ACIT, CHENNAI vs. BARCLAYS INVESTMENTS AND LOANS (I) LTD., CHENNAI

Asst. Commissioner of Income Tax, Corporate Circle-1(2), Chennai, [ the ld AO ] against the appellate order passed by the Commissioner of Income-tax (Appeals)-1, Chennai, [ The ld CIT (A) ] dated 5th September, 2016 for A.Y. 2010-11, raising following grounds of appeal, wherein the appeal of the assessee arising out of the assessment order dated 29th March, 2014 passed by the ld AO under Section 143(3) read with section 92CA of the Income-tax Act, 1961 (the Act) was partly allowed.

Brief facts of the case shows that the assessee namely Barclays Investment and Loans (India) Limited [ Assessee] is a public limited company engaged in the business of lending and investment as a non-banking financial company registered with Reserve Bank of India. Assessee filed its return of income on 30th September, 2010 at a loss of ₹160,87,18,146/-.

The return of the assessee was picked up for scrutiny and consequently, assessment order under Section 143(3) read with section 92CA of the Act was passed on 29th March, 2014, wherein the learned Assessing Officer disallowed the loss on fair valuation of outstanding Equity Linked Debentures (ELDs) amounting to ₹321,37,17,255/- and disallowance under Section 14A of the Income-tax Act, 1961 (the Act) of ₹1,55,16,891/-.

Ground no.1 and ground no.4 of the appeal are general in nature and does not require any decision therefore, those are dismissed.

During the year, assessee accounted loss of ₹321,37,17,255/- on fair valuation of ELDs. The above claim was made on the outstanding Equity Linked Debentures of ₹1,155/- crores. In terms of Accounting Standard (AS) 30 on financial instruments recognition and measurement the above Equity Linked Debentures were restated at the fair value as on 31st March, 2010. For valuation, assessee adopted four different models. In the earlier years also as well as in the subsequent years, the Assessee Company has recognized gains on fair valuation of Equity Linked Debentures and offered it to tax. The learned Assessing Officer also has taxed the above gain for A.Y. 2008-09 to A.Y. 2009-10 in scrutiny assessment. Further, substantial gains for A.Y. 2011-12 and A.Y. 2012-13, have also been offered for taxation. However, for this year the assessee incurred the loss of ₹321 crores, which was claimed as deduction. The learned Assessing Officer examined the claim of the loss. The assessee submitted the facts as stated above. The learned Assessing Officer held that it is not possible to verify whether the additional loss provided at the end of the year is as per actual loss /gain, he held that it is also not supported by any evidence. He held that assessee has adopted AS 30, but there was no detail as to how the above Accounting Standard is applied in determining fair valuation of ELDs. Therefore, according to the learned Assessing Officer the system adopted by the Assessee Company does not reflect true and correct profit of the assessee and accordingly, he disallowed the loss.

The assessee challenged the same before the learned CIT (A). Before him, the assessee explained the matching concept principle, gains offered on identical basis

The learned Departmental Representative submitted that the loss claimed by the assessee is merely a notional loss and further various models adopted by the assessee has several drawbacks and hence, the amount of loss claimed by the assessee does not give true and correct picture. It was further stated that when the quantum of the loss has not been verified, the order of the learned CIT (A) is incorrect in allowing the claim of the assessee.

The learned Authorized Representative submitted that assessee has submitted a letter dated 6th March, 2014, wherein as per Para no.18 of that letter, assessee has submitted the complete details with respect to the claim of loss. He further referred to letter dated 25th March, 2014, wherein the assessee submitted the details of ELDs for 3 years and further as per Para no. 4 has explained the complete methodology. Vide Para nos.7 to 8, the accounting policy as well as the valuation was also submitted. He further referred to the remand report dated 18th April, 2016 considered by the learned CIT (A) and submitted that the method of valuation by various models is accepted methodology. He further referred to the decision of co- ordinate Bench in J.P. Morgan Securities India (P.) Ltd. (supra), wherein the co- ordinate Bench has allowed the identical loss. Several other judicial precedents were relied on wherein loss arising on fair valuation of financial instruments or derivatives, was allowed. The learned Authorized Representative further submitted that for A.Y. 2008-09 and A.Y. 20099-10, the issue reached before the Hon'ble Madras High Court in appeal no. 152 and 155 of 2021 decided on 8th march, 2021, wherein the order of the co-ordinate bench were challenged by the Revenue and the appeal of the Revenue was decided- upholding the order of ITAT holding that anticipated loss claimed of

We have carefully considered the rival contentions and perused the orders of the lower authorities. The issue involved in the instant case is covered in the case of the assessee for A.Y. 2008-09 and A.Y. 2009-10, which was decided by the co-ordinate bench vide order dated 13th July, 2016. For A.Y. 2008-09, assessee claimed the loss of ₹ 4,32,35,742/- and for A.Y. 2009-10 loss was also claimed. The co-ordinate bench based on the decision of Hon'ble Supreme Court in case of Woodward Governor India (P.) Ltd. (supra) allowed the claim of the assessee. The Hon'ble Madras Highcourt upheld the order of the co-ordinate bench. Therefore, the issue is squarely covered on the principle that the loss is allowable to the assessee. Therefore, respectfully following the decision of the co-ordinate Bench in assessee’s own case for A.Y. 2008- 09 and A.Y. 2009-10, which has been upheld by the Hon'ble Madras High Court, we hold that the losses incurred by the assessee is not a notional loss and is allowable to assessee as deduction from income.

However, as the quantum of the loss has not been verified by the learned Assessing Officer, we set aside the issue back to the file of the learned Assessing Officer to examine the quantum of allowability of the losses. Accordingly, the ground no.2 of the appeal of the learned Assessing Officer is allowed to that extent. We make it abundantly clear that the assessee should submit the details of the quantum of the losses and the learned Assessing Officer needs to verify the quantum of the loss. Accordingly, ground no.2 of the appeal of the learned Assessing Officer is allowed to that extent.

Coming to the ground no.3 of the appeal, where the learned Assessing Officer noted that assessee has invested ₹44.62 crores as on 31st March, 2011 and ₹29 crores as on 31st March, 2010 in the investments income from which is exempt from tax. The learned Assessing Officer was satisfied that assessee has to incur expenditure embedded in the indirect expenditure towards maintaining these investments and therefore, the claim of the assessee that no expenditure has been incurred in relation to the exempt income is not acceptable. Accordingly, he applied Rule 8D of the Rules and computed the disallowance of ₹1,55,60,891/-.

The learned Departmental Representative has categorically held that even if assessee does not earned any exempt income disallowance under rule 14A is required to be made. He referred to the amendment made by The Finance Act 2022.

The learned Authorised Representative referred to the computation of total income took us to page no. 78 of the Paper Book which is computation of total income and submitted that during the year assessee has not earned any exempt income. Therefore, there is no question of disallowance under Section 14A of the Act.

We have carefully considered the rival contentions and perused the orders of the lower authorities. It is clear that assessee has not earned any exempt income and therefore, no disallowance under Section 14A of the Act for A.Y. 2010-11 can be made. Further, amendment made by the Finance Act, 2022, will take effect from 1st April, 2022 and cannot be presume to have retrospective effect as held by Hon'ble High Court of Delhi in PCIT Vs. Era Infrastructure (India) Ltd. in [2022] 141 taxman. com 289 (Delhi). Therefore, following the above decision of the Hon'ble High Court, we also hold that the amendment made by the Finance Act, 2022 cannot be applied to the impugned assessment year. Accordingly, ground no.3 of the appeal of the learned Assessing Officer is dismissed.

Accordingly, the appeal of the learned Assessing Officer is partly allowed for statistical purposes.