BAJAJ AUTO LTD.,MUMBAI vs. DCIT -LTU -1 , MUMBAI

Addition in respect of marked-to-market gain on foreign exchange fluctuations: Rs.76,08,00,000;

5. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the addition of Rs. 76,08,00,000 on account of marked-to-market gain on

6. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the fact that the method of accounting consistently followed by the appellant is based on the concept of prudence which does not allow for recognition of marked-to-market gains.

7. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the fact that the concept of prudence has been recognised in Accounting Standard 1 issued by the Institute of Chartered Accountants of India and in the Income- tax Accounting Standard-1 issued by the Central Government under section 145(2) of the Act 8 On the facts and in the circumstances of the case and in law, the CIT(A) erred in observing that the appellant has followed inconsistent method of accounting to suit its needs and reduce the tax liability.

9 Without prejudice to the above, the appellant prays that that if the aforesaid amount is taxed in AY 2010-11, then the said amount ought to be allowed as a deduction in the subsequent year, i.e., AY 2011-12, i.e. the year in which the aforesaid gain has been reversed upon utilization/ cancellation of the forward contract without any corresponding debit in its books of account.

Disallowance of expenditure incurred in respect of Omega project: Rs.1,77,69,266 and In respect of PV1500 project: Rs. 6,47,60,472:

10. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the disallowance of Rs. 1,77,69,266 being expenditure incurred in

11. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the disallowance of Rs. 6,47,60,472 being expenditure incurred in connection with the PV1500 project relating to development of four-wheeler goods carriers

12. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the fact that the expenditure in respect of the Omega project and the PV1500 project was incurred wholly and exclusively in connection with the business of the appellant of manufacture and sale of vehicles.

13. On the facts and in the circumstances of the case and in law, the CIT(A) erred in observing that the expenses incurred under the Omega project and the PV1500 project were for a new line of business and would give rise to a new source of revenue in the hands of the appellant.

14. On the facts and in the circumstances of the case and in law, the CIT(A) erred in observing that in the case of the appellant, it cannot be arrived that there could have been unity of control even for the new line of business.

15. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the fact that the expenditure incurred in respect of the Omega project and the PV1500 project comprises of revenue expenditure such as purchase of materials and components, labour cost, consumables, travelling, etc Allowability of expenditure incurred in respect of PV1500 project written-off during the year under consideration,

16. On the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the action of the Assessing Officer in not granting deduction under section 37(1) in respect of the expenditure of Rs. 15,41,08,719 incurred in connection with the PV1500 project relating to development of four-wheeler goods carriers, which was written-off during the year under consideration

17. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the fact that the expenditure in respect of the PV1500 project was incurred wholly and exclusively in connection with the business of the appellant of manufacture and sale of vehicles.

18. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating the fact that the expenditure incurred in respect of the PV1500 project comprises of revenue expenditure such as purchase of materials and components, labour cost, consumables, travelling, etc.

19. On the facts and in the circumstances of the case and in law, the CIT(A) erred in observing that the write-off of the above expenditure incurred in respect of the PV1500 project is against the accounting policy of the appellant of amortising the expenditure on technical know- how acquired equally over a period of six years

20. On the facts and in the circumstances of the case and in law, the CIT(A) erred in not appreciating that the aforesaid expenditure was written-off on account of change in design of four-wheeler goods carriers.”

4. Subsequently, the assessment was reopened under Section 147 of the Act by issuing notice under Section 148 of the Act on 29th March, 2017. The assessee responded vide letter dated 19th April, 2017, to provide reasons. Further, on 16th May, 2017, it filed an acknowledgement copy filed on 27th April, 2017. The reasons recorded by the learned Assessing Officer were supplied to the assessee on 19th May, 2017, which are as under:-

”1. The original return of income has been filed electronically on 13.10.2010 declaring total income of Rs.2054,74,27,010/- under normal provision and Book Profit of Rs. 2399,83,57,235/- u/s 115JB of the IT Act, 1961. The case was selected for scrutiny and order u/s 143(3) r.w.s, 144C(3) was passed on 25.02.2014 determining total income of Rs.2215,76,11,976/- under normal provision and Rs.2408,00,31,366/- under section 115JB of the Act.

2.1 It is seen from the Schedule 14 in note 9/h) to the Annual Report of the assessee and the P&L account that, during the year assessee has entered into a range of

3.1 During the year under consideration, the assessee has claimed the following:-

No. Project Nature of expense Amount in ₹ 1. Omega Project Prototype components 17769266 2. PV 1500 project Advances written off 64760472 3.3 In view of the above specific provisions, and the expenses written off being in the nature of capital expenses, the same is required to be disallowed u/s. 37(1) of the Act. This has resulted in under assessment of taxable income for the year of Rs.825,29,738/- and a resultant short levy of tax of Rs.280,51,858/-.

i. That, there is no failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment. ii. There is no new tangible material coming into the possession of the learned Assessing Officer. iii. Reopening is made merely on the change of opinion.

“6.2 In response to the same, the assessee vide letter dated 28.12.2017 submitted as under:-

Allowability of foreign exchange loss on range forward contracts:

2.1) In the reasons recorded for reopening of assessment, it has been stated as under:

2.1 It is seen from Schedule 14 that in note 9(8) to the Annual Report of the assessee and the P&L account that, during the year assessee has entered into range forward contracts on Mark to Market (M2M) basis. These hedging contracts are stated to be entered to hedge future exports and to hedge highly probable forecast transactions. The market value of such derivative hedging instruments outstanding at the close of the year includes a gain of Rs. 76,08,00,000/- on account of foreign exchange fluctuation. The assessee has not recognized this gain as income in the P&L account. It is however found from the assessee's PSL a/c that, in the immediately preceding year i.e. AY 2009-10, the assessee has recognized the valuation loss on such transactions as an expense. Therefore, non- inclusion of the gains for the year under consideration in the income/receipts in P&L account is not in accordance with the regularly followed accounting practices of the assessee. The deviation from the regularly forward method of accounting by assessee has resulted in not showing of the profits for the year amounting to Rs. 76,80,00,000/-. Therefore, this amount is required to be added to the 2.2) In this regard, it may be noted that BAL has huge portfolio of export receivables considering that almost 30% of the company's net sales during the year were in export markets. Considering a huge portfolio of foreign exchange receivables, the company obtains range forward contracts to hedge the foreign exchange fluctuation risk. These contracts are in the nature of highly probable forecast transactions since there is no one-to- one underlying asset at the time when the contracts are entered into, and instead they are based on the past performance of exports of the company as certified by the auditors, as per the requirements of the Reserve Bank of India.

2.3) In this regard, attention is invited to Note no. 9(b) of Schedule 14 "Notes forming part of financial statements" which mentions the facts as under:

"The company has also entered into range forward contracts to hedge highly probable forecast transactions, where the export realizations of the company are protected below a minimum pre-determined foreign exchange rate whereas the realization advantages are available to the company does not benefit by rupee depreciating beyond the pre-determined foreign exchange rate. Though these instruments meet the management's Foreign exchange risk management objectives, they do not meet the test of effectiveness as per the principles of hedge accounting. The market value of instruments outstanding at the close of the year indicate a gain aggregating Rs. 760.8 million, which as a matter of produce has not been recognized, as against a loss 2.4) It is submitted that the assessee's stand of not recognising the mark-to-market gain of Rs. 76.08 crores is based on the concept of prudence which is recognised in AS-1 issued by the Institute of Chartered Accountants of India (ICAI) as follows:

"Prudence:

In view of the uncertainty attached to future events, profits are not anticipated but recognised only when realised though not necessarily in cash. Provision is made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information."[Para 17(a)] 2.5) The aforesaid concept of prudence is also recognised by Accounting Standard (Income-tax) -1 issued by the CBDT as follows:

"Prudence - Provisions should be made for all known liabilities and losses even though the amount cannot be determined with certainty and represents only a best estimate in the light of available information." [Para 4(i)] 2.6) In view of the above, it is submitted that the market- to-market gain of Rs. 76,08 crores ought not to be included in the total income of the year under consideration since the same is not in accordance with the concept of prudence recognised by the Accounting Standards issued by the ICAI and by the Income-tax Accounting Standards notified by the CBDT under section 145(2).

"3.2) In this regard, at the outset, attention is invited to the facts relating to the above projects/ expenses:

(a) Expenses in respect of Omega project: Rs. 1,77,69,266: During FY 2009-10, the assessee had decided to relaunch auto-geared scooters. The said project was named "Omega project. In order to develop the prototype of the scooters, the assessee had raised purchase orders on several vendors for acquiring the components to be used for manufacturing of the prototype (copies of debit notes raised by the vendors for the components used in the prototype are enclosed as Annexure 1). However, before the development of the prototype, the assessee decided to scrap the project considering the lack of likeliness of demand for such scooters. Thus, the project I was scrapped at the concept stage itself, and the expenditure incurred on the aforesaid project was written off to the Profit and Loss account (under the head "Miscellaneous Expenses") in accordance with Accounting Standard 26 on "Intangible Assets", which reads as under:

"4.1 No intangible asset arising from research (or from the research phase of an internal project) should be recognised. Expenditure on research (or on the research phase of an internal project) should be recognised as an expense when it is incurred.

4.2 This Standard takes the view that, in the research phase of a project, an enterprise cannot demonstrate that an intangible asset exists from which future economic The write-off of expenditure is therefore in accordance with the Accounting Standard issued by the Institute of Chartered Accountants of India.

(b) Expenses in respect of PV1500 project: Rs. 6,47,60,472:

During FY 2005-06, the erstwhile Bajaj Auto Limited had decided to enter into manufacturing of four-wheeler goods carrier under the project named "PV 1500". Under the said project, the assessee placed purchase orders with Genix Automotive Engineering Company Ltd., South Kora ('Genix) for acquiring prototype body-in-white (B/W) parts and fixtures and press tools.

The BIW parts were delivered by Genix to BAL over a period ranging from October 2006 upto November 2008. The materials received from Genix were shown under "Development in progress" (Schedule 6 of the Annual Accounts).

In FY 2009-10, the assessee decided to continue with the development of the four- wheeler goods carrier models with a modified design with little changes, and accordingly, the purchase orders for the balance BIW parts were cancelled. Accordingly, the advance payments made by the company in connection with the purchase orders, which were not refunded by Genix, were written off under the head "Miscellaneous Expenses. In this regard, we have enclosed herewith the following documents:

(i) Copy of the approval dated 18 February 2010 granted by the Reserve Bank of India for write-off of the advance paid to Genix (Refer Annexure 2)

“6.3 I have carefully considered the facts of the case, discussion of the AO in the assessment order, oral contentions and written submission of the appellant and material available on record. The assessee's submission in respect of the reasons recorded and whether there has been failure on its part to disclose fully and truly all material facts necessary for assessment are being analyzed here in under:

The appellant in their submission have primarily contended that the assessment has been reopened after the period of 4 years from the end of the relevant assessment year and assessment in this case was completed u/s 143(3) and further there being no failure on their part to disclose fully and truly all material facts necessary for assessment, the reopening done by the AO was bad in law. To support such contention, the appellant contends that they had submitted copy of the Annual Report to the AO where there is a specific reference relating to valuation difference at Note No.9(b) and that vide letter dated 19.09.2013 they had submitted a note in respect of claim deduction on foreign exchange valuation loss written back. In regard to such contention and submission of assessee it is stated that the explanation (1) of Sec.147 clarifies that production before the Assessing Officer of account books or other evidence from which material evidence could, with due diligence, have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the proviso to Sec. 147 of the Act. Accordingly, merely submitting copy of Annual Report, where in the shape of some note, the assessee seeks to have disclosed the relevant and material fact towards the valuation difference on foreign exchange hedging cannot be considered to be acceptable as proper disclosure made. It would also be important to actually seen what the assessee has mentioned in its notes to accounts. It is seen that the assessee in their annual report for F.Y.2009-10 relevant to the assessment year under consideration have at sub-para (3) of para 9(b) has mentioned as under :-

[Bold for emphasis] Further, in schedule 14 of note forming part of financial statement for F.Y. 2008-09 of the annual report pertains to changes in the accounting policies, at sub-para(3) of Para 10(b), it has been mentioned as under :-

The company has also, during the year, entered into range forward contracts to hedge highly probable forecast transactions, where the export realisations of the company are protected below a minimum pre-determined foreign exchange rate whereas the realisation advantages are available to the company therefrom up to a high pre-determined foreign exchange rate. Though these instruments meet the management's Foreign exchange risk management objectives, they do not meet the test of effectiveness as per the principles of hedge

[Bold for emphasis] It is seen that in the annual report for F.Y.2008-09 relevant to A.Y. 2009-10 the schedule 14 of notes forming part of the financial statement, clearly speak of changes in the accounting policy and at para 10(b) which has been reproduced herein above it has been mentioned that because the instrument in which the hedging has been done do not meet the test of effectiveness as per principles of hedge accounting, hence, the valuation loss aggregating to Rs.218 million have been recognised in the P&L Account. It is, however, curiously noted that precisely for the same reasoning and with the mention that the instrument in which the investments have been made for hedging do not meet the test of effectiveness as per the principles of hedge accounting, the gain aggregating to Rs.760.8 millions has not been recognised. It is noted and mentioned herein that assessee resorted to change in method of accounting in the accounting year 2008-09 to claim the loss on account of hedging to the tune of Rs.218 million and in the next year when there is a gain happened on account of similar transaction, the assessee has in its note to the final account, in its annual report has mentioned to have not recognised such gain. It clearly shows inconsistent method of accounting, resorted only to either claim the loss or not to offer gain to tax on account of its hedging transactions, in respective years. The assessee company tries to justify such accounting treatment on the basis of prudence. In regard to such submission of the assessee it is stated that there cannot 6.3.2 The assessee also has contended that vide letter dated 19.09.2013 they had submitted note in respect of claim deduction on foreign exchange loss written back. In regard to such contention of the assessee it is stated that the copy of the said note has been submitted at page No.120 of the paper book. This note is on allowability of foreign exchange loss and is in reference to the notice dated 01.07.2014 issued u/s 142(1) by the AO to explain the allowability of foreign exchange loss. The appellant in the said letter has submitted that there was a loss of Rs.21.8 crores in the previous year relevant to A.Y. 2009- 10 which was debited in the P&L Account and which was disallowed in the assessment completed u/s 143(3) for A.Y. 2009-10 dated 18.04.2013. The appellant therein has further mentioned that they have filed appeal in respect of said issue before CIT (A) and that during the previous year 6.3.3 In respect of expenses incurred for Omega project aggregating to Rs.1,77,69,266 and expenses incurred in connection with the PV1500 project aggregating to Rs 6,47,60,472:

The assessee has also objected similarly for the issue regarding the expenses incurred for Omega Project and PV1500 project and has stated that note on the allowability of the same was submitted on 06.12.2013 to the AO and therefore there was no failure on their part to disclose fully and truly all material facts necessary for assessment. In regard tosuch contention and submission of the assessee it is stated that the note submitted on the allowability of the aforesaid expenses vide their letter dated 06.12.2013 have been enclosed from page 121 to 124 of the paper book. It is seen from their note that they have given the detail in respect of nature of expenses and justification for their allowability u/s 37(1) of the Act. However, it is stated that the PV1500 project was started by the assessee in 2005-06 and expenses up till F.Y. 2008-09 was incurred by the assessee to the tune of 6.3.4 The assessee has also contended that reopening cannot be resorted to in the absence of new tangible material. In regard to such contention of the assessee and the reliance placed by the assessee in their submission, it is stated that this aspect would come into consideration only under the circumstances when all the material facts necessary for assessment were fully and truly disclosed by the assessee itself. If in the set of facts, it is held that the assessee has failed to truly and fully disclose all material facts necessary for assessment, so much portion of material which assessee has failed to fully and truly disclose would come within the ambit of "New tangible material" that has come to notice of the AO and reopening u/s 147 would be valid in respect of the same. In the foregoing discussion, it has been held that the assessee has failed to disclose truly and fully all the material facts 6.3.6 The appellant has also contended that despite their request to provide a copy of satisfaction recorded by the Commissioner in respect of reopening of the assessment, the same has not been provided till date. In regard to such submission of the assessee it is stated that the AO in the assessment order has clearly mentioned that approval of Ld. CIT(LTU), Mumbai was obtained on 27.03.2017 and notice u/s 148 of the Act dated 29.03.217 was issued and served on the assessee on the same day. In these facts there cannot be any reason to doubt the factum of granting of approval by the Ld. CIT(LTU), Mumbai as required u/s 150(1) of the Act. As per the procedure prescribed by the Hon'ble Supreme court in the case of 6.3.7 In view of the facts and circumstances of the case and discussion herein above the contentions and submissions of the assessee are not found to be acceptable. The reopening resorted to by the AO by way of issue of notice u/s 148 within the meaning of Sec.147 of the Act is found to be valid and consequent assessment completed u/s143(3) r.w.s. 147 of the Act is found to be good in law. Accordingly, the ground No.1 raised by the assessee is dismissed.”

“7.3 I have carefully considered the facts of the caso, discussion of the AO in the assessment order, oral contention and written submission of the assesseo and material available on record. The AO has made the addition observing that the assessco has adopted different accounting principles for different assessment years as per 1) F.Y. 2008-09

The company has also, during the year, entered into range forward contracts to hedge highly probable forecast transactions, where the export realisations of the company are protected below a minimum pre- determined foreign exchange rate whereas the realisation advantages are available to the company therefrom up to a high pre- determined foreign exchange rate. Though these instruments meet the management's Foreign exchange risk management objectives, they do not meet the test of effectiveness as per the principles of hedge accounting. Hence valuation losses aggregating Rs. 218 million, have been recognised in the profit and loss account.

2) F.Y.2009-10

The company has also entered Into range forward contracts to hedge highly probable forecast

[Bold for emphasis]

From the aforesaid portion of notes, more specifically the bold part, it can be seen that for the precisely similar reasoning and referring to the accounting standard 30, the assessee has taken contrary position to suit his requirement, i.e. in the accounting year 2008-09 to claim the loss of Rs.218 million and in the immediate next year i.e., in the accounting year 2009- 10 to not to offer a gain of Rs.760.8 million. It is further seen from the annual report of the appellant for accounting year 2008-09 that part 10 of schedule 14 deals with changes in the accounting policies. It clearly means that the assessee changed its accounting policies to claim loss arising out of hedging transaction of Rs.218 million. In the immediate next year despite it has gain, it has not offered the same to tax. The 7.3.1 In the submission the assessee has contended that since the AO has not allowed the loss claimed in the assessment year 2009-10 as also in A.Y. 2014-15, treating the same to be notional/ contingent in nature and therefore there should be no addition made in the year under consideration. In regard to such contention of the assessee it is stated that the AO may have taken such a position in the assessment but it is not the case that the assessee has accepted the same. It is submission of the assessee that they have filed appeal against such orders of the AO. What needs to be the case is that the stand of the assessee should not only be consistent from year to year, but also should be in line with the accounting standards and principles enshrined in accounting standards. Further thereto,

“8.3 I have carefully considered the facts of the case, discussion of the AO in the assessment order, oral contention and written submission of the assessee and material available on record. The expenditure in question are of the nature which were incurred by the assessee under Omega Project for development of proto type for relaunching of auto-geared scooters and under the project named PV 1500 for manufacturing four wheeler goods carrier. It is mentioned that the assessee primarily is into the business of two wheeler motor cycles and three wheelers. Neither it manufactures auto geared scooters

ii. With respect to the second addition, he referred to page no.116 of the Paper Book which is part of the notice dated 1st July, 2013, wherein as per paragraph no.45, iii. He submits that as the learned Assessing Officer was satisfied about the claim, there is no disallowance made in the assessment order and therefore, there is also a change of opinion. iv. He further referred to the copy of the reasons recorded at page no.72 of the Paper Book and the objections raised against the reopening placed at page no.74 of the Paper Book stating that there is no new credible evidence available in form of tangible material for reopening of the assessment. v. He further submitted that reopening has been made merely on the basis of change of opinion. He submits that it is reappraisal of note at schedule 14. vi. He further referred to the decision of Hon'ble Bombay High Court in case of paragraph number 20 of Hindustan lever Ltd 2004 (268 ITR 332) (Bombay), paragraph number 8t – 11 of the decision of the honourable High Court in case of sesa Goa Ltd (2007) 294 ITR 101 and Ananta landmark private limited versus Deputy Commissioner Of Income Tax in vii. The learned authorized representative also referred to the factual paper book containing 147 pages and a case law compilation where 6 case laws were listed down.

Order pronounced in the open court on 23.11. 2023.