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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI G.S. PANNU & SHRI SANDEEP SINGH KARHAIL
The present appeal has been filed by the assessee challenging the impugned order dated 05/03/2021, passed under section 263 of the Income Tax Act, 1961 ("the Act") by the learned Principal Commissioner of Income Tax–8, Mumbai, [“learned PCIT”], for the assessment year 2015–16.
In this appeal, the assessee has raised the following grounds:–
“Based on the facts and circumstances of the case and in law, the Appellant respectfully craves leave to prefer an appeal under section 253 of the Income- tax Act, 1961 ("the Act") against the revisionary order dated March 05, 2021 passed by the Learned Principal Commissioner of Income-tax-8, Mumbai (referred to as learned PCIT) under section 263 of the Act, on the following grounds:
Tata Teleservices (Maharashtra) Limited ITA no.1308/Mum./2021
On the facts and circumstances of the case and in law, the notice issued under section 263 of the Act as well as the order passed under section 263 of the Act by the learned PCIT are illegal, bad in-law and without jurisdiction.
2. On the facts and circumstances of the case and in law, the learned PCIT has erred in assuming the jurisdiction under section 263 of the Act, without appreciating the facts that the learned Assessing Officer (AO) has made proper enquiry and verification with respect to claim of Mark to Market (MTM) loss amounting to INR 9.29 crores recognized on derivative contract in nature of cross currency interest rate swap ('CCIRS') during the assessment proceedings and the same were answered to the satisfaction of the learned AO. 3. On the facts and circumstances of the case and in law, the leamed PCIT has erred in initiating the proceedings under section 263 of the Act on the basis of the wrongful assumption that 'no enquiry' was made with respect to the issue of MTM loss amounting to INR 9.29 crores by the learned AO during the assessment proceedings for AY 2015-16 which itself is contrary to the observation of learned PCIT, whereby the learned PCIT has made reference to submission dated December 13, 2017 filed by the Appellant before the Learned AO on the subject issue which was accepted by the learned AO during the assessment proceedings. 4. Without prejudice to Ground No 3, on the facts and circumstances of the case and in law, the learned PCIT has erred in initiating the proceedings under section 263 of the Act on the basis that the Learned AO has passed the order without making adequate enquiry and not discussing the subject issue in the assessment order, without appreciating the fact that lack of discussion in the order as long as the query is raised during assessment proceedings and answered to the satisfaction of the Learned AO, the same cannot be regarded as lack of adequate enquiry. 5. On the facts and in circumstances of the case and in law, the learned PCIT has erred in concluding the assessment order passed by the learned AO as erroneous and prejudicial to the interest of revenue and not giving any finding to this effect, without appreciating the fact that the subject MTM loss of INR 9.29 crores claimed during the subject year has been reversed in the subsequent year i.e. AY 2016-17 and duly offered to tax in the rectum of income for AY 2016-17. Without prejudice to grounds 1 to 5 above: 6. On the facts and in circumstances of the case and in law, the learned PCIT has erred in referring to the decision of Apex court in case of PCIT vs Woodward Governor India (P.) Ltd. (312 ITR 254) and Instruction No. 03/2010 issued by Central Board of Direct Taxes, by grossly ignoring the fact that the apex court in its judgment has stressed on adoption of a well-recognized method of accounting laid down by Institute of Chartered Accountants of India (ICAI) and consistency in the matter of compliance of such method of accounting and the Appellant has done the treatment of subject MTM loss in accordance with the guidelines on accounting for derivatives issued by ICAI. 7. On the facts and in circumstances of the case and in law, the leamed PCIT has erred in disregarding the detailed submission filed both on facts as well as Page | 2
Tata Teleservices (Maharashtra) Limited ITA no.1308/Mum./2021 on merits, substantiating the fact that the MTM loss recognized on account of derivative contract in nature of CCRIS entered by TTML to hedge against the foreign currency non-resident loan ('FCNR loan') liability is allowable in accordance with the provisions of the Act. All the above grounds are without prejudice to each other. The Appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of the appeal. The Appellant prays that appropriate relief be granted based on the said grounds of appeal and the facts and circumstances of the case.”
In the present appeal, the assessee is aggrieved against the invocation of revisionary proceedings under section 263 of the Act by the learned PCIT.
The brief facts of the case as emanating from the record are: The assessee is a company and is engaged in providing cellular telecommunication communication services to its subscribers. For the year under consideration, the assessee e-filed its return of income on 26/11/2015 declaring a loss of Rs. 475,90,34,534. The return of income filed by the assessee was selected for complete scrutiny and notice under section 143(2) of the Act was issued and served on the assessee. Thereafter, notices under section 142(1) of the Act along with a detailed questionnaire were issued and served on the assessee. The Assessing Officer (“AO”) vide order dated 26/12/2017 passed under section 143(3) of the Act concluded the scrutiny assessment proceedings and assessed the total income of the assessee at a loss of Rs.317,09,44,630.
Subsequently, vide notice dated 26/02/2020 issued under section 263 of the Act, the learned PCIT initiated revisionary proceedings on the basis that Marked To Market (“MTM”) loss claimed by the assessee and allowed vide assessment order passed under section 143(3) of the Act is of capital nature and therefore should not be allowed as it directly relates to capital expenses. Page | 3
Tata Teleservices (Maharashtra) Limited ITA no.1308/Mum./2021 The learned PCIT further alleged that the assessee itself claims MTM loss but does not offer any MTM gains. Accordingly, the learned PCIT alleged that since the aforesaid aspects have not been enquired into by the AO the assessment order is erroneous and prejudicial to the interest of the Revenue.
In response thereto, the assessee submitted that the AO after due examination of facts, details, and information submitted by the assessee, during the assessment proceedings, allowed the MTM loss claimed by the assessee. Further, the assessee submitted that the financial statements of the assessee documented the treatment given to MTM loss and the same is in accordance with the guidelines on accounting for derivatives issued by the Institute of Chartered Accountants of India, which prescribes that the company provides a loss in respect of all outstanding derivative contracts in the balance sheet on MTM basis and any gains arising on such MTM are not recognised as income. The assessee also submitted that subject loss on MTM basis has been duly reversed in the subsequent year and accordingly has been offered to tax in the return of income. Therefore, the order is neither erroneous nor prejudicial to the interest of the Revenue.
The learned PCIT vide impugned order did not agree with the submissions of the assessee and held that the loans in respect of which the assessee claimed MTM loss are of enduring nature and therefore the MTM loss is capital in nature and should not have been allowed as it was directly related to capital expenses. The learned PCIT further held that the AO has not discussed the issue of allowability of MTM loss in the assessment order nor it has recorded the reasons for accepting assessee’s submission. It was also held Page | 4
Tata Teleservices (Maharashtra) Limited ITA no.1308/Mum./2021 that the AO has not verified whether MTM losses are speculative in nature under section 43(5)(d) of the Act. The learned PCIT further held that the reversal of loss in the subsequent assessment year was not verified by the AO, as the assessee did not submit any document in this regard during the assessment proceedings for the year under consideration. Thus, the AO has failed to make the necessary enquiry and bring on record all facts necessary for determining the true character and nature of income, which resulted in an order which is erroneous and prejudicial to the interest of the Revenue as per the provisions of Explanation-2(a) to section 263 of the Act. Accordingly, vide impugned order the learned PCIT set aside the assessment order so passed, with a direction to frame the assessment de novo as per the observations made in the order. Being aggrieved, the assessee is in appeal before us.
We have considered the submissions of both sides and perused the material available on record. The assessee entered into derivative contracts in the nature of interest rate swaps and cross-country interest rate swaps on forward contracts. In accordance with the accounting policy, the assessee provides for losses in respect of all outstanding derivative contracts in the balance sheet date by marking them to market, and any gains arising on such MTM are not recognised as income. During the year under consideration, the assessee has entered into a derivative contract with IndusInd Bank to hedge against Foreign Currency Non-Resident (“FCNR”) loan liability which is largely taken for the purpose of supplementing the working capital needs, repayment of existing debts, strengthening the existing GSM network, etc. In terms of the accounting policy, the assessee has recognised the MTM loss of Rs.9.29 crore
Tata Teleservices (Maharashtra) Limited ITA no.1308/Mum./2021 on the basis of the bank advice and claimed the same as revenue in nature. During the assessment proceedings, vide notice dated 24/07/2017 issued under section 142(1) of the Act, forming part of the paper book from pages 91-92, the AO, inter-alia, raised the following specific query regarding the MTM loss claimed by the assessee:-
“10. As per note 24 in point B you have debited mark to market loss on cross currency interest rate swap at Rs. 9.25 crores. Explain its allowability.”
As is evident from the submission dated 13/12/2017 on page 93 of the paper book, the assessee replied to the query raised by the AO and substantiated its claim of MTM loss on cross-currency interest rate swap. The AO vide order dated 26/12/2017 passed under section 143(3) of the Act made certain additions, however, did not make any addition on this aspect. Vide impugned order, the learned PCIT held that the AO has not discussed the issue of allowability of MTM loss in the assessment order, nor it has recorded the reasons for accepting assessee’s submission. The learned PCIT further held that the AO has accepted assessee’s submission without making further enquiry. From the perusal of the notice issued by the AO and the reply filed by the assessee, we find that this issue was specifically raised during the scrutiny assessment proceedings and the same was duly replied to by the assessee. Therefore, it cannot be concluded that this aspect was not examined by the AO. We find that the Hon’ble jurisdictional High Court in CIT v/s Reliance Communication Ltd, [2016] 69 taxmann.com 103 (Bombay) held that the fact that the AO did not make any reference in the assessment order cannot make the order erroneous when the issues were indeed looked into.
Tata Teleservices (Maharashtra) Limited ITA no.1308/Mum./2021
As per the learned PCIT, the derivative contract with IndusInd Bank was directly linked to the outside borrowings in forex and the assessee itself has stated that FCNR loans were utilised for repayment of existing debts (capital expenditure) and strengthening the existing GSM network (i.e. creating benefit of enduring nature and creation of new assets). Thus, as per the learned PCIT, the MTM loss of Rs.9.29 crore was capital in nature and should not have been allowed as it was directly related to capital expenses. On the contrary, as per the assessee, the claim of MTM loss is in accordance with the guidelines on accounting for derivatives issued by the Institute of Chartered Accountants of India, which prescribes that the company provides for losses in respect of all outstanding derivative contracts in the balance sheet on MTM basis and any gains arising on such MTM are not recognised as income. The assessee also submitted that non-recognition of the MTM gain based on the prescribed accounting treatment is consistent with the decision of the Hon’ble Supreme Court in CIT v/s Woodward Governor India (P) Ltd. [2009] 312 ITR 254 (SC). Accordingly, the assessee claimed MTM loss on a cross-country interest rate swap but did not offer any MTM gains, which was accepted by the AO while passing the assessment order under section 143(3) of the Act. Therefore, from the above, it is evident that in the present case, the learned PCIT only disputed the characterisation of MTM loss as claimed by the assessee, and in such circumstances, it cannot be held that the AO failed to make the enquiries or verification which should have been made. Thus, we are of the considered opinion that Explanation-2(a) to section 263 of the Act, as invoked by the learned PCIT, is not applicable to the facts of the present case.
Tata Teleservices (Maharashtra) Limited ITA no.1308/Mum./2021
As regards the finding of the learned PCIT that the AO has not verified whether MTM losses are speculative in nature under section 43(5)(d) of the Act, we find that this allegation does not form part of the notice issued under section 263 of the Act by the learned PCIT and therefore the opportunity was not granted to the assessee to rebut the same. Thus, it is contrary to the provisions of section 263 of the Act, which specifically requires the grant of opportunity of being heard to the assessee. We find that the Hon’ble Supreme Court in CIT v/s Amitabh Bachchan, [2016] 384 ITR 200 (SC) observed as under:-
“10...... What is contemplated by Section 263, is an opportunity of hearing to be afforded to the assessee. Failure to give such an opportunity would render the revisional order legally fragile not on the ground of lack of jurisdiction but on the ground of violation of principles of natural justice.”
Further, as per the assessee, the MTM loss of Rs.9.29 crores was duly reversed in the subsequent assessment year, i.e. assessment year 2016-17, and accordingly, has been offered to tax in the return of income. From the perusal of financial statements for the assessment year 2016-17, i.e. Note 26 on page 79 of the paper book, we find that the MTM loss of Rs.9.29 crore on cross currency interest rate swap claimed in the financial year ending 31/03/2015 was reversed in the financial year ending 31/03/2016. Further, from the computation of income for the assessment year 2016-17, forming part of the paper book on page 90, the submission of the assessee is duly corroborated that there is no claim of MTM loss of Rs.9.29 crore, and therefore the assessee has offered to tax the said amount in its return of income for the assessment year 2016-17. The learned PCIT rejected this submission of the assessee merely on the basis that the assessee did not submit these details Page | 8
Tata Teleservices (Maharashtra) Limited ITA no.1308/Mum./2021 before the AO during the assessment proceedings and therefore, it cannot be said that the assessment was completed after verifying assessee’s books of accounts for the subsequent year. It is pertinent to note that the question as to the year in which deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different. However, the assessee is a company, and therefore tax is leviable at a uniform rate. It is trite law that in order to invoke section 263, the assessment order must be erroneous and also prejudicial to revenue, and if one of the limbs is absent, i.e., if the order of the AO is erroneous but is not prejudicial to Revenue or if it is not erroneous but is prejudicial to Revenue, recourse cannot be had to section 263 of the Act. Since the MTM loss of Rs.9.29 crore was duly reversed in the subsequent year and has been offered to tax, therefore, there is no prejudice to the Revenue. Therefore, the impugned revisionary proceedings invoked under section 263 of the Act cannot be upheld and thus, are set aside. Accordingly, the impugned order passed by the learned PCIT under section 263 of the Act is quashed.
The assessee, vide application dated Nil, has also raised the following additional ground of appeal:–
“1. The Learned Principal Commissioner of Income Tax-8, Mumbai ('Learned PCIT”) has erred in passing the order under section 263 of the Income tax Act, 1961 ('Act) without complying with the Circular No. 19/2019 dated August 14, 2019, accordingly the aforementioned order is non est and null and void in law.”
During the hearing, the learned Authorised Representative (“learned AR”), after the submissions by both sides on the grounds raised in the appeal,
Tata Teleservices (Maharashtra) Limited ITA no.1308/Mum./2021 made his submission on the aforesaid additional ground of appeal. The learned AR submitted that the impugned order is issued manually without mentioning the Document Identification Number (“DIN”) and therefore has been passed without complying with Circular No. 19 of 2019. For this reason, the impugned order is non-est in law, and null and void. The learned AR placed reliance upon the decision of the coordinate bench of the Tribunal in Teleperformance Global Services Private Limited v/s ACIT, in & 2815/Mum/2022.
15. Since, in the present case, the revisionary proceedings have been found to be without jurisdiction and thus the impugned order passed by the learned PCIT under section 263 of the Act has already been set aside, we are expressing no findings on the additional ground raised by the assessee and the same is left open.
In the result, the appeal by the assessee is allowed. Order pronounced in the open Court on 13/07/2023