CHOLAMANDALAM INVESTMENT AND FIANANCE CO. LTD.,CHENNAI vs. DCIT, CORPORATE CIRCLE-1(1), CHENNAI

The two appeals filed by the assessee are directed against the separate order of the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, dated 14.08.2024 & 28.08.2024 and pertains to assessment years 2013- 14 & 2014-15 respectively. The Revenue has also filed three appeals against the separate orders of the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, dated 14.08.2024 & 28.08.2024 for the assessment year 2014-15 and 28.08.2024 for the assessment year 2015-16. Since facts are identical and issues are common, for the sake of convenience we dispose off all these appeals by this consolidated order.

AY 2013-14 2. The assessee has raised the following grounds:-

On the facts, and in the circumstances of the case, and in law, the Appellant craves to prefer an appeal against order dated

14. August 2024 passed by the Commissioner of Income-tax (Appeals), Chennai (hereinafter referred to as the Hon'ble CIT(A)), under section 250 of the Income-tax Act, 1961 (the Act'), in respect of order dated

31. March 2016 passed by the Assessing Officer (AO')under section 143(3) of the Act, on the grounds as set out herein:

2835&2836/Chny/2024 1. Ground relating to disallowance of forex loss of INR 6,27,10,303/- treating as 'speculative' in nature:

1.1 On the facts and circumstances of the case, and in law, the Hon'ble CIT(A) and the learned AO has erred in disallowing a sum of INR 6.27,10,303 treating as 'speculative' in nature as laid down under section 43(5) of the Act.

1.2 On the facts and circumstances of the case, and in law, the Hon'ble CIT(A) and the learned AO has factually erred in understanding the nature of transaction, treating the sum as a foreign exchange loss, instead of being premium onforward contract' to hedge foreign exchange risk exposure.

1.3.On the facts and circumstances of the case, and in law, the Hon' ble CIT(A) and the learned AO has erred in construing that in absence of actual delivery, the transaction shall be 'speculative' covered under section 43(5) of the Act.

1.4. On the facts and circumstances of the case, and in law, the Hon'ble CIT(A) has erred in construing that the transaction under consideration is a commodity asper section 43(5) of the Act and disregarded the decision of Hon'ble jurisdictional Income Tax Appellate Tribunal in respect of this issue.

1.5.On the facts and in the circumstances of the case, and in law, the Hon'ble CIT(A)erred in alleging that the transaction under consideration is a speculative bet on the currency which is in the nature of wagering contract.

1.6.On the facts and in the circumstances of the case, and in law, the Hon'ble CIT(A)erred in disregarding that the Appellant has complied with the principles relating to tax treatment as laid down in respect of 'premium on forward contracts by Income Computation and Disclosure Standard VI, CBDT circular No. 23 of 1960dated 12 September 1960 and Accounting Standard 11.

2835&2836/Chny/2024 1.7. On the facts and circumstances of the case, and in law, the Hon’ble CIT(A) erred in upholding the principle laid down by various Courts and Hon'ble Tribunal including the jurisdictional Income Tax Appellate Tribunal.

The Appellant craves leave to add to, or alter, by deletion, substitution, modification or otherwise, the above ground of appeal, either before or during the hearing of the appeal.

3. The brief facts of the case are that the assessee M/s.Cholamandalam Investment and Finance Company Limited (‘CIFCL’) is a public limited company with its registered office in Chennai and listed on the National Stock Exchange and Bombay Stock Exchange, who is comprehensive financial services provider offering vehicle finance, home loans, loan against property, etc. The assessee had electronically filed its return of income on 29.11.2013 for the A.Y. 2013-14 declaring a total income of Rs.5,33,60,22,720/-. The assessee’s return was selected for scrutiny and a detailed scrutiny was undertaken asking for several details/ information from the assessee. Subsequently, the assessing officer (‘AO’) (Deputy Commissioner of Income Tax -1(3)) passed an assessment order dated 31.03.2016u/s.143(3) of the Income Tax Act, 1961 (‘the Act’) wherein the total income of the assessee was determined at Rs.5,61,58,50,913/- and raised a demand of Rs.5,52,98,040/-.Aggrieved by the assessment order, the assessee 2835&2836/Chny/2024 preferred an appeal before the Commissioner of Income Tax – 1, Chennai [‘CIT(A)’] on 28.04.2016. Vide the appellate order dated 14.08.2024, the ld.CIT(A) passed an order partly allowing the grounds of the assessee.

4. Aggrieved by the said order, the assessee preferred an appeal, bearing before us.

5. Factual grounds - Disallowance of premium on forward contract treating as ‘speculative’ in nature:

The ld.AR for the assessee stated that CIFCL as a part of its business, borrowed funds in foreign currency which were required to be settled in foreign currency. In order to hedge against the foreign exchange fluctuations and to limit the excess foreign exchange outflow, the assessee had entered into forward contracts with the bankers to buy the foreign currencies at a pre-determined rate. The ld.AR further explained the transaction with an illustration: Let's assume CIFCL has taken a loan of USD 100 million from a foreign bank, which needs to be repaid in 3 years. To protect itself from foreign exchange fluctuations, CIFCL hedges this loan with HSBC bank by agreeing to receive USD 100 million at a pre-determined price say INR 9,000 million. At the end of the tenure, CIFCL pays 2835&2836/Chny/2024 the amount of INR 9,000 million to HSBC in lieu of USD 100 million. CIFCL would then repay the loan of USD 100 million to the foreign bank. By virtue of this forward contract, no foreign currency losses/gains are accrued to CIFCL. To facilitate this transaction, CIFCL is required to pay a premium on the contract, ranging from 4% to 5% per annum depending on the commercial terms of the agreement. This premium is recognized as cost and is proportionately allocated over the loan's tenure, typically 2 to 3 years, and claimed in the Profit and Loss Account.

5.1 The ld.AR stated that in the impugned assessment order, the AO has disallowed the claim of Rs.6,27,10,303/- stating that such foreign exchange loss is speculative in nature, on account of the following reasons (refer page no. 18 of the appeal set, para 6) - • It was stated that the transaction was a restatement of the loan borrowed. • No provision in respect of the said expense was created in the earlier years • Placing reliance on the case of S. Vinodkumar Diamonds (P) Ltd Vs. Addl. CIT (ITAT, MUM) 89 DTR 129, it was stated that there was no actual delivery of foreign exchange loss, and such loss is speculative in nature.

2835&2836/Chny/2024 • Additionally, the transaction is not covered under the exceptions of section 43(5), i.e., Section 43(5)(a) and 43(5)(d) of the Act, hence it is considered speculative in nature. As per Section 43(5) of the Act, ‘speculative transaction’ means a transaction in which a contract for the purchase or sale of any commodity, including stocks and shares, is periodically or ultimately settled otherwise than by the actual delivery or transfer of the commodity or scrips.

5.2 In this regard, the ld.AR submitted that the AO has misconstrued the facts and treated these transactions as speculative in nature under section 43(5) of the Act, however, the transaction does not satisfy the criteria to be categorized as ‘speculative’. The ld.AR took through the various documentary evidence which substantiate the facts of the case.

5.3 During the course of assessment proceedings, in response to the notice dated 25.05.2015 (refer page no. 54 of the paper book), vide its submission dated 15.02.2016, the assesseehad submitted details of the amount of premium amortized in respect of forward contract and also submitted the agreements of the forward 2835&2836/Chny/2024 contract, wherein the commercial terms of the agreement have been stated (refer page nos. 57 to 73 of the paper book).

The details are tabulated below for your reference - Underlyi Date of Maturity Loan Loan Hedge Proporti Proportionat Agreemen ng loan transaction date amount tenure cost onate e cost for t details (Rs. in per number the year submitted crores) annu for AY during m 2013-14 original proceedin gs 1 USD 20 15.12.2010 16.12.2013 91.00 3 years 5.30% 365 4,82,30,000 Pg 63 of million Paperbook 2 USD 53 27.04.2009 27.04.2012 265.21 3 years 5.70% 26 44,66,386 Pg 67 of million Paperbook 3 USD 10 14.10.2009 16.10.2012 46.15 3 years 4.00% 198 1,00,13,918 Pg 60 of million Paperbook Proportionate hedge cost applicable in respect of foreign current 6,27,10,30 Pg 35 and loans debited to foreign exchange loss in the Profit and Loss Account 3 Pg 59 of Paperbook 5.4 The ld.AR submitted that there would be no losses/ gains which would accrue to CIFCL. In fact, CIFCL shall be obligated to pay a fixed premium to the bank for undertaking the hedging irrespective of the actual foreign exchange fluctuation. Further, the forward contracts entered by the assessee were settled by way of actual delivery, implying that the transactions are bona fide and hence cannot be construed to be 'speculative transaction'. The relevant extract of bank statement substantiating the claim was 2835&2836/Chny/2024 submitted by the assessee during the original proceedings (refer page no. 75 of the paper book).

5.5 Disregarding these submissions, the AO passed the assessment order making the said addition treating this to be speculative loss.

5.6 Aggrieved by the AO’s order, the assessee filed an appeal before the Ld.CIT(A). While the ld.CIT(A) acknowledged and understood clearly the nature of transaction (refer second para Page 64 of the appeal set), however, misconstrued the facts (refer last para of Page 64 of the appeal set) and pronounced the issue against the assessee, stating the following (refer page no. 59 of the appeal set)- • The loss has been debited to the assessee’s account • Premium cost is forex derivative and speculative in nature • Classified it as a commodity by relying on the judgment of the Hon’ble Special Bench of the Calcutta Tribunal in the case of Shree Capital Services Ltd vs. ACIT (2009) 121 ITD 498 (Kol.). • Considered this transaction as a speculative bet on the currency, thereby categorizing it as a wager contract.

2835&2836/Chny/2024 • Concluded that these transactions do not settle on actual delivery stated that the transactions undertaken resulted in huge losses to the assessee and hence cannot be considered hedging.

5.7 Theld.AR thus submitted that the ld.CIT(A), like the AO has misunderstood the facts of the case and classified the transaction in question as speculative. The transaction involves actual delivery of the currency, and the assessee does not claim any foreign exchange loss. Furthermore, if the assessee does not meet the criteria for a speculative transaction as defined u/s.43(5) of the Act, since the transaction is undertaken by actual delivery, the question of it being a commodity or wagering contract does not arise.

5.8 The ld.AR submitted that the assessee has complied with the principles of CBDT circular No.23 of 1960 dated 12.09.1960 wherein the principles relating to tax treatment of hedging transaction have been provided. As per Point No.3 of the said circular, the CBDT clarified that where a transaction is a bona fide ready delivery contract being settled by delivery then in such a case the loss shall not be treated as a loss arising in a speculative transaction (refer page no. 117 of the paper book)

2835&2836/Chny/2024 5.9 The ld.AR stated that the assessee has also complied with the principles of ICDS VI. As per ICDS VI - relating to the effects of changes in foreign exchange rates, the term "Forward exchange contract" means an agreement to exchange different currencies at a forward rate and includes a foreign currency option contract or another financial instrument of a similar nature. Paragraph 8 of the ICDS that deals with the forward exchange contract states that any premium or discount arising at the inception of a forward exchange contract shall be amortized as expense or income over the life of the contract and the exchange differences on such a contract shall be recognized as income or as expense in the previous year in which the exchange rates change.

5.10 The assessee has placed reliance in respect of the above contentions on the below judgements:– • Jurisdictional Hon’ble Tribunal decision in the case of SCM Garments (P.) Ltd. v. Deputy Commissioner of Income-tax, Central Circle-Ill, Coimbatore [2015] 59 taxmann.com 395 (Chennai -Trib.), wherein it was held that foreign currency contracts cannot be treated as wagering contracts and that the foreign currency is neither commodity nor stock or shares.

• Hon’ble Mumbai Tribunal in the case of London Star Diamond Company (I) P. Ltd. Vs DCIT - 38 Taxmann.com 2835&2836/Chny/2024 338, it was held that forward contracts entered into with banks for hedging foreign exchange loss on outstanding receivables in foreign currency are integral or incidental to the exports. Therefore, loss on such forward contracts is by nature a business loss rather than a speculative loss.

• Hon’ble Bangalore Tribunal in the case of Quality Engineering & Software Technologies (P.) Ltd. v. DCIT [2014] 52 taxmann.com 515, wherein it was held that where assessee company entered into forward contracts in order to protect its interest against fluctuations in foreign currency, in respect of consideration for export proceeds and there was an actual contract for sale of merchandise, said transaction would not qualify to be called as speculative transaction.

• In a recent ruling of Jurisdictional Hon’ble Tribunal in the case of Assistant Commissioner of Income tax v. Coastal Energy (P.) Ltd.[2024] 168 taxmann.com 564 (Chennai - Trib.) it was held that- “…6.4 Foreign exchange forward contracts are not 'commodities' and hence, are outside the scope of section 43(5) of the Act.

The term "commodity" has not been defined under the Act. The Forward Contracts (Regulation) Act, 1952 ('FCRA') defines 'goods' as "every kind of movable property other than actionable claims, money and securities”.

Since the provisions of section 43(5) of the Act apply only to transactions in 'commodity', it is respectfully submitted that the provisions of the said section are not at all applicable in the present case for the simple reason that foreign currency is not a trading commodity.

6.6 Transaction settled by way of actual delivery or transfer is not 'speculative' in nature 2835&2836/Chny/2024 Further, the Ld.AR argued that in order to be a 'speculative transaction', there should be a contract for purchase or sale of a commodity, including stocks and shares and such contract should be settled otherwise than by actual delivery or transfer of the commodity. In other words, the transaction must be settled on a net-net basis, whereby the difference between the price prevailing on the settlement date and the contracted price is paid/ received by the parties to the contract. Given that the contracts are settled by actual delivery and not on a net-to-net basis, the same does not fall within the meaning of 'speculative transaction' as mentioned in section 43(5) of the Act.”

5.11 Based on the above submission, the ld.AR prayed that the expenditure i.e., the premium amortized as a result of the forward contract be allowed as an expenditure by deleting the disallowance made by AO of Rs.6,27,10,303/-.

7.1 The AO and also the ld.CIT(A) have misconstrued the facts and treated these transactions as speculative in nature under section 43(5) of the Act and has disallowed the same. The Ld.CIT(A) further observed that these transactions are commodity trading in the nature of speculation and the premium paid is a speculation loss. However, we note that the forward contract premium paid by the 2835&2836/Chny/2024 assessee is as per the agreement entered into with the bankers/insurers to protect / cover the risk of the fluctuation in foreign currency and hence the same has been claimed as an expenditure by amortising the same proportionately to the respective assessment years according to the term(period) of the borrowings. Therefore, the said expenditure cannot be termed as speculation loss u/s.43(5) of the Act as wrongly interpreted by the lower authorities.

7.2 Our above view is also supported by the following decisions relied by the assessee: • Jurisdictional Hon’ble Tribunal decision in the case of SCM Garments (P.) Ltd. v. Deputy Commissioner of Income-tax, Central Circle-Ill, Coimbatore [2015] 59 taxmann.com 395 (Chennai -Trib.), wherein it was held that foreign currency contracts cannot be treated as wagering contracts and that the foreign currency is neither commodity nor stock or shares.

• Hon’ble Mumbai Tribunal in the case of London Star Diamond Company (I) P. Ltd. Vs DCIT - 38 Taxmann.com 338, it was held that forward contracts entered into with banks for hedging foreign exchange loss on outstanding receivables in foreign 2835&2836/Chny/2024 currency are integral or incidental to the exports. Therefore, loss on such forward contracts is by nature a business loss rather than a speculative loss.

• Hon’ble Bangalore Tribunal in the case of Quality Engineering & Software Technologies (P.) Ltd.v. DCIT [2014] 52 taxmann.com 515, wherein it was held that where assessee company entered into forward contracts in order to protect its interest against fluctuations in foreign currency, in respect of consideration for export proceeds and there was an actual contract for sale of merchandise, said transaction would not qualify to be called as speculative transaction.

• Jurisdictional Tribunal in the case of Assistant Commissioner of Income tax v. Coastal Energy (P.) Ltd.[2024] 168 taxmann.com 564 (Chennai - Trib.) it was held that- “…6.4 Foreign exchange forward contracts are not 'commodities' and hence, are outside the scope of section 43(5) of the Act. The term "commodity" has not been defined under the Act. The Forward Contracts (Regulation) Act, 1952 ('FCRA') defines 'goods' as "every kind of movable property other than actionable claims, money and securities”. Since the provisions of section 43(5) of the Act apply only to transactions in 'commodity', it is respectfully submitted that the provisions of the said section are not at all applicable in the present case for the simple reason that foreign currency is not a trading commodity.” 2835&2836/Chny/2024 7.3 In the present facts and circumstances of the case, the premium paid and claimed as an expenditure by the assessee proportionately in the impugned assessment year is in relation to hedging of the fluctuation of foreign currency borrowings and cannot be termed as speculation loss and hence we are of the considered view that the AO and that of the Ld.CIT(A) have disallowed the expenditure by misinterpreting the transaction. Therefore, we set aside the order of the ld.CIT(A) and direct the AO to delete the addition made of Rs.6.27 Crores on account of premium paid towards forward contract by allowing the grounds raised by the assessee.

9. The assessee filed its original return of income for the AY 2014-15 on 28.11.2014. The revised return of income was filed on 26.03.2016 declaring total income of Rs.6,57,88,98,760/- under normal provisions of the Act without altering the taxable income claiming refund of Rs.3,29,11,180/-. The return was selected for scrutiny and the Assessment Officer (‘AO’) (Deputy Commissioner of 2835&2836/Chny/2024 Income Tax -1(3)) passed an assessment order under section 143(3) of the Income Act, 1961 (‘the Act’) on 31.12.2016 assessing the total income at Rs.7,55,72,56,360/-, by making additions on the issue of excess interest spread and raising a demand of Rs.41,64,74,730/-. Aggrieved by the assessment order, the assessee filed an appeal before the ld.CIT(A) dated 28.01.2017.

9.1 Further, the reassessment proceedings u/s.147 of the Act was initiated vide notice dated 19.03.2019. Vide the order dated 30.12.2019, the AO re-assessed the total income u/s.143(3) r.w.s.147 of the Act at Rs.7,65,29,36,710/-, by making an additions in respect of depreciation on temporary structures and foreign exchange loss and thereby raising a demand of Rs.7,73,45,400/-. Aggrieved by the reassessment order, the assessee filed an appeal before the Ld. CIT(A) dated 28.01.2020. Vide the first appellate orders dated 14.08.2024 and 28.08.2024, the ld. CIT(A) passed the order partly allowing the grounds of the assessee.

2835&2836/Chny/2024 disallowance of premium on forward contracts amounting to Rs.3,43,56,000/-.

The ld.AR contends that the initiation of reassessment proceedings is bad in law, since the AO had explicitly requested to furnish the details in respect of foreign exchange loss vide notice dated 11.07.2016 and 20.10.2016 (point no. 3(c)) (refer page no 77 of paper book) during the original assessment proceedings. In response to the above notice, the assessee furnished working vide submission dated 21.11.2016 (refer page no 79 of paper book) including the name of counterparty, date of transaction, underlying borrowings, quantum of loan availed, payment to be made by the assessee and the quantum of days. Further, in respect of depreciation claim, the assessee had filed the detailed income-tax return along with tax audit report vide submission dated 16.09.2015, wherein details of depreciation claimed at 100% were clearly given to the AO.

2835&2836/Chny/2024 Since this issue was already assessed by the AO, the assessee objects to the proposed reassessment for the following reasons: i. Reopening in absence of discovery of any new tangible material or fact is not valid ‘reason to believe’ that income has escaped assessment; ii. Initiation of reassessment proceedings for AY 2014-15 is based on mere change of opinion; iii. Lack of analysis during assessment cannot justify reassessment under Section 147 iv. Assessment made after making detailed enquiries – Reassessment cannot be made 10.1 The ld.AR submitted that the assessee had filed detailed response, placing reliance on various judicial precedents, for substantiating its contention (refer page 50 of paper book). However, the AO disregarded the plea of the assessee and passed the order dated 30.12.2019 under section 143(3) read with section 147 of the Act (refer page no. 9 of appeal set). The ld.AR submits that the AO misconstrued the principles of the case laws relied on by the assessee and rejected these case laws on erroneous grounds.

10.2 Aggrieved by the AO’s order, the assessee preferred an appeal before the Ld.CIT(A). The assessee filed detailed submission in respect of reopening of assessment proceedings and also presented detailed rebuttal for each and every case law disregarded by the 2835&2836/Chny/2024 AO. However, the Ld.CIT(A) also disregarded the submission made and proceeded with the reassessment.

10.3 Aggrieved by the Ld.CIT(A), the assessee preferred an Appeal before us. In this regard, the ld.AR submitted that the reassessment proceedings should be quashed since the AO had already reviewed the issue. It would be grave injustice to the assessee who has already submitted the details during the assessment proceedings. The ld.AR submitted that revenue cannot reopen concluded assessments and if such exercise is permitted that would be quite contrary to the intention of the Act. The assessee should not be penalized for mere oversight by the AO. It would thus, mean that every aspect evaluated or not evaluated during assessment proceedings would perpetually be open for reassessment and the assessment would never reach finality.

10.4 The ld.AR places reliance on the Hon’ble Supreme Court in case of Kelvinator of India Ltd. [2010] 187 Taxman 312 (SC) wherein it was held that the assessing officer has the power to reopen the assessment only where there is a ‘tangible material’ to come to the conclusion that there is escapement of income from assessment. 2835&2836/Chny/2024

“Prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under two conditions, viz., if (a) the ITO had reason to believe that, by reason of the omission or failure on the part of an assessee to make a return under section 139 for any assessment year to the ITO or to disclose fully and truly all material facts necessary for his assessment for that year, income chargeable to tax had escaped assessment for that year, or (b ) the ITO had in consequence of information in his possession reason to believe that income chargeable to tax had escaped assessment for any assessment year. The fulfilment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 with effect from 1-4-1989 those conditions are given a go-by and only one condition has remained, viz., where the Assessing Officer has reason to believe that income has escaped assessment, the section confers jurisdiction to reopen the assessment. Therefore, post 1-4-1989, power to re-open is much wider. However, one needs to give a schematic interpretation to the words 'reason to believe', failing which section 147 would give arbitrary powers to the Assessing Officer to reopen assessments on the basis of 'mere change of opinion', which cannot be per se reason to reopen. One must also keep in mind the conceptual difference between power to review and power to reassess. The Assessing Officer has no power to review; he has the power to reassess, but the reassessment has to be based on fulfilment of certain pre-conditions and if the concept of 'change of opinion' is removed as contended on behalf of the department, then in the garb of reopening the assessment, review would take place. One must treat the concept of 'change of opinion' as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1-4-1989, the Assessing Officer has power to reopen, provided there is 'tangible material' to come to conclusion that there is escapement of income from assessment. Under the Direct Tax Laws (Amendment) Act, 1987, the Parliament not only deleted the words 'reason to believe' but also inserted the word 'opinion' in section 147. However, on receipt of representations from the companies against omission of the words 'reason to believe', the Parliament re-introduced the said expression and deleted the word 'opinion' on the ground that it would vest arbitrary powers in the Assessing Officer.”

10.5 Case laws relied on for various objections are as under - • Reopening in absence of discovery of any new tangible material or fact is not valid ‘reason to believe’ that income has escaped assessment- Where it was held that facts have been viewed during the original proceeding and an assessment order has been passed, then in such 2835&2836/Chny/2024 cases, reopening of an assessment on the same facts without anything more would be a review and not permitted under the garb of reassessment. This would be a mere change of opinion in the absence of any tangible material and is not sufficient to assume jurisdiction to issue the impugned notice. In this connection the Ld.AR placed reliance on below judicial precedents: The Hon’ble Madras High Court in the case of CIT vs. RPG - Transmissions Ltd. [2014] 48 taxmann.com 57 (Madras - The Hon’ble Bombay High Court in case of Asian Paints Ltd v. DCIT & Anr [2009] 308 ITR 195 (Bom.) The Hon’ble Bombay High Court in the case of ICICI Home - Finance Co Ltd. v. ACIT [2012] 25 taxmann.com 241 (Bom.) The Hon’ble Supreme Court in the case of Calcutta Discount - Co. Ltd., v. ITO, [1961] 41 ITR 191 (SC) - The Hon’ble Supreme Court in the case of State of Uttar Pradesh v. Aryaverth Chawl Udyog [(2015) 53 taxmann.com 66]

No ‘reason to believe’ that income has escaped assessment – Mere • change of opinion not a valid basis for reassessment Wherein it was held that mere a change on opinion cannot be held as a valid reason for reopening of assessment. In this connection we would like to place reliance on below judicial precedents The Hon'ble Supreme Court in case of CIT v. Foramer - France [2003] 264 ITR 566 (SC)

2835&2836/Chny/2024 - The Hon’ble Supreme Court in the case of LakhmaniMewal Das (103 ITR 437) The Hon’ble Supreme Court in the case of Sheo Nath Singh - v. Appellate Asstt. CIT [1971] 82 ITR 147

• Lack of analysis during assessment cannot justify reassessment under Section 147: Where it was held that nothing new has come before the purview of the learned AO and order for reassessment is issued because of the lack of analysis at the time of assessment proceedings. In this connection the Ld.AR placed reliance on below judicial precedents The Hon’ble Bombay High Court in the case of Asian Paints - Ltd. v. DCIT &Anr. (supra) The Hon'ble Calcutta High Court in the case of Amrit Feeds - Ltd v. ACIT [2011] 239 CTR 82 (Cal)

Assessment made after making detailed enquiries – Reassessment • cannot be made Wherein it was held that assessing officer had allowed a deduction after making inquiries and considering the reply of the assessee, then the subsequent withdrawal of the same under Section 148 amounts to change of opinion which is invalid In this connection the Ld.AR placed reliance on below judicial precedents - The Hon’ble Bombay High Court in case of Cartini India Ltd. v. ACIT [2009] 314 ITR 275 (Bom)

2835&2836/Chny/2024 - The Hon’ble Delhi High Court in the case of BLB Limited [2012] 19 taxmann.com 115 (Delhi) The Hon’ble High Court of Delhi in case of Usha Internationals - Limited vs CIT VI Delhi [ITA No. 2026/2010] The Hon’ble Madras High Court in the case of CIT v. Chakiat - Agencies (P.) Ltd. [2009] 314 ITR 200 - The Hon’ble Supreme Court in the case of Gemini Leather Stores vs ITO [1975] 100 ITR 1 The Hon’ble Calcutta High Court in the case of Amrit Feeds Ltd. - vs ACIT [2011] 51 DTR 315 (Cal)

10.6 Per contra, the ld.DR supported the orders of the lower authorities.

10.7 We have heard the rival contentions and perused the orders of the lower authorities. We have adjudicated the issues raised in the appeal on merits in favour of the assessee and hence the legal ground raised by the assessee is not adjudicated and kept open as it becomes academic.

2835&2836/Chny/2024 Since, the facts and issues in this appeal is identical and there is no change in the facts and circumstances therefore, following the rule of consistency, the decision in for A.Y. 2013-14 is applicable mutatis mutandis for assessee’s appeal for the A.Y 2014-15 also by allowing the related grounds of appeal raised by the assessee.

Revenue’s Appeal inITA No.2836/CHNY/2024, - AY 2014-15 13. The Revenue has raised the following ground:- i. The order of the learned CIT(A) is contrary to the facts and circumstances of the case. ii. The Ld. CIT(A) has failed to appreciate the fact that on the issue of. disallowance of claim of 100% depreciation on improvements made to leaseholds, for the relied upon year of AY 2010-11, the AO was directed to verify the expenses claimed and then grant depreciation accordingly. The AO while giving effect to the order of the CIT(A) for the AY 2010-11 has sustained the additions as the assessee failed to produce the requisite bills/vouchers. iii. The Ld. CIT(A) has erred in deleting the entire addition of excess depreciation (100%) without setting aside the issue to the file of the AO for verification. iv. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) maybe set aside and that of the Assessing Officer restored.

2835&2836/Chny/2024 14 The Ld.DR stated that in the impugned Ld.CIT(A) order, on this issue of allowability of depreciation @ 100% on the expenses incurred for erecting structures, was already decided in assessee's favour by the Ld.CIT(A)-1, Chennai vide appellate order dated 20.09.2019, passed for the earlier Assessment Year 2010-11, in the assessee's own case. Vide para 40 of the relevant appellate order for Assessment Year 2010-11, it was held as under;

"The facts of the case, the observations of the AO and the submissions of the appellant &have been carefully considered. In Para 7.22 of the assessment order, the A.O has referred to the additions as "Temporary structure" and also mentioned that such a stand was in consonance with that of the earlier years. In the instant case, the expenses incurred were towards partitions, false ceilings, carpets and wooden structures which would be demolished by the lessor at the end of the lease period. Taking into account the nature of the expenses incurred and the fact that they are liable to be demolished at the end of the lease period, they are considered eligible for depreciation at 100% as "Temporary structure". The AO is directed to verify the expenses claimed and to grant depreciation accordingly. This ground of appeal is allowed".

Subsequently it is seen from the note to the Order of Giving Effect to the Ld.CIT(A) order dated 06.07.2020 for the Assessment Year 2010-11, it has been stated that:

".. Regarding allowance of 100% on lease hold premises as per directions of the Ld.CIT(A), bills of expenses were called for. In this regard the assessee vide letter dated 16.06.2020, submitted that they are agreeing for 10% depreciation instead of 100% since no bills were produced no change on this amount is made to the assessment order U/s.143(3)."

2835&2836/Chny/2024 14.1 Thus, it is found that in the impugned order, Ld.CIT(A) has not given any directions to the Assessing Officer to verify the claim of expenses and then allow depreciation there on. Moreover, the assessee company itself has agreed for allowability of this expenses @ 10 %.

14.2 Under these circumstances, for the reasons stated supra the Hon'ble Bench may kindly allow the appeal filed by the Department, by setting aside the order passed by the Ld.CIT(A) on this issue, and direct the Assessing Officer to verify the relevant expenses and allow depreciation there on accordingly.

15.1 We have heard the rival contentions perused material available on record and gone through the orders of lower authorities. The AO has restricted the depreciation to 10%, thereby the balance amount of Rs.6,81,38,165/- has been added to the income, for the reason that the temporary structure is also an asset and has been included in the block of asset of the assessee. We note that the Ld.CIT(A) in his order for the assessment year 2010-11 has set aside the issue to the AO by taking into account the nature of the expenses incurred and the fact that they are liable to be demolished at the end of the lease period, they are considered eligible for depreciation at 100% as "Temporary structure" and directed the AO to verify the expenses claimed and to grant depreciation accordingly. However, in the instant case, the ld.CIT(A) has directed the AO to allow depreciation @ 100% on ‘temporary structures’ by following the Ld.CIT(A) order for the A.Y. 2010-11. Therefore, in the present facts and circumstances of the case we do not agree with the Ld.CIT(A)’s direction to allow the depreciation @ 100%. Thus, we direct the AO to verify the expenses claimed by the assessee and to grant depreciation accordingly.

2835&2836/Chny/2024 16. In the result the appeal of the revenue is allowed for statistical purposes.

17.Revenue’s Appeal in - AY 2014-15 The Revenue has raised the following grounds:- i.The order of the learned CITA) is contrary to the facts and circumstances of the case. ii.The Ld. CIT(A) has failed to appreciate the fact that as per the agreements entered with the SPV, the transaction is the absolute sale transaction, and all the significant risks and rewards of the assets is transferred to the buyer. Therefore, once the debt assets are transferred there is no outstanding amount receivable by the assessee and hence the assessee has no right to receive interest. iii. The Ld. CIT(A) has failed to consider the fact that since the assessee has no right to receive the interest, the question of interest income accruing over the tenure of the loan does not arise and the assessee can offer the income only in the year in which the income accrues. iv. The Ld. CITA) has failed to consider the fact that once the income had accrued, the incident of taxation cannot be postponed to the future year while making entries in the books of accounts i.e., if the year of accrual of income is identified then income has to be assessed in the year of accrual and the same cannot be deferred by accounting entries. v. The Ld. CIT(A) has failed to note that the assessee was following mercantile system of accounting and once the assessee has sold the loan portfolio, it has no right to receive the interest from the end borrower and hence the actual payment received from the end borrower does not matter i.e., once the loan portfolio is sold, there is no outstanding loan in the books of the assessee and the entire loan is de recognised and transferred to the books of special purpose vehicle. vi. The Ld. CIT(A) has erred in law in not considering the fact that the AO had correctly arrived at the actual interest accrued from EIS to the assessee, during the AY 2014-15, the year of absolute sale of receivables based on the well-reasoned discount factor of 10. 7% to determine the 2835&2836/Chny/2024 present value of the future earnings which was arrived at based on the working given by the assessee. vii. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CITA) may be set aside and that of the Assessing Officer restored.

17.1 The sole ground of appeal raised by the Revenue is deleting the addition of Rs.97,83,57,602/- on account of accrued income towards excess interest spread (EIS). During the assessment proceedings, the AO noted that for the assessment year 2014-15, the assessee offered Rs.121.48 crores towards “interest spread on assignment / securitisation” which was reflected in Note

17. (Revenue from Operations) attached to P & L Account for the financial year 2013-14. The AO also noted that Rs.228.57 crore was shown as “remittances payable-derecognised assets” under the head Other Current Liabilities in Note

8. The assessee submitted during the assessment proceedings that the detailed note on the nature of transactions and the method of recognizing the revenue from the same stated that the transaction of sale of derecognized assets was basically securitization transaction for which it had entered into securitization agreement with various stake holders. Securitisation was a process of raising funds form the business by which a single performing asset or a pool of performing assets were 2835&2836/Chny/2024 sold to a Special Purpose Vehicle (SPV) and transferred from the balance sheet of the originator to the SPV in return of an immediate cash payment and in turn, the SPV sells the security interests representing claims on incoming cash flows from the asset or pool of assets to third party investors by issuance of pass through certificates. In support of that the assessee submitted copy of the agreement of SPV to the AO along with the deed of assignment of receivables in the process of securitization entered. After considering the submissions made by the assessee, the AO was not convinced and made addition by recomputing the accrued income for the assessment year 2014-15 towards the Excess Interest Spread (EIS) and made addition of Rs.97,83,67,802/-. Aggrieved, the assessee preferred an appeal before the Ld.CIT(A).

18. Before the Ld.CIT(A), the assessee filed a detailed note on the nature of transaction and the complete details of documents submitted before the AO was furnished. Further the assessee stated that the earnings from EIS due to the difference between the interest amounts on the loans and the yield payable to the holders of the PTC (Pass Through Certificates). The receivables and all other amounts collected by the assessee from the operators as well as the amounts drawn from the credit enhancement are deposited 2835&2836/Chny/2024 in the ‘collection and pay out account’ operated by the trust and payment from the account is made by the trust as per ‘Waterfall Mechanism’. Thus, EIS is residual amount left after settlement of various other dues and payables. Further the interest spread from times to future yeas and its accrual and receipt is contingent upon certain conditions which cannot be estimated on the date of agreement such as default made by default operators, waterfall mechanism, etc. Therefore, the assessee does not have any right to receive the said monthly interest on or before the specific date as per the repayment schedule. Accordingly, such EIS income is offered to tax by assessee on accrual basis since the interest spread pertains to future years and its accrual and receipt is contingent upon certain conditions which cannot be reasonably estimated on the date of agreement. The assessee also submitted that the treatment of EIS is in line with the prudential norms prescribed by RBI and the principles of prudence. Thus, EIS income should be taxed on accrual basis and not on upfront basis.

18.1 The assessee relied on the decision of the Chennai Bench of the Tribunal in its own case for the assessment year 2016-17 in dated 08.06.2022, wherein the very same issue had come up for consideration and after discussing the entire facts 2835&2836/Chny/2024 decided in favour of assessee. After considering the submissions and on perusal of the decision of the Chennai Bench of the Tribunal for the assessment year 2016-17 supra, the Ld.CIT(A)-NFAC deleted the conditions made on account of EIS by allowing the appeal of the assessee by passing an order dated 14.08.2024 by holding as under:- 7. find that the addition on account of excess interest spread was also made in the AY 2016-17 under identical facts. The matter travelled to the Hon'ble ITAT Chennai 'A' Bench, Chennai. While deciding the assessee's appeal in AY 2016-17, the Hon'ble ITAT Chennai 'A'Bench vide their order dated 08-06-2022 decided the issue in favour of the assessee. For the sake of clarity, the relevant para nos. 6 to 9 of the Hon'ble ITAT's order dated 08-06-2022 are reproduced as under:-

"Our findings and Adjudication 6. The undisputed facts that emerge are that the assessee has transferred certain pool of outstanding debts owned by it by way of absolute sale to SPV by receiving lump-sum purchase consideration which is equal to the book value of the pool of debts transferred by the assessee. The SPV funds the deal by issuing pass-through certificates to the beneficiaries which get return of approx. 7%. Thus, the assessee gets immediate recovery of the principal outstanding. These debts would generate interest income in the range of approx. 14% over their respective tenure. As per the terms of the agreement, the assessee would be entitled for excess interest spread (EIS) as generated from the debts over their tenure which is in the range of 4 years to 16 years. The assessee would collect the debts on due date and deposit the receivables in a separate 'Collection and Payout Account'. The surplus generated by the SPV (which would be in range of 7% approx.) in this account would be distributed as per unique mechanism which is known as Waterfall mechanism' The priority of payment was as under: - (i)Any statutory or regulatory dues; 2835&2836/Chny/2024 (ii) Any expenses incurred by the Servicer or alternate servicer or Trustee or Trust or any fees payable to the Rating Agency, Trustee, Due Diligence Auditor, Legal Counsel and/or the Designated Bank; (iii) Payment of arrears in the Investor Payouts (iv)Yield to the Investors (v)Principal portion of the Scheduled Payouts and the Prepayment Amounts, if any, to the Investors: (v) Reinstatement of the Credit Enhancement; (vi) Residual amount, if any, shall be paid to the Seller on a monthly basis towards Excess Interest Spread (EIS).

In other words, what the assessee would actually get over the tenure of the debts is uncertain. The assessee is entitled for residual surplus only after series of payment as aforesaid. The EIS arises to the appellant due to the difference between the interest received on Loans and the Yield payable to the beneficiaries. The proportionate component of EIS becomes due to the appellant only on the respective due date of the installment subject to the collection made from the borrower. The assessee offers the income over the tenure of the debts as and when the same is crystallized and accrues to the assessee. The assessee is following consistent method of accounting to recognize the revenue in this manner. Following this consistent method, the income on these transactions has been offered in subsequent years also. The income thus offered by the assessee is on the reasoning that interest spread pertains to future years and its accrual and receipt is contingent upon certain conditions which cannot be estimated on the date of agreement. The said treatment of EIS is stated to be in line with the prudential norms prescribed by RBI and the principles of prudence. Further, similar practice is followed by the industry. Notably, if income is utilized as per the agreed waterfall mechanism, there would be situations where the residual EIS paid to assessee could be 'nil' or significantly lesser or even higher (if shortfalls in previous months are collected in a subsequent month at one go) than the amounts which are set out in the schedule, wherein scheduled amounts are based on ideal cash flows. Further, the agreement provides that the schedule of investor payouts forming part of the agreement may be revised from time to time in accordance with the Transaction 2835&2836/Chny/2024 Documents whether on account of pre-payments, part payments or otherwise. It also provides that the payout schedule is indicative in nature and may undergo alterations as per the provisions of the Deed. Accordingly, the time at which the residual EIS as receivable by the assessee would become determinate only on the day when the Trust is aware of the amounts which are credited in the Collection and Payout Account' and the quantum of monies which have to be utilized for meeting any statutory dues of the Trust or the expenses due and payable by the Trust including fees and interest payable to the persons making available the External Credit Enhancement and also the quantum of monies which are required for meeting the overdue 'Pass Through certificate' (PTC) Yield in respect of any shortfalls in Investor payouts in previous months. All these amounts could only be determined on each payout date.

7. The case of the revenue is that the debts so transferred by the assessee are absolute sale and assignment of the assets on an outright basis from the seller to trust, carrying good clear and marketable title. They cease to form part of the properties or assets of the assessee and the trustees would not have any recourse against the assessee in respect of the assets transferred for whatever reasons. The assessee was not to make good any losses suffered by the trustee due to non-receipt of receivables other than to the extent of the credit enhancement made available. Therefore, the income so arising on these transactions would have to be offered to tax in this year only. The transaction of sale is Complete and the revenue is crystallized in the year of sale since the significant risks and rewards of ownership are transferred to the buyer. As per Accounting Standard-9 (AS-9), where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, revenue recognition is postponed to the extent of uncertainty in volved. However, where there is no uncertainty as to ultimate collection, revenue is recognized at the time of sale even though payments are made by installments. When the uncertainty related to collectability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. We 2835&2836/Chny/2024 find that it is undisputed fact that the debts have been transferred by way of absolute sale and there is no recourse to the assessee in case of default by the borrowers. There is no quarrel on this point. The only point under dispute is recognition of revenue under such an arrangement. We are of the considered opinion that though the sale may be unconditional but the revenue under the arrangement may arise at different point of time keeping in view the terms of the arrangement. In the present case, the receipt of EIS is uncertain and the same may or may not accrue to the assessee over the terms of the loan. The same has already been noted by us in preceding paras 4.8 & 4.9 of the order. The assessee, following a consistent method of accounting, has offered EIS to tax on proportionate basis as and when they have accrued over the tenure of loan and the same has been accepted by revenue. The said methodology is in accordance with the RBI norms as well as AS-9 which provide that in case the revenue could not be measured with reasonable certainty, a suitable provision thereof should be made. However, in the present case, we find that EIS may not have even accrued to the assessee in future years and thus, no such provision could be made in this year. Therefore, keeping in view the principle of prudence as well as rule of consistency, no fault could be found with the accounting methodology adopted by the assessee to recognize the revenue under securitization transactions.

1 The last aspect of the matter is that Ld. AO has arrived at estimated income under Such arrangement by applying the present value factor on future estimated earnings, the receipt of which was uncertain. We concur with the submissions of Ld. AR that such a methodology has not been recognized under Income Tax Act and only the real income has to be assessed to tax.

9. Considering entirety of facts and circumstances, we direct Ld. AO to accept the accounting methodology of the assessee and delete the impugned addition. The corresponding ground thus raised stand allowed."

Since facts of the present assessment year are exactly similar and identical to that of the appellant's case for the AY 2016-17, therefore respectfully following the above decision of the Hon'ble Chennai ITAT 'A' 2835&2836/Chny/2024 Bench, it is held that the AO was not justified in making addition of Rs.97,83,57,602/- on account of accrued income towards excess interest spread, the AO is directed to delete the same. The ground no. 1 of appeal raised by the appellant regarding this issue is allowed.”

Aggrieved, the Revenue is in appeal before us.

7. The case of the revenue is that the debts so transferred by the assessee are absolute sale and assignment of the assets on an outright basis from the seller to trust, carrying good clear and marketable title. They cease to form part of the properties or assets of the assessee and the trustees would not have any recourse against the assessee in respect of the assets transferred for whatever reasons. The assessee was not to make good any losses suffered by the trustee due to nonreceipt of receivables other than to the extent of the credit enhancementmade available. Therefore, the income so arising on these transactions would have to be offered to tax in this year only. The transaction of sale is complete and the revenue is crystallized in the year of sale since the significant risks and rewards of ownership are transferred to the buyer. As per Accounting Standard-9 (AS-9), where the ability to assess the ultimate collection with reasonable certainty is lacking at the time of raising any claim, revenue recognition is postponed to the extent of uncertainty involved. However, where there is no uncertainty as to ultimate collection, revenue is recognized at the time of sale even though payments are made by installments. When the uncertainty related to collectability arises subsequent to the time of sale or the rendering of the service, it is more appropriate to make a separate provision to reflect the uncertainty rather than to adjust the amount of revenue originally recorded. We find that it is undisputed fact that the debts have been transferred by way of absolute sale and there is no recourse to the assessee in case of default by the borrowers. There is no quarrel on this point. The only point under dispute is recognition of revenue under such an arrangement. We are of the considered opinion that though the sale may be unconditional but the revenue under the arrangement may arise at different point of time keeping in view the terms of the arrangement. In the present case, the receipt of EIS is uncertain and the same may or may not accrue to the assessee over the terms of the loan. The same has already been noted by us in preceding paras 4.8 & 4.9 of the order. The assessee, following a consistent method of accounting, has offered EIS to tax on proportionate basis as and when they have accrued over the tenure of loan 2835&2836/Chny/2024 and the same has been accepted by revenue. The said methodology is in accordance with the RBI norms as well as AS-9which provide that in case the revenue could not be measured with reasonable certainty, a suitable provision thereof should be made. However, in the present case, we find that EIS may not have even accrued to the assessee in future years and thus, no such provision could be made in this year. Therefore, keeping in view the principle of prudence as well as rule of consistency, no fault could be found with the accounting methodology adopted by the assessee to recognize the revenue under securitization transactions.

8. The last aspect of the matter is that Ld. AO has arrived at estimated income under such arrangement by applying the present value factor on future estimated earnings, the receipt of which was uncertain. We concur with the submissions of Ld. AR that such a methodology has not been recognized under Income Tax Act and only the real income has to be assessed to tax.

In the present facts and circumstances of the case, identical issue has already been decided in favour of assessee for the assessment year 2016-17 by this Tribunal and by respectfully following the decision cited supra, we do not find any infirmity in the order of the CIT(A) in deleting the addition made on account of EIS and hence, we dismiss the grounds of appeal raised by the Revenue. Accordingly, the appeal filed by the Revenue is dismissed. for A.Y. 2015-16 2835&2836/Chny/2024 The Revenue has raised the following grounds:- i. The order of the learned CIT(A) is contrary to the facts and circumstances of the case. ii. The Ld. CIT(A) has failed to appreciate the fact that as per the agreements entered with the SPV, the transaction is the absolute sale transaction and all the significant risks and rewards of the assets is transferred to the buyer. Therefore, once the debt assets are transferred-there is no outstanding amount receivable by the assessee and hence assessee has nо right to receive interest. iii. The Ld. CIT(A) has failed to consider the fact that since the assessee has no right to receive the interest, the question of interest income accruing over the tenure of the loan does notarise and the assessee can offer the income only in the year in which the income accrues. iii. The Ld. CIT(A) has failed to consider the fact that once the income had accrued, the incident of taxation cannot be postponed to the future year while making entries in the books of accounts i.e., if the year of accrual of income is identified then income has to be assessed in the year of accrual and the same cannot be deferred by accounting entries. v. The Ld. CIT(A) has failed to note that the assessee was following mercantile system of accounting and once the assessee has sold the loan portfolio, it has no right to receive the interest from the end borrower and hence the actual payment received from the end borrower does not matter i.e., once the loan portfolio is sold, there is no outstanding loan in the books of the assessee and the entire loan is derecognized and transferred to the books of special purpose vehicle. vi. The Ld. CIT(A) has erred in law in not considering the fact that the AO had correctly arrived at the actual interest accrued from EIS to the assessee, during the AY 2015-16, the year of absolute sale of receivables based on the well-reasoned discount factor of 10.7% to determine the present value of the future earnings which was arrived at based on the working given by the assessee. vii. The Ld. CIT(A) has failed to appreciate the fact that on the issue of disallowance of claim of 100% depreciation on improvements made to leaseholds, for the relied upon year of AY 2010-11, the AO was directed to verify the expenses claimed and then grant depreciation accordingly. The AO while giving effect to the order of the CIT(A) for the AY 2010-11 has sustained the additions as the assessee failed to produce the requisite bills/ vouchers. viii. The Ld. CIT(A) has erred in deleting the entire addition of excess depreciation(100%) without setting aside the issue to the file of the AO for verification.

2835&2836/Chny/2024 ix. ix. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned CIT(A) may be set aside and that of the Assessing Officer restored.

Order pronounced in the open court on 28th April, 2025 at Chennai.