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Income Tax Appellate Tribunal, ‘C’ BENCH : BANGALORE
Before: SHRI. CHANDRA POOJARI & SMT. BEENA PILLAI
ORDER
PER BEENA PILLAI, JUDICIAL MEMBER Present appeal has been filed by assessing against order dated 16/04/2018 passed by the Ld.Pr.CIT, under section 263 of the Act, for assessment year 2014-15 on following grounds of appeal: “1. That the above order of the Commissioner of Income tax in so far it is against the assessee is against the law, facts, circumstances, natural justice, equity and all other known principles of law.
2. The CIT erred in assuming jurisdiction u/s 263 without first satisfying that the assessment order suffered from an error which is prejudicial to interest of revenue.
3. The CIT erred in issuing the notice u/s 263 when there was no error from the records available.
4. The CIT erred in holding the discretion exercised by the AO in favour of the assessee as an error and such a view is against law. 5. That the CIT erred in holding that order of assessment was erroneous and prejudicial to the interests of revenue. 6. The order u/s 263 passed by the Learned CIT dt. 16.04.2018 is erroneous having regard to the facts, circumstances and law on the issue. 7. The Learned CIT erred in setting aside the order passed u/s 143(3) dated: 30.09.2016 by the AO as erroneous and prejudicial to interest of revenue and directing afresh assessment. 8. The Learned CIT erred in setting aside the issue of loss on foreign exchange forwards contracts of Rs. 1,02,93,910/- for fresh consideration overlooking the fact that the AO had specifically looked into this issue and after being satisfied allowed the loss. 9. The Learned CIT erred in passing an order and issuing directions overlooking the judicial decisions and law on the subject. 10. For the above and other grounds and reasons which may be submitted during the course of hearing of this appeal, the assessee requests that the appeal be allowed as prayed and justice be rendered.” 2. Brief facts of the case are as under: 2.1 The assessee is engaged in providing hybrid IT infrastructure services. For your under consideration it filed a return of income on 29/11/2014, declaring total income of ₹ 53,17,41,650/-. The same was processed under section 143(1) and the case was selected for limited scrutiny under CASS. 2.2 The Ld.AR to issue a notice under section 143 (2) on 08/09/2015 calling the details and books of accounts of Page 3 of assessing. Notice under section 142 (1) was also issued to the assessee. The Ld.AR after going through the documents filed by sissy in respect of the reasons for which the assessment was selected for limited scrutiny was examined as per the instructions No.7/2014 dated 26/09/2014 by the CBDT. The assessment order was passed accepting the return of income filed by the assessee. 2.3 Subsequently, the Ld.Pr.CIT issued notice under 263 of the Act, as according to him, the assessment order dated 30/09/2016 was erroneous and prejudicial to the interest of the revenue for the following reasons:
“1. As verified from assessment record it was seen that the assessee has debited Rs.1,02,93,910/- towards Forward Contract-mark to market loss vide Note-3.19/other expenses/Foreign exchange loss (including mark-to market losses) in the P & L account. This primafacie is a notional loss and therefore inadmissible and was required to be added to the total income of the assessee.
3. The AO has failed to conduct adequate enquiries regarding the above issue and has failed to bring to tax the correct income while completing the assessment U/s 143(3). Therefore, action u/s.263 is warranted and the assessment for the A.Y.2014-15 was proposed to be revised accordingly.
The case was posted for hearing on 19-03-2018 by issue of show-cause notice dated 07-03-2018. The AR of the assessee Sri. B.K.Manjunath, CA appeared and filed copy of ITAT, Bangalore "C" Bench decision in the case of M/s Quality Engineering and Software Technologies (P) Ltd vs DC1T in 1TA No.275/Bang/2014 dated 08.09.2014 in support of assessee's contention that the assessment is not reuired to be revised U/s 263.
The submissions made by the AR of the assessee are carefully examined in the light of facts of the case, material placed on record and the provisions of sec. 263 of the Act. During the assessment proceedings, the AO has not verified the issue with reference to instruction No.3/2010 Page 4 of CBDT dated 23.03.2010 which is binding on him. There is no finding in the, assessment regarding the nature of the underlying asset and the nature of the transaction. The AO has not applied his mind to this aspect and allowed the claim made by the assessee in a mechanical manner. It is incumbent on the AO to make requisite verification before allowing a claim made by the assessce. The AO cannot remain passive when the issues in the return of income provoke further inquiries. Thus, the assessment in question was made without making proper inquiries or verification which should have been made on the facts of the case. Further in view of clause (a) of Explanation-2 to sec. 263 as inserted in the statute from 01.06.2015, if there is failure on part of the AO to make proper enquiries, the assessment will be deemed to be erroneous and prejudicial to revenue.” 2.4 The Ld.Pr.CIT was of the opinion that assessing officer had not carried out any enquiry in respect of the notional loss that was debited amounting to ₹ 1,02,93,910/- towards forward contract being marked to market loss in the P&L account. 2.5 Various details were called for by the Ld.Pr.CIT and after considering the submissions, following view was taken:
2.6 Aggrieved by the order of Ld.Pr.CIT, the assessee is in appeal before this Tribunal.
At the outset the Ld.AR plays reliance on following decisions in order to substantiate his argument that since the assessee’s case Page 5 of Ld.Pr.CIT, was not part of the scrutiny. And therefore the impugned order deserves to be quashed and set aside. Decision of Hon’ble Mumbai Tribunal in case of Antariksh Realtors Pvt.Ltd. vs. ITO in assessment A 2015-16 by order dated 22/10/2021 Decision of coordinate bench of the Tribunal and in case of, M/s.Origami Cellulo Pvt.Ltd. vs. Pr.CIT in ITA number 394/Bang/2024 assessment A 2015-16 by order dated 15/09/2021 CBDT instruction number 20/2015 dated 29/12/2015 4. The Ld.AR the submitted that the Ld.Pr.CIT, exceeded in his jurisdiction, by issuing notice under section 263 thereby traversing beyond the limited scope of adjudicating those issue that fell beyond the realm of remitted scrutiny reasons for which the case was selected under CASS for assessment.
5. Even otherwise, the Ld.AR submitted that, on merits, the issue of foreign exchange fluctuation loss due to the assessee entering into forward contracts in foreign currency, has to be accounted for as on the date of balance sheet in accordance with the guidelines laid down by the Institute of chartered accountants. He playced reliance on the decision of coordinate bench of this Tribunal in case of Toshiba Embedded Software (India) Pvt.Ltd vs DCIT, reported in (2018) 64 ITR (Trib.) 675.
On the contrary, the Ld.CIT.DR submitted that the jurisdiction under section 263 of the act was involved as the assessment order passed was prejudicial to the interests of the revenue. He supported the view taken by the Ld.Pr.CIT. The Ld.CIT.DR filed following written submission in support of his arguments:
We have perused the submissions advanced by both sides in light of records placed before us.
Admittedly the case of assessee was selected for limited scrutiny, and during the assessment proceedings the same was not converted into complete scrutiny by following the due process of law. We are therefore of the opinion that the assessment order dated 30/09/2016 was not the case of complete scrutiny. To this extent the Ld.Pr.CIT has transgressed his power on the issue that did not fail within the realm of the limited scrutiny reasons. We refer to the decision of coordinate bench of this Tribunal in case of M/s.Origami Cellulo Pvt.Ltd. vs. Pr.CIT (supra) in support of this view.
In respect of the validity of order passed by Ld.Pr.CIT under section 263 of the act, we are of the view that, it is necessary that, the assessment order passed must be erroneous insofar as prejudicial to the interest of revenue. Therefore, both the ingredients of the assessment order being erroneous and prejudicial to the interest of the revenue must be satisfied, the assessment order. In the present facts of the case, the assessment order cannot be held to be erroneous as the Ld.Pr.CIT has not been able to bring out that the issue considered under 263 fell within the realm of the limited scrutiny reasons. Insofar, the assessment order being prejudicial to the interest of the revenue, we note that the issue on merits stands covered in favour of assessee by various decision of coordinate bench of this Tribunal and Hon’ble Supreme Court, in case of CIT vs. Woodward Governor India Pvt.Ltd., reported in (2009) 312 ITR 254. Accordingly we hold the order passed under section 263 to be bad in law and deserves to be caused and the grounds raised by the assessee stands allowed. In the result appeal filed by assessee stands allowed. Order pronounced in open court on 29th June, 2022.