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TMI Blog2021 (11) TMI 709X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax -1, Bhopal (here-in-after referred to as 'Ld. PCIT') on the following grounds which are independent and without prejudice to each other: On the facts and circumstances of the case and in law, the Ld. PCIT has: On validity of initiation of revision proceedings: 1.Erred in initiating the revision proceedings under section 263 of the Act without appreciating that section 263 cannot be invoked unless the conjunctive conditions that the assessment order passed in erroneous in law as well as prejudicial to the interest of the revenue are satisfied. 2.Erred in invoking revisionary proceedings under section 263 of the Act, without pointing out with proper evidence that on which of the points order passed is erroneous leading to prejudice being caused to revenue and also without appreciating that such an order cannot be made to remand back the matter to the file of assessing officer for conducting fresh enquiry and thereby seeking re-examination of the entire matter, which is against the legislative intent of section 263 of the Act 3.Erred in invoking revision proceedings under section 263 of the Act without considering that the Appellant having followed the decision o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee submitted that the delay in filing the appeal is due to country-wide lockdowns imposed by the government in wake of Covid-19 outbreak and taking cognizance of the same the government had introduced the taxation and other laws (Relaxation and Amendment of Certain Provisions) Act 2020 in order to relax/extend the statutory timelines for various compliance under various laws including the Income Tax Act 1961. Prayer was made to condone the delay. Ld. DR opposed the request. We, however, under the given facts and circumstances of the case, are satisfied with the reason giving rise to delay in filing the instant appeal. We condone the delay and admit the appeal for adjudication on merits. 4. Brief facts of the case as culled out from the records are that the return of income for A.Y. 2014-15 was filed on 30.11.2014 declaring income of Rs. 18,14,79,168/- which was set off entirely against the brought forward loss of A.Y. 2013-14 and the balance loss and unabsorbed depreciation to be carried forward to subsequent years was shown as Rs. 78,07,50,625/-. Further, the assessee filed revised return of income on 14.1.2016 declaring total income of Rs. 18,57,70,341/- after set-off of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o present yourself in person or through an authorized representative on 04.02.2020 at 12:30PM to explain your case. In case no reply is received by stipulated date, it will be presumed that you have nothing to say in the matter and a decision will be taken on the basis of records available in this office." 5. In response to the above, the assessee co. filed its detailed reply filed at page nos.90 to 106 of the paper book explaining why the case is not fit for invocation of powers under section 263 and also on merits of the ground i.e. provision for mark to market loss is not a contingent liability relying upon relevant judicial pronouncements. However, the Ld. PCIT passed her order under section 263 on 25 February 2020 wherein she held that the provision for mark to market loss on derivative contracts is a contingent liability and as such, the invocation of powers under section 263 is justified in this case. Accordingly she set aside the Ld. AO's order dated 25 January 2018 and directed the Ld. AO to make a fresh assessment. Being aggrieved, the assessee co. is in appeal before this Tribunal. 6. Before us, the ld. Counsel for the assessee reiterated the submissions made before th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sted to submit books of accounts. Therefore, the assessee co. had also submitted the trial balance for the subject year vide submission dated 24 November 2017. The Ld. AO noted that the books of accounts in e-format are checked on a test check basis, therefore, the Ld. AO had duly examined the issue and with due application of mind did not invoke any disallowance on account of mark-to-market on forward contracts. Ld. Counsel for the assessee further submitted that the Ld. PCIT has blatantly ignored the assessee's submission and the relevant judicial precedents. The Ld. PCIT has failed to distinguish even a single judicial precedent relied upon by the assessee. Further, the ld. Counsel for the assessee submitted that the assessee co. has entered into the forward contracts to hedge its business assets and liabilities and not for trading/speculation purposes. Hence, any loss incurred on such forward contracts is an allowable business expenditure under section 37 of the Act and since the assessee co. follows the mercantile system of account, the expenses/losses are to be allowed on the basis of accrual and not on payment/realisation. Thus, the ld. Counsel for the assessee submitted tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Hon'ble Supreme Court in case of Malabar Industrial Co. Limited vs CIT (243 ITR 83) (SC). We observe that the tax treatment of such markto- market loss on forward contracts (i.e. claiming the same as an expenditure) followed by the assessee co. has been upheld by this jurisdictional bench of ITAT in the case of HEG limited vs ACIT (ITA 583 of 2012) (page nos.107 to 126 of the paper book) following the judgment of Hon'ble Supreme Court in the case of CIT vs. Woodward Governor India Private Limited (312 ITR 254) (SC) (page nos.127 to 141 of the paper book). Jurisdictional ITAT Indore in the case of HEG Limited vs ACIT (supra) on similar facts held that provision for mark to market loss is allowable as a deduction. Further, Hon'ble Supreme Court in the case of CIT vs Woodward Governor India Private Limited (supra) held mark to market loss to be allowable. WE also find that Hon'ble Supreme Court in the case of ONGC vs CIT (322 ITR 180) (SC) upheld the order of Special Bench of Delhi ITAT wherein it held that the foreign exchange fluctuation loss is not contingent or notional. Accordingly, we are of the view that when the assessment order is in line with the decision of the Supreme C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fferences are recognised in the same manner as those on the underlying foreign currency asset or liability. Apart from forward exchange contracts taken to hedge existing assets or liabilities, the Company also uses derivatives to hedge its foreign currency risk exposure relating to firm commitments and highly probable transactions. In accordance with the relevant announcement of the Institute of Chartered Accountants of India, the company provides for losses in respect of such outstanding derivative contracts at the balance sheet date by marking them to market......" Note on provisions as per AS 29 9. Further, the Ld. AO had requested to submit books of accounts. In this regard, the assessee co. submitted the trial balance of for the subject year vide submission dated 24 November 2017 (page 230 to 231 of the paperbook). We find that vide Para 5.3 of the final assessment order, the Ld. AO noted that the books of accounts in e-format are checked on a test check basis. The Ld. AO specifically scrutinized the miscellaneous expenses and also made an addition in this regard. Vide Para 5.2 of the final assessment order, we find that the warranty expenses incurred by the assessee co. ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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 Rs. 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 vs ACIT (ITA No.583/Ind/2012, order dated 28.9.2018) (Jurisdictional ITAT Indore) (supra). The relevant portion of the order of the ITAT is reproduced hereunder: "11. Now we take up Ground No.4 wherein both the lower authorities disallowed the claim of foreign currency fluctuation loss of Rs. 2,82,42,778/- which was suffered by the assessee on account of forward market contract of forex derivatives outstanding at the year end. The Ld Counsel for the assessee submitted that the issue raised in the appeal is squarely covered in favour of the assessee by various judgments including the Special Bench decision in the case of DCIT V Bank of Bahrain & Kuwait 132 TTJ 505 (Mum) (SB). He also submitted that the actual loss incu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpugned amount is merely notional loss. Ld. Counsel for the assessee has contended that the impugned notional loss has been shown in the financial statement in order to comply to the Accounting Standard-11 issued by the Chartered Accountants of India for "the effect of changes in Foreign Exchange Rates" which provides that the assessee should show the loss/profit in the profit and loss account arising out of the difference in rate of foreign currency rate at the year end vis-a-vs forward contract rate on the maturity date. It is also contended that in the subsequent year when the alleged "marked to market" forward contract matured/squared, all resultant profit and loss has been booked in the books of accounts after duly adding/reducing the alleged notional loss of Rs. 2,82,42,778/-. This plea of the assessee has not been rebutted by the revenue authorities. 14. We find that the Co-ordinate Bench, Mumbai I.T.A No.7629/Mum (2011) in the case of ACIT V M/s. D. Dipak & Co date4d 30.04.2013 dealing with the same issue of "marked to market" loss of notional nature, allowed the issue in favour of the assessee by relying on the Special Bench decision in the case of DCIT V Bank of Bahrain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29(Mum). 3. The submissions made by the assessee on this issue were not found acceptable by the A.O. According to him, the relevant foreign exchange contract were still outstanding on the closing day of the previous ear and therefore the "marked to market" loss claimed by the assessee by revaluing The said contract was not the loss actually incurred by the assessee. He held that the actual toss or gain would be ascertained/determined only after the expiry period of the relevant contract or their termination and at that time there might not be any such loss at all. He held that the marked to marked loss claimed by the assessee thus was only the notional loss which was not allowable, As regards the decision of the Special Bench of the Tribunal in the case of Bank of Bahrain & Kuwait (supra) relied upon by the assessee, the A.O. held that the same was distinguishable on facts inasmuch as the foreign currency in that case was held by the assessee as stock-in-trade and he had entered into foreign exchange contract in order to protect its interest against the wide fluctuation in the foreign currency itself He held that in the case of the assessee, foreign currency was not its stock-in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l creditors for goods of Rs. 122 Cr, imports payable account for Rs. 102 Cr. Thus, it is evident that appellant is exposed to risk arising out of fluctuation in Exchange rate and as a prudent businessmen likely to hedge its risk. 5.2 From para 6 of schedule-F to Balance Sheet under the heading " Report on Notified Accounting Standards", it is "evident that appellant is reporting all monetary items i.e. Export Receivable, Import Payable and Foreign Currency Working Capital Loan appearing in balance sheet at closing rate and recognizing the exchange rate difference in Trading Account as expenses or income, as the case may be. Similarly outstanding forward contract are marked to market and resulting loss or gain is being recognized as expenses or income in trading account. It may be mentioned that this method of recording transaction denominated in foreign currency is as per AS-1 I & being consistently followed and there is no change as compared to earlier year. In the light of the relevant facts as noted by him, the ld. CIT(A) decided this issue by applying the ratio of the decisions laid down in the various judicial pronouncements. In this regard, he referred to the decision of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision are squarely applicable to the issue involved in the present appeal. He also relied on the decision of Mumbai Bench of the ITAT in the case of DCIT vs. Banque Indosuez (Known as Credit Agricole Indosuez) reported in (2013) 55 SOT 38 (Mumbai) and in the case of Societe Generale vs. DDIT (International Taxation) reported in (2013) 21 ITR (Trib) 606 (Mumbai) in support of the assessee's case. 7. We have heard the arguments of both the sides and also perused the relevant material available on record, It is observed that a similar claim for marked to market loss claimed by the assessee in respect of forward foreign exchange contract debited to the P&L account has been allowed by the Special Bench of this Tribunal in the case of Bank of Bahrain & Kuwait (supra) after discussing and considering all the relevant aspects of the matter and the relevant observations of the tribunal recorded in this context are summarized as under:- "[i] A binding obligation accrued against the Appellant the minutes it entered into forward foreign exchange contracts, (ii] A consistent method of accounting followed by the Appellant cannot be disregarded, The Appellant has consistently follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract is to mature on 30th April at the price of Rs. 46 per dollar. Suppose at the end of the year 31st March, the rate of dollar has gone up to Rs. 43, the assessee's claim is that the difference of Rs. 1 (Rs. 43 -42) as on 31 st March, 1998 should be taken as loss and allowed deduction accordingly. The Special Bench of the Tribunal in the case of Dv. CIT (International Taxation) v. Bank of Bah rain & Kuwait [201 OJ 41 OT 290 (Mum) has held that the loss incurred by the assessee on account of evaluation of the contract on the last day of the accounting year i.e , before the date of maturity of the forward contract, is allowable as deduction. In that view of the matter this loss of Rs. 7. -4 c:-ore representing difference of Re. 1 (Rs. 43 - 42) is liable to be allowed as deduction". 9. In the latest decision rendered on 9th January, 2013 in the case of Societe Generale (supra) cited by the ld. counsel for the assessee, the coordinate Bench of this Tribunal has again allowed a similar claim of the assessee for the loss of Rs. 9.16 crores on foreign exchange contracts outstanding as on 31-3- 1998 holding that this issue is squarely covered in favour of the assessee by the deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the Assessing Officer. Consequently, grounds raised in the appeal of the assessee for the assessment year 2014-15 stand allowed. 11. Now, we shall take up the assessee's appeal bearing ITA No.199/Ind/2020 for the assessment year 2015-16. The assessee has raised the following grounds of appeal: "On the facts and circumstances of the case and in law, the Ld. PCIT has: On validity of initiation of revision proceedings: 1. Erred in initiating the revision proceedings under section 263 of the Act without appreciating the section 263 cannot be invoked unless the conjunctive conditions that the assessment order passed in erroneous in law as well as prejudicial to the interest of the revenue are satisfied. 2. Erred in invoking revisionary proceedings under section 263 of the Act, without pointing out with proper evidence that on which of the points order passed is erroneous leading to prejudice being caused to revenue and also without appreciating that such an order cannot be made to remand back the matter to the file of assessing officer for conducting fresh enquiry and thereby seeking reexamination of the entire matter, which is against the legislative intent of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nies viz. VA Tech Hydro India Private Limited, Mandideep and VA Tech Escher Wyss Flovel Limited, Prithla. Subsequently, with effect from 1 January 2009, the Prithla unit merged into Mandideep Unit. Later on, the name of the amalgamated Company was changed to Andritz Hydro Private Limited. Prior to the merger, both the companies were creating provisions for warranty. The tax treatment for such provision was as follows: Entity Tax treatment of provision for warranty In the year of creation of provision In the year of utilisation/reversal of provision Mandideep Unit Claimed as deduction No adjustment required Prithla Unit Added back to the income Reduced separately from the income After the merger, the treatment adopted by the Mandideep unit has been continued and has also been upheld by the assessing authorities as well as by the appellate authorities. At the time of merger i.e., as on 31 December 2008, the amount of provision standing in the balance sheet of Prithla unit was Rs. 5,10,50,999/- which was transferred to the books of the assessee co. pursuant to the merger. Post the merger, the assessee co. has been utilising/reversing the aforesaid provision for warranty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is in appeal before this Tribunal. Before us, the ld. Counsel for the assessee reiterated the submission made before the Revenue Authorities and submitted that the said decisions referred to by the ld. PCIT are in respect of AY 2010-11, AY 2011-12 and AY 2013-14 viz. post-merger period i.e., where the allowance was claimed in the year of creation of provision itself and not in respect of pre-merger period of Prithla Unit where the Company had not claimed any deduction of the warranty provision in the year of creation of such provision. Ld. Counsel for the assessee further submitted that the Ld. AO had made inquiries about the warranty provision, not only during the assessment proceedings for AY 2015-16 but for earlier years as well. Further, ld. Counsel for the assessee submitted that there is no loss to the revenue on account of Ld. AO's acceptance of the claim of deduction of utilisation/reversal of that warranty provision since the said provision was disallowed and offered to tax in the earlier years. Thus, the warranty provision of Rs. 1,09,47,677/- was neither erroneous nor prejudicial to the interests of Revenue. Ld. Counsel for the assessee further submitted that af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 263 of the Act, the order passed by the Ld. AO can be revised only if the said order is erroneous in so far as it is prejudicial to the interests of the revenue. Accordingly, in order to initiate the revision proceedings, two conditions are required to be satisfied simultaneously - (i) the order should be erroneous and also (ii) prejudicial to the interest of Revenue as held in the cases Malabar Industrial Co. Limited vs CIT (243 ITR 83) (SC); CIT vs Associated Food Products (P.) Ltd. (280 ITR 377) (Madhya Pradesh HC); Manish Kumar vs Commissioner of Income-tax (16 taxmann.com 212) (Indore ITAT). We find that the assessee in its submission to the Ld. PCIT, the Appellant had explained that the deduction for utilisation/reversal of warranty provision has been claimed only in respect of the pre-merger provision brought from Prithla Unit which was disallowed in the return of income of the year of creation of such provision. The assessee co. had also furnished copies of computation of income of Prithla Unit for premerger years from which disallowance of warranty provision in the year of creation could be easily verified and the Ld. PCIT has not disputed the above facts as on pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not examine all the material facts of the case during the assessment proceedings. This view is supported by the ratio laid down in the the following judicial pronouncements: a. Jurisdictional bench of ITAT in the case of Vidisha Tractors vs ACIT (53 TTJ 432) (ITAT Indore). b. Hon'ble Delhi High Court in its judgment in the case of CIT vs Anil Kumar Sharma 335 ITR 83 (Delhi HC) c. Hon'ble Delhi High Court in its judgment in the case of CIT vs Hindustan Marketing & Advertising Co. Ltd. 341 ITR 180 (Delhi HC) 17. Further, we find that at the time of merger i.e. as on 31 December 2008, the amount of provision standing in the balance sheet of Prithla unit was Rs. 5,10,50,999. This amount has arrived as follows: Assessment Year Amount of provision created Tax Treatment in the return AY 2003-04 and earlier years 1,33,87,575 Disallowed AY 2004-05 1,80,424 Disallowed AY 2005-06 16,48,000 Disallowed AY 2006-07 87,86,000 Disallowed AY 2007-08 90,30,000 Disallowed AY 2008-09 1,16,01,000 Disallowed AY 2009-10 (Pre-Merger) 64,18,000 Disallowed As on 31 December 2008 5,10,50,999 From above, we find that the Prithla Unit had crea ..... 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