2014 (2) TMI 1207 - AT - Income Tax

Revision u/s 263 - FCCB funds diverted to the M/s Reliance Info Investment without charging interest - Commissioner held that the interest free fund would be deemed to be transfer of an asset in view of the provisions of sections 60 to 63 of the Act - Held that - Tribunal has considered all the contention of the department regarding applicability of section 60 to 63 of the Act to the interest income and then gave a finding that the issue was debatable and provisions of section 263 could not be invoked when the AO has already conducted an enquiry and taken one of the possible view. There is no quarrel on the point that for the year under consideration the AO conducted an enquiry on the issue therefore we do not find any reason for distinguishing either the fact or the finding of the Tribunal on the issue for the A.Y. 2007-08.- Decided in favour of assessee Mark to market loss/gain - AO disallowed the net loss after adjusting the gain on account of foreign currency derivatives for hedging - Held that - It is clear that the Tribunal while decided the issue for the A.Y. 2007-08 has also considered the CBDT instruction no. 3/2010 which has been heavily relied upon by the Commissioner as well as the ld. DR. We further note that the AO has examined this issue and disallowed the net loss after adjusting the gain on account of foreign currency derivatives for hedging and therefore it is manifest from the record that the issue has been examined by the Assessing Officer and taken a possible view. The Tribunal on the identical facts has decided this issue by holding that the view of the Commissioner cannot be countenanced with. Accordingly we do not find any reason to take a different view from that of already taken by the Tribunal for the A.Y. 2007-08 - Decided in favour of assessee

Summary

Issues Involved:
1. Legitimacy of the Commissioner of Income-tax invoking Section 263 of the Income-tax Act.
2. Applicability of Sections 60 to 63 of the Income-tax Act to interest income from interest-free loans.
3. Allowability of mark-to-market (MTM) losses on foreign exchange derivatives.

Issue-wise Detailed Analysis:

1. Legitimacy of the Commissioner of Income-tax invoking Section 263 of the Income-tax Act:
The appeal by the assessee challenges the revision order dated 22/11/2012 passed by the Commissioner of Income-tax under Section 263 of the Income-tax Act for the Assessment Year 2008-09. The Commissioner found the assessment order dated 31/12/2010 to be erroneous and prejudicial to the interest of revenue. The Commissioner issued a show-cause notice to the assessee, who contended that the Assessing Officer (AO) had already examined the issues and taken a possible view. The Commissioner did not accept the assessee's contention and directed the AO to reframe the assessment after reexamining the issues.

2. Applicability of Sections 60 to 63 of the Income-tax Act to interest income from interest-free loans:
The Commissioner observed that the assessee company had raised funds through foreign currency convertible bonds (FCCB) and granted an interest-free loan to M/s Reliance Info Investment Pvt. Ltd. (RIIL), which earned interest income. The Commissioner deemed this to be a transfer of an asset under Sections 60 to 63 of the Income-tax Act, thus making the interest income liable to be clubbed in the hands of the assessee company. However, the Tribunal, in the assessee's own case for A.Y. 2007-08, held that the issue was debatable and that the provisions of Section 263 could not be invoked when the AO had already conducted an enquiry and taken one of the possible views. The Tribunal noted that the AO had enquired about the matter during the assessment proceedings and that the issue was debatable, thus falling within the realm of "debatable issue," which cannot be revised under Section 263.

3. Allowability of mark-to-market (MTM) losses on foreign exchange derivatives:
The Commissioner also found that the assessee had acquired forex/derivative instruments for hedging and recognized MTM losses as on the reporting day, which he deemed notional and contingent, thus not allowable for set-off against taxable income. The Tribunal, in the assessee's case for A.Y. 2007-08, considered the CBDT Instruction No. 3/2010, which states that forex derivative losses are not deductible. However, the Tribunal held that both forex gains and losses should be treated consistently. The Tribunal noted that the AO had examined the issue and disallowed the net loss after adjusting the gain on forex derivatives, thus taking a possible view. The Tribunal concluded that the assessment order could not be described as prejudicial to the interests of the revenue, as the AO had taken a possible view after proper enquiry.

Conclusion:
The Tribunal found that the issues for the year under consideration were identical to those for A.Y. 2007-08, where the Tribunal had set aside the revision order passed by the Commissioner. The Tribunal held that the AO had conducted an enquiry and taken a possible view on both the applicability of Sections 60 to 63 and the allowability of MTM losses. Therefore, the Tribunal set aside the impugned revision order of the Commissioner, allowing the appeal of the assessee. The order was pronounced in the open court on 12/02/2014.