DCIT-9(1)(2), MUMBAI vs. ASCENT HYDRO PROJECTS PVT. LTD., MUMBAI

These appeals are filed by the Revenue against different orders of the Learned Commissioner of Income Tax (Appeals)–16, Mumbai

Since the issues raised in all the appeals are identical, therefore, for the sake of convenience, these appeals are clubbed, heard and disposed off by this consolidated order. We are taking Appeal in ITA.No. 6427/MUM/2018 for Assessment Year 2013-14 as a lead case.

Revenue has raised following grounds in its appeal: - “1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing to recomputation of deduction u/s 80IA by excluding the profit on sale of Carbon Credit of ₹.15,85,387/- without appreciating the facts that said receipt was not derived from the activity of power generation but it was a receipt which was incidental to the business. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the disallowance of ₹.51,53,632/- on account of Carbon credit accrued but not accounted made by the AO.

Further, Assessing Officer observed that in the notes to accounts, assessee made a disclosure regarding change in accounting policy in view of the revised guidelines issued by the ICAI in accounting of revenue from sale of carbon credits. The assessee reported the market on profit was ₹.51,53,632/-. The Assessing Officer taxed the above said amount in the year under consideration and the assessee has offered the above said income in the subsequent year.

Aggrieved assessee preferred an appeal before the Ld.CIT(A) and Ld.CIT(A) relying on assessee’s own case in ITA.No. 3283/MUM/2016 dated 20.12.2017 allowed the ground raised by the assessee.

Respectfully following the above said decision, we are inclined to dismiss the Ground No. 1 raised by the revenue.

Further, revenue has raised additional ground in the Ground No. 1 itself, objecting in allowing the disallowance of ₹.51,53,632/- on account of carbon credits accrued but not accounted by the assessee. We observe that the Ld.CIT(A) has allowed the issue under consideration in favour of the assessee by referring to the guidance note issued by ICAI and further

With regard to Ground No. 2, the facts are, the Assessing Officer observed that the assessee has not declared the profit on MTM in its Profit and Loss Account by recording the reasons in the notes to accounts as per which assessee has followed the accounting standard issued by ICAI. After considering the submissions made by the assessee the Assessing Officer observed that assessee has unrealized mark to market gains amounting to ₹.1,21,81,727/- as a result of interest rate and currency swap agreement, as he has not convinced with the submissions Assessing

Aggrieved assessee preferred an appeal before the Ld.CIT(A) and before the Ld.CIT(A) assessee submitted that a loan of US $4.5 million was taken from Deutsche Investitions (DEG) for construction of power plants. As per the contract, the assessee had hedged the foreign currency exposure by way of foreign exchange derivative instrument to the extent of Euro 1.6 million, with the State Bank of India (SBI), pegging the Euro rate ₹.58.625. Accordingly, irrespective of the prevailing exchange rate, the assessee is entitled to obtain the Euro from SBI at ₹.58.625 over the tenure of the loan i.e., 80,000 Euros every six months for ten years.

The assessee submitted that during the year under consideration the outstanding loan as on 31.03.2013 was Euro 9,60,000 and the rate on that day was ₹.72.23. Since the assessee had pegged the Euro at 7 & 6732/MUM/2018 ITA NO. 4156/MUM/2019 (A.Y: 2014-15) M/s. Ascent Hydro Projects Pvt. Ltd., ₹.58.625, there was a notional gain (MTM) of ₹.1,21,81,727/- which was not recognized by the assessee in their books of accounts and the same was mentioned in Note No. 35 of the auditor's report. The Assessing Officer treated the above said amount which is the Mark to Market gain which had not been recognized by the assessee in their books of accounts as income and added the same only the realized gains while computing the taxable income. The assessee further submitted before the Ld.CIT(A) that it has been done as per the guidelines issued by ICAI in AS-1 in respect of non-monetary transaction i.e. derivative transactions.

After considering the detailed submissions Ld.CIT(A) allowed the Ground raised with the following observations: - “6.4.5 As per AS-1, it is a well settled principle that while anticipated losses can be taken into account in computing profit, anticipated profits in the shape of unrealized gains should not be brought into the accounts as no prudent trader would care to show increased profit before its realization. This is what the Supreme Court has held in the case of Chainrup Sampatram V/ s. CIT, West Bengal (1953) (24 ITR 481) (SC). The Hon‘ble Apex Court’s decision is in keeping with the guidelines laid down by the ‘Institute of Chartered Accountant of India which has approved the rule of prudence for not recognizing the anticipated profit before the same is realized. The said decision had been followed in the case of Edelweiss Security Limited V/s Additional CIT (ITA 2193/Mum/ 2009). Identical view was taken by the Hon'ble ITAT in the following cases also: (i) DCIT V/s. Edelweiss Securities Limited [ITA 7792/ Mum/ 2012] (ii) DCIT V/s. Edelweiss Securities Limited [ITA 5939/ Mum/ 2021] (iii) Edelweiss Capital Limited V/s ITO [ITA 5324/Mum/ 2007] °

On the other hand, Ld. AR submitted that assessee has borrowed funds to purchase plant and machinery which is capital assets and assessee has followed accounting standard and guidance note issued by the ICAI, as per which assessee has to record the profit or loss as per prudent method of recording the transactions as per the guidance note, assessee has to record the losses of MTM and gain only when it is actually

Considered the rival submissions and material placed on record, we observed from the record that assessee has taken Euro loan to setup power plant and assessee has to pay installments of Euro 80,000/- half yearly. In order to mitigate the exchange fluctuation loss, Assessee had booked forward contract with SBI and hedged the exchange rate at ₹.58.625 for the remaining period of loan outstanding. No doubt assessee has notional gain on loan outstanding amount at the end of the Financial Year but assessee can offer the gain as and when it settles the loan. As per records, for the outstanding loan which is still outstanding at the end of respective years. As per the guidance note and prudent method of accounting issued by ICAI assessee can declare the income as and when it settles the loan or it realizes the gain. We observe from the Assessment

With regard to Ground No. 3 raised by the revenue, the Assessing Officer included the mark to market income in computing the book profits u/s. 115JB of the Act. He observed that net profit for computing the book profits are taken from the financials of the assessee and it has not prepared in accordance with the provisions of Schedule VI of Companies Act. The Profit and Loss Account shall have to be prepared in accordance with Part II of Schedule VI of the Companies Act. Assessing Officer is of the view that as per Schedule VI, net exchange/loss on foreign currency

Aggrieved assessee preferred an appeal before the Ld.CIT(A) and Ld.CIT(A) deleted the addition made in book profits u/s. 115JB of the Act with the observation that the assessee has succeeded on merit in the earlier ground in which, whether the mark to market gain on the foreign exchange rate has to be offered for tax, since it was decided that the above said income is not forming part of regular income and it can be offered only when it is actually realized as per the accounting standard issued by ICAI.

Aggrieved revenue is in appeal before us and Ld.DR vehemently argued that, as highlighted by the Assessing Officer, accounts are not prepared as per the Schedule VI of the Companies Act, he supported the 12 & 6732/MUM/2018 ITA NO. 4156/MUM/2019 (A.Y: 2014-15) M/s. Ascent Hydro Projects Pvt. Ltd., finding of the Assessing Officer and he relied on the case of DCIT v. M/s. Bombay Diamond Co. Ltd in ITA.No. 7488/Mum/2007 dated 30.11.2009 and further he relied on the case of Jayanth Packaging Pvt. Ltd., v. DCIT [128 taxman.co 2].

On the other hand, Ld. AR relied on the finding of the Ld.CIT(A).

Considered the rival submissions and material placed on record, this ground is connected to the Ground No. 2 raised by the revenue and in Ground No. 2 we have already adjudicated that the, assessee has declared the mark to market gain only on the basis of actual realisation which is a prudent method of accounting and we already adjudicated that the method adopted by the assessee is proper and as per the accounting standard and guidance note issued by ICAI. Therefore, we cannot possibly say that assessee has not followed the method of account prescribed under Schedule–VI to the Companies Act. Therefore, we are inclined to agree with the findings of the Ld.CIT(A). Accordingly, ground raised by the revenue is dismissed.

Coming to the appeals relating to A.Ys. 2009-10 and A.Y. 2014-15, since facts in these cases are mutatis mutandis, therefore the decision

In the result, appeals filed by the revenue are dismissed.