1. This appeal filed by the assessee is directed against the order passed by the learned CIT(A)-I, Bhubaneswar dt. 3rd Sept., 2004 for the asst. yr. 1999-2000.
2. The grounds of appeal filed along with Form No. 36 are not in conformity with the Rule 8 of ITAT Rules. On the direction of the Bench, the assessee has filed consolidated grounds of appeal on 29th May, 2006 which are as under: (1) For that upholding of Rs. 8 lakhs as notional income in respect of interest on Orissa Construction Corporation Ltd., (OCC) @ 16 per cent per annum on Rs. 50 lakhs is bad in law and untenable as OCC while settling the loan repayment, did not pay interest to appellant.
(2) For that the upholding of the disallowance of Rs. 15,98,612 relating to foreign exchange fluctuation loss incurred on account of contract with foreign buyers M/s Sinonex is unjustified, as the assessee company has suffered such loss on account of export of chrome ore, to M/s Sinonex the export of which is the business of the assessee company. Further, the expenditure is covered by order of the Hon'ble Tribunal for asst. yr. 1997-98 vide appeal No. 485/Ctk/2003 order dt. 11th Nov., 2005.
(3) For that not allowing the carry forward of loss to succeeding assessment years is unjust as the appellant has filed IT return on 28th Feb., 2000 within the prescribed time-limit although the appellant could not file the audited accounts in reply to the deficiency letter No. 338 dt. 13th Nov., 2000 for reasons beyond the control of the appellant. Further, the appellant had all along filed tax returns on the basis of provisional accounts which have been accepted by the Department. CBDT in the past had also condoned the delay in filing the audited accounts vide its order under Section 119(2) of IT Act, 1961. Further the learned Tribunal, Cuttack Bench, Cuttack had cancelled the penalty imposed under Section 271B for the appellant's inability to file the tax return under Section 44AB thereby admitting that the appellant was prevented by sufficient cause for not filing audited accounts in time.
3. At the time of hearing, both the parties conceded that ground No. 1 relating to the interest on OCC at 16 per cent on Rs. 50 lakhs is against the assessee and ground No. 2 relating to the foreign exchange fluctuation loss is against the Revenue in view of the decision of the Tribunal in the assessee's own case for asst. yrs. 1993-94, 1995-96 to 1998-99. Copy of the order of the Tribunal dt. 11th Nov., 2005 has been placed on record by the assessee's learned Counsel.
4. After hearing the rival submissions and on careful perusal of the material available on record, it is observed that the issues involved in ground Nos. 1 and 2 raised in this appeal have been discussed by the Tribunal in its order dt. 11th Nov., 2005 in the assessee's own case for the preceding assessment years. The relevant paras 33, 72 and 73 are extracted as under: 33. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and the paper book filed on behalf of the appellant. We find that the appellant had advanced an amount of Rs. 50,000 to OCC Ltd. on 2nd Jan., 1998 as temporary loan bearing 16 per cent interest with provision for penal interest. We further find that the assessee is following mercantile system of accounting and accordingly in the fitness of things the assessee should have shown interest on such loan on accrual basis and offered the same for taxation. In case the interest could not be realised and becomes bad the assessee was at liberty to claim this as a bad debt and write off in the accounts. We further find that Clause 9.2 of the (Accounting Standard) AS-9 relied on by the learned Counsel reads as under: 9.2 Where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim e.g. for escalation of price, export incentives, interest etc.
revenue recognition is postponed to the extent of uncertainty involved. In such cases, it may be appropriate to recognise revenue only when it is reasonably certain that the ultimate collection will be made. Where there is no uncertainty as to ultimate collection, revenue is recognized at the time of sale of rendering of service even though payments are made by instalments.
The case law relied on by the learned Counsel is also distinguishable. In the said case decision it was held that the law does not oblige a trader to make the maximum profit that he can, out of his trading transactions. Income which accrues to a trader is taxable in law. Income which he could have but has not earned is not made taxable as income accrued to him. In the present case the income has been accrued to the assessee. Accordingly the learned CIT(A) was justified in confirming the additions. The ground raised by the assessee is accordingly dismissed." "72. We have considered the rival submissions made by both the sides and perused the orders of the authorities below and paper book filed on behalf of the appellant. We find that para 7(a) of AS-11 issued by the ICAI reads as under: 7(a) monetary items denominated in a foreign currency (e.g. foreign currency notes, balances in bank accounts denominated in a foreign currency and receivable, payables and loans denominated in a foreign currency should be reported using the closing rate. However, in certain circumstances, the closing rate may not reflect with reasonable accuracy the amount in reporting currency that is likely to be realised from, or required to disburse, a foreign currency monetary item at the balance sheet date, e.g. where there are restrictions on remittances or where the closing rate is unrealistic and it is possible to effect an exchange of currencies at that rate at the balance sheet date. In such circumstances, the relevant monetary item should be reported in the reporting currency at the amount which is likely to be realised from or required to disburse, such item at the balance sheet date.
73. We further find that the assessee is following mercantile system of accounting and has duly considered such foreign exchange fluctuation loss to give a true and fair picture of the state of affairs of the company. Considering the totality of the facts of the case and considering the guidelines issued by the ICAI in AS-11, we direct the AO to allow the above amount as an allowable expenditure under Section 37(1) of the IT Act We direct accordingly.
4.1 Following the principle of precedence and respectfully following the said order of the Tribunal, we dismiss ground No. 1 and allow ground No. 2 of the assessee's appeal.
5. Ground No. 3 is relating to the carry forward of the loss for the asst. yr. 1999-2000.
6. Brief facts of this issue are that the assessee which is a Government of Orissa undertaking, filed its return of income for the asst. yr. 1999-2000 on 28th Feb., 2000 i.e. before the extended time-limit for filing of the return of income under Section 139(1) of the IT Act, 1961. The said return of income was not accompanied with the auditor's report as required under the IT Act. The AO issued a deficiency notice in terms of Section 139(9) of the IT Act on 13th Nov., 2000 and allowed 15 days time to the assessee to make good the deficiency by filing the required audited report. The assessee could not file the same within the stipulated time. Thereafter, the AO treated the return filed by the assessee as 'invalid' within the meaning of Section 139(9) by his letter dt. 27th March, 2002. Later on, notice under Section 148 of the Act was issued by the AO and the assessee filed its return of income in response to the said notice on 24th Dec, 2002 declaring total loss of Rs. 11,82,76,427. The AO, however, disallowed the claim of the carry forward of the loss by stating as under: 4.3 Section 139(3) stipulates inter alia that for the carry forward of losses to be allowable, the assessee has to furnish the return of income within the time allowed under Section 139(1). In the instant case, the returns filed by the assessee were treated as invalid non est within the meaning of Section 139(9) of the Act. Section 139(9) stipulates that once the return is treated as an invalid return, 'the provisions of the IT Act shall apply as if the assessee had failed to furnish the return'. Accordingly, in this case, as the returns have been treated as invalid, it follows that the assessee has failed to furnish the returns for the assessment years under reference. The benefits of Section 139(3) are therefore denied to it. Hence, again no exceptions have been provided in the said sections.
4.4 As per Section 80, the right to carry forward the losses will be lost if the return is not filed in time for the year in which such loss was incurred. The said section begins with a non obstante clause, thus overriding the provisions of Section 66 to Section 79 of the Act. Section 80 requires two conditions to be met for carry forward of losses to be allowed (Bishamber Sahal v. ITO (1987) 29 TTJ (Del) 194 : (1987) 22 ITD 16 (Del); 4.5 In the case of the assessee, the said conditions are not met on account of the application of Section 139(9) of the Act. With effect from 1st April, 1985, no loss is allowable to be carry forward unless the return under Section 139(1) is filed within time [CIT v. Smt. Gunavathy Dharmasy .] 4.6 As the return of income filed on 28th Feb., 2000 was treated as invalid under Section 139(9) of the Act, it follows that the assessee has failed to furnish the return for this assessment year.
Accordingly, no benefits under Section 139(3) are allowable to it.
Accordingly, the loss for the assessment year is not allowed to be carried forward to the succeeding assessment years.
7. On appeal, the learned CIT(A) confirmed the order of the AO by observing as under: 4.2 I have carefully considered the submissions and gone through the facts on record. I find that the AO has discussed the issue at length and given elaborate reasons, including citation of certain judicial pronouncements like the decision of the Hon'ble Tribunal, Delhi Bench and the decision of the Hon'ble Kerala High Court, which has not been disputed by the appellant. The above action of the AO also finds support from the decision of the Hon'ble Allahabad High Court in UP Rajya Vidyut Utpadan Nigam Ltd. v. Dy. CIT , in which treating returns as invalid was upheld as the P&L a/c filed with the return as provisional. I find the action of the AO to be in accordance with the provisions of law and, hence no interference is called for.
8. At the time of hearing before us, the learned Counsel for the assessee argued the case at great length. He has filed written submission in respect of the assessee's case and contended that the action of the Revenue is arbitrary and unlawful. According to the learned Counsel of assessee the return of income for the asst. yr.
1999-2000 filed by the assessee on 28th Feb., 2000 was a perfectly valid return in all respects excepting that it was not accompanied with the audit report and in that way, could not be considered 'defective' in terms of Clauses (bb) and (c) of the Explanation to Section 139(9) of the IT Act. Though the AO issued a deficiency notice asking the assessee to correct the same, it was not within the hands of the assessee for the following reasons: As the assessee is a Government of Orissa Undertaking and the audit is subjected to the full control of the Comptroller and Auditor General of India in the matter of appointment of statutory audit and the subsequent process of the audit work. Since the statutory audit of the company could not be completed in time, the tax audit work also got delayed subsequently.
8.1 The learned Counsel for the assessee further submitted that the order of the AO is in violation of Section 139(9) of the IT Act and also not in conformity with the CBDT Instruction No. 1348 dt. 30th Aug., 1980 wherein the Board specifically instructed its subordinate officers as follows: The omission to enclose copies of the audited P&L a/c, balance sheet and the auditor's report should be treated as a defect in all cases requiring statutory audit. If the return indicates that the audit has not been completed and hence audited accounts and auditor's report could not be enclosed, the return should not be treated as defective.
In the present case, there were enough indications in the return of income filed by the assessee on 28th Feb., 2000 to the effect that the audit of its accounts has not been completed till 28th Feb., 2000. And the defect mentioned by the AO himself by stating that "it is understood that the statutory audit for the financial year 1998-99 relevant to the asst. yr. 1999-2000 has not been completed in pursuance of the provisions of the Co-operative Societies Act/Companies Act.
8.2 The learned Counsel for the assessee has further submitted that the assessee company has been permitted by the CBDT in relaxation of different provisions of the IT Act by applying Section 119(2) of the IT Act which are as under: (i) CBDT's order F. No. 202/10/94-ITA-E dt. 8th May, 1994 relaxing the conditions laid down in Section 32AB(5) for asst. yr. 1989-90.
(ii) GBDT's order F. No. 202/1/95-ITA-E dt. 22nd Feb., 1995 relaxing the conditions laid down in Section 32AB(5) for asst. yr. 1990-91.
(iii) CBDT's order F. No. 178/5/2002-ITA-I dt. 12th April, 2002 relaxing the conditions laid down in Section 80HHC(4) for asst. yr.
1997-98.
8.3 By referring to the Clause (c) of the Explanation to Section 139(9) of the IT Act, the learned Counsel for the assessee has submitted that on plain reading of the above Clause (c) of Explanation below Section 139(9) of the Act, the emphasis should be given on the words "have been audited". It indicates that this clause shall apply where the accounts of an assessee have been audited by the statutory auditor and not in the cases where the accounts have not been audited. Here in this case, admittedly, the accounts of the assessee company have not been audited till the revised return in response to notice under Section 148 was filed by it. As stated above, the assessee company is a Government of Orissa Undertaking. Therefore, statutory audit is to be done by an auditor duly appointed by Comptroller and Auditor General of India (CAG). Therefore, the company is subject to full control of the CAG in the matter of appointment of its statutory auditor and the subsequent process of the audit work. The assessee has no power or competence to appoint of its own the auditor to get its accounts audited. On the face of this fact itself, it can be inferred that the assessee company was prevented by filing the return without enclosing the statutory audit report as required under the Act. Therefore, when the assessee was prevented by the said reason the return filed under Section 139(1) and in response to notice under Section 148 enclosing therewith the provisional P&L a/c and balance sheet, etc. cannot be termed as defective or invalid one.
8.4 The learned Counsel for the assessee further submitted that the assessee had all along filed tax returns on the basis of provisional accounts which have been accepted by the Department. CBDT in the past had also condoned the delay in filing the audited accounts vide its order under Section 119(2). Further the Tribunal, Cuttack Bench, Cuttack had cancelled the penalty imposed under Section 271B for the assessee's inability to file the tax return under Section 44AB, thereby admitting that the assessee was prevented by sufficient cause for not filing audited accounts in time.
8.5 The assessee's learned Counsel thus contended that taking into consideration all the above aspects, the order treating the original return filed on 28th Feb., 2000 as invalid on the flimsy ground of the return being not accompanied with the audited accounts (a task which was not possible for the appellant company to achieve for the different reasons as discussed above) be reversed and the said original return be kindly declared as a valid return and consequently, the claim of carry forward of loss and unabsorbed depreciation may also be directed to be allowed.
9. On the other hand, the learned Departmental Representative for the Revenue heavily relied on the orders of the Revenue authorities. He further contended that for the reasons as discussed in the assessment order and the appellate order of the learned CIT(A), the action of the Revenue on this issue or in this regard is as per law. He, therefore, submitted that under these facts and circumstances of the case, the appeal of the assessee on this issue may be dismissed.
10. We have heard the rival contentions of the parties and perused the material placed before us including the paper book containing 44 pages filed by the assessee. The main question before us is whether the action of the AO in treating the return filed by the assessee company under Section 139(1) within the prescribed time as defective and hence 'invalid return' was correct or not and that the proceedings under Sections 147/148 in response to the request of the assessee for extension of time for filing of the revised return as soon as the accounts of the assessee are duly audited both in terms of company law as well as the IT Act were correct or not. There is no dispute that the return filed under Section 139(1) was within the statutory time-limit and also there is no dispute that the audit of the accounts of the assessee company was not within the hands of the assessee company, which is an undertaking of the Government of Orissa and the appointment and conduct of audit is within the control of CAG of India. Clause (c) of Explanation below Section 139(9) reads as under: Explanation. : For the purposes of this sub-section, a return of income shall be regarded as defective unless all the following conditions are fulfilled, namely: (c) where the accounts of the assessee have been audited, the return is accompanied by copies of the audited P&L a/c and balance sheet and the auditor's report and, where an audit of cost accounts of the assessee has been conducted, under Section 233B of the Companies Act, 1956 (1 of 1956), also the report under that section.
It is clear from the above that the Clause (c) of Explanation below Section 139(9) is applicable where the accounts of the assessee has been audited. Admittedly in this case the accounts of the assessee company have not been audited when the return under Section 139(1) was filed even till the revised return in response to notice under Section 148 was filed by the assessee. The AO himself also admitted the said position. The admitted reasons for such non-filing of audited accounts and auditor's report along with the return of income have been noted above, by which the assessee was prevented from filing the return without enclosing the statutory audit report as required under the Act.
Therefore, it can be inferred that the above clause of Explanation below Section 139(9) do not have any direct impact on the issue at our hand.
11. We further find that the issue of treatment of returns as defective has also been clarified by the CBDT vide Instruction No. 1348 dt. 30th Aug., 1980, the relevant portion of which has been quoted above in this order. In the said instruction, the CBDT made it clear that "if the return indicates that the audit has not been completed and hence audited accounts and auditor's report could not be enclosed, the return should not be treated as defective". It is an admitted position that the AO was aware of the fact that CAG is the competent body to appoint auditor for the assessee company, being a Government of Orissa Undertaking and the assessee had no control over CAG. The said fact has also been indicated during assessment proceeding and there was enough indications in the return of income filed by the assessee on 28th Feb., 2000 to the effect that the audit of its accounts had not been completed till then. During the course of hearing, the learned Counsel drew our attention to the fact that the assessee had all along filed tax returns on the basis of provisional accounts which have been accepted by the Department. CBDT in the past had also condoned the delay in filing the audited accounts vide its order under Section 119(2). Further the Tribunal, Cuttack Bench, Cuttack had cancelled the penalty imposed under Section 271B for the assessee's inability to file the tax return under Section 44AB, thereby admitting that the assessee was prevented by sufficient cause for not filing audited accounts in time. It is pertinent to mention here that the learned Departmental Representative did not oppose this submission of the assessee's learned Counsel.
12. In view of the above discussions, the original return filed under Section 139(1), in our considered opinion, was a valid return. Once we have held that the return filed under Section 139(1) was a valid one, although it was not accompanied by statutory audit report, the claim of carry forward of the loss and the depreciation is also allowable as per claim of the assessee, more so when the AO did not raise any objection about the quantum of loss and depreciation. We, therefore, direct the AO to allow the claim of the assessee, on these accounts.