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TMI Blog2023 (1) TMI 203X X X X Extracts X X X X X X X X Extracts X X X X ..... cts, as may be considered relevant by the assessee, must be afforded to him by the Commissioner prior to the finalization of the decision. We find that this requirement has duly been fulfilled by the revisional authority in the present case and adequate opportunity has been granted to the assessee to state its case. The decision of Hon ble High Court of Madras in Shri Ravi Kannan [ 2020 (7) TMI 818 - MADRAS HIGH COURT] as referred to by Ld. AR, is a case wherein it was a finding by Hon ble Court that the notice was a vague statement. PCIT agrees that the verifications were done, however, it was stated that proper verification was not done. In such a case, PCIT was bound to disclose in the show-cause notice as to why he considers the verification to be not proper. However, the case before us falls under the category wherein Ld. AO has not applied his mind to the issue. Further, the notice clearly states the reasons as to why the order is being subjected to revision u/s 263. In the replies to show-cause notice, it was nowhere the case of the assessee that the notice was vague or the same did not disclose the reasons for revision. The case law of CIT V/s PVP Ventures Ltd. [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluded the issues that are the subjectmatter ofnotice issued under section 263 of the Act.The Learned PCIT in the SCN has also accepted to the examination of the said fact by the AO. 3. TheLearned Principal Commissioner of Income Tax, Chennai-3 erred in law stating that the assessment order passed by the AO is prejudicial to Interest of Revenue. 4. The Learned Principal Commissioner of Income Tax, Chennai-3 failed to appreciate that the twin conditions of Section 263 should be satisfied in order to invoke Section 263. 5. The Learned Principal Commissioner of Income Tax, Chennai-3 failed to appreciate that there is no tax effect liability in order to invoke section 263 6. The Learned Principal Commissioner of Income Tax, Chennai -3 failed to appreciate that Hon ble AAR has not provided any ruling whether the treatment adopted by the appellant is correct or not. 7. The Learned Principal Commissioner of Income Tax, Chennai-3 failed to appreciate the fact that notional adjustments do not have bearing under the Act. 8. Without prejudice to the above grounds, the purpose of invoking the 263 proceedings were dropped and the Learned PCIT proceeded to co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... costs. Consequently, connected miscellaneous petition is closed. Accordingly, the appeal has been placed before us for hearing and disposal in a time-bound manner as directed by Hon ble Court. Arguments before us 3. The Ld. AR, assailed the revision, inter-alia, on the ground that issue as flagged in the revisional order was extensively examined and verified by Ld. AO during the course of regular assessment proceedings and it was not the case that no enquiries were made by lower authorities. The Ld. AO had already adopted a view which was perfectly valid / justified and therefore, the revision was bad-in-law. Another argument raised by Ld. AR is that the issue for which show-cause notice was issued by revisional authority was ultimately withdrawn whereas other issue was taken up without affording any opportunity of hearing to the assessee which is contrary to statutory mandate of Section 263. To support the arguments, reliance has been placed on various judicial pronouncements, the copies of which have been placed on records. The Ld. AR also filed copies of computation of income etc. The Ld. Sr. DR, on the other hand, justified the revision and submitted that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hrough profit and loss. 5,419,955 Total 900,514,114 In this regard, the Company submits the nature of deduction as following: Difference on account of fair value measurement of the operating financial asset The Company has entered into a Power Purchase Agreement ('PPA') with Tamil Nadu Generation and Distribution Corporation (TANGEDCO), formerly known as Tamil Nadu Electricity Board for generation and sale of power. During the subject AY, the Company has adopted Indian-Accounting Standards ('Ind-AS') for preparation and presentation of Financial statements. Pursuant to adoption of Ind-AS, the arrangement of the Company has been regarded to be in the nature of Service Concession Agreement. Consequently, the Company has derecognized its entire infrastructure in the nature of fixed asset and recognized a financial asset to the extent it has an unconditional right to receive consideration in return for the construction of the infrastructure and an intangible right in relation to the residual interest in the infrastructure on expiry of the PPA. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fixed assets, recognition of an OFA and recording of notional fair valuation difference in respect of OFA, as per books of accounts, is only for the purpose of presentation of financial statements and more particularly given the applicability of Ind AS. Given the same, such adjustments do not have any bearing on the taxable income under the provisions of the Act. In this regard, the Company wishes to highlight the relevant accounting principles basis which the aforesaid accounting treatment has been undertaken as under- 1.1 Accounting principles basis which arrangement of the Company has been regarded to be in the nature of the Service Concession Agreement Background SCA are arrangements between a public sector entity (grantor) and a private sector company (operator) for construction of infrastructure assets, in which the grantor controls or regulates the services provided with the infrastructure, their price, and any significant residual interest in the infrastructure. This public-to-private model is a popular model especially in the context of developing toll roads, bridges, airports and power generation, amongst others. Accounting Principles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to Ind AS adoption- SLNo. Nature of Adjustment Amount (INR) Treatment adopted in Financial Statement 1 Amortization of OFA 5,763,528 Debited to P L 2 Fair value measurement of the OFA. 395,849,416 Credited to P L Company submits that the aforesaid items of adjustments is mandated for per presentation and disclosure requirement of the applicable Ind AS and has no bearing for computing the total income. 1.2 Treatment adopted under the provisions of the Act The Company submits that the entire items of Fixed assets capitalized under the requirement of the erstwhile Accounting Standards since inception has been considered as depreciable Asset forming part of the 'Block of Assets' and thus being eligible, depreciation is claimed thereon as per the applicable rates under Section 32 of the Act. In other words, the same treatment as has being given for tax purposes before adoption of Ind AS has been continued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of retranslation of its closing balance to the Applicant's functional currency for reporting purposes would not be required to be considered for computation of the book profits chargeable to tax under the provisions of section 115JB of the IT Act? 2) Whether the contractual revenue attributed to the ('OFA') and the notional unrealized retranslation difference being adjusted to the Statement of Profit and Loss ('P L') on account of reporting of its closing balance to theApplicant's functional currency for reporting purposes would be governed by the provisions of the IT Act? 3. Subsequently, the Hon'ble AAR(IT), Mumbai vide order dated 19/11/2019 had rejected the application filed by the assessee company as not maintainable. In this context, it is seen from the assessment records that the contractual revenue attributed to the 'OFA' and the notional retranslation difference were reduced from the 'P L' but considered for computing book profits under MAT by the assessee company for A.Ys. 2016-17 as under: - A.Y. Adjustments reduced from P L Amount reduced from P L (in Rs.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d-AS') for accounting purposes. Under the Ind-AS accounting, the arrangement of the Company with TANGEDCO has been considered to be in the nature of Service Concession Arrangement ('SCA'). Note on Service Concession Arrangement A SCA is a binding arrangement between a 'grantor' and an 'operator' in which the latter utilizes / deploys Service Concession Asset ('Service Assets') to provide a public service on behalf of the former for a specified period of time in lieu of consideration over the period of the arrangement. Under a SCA- 'Grantor' is the entity that grants the right to use the Service Assets to the Operator; Operator' is the entity that utilizes Service Assets to provide public services subject to the grantor's control of the asset. Service Assets is an asset used to provide public services in a SCA that is either- -provided by the operator (construct / develop / acquire or existing asset) -provided by the grantor (existing asset or update) Under Appendix A of Ind-AS 11 - Construction Contracts (presently Appendix C of Ind-AS 115 - Revenue from Contracts with Customers), followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Alternate Tax ('MAT') provisions. The case was selected for scrutiny assessment. During the assessment proceedings, the Company has filed various submissions, provided time to time clarification and furnished the details and explanations called for by the learned Assessing Officer ('AO'). With respect to the transaction under consideration, the Company has provided detailed explanations for the enquiry made on the taxability of subject transaction (the copy of notice issued by the AO and our submissions filed during the course of the assessment proceedings is enclosed as Annexure 4 for your goodself s ready reference). Further, as your goodself has rightly pointed out in Paragraph 4 of the subject SCN, the AO on perusal of our detailed submissions provided and explanations accorded by our Authorized Representatives has accepted the fact that the transaction under consideration is not taxable and accordingly proposed to not make any adjustment to the return of income filed by the Company. Thus, in the instant case, the learned AO had perused all the relevant information/ documents submitted during the proceedings and had accordingly accepted the returned inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cluded. So, the Company had a fair chance to put forth his points before the Assessing Officer. Given the above, your goodself would appreciate that the Hon'ble AAR has rejected the application filed by the Company as the question raised has been already dealt in the assessment proceedings and that the tax department has accepted the stand adopted by the Company. In other words, the Hon'ble AAR has not provided any ruling whether the treatment adopted by the Company is correct or not . The Hon'ble AAR has categorically held that given that the issue has already been deliberated, discussed and concluded before the tax authorities it may not interfere on the same. In this regard, your goodself, by placing reliance on the order passed by the AAR rejecting the application of the Company had issued the subject notice asking the Assessee to provide explanations why the transaction under consideration should not be taxed under section 43AA of the Act. The Company in this connection objects to your goodself s action of initiating revisionary proceedings based on the submissions on legal aspects as well on merits in the ensuing paragraphs In the said back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be applicable only from AY 2017-18 and therefore, the reference to Sec.43AA in the show-cause notice is treated as withdrawn. The relevant observations were as under: - 6.1 Before going into the merits of the issue, there are certain technical aspects related to mention of Sec.43AA of the Income Tax Act in the show cause notice. On perusal, it is seen that the provisions of Section 43AA of the Income tax Act, 1961 came into statute only from 01.04.2017 applicable from the A.Y.2017-18 after ICDS notified by the CBDT on forex transactions come into effect from AY 2017-18. Since the assessment year under consideration is AY 2016-17, the reference to section 43AA in the show cause notice is treated as withdrawn and the main issue is considered independently on the basis of material available on record. 6.5 Proceeding further, Ld. CIT(A) noted that the assessee had redrawn its Profit Loss Account as per Ind-AS and recognized certain income in the financial statements. From the terms of Power Purchase Agreement (PPA), it was clear that the assessee was entitled to calculate fixed capacity charges comprising value of approved capital cost, RoE etc. in terms of USD to safeguard it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and prejudicial to the interest of the revenue and the entire issue was considered on merits as per the details available on record at the time of assessment. Regarding submissions that Ld. AO had already considered the issue, it was held that there was failure on the part of Ld. AO to consider the decision of Hon ble Supreme Court and therefore, the order was erroneous and prejudicial to the interest of the revenue as per Clause (d) of Explanation-2 to sub-section (1) of Section 263. The case also fall under clause (a) of the aforesaid Explanation-2 since the order was passed without making inquiries or verification which is required to be made. 6.8 The plea that the assessee paid taxes under MAT and therefore, there would be no tax impact was negated on the ground that the assessee would be able to carry forward the MAT credit for set-off in subsequent years. 6.9 Finally, Ld. AO was directed to redo the assessment with following directions: - 8. In the light of the finding that the order of assessment is erroneous so far as it is prejudicial to the interest of revenue at paragraphs 6 7 above, the order of assessment dated 19.12.2018 is hereby set-aside to the file o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, to say that the aforesaid adjustment was mere accounting treatment and would not impact the taxable income under the provisions of the Act would not be a correct proposition since the revenue were to be recognized over the useful life of a project in a particular manner as mandated by the new accounting standard. As per the new accounting treatment, the services were to be recognized as financial asset at its fair value and the project was to be treated in the nature of Service Concession Agreements. Upon perusal of assessment order and queries raised therein, we find that this aspect of revenue recognition was never touched upon by Ld. AO. In fact, except for raising an initial enquiry, no further enquiries were made by Ld. AO to understand the impact of new accounting treatment on revenue recognition and the assessee s explanation was accepted as such. The assessee may have responded elaborately to such query, but the same should have been subjected to further enquiries since it would significantly impact the revenue recognition for the assessee under the contracts. We find that this element of enquiry is missing in the present case. Upon perusal of assessee s replies as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in Section 263 with effect from 01/06/2015 to declare that order shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue, if in the opinion of appropriate authority-(a) the order was passed without making inquiries or verifications which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order is not in accordance with any direction or instructions etc. issued by the Board u/s 119; or (d) the order was not in accordance with binding judicial precedent. In the impugned order, Ld. Pr. CIT has rightly pointed out that the case would fall under Clause (a) as well as under Clause (d) of this explanation and we concur with these findings of Ld. Pr. CIT. 12. The Hon ble Supreme Court in CIT V/s Amitabh Bachchan (69 Taxmann.com 170 11/05/2016) held that the power of appeal and revision is contained in Chapter XX of the Act which includes section 263 that confers suo-motu power of revision in the Commissioner. The different shades of power conferred on different authorities under the Act has to be exercised within the areas specifically delineated by the Act and the exercise of power under on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the initiation of the exercise in the absence thereof or to require the Commissioner to confine himself to the terms of the notice and foreclosing consideration of any other issue or question of fact. This is not the purport of Section 263. Of course, there can be no dispute that while the Commissioner is free to exercise his jurisdiction on consideration of all relevant facts, a full opportunity to controvert the same and to explain the circumstances surrounding such facts, as may be considered relevant by the assessee, must be afforded to him by the Commissioner prior to the finalization of the decision. We find that this requirement has duly been fulfilled by the revisional authority in the present case and adequate opportunity has been granted to the assessee to state its case. 13. The decision of Hon ble High Court of Madras in Shri Ravi Kannan V/s ACIT (TCA No.316 of 2018 dated 29.07.2020), as referred to by Ld. AR, is a case wherein it was a finding by Hon ble Court that the notice was a vague statement. The PCIT agrees that the verifications were done, however, it was stated that proper verification was not done. In such a case, PCIT was bound to disclose in the show- ..... 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