THE DEUTSCHE INVESTMENTS INDIA P.LTD,MUMBAI vs. PR CIT 12, MUMBAI

This appeal in A.Y.2011-12 preferred by the order against the revision order of the ld. Principal Commissioner of Income Tax-12, Mumbai u/s.263 of the Act dated 30/03/2017 for the A.Y.2011-12.

We have heard rival submissions and perused the materials available on record. We find that assessee is engaged in the business of providing non-banking financial services. The return of income for the A.Y.2011-12 was filed electronically by the assessee company on 25/11/2011 declaring total income of Rs.36,61,92,270/-. The reference was made to the ld. Transfer Pricing Officer u/s.92CA(1) after obtaining the approval of the ld. CIT-6, Mumbai vide letter dated 30/08/2013. Later, an order u/s.92CA(3) of the Act was passed by the ld. TPO on 31/12/2014 accepting the entire international transactions carried out by the assessee to be at arm’s length price. The scrutiny assessment was completed u/s.143(3) of the Act on 26/03/2015 by the ld. AO determining the total income of the assessee at Rs.49,01,98,760/- after disallowing provision for depreciation and addition on account of broken period interest. This assessment was sought to be revised by the ld. PCIT by invoking revision jurisdiction u/s.263 of the Act on the ground that the assessee had debited the following expenses which had been allowed as deduction by the ld. AO without making any enquiries:-

The brief facts of the case are, Ld CIT(A) observed in the case of the assessee that an order under section 143(3) of the Income Tax Act 1961 (in short Act) on 30.01.2014 passed by DCIT (AO). Assessee declared return income of ₹ 1,59,70,040/–, the assessment was completed at income of ₹ 58,57,13,080/– after making an addition on account of provision for depreciation. Ld CIT examined the assessment records and he observed that in the profit and loss account for the year under consideration, the assessee had booked losses under the head other income in schedule 14 as under: a). ₹ 8762.88 lakhs on account of revelation of non-convertible debentures. b). ₹ 630.71 lakhs on account of revaluation of futures and options net of premium received.

Further it was argued that the points on which action under section 263 is proposed are such that the year of allowability of the loss becomes only the relevant matter. The losses are allowable in one or the other year and in such case, in accordance with the decision of the Supreme Court in the Case of Excel Industries Ltd (2013) (219 taxman 379), dispute should not be raised by the Department.

Further it was stated in the letter that the losses relating to nonconvertible debentures (NCD) is in respect of interest on which is linked to the performance of specified equity indices over the period of debentures. It was submitted that the company changed its accounting policy for the recognition of MTM on fair valuation of these NCD is by adopting accounting guidance contained in accounting standard 30 (AS – 30) whereby both gains and losses on revaluation of NCD‟s are accounted for in the profit and loss account. The NCD issued by the company are listed on recognized stock exchange in India. At the end of the year, they are revalued and any liability with respect to the MTM loss, if any, is recognized in the profit and loss account, thereby claimed as deduction. It was submitted that in the next financial year, this MTM adjustments are reversed and at the end of the year, these are revalued once again. It was explained that the assessee in earlier years was recognizing only MTM losses. It was submitted that in the year under consideration, both gains and losses are to be recognized as per the accounting principles.

With regard to CBDT instruction is No. 3 of 2010, it was submitted that the same was in respect of loss on forex derivatives transactions and the applicability of section 43 (5) of the act, the reliance was placed on the decision of various Supreme Court‟s decisions to argue that in a Mercantile system of accounting liability is allowable once it has been incurred even though the actual disbursement may be at a later date.

With regard to loss on revelation of futures & options, it was submitted that these were held as stock in trade and therefore its valuation was done on MTM basis. The reliance was placed on the decision of special bench of Mumbai ITAT in the case of Bank of Bahrain and Kuwait (2010) (41 SO T2 90).

After considering the submissions of the assessee, Ld CIT observed that with regard to the enquiry made by AO on the issues mentioned in show cause notice, he observed that no such enquiry was made in the questioner dated 29th Nov. 2013. He observed that the assessee had submitted a note vide letter dated 27.01.2014, and he observed that it is only extract of the notes to the accounts in the financial statements for the year under consideration. From the records and order sheet of the assessment records, he observed that no further query was raised by the AO on this issue and considering the quantum of loss in the case of assessee, he might have sought a note on the nature of loss but it is evident that AO has failed to examine the admissibility of such loss. With the above observation he observed that in no way can a perfunctory query and an equally terse response can be construed as an enquiry or examination. Further he rejected the reliance of Supreme Court decisions to claim the above said deductions and he observed that in the given case the issue relates to interest of NCD, which is linked to the performance of specified equity indices over a period of debentures. Ld. CIT observed that the issue under consideration was allowability of interest, and this is a deduction which should have been considered and claimed under section 36 (1) (iii) of the Act . 10. Ld CIT observed that in the case of Equity Linked Debentures (ELD), the advantage of the investor is that the principal amount lent reminds protected and at the same time the lender gets interest linked to the performance of the Indices. He observed that in case the value of any indices at the end of particular year goes below the base price of such Indices adopted at its issue, there is no obligation on the company to pay any interest to the lender nor it would become payable. Therefore, the value of the Indices at the end of the maturity period of the debenture with reference to its base value adopted at the time of issue alone is relevant for the payment of interest. In case the net result of the calculation is a negative figure, no interest will be paid to the debenture holder. If it is a positive figure, the interest will be paid accordingly. Therefore, the case of the assessee is different than what it has claimed. 11. Ld CIT further observed that with regard to losses in respect of future & option is concerned, assessee had filed the details wide letter dated 24.01.2014 and it had only furnished the extract of the notes to the financial statements, which was already available with the AO. He further observed that in the present proceedings, the assessee was required to explain why the ratio of the decision of Delhi High Court in the case of DLF commercial developers Ltd (261 The Deutsche Investments India Pvt. Ltd., CTR 127) holding that losses arising out of transactions in futures and options are in the nature of speculation losses in terms of section 73 of the Act, should not be applied. In response, assessee submitted that it is a nonbanking financial company and provisions of section 73 is not applicable and with regards to CBDT instructions, it was submitted that Department instructions and circulars not binding on the assessee and on quasi-judicial authorities.

After considering the submissions of the assessee, Ld CIT observed that notwithstanding the allowability or otherwise of the losses booked on account of revaluation of nonconvertible debentures and of futures & options, it is an undisputed fact that the AO while completing the assessment has allowed losses to the extent of the losses claimed by the assessee without ascertaining the nature of transactions yielding such losses. He observed that merely raising a quarry and in response that too, accepting an explanation which was merely a reproduction of statement in the notes to financial statements, which was already available with the AO Starkly demonstrates that in framing the order, AO had proceeded in a mechanical manner without any application of mind. He observed that considering the facts and circumstances of the case warranted the AO to comprehend the nature of the transactions and consider the admissibility of the losses arising there from in accordance with the provisions of law and the instructions of the CBDT. He observed that the present case of the assessee clearly falls with clause (a) of explanation to section 263 of the Act. Based on the above discussion, Ld CIT set aside the assessment order dated 30.01.2014 with a direction to pass an assessment order afresh in accordance with law, applicable judicial decisions and instructions/circulars issued by the CBDT.

Aggrieved with the above order, assessee preferred an appeal before us raising the following grounds of appeal:-

Further he brought to our notice page 77 of the paper book in which the coordinate bench in assessee‟s own case relating to assessment year 2008–09, has dealt with the similar issue considered by the Ld CIT in his order and on the same issue of losses claimed by the assessee. The ITAT has set aside the 263 order with the observation that the AO has adopted one of the two possible view with which Ld. CIT does not agree, the same does not give Ld. CIT jurisdiction to exercise the revisionary power under section 263 of the Act.

On the other hand, Ld DR brought to our notice Pages 86 and 89 of paper book and submitted that the ITAT has clearly observed that the explanation 2 in section 263 was effective from 01.06.2015 and the same is not operative for the assessment year 2008-09. Accordingly, he referred to the explanation 2 (a) of section 263 of the Act and submitted that it is clarificatery in nature and the amendment is applicable retrospectively. For this proposition he relied on the decision of coordinate bench in the case of Crompton Greaves Ltd (ITA No. 1994/Mum/2013 & 2836/Mum/2014). He submitted that Ld. CIT direction is proper and in accordance with Explanation-2 inserted in section 263 of the Act. When the assessing officer does not verify the issue at the time of assessment proceedings, it clearly falls under explanation 2 (a). Further he submitted that LdCIT has lucidly brought out that enquiry should have been made are not made. He also submitted that Ld CIT has only remitted the issue back to the assessing officer for fresh consideration. As such there is no prejudice caused to the assessee.

In rejoinder, Ld. AR submitted that ITAT has clearly given finding that explanation-2 does not apply as the same is applicable effective from 01.06.2015. Therefore the above explanation-2 not apply to the current assessment year also. Further, he pleaded that the issue having been dealt as per the computation of income and relevant notes declared alongwith the financial statement and relevant case laws, it cannot be said that the AO has not applied his mind. He further relied on the decision of ITO The Deutsche Investments India Pvt. Ltd., vs D.G Housing Projects (343 ITR 329) to submit that Ld CIT has not dealt on merits of the issue to quantify the prejudice caused to the revenue instead of remitting it back to AO for fresh consideration.

Considered the rival submissions and material placed on record. We notice that Ld. CIT has invoked provisions of section 263 in this assessment year on the basis that AO has asked for certain clarification from the assessee and those information/clarification was already available on record or part of financial statement. He observed that the AO has completed the assessment without enquiry and not applied his mind on this issue. We notice from the record submitted before us and the similar issue the revenue has raised in the assessment year 2008– 09 wherein similar proceedings were initiated under section 263 of the Act. The Commissioner of income tax at that point of time has set aside the assessment order with the similar finding. We notice that in that 263 order as well Ld. CIT has not quantified how it is prejudicial to the interest of revenue rather discussed the situation and remitted this issue back to the AO for de novo consideration. The coordinate bench has considered the same issue and came to the conclusion as below:- 12. We find that the provision of section 263 can be invoked by learned CIT if the order passed by the Assessing Officer is erroneous in so far it is prejudicial to the interest of the revenue. So it was incumbent upon learned CIT to give a finding that the order of the Assessing Officer is both erroneous and prejudicial to the interest of revenue. Hence, learned CIT(A)‟s direction to make further examination without pointing out that order is both erroneous and prejudicial to the interest of revenue is not sustainable.

We further note that on the issue of broken period interest and mark to market loss, learned Counsel of the assessee has submitted that the necessary details were given in the computation of income and on the touchstone of Hon'ble Bombay High Court decision in the case of State Bank of India (supra) it cannot be said that the Assessing Officer has not applied his mind on this issue. He submits that the assessee has duly submitted case laws in favour of the assessee on these cases, which the Assessing Officer has duly accepted. In this regard we note that Hon'ble Bombay High Court in the case of State Bank of India (supra) has expounded as under :- “Moreover, the Assessment order in regular assessment proceedings in terms disallowed some of the claims made for deduction under Section 143(3) of the Act. Therefore, in the present facts, we are prima-facie of the view that, the Assessing Officer has by necessary implication allowed the claim. Moreover, the basic document for completing the assessment under Section 143(3) of the Act is the computation of income. Therefore, to the extent the claims made for deduction in the computation of come, were disallowed by the Assessing Officer, discussion on the same is found in the assessment order. It is an accepted position that the assessment orders would necessarily deal only with the claims being disallowed and not with the claims being allowed. This is for the reason as observed by the Gujarat High Court in CIT Vs. Nirma Chemicals Ltd 309 ITR 67, that if the Assessing Officer was to deal with all the claims which were to be allowed in the assessment order, the result would be an epictome. This is so, as it would cast an impossible burden upon the Assessing Officer considering his workload and the period of limitation. There was also no reason in the present facts for the Assessing Officer to ask any queries in respect of this claim of the petitioner, as the basic document viz. computation of income at note 21 (Assessment Year 2013- 14) and note 22 (Assessment Year 2014-15) thereof explained the basis of the claim being made to the satisfaction of the Assessing Officer. Thus, it must necessarily be inferred that the Assessing Officer has applied his mind at the time of passing an assessment order to this particular claim made in the basic document viz. computation of the income by not disallowing it in proceedings under Section 143(3) of the Act as he was satisfied with the basis of the claim as indicated in that very document. Therefore, where he accepts the claim made, the occasion to ask questions on it will not arise nor does it have to be indicated in the order passed in the regular assessment proceedings.”

In the result, appeal of the assessee is allowed.