M/S.KALYAN JEWELLERS INDIA LTD,THRISSUR vs. THE ACIT, THRISSUR

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against the order of PCIT passed u/s 263 of the Income-tax Act,1961 ['the Act' for short] dated 28.10.2019 for the assessment year 2015-16.

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assessment order u/s.143(3) in this case was passed on 18/12/2017 by the Asst. Commissioner of Income Tax, Circle- 1(1), Thrissur, accepting the total income declared by the assessee. 2.1 Relevant IT MR was called for by the Ld. Principal CIT and on perusal of the same, he observed from records that assessment order passed on 18/12/2017 by Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue for the following reason(s):-

(i) The assessee company uses derivative financial instruments to manage risks associated with gold price fluctuations. The company has ad6pted the accounting principles set out in the guidance note on derivatives for contracts entered into for hedging gold price and foreign currency fluctuations. The outstanding contracts as at the balance sheet date are marked to market and gains or losses are recognised in the statement of profit and loss.

(ii) During the F.Y.2014-15 in order to hedge the price risk of gold, the company had entered into commodity forwards contracts and simultaneous foreign currency forward contracts to hedge the USD/INR risk. As per the accounting principles prescribed and followed by the company, a marked to market (MTM) gain on the gold forward contracts aggregating to Rs.5,562.79 lakhs was recognised in the statement of profit and loss. However, the amount was deducted (i.e. not offered for tax) while computing the total income under normal provisions.

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(iii) As per section 5(1) of the Income Tax Act, total income of a resident includes all income from whatever source derived which is received or deemed to be received or accrues or arises or deemed to accrue in India or accrues or arises to him outside India during the previous year. Further, as per Section 145(1) income chargeable under the head "Profits and Gains of business or profession" or "Income from other sources" shall, subject to the provisions of sub-section(2), be computed in accordance with either cash or mercantile system of accounting regularly employed by the assessee. A, per ruling of Apex Court in several cases, profits for income tax purposes are to be computed in accordance with ordinary principles of commercial accounting, unless, such principles stand superseded or modified by legislative enactments. Wherever necessary, the legislature made provisions in the Income Tax Act for such supersession — e.g. Sections 40, 43A, 43B, 145A, 145B etc. There is no provision in the Act to exclude the MTM gain recognised in the statement of profit and loss on accrual basis in accordance with accounting principles regularly followed by the company. The acceptance of companies incorrect claim resulted in short accounting of income under normal provisions.

(iv) On scrutiny of the assessment records it was noticed that the 'assessee had availed deduction of an amount of Rs.81,30,000/-ii7s.80GGB and Rs.60,00,000/- (i.e.50% of Rs.1,20,00,000/-) u/s.80G.(Total Rs.1,41,30,000/-) and stood allowed in assessments.

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2.2 In this connection Ld. Principal CIT noted that as per sub-section(4) to ,section 80G, aggregate sums referred to in sub-clause(iv), (v), (vi), (via) and (vii) of clause (a) and in clause (b) & (c) of sub-section(2) to section 80G exceeds ten percent of adjusted gross total income, then the amount in excess of ten percent of adjusted gross total income shall be ignored.

In this case the adjusted gross total income as per section 80G(4) is as follows:-

Gross total income as per computation of assessee Rs.2,21,06,961

Less: deduction availed u/s.80GGB Rs. 81,30,000 Adjusted gross total income Rs.1,39,76,911

Maximum qualifying amount to be deducted u/s.80G 13976911*10/100 Rs.1397691

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tax) while computing the total income chargeable to tax under normal provisions.

3.1 Ld. Principal CIT stated that Section 5 of the Act provides that the total income of a person for any previous year shall include all incomes derived from whatever source, which is received or is deemed to be received or which accrues or arises or is deemed to accrue or arise during such previous year, unless specifically exempt from tax under the provisions of the Act.

3.2 Perusal of assessment records/order sheet entries by the Ld. Principal CIT revealed that the assessment order was passed without making enquiries or verification which should have been made regarding the claim of deduction made by the assessee and whether the method adopted by the assessee to compute income chargeable to tax did satisfy the mandate of provisions of section 145 of the Act applicable for relevant A.Y. 2015-16. The Assessing Officer had not got relevant details in this regard during the assessment proceedings.

3.3 Ld. Principal CIT further stated that Mark to Market (MTM) gains are to be taxed on accrual basis has been held by Hon'ble ITAT Mumbai in the case of Tata Consultancy Services Ltd. Vs. CIT 2019 ITAT Mumbai (ITA No.2794/Mum/2018) order dated 18th April 2019 {(2019) (4) TMI 1228-ITAT Mumbai} which is directly on the issue of taxability of Mark to Market Gains.

3.4 Ld. Principal CIT observed that the assessing Officer had not made any enquiries in respect of the above issue during assessment proceedings. Also, whether the method adopted by the assessee to compute income chargeable to tax satisfied the mandate of section 145 of the Act was not examined by the

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Assessing Officer. Hence, the assessment order is deemed to be erroneous and prejudicial to the interests of revenue.

3.5 As regards the maximum qualifying amount eligible u/s 80G, the assessee's authorised representative, submitted the following "We hereby accept the wrong claim taken under section 80G and agree with the department's view regarding the maximum qualifying amount that can be claimed under the section."

3.6 In view of the above, Ld. Principal CIT set aside the assessment and directed the Assessing Officer to do fresh assessment after giving a reasonable opportunity of being heard to the assessee.

ITA No.744/Coch/2019 M/s. Kalyan Jewellers India Ltd., Thrissur Page 7 of 9 v) Large share premium received during the year (verify applicability of Sec 56(2)(viib)). vi) Delayed payment of tax and return filed late. vii) Large- other expenses claimed in the Profit & Loss a/c. viii). Depreciation claimed at higher rates/higher additional depreciation claimed. viii) New foreign asset in the nature of financial interest in any entity. ix) Low income shown by large contractors. x) Receipt of large value foreign remittance (Froml5CA). xi) Large difference in the opening stock of current year and closing stock of previous year shown in P86a/c as per Return of Income. ix). Large difference in the closing stock shown in Balance sheet and P8sLa/c of current year as per Return of Income. x). Mismatch in sales turnover reported in Audit Report and ITR. xii) Mismatch in amount paid to related persons u/s 40A(2)(b) reported. xi). Purchase of property reported in Form 26QB.

4.1 It shows that there was no enquiry on the present issue. In our opinion, Ld. PCIT can exercise jurisdiction u/s 263 of the Act if he is satisfied that order sought to be revised is:- 1) Erroneous 2) Prejudicial to the interest of revenue.

4.2 Section 263 of the Act empowers the Ld. PCIT/CIT to initiate suo motu proceedings either AO takes wrong decision without considering the material available on record or he takes decision without making any enquiries into matters, where such enquiry was prima facie warranted. The Ld. PCIT was of the opinion that there

ITA No.744/Coch/2019 M/s. Kalyan Jewellers India Ltd., Thrissur Page 8 of 9 was no proper enquiry by the AO and the AO accepted the return of income without making further enquiry with regard to MTM transactions while passing the assessment order on 18.12.2017 u/s 143(3) of the Act. It is incumbent on the part of AO to come to the independent conclusion that issue dealt by the Ld. PCIT is in order. In the present case, the AO has absolutely closed his eyes and accepted the issue in dispute without making any enquiry. Therefore, Ld. PCIT exercised jurisdiction u/s 263 of the Act and remitted the issue in dispute to the file of AO for further enquiry. The Ld. AO being a quasi-judicial authority cannot take a view, either against or in favour of the assessee/revenue without making proper enquiries and without proper examination of the claim made by the assessee in the light of applicable law. In the present case, there was no iota of evidence on record to suggest the enquiry made by the AO on the impugned issue raised by the Ld. PCIT. In our opinion, there is no infirmity in exercising jurisdiction by Ld. PCIT u/s 263 of the Act and setting aside the assessment order dated 18.12.2017 for the assessment year 2015-16 to the file of AO to make further enquiry with regard to gain or loss on MTM transactions. Hence, we dismiss the appeal filed by the assessee.

Sd/- Sd/- (Beena Pillai) (Chandra Poojari) Judicial Member Accountant Member

Bangalore, Dated 14th Sept, 2022. VG/SPS

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Asst. Registrar, ITAT, Bangalore.