Delhi High Court

Amrit Steels Ltd. vs Dy. Cit on 14 July, 2000

Equivalent citations: (2001) 71 TTJ Del 761

ORDER

Phool Singh, J.M.

This appeal, preferred by the assessee, is directed against order dated 6-3-1995, recorded by the Commissioner, Meerut, under section 263 of the Income Tax Act, 1961, by which assessment order of the assessee for assessment year 1992-93 was set aside to the limited extent with direction to the assessing officer (hereinafter referred to as the "assessing officer") to reexamine the claim of the assessee about manufacturing and other expenses amounting to Rs. 98,65,051 debited by the assessee under sub-head "foreign exchange loss" and to pass suitable order.

2. Assessment of the assessee for assessment year 1992-93 was completed on 26-3-1993, at an income of Rs. 27,11,668. From perusal of assessment records, the Commissioner, Meerut, noted that assessee had debited an amount of Rs. 98,65,091 under sub-head "foreign exchange loss" in the profit and loss account for the year ending 31-3-1992. In the annual report and accounts for that period the assessee had mentioned that due to steep devaluation of Indian rupees vis-a-vis US dollar during this year the company had to make a provision of Rs. 98.65 lacs (net) as against Rs. 42.55 lakhs in the preceding year towards "foreign exchange loss" as liability in foreign currency for purchase of zinc in the year 1988. The Commissioner, Meerut, noted that assessing officer allowed the said claim of the assessee which he was of the opinion erroneous and treated as prejudicial to the interest of revenue . He issued show-cause notice to the assessee as to why action under section 263 should not be taken on the facts of this case. The assessee filed reply and it was submitted that loss of the assessee was liable to be allowed as assessee was maintaining accounts on mercantile basis. The liability to pay the foreign suppliers due to the outstanding balance in respect of goods purchased by the assessee was revenue expenditure that is why it was an allowable liability. Zinc was purchased in 1988 and question was whether additional liability of Rs. 98,65,051 incurred by the assessee due to foreign exchange fluctuation arose in the year 1988 or arose during the accounting year relevant to the assessment year 1992-93 and was allowable or not and for that reliance was placed by the assessee on the decision of Calcutta High Court in the case of CIT v. International Combustion (I) (P) Ltd. (1982) 137 ITR 184 (Cal) in which facts were said to be identical. It was also submitted that purchases made by the assessee in earlier year will not make any difference in this case as liability of earlier year remained as trading liability of the year under consideration and in order to discharge that liability, the assessee, after devaluation had to pay a larger amount in Indian rupees. Reliance was also placed on the decision of Honble Supreme Court in the case of Sutlej Cotton Mills v. CIT (1978) 116 ITR 1 (SC) in which it was laid down by their Lordships that where profit or loss arises to an assessee on account of the appreciation or depreciation in the value of foreign currency held by it on conversion into another currency, such profit or loss would ordinarily be trading profit or loss if the foreign currency is held by the assessee on revenue account or as a trading asset. The contention was that assessing officer has rightly allowed the claim of the assessee.

3. The Commissioner considered all the submissions and was in agreement with the contention of the assessee that expenditure was allowable one but the same is to be allowed only in the year the liability arose on account of the payment of revenue which was on an increased amount due to fluctuation in foreign exchange. As assessee had not made any payment in the year under consideration, the claim of the assessee cannot be allowed. The learned Commissioner also distinguished the ratio of the case of CIT v. International Combustion (I) (P) Ltd. (supra) and further concluded that assessee had not made any payment and simply claimed the foreign exchange loss on notional basis. He was of the opinion that it was extremely difficult to hold that claim of the notional loss which had arisen in the earlier year is qualified for deduction from the profit and loss account of the particular year merely on the basis that assessee was maintaining mercantile system of accounting. Accordingly, he set aside the assessment order on this issue with direction to assessing officer to re-examine the entire matter on merit. Aggrieved, the assessee has filed appeal before the Tribunal.

4. The learned counsel for the assessee Shri C.S. Aggarwal, advocate, reiterated the same submissions and pointed out that Commissioner, Meerut, was not justified to pass the impugned order as assessing officer had rightly allowed the claim of the assessee. In order to appreciate the stand of assessee the learned counsel invited our attention to chart filed along with the paper-book which contains the details of expenses relating to purchase of zinc from financial year 1988-89 to 1994-95. It was submitted that in assessment year 1989-90 cost of goods debited was Rs. 2,70,99,347 along with interest of Rs. 12,19,470. Sale price credited to profit and loss account was Rs. 3,85,87,288 and profit was declared at Rs. 42,81,022. In assessment year 1990-91 the assessee claimed foreign exchange fluctuation loss of Rs. 42,49,845 which was allowed by the assessing officer and identical claim in assessment year 1991-92 to the extent of Rs. 42,54,624 was allowed. In the year under consideration the assessing officer following the earlier years order allowed the claim which is subject-matter of order recorded by the Commissioner but findings of the Commissioner are not in consonance with the factual position. The learned counsel submitted that Commissioner rightly observed that assessee was following mercantile system of accounting and the amount is allowable expenditure but he wrongly noted that loss claimed by the assessee on account of the foreign exchange fluctuation was on notional basis while factual position is otherwise as due to fluctuation in the foreign exchange value of Indian rupees vis-a-vis US dollar the trading liability which was on a specific amount stood increased to another specific figure and thus it cannot be said that trading liability which increased in this manner was notional one. Further, it is also not contingent liability as observed by the Commissioner. Learned counsel further pointed out that in assessment year 1993-94 identical claim of the assessee was allowed by the department vide intimation under section 143(1)(a) of the Act and thus action of the assessing officer in allowing the claim is based on the stand of the department in earlier years and subsequent years. Not only this the learned counsel further submitted that Tribunal Delhi Bench "D" in the case of Telemecanique & Controls (India) Ltd. v. Dy. CIT (1997) 60 lTD 483 (Del-Trib) was seized with the identical matter. In that case assessee was following mercantile system of accounting and it had imported raw material from a French company and claimed deduction on revenue account being the exchange loss which was incurred on account of the adverse fluctuation in exchange rate as on 31-3-1992, which was disallowed by the assessing officer. The Commissioner (Appeals) also opined that amount was allowable but that was to be allowed on a point of time when money was actually remitted. The Tribunal concluded that claim of the assessee was allowable on revenue account in respect of exchange loss arising consequent to increased foreign currency liability for payment of cost of raw-material imported as a result of adverse fluctuation in exchange rate though amount was not actually paid in the relevant previous year. The contention of the learned counsel on the basis of the above is that facts of the assessees case are identical and if the stand of the department in the case of assessee itself in preceding years and subsequent years as well as the view of the Tribunal in identical case is taken into consideration then irresistible conclusion will be that it is one of the possible view which helps the case of the assessee and if one view is possible which had been accepted by the assessing officer then the Commissioner had no jurisdiction to exercise his revisional power under section 263. The learned counsel had referred to the decision of Honble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (2000) 14 DTC 146 (SC) : (2000) 243 ITR 83 (SC) in which their Lordships after discussing the scope of power of Commissioner under section 263 of the Act concluded that when an Income Tax Officer adopted one of the course permissible in law and it has resulted loss of revenue or where two views are possible and Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order, prejudicial to the interest of revenue unless the view taken by the Income Tax Officer is unsustainable in law. On the basis of this ratio the contention is that Commissioner had wrongly exercised his power under section 263 and order is to be quashed.

5. The learned Departmental Representative as against it, placed reliance on the order of Commissioner and placing reliance on the decision of Honble Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT (supra) argued that it was no doubt trading liability but it can be claimed in the year of payment. Further, the learned Departmental Representative submitted that principle of res judicata is not applicable to the income-tax proceedings and what assessing officer has done in earlier years was not binding on the Commissioner. In the year under consideration Commissioner perused the record and rightly concluded that assessing officer has wrongly decided the issue in favour of the assessee without making any enquiry and if no enquiry is made by the assessing officer then Commissioner had all jurisdiction to intervene and to set aside the assessment order to that extent and to direct the assessing officer to make necessary enquiry which the Commissioner, Meerut, had done in the case in hand and the same is not in anyway prejudicial to the interest of assessee. The Commissioner had given an open field to assessing officer to examine the case of the assessee and after taking the legal position into consideration to decide the allowability or otherwise of the claim. The learned Departmental Representative has referred to the decisions of the Honble Punjab & Haryana High Court in the case of CIT v. Sunil Theatre (1989) 177 ITR 558 (P&H), Allahabad High Courts decision in Addl. CIT v. Saraya Distillery (1978) 115 ITR 34 (All) and CIT v. Jagadhri Electric Supply & Industrial Co. (1983) 140 ITR 490 (P&H) to stress the point that Commissioner had right to pass the order in such circumstances.

6. In rejoinder the learned counsel submitted that Commissioner had not made basis of the impugned order the point that assessing officer had not carried out any enquiry before allowing the claim of the assessee and unless this was not recorded in the notice issued to an assessee under section 263 or in the impugned order that basis cannot be argued by the learned Departmental Representative nor Tribunal can alter the basis for initiation of revisional proceedings by Commissioner as concluded in the case of CIT v. L.F. Dsilva (1991) 192 ITR 547 (Karn). The contention is that learned Departmental Representative was not able to point out as to why the view of learned assessing officer was not one of the possible views and how the ratio of Honble Supreme Court in the case of Malabar Industrial Co. Ltd. v. CIT (supra) was not applicable.

7. We have considered the rival submissions and perused the impugned order as well as gone through the case laws referred to by the learned representatives of the respective parties. Undisputed facts which are on the record are that assessee had purchased zinc from foreign country in 1988 and had shown the transaction in assessment year 1989-90 including the profit earned out of that transaction. The cost of the goods remained to be paid and due to fluctuations of foreign exchange rate of Indian rupees vis-a-vis US dollar the assessee claimed Rs. 22,49,854 as foreign exchange fluctuation loss which was allowed in assessment year 1990-91 and such claim for Rs. 42,54,624 was further allowed in assessment year 1991-92 by the assessing officer. Nothing has come on record as to whether the department has initiated any proceeding against those orders or not. Not only this in assessment year 1994-95 the assessee claimed such loss to the extent of Rs. 8,41,918 and department has allowed the claim. The Commissioner, Meerut, has also noted in the impugned order that assessee was following mercantile system of accounting and further admitted that the unpaid price of zinc purchased by the assessee was a trading liability and amount due was an allowable expenditure along with the fluctuation loss. The only point which had been made basis for passing the impugned order by the Commissioner is that such loss is allowable only in the year when assessee is remitting the unpaid price of the zinc along with the amount of foreign exchange fluctuation loss. In this connection we may refer to the decision of Tribunal in the case of Telemecanique & Controls (India) Ltd. v. Dy. CIT (supra) in which facts were identical. Assessee who was following mercantile system of accounting imported raw material from French company. It claimed deduction on revenue account being the "exchange loss" which was incurred on account of the adverse fluctuation in exchange rate as on 31-3-1992 vis-a-vis to Franc as compared to Indian rupee. The amount was not actually paid but was stated to be payable on demand. The assessing officer rejected the claim by holding that the same should be allowed at the point of time when the money was actually remitted as it was contingent liability. The Commissioner (Appeals) was also of the same opinion while dismissing the appeal. The Tribunal concluded that system of accounting followed by an assessee is a crucial factor for allowability of expenditure and loss as also for the taxation on receipts. In the case of the assessee burden had increased in respect of the liability to pay the cost of the goods which it had imported admittedly on revenue account. As it followed the mercantile system of accounting it was entitled to claim the consequential loss in the year in which devaluation took place. The Bench further took into consideration the provisions of section 43A of the Act which speak of an increase or reduction in the liability of the assessee as expressed in Indian currency for making payment towards whole or a part of the cost of the assets and observed further that no doubt that section refers to capital expenditure but it no way envisages payment as a condition for effecting an increase or decrease in the cost of an asset for specified basis. The words "increase or reduction in the liability" are to be understood in the context of the method of accounting followed by an assessee. This line of reasoning could equally be applied to the claim of the assessee under section 28 and on that basis claim of the assessee was allowed irrespective of the fact that no actual payment was made in that year. The reasonings of the Commissioner in the impugned order are identical to the submissions of the learned Departmental Representative before the Tribunal and Tribunal had considered all the case laws on that point while arriving at the conclusion.

8. Not only this in the case of Sutlej Cotton Mills Ltd. (supra) their Lordships of Apex Court have laid down that where profit or loss arises to an assessee on account of appreciation or depreciation in the value of foreign currency held by it, such profit or loss would ordinarily be trading profit or loss if the foreign currency held by the assessee was on revenue account or as a trading asset. The Honble Calcutta High Court in the case of CIT v. International Combustion (I) (P) Ltd. (supra) had also allowed such loss on devaluation of Indian rupee. No doubt that was a case in respect of purchase of plant and machinery but ratio was the same and their Lordships of Calcutta High Court held that additional liability incurred by the assessee due to the devaluation of Indian rupee was an admissible deduction in computing its profit in the year under consideration.

9. From the consideration of the above case laws as well as the stand of the department in the case of the assessee in the preceding years as well as in assessment year 1994-95 where such claim of the assessee stands allowed, the question arises as to whether Commissioner can invoke the jurisdiction under section 263 of the Act because action of the assessing officer in allowing the claim of the assessee is having support of the case laws referred to above including the decision of the Tribunal in the case of Telemecanique & Controls (India) Ltd. v. CIT (supra) which is on identical facts. The scope of powers of Commissioner under section 263 had been subject-matter of decision of Apex Court in the case of Malabar Industrial Co. Ltd. v. CIT (supra). Their Lordships reproduced the section 263 and concluded that provision of section 263 cannot be invoked to correct each and every type of mistake or error committed by the assessing officer but it is only when an order is erroneous that the section will be attracted. Their Lordships further proceeded to define the phrase "prejudicial to the interest of revenue " and noted that it is not an expression of art and is not defined in the Act. According to Their Lordships in its ordinary meaning it is of wide import and is not confined to loss of tax. Their Lordships have laid down the following relevant observation on this point which is reproduced as under :

"The phrase "prejudicial to the interest of revenue " has to be read in conjunction with an erroneous order passed by the assessing officer. Every loss of revenue as a consequence of an order of the assessing officer cannot be treated as prejudicial to the interests of the revenue . For example, when an Income Tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue ; or where two views are possible and the Income Tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue, unless the view taken by the Income Tax Officer is unsustainable in law. It has been held by this court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the assessing officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue , Rampyari Devi Saraogi v. CIT (1968) 67 ITR 84 (SC) and in Smt. Tara Devi Aggarwal v. CIT (1973) 88 ITR 323 (SC). "

10. If we apply the above preposition of law laid down by their Lordships of Apex Court to the facts of the case then the assessment order framed by the assessing officer allowing the claim of the assessee cannot be treated as prejudicial to the interest of revenue as assessing officer has taken one view which is possible one irrespective of the fact that Commissioner did not agree to the same but it cannot be treated as erroneous and prejudicial to the interest of revenue as their Lordships have opined. Respectfully following the same, the only conclusion is that order passed by the Commissioner under section 263 of the Act is not sustainable and the same is liable to be quashed.

11. In the result, appeal is allowed and order under section 263 passed by the Commissioner is hereby cancelled.