MAINI PRECISION PRODUCTS LIMITED,BANGALORE vs. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4(1)(1), BANGALORE

Briefly stated, the facts of the case are assessee being a company filed its return of income for the Assessment Year 2009-10 on 25.09.2009 admitting Nil income. The case was selected for scrutiny and Order under section 143(3) of the Act dated 30.12.2011 was passed by the learned AO assessing the income of the assessee at Rs.9,75,38,040/- after disallowing the investments and purchase advances written off. Subsequently, rectification order was passed under section 154 of the Act dated 21.03.2012 and again on 31.05.2013 was passed by the learned AO. The assessee again applied for rectification on 07.11.2013 stating that the assessee has declared a loss of Rs.3,91,94,048/- after taking credit of Rs.7,32,45,160/- being unrealized gain on fair value of instruments / derivatives. The learned AO, after examination of the records was of the opinion that the assessee company itself has recorded the income of Rs.7,32,45,160/- arising out of unrealized gain on fair value of derivatives and since no return was filed, reducing the above said income, proceeded to conclude that the same could not be rectified under section 154 of the Act since the assessee has not exercised the option of filing the revised return of income. Subsequently, the assessee had preferred petition under section 264 of the Act dated 17.03.2014 and after due deliberation the Ld CIT-3, set aside the Assessment Order back to the learned AO with a direction that the submission of the assessee with regard to erroneous reporting of income as claimed, be considered on merits and as per law. Consequent to the directions of the learned CIT-3, the AO verified the erroneous reporting of the assessee and noting that the assessee has not utilized the option of filing revised return to correct the inadvertent mistake, but rather has paid the applicable taxes on the said income. The leanred AO relying on the decision of the Hon’ble Supreme Court in Goetze (India) Ltd., Vs. CIT, denied to admit any claim made without being claimed while filing the return of income by the assessee. The learned AO confirmed the addition of Rs.7,32,45,160/- as claimed by the assessee in the original return of income.

On being aggrieved by the Order of the learned AO, assessee filed appeal before the learned CIT(A). The learned CIT(A), considering the similar submissions made by the assessee, dismissed appeal of the assessee.

On being aggrieved by the Order of the learned CIT(A), assessee is in appeal before us by raising the following grounds:

The only issue contested by the assessee is with respect to treating amount of Rs.7,32,45,160/- arising out of unrealized gain on derivatives as an income of the assessee. The learned AR submitted that the assessee while filing the return of income inadvertently considered the amount of Rs.7,32,45,160/- as part of its total income which is represented by the unrealized gain on the fair value of the derivatives. He further submitted that the assessee has not realized the gain and inclusion of this amount in the taxable income was an inadvertent error. He also further submitted that the assessee complied with the provisions contained in Accounting Standards 11 which deals with “Effects of changes in Foreign Exchange Rates” issued by the Institute of Chartered Accountants of India. Assessee thus marked-to-market gains on the foreign exchange contract which is notional gain and is not liable to tax under the Act even though credited to the P&L A/c which is in adherence with the purpose of accounting and disclosure as required under the accounting standards to be mandatorily complied by the assessee. The learned AR also submitted that the Hon’ble Supreme Court in the case of National Thermal Power Corporation Ltd., Vs. CIT and Jute Corporation of India Ltd., Vs. CIT has settled the legal position regarding the plenary powers of the Tribunal to entertain new claims. He therefore prayed that addition be deleted.

Per contra, the learned DR fully supported the Order of the lower authorities.

We have heard the rival contentions and perused the material available on record. It is an admitted fact that the assessee has filed the return of income considering the unrealized gain arising out of marked-to-market gains of derivatives amounting to Rs.7,32,45,160/-, considering it as an income of the assessee. It is noted that the unmatured forward contracts were revalued based on the exchange rates prevailing as on the date of the Balance Sheet, resulting into notional gain of Rs.7,32,45,160/- which was accounted in the books of accounts to comply with the provisions of Accounting Standard-11 issued by ICAI. It is an undisputed fact that assessee has not realized any gain out of restatement of foreign exchange transactions. Assessee following mercantile system of accounting in order to comply with the Accounting Standard has determined the adjustments to the financial statements as prescribed by the Accounting Standards. The Hon’ble Supreme Court of India in the case of PCIT Vs. Suzlon Energy Ltd., upheld the Order of the Hon’ble High Court allowing the assessee’s claim of foreign exchange fluctuation loss on Marked-to-eMarket basis. Similarly, it was also contested by the Revenue authorities that assessee has not claimed the deduction by filing of revised return and therefore as per the decision of the Hon’ble Supreme Court in the case of Goetze (India) Ltd., the assessee is not entitled to make a claim otherwise done by way of filing revised return of income. However, in the case of NTPC Ltd., Vs. CIT, the Hon’ble Supreme Court of India has held that even though the question of law was not raised by the authorities below nor in the grounds of appeal but raised by way of additional issue in a forwarding letter shall be allowed. Further, the Hon’ble High Court of Bombay in CIT Vs. Pruthvi Brokers and Shareholders also held that appellate authorities considering the additional claim allowing it even though such a claim was not made in the return of income which was inadvertent and without any malafide intention, the impugned additional claim of the assessee is to be allowed. The Hon’ble High Court of Madras in CIT Vs. Abhinitha Foundation (P) Ltd., reported in 396 ITR 251 (Madras) wherein under similar circumstances a claim not made in the return of income but raised during the assessment proceedings with supporting materials was held to be admissible. The Hon’ble Supreme Court of India in the case of Jute Corporation of India Ltd. Vs. CIT 187 ITR 688 (SC) has held that the appellate authorities including the Tribunal possess plenary powers and can entertain additional grounds or claims so long as the relevant material is already on record. In the instant case, the assessee has claimed the notional gains arising out of Marked-to-Market transactions as included in the total income of the assessee but during the assessment proceedings filed a revised computation claiming that it shall not be included in the total income of the assessee. The Revenue has not brought any material on record to justify the claim on merits. We are therefore of the considered view that in the light of the judicial precedence as stated above, direct the learned AO to examine the claim arising out of foreign exchange gain from marked-to-market rates and allow the claim of the assessee in accordance with law if found correct. Thus, the grounds raised by the assessee are allowed.

In the result, appeal of the assessee is allowed for statistical purposes.