TMI Blog2021 (11) TMI 709X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings under section 263 of the Act without considering that the Appellant having followed the decision of Hon'ble Supreme Court of India in the case of CIT vs Woodward Governor India Private Limited (312 ITR 254) and other jurisdictionally binding decisions, there cannot be any prejudice to the interest of the revenue. 4.Erred in initiating erred in initiating revisionary assessment proceedings under section 263 of the Act without appreciating that proceedings under section 263 of the Act cannot be invoked in case where the view taken by the Ld. PCIT is based on the presumption of inadequate enquiry being made at the time of regular assessment proceedings, without pointing out specifically why the assessment order is prejudicial to the interest of the revenue. 5.Erred in passing the order under section 263 without considering and rejecting the contentions of the Appellant raised in the Appellant's submission dated 19 February 2020. On merits of the issue involved in revision proceedings: 6.Erred by not accepting the Appellant's contention that the provision for mark to market loss on forward contracts is not a contingent liability a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years was shown as ₹ 78,07,50,625/-. Further, the assessee filed revised return of income on 14.1.2016 declaring total income of ₹ 18,57,70,341/- after set-off of brought forward losses, the balance loss to be carried forward to subsequent years was shown as ₹ 78,05,27,292/-. In the draft assessment order, the Ld. AO did not propose any addition in respect of the mark to market loss of INR 30,31,69,199/- on revaluation of the forward contracts claimed by the assessee co. The assessment was finalised on 25 January 2018 without any modification in the draft assessment order assessing total loss at ₹ 77,42,44,939/-. On 16 January 2020, the Ld. PCIT issued a notice under section 263 alleging that the AO s acceptance of such treatment is erroneous and is prejudicial to the interest of revenue. The Ld. PCIT drew this conclusion based on a reporting by the tax auditor in the Assessee s tax audit report wherein they have reported the aforesaid provision as a liability of a contingent nature . The said show cause notice reads as under: Please refer to the order u/s 143(3) r.w.s. 144C r.w.s 92CA of the IT Act, 1961 dated 25.01.2018 passed by the DCIT-1(1), Bho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the ld. PCIT and submitted that the order passed by the Ld. AO cannot be revised because the said order is neither erroneous in so far as it is nor prejudicial to the interests of the revenue as the assessee co. in its submission to the Ld. PCIT had explained that the tax treatment of such mark-to-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) following the judgment of Hon ble Supreme Court in the case of CIT vs. Woodward Governor India Private Limited (312 ITR 254) (SC). The assessment order is in line with the decision of the Hon ble Supreme Court and jurisdictional bench of Hon ble ITAT, therefore, it cannot be said to be erroneous in nature. Hence the essential condition for invoking provisions of section 263 is not satisfied. Accordingly, the Ld. PCIT erred in holding that the Ld. AO s order is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 that the Ld. AO has rightly not disallowed the mark to market loss of ₹ 30,31,69,199/- on forward contracts. 7. Per contra Ld. Departmental Representative vehemently argued supporting the order of Ld. PCIT and submitted that the provision for mark to market loss on derivative contracts is a contingent liability, therefore, the powers under section 263 were rightly invoked by the ld. PCIT in this case. 8. We have heard rival contentions of both the parties and perused material available on record. We find that the assessee company is engaged in the business of design, manufacture, servicing, erection and installation of hydro and thermal power generator, generator components, hydro turbines, governing equipment, inlet butterfly valves, spherical valves and other related plants and equipment for all types of turbines. The assessee s company s suppliers and customers are located across the globe and the assessee company has significant e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80) (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 Court and jurisdictional bench of Hon ble ITAT, it cannot be said to be erroneous in nature. Further, we find that the mark to market loss under consideration was reversed in FY 2014- 15. Such reversal was credited to the Profit and Loss Account and was accordingly offered to tax during AY 2015-16. The following relevant extract from financial statements of FY 2014-15 was also provided to the Ld. PCIT: From above, we find that there is no loss to the revenue on account of Ld. AO s acceptance of the claim of mark to market loss of ₹ 30,31,69,199/- as such loss is reversed in the next year and the assessee co. had offered to tax a mark to market gain/reversal of mark to market loss of ₹ 36,45,26,777 on account of revaluation of forward contracts in FY 2014-15. Thus, the order of the ld. Assessing Officer cannot be said to be prejudicial to the interests of revenue . We also find that the assessee co. had mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. have been tested to determine whether the same are contingent in nature. Accordingly, it can be seen that wherever required the Ld. AO had specifically checked if the expenses are contingent in nature. Accordingly, the Ld. 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. Thus, we find that the Ld. AO duly examined the issue and with due application of mind, the ld. Assessing Officer did not invoke any disallowance on account of mark-to-market on forward contracts. This view is supported by the order of Jurisdictional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 incurred in the forward market contracts for foreign exchange for the transactions squared up during the year have already been allowed by the revenue authorities but both the lower authorities has denied the claim of loss with regard to pending forward contracts which were due to mature in the subsequent financial year for which notional loss was booked by the assessee in the profit and loss account on the basis of accounting standard (AS) 11 issued by the Chartered Accountants of India. Ld. Counsel for the assessee referred and relied on the following decisions ; (a) I.T.A.T. Mumbai Bench in the case of ACIT V M/s. D. Dipak Co I.T.A No.7629/Mum (2011) (b) Supreme Court in the case of CIT V Woodward Governor India P. Ltd (2009) 312 ITR 254 (SC) (c) I.T.A.T. Special Bench in the case of DCIT V Bank of Bahrain Kuwait 132 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,42,778/-. 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 Kuwait 132 TTJ 505 (Mum SB) (2010) observing as follows (for sake of convenience we have also mentioned the facts of the case) ; This appeal is preferred by the Revenue against the order of ld. CIT(A) - 27, Mumbai dtd. 28-8-2011 whereby he deleted the addition made by the A.O. on account of marked to market loss of ₹ 5,53,02,172/-claimed by the assessee on revaluation of the pending forward contract on the closing day. 2. The assessee in the present case is a partnership firm which is engaged in the business of manufacturing, trading as well as import and export of diamonds. The return of income for the year under consideration was filed by n 29-9-2008 declaring total income of ₹ 54,44,2'5,595/-. During the o se of assessment proce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unal 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-trade and therefore the decision of the Special Bench of the Tribunal in the ease of Bank of' Bahrain and Kuwait (supra) was not applicable in the case of the assessee being distinguishable on facts. As regards the reliance placed by the assessee on Accounting Standard - 11, the A.O. held that the reporting of notional losses to adhere to the accounting guidelines would not by itself make it deductible for Income Tax purposes especially when there is no provision in the Income 'I'ax Act to allow the deduction on account of notional loss for which the liability has not crystallized. He therefore disallowed the marked to market loss claimed by the assessee in respect of forward exchange contract claimed by the assessee in the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 the Hon'ble Delhi High Court in the case of Woodward Governor 294 ITR 451 as affirmed by the Hon'ble Supreme Court (312 ITR 254) wherein it was held that the liability arising out of already concluded contracts stands accrued the minute the contract is entered into and mere postponement of the payment to different date cannot extinguish the liability and render it notional or contingent. He then referred to the decision of Hon'ble Supreme Court in the case of ONGC vs. CIT (322 ITR 180) wherein it was held that when the assessee maintained its accounts on mercantile system of accounting and the loss suffered by it on account of fluctuation in the rate of foreign exchange as on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed 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 followed the same method of accounting in regard to recognition of profit or loss both) in respect of forward foreign exchange contract as per the rate prevailing on March, 31, (iii) A liability is said to have crystallized when a pending obligation on the balance sheet date is determinable with reasonable certainty, (iv) As per AS-II when the transaction is not settled in the same accounting period as that in which it occurred, the exchange difference arises over more than one accounting period, (v) In view of the decision of the Supreme Court the case 0 Woodward Governor India (I) P. Ltd the Appellant's claim is allowable. (vi) In the ultimat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tract, is allowable as deduction. In that view of the matter this loss of ₹ 7. -4 c:-ore representing difference of Re. 1 (₹ 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 ₹ 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 decision of the Special Bench of ITAT in the case of Bank of Bahrain Kuwait (supra). In our opinion, the issue involved in the present case thus is squarely covered in favour of the assessee by various judicial pronouncements discussed above and respectfully following the same, we uphold the impugned order of the ld. CIT(A) allowing the claim of the assessee on account of marked to market loss on revaluation of the pending forward contract for foreign exchange. 15. From the perusal of the above order of the Co-ordinate Bench the issue raised before us are squarely similar to those adjudicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 section 263 of the Act. 3. Erred in initiating erred in initiating revisionary assessment proceedings under section 263 of the Act without appreciating that proceedings under section 263 of the Act cannot be invoke in case where the view taken by the Ld. PCIT is based on the presumption of inadequate enquiry being made at the time of regular assessment proceedings, without pointing out specifically why the assessment order is prejudicial to the interest of the revenue. 4. Erred in passing the order under section 263 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent 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 ₹ 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 as and when required. The assessee co. has been claiming deduction of such utilisation/reversal in its return of income as no deduction was claimed in the year of creation of provision in Prithla Unit. The above treatment has been consistently ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 1,09,47,677/- was neither erroneous nor prejudicial to the interests of Revenue. Ld. Counsel for the assessee further submitted that after the merger, the tax 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. Accordingly, the Prithla Unit had created a provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion 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 para 4, the Ld. PCIT has clearly written that It is noticed that the assessee in the computation of income in the relevant A.Y. 2015-16 has deducted a sum of ₹ 1,09,47,667/- on account of warranty expenses di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ench 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 ₹ 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 D ..... X X X X Extracts X X X X X X X X Extracts X X X X
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