assessing officer has discussed any tangible material in possession of the learned AO for reopening of the assessment. It is clearly reappraisal of pre existing material available with him at the time of original assessment.
As on both these issues of reopening, we do not find that there is any tangible material in possession of the assessing officer, which has come to his knowledge subsequent to the passing of the assessment order, we do not find that the reopening of the assessment is sustainable.
Even the learned CIT – A has also categorically stated that mere failure to disclose fully and truly on part of the assessee
In the result we find that in absence of tangible material, the reopening of assessment cannot be made. Accordingly, ground numbers 1 – 4 of the appeal of the assessee are allowed.
In view of our above decision with respect to the reopening of the assessment, ground numbers 5 – 20 are not required to be adjudicated.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 23.11. 2023.