INCOME TAX ACT, 1961

Section 263

Revision under section 263 - Erroneous and prejudicial order - Acceptance of wrong accounting method by AO - Postponement in collection of taxes

Assessee reduced unrealised gains on open forward contracts in foreign exchange on the date f balance-sheet on mark to market basis and included such income in succeeding year on settlement of forward contract on the ground of AO having accepted such acounting treatment, CIT held assessment order to be erroneous and prejudicial to the interest of revenue. Held: Method of accounting followed by assessee in reduced unrealised gains on open forward contracts in foreign exchange on the date of balance-sheet on mark to market basis was not a correct method of accounting which had made assessment order as erroneous. Assessee ought to have included unrealised gains on open forward contracts in foreign exchange on the date of balance-sheet on mark to market basis based on closing rate of foreign exchange on the date of reporting keeping in view Accounting Standard AS-11 which was mandatory. Merely because assessee had included such income in succeeding year on settlement of forward contract. could not remove the prejudice caused to revene as it had postponed the collection of taxes which were in fact public money meant for use in public interest for public purposes. The revenue was entitled to its share in income by way of income-tax on all the income which had crystallized during the previous year and it could not be postponed by following incorrect method of accounting/policies. Accordingly, assessment order passed by AO was not only erroneous but was also prejudicial to the interest of revenue and CIT had rightly invoked jurisdiction under section 263.

REFERRED : CIT v. M/s. Woodward Governor India (P) Ltd. & M/s. Honda Siel Power Products Ltd. (2009) 312 ITR 254 (SC) : 2009 TaxPub(DT) 1628 (SC)

FAVOUR : Against the assessee.

SUBSCRIBE FOR FULL CONTENT