DCIT, CHENNAI vs. FLORIND SHOES (P) LTD., CHENNAI

आदेश / O R D E R

PER D.S.SUNDER SINGH, ACCOUNTANT MEMBER:

These cross appeal are filed by the assessee and the Revenue against the Order dated 29.11.2013 of Commissioner of Income Tax (Appeals)-II, Chennai, in for the AY 2003-04. & 820/Mds/2014 :- 2 -: AY 2003-04 (Assessee’s appeal):

2.0 The Assessing Officer (in short ‘AO’) found that the assessee has made the High Sea sales of Rs.1,03,55,040/- and received the income of Rs.1,75,01,599/- Exchange difference which was not disclosed in the return of income. Therefore, the AO has reopened the assessment u/s.147 and completed the re-assessment by an order dated 31.11.2010 u/s.143(3) r.w.s.147 of Income Tax Act on total income of Rs.2,22,63,367/-. During the revised assessment, the assessee furnished the copies of agreements and invoices, etc., and as per the agreement the assessee is entitled for a consideration of 2% over and above the invoices value clear of all the expenses. The assessee has not furnished any material to show that the sales were done on ‘no Profit & Loss’ basis.

Therefore, the AO estimated the income at the rate of 2% on gross High Sea sales and brought to tax the exchange rate fluctuation of Rs.1,75,01,599/- as income. Aggrieved by the order of the AO the assessee went on appeal before the CIT(A) and challenged the order of the AO in respect of both reopening and the additions made in the reassessment order. The Ld CIT(A) confirmed the reopening of assessment, estimation of income and deleted the addition of exchange rate fluctuation. Aggrieved by the order of the Ld.CIT(A) the assessee filed appeal before us. & 820/Mds/2014 :- 3 -:

3.0 The assessee raised two issues in its grounds of appeal. The first issue is related to the re-opening of assessment and the second issue is the estimation of income @2% on High Sea sales.

4.0 Ground Nos.1 & 10 are general in nature which do not require specific adjudication.

5.0 Ground Nos.2 to 6 are related to the re-opening of assessment.

The Ld.AR during the appeal hearing argued that the assessee filed the return of income in this case on 13.11.2003 admitting the taxable income of Rs.1,29,60,090/- and the assessment was completed u/s.143(3) on total income of Rs.1,38,74,513/- by an order dated 27.02.2006. Subsequently, the assessment was re-opened by issue of notice u/s.148 on 18.03.2010, that is beyond the limit of 4 years without having any fresh material before the AO. Therefore, the Ld.AR argued that the issue of notice u/s.148 without having fresh material is bad in law and required to be quashed. On the other hand, the Ld.DR argued that the assessee has made High Sea sales of Rs.1,03,55,040/- and received the income of Rs.1,75,01,599/- as exchange rate difference and the same was not disclosed by the assessee in the Income Tax Retur and the same came to the notice of the AO through commercial tax department which constitutes the additional information and hence AO has rightly re-opened the assessment and there is no error in the re-opening of assessment. & 820/Mds/2014 :- 4 -:

6.0 We heard both the parties and perused the material placed before us.

In this case, the assessment was completed u/s.143(3) on 27.02.2006 and the notice u/s.147 was issued on 18.03.2010 beyond the period of four years. As per the proviso to Sec.147 of Income Tax Act, no action can be taken u/s.147 in a case where the assessment is completed u/s.143(3) unless the income chargeable to tax has escaped assessment by reason of the failure on the part of the assessee. For ready reference, we extract the relevant provisions of Income Tax Act as under: 147. If the 21[Assessing] Officer 22[has reason to believe23] that any income chargeable to tax has escaped assessment23 for any assessment year, he 23may, subject to the provisions of sections 148 to 153, assess or reassess23 such23 income 23and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings23 under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year24, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure24 on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts24necessary for his assessment, for that assessment year:

In this case, the assessee has made the High Sea sales of Rs.1,03,55,040/- and received the income of Rs.1,75,01,599/- which has come to the notice of the Income Tax Department from the commercial tax Department and the assessee has not disclosed the above receipts in the income Tax returns. From a query raised from the Bench, the Ld.AR & 820/Mds/2014 :- 5 -: fairly conceded that the information regarding the High Sea sales and the Exchange fluctuation was not disclosed in Income Tax Return in the original Return. Thus there is a failure on the part of the assessee in not disclosing the income. The Ld.CIT(A) also dealt with the issue in detail in his order in Para No.4.1 to 4.1.6 which is extracted here under for the sake of convenience.

4.1.1 From the above provisions, it is clear that as and where there is an assessable income for any of the assessment years and the same was not brought to tax, it constitutes a reason for re-opening the return u/s.147 of the Act. Further, what constitutes the escapement of income has also been provided in the above provisions of sec. 147 of the Act. As per these provisions, the escapement of income means, - i. Understatement of income or claim of excessive loss, deduction, allowance or relief in the return (where the return of income has not been subjected to scrutiny assessment u/s.143(3)); or ii. Underassessment of taxable income, or assessing the income at too low a rate, or granting of excessive relief, or granting/computation of excessive loss or depreciation allowance or any other allowance, if the return was already subjected to scrutiny assessment u/s.143(3).

4.1.2 Whereas in the instant case, as per the information contained in the copies of Commercial Tax Department’s assessment order the assessee during the financial year 2002-03 had made high sea sales of Rs.1,03,55,040/-. The company also received an income of Rs.1,75,01,599/- as Exchange Rate difference. However, the assessee has not included these two incomes in its P&L account of the year. Neither the assessee disclosed these details in its return of income filed, nor the Assessing Officer was aware of these facts at the time of completing the original assessment u/s.143(3) of the Act. Further, this information was received from an external source (Commercial Tax department). In addition, the assessee failed to exclude 90% of the non-business income while computing the deduction u/s.80HHC of the Act. Thus, there is an underassessment of taxable incomes, within the meaning of sec.147 of the Act. This is sufficient reason for re-opening the assessments u/s.147. Accordingly, after recording these reasons, the Assessing Officer re- opened the assessment u/s.147 of the Act, by issuing notice u/s.148. The Assessing Officer also communicated these reasons to the assessee during the course of assessment proceedings. In fact, these facts are clearly available from the assessment order itself, which is reproduced as under: • The assessee company has filed return of income for the Asst Year 2003- 2004 on 13.11.2003 returning taxable income of Rs.1,29,60,090/-. The return was processed u/s.143(1) on 21.08.2004. Then, the assessee filed a revised return of income on 4.3.2005 returning a total income of Rs.1,15,24,380. Later, scrutiny assessment u/s.143(3) of the Act was completed on 27.02.2006 and the taxable income was determined at Rs.1,38,74,513/-. Against the assessment order, the assessee preferred an appeal before CIT(Appeals). The CIT (Appeals)-III, vide order in dated 04.06.2007, deleted certain disallowances / additions made in the assessment order and consequently, the taxable income was revised at Rs.1,33,70,916/- and a refund of Rs.14,59,060/- was determined, which was fully adjusted against demand of assessment year 2004-05. • Subsequently, from the copies of Commercial Tax Department’s assessment order it is seen that the assessee has made High Sea Sales of Rs.1,03,55,040/- and it appeared that the assessee received an income of Rs.1,75,01,599/- as Exchange & 820/Mds/2014 :- 6 -:

Rate difference. The assessee has not disclosed these receipts in the P&L account as turnover and under ‘Other income’ respectively. • In view of the above, the assessment was reopened u/s.147-of the Act and a notice u/s.148 was issued on 18.03.2010. In response, the assessee filed a letter on 08.04.2010, requesting to treat the original return as compliance to notice u/s.148. A notice u/s.143(2) dated 19.04.2010 was issued to regularize the assessment. As required by the assessee, the reasons for reopening the assessment were communicated.

4.1.3 Thus, as discussed in detail by the Assessing Officer in his order, the issues of high sea sales of Rs.1,03,55,040/-, Exchange Rate difference of Rs.1,75,01 599/- and also the issue of exclusion of 90% of the other non-business income from the eligible profits for the purpose of deduction u/s.80HHC were never considered at the time of original assessment u/s.143(3). Hence, the question of “change of opinion” doesn’t apply to the facts of the present situation.

4.1.4 Further, when there is no discussion on the issue in the assessment order and no details were called for by the Assessing Officer or filed by the assessee on the issue, an no finding either positive or negative was arrived at during the course of the original assessment proceedings, there is no question of change of opinion, as held by several courts, like - • A.L.A. Firm Vs CIT 102 ITR 622 (Mad), • Ess Kay Engineering Co (P) Ltd. Vs CIT 247 ITR 818 (SC) • Revathy C.P. Equipments Ltd. Vs DCLT & Ors 241 ITR 856 (Mad) • EMA India Ltd. Vs ACIT 3ODTR 82 (All)

Change of opinion comes to rescue of assessee only when Assessing Officer has taken one of permissible views at the time of original proceedings. A wrong application of law cannot be held as permissible view and that can always be changed for appreciating law, as held by Kolkata bench of ITAT in the case of Sorn Dutt Builders (P) Ltd. Vs DCIT 98 lTD 78 (Kol).

4.1.5 More importantly, since the information regarding the escapement of income has come from the external source (other than the details contained in the return of income and assessment folders), even the restrictions imposed by the proviso to sec. 147 that ‘no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to [...] disclose fully and truly, all material facts necessary for his assessment, for that assessment year’, will not come to the rescue of the assessee.

4.1.6 Therefore, in view of the above discussions and the judicial pronouncements, the Assessing Officer’s action of re-opening the assessments u/s.147 of the Act, is as per the Act and hence confirmed. The assessee fails in its appeals in this regard.

6.1 Since the income has escaped from the assessment because of the failure on the part of the assessee to disclose fully and truly all material facts for the assessment, we do not find any infirmity in the order of the Ld.CIT(A) and uphold the same. Accordingly, Ground Nos.2 to 6 are dismissed. & 820/Mds/2014 :- 7 -:

7.0 Ground Nos.7 & 8 are related to the estimation of income on High Sea Sales:

The assessee made High Sea Sales of Rs.1,03,55,040/- which was not disclosed in the Income Tax returns. The assessee furnished the agreements copies of invoices, etc., and as per the agreement the assessee is entitled for a consideration of 2% over and above the invoice value clear of all the expenses. The assessee has not furnished any material to show that the sales were done on ‘no Profit & Loss’ basis.

Therefore, the AO estimated the income at the rate of 2% on gross sales and the first Appellate Authority has confirmed the addition.

7.1 Aggrieved by the order of the Ld.CIT(A), the Ld.AR filed the appeal before us and argued that the High Sea Sales were made outside the country by way of High Sea Sales and purchases hence the same was not included in the Profit & Loss A/c both debit and credit sides. The Ld.AR submitted that the High Sea Sales were made at cost price and there was no profit element in the transaction. Accordingly, the Ld.AR contended that the addition made by the AO required to be deleted. On the other hand, the Ld.DR invited our attention to the observations made by the AO regarding receipt of consideration @ 2% over and above the invoice value and argued that CIT(A) has rightly confirmed the addition and no interference is called for. & 820/Mds/2014 :- 8 -:

7.2 We heard both the parties and perused the material placed before us.

In the Assessment Order, the AO has given a finding that the assessee is entitled for the consideration of 2% over and above the invoice value on High Sea sales. All the expenses would be borne by either purchaser or seller. The Ld.AR has not brought any evidence to prove that the assessee has not received the consideration over and above 2% on High Sea Sales. The Ld.A.R also did not bring any evidence relating to the expenditure incurred on High Sea sales over and above the amount debited to P&L account. Therefore, we do not find any infirmity in the order of the Ld.CIT(A) and the same is confirmed. Ground Nos.7 & 8 of the assessee are dismissed.

8.0 Ground No.9 is related to not giving proper opportunity by the Ld.CIT(A):

The Ld.AR has not made any argument on this ground and as per the Ld.CIT(A) order, the order was passed after giving suuficient opportunities to the assessee. Therefore, this ground of appeal is dismissed.

9.0 In the result, the appeal of the assessee is dismissed. & 820/Mds/2014 :- 9 -: ./2014 AY 2003-04 (Revenue’s Appeal)

10.0 The Revenue has filed the appeal against the CIT(A) order on deletion of addition in respect of the Exchange Rate of Rs.1,75,01,595

Appearing for the Revenue, Learned Departmental Representative (in short ‘Ld.DR’) argued that the assessee had reported turnover of Rs.168,23,12,632/- in the Income tax Return and the turnover reported for CST was Rs.171,45,06,509/- which was inclusive of exchange fluctuation gain of Rs.1,75,01,599/- which should have been actually offered by the assessee under the head other income. The AO has called for the details during the assessment proceedings u/s.142(1) of Income Tax Act (in short ‘the Act’) but the assessee has not furnished the details such as party wise details of export sales, prevailing rate of exchange as on the date of invoice and the date of realization etc., Hence the AO treated the entire Exchange rate fluctuation as income and added back to the Income. On the other hand, Learned Authorized Representative (in short ‘Ld.AR’) relied on the Ld.CIT(A) order.

11.0 We have considered the submissions made by the both the parties and perused the material placed on record. & 820/Mds/2014 :- 10 -:

As per the Assessment Order, the assessee has made High Sea sales of Rs.150355340/- and it had received the income Rs.1,75,01,599/- as exchange rate difference. During the assessment proceedings, the AO has called for the details u/s.142(1) but the assessee has failed to furnish the details called for. The assessee has filed the revised return admitting the turnover of Rs.168,23,12,632/- against the total turnover of Rs.171,45,06,509/-. The income of Rs.1,75,01,599/- received as exchange rate difference was not included in the turnover admitted for income tax purposes. The assessee has not furnished the party-wise break up of details in respect of export sales, prevailing rate of exchange on the date of Invoice and the date of realization, etc., even though the same was called for by the AO by notice u/s.142(1) of Income Tax Act dated 11.11.2010. The Ld.AR argued that the exchange rate fluctuation would not form part of the total sales. Hence, the exchange rate fluctuation should be reduced from the sales. The assessee argued that the exchange rate has resulted in loss but not the gain. Whether the exchange rate fluctuation was loss or gain, whether it should be reduced from the sales or to be taxed separately, required to be verified from the bills and invoices raised by the assessee, books of accounts and the records. No such exercise was done by either the AO or the Ld.CIT(A). Therefore, we are of the considered opinion that the issue should go back to the file of AO to verify whether the exchange rate fluctuation was in fact loss or gain. Both the parties have agreed for remitting the matter back to the file of AO. Accordingly, we set-aside the orders of the lower authorities on & 820/Mds/2014 :- 11 -: this issue and remit the matter back to the file of the AO to decide the issue afresh on merits in the light of the above direction of this Tribunal.

12.0 In the result, the appeal of the Revenue is allowed for statistical purpose.