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Income Tax Appellate Tribunal, MUMBAI ‘B’ BENCH, MUMBAI
Appearances by: Percy J Pardiwala, Sr Advocate along with Jeet Kamdar, Advocate, for the appellant A K Kardam, Commissioner (Departmental Representative), for the respondent Date of concluding the hearing : 14/12/2021 Date of pronouncing the order : 08/03/2022 O R D E R Per Pramod Kumar VP 1. By way of this appeal, the assessee appellant has challenged the correctness of the order dated 13th March 2020, passed by the learned Principal Commissioner of Income Tax, under section 263 r.w.s. 143(3) of the Income Tax Act, 1961 [hereinafter referred to as ‘the Act’], for the assessment year 2017-18, holding that the Assessing Officer’s not bringing to tax the opening balance of Rs 2238.55 crores, in respect of Foreign Currency Translation Reserve, has rendered the order erroneous and prejudicial to the interest of the revenue. The assessment order under section 143(3) dated 19th March 2019 has been, on this basis, set aside for adjudication de novo, and it is this action of the learned Principal Commissioner that has been challenged before us.
2. The material facts are not in dispute. The assessee before us is a public sector company engaged in the business of banking and allied activities. The assessee had filed an income tax return disclosing a taxable income of Rs 5,272.63 crores on 30th November 2017. It was subjected to scrutiny assessment proceedings, and the assessment was finally framed at Rs 10,174.33 crores, vide assessment order dated 19th March 2019. Subsequently, vide show cause notice dated 22nd January 2020, the revision proceedings were initiated as follows:
Assessment year: 2017-18 Page 2 of 6
Return of income in this case was e-filed on 30.11.2017 declaring total income of Rs.5272,63,72,980/- which was subsequently revised on 31.3.2018 declaring total income at Rs.4535,87,04,470/- . Assessment in this case was completed by the Assessing Officer u/s 143(3) of the Income Tax Act, 1961, on 19.3 2019 determining total income at Rs.10174,33,52.812/- under normal provisions and Book Profit was recomputed at Rs.10673,62,01,341/-.
3. On examination of records, it is observed that the assessment order dated 19.3.2019 passed by the Assessing Officer is erroneous in so far as it is prejudicial to the interest of the revenue due to the following reasons.- "As per para C-4.2(Pg 181) of the Balance Sheet of the assessee it is seen that the balance in Foreign Currency Translation Reserve (FCTR) as on 01.4.2016 was Rs.2238.55 crores. It is mentioned that based on legal opinion, assessee had not considered the opening balance of FC'i R for computing taxable income. The C8DT Circular No. 10/2017 dated 23.3.2017 has notified Income Computation and Disclosure Standards which are effective from 01.4.2016. The CBDT has further clarified that FCTR balance as on 01.4.2016 pertaining to exchange differences on monetary items for non- integral operations shall be recognized in the previous year relevant to AY 2017-18 to the extent not recognized in the income computation in the past. Failure of the Assessing Officer to consider the same has rendered the assessment order u/s 143(3) dated 19.3.2019 as erroneous in so far as it is - prejudicial to the interests of the revenue." 4. In view of the aforesaid reasons it is proposed to revise the assessment order dt.19.3.2019 under section 263 of the Income Tax Act, 1961, being erroneous in so far as it is prejudicial to the interest of revenue. 5. You are hereby given an opportunity to represent your case as to why the proposed action u/s 263 be not pursued and necessary order be passed on the issues discussed above.
3. In reply to the aforesaid show cause notice, the assessee made elaborate submissions before the learned Principal Commissioner, and, submitted, inter alia, as follows: Your good self have observed that in the context of complying with Inconn.1 1. Computation and Disclosure Standard (ICDS) VI in computing the income from business, opening balance of Foreign Currency Translation Reserve (FCTR) viz Rs.2238.55 crore- which actually related to period prior to AY 2017-18, be charged to tax in the current assessment year based on clarification issued by CBDT and failure to tax the same has rendered assessment order u/s 143(3) dated 19.03.2019 as erroneous in so far as it is prejudicial to the interest of revenue. 2. At the outset we wish to state that the above order of AO is not erroneous and prejudicial to revenue. The foreign currency monetary assets constitute stock in Assessment year: 2017-18 Page 3 of 6 trade of banking business and therefore we submit that a mere re-valuation of closing stock- without considering opening stock does not give rise to taxable- income even under the newly introduced ICDS VI. Several judicial decisions endorse this principle. In this regard reference may be made to transitional provisions contained in ICDS VI - para 9(3) which is as under: "Exchange differences arising in respect of monetary items or non-monetary items, on the settlement thereof during the previous year commencing on the 1st day of April, 2016 or on conversion thereof at the last day of the previous year commencing on the 1st day of April, 2016 , shall be recognised in accordance with the provisions of this standard after taking into account the amount recognised on the last day of the previous year ending on the 31st March, 2016 for an item, if any, which is carried forward from said previous year."
The expression exchange difference arising clearly denotes income or loss arising in the current year. The expression after taking into account the amount recognized on the last day of the previous year ending on the 31st March, 2010 for an item, if any, which is carried forward from said previous year does not give inference that the unrealized exchange difference pertaining to period prior to 1st April, 2016 is also to be charged to lax current year The transitional provision cannot be construed to charge to tax unearned gain of prior years. The correct construction of the statute is to account for income/expenses that resulted in revaluation in current year winch is done by revaluing both closing and opening balances. While doing so, the transitional provision provides that any income charged to tax in current year relating to outstanding foreign exchange if already charged to tax by the revenue in earlier year be reduced in order to avoid double taxation A transitional provision in the; statute to bridge the gap in change in accounting policy cannot be construed to charge to tax notional income pertained to earlier years. If only the closing balance is to revalued as directed by your good self, we submit that it would amount to an erroneous construction.
Further we submit that in a number of judicial decisions in the context of valuation of closing stock, the proposition laid down is that in case any change in the method of valuation of closing stock hitherto followed by the assessee is forced on the assessee then both the opening and closing stock are to be valued on the same basis so that profit is correctly computed. Reference in this regard may be had to the Privy Council judgment in the case of CIT vs. Ahmedabad New Cotton Mills Co. Ltd. [1929] 4 ITC 245 (PC) held that "If the method of altering both valuations is not adopted it is perfectly plain that the profit which is brought forward is not the real one. It may be more or it may be less, but it has no relation to the true profit if the stock is valued on one basis when it goes out without considering the value of the stock when it comes in." The above principle was followed by the Hon'ble Bombay High Court judgment in the case of Melmould Corporation v. CIT [1993] 202 ITR 789 (Bom)
Assessment year: 2017-18 Page 4 of 6
We wish to reiterate that the assessee all along was valuing its monetary items relating to non-integral operations at the exchange rate on the date of transaction (the balance in FCTR account being notional is only a proforma entry). For the current previous year in order to comply with ICDS VI which required valuation at the yearend rate, it valued in accordance with the above legal principle, both opening and closing monetary items relating to non-integral operations at year end exchange rates and claimed the difference as deduction. By this manner the assessee complied with the requirements of ICDS VI without violating the legal principle of income determination.
6. Even otherwise, we submit that on the issue; of scope of circulars issued by CBDT, based on a number of judicial decisions, it is, not binding on the assessee when it is in variance with judicial principle. 7. We also wish to bring to your kind notice the opinion given in the Technical Guide on ICDS issued by ICAI which is produced as under- 10.3 As regards the treatment of the opening Foreign Currency Translation Reserve, a reference may be made to the clarifications on ICDS contained in Circular no. 10/2017, dated 23rd March, 2017 issued by the CBDT. Question no. 16 and answer thereto deal with the; impact of the transitional provision of the ICDS. The same are reproduced below: Question 16: What is the taxability of opening balance as on 1st day of April 2016 of foreign Currency translation Reserve (FCTR) relating to non- integral foreign operation, if any, recognized as per Accounting Standards (AS) 11? Answer: FCTR balance as on 1 April 2016 pertaining to exchange differences on monetary items for non-integral operations, shall be recognized in the previous year relevant for assessment year 2017-18 to the extent not recognized in the income computation in the past. 10.4 The correctness of the answer seems debatable as there is no real income that is really earned on the conversion. Further the treatment as prescribed in ICDS VI cannot apply to earlier years where the amount may not be taxable. Hence one will have to take appropriate professional judgment." 8. In view of the above, it is submitted that the order of AO is neither erroneous nor prejudicial to interest of revenue and hence no disallowance is called for.
4. None of these submissions, however, impressed the learned Principal Commissioner. She thus proceeded with the revision proceedings, and concluded as follows:
Assessment year: 2017-18 Page 5 of 6
As per clause (a) to Explanation to Section 263 (amended by Finance Act, 2015 with effect from 01.06.2015), an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner, the order is passed without making enquiries or verification which should have been made. In the instant case, as mentioned in paragraph 2 it is found that the A.O passed the assessment order without making inquiries and verification which were required to have been made in the case. The non-verification and recognizing the FCTR opening balance of Rs. 2238.55 crores as on 01/04/2016 pertaining to the exchange difference on monetary items for non-integral operations as income has resulted in consequent loss of revenue which has rendered the assessment order erroneous in so far as it is prejudicial to the interest of revenue. In this regard, the judgment of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Limited v. CIT [2000] 243 ITR 83 (SC) may be referred to wherein the Hon'ble Court held "...The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income-tax Officer, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. The phrase prejudicial to the interests of the revenue has to be read in conjunction with an erroneous order passed by the Assessing Officer." It was further held by the Apex Court that the assessment orders was erroneous if the assessing officer passed the assessment order without applying his mind to the case in all perspective. In view of the aforesaid judgment of the Apex Court, if assessment has been made without application of mind in all perspective and there is consequential loss of revenue the order becomes erroneous in so far it is prejudicial to the interest of revenue. In this case the A.O failed to apply his mind on the aspect of recognition of revenue on FCTR in compliance with Circular No. 10/2017 dated 23.3.2017 w.e.f 1.4.2016, thereby causing loss of tax to the Department. Therefore, the assessment order is held to be erroneous in so far it is prejudicial to the interest of revenue. 6 In this case, as is evident from the preceding paragraphs, the Assessing Officer by not bringing to tax the opening balance of FCTR amounting to Rs.2238,55,01,000/- to assessee's income for the years under consideration has not followed the Circular No. 10/2017 dated 23.3.2017 issued by CBDT. The assessment order dated 19.3.2019, is therefore, found erroneous on this issue in so far it is prejudicial to the interest of revenue. The assessment order is, therefore, set aside being erroneous and prejudicial to the interest of the revenue on the aforesaid issues and to be re-adjudicated after giving the assessee due opportunity under the law.
5. The assessee is aggrieved and is in appeal before us.
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position. 7. On a plain perusal of the impugned revision order as also the assessment order, which is subjected to revision by the said order, it is clear that the issue with respect to taxability of Assessment year: 2017-18 Page 6 of 6 foreign currency translation reserve (FCTR) related aspects has not been examined, or even claimed to have been examined, by the Assessing Officer at any stage. The impact of the CBDT circular dated 23rd March 2017 has not at all been considered by the Assessing Officer. Whatever be the legal position with respect to the taxability status related to FCTR, the fact remains that there is not even a basic inquiry in respect of this position. Such a casual approach of the Assessing Officer cannot meet our approval. The Assessing officer remaining passive on the facts which called for further inquiry, therefore, does indeed render the order erroneous and prejudicial to the interest of the revenue. To this extent, the subject assessment order is indeed erroneous and prejudicial to the interest of the revenue, so far as non-examination of this aspect of the matter is concerned. We, however, note that even though the learned Principal Commissioner has given remitted the matter to the file of the Assessing Officer for adjudication on merits, after giving a due opportunity of hearing to the assessee, she has made some observations on merits against the assessee. The matter being remitted to the file of the Assessing Officer for examination is meaningless when such observations are made by the Principal Commissioner. We, therefore, vacate these observations on merits, and direct the Assessing Officer to decide the matter afresh on merits in accordance with the law, by way of speaking and after giving a fair opportunity of hearing to the assessee- and without being influenced by the observations made by the learned Principal Commissioner on merits. All contentions on merits shall remain open. We order so.
As the matter has been permitted to go back to the Assessing Officer, with all contentions on merits being open, we are not inclined to deal with, legal submissions made by the learned senior counsel on merits at this stage. Suffice to say that all these issues remain open for adjudication as on now.
In the result, and subject to the observations made in paragraph 7 above, the appeal is allowed for statistical purposes. Pronounced in the open court today on the 8th day of March, 2022.