DCIT, Central Circle - 2(2), Kolkata, Kolkata V. M/s. Ananya Wood Pvt. Ltd., , Kolkata

ITSSA 36/KOL/2017

• Counselvise Citation: [2018] 119 COUNSELVISE.COM (IT) 4469 (ITAT-KOLKATA)
• Duration Of Justice: 1 year(s) 4 month(s) 10 day(s)
• Appeal Type: Income Tax (Search & Seizure) Appeal
• Pronouncement Date: 25-10-2018
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Assessment Year: 2012-2013
• Appeal Filed On: 15-06-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G HANGSHING
• Keywords: Search and seizure; Assessment record
• Section: 153A; 145; 132; 139

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D, BENCH KOLKATA BEFORE SHRI S. S. GODARA, JM & DR. A.L.SAINI, AM IT(SS)A NO. 36/KOL/2017 (A.Y: 2012-13) DCIT, CENTRAL CIRCLE 2(2), KOLKATA R.P. RAM, ROOM NO. 402, AAYAKAR BHAWAN POORVA, 110, SHANTIPALLY, KOLKATA 700 107. VS. M/S. ANANYA WOOD PVT. LTD. 67/27, STRAND ROAD, KOLKATA 700 006. ./ ./PAN/GIR NO. : AAFCA 5351 G ( /APPELLANT ) .. ( / RESPONDENT ) REVENUE BY : SHRI G. HANGSHING, CIT, DR ASSESSEE BY : NONE / DATE OF HEARING : 13/08/2018 /DATE OF PRONOUNCEMENT: 25/10/2018 / O R D E R PER DR. ARJUN LAL SAINI, AM: THE CAPTIONED APPEAL FILED BY THE REVENUE, PERTAINING TO ASSESSMENT YEAR 2012-13, IS DIRECTED AGAINST THE ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS)- 20, KOLKATA, IN APPEAL NO. 385/CIT(A)-20/CC-2(2)/15-16, DATED 08- 03-2017, WHICH IN TURN ARISES OUT OF AN ORDER PASSED BY THE ASSESSING OFFICER U/S. 143(3)/153A OF THE INCOME-TAX ACT, 1961 (IN SHORT, THE ACT), DATED 30-03- 2015. 2. AT THE OUTSET, WE FIND THAT APPEAL OF REVENUE IS DELAYED BY 4 DAYS AND LEARNED DR HAS REQUESTED THE BENCH TO CONDONE THE DELAY. WE HEARD THE LEARNED DR ON THIS PRELIMINARY ISSUE AND CONDONE THE DELAY AND ADMIT THE APPEAL FOR HEARING. 3. AT THE TIME OF HEARING NONE APPEARED ON BEHALF OF ASSESSEE IN SPITE OF ISSUANCE OF NOTICE FOR HEARING MORE THAN ONE OCCASION AND LD. DEPARTMENTAL REPRESENTATIVE(DR), WAS PRESENT FOR THE APPELLANT REVENUE. IN THE ABSENCE OF ANY APPEARANCE BY THE ASSESSEE, THE APPEAL IS BEING DISPOSED OF EX PARTE QUA THE ASSESSEE, AFTER HEARING LD. DR FOR THE REVENUE ON MERITS IN TERMS OF RULE 24 OF THE INCOME TAX APPELLATE, TRIBUNAL, RULES, 1963. 4. GRIEVANCES RAISED BY THE REVENUE ARE AS FOLLOWS: M/S. ANANYA WOODS PVT. LTD. IT(SS)A NO.36/KOL/2017 A.Y: 2012-13 2 1.THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT(A) HAD ERRED IN DELETING THE DISALLOWANCE OF FOREIGN EXCHANGE LOSS IN SPITE OF THE FACT THAT THE LOSS HAS INCURRED ONLY ON CHANGE OF ACCOUNTING STANDARD WHICH IS NOT ALLOWED A PER SECTION 145 OF THE ACT. 2. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT(A) HAD ERRED IN OBSERVING THAT THE CBDTS INSTRUCTION NO. 03/2010 DATED 23.03.2010 IS NOT APPLICABLE IN THE CASE, WHEREAS THE SAID INSTRUCTION CAN BE APPLIED WHERE ASSESSEE ADOPT THE VALUATION OF FOREIGN EXCHANGE ON MARKED TO MARKET BASIS. 3. THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE DEPARTMENT CRAVES TO ADD MORE GROUNDS OR ALTER ANY GROUNDS AT THE TIME OF THE APPEAL. 5. THE BRIEF FACTS QUA THE ISSUE ARE THAT THE ASSESSEE IS A COMPANY AND DERIVE INCOME FROM THE BUSINESS OF TIMBER TRADING. A SEARCH AND SEIZURE OPERATION WAS CONDUCTED UNDER SECTION 132 OF THE INCOME TAX ACT, 1961 ON 12.10.2012 AT THE OFFICE AND OTHER BUSINESS PREMISES OF RAJGARIA GROUP OF CASES. SUBSEQUENTLY, NOTICE U/S 153A OF THE INCOME TAX ACT, 1961 WAS ISSUED ON 18.11.2013 AND SERVED UPON THE ASSESSEE. IN RESPONSE TO THE NOTICE U/S 153A, THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE A.Y. 2012-13 ON 03.12.2013 SHOWING TOTAL INCOME TO THE TUNE OF RS. 69,39,810/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ON PERUSAL OF ASSESSMENT RECORDS, IT WAS NOTICED THAT ASSESSEE HAD REOPENED AND REVISED IT AUDITED ACCOUNTS TO TRANSLATE THE RECEIVABLES AND PAYABLES IN FOREIGN CURRENCY AT YEAR END RATE. THE ASSESSEE WAS ASKED TO EXPLAIN SUCH REOPENING AND REVISION OF ACCOUNTS. IN RESPONSE, THE ASSESSEE FILED A WRITTEN SUBMISSION STATING THAT IN THE ORIGINAL RETURN, THE ASSESSEE COMPANY HAS NOT TRANSLATED THE RECEIVABLES AND PAYABLES IN FOREIGN CURRENCY AT YEAR END RATE. HOWEVER, DURING FILING OF ITS RETURN UNDER SECTION 153A OF THE INCOME TAX ACT, 1961, THE ASSESSEE COMPANY HAD TRANSLATED ITS RECEIVABLES AND PAYABLES IN FOREIGN CURRENCY AT YEAR END RATE AS REQUIRED BY ACCOUNTING STANDARD 11 ISSUED BY THE ICAI. IN SUPPORT OF ITS CLAIM, THE ASSESSEE ALSO FILED A COPY OF CIRCULAR NO. 1/2003 DATED 30.01.2003 ISSUED BY THE DEPARTMENT OF COMPANY AFFAIRS. HOWEVER, THE ASSESSING OFFICER REJECTED THE SUBMISSIONS OF THE ASSESSEE HELD AS FOLLOWS: THE ASSESSEE COMPANY HAS REVISED THE AUDITED ACCOUNTS SUBMITTED EARLIER ALONG WITH RETURN FILED U/S 139 OF THE INCOME TAX ACT, 1961, BY CHANGING ITS ACCOUNTING POLICY. AS PER INSTRUCTION NO. 03/2010 DATED 23-3-2010: M/S. ANANYA WOODS PVT. LTD. IT(SS)A NO.36/KOL/2017 A.Y: 2012-13 3 'MARKED TO MARKET' IS IN SUBSTANCE A METHODOLOGY OF ASSIGNING VALUE TO A POSITION HELD IN A FINANCIAL INSTRUMENT BASED ON ITS MARKET PRICE ON THE CLOSING DAY OF THE ACCOUNTING OR REPORTING RECORD. ESSENTIALLY. 'MARKED TO MARKET' IS A CONCEPT UNDER WHICH FINANCIAL INSTRUMENTS ARE VALUED AT MARKET RATE SO AS TO REPORT THEIR ACTUAL VALUE ON THE REPORTING DATE. THIS IS REQUIRED FROM THE POINT OF VIEW OF TRANSPARENT ACCOUNTING PRACTICES FOR THE BENEFIT OF THE SHAREHOLDERS OF THE COMPANY AND ITS OTHER STAKEHOLDERS. WHERE COMPANIES MAKE SUCH AN ADJUSTMENT THROUGH THEIR TRADING OR PROFIT/LOSS ACCOUNT, THEY BOOK A CORRESPONDING LOSS (I.E THE DIFFERENCE BETWEEN THE PURCHASE PRICE AND THE VALUE AS ON THE VALUATION DATE) IN THEIR ACCOUNTS. THIS LOSS IS A NOTIONAL LOSS AS NO SALE/CONCLUSION/SETTLEMENT OF CONTRACT HAS TAKEN PLACE AND THE ASSET CONTINUES TO BE OWNED BY THE COMPANY. A . MARKED TO MARKET' LOSS MAY BE GIVEN DIFFERENT ACCOUNTING TREATMENT BY DIFFERENT ASSESSES. SOME MAY REFLECT SUCH LOSS AS A BALANCE SHEET ITEM WITHOUT MAKING ANY CORRESPONDING ADJUSTMENT IN THE PROFIT AND LOSS ACCOUNT. OTHER MAY BOOK THE LOSS IN THE PROFIT AND LOSS ACCOUNT WHICH MAY RESULT IN THE REDUCTION OF BOOK PROFIT. IN CASES WHERE NO SALE OR SETTLEMENT HAS ACTUALLY TAKEN PLACE AND THE LOSS ON MARKED TO MARKET BASIS HAS RESULTED IN REDUCTION OF BOOK PROFITS, SUCH A NOTIONAL LOSS WOULD BE CONTINGENT IN NATURE AND CANNOT BE ALLOWED TO BE SET OFF AGAINST THE TAXABLE INCOME. THE SAME SHOULD THEREFORE BE ADDED BACK FOR THE PURPOSE OF COMPUTING THE TAXABLE INCOME OF AN ASSESSEE. IN VIEW OF THE ABOVE, IT IS HELD THAT LOSS ON ACCOUNT OF REVALUATION OF SUNDRY CREDITORS IS A NOTIONAL LOSS WHICH THE ASSESSEE HAS NOT ACTUALLY SUFFERED AND THEREFORE CANNOT BE ALLOWED. IT IS HELD THAT THE SAME HAS BEEN DONE TO OFFSET THE UNDISCLOSED INCOME DISCLOSED IN THE DISCLOSURE PETITION GIVEN BEFORE THE DDIT (INV). HENCE THE REVISION OF THE BOOKS OF ACCOUNTS IS REJECTED. CONSEQUENTLY, ON CONVERSION OF CLOSING LIABILITY AT YEAR END RATE, AN AMOUNT OF RS. 1,09,00,000/- HAS BEEN DEBITED IN THE PROFIT & LOSS ACCOUNT AND CLAIMED IN THE RETURN FILED U/S 153A OF THE INCOME TAX ACT, 1961. THE SAME IS DISALLOWED AND AN AMOUNT OF RS. 1,09,00,000/- IS ADDED BACK TO THE TOTAL INCOME. 6. AGGRIEVED BY THE ADDITION MADE BY THE ASSESSING OFFICER, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE LD. CIT(A) WITH SUCCESS. THE LD. CIT(A) HAS ALLOWED THE APPEAL OF THE ASSESSEE OBSERVING THE FOLLOWING: 7. I THINK THE AO HAS NOT ACCEPTED THE CHANGE IN THE ACCOUNTING SYSTEM AS REQUIRED BY ACCOUNTING STANDARD-II BECAUSE BY ADOPTING THIS METHOD THE ASSESSEE COMPANY HAS TRANSLATED ITS RECEIVABLES AND PAYABLES IN FOREIGN CURRENCY AT YEAR END RATE. I THINK IT IS NOT FOR THE AO TO DECIDE WHICH ACCOUNTING STANDARD THE ASSESSEE SHOULD ADOPT. IF THE ASSESSEE HAS CHANGED ITS OLD ACCOUNTING SYSTEM AND ADOPTED A NEW ONE AS PRESCRIBED IN ACCOUNTING STANDARD-II WHICH IS AS PER THE LAW, M/S. ANANYA WOODS PVT. LTD. IT(SS)A NO.36/KOL/2017 A.Y: 2012-13 4 IN THAT CASE THE AO HAS NO BUSINESS TO REJECT THE CHANGE OF ACCOUNTING SYSTEM OF THE ASSESSEE. FURTHER, THE AO HAS TREATED ASSESSEE'S LOSS ON ACCOUNT OF FOREIGN CURRENCY TRANSACTION AS 'MARKET TO MARKET' CONCEPT AND TREATED IS AS DERIVATIVE LOSS. ON THE OTHER HAND, THE AR HAS CATEGORICALLY STATED THAT IN ITS CASE THE ASSESSEE HAS REINSTATED ITS ACTUAL PAYABLES IN FOREIGN CURRENCY AT YEAR END EXCHANGE RATE AND RECOGNIZED THE GAIN OR LOSS AS THE CASE MAY BE THEREFORE, THE SAME CANNOT BE CATEGORIZED AS DERIVATIVE TRANSACTION. THEREFORE, THE GAIN OR LOSS AS THE CASE MAY BE IS NEITHER NOTIONAL NOR CONTINGENT IN NATURE AS STATED IN CBDT INSTRUCTION. IT IS PURELY EXCHANGE GAIN OR LOSS DUE TO CONVERSION OF ACTUAL PAYABLES IN FOREIGN CURRENCY AT YEAR END EXCHANGE RATE. WITHOUT SUCH CONVERSION THE TRUE AND FAIR VIEW OF THE ACCOUNTS AT THE YEAR END IS NOT AT ALL POSSIBLE. THE AR HAS ALSO BROUGHT ON RECORD CASE LAWS OF CIT VS. LANCO TANJORE POWER COMPANY LIMITED ITA NO. 1322/MDS/2012 THE ITAT, CHENNAI HAS HELD THAT FOR A CONTRACT TO BE A FOREIGN EXCHANGE DERIVATIVE CONTRACT, ITS VALUE SHOULD BE DERIVED FROM PRICE MOVEMENT IN ONE OR MORE UNDERLYING ASSETS. HERE, WHAT THE ASSESSEE HAD OBTAINED WAS ONLY A COVER FOR THE AMOUNT OF FOREIGN CURRENCY IN RESPECT OF THE FLUCTUATIONS THAT COULD HAPPEN. IT COULD NEVER BE CATEGORIZED AS A FOREIGN EXCHANGE DERIVATIVE CONTRACT. BEING NOT A FOREIGN EXCHANGE DERIVATIVE CONTRACT, IN OUR OPINION, CBDT INSTRUCTION NO.03/2010 MENTIONED ABOVE, WAS NOT AT ALL APPLICABLE. AS AGAINST THIS, HON'BLE APEX COURT IN THE CASE OF WOODWARD GOVERNOR INDIA P. LTD. (SUPRA) HAS CLEARLY HELD THAT LOSS IN FOREIGN EXCHANGE, IF ANY, AT THE END OF THE YEAR, WOULD BE DEDUCTIBLE BY VALUING THE OUTSTANDING LIABILITY AT THE MARKET RATE AS ON THE DATE OF CLOSING OF ACCOUNTS. WE ARE, THEREFORE, OF THE OPINION THAT CIT (APPEALS) WAS JUSTIFIED IN ALLOWING THE CLAIM OF THE ASSESSEE. 8. FURTHER, I HAVE ALSO CONSIDERED CASE LAWS BROUGHT ON RECORD IN THE CASE OF WOODWARD GOVERNOR INDIA PVT LTD (SUPRA) IN WHICH THE HON'BLE SUPREME COURT HAS CLEARLY HELD THAT LOSS IN FOREIGN EXCHANGE, IF ANY, AT THE END OF THE YEAR WOULD BE DEDUCTIBLE BY VALUING THE OUTSTANDING LIABILITY AT THE MARKET RATE AS ON THE DATE OF CLOSING OF ACCOUNTS. THUS KEEPING IN VIEW THE FACT THAT THE ASSESSEE IS NOT INVOLVED IN DERIVATIVE TRANSACTIONS, I THINK AS PER THE RATIO DECIDED BY THE HON'BLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA PVT LTD (SUPRA), ASSESSEE'S APPEAL ON GROUND NO 2 IS TO BE ALLOWED. 7. AGGRIEVED BY THE ORDER OF THE LD CIT(A), THE REVENUE IS IN APPEAL BEFORE US. M/S. ANANYA WOODS PVT. LTD. IT(SS)A NO.36/KOL/2017 A.Y: 2012-13 5 8. HAVING HEARD LD DR FOR THE REVENUE, WE NOTE THAT ISSUE IS SQUARELY COVERED BY THE JUDGMENT OF HON`BLE SUPREME COURT IN THE CASE OF WOODWARD GOVERNOR INDIA PVT LTD (SUPRA). WE NOTE THAT ASSESSEE HAD MADE REVISION OF BOOKS OF ACCOUNT TO COMPLY WITH ACCOUNTING STANDARD 11, ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANT OF INDIA ON THE EFFECTS OF CHANGES IN FOREIGN EXCHANGE RATES. IT SHOULD ALSO BE NOTED THAT THE REVISION HAD BEEN MADE BY THE ASSESSEE IN ACCORDANCE WITH CIRCULAR NO. 1/2003 DATED 13.01.2003 ISSUED BY THE DEPARTMENT OF COMPANY AFFAIRS. WE NOTE THAT THE ASSESSING OFFICER HAS NOT DISPUTED SUCH REVISION BUT HAS DISALLOWED FOREIGN EXCHANGE LOSS TO THE TUNE OF RS. 1,09,00,000/- ARISING DUE TO CONVERGENCE OF FOREIGN EXCHANGE LIABILITY AT YEAR END RATE BY RELYING ON INSTRUCTION NO. 3/2010 DATED 23.03.2010 AND TREATING THE SAME AS DERIVATE CONTRACT. WE NOTE THAT IN THE INSTANT CASE THE ASSESSEE HAS REINSTATED ITS ACTUAL PAYABLES IN FOREIGN CURRENCY AT YEAR END EXCHANGE RATE AND RECOGNIZE GAINS OR LOSS, AS THE CASE MAY BE, THEREFORE, THE SAME CANNOT BE CATEGORIZED AS DERIVATIVE TRANSACTION. THEREFORE, THE GAIN OR LOSS AS THE CASE MAY IS NEITHER NOTIONAL NOR CONVERGENT IN NATURE AS STATED IN CBDT INSTRUCTION. IT IS PURELY EXCHANGE GAIN OR LOSS DUE TO CONVERGENCE OF ACTUAL PAYABLES IN FOREIGN CURRENCY AT YEAR END EXCHANGE RATE. FOR THAT WE RELY ON THE JUDGEMENT OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS WOODWARD GOVERNOR INDIA P. LTD. 312 ITR 254 WHEREIN IT WAS HELD THAT LOSS IN FOREIGN EXCHANGE, IF ANY, AT THE END OF THE YEAR, WOULD BE DEDUCTIBLE BY VALUING THE OUTSTANDING LIABILITY AT THE MARKET RATE AS ON THE DATE OF CLOSING OF ACCOUNTS. THAT BEING SO, WE DECLINE TO INTERFERE IN THE ORDER PASSED BY THE LD. CIT(A), HIS ORDER ON THIS ISSUE IS HEREBY UPHELD AND THE GROUNDS RAISED BY THE REVENUE IS DISMISSED. 9. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 25/10/2018. SD/- (S. S. GODARA) SD/- (A. L. SAINI) / JUDICIAL MEMBER / ACCOUNTANT MEMBER /KOLKATA; DATED: 25/10/2018 RS, SR.PS M/S. ANANYA WOODS PVT. LTD. IT(SS)A NO.36/KOL/2017 A.Y: 2012-13 6 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT- DCIT, CC 2(2), KOLKATA. 2. / THE RESPONDENT.- M/S. ANANYA WOOD PVT. LTD. 3. ( ) / THE CIT(A), 4. / CIT 5. , , / DR, ITAT, KOLKATA 6. [ / GUARD FILE. //TRUE COPY// BY ORDER SENIOR PRIVATE SECRETARY, HEAD OF OFFICE/D.D.O, I.T.A.T, KOLKATA BENCHES, KOLKATA .