TMI Blog2016 (2) TMI 1061X X X X Extracts X X X X X X X X Extracts X X X X ..... e Assessee in reply to the query of the AO in the original assessment proceedings, there was a whole note on exchange fluctuation enclosed in the form of Annexure-B. Despite this it cannot be said that the AO was ignorant of what the Assessee was doing in respect of foreign exchange loss while accounting for derivatives contracts. The change in the method of accounting and the consequential change in the loss figure have been adequately explained by the Assessee. Under Note J in the “Statement of significant accounting policy” in Schedule 22 to the audited annual accounts, the Assessee had made a distinction between foreign exchange contracts not intended for trading and speculative purposes and those for trading and speculative purposes. It is, therefore not possible to accept the plea of the Revenue that there was any deliberate failure on the part of the Assessee to make full and true disclosure of the change in the accounting policy that led to computation of loss as a result of fluctuation in foreign exchange derivatives. This has to be also appreciated in the context of the Assessee following the mercantile system of accounting and Section 145 of the Act. The income of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion entered into by the Assessee with its foreign associate. 5. It is significant that during the course of the assessment, notices under Section 143(2) and 142(1) were issued by the AO on 21st June 2011 requiring the Assessee to furnish the following information: (a) the details of the short term loans taken by the Petitioner Kotak Mahindra Bank and Nova Scotia Bank. (b) the details of the investment made during the year. (c) the details of the dividend income earned during the year along with a justification for making nil disallowances under Section 14A of the Act. 6. On 19th September 2011, the Petitioner furnished the above details including the details of interest bearing funds borrowed during the year as well as the justification for inapplicability of Section 14A of the Act to the expenses, including interest expenses incurred, on the ground that the investment yielding exempt income was not yielded from borrowed funds. 7. On 26th September 2011 another show cause notice was issued by the AO under Section 143(2) read with Section 142(1) of the Act inter alia asking the Assessee to furnish: (i) justification as to why disallowance in terms of Rule 8D o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure related to the investment was not shown by the Assessee as being related to the investment which was subject matter of the disallowance under Section 14A of the Act. It was further stated that although disallowance under Section 14A was made by the Assessee in terms of Rule 8D and was noted in the original assessment order, but the interest expenses directly related to the investment could not be taxed since the Assessee failed to disclose the true particulars of its income in that regard. It was concluded by the AO that there is a direct nexus between the interest expenses paid and the short term investments made by the Assessee. 14. The 'reasons to believe' recorded under Section 148 of the Act proceeded to set out, in a tabular form, the calculation of the interest expenses related to short term capital gain. The interest to be disallowed was worked out as ₹ 49,46,301. 15. The second aspect adverted to in the reasons to believe was that a sum of ₹ 9,52,93,423 claimed by the Assessee as deduction on account of FE loss. It was noted that the above figure included a sum of ₹ 1,71,43,726 which pertained to FE derivatives claimed on mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uring the concerned AY. The declaration of cumulative interest expenses could not be considered as submitting the complete particulars. Also no break up of interest expenses in regard to investment from borrowed funds was disclosed. (iii) After the AO had passed the final assessment order on 6th July 2012, the CIT-II reviewed the file. A review report dated 15th January 2013 was issued to the AO. The review report highlighted the erroneous judgment made by the AO with regard to the disallowances under Section 14A of the Act by making an addition of only ₹ 59 and not considering the interest expenses incurred on the borrowed funds utilised for the purpose of investment by the Assessee. Further the AO failed to disallow the notional FE loss of ₹ 1,71,43,726 incurred on derivatives based on the MTM basis. 18. It is then disclosed in the counter affidavit as under: CIT-II made a noting on the order sheet of the review file to call for the action taken report from the concerned officers. In view of this direction, the ITO (hqrs.) Judicial-II issued a letter 04.03.2013 to DCIT -5(1), requesting to take corrective action and action taken report in this regard to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that, even assuming without admitting that the entire funds borrowed from Nova Scotia Bank and Kotak Mahindra Bank were invested in mutual funds, since the investment was made in a Growth Plan which could not have yielded any exempt income, no disallowance could have been made under Section 14A of the Act read with Rule 8D of the Rules. Even as regards the disallowance of loss arising from foreign exchange derivatives ( FED ) on MTM basis, necessary disclosures were duly furnished by the Assessee in the course of the original assessment proceedings in Clause 2(a) of the notes of accounts contained in Schedule 22 of the audited financial statement. That note clearly states that the profits were reduced in the relevant previous year on account of the loss of ₹ 1.71 crores being suffered on derivatives on MTM basis. By a letter dated 28th November 2011, the queries raised by the Respondents by notice dated 26th September 2011 in this regard were replied to. There was a verification undertaken by the Respondents and it is only thereafter the losses were allowed by the AO. 22. It was pointed out by Mr. Vohra that the Petitioner had followed the mercantile system and that in te ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... returns filed and therefore it could not be said that the material and true particulars were not disclosed by the Assessee. Reliance was placed on the decision in CIT v. Sain Processing and Wvg. Mills (P.) Ltd (2010) 325 ITR 565 (Del.). It was further submitted that the reasons for reopening the order had to be found in the order itself and cannot be supplied by an affidavit filed subsequently. Reliance was placed on the decisions in Sheth Brothers v. JCIT (2001) 251 ITR 270 (Guj) and Vijaykumar M. Hirakhanwala HUF v. ITO (2006) 287 ITR 443 (Bom.). Submissions of the Respondents 25. In response to the above submissions, it was submitted by Mr. Ashok Manchanda, learned counsel for the Revenue, that it was only after the original assessment proceedings were concluded that the AO learnt that the expenditure was not on account of interest and that the financial charges in the period relevant to AY 2008-09 had increased to ₹ 2,27,24,801 as compared to the interest outgo of ₹ 60,58,887 in the earlier AY 2007-08. This increased interest cost was mainly due to making of short term investment through funds borrowed from Nova Scotia Bank and Kotak Mahindra Bank for transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely mentioned at the appropriate place in the return of income . Thus the Assessee had deliberately concealed and furnished inadequate particulars of income with a view to evade taxes. Discussion and Reasons 29. The two questions that the Court proposes to examine is whether the Assessee had made complete disclosure during the assessment proceedings and whether there was any new tangible material available with the respondents for forming reason to believe that income had escaped assessment. 30. In the counter affidavit filed by the Respondents, reliance has been placed on Instruction No. 15 dated 4th November 2008, in terms of which the CIT had the administrative power to review the file and the assessment order. The CIT-II made a noting on the order sheet of the review file to call for an action taken report from the concerned officer. This was followed by a direction being issued by the ITO (hqrs.) Judicial-II on 4th March 2013 to DCIT 5(1), asking that corrective action be taken and an action taken report be sent to the office of the CIT-II by 7th March 2013 without fail. It is admitted in the counter affidavit that pursuant to the above administrative direction of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r alone and the Court would not expect its being done in some other manner. .... 8. Thus, if authority is given expressly by affirmative words upon a defined condition, the expression of that condition excludes the doing of the Act authorised under other circumstances than those as defined. It is also established principle of law that if a particular authority has been designated to record his/her satisfaction on any particular issue, then it is that authority alone who should apply his/her independent mind to record his/her satisfaction and further mandatory condition is that the satisfaction recorded should be independent and not borrowed or dictated satisfaction. Law in this regard is now sell-settled. In Sheo Narain Jaiswal Ors. Vs. ITO, 176 ITR 35 (Pat.), it was held: Where the Assessing Officer does not himself exercise his jurisdiction under Section 147 but merely acts at the behest of any superior authority, it must be held that assumption of jurisdiction was bad for non- satisfaction of the condition precedent. 34. Nothing prevented the CIT from exercising powers under Section 263 of the Act if it was felt that the order of the AO is prejudici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Full Bench of this Court observed that there could be instances where an AO may not have raise a query during the original assessment proceedings but may have examined the subject matter because the aspect or question may have been too apparent and obvious. In Swarovski India Pvt. Ltd. v. Deputy Commissioner of Income Tax 368 ITR 601 (Del), it was held that the escapement of income by itself is not sufficient for reopening the assessment in a case covered by the first proviso to Section 147 of the said Act and unless and until there was failure on the part of the assessee to disclose fully and truly all the material facts necessary for assessment, the power to reopen the assessment should not be invoked. It was insisted that the reasons for reopening of the assessment should specifically indicate which material fact was not disclosed by the Assessee in the course of the original assessment under Section 143(3) of the Act failing which there should not be any reopening of the assessment. 37. In Prabhu Dayal Rangwala v. Commissioner of Income-Tax 373 ITR 596 (Del) a Division Bench of this Court after reviewing the case law till then held: 18. In view of the dictum of the Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs was in the sum of ₹ 1,51,28,845 and the bank charges amount was ₹ 10,86,035. Specific queries were raised by the AO during the course of the original assessment proceedings as regards the interest expenses. The AO rejected the contention of the Petitioner regarding low interest expense having been incurred and made a disallowance of ₹ 59 which was questioned by the Assessee before the DRP unsuccessfully. 39. Apart from stating that on review, the CIT found that there should have been a greater figure of disallowance, the Respondent did not point out what tangible materials had come to their possession in order to form reasons to believe that the income had escaped assessment on the above ground. 40. The Court s attention was drawn to Schedule 7 of the audited annual accounts wherein the investments were reported. It shows that in the beginning of the year, the Assessee s investment was ₹ 9664 being 961 units of Birla Sunlight Mutual Funds. They were sold during the relevant AY and therefore the balance at the end of the year was nil. The same Schedule 7 gives details of the mutual funds and number of units purchased and sold during the year. It is, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recorded under Section 148(2) of the Act and the Assessing Officer is not authorised to refer to any other reason even if it can be otherwise inferred and/ or gathered from the records. He is confined to the recorded reasons to support the assumption of jurisdiction. He cannot record only some of the reasons and keep the others up his sleeves to be disclosed before the Court if his action is ever challenged in a Court of law. 42. Even as regards the loss on account of FE fluctuation, there appears to be a complete disclosure of all the relevant facts by the Assessee during the original assessment proceedings. It must be recalled that the return was picked up for scrutiny under Section 143(3) and in the balance sheet accounts (together with notes) rendered by the Assessee, there was sufficient disclosure on this aspect. Schedule 22 to the notes of accounts had a separate disclosure under the heading as under: 2. Statement of significant accounting policies a) Basis of preparation The financial statements have been prepared to comply in all material respects with the Notified accounting standard by Companies Accounting Standards Rules, 2006 and the relevant provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rward rate (or the forward rate last used to measure a gain or loss on that contract for an earlier year). The gain or loss so computed is recognised in the statement of profit and loss for the period. The premium or discount on the forward exchange contract is not recognised separately. 43. The submission of Mr. Manchanda that relevant and material facts have to be specifically discussed in the returns of income of the tax audit report appears to overlook the fact that the Assessee cannot be expected to guide the AO on how he should scrutinize the accounts. In the letter dated 28th November 2011 of the Assessee in reply to the query of the AO in the original assessment proceedings, there was a whole note on exchange fluctuation enclosed in the form of Annexure-B. Despite this it cannot be said that the AO was ignorant of what the Assessee was doing in respect of foreign exchange loss while accounting for derivatives contracts. The change in the method of accounting and the consequential change in the loss figure have been adequately explained by the Assessee. Under Note J in the Statement of significant accounting policy in Schedule 22 to the audited annual accounts, the As ..... X X X X Extracts X X X X X X X X Extracts X X X X
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