1. Assessee had claimed foreign exchange loss as revenue expenditure in its profit & loss A/c to the extent of Rs. 2,08,09,140 and further claimed Rs.15,83,130 on account of provision for doubtful debts and accordingly filed the return of income for the assessment year (A.Y.) 2014-15.
2. Assessee’s case was selected for limited scrutiny assessment under section 143(3) of The Income Tax Act, 1961 (The Act) and therefore notice was issued to assessee u/s 142 (1) of The Act. However, the above-mentioned expenses ware duly allowed by Assessing Officer (AO) under limited scrutiny assessment.
3. On above issues Principal Commissioner of Income Tax (Pr. CIT) set aside the assessment for AY 2014-15 and passed order u/s 263 of The Act and disallowed the above-mentioned expenditure on account that the loan has been utilised for fixed capital hence expenditure was capital expenditure and not deductible u/s 37(1) of The Act.
4. Further, Pr. CIT had added back the provision for doubtful debts for calculating income under Minimum Alternate Tax (MAT) u/s 115JB(2) of The Act.
1. Assessee had submitted that in a limited scrutiny assessment, the AO has to restrict himself to the issues raised in the limited scrutiny and cannot make any addition on other issues unless prior administrative approval is obtained from the Pr. CIT/CIT or DIT concerned.
2. Assessee had also submitted that if the AO has no power to pass an order on particular issue, then Pr. CIT also has no power on that issue u/s 263 of The Act.
3. Assessee had also submitted in response to AO’s contention that the loan was taken in foreign currency and not for acquiring any asset from outside India.
1. ITAT opined that the AO has the power to take up the assessment for comprehensive scrutiny with the approval of the Pr. CIT/DIT concerned where potential escapement of income is exceeding Rs.10 lakh. In the instant case, AO could have converted the limited scrutiny assessment in this case to comprehensive assessment.
2. Further ITAT opined that Pr. CIT is well within its powers to initiate suo moto proceedings where AO takes wrong decision without considering the materials available on record.
3. On above basis ITAT held that AO failed to convert limited scrutiny into a complete scrutiny and AO is duty bound to check all the materials available on record.
4. ITAT concluded that the nature of expenditure being capital or revenue does not depend on the purpose for which foreign currency loan was obtained or on nature of ultimate utilization of loan amount. The same was also affirmed by Apex court in case of India Cements Limited v. CIT [1966] 60 ITR 52 (SC), hence this ground of appeal of the assessee is allowed
Source: [2019] 111 taxmann.com 189 (Cochin – Trib.)
