Rectification of mistake — Tribunal should have regard to all the facts — Capital or revenue expenditure — Business loss — Loss incurred due to fluctuation of foreign exchange rate — To be decided in the light of CIT v. Woodward Governor India P. Ltd.

The assessment order for A.Y. 1998-99 was passed on 10th January, 2001, in which foreign exchange fluctuation loss amounting to Rs.38,30,000 was disallowed by the Assessing Officer.

The assessee filed an appeal before the Commissioner of Income-tax (Appeals) who upheld the disallowance on the ground that the exchange fluctuation related to long-term loan, and it could not be allowed as revenue expenditure.

Against the order of the Commissioner of Incometax (Appeals), the assessee filed an appeal before the Tribunal. The Tribunal vide order dated 22nd April, 2004, upheld the disallowance of loss of Rs.38,30,000.

Thereafter, the assessee filed an appeal before the High Court. While disposing of the appeal, it was observed by the High Court on 6th December, 2004, that:

“In view of paragraphs 13 and 14 of the Tribunal’s order, it is not possible for us to accept the contention that the assessee had produced books of account. It is for the Tribunal, which is a fact-finding authority, to examine the same and to record a finding. If the appellant had produced all the necessary documents in this behalf, then the Tribunal should have examined the same. In fact, in such a situation, instead of approaching this Court, the assessee ought to have moved the Tribunal u/s.254(2) of the Income-tax Act, 1961. It would be open to the appellant to move the Tribunal within 15 days from today. The appeal is disposed of accordingly.”

Thereafter, the assessee filed an application u/s. 254(2) of the Act, before the Tribunal and that application was dismissed by the Tribunal vide its order dated 15th June, 2005.

On an appeal, the High Court was of the view that ex facie, the appeal challenging two different orders passed by the Tribunal dated 22nd April, 2004, and 15th June, 2005, in one single appeal was not maintainable.

The High Court held that as far as the order dated 22nd April, 2004 was concerned, the same was challenged by the assessee by the way of appeal and vide order dated 6th December, 2004, that appeal had been disposed of by the High Court. The assessee could not reagitate the same issue again.

Coming to the order dated 15th June, 2005, passed by the Tribunal, the High Court noted that the Tribunal while dismissing the application for rectification, vide impugned order had held that:

“Our attention was invited to para 13 of the order in which the Tribunal has observed that it was for the assessee, which possesses exclusive knowledge as to the utilisation of the loan, to prove the same by leading evidence to that effect by producing the books of account and showing the entries made therein and that the assessee has not discharged this burden either before the Commissioner of Income-tax (Appeals) or before the Tribunal. It is stated that the Tribunal has noted in para 14 of the order that in A.Y. 1997-98 the assessee had filed some details and documents on the basis of which the Commissioner of Income-tax (Appeals) accepted the claim, but has gone further to record that for the year under appeal no such details were filed. The submission of the assessee before us is that the loss was allowed by the income-tax authorities in the A.Ys. 1996-97 and 1997-98 and a different treatment for the same is not warranted since the facts were the same for the year under appeal also. It is submitted that inasmuch as the Tribunal has overlooked this aspect of the matter, there is an error apparent from the record. It was alternatively submitted that the Tribunal should give a finding about the nature of the loss, whether it is capital or revenue. However, it was fairly admitted before us that this claim was not made before the income-tax authorities or before the Tribunal.”

The High Court observed that according to this order, it had been admitted before the Tribunal that the claim was not made before the incometax authorities or before the Tribunal. The Tribunal further held that:

“We have considered the matter. Given the findings of the Tribunal in paras 13 and 14 of its order, the present application cannot be accepted. It may perhaps be that the evidence produced in the earlier years was relevant for the purpose of deciding the merits of the assessee’s claim, but when the Departmental Authorities have held that for the year under appeal there was no evidence brought on record to show the utilisation of the loan, and where such a finding has been upheld by the Tribunal, the provisions of section 254(2) of the Act cannot be invoked. We do appreciate the assessee’s anxiety and it may even be open to the assessee to argue that the evidence adduced by the assessee for the earlier years would be sufficient to discharge the assessee’s burden for the year under appeal, but even if there is grievance on this score, it could not perhaps be redressed by resorting to section 254(2) of the Act. At best it may amount to an error of judgment or may even amount to the Tribunal insisting on the same evidence being formally placed on record for the year under appeal, which may appear to be ritualistic, but since the Tribunal has gone on the basis of the question of burden, it is not possible for us to accept the present application. We are also unable to give a finding as to the nature of loss, keeping in view the very fair admission that the question was not raised before the Tribunal or the income-tax authorities.”

According to the High Court, the appeal was wholly misconceived and without any basis and there was no reason to disagree with the findings given by the Tribunal and there was no infirmity in the impugned order passed by the Tribunal. The Supreme Court held that having examined the facts and circumstances of the case, which pertained to the A.Y. 1998-99, and particularly in the light of the order passed for the earlier A.Ys. 1996-97 and 1997-98, as also having regards to the assessment orders passed in the following year (1999-2000) and in view of its judgment in the case of CIT v. Woodward Governor India P. Ltd. reported in (2009) 315 ITR 254 (SC), the Tribunal was wrong in refusing to rectify its own order u/s. 254(2) of the Income-tax Act, 1961, particularly when it had failed to appreciate that in any event the expenditure could have fallen on the capital account, which was specifically pleaded by the assessee as an alternate submission.

For the aforestated reasons, the Supreme Court set aside the judgment of the High Court and the matter was remitted to the Tribunal. The Tribunal was directed to decide the matter de novo in accordance with the law laid down by the Supreme Court in the case of Woodward Governor India P. Ltd. (2009) 312 ITR 254 (SC) as well as on the merits of this case.