2021 (11) TMI 709 - AT - Income Tax

Revision u/s 263 by CIT-A - allowability of mark-to-market loss on forward contracts - HELD THAT - AO scrutinized the expenses debited to the Profit and Loss account for the subject year in detail and cannot have said to missed mark-to-market loss on forward contracts which is apparent in the other expenses note of Financial statements. This clearly shows that the documents and submissions/ details filed were duly verified and considered by the Ld. AO while passing the Assessment order. AO duly examined the issue and with due application of mind, the ld. AO did not invoke any disallowance on account of mark-to-market on forward contracts. This view is supported by the order of Jurisdictional bench of ITAT in the case of Vidisha Tractors 1995 (5) TMI 73 - ITAT INDORE Assessee co. meets all the requirements viz. it has been consistently following the mercantile system of accounting, it has been consistently recognising the mark to market gains/losses as per the accounting standards and it has been giving the same treatment to mark to market gains as given to mark to market losses i.e. the mark to market gains credited to the Profit and Loss Account are duly offered to tax, then the Ld. AO was justified in allowing the mark to market loss of ₹ 30,31,69,199 on forward contracts. We find that the identical issue of mark to market loss on forward contracts (that are not entered for trading/speculation purposes) has also been held to be an allowable deduction by the ratio laid down in the case of HEG Limited 2018 (10) TMI 59 - ITAT INDORE AO s order is not erroneous and prejudicial to the interest of revenue since mark to market loss incurred by Company on revaluation of forward contracts is an allowable deduction as the loss claimed by the assessee co. was in accordance with a recognized method of accounting, the loss claimed by the assessee co. was not a notional/contingent loss, but is an actual loss and the mark-to-market loss on forward contracts has not been treated as a contingent liability in the audited financial statements. Thus, the mark-to-market loss on forward contracts cannot be said as contingent in nature. Therefore, the Ld. PCIT has erred in invoking powers under section 263 of the Act. Accordingly, we set aside the order of the ld. PCIT holding it invalid and restore the order of the Assessing Officer. Consequently, grounds raised in the appeal of the assessee for the assessment year 2014-15 stand allowed.

Summary

Issues Involved:
1. Validity of initiation of revision proceedings under section 263 of the Income Tax Act.
2. Merits of the issue involved in revision proceedings regarding the provision for mark to market loss on forward contracts.
3. Merits of the issue involved in revision proceedings regarding the allowance of deduction towards reversal/utilization of warranty provision.

Detailed Analysis:

1. Validity of Initiation of Revision Proceedings under Section 263:
The Appellant argued that the revision proceedings under section 263 were initiated erroneously by the Ld. PCIT without satisfying the conjunctive conditions that the assessment order must be both erroneous and prejudicial to the interest of the revenue. The Appellant contended that the Ld. PCIT failed to point out specific errors or provide proper evidence to support the invocation of section 263. The Tribunal agreed with the Appellant, noting that the assessment order was in line with the Supreme Court and jurisdictional ITAT decisions, and thus, could not be deemed erroneous or prejudicial to the revenue.

2. Merits of the Issue Involved in Revision Proceedings: Provision for Mark to Market Loss on Forward Contracts:
The Appellant contended that the provision for mark to market loss on forward contracts was not a contingent liability and should not be disallowed. The Appellant relied on the Supreme Court's decision in CIT vs. Woodward Governor India Private Limited (312 ITR 254) and the jurisdictional ITAT's decision in HEG Limited vs. ACIT (ITA 583 of 2012), which upheld the allowability of such losses. The Tribunal found that the Ld. AO's acceptance of the mark to market loss was in accordance with established judicial precedents and therefore, not erroneous. The Tribunal also noted that the loss was reversed in the subsequent year and offered to tax, negating any prejudice to the revenue. Consequently, the Tribunal held that the Ld. PCIT erred in invoking section 263 and set aside the order, restoring the Ld. AO's assessment.

3. Merits of the Issue Involved in Revision Proceedings: Allowance of Deduction Towards Reversal/Utilization of Warranty Provision:
The Appellant argued that the deduction for the reversal/utilization of the warranty provision did not result in double deduction, as the provision was not claimed in the year of creation. The Tribunal observed that the Ld. AO had made inquiries about the warranty provision during the assessment proceedings and had allowed the deduction after applying his mind to the facts. The Tribunal noted that the provision was disallowed in the earlier years and thus, the deduction in the current year did not prejudice the revenue. The Tribunal held that the Ld. PCIT's invocation of section 263 was unjustified and set aside the order, restoring the Ld. AO's assessment.

Conclusion:
The Tribunal allowed both appeals filed by the Appellant, setting aside the orders of the Ld. PCIT and restoring the original assessment orders for the assessment years 2014-15 and 2015-16. The Tribunal concluded that the Ld. PCIT had erred in invoking section 263, as the original assessment orders were neither erroneous nor prejudicial to the interests of the revenue.