1. This appeal filed by the assessee is directed against the order dated 2.2.2010 of the CIT(A) arising from the order relating to AY 2004-05.
2 The assessee has raised the following effective grounds in its appeal:
i) The ld CIT(A) has erred in confirming the reopening of the assessment proceedings u/s 147 of the act, as valid through there was additional material which was not disclosed in the original scrutiny proceedings for the year under consideration.
ii) The ld CIT(A) has erred in confirming the reopening of the assessment proceedings through the original order made u/s 143(3) of the Act contained the detailed note ofthe allowance ofthe said fluctuation.
Iii The ld Cit(A) has erred in confirming the additions of Rs. 99,78,719/- towards foreign exchange gain which is nothing but the notional gain accounted for in terms of Accounting Standard 11 issued by the Institute of Chartered Accountants of India.
iv) The ld CIT(A) has erred in confirming the additions of Rs. 99,78,719/- based upon the decision in the case of Woodward Governor India Pvt Ltd as reported in 312 ITR 254 without correlating the facts of the case to the case of the appellant.”
3. The grounds nos 1 & 2 relate to validity of reopening of the assessment.
3.1 Facts of the case, in brief, are that the original assessment was completed u/s 143(3) on 29.9.2006 determining the total loss at Rs. 4,95,28,863/-. Subsequently the assessment was reopened by issuing notice u/s 148 on 17.2.2009 on the ground that the assessee has reduced an amount of Rs. 1,00,38,101/- on account of foreign exchange fluctuation gain from the income and failed to add back the said amount in the total income which resulted into under assessment. In the reassessment, the Assessing Officer made an addition of Rs. 99,78,719/- towards foreign exchange gain. The assessee has challenged the reassessment as well as validity of reopening of the assessment before the CIT(A) which was dismissed vide the impugned order.
4 Before us, the ld AR of the assessee has submitted that the reopening is base on change of opinion. He has referred the reasons for reopening of the assessment at page 42 of the paper book and submitted that the Assessing Officer made a detailed enquiry and examined about the foreign exchange fluctuation and after considering the reply of the assessee in respect of foreign exchange fluctuation gain as well as loss, the Assessing Officer accepted the same. Thus, reopening of the assessment based on the same issue is nothing but change of opinion. The ld AR has referred the reply of the assessee to the query made by the Assessing Officer and submitted that the assessee has given the full details of working of Foreign Exchange Fluctuation expenses in Annexure L of the said letter wherein the assessee has computed the working of notional gain on fluctuation rate on ICICI term loan at Rs. 1,06,01,410/- and after adjusting the actual loss( on working capital FCNRB loss from SBI) of Rs. 5,63,309/-, the net notional gain has been worked out at Rs. 1,00,38,101/-. Since the notional loss as on 31.3.2004 on term loan and on capital account, the same cannot be treated as income of the assessee. The ld AR has then contended that once the Assessing Officer has duly examined and verified the question of foreign exchange fluctuation, the assessment cannot be reopened on the same issue. He has relied upon the decision of the Hon’ble Supreme Court in the case of CIT vs Kelvinator India Ltd reported in 321 ITR 561 as well as the decision of the jurisdictional High Court in the case of Aventis Pharma Ltd vs ACIT reported in 323 ITR 570.
4.1 The ld DR, on the other hand, while supporting the orders of the lower authorities has submitted that in the original assessment, the Assessing Officer examined only the issue of loss on foreign exchange fluctuation and not the issue of gain on exchange fluctuation rate. He has submitted that the assessee has reduced this amount of Rs. 1,00,38,101/- in the computation of the total income with note that the item separately treated whereas this amount has not been added back separately. Thus, this issue was not at all examined and decided by the AO in the original issue. The ld DR, thus contended that when no view was taken by the Assessing Officer in the original assessment, then there is no question of change of opinion at the time of reopening of the assessment on that issue.
Assessing Officer made an inquiry regarding foreign exchange fluctuation loss, which was replied by the assessee his vide letter dated 14.9.2006, which was reproduced by the Assessing Officer at para 6 of the original assessment order as under:
“Term loan of Rs. 43.75 crores from ICICI bank was converted into US $ loan in January 2004 to reduce the cost of borrowing. The difference of rate of conversion of loan and the rate prevailing on 31st March 2004 amounting to Rs. 1,00,38,100/- which was credited to Profit and loss account as foreign exchange fluctuation. This comprises of Rs. 1,06,01,410/- as notional gain of foreign exchange fluctuation and Rs. 5,63,310/- as actual loss on account of foreign exchange fluctuation on the payment to bank. Thus, resulting in the net gain of Rs. 1,00,38,100/-as shown in the groupings of profit and loss account. On further verification it was noticed that one of the installment was due in the month of March 2006 on which the company has made a gain of Rs. 59,382/-. Accordingly claim of loss of Rs. 5,63,310/- as claimed in the computation of total income under the head of Crystallized Foreign Exchange loss will stand reduced to Rs. 5,03,928/-.”
5.1 It is evident from the explanation given by the assessee vide letter dated 14.9.2006, as produced by the Assessing Officer in the original assessment that the amount of Rs. 1,00,38,100/- was shown by the assessee as notional gain on account of foreign exchange fluctuation with respect to the term loan liability. The Assessing Officer, after considered the reply had made the addition with respect to Rs. 59,382/- on account of foreign exchange fluctuation loss. Thus, it is clear that the Assessing Officer, at the time of reassessment, was satisfied with the reply given by the assessee regarding the notional gain on foreign exchange fluctuation because the gain was on capital account. Subsequently, the Assessing Officer has reopened the assessment after recording the reasons as under:
“From the computation of total income, it is seen that you have reduced an amount Rs. 1,00,38,101/- on account of Exchange Fluctuation Gain from the income, being the item considered separately. However, you have failed to add back the same to the total income, which has resulted into under assessment of income to the tune of Rs. 1,00,38,101/-
5.2 The issue of foreign exchange fluctuation gain though was not specifically addressed in the original assessment, however, the said issue was connected with the exchange loss claimed by the assessee and finally the assessee worked out the net notional gain as per Annexure L to the reply. The details of exchange rate fluctuation has been given by the assessee as per 31-A of the paper book being Annexure L as under;
Details of Exchange Rate fluctuation for the year – 2003(Assessment Year 2004-05)
i) Notional Gain on Exchange Rate fluctuation
ICICI Term Loan
a. Balance as on 31.3.2004
US $ 90,99,922.80 x Rs. 1.165 10601410
Original rate 45,385
Ate as on 31.3.2004 44,220
Less Actual loss on working Capital
FCNRB loss from SBI, Fort 563309
Net notional gain 10038101
5.3 Thus, it is clear that the issue of loss on foreign exchange fluctuation with respect to the working capital loan is part and parcel of the entire exchange rate fluctuation working wherein the assessee has worked out the net notional gain at Rs. 1,00,38,101/-. Once the Assessing Officer considered and examined the issue of foreign exchange fluctuation as manifest from the original assessment order, the assessment completed u/s 143(3) cannot be reopened on the same issue by taking a different view. The Hon’ble Supreme Court in the case of Kelvinator India Ltd (supra) has held that concept of change of opinion has not been obliterator by virtue of amendment of sec 147 of the I T Act. Similarly, the jurisdictional High Court in the case of Aventis Pharma Ltd (supra) has observed as under
“14. The view which we have taken of the provisions of s. 147 is consistent with the law laid down by the Supreme Court in CIT vs. Kelvinator of India Ltd. (2010)228 CTR (SC) 488: (2010)34 DTR (SC) 49: (2010) 320 ITR 561 (SC). The Supreme Court has held that:
“…Therefore, post-1st April, 1989, power to reopen is much wider. However, one needs to give a schematic interpretation to the words ‘reason to believe’ failing which we are afraid s. 147 would give arbitrary powers to the AO to reopen assessments on the basis of ‘mere change of opinion’, which cannot be per se reason to reopen. We must also keep in mind the conceptual difference between power to review and power to reassess. The AO has no power to review; he has the power to reassess. But reassessment has to be based on fulfilment of certain precondition and if the concept of ‘change of opinion’ is removed, as contended on behalf of the Department, then, in the garb of reopening the assessment, review would take place. One must treat the concept of ‘change of opinion’ as an in-built test to check abuse of power by the AO. Hence, after 1st April, 1989, AO has power to reopen, provided there is ‘tangible material’ to come to the conclusion that there is escapement of income from assessment. Reasons must have a link with the formation ofthe belief.”
15. Before concluding, it would be necessary to record two further submissions which have been urged on behalf of the assessee. The first submission is based on the proviso to s. 147 which provides that the AO may assess or reassess such income which is chargeable to tax and has escaped assessment, other than income involving matters which are the subject-matter of any appeal, reference or revision. Counsel for the assessee submitted that against the order of assessment, the assessee had filed an appeal before the CIT(A). The grounds in the appeal specifically include a challenge to the order of assessment on the ground that the AO, erred in disallowing depreciation of Rs. 64.62 lakhs by holding that the same represented depreciation on obsolete assets which are not used in business and included in the WDV ofthe block of assets. Similarly, another point in the appeal is that the AO erred in determining long-term capital gains arising on the sale of Phase III land at Mulund to the extent of Rs. 10.66 crores. The contention is that in view of the proviso to s. 147, the AO is precluded from reopening the assessment on an issue which is the subject-matter of a pending appeal. The second submission was based on s. 120 of the Act and it was urged that since the original order of assessment was passed by the Addl. CIT, Range 8(1), Mumbai, it was not within the jurisdiction of the Asstt. CIT, who is a subordinate authority, to reopen the assessment.
16. For the reasons already indicated, on the question as to whether the AO had reason to believe that income had escaped assessment within the meaning of s. 147, we have come to the conclusion that there was no tangible material before the AO to hold so and that the reasons recorded for reopening the assessment constitute a mere change of opinion. In the circumstances, it is not necessary to decide upon the additional submissions which have been urged on behalf of the assessee as noted earlier. “
6. In view of the above discussion and respectfully following the decisions of the Hon’ble Supreme Court as well as the jurisdictional High Court (supra) we hold that the reopening of the assessment is not sustainable being based on change of opinion. Accordingly, we hold that the reopening of the assessment is invalid.
7. Ground nos. 3 & 4 relate to the issue on merit.
8. The gain on foreign exchange fluctuation with respect to the term loan has also covered in favour of the assessee by the decision of the Hon’ble Supreme Court in the case of CIT v Woodward Governor India P Ltd reported in 312 ITR 254. Since there is no dispute in the case in hand that the alleged gain is only on term loan; therefore, the same cannot be treated as gain on revenue account in view of the decision of the Hon’ble Supreme Court cited supra. Even, the adjustment in the actual cost of the asset is not provided under the amended provisions of sec. 43A as on the date of balance sheet because. As per the amended provisions of sec. 43A, the adjustments in the actual cost is made on cash basis. The Hon’ble Supreme Court has observed in para 33 and 34 in the case cited supra as under:
33. As stated above, what triggers the adjustment in the actual cost ofthe assets, in terms of unamended s. 43A ofthe 1961 Act is the change in the rate of exchange subsequent to the acquisition of asset in foreign currency. The section mandates that at any time there is change in the rate of exchange, the same may be given effect to by way of adjustment of the carrying cost of the fixed assets acquired in foreign currency. But for s. 43A which corresponds to para 10 of AS-11 such adjustment in the carrying amount of the fixed assets was not possible, particularly in the light of s. 43(1). The unamended s. 43A nowhere required as condition precedent for making necessary adjustment in the carrying amount ofthe fixed asset that there should be actual payment of the increasedldecreased liability as a consequence ofthe exchange variation. The words used in the unamended s. 43A were “for making payment” and not “on payment” which is now brought in by amendment to s. 43A vide Finance Act, 2002.
34. Lastly, we are of the view that amendment of s. 43A by the Finance Act, 2002 w.e.f. 1st April, 2003 is amendatory and not clarificatory. The amendment is in complete substitution of the section as it existed prior thereto. Under the unamended s. 43A adjustment to the actual cost took place on the happening of change in the rate of exchange whereas under the amended s. 43A the adjustment in the actual cost is made on cash basis. This is indicated by the words “at the time of making payment”. In other words, under the unamended s. 43A, “actual payment” was not a condition precedent for making necessary adjustment in the carrying cost of the fixed asset acquired in foreign currency, however, under amended s. 43A w.e.f. 1st April, 2003 such actual payment of the decreased / enhanced liability is made a condition precedent for making adjustment in the carrying amount of the fixed asset. This indicates a complete structural change brought about in s. 43A vide Finance Act, 2002. Therefore, the amended section is amendatory and not clarificatory in nature.
Accordingly, the issue on merit is also decided in faovur of the assessee.
9 In view of the above, we decide the issue in favour of the assessee.
10 In the result, the appeal filed by the assessee is allowed.
Order pronounced on the 13th , day of May 2011.