M + W Zander (S) Pvt Ltd.,- India Branch, Hyderabad V. ADIT (Intl. Taxn)-1, Hyderabad

ITA 2095/HYD/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66093 (ITAT-HYDERABAD)
• Duration Of Justice: 7 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-08-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 19-12-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: GYANANE PRAKASH
• Assessee Lawyers: S RAMA RAO
• Keywords: Reopening of assessment; Capital asset; Difference of opinion; Change of opinion
• Section: 143(3); 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 2095/HYD/2011 ASSESSMENT YEAR 2006-07 M/S. M + W ZANDER (S) PTE. LTD., INDIA BRANCH HYDERABAD, PAN: AACCM4012H VS. ASST. DIRECTOR OF INCOME - TAX (INTERNATIONAL TAXATION)-I, HYDERABAD. APPELLANT RESPONDENT APPELLANT BY: SRI S. RAMA RAO RESPONDENT BY: SRI GYANANE PRAKASH DATE OF HEARING: 06 . 06 .201 2 DATE OF PRONOUNCEMENT: 03.08. 2012 O R D E R PER CHANDRA POOJARI, AM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF DISPUTE RESOLUTION PANEL (DRP), HYDERABAD DATED 6.9 .2011 FOR THE ASSESSMENT YEAR 2006-07. 2. THE ASSESSEE RAISED THE FIRST GROUND WITH REGARD TO REOPENING OF ASSESSMENT. 3. THE LEARNED AR SUBMITTED THAT THE ASSESSMENT HAS BE EN REOPENED WITHOUT ANY TANGIBLE FRESH MATERIAL. HE R ELIED ON THE JUDGEMENT OF SUPREME IN THE CASE OF CIT V. KELVINAT OR OF INDIA LTD. & ORS. (320 ITR 561). ACCORDING TO THE AR REOPENIN G OF ASSESSMENT IS ONLY CHANGE OF OPINION. BEING SO IT IS BAD IN LAW. 4. THE DR SUBMITTED THAT THE CLAIM OF THE ASSESSEE WAS NOT EXAMINED IN ORIGINAL ASSESSMENT AND EXCESS CLAIM WA S GIVEN TO THE ASSESSEE AND AS SUCH IT WAS REOPENED. 5. WE HAVE HEARD BOTH THE PARTIES AND CONSIDERED THE M ATERIAL AVAILABLE ON RECORD. IN THIS CASE THE ORIGINAL ASS ESSMENT U/S. ITA NO. 2095/HYD/2011 M/S. M + W ZANDER (S) PTE. LTD. ======================= 2 143(3) OF THE ACT WAS COMPLETED ON 26.12.2008 DETER MINING A LOSS OF RS. 95,21,820. THE ASSESSMENT WAS LATER ON REOP ENED BY ISSUING NOTICE U/S. 148 OF THE ACT. THE DRAFT ASSE SSMENT ORDER WAS COMPLETED ON 30.12.2010 DETERMINING TOTAL INCOM E AT RS. 3,61,22,957. THE DRAFT ASSESSMENT ORDER WAS SERVED UPON THE ASSESSEE ON 3.1.2011. THE REOPENING OF THE ASSESS MENT IS WITHIN FOUR YEARS FROM THE END OF THE RELEVANT ASSESSMENT YEAR. AS PER CLAUSE (B) OF EXPLANATION 2 TO PROVISO TO SECTION 1 47 WHERE A RETURN OF INCOME HAS BEEN FURNISHED BY THE ASSESSEE BUT NO ASSESSMENT HAS BEEN MADE AND IT IS NOTICED BY THE A SSESSING OFFICER THAT THE ASSESSEE HAS UNDERSTATED THE INCOM E OR HAS CLAIMED EXCESSIVE LOSS, DEDUCTION, ALLOWANCE OR REL IEF IN THE RETURN, THE ASSESSING OFFICER IS ENTITLED TO REOPEN THE ASS ESSMENT. FURTHER IN THE CASE OF ACIT VS. RAJESH JHAVERI STOC K BROKERS (P) LTD. (SUPRA), IT WAS HELD THAT THE ASSESSING OFFICE R IS HAVING JURISDICTION TO ISSUE NOTICE U/S. 148 FOR BRINGING TO TAX INCOME ESCAPING ASSESSMENT ON THE GROUND THAT THE ASSESSEE CLAIMED EXCESSIVE RELIEF OR DEDUCTION. WE ARE OF THE OPIN ION THAT REOPENING OF ASSESSMENT IS VALID. 6. WE HAVE ALSO CAREFULLY GONE THROUGH THE ORDER OF TH E MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF H.V. TR ANSMISSIONS LTD., IN ITA NO. 2476/MUM/2010 DATED 7.10.2011. IN THIS CASE THE ASSESSEE INCURRED EXPENSES TOWARDS ENTERPRISE R ESOURCE PLANNING SOFTWARE AMOUNTING TO RS. 95.14 LAKHS. IN THE ACCOUNTS THE ASSESSEE HAS DEBITED 25% OF THIS AMOUNT I.E., R S. 23,78,500 WHEREAS IN THE COMPUTATION OF INCOME, THE ASSESSEE HAS CLAIMED THE ENTIRE AMOUNT OF RS. 95.14 LAKHS AS DEDUCTION. THE EXPENSES INCURRED BY THE ASSESSEE IS PAYMENT FOR ACQUISITION OF SOFTWARE WHICH IS CAPITAL IN NATURE. HENCE THE ASSESSMENT I S REOPENED TO DISALLOW THE SAME. ON APPEAL TO THE TRIBUNAL, IT W AS HELD THAT THERE WAS NO MATERIAL COMING TO THE POSSESSION OF T HE ASSESSING OFFICER ON THE BASIS OF WHICH THE ASSESSMENT COMPLE TED U/S. ITA NO. 2095/HYD/2011 M/S. M + W ZANDER (S) PTE. LTD. ======================= 3 143(1) WAS REOPENED AND THIS POSITION HAS NOT BEEN DISPUTED EVEN BY THE DR. BEING SO, IN THE PRESENT CASE WE ARE N OT IN A POSITION TO APPLY THE RATIO LAID DOWN BY THAT DECISION BECAU SE CLAUSE (B) TO EXPLANATION 2 TO PROVISO 2 OF SECTION 147 CLEARLY A UTHORISES THE ASSESSING OFFICER TO REOPEN THE ASSESSMENT. THIS P ROVISION IS TO BE CONSIDERED FOR THE PURPOSE OF ADJUDICATING THIS ISS UE. THIS GROUND RELATING TO REOPENING OF ASSESSMENT IS DECIDED AGAI NST THE ASSESSEE. 7. THE NEXT GROUND IN THIS APPEAL IS WITH REGARD TO AL LOWABILITY OF PROVISIONS MADE FOR PURCHASES AT RS. 4,03,29,682 . THE ASSESSEE CLAIMED THIS AMOUNT TOWARDS PROVISIONS FOR PURCHASES IN HIS ACCOUNT. ACCORDING TO THE ASSESSEE, IT IS FOLL OWING PERCENTAGE COMPLETION METHOD (PCM). SECTION 211 (3A) OF THE C OMPANIES ACT, 1956 MANDATES EACH COMPANY TO PREPARE EVERY PROFIT AND LOSS A/C. AND BALANCE SHEET OF A COMPANY TO COMPLY WITH THE ACCOUNTING STANDARDS (AS). AS SUCH, THE ASSESSEE I S FOLLOWING AS- 7 FOR REVENUE RECOGNITION. AS PER THE NATURE OF AC TIVITY UNDERTAKEN BY THE ASSESSEE IN CONSTRUCTION CONTRACTS IS SUCH T HAT THE DATE AT WHICH THE CONTRACT ACTIVITY IS ENTERED INTO AND THE DATE WHEN THE ACTIVITY IS COMPLETE USUALLY FALL INTO DIFFERENT AC COUNTING PERIODS. THEREFORE, THERE IS CERTAIN DIFFICULTY IN ACCOUNTIN G THE CONSTRUCTION COST, REVENUE AND CONTRACT COST TO EACH ACCOUNTING YEAR. THE ASSESSEE IS FOLLOWING AS-7 AND MAKING REASONABLE ES TIMATE OF EXPENSES CORRESPONDING TO RECOGNITION OF REVENUE. SOMETIMES, THOUGH THE ASSESSEE FOLLOWED THE PCM, THE ASSESSEE HAS FORESEEN CERTAIN MORE EXPENDITURE COMMENSURATE WITH THE REVE NUE RECOGNISED BY THE ASSESSEE. BEING SO, TH E ASSESS EE PROVIDED PROVISIONS FOR PURCHASES/EXPENSES WHICH ARE NOT PRO PERLY SUPPORTED BY VOUCHERS AND THESE PROVISIONS FOR PURC HASES OR EXPENSES WILL BE REVERSED IN THE NEXT ACCOUNTING YE AR. IN OTHER WORDS, IT IS NOTHING BUT FOLLOWING THE MATCHING PRI NCIPLES OF EXPENSES AND REVENUE TO GIVE TRUE PICTURE OF PROFIT OR LOSS, ITA NO. 2095/HYD/2011 M/S. M + W ZANDER (S) PTE. LTD. ======================= 4 OTHERWISE IT AMOUNTS TO DISCLOSING INCORRECT PROFIT S/LOSS OF THE ASSESSEE. THE AR RELIED ON THE FOLLOWING JUDGEMENT S: A) FREDERIC R. HARRIS (INDIA) (P.) LTD. V. DCIT, 81 IT D 227 (DEL) B) THERMAX BABCOCK @ WILCOX LTD. V. DCIT, 79 ITD 63 (P UNE) C) M.N. DASTUR & CO. LTD. V. DCIT, 61 ITD 167 (CAL.) D) ACIT V. DHARTI ESTATE, 129 ITD 1 (MUM) (TM) E) INDIAN OILTANKING LTD. V. ITO, 120 ITD 237 (MUM) F) DCIT V. OTIS ELEVATOR CO. (I) LTD., 99 ITD 73 (MUM) G) DCIT V. BUMI HIWAY (M) SDN BHD, 21 SOT 311 (DEL) H) DCIT V. RANKA DEVELOPERS, 6 SOT 815 (BANG.) I) BHARAT EARTH MOVERS V. CIT, 112 TAXMAN 61 (SC) J) DCIT V. MARUTI UDYOG LTD., 99 ITD 666 (DEL) K) OIL & NATURAL GAS CORPN LTD. V. DCIT, 83 ITD 151 (D EL) (SB) L) CIT V. MANISH BUILD WELL (P) LTD., 16TAXMANN.COM 27 (DEL) M) H.M. CONSTRUCTIONS V. JCIT, 84 ITD 429 (BANG.) 8. ON THE OTHER HAND, THE LEARNED DR SUBMITTED THAT TH E ASSESSEE IS FOLLOWING PERCENTAGE COMPLETION METHOD (PCM). ONE SIDE THE ASSESSEE IS CLAIMING THAT WORK IS COMPLETE D AND ACTUAL BILLS ARE AVAILABLE AND ON THE OTHER SIDE IT CLAIMS THAT PROVISIONS ARE BEING MADE BECAUSE HIGHER REVENUE WAS DISCLOSED . ACCORDING TO THE DR WHEN THE ASSESSEE IS FOLLOWING PCM THERE ABSOLUTELY NO REQUIREMENT FOR DISCLOSING EXCESS REVENUE AND AGAIN TO MAKE PROVISION FOR EXPENSES OR PURCHASES AND IT IS ONLY LUMP SUM ESTIMATION MADE TOWARDS PROVISIONS NOT ON THE BASIS OF ANY EVIDENCE SUPPORTING THE CLAIM OF THE ASSESSEE. BEI NG SO THE CLAIM OF THE ASSESSEE HAS TO BE REJECTED. 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED MATERIAL ON RECORD. THE PRIMARY CONTENTION OF THE ASSESSEE IS THAT IT IS FOLLOWING PCM AND IT WAS NOT POSSIBLE TO BOOK THE R EVENUE AS WELL AS EXPENSES. CERTAIN LEVEL OF EXCESS WORK IS REQUI RED WHERE ITA NO. 2095/HYD/2011 M/S. M + W ZANDER (S) PTE. LTD. ======================= 5 CERTAIN MISMATCH OF REVENUE WILL BE THERE. BEING S O SOMETIMES HUGE EXPENSES ARE REQUIRED TO BE INCURRED FOR COMPL ETION OF THE PROJECT THEN TO BE IN LINE WITH THE CONCEPT OF MA TCHING EXPENSES AND REVENUE IN ORDER TO RECOGNISE THE RELEVANT REVE NUE, THE ASSESSEE MADE PROVISIONS IN THE BOOKS OF ACCOUNT TO WARDS FUTURE EXPENSES AND WILL BE REVERSED IN THE IMMEDIATE NEXT ASSESSMENT YEAR. THIS PRACTICE HAS BEEN FOLLOWED BY THE ASSES SEE YEAR TO YEAR AND THERE IS NO LOSS OF REVENUE TO THE DEPARTMENT. CONSIDERING THE ABOVE PRACTICE OF THE ASSESSEE-COMPANY, WE ARE INCLINED TO SET ASIDE THE ORDERS OF THE LOWER AUTHORITIES AND REMAN D THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER WITH A DI RECTION TO VERIFY WHETHER THE ASSESSEE IS FOLLOWING THIS ACCOUNTING M ETHOD CONSISTENTLY OR WHETHER IT IS A REVERSAL OF PROVISI ONS MADE FOR PURCHASES IN THE VERY NEXT ASSESSMENT YEAR AND IF I T IS SO, THE CLAIM OF THE ASSESSEE HAS TO BE ALLOWED. ACCORDING LY, THIS ISSUE IS REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER FOR FRESH CONSIDERATION AFTER PROVIDING REASONABLE OPPORTUNIT Y OF HEARING TO THE ASSESSEE. 10. THE NEXT GROUND IN THIS APPEAL IS WITH REGARD TO DISALLOWANCE OF RS. 53,15,095 ON THE GROUND THAT LO SS ARISING ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATIONS IS NOT ALL OWABLE AS A DEDUCTION. 11. BRIEF FACTS OF THE ISSUE ARE THAT IT IS THE CLAIM O F THE ASSESSEE THAT IT HAS OBTAINED LOAN FROM ITS HEAD OFFICE FOR AN SGD 15,00,000 AND SGD 10,00,000 RESPECTIVELY. IT ALSO FILED LETT ER DATED 25.4.2005 AND RBI'S LETTER DATED 26.4.2005 STATING THAT WITH RESPECT TO THE EXECUTION OF PARTICULAR PROJECTS, IT HAD BORROWED CERTAIN MONIES ON REPATRIATION BASIS FROM ITS HEAD OFFICE. THE ASSESSEE ALSO REFERRED TO BOMBAY HIGH COURT DECISIO N IN THE CASE OF CIT V. DEMPO AND CO. PVT. LTD. (206 ITR 291) WHE REIN IT HAS SUMMED UP THE POSITION THAT FOR DETERMINING WHETHER THE ITA NO. 2095/HYD/2011 M/S. M + W ZANDER (S) PTE. LTD. ======================= 6 DEVALUATION LOSS IS REVENUE OR CAPITAL WHAT IS RELE VANT IS UTILISATION OF THE AMOUNT AT THE TIME OF DEVALUATION AND NOT TH E OBJECT FOR WHICH THE LOAN WAS TAKEN. ALSO IT WAS HELD THAT LO SS IN RESPECT OF CIRCULATING CAPITAL IS REVENUE LOSS WHEREAS LOSS IN RESPECT OF FIXED CAPITAL IS NOT. THE ASSESSEE REFERRED TO THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA PVT. LTD. (312 ITR 254) (SC ). 12. THE CONTENTION OF THE ASSESSEE IS THAT U/S. 43A WHE NEVER THERE IS AN INCREASE IN THE LIABILITY OF THE ASSESS EE AS EXPRESSED IN INDIAN CURRENCY, THE LIABILITY IS TO BE ALLOWED AT THE TIME OF MAKING PAYMENT. HOWEVER, SECTION 43A DEALS WITH A CASE WH EREIN THE ASSESSEE HAS ACQUIRED A CAPITAL ASSET AND IN THE CA SE OF THE ASSESSEE IT HAS BORROWED FOR THE PURPOSE OF WORKING CAPITAL AND HENCE LIABILITY HAS ARISEN ON ACCOUNT OF REVENUE AC COUNT AND THE SAME IS ADMISSIBLE. 13. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATE RIAL ON RECORD. FROM A READING OF THE ENTIRE AS-11 AND ALS O THE EXTRACTS IT FOLLOWS THAT LOAN IS A NON-INTEGRAL FOREIGN OPERATI ON WITH REFERENCE TO THE HEAD OFFICE, SO LONG AS BRANCH IS INDEPENDEN TLY CONDUCTING ITS BUSINESS ACTIVITIES. IN THE CASE ON HAND THE B RANCH IS INDEPENDENTLY CARRYING OUT CONTRACTS IN THIS COUNTR Y AND HENCE, THE FLUCTUATION IN THE RATE OF EXCHANGE CANNOT HAVE EFFECT ON ITS INTEGRAL OPERATIONS. THE ENTIRE TRANSACTION IS NON -INTEGRAL IN NATURE AND HENCE, THE SAME IS TO BE TREATED AS PER PARA 24 OF AS- 11. THE FLUCTUATIONS IN THE RATE OF FOREIGN EXCHAN GE ON THE QUANTUM OF LOAN WOULD NOT AFFECT THE DAY TO DAY WOR KING OR THE PROFIT OF A GIVEN YEAR. IT WOULD AFFECT ONLY ON RE PAYMENT AT THE TIME OF SETTLEMENT. HENCE, THE GAIN OR LOSS IS TO BE ACCUMULATED IN THE RESERVE ACCOUNT UNTIL THE DATE OF SETTLEMENT WH EREUPON IT CAN BE CREDITED OR DEBITED IN THE PROFIT AND LOSS A/C. HENCE, THE LOSS CLAIMED IS TO BE CARRIED FORWARD IN THE FOREIGN CUR RENCY TRANSLATION RESERVE ACCOUNT AND SQUARED UP AT THE TIME OF SETTL EMENT. IT ITA NO. 2095/HYD/2011 M/S. M + W ZANDER (S) PTE. LTD. ======================= 7 CANNOT BE ALLOWED TILL THE TIME OF SETTLEMENT. ACC ORDINGLY, WE CONFIRM THE ORDER OF THE CIT(A) ON THIS ISSUE. THI S GROUND OF THE ASSESSEE IS DISMISSED. 14. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALL OWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 3 RD AUGUST, 2012. SD/ - (SAKTIJIT DEY) JUDICIAL MEMBER SD/ - (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED THE 3 RD AUGUST, 2012 COPY FORWARDED TO: 1. M/S. M + W ZANDER (S) PTE. LTD. INDIA BRANCH, PLOT NO. 1264, 2 & 3 FLOORS, SAI SHIKHA, ROAD NO. 36, JUBILE E HILLS, HYDERABAD. 2. THE ASST. DIRECTOR OF INCOME - TAX (INTERNATIONAL TAXATION) - I, HYDERABAD. 3. THE DISPUTE RESOLUTION PANEL (DRP), HYDERABAD. 4. THE ADDL. CIT (INTERNATIONAL TAXATION), HYDERABAD. 5 . THE DR B BENCH, ITAT, HYDERABAD. TPRAO