TAQA NEYVELI POWER COMPANY PRIVATE LIMITED,CHENNAI vs. PCIT, , CHENNAI-3

Fair value gain on financial instruments at fair value through profit and loss • As mentioned above, the Company has adopted Ind AS for preparation and presentation of financial statements. Under the Ind AS 109 accounting methodology, investments in mutual funds is considered as 'Financial Asset' and the same is required to be presented at fair value in the financial statements with the difference adjusted to P&L. • Accordingly, notional difference arising on fair valuation amounting to INR 5,419,955 credited to the P&L has been excluded for computing the taxable income of the Company under the normal provisions of the Act, • The Company submits that the aforesaid items of adjustments is mandated for per presentation and disclosure requirement of the applicable Ind AS and has no bearing for computing the total income. The Company submits that the same treatment as has being given for tax purposes before adoption of Ind AS has been continued to be given even post Ind AS. We request your good-self to take the above on record. Should you have any reservations, or require any further explanations/clarifications, kindly provide us with a further opportunity to present our case in person or through our authorized representatives and make submissions. Thanking you, 5.5 It is discernible that the assessee, in a very elaborate manner, replied to the queries raised by Ld. AO in this regard and explained the factors leading to change in accounting treatment to recognize the revenue in the books of accounts. It could also be gathered that Ld. AO accepted the returned income in order dated 19.12.2018 and chose not to disturb the same. Revisional Proceedings 6.1 Subsequently, upon perusal of case records, Ld. Pr. CIT held an opinion that the order would require revision and accordingly, issued a show cause notice on 19.02.2021, the substantive portion of which read as under: - 2. On perusal of records it is seen that “M/s Taqa Nayveli Power Company Pvt. Ltd. had filed an application on 04.04.2019 raising the following questions before the Hon’ble AAR (IT), Mumbai: 1) Whether the contractual revenue attributed to the Operating Financial Asset ('OFA') and the notional unrealized difference being adjusted to the Statement of Profit and Loss ('P&L') on account of retranslation of its closing balance to the Applicant's functional currency for reporting purposes would not be required to be considered for computation of the book profits chargeable to tax under the provisions of section 115JB of the IT Act? 2) Whether the contractual revenue attributed to the ('OFA') and the notional unrealized retranslation difference being adjusted to the Statement of Profit and Loss ('P&L') on account of reporting of its closing balance to theApplicant's functional currency for reporting purposes would be governed by the provisions of the IT Act? 3. Subsequently, the Hon'ble AAR(IT), Mumbai vide order dated 19/11/2019 had rejected the application filed by the assessee company as not maintainable. In this context, it is seen from the assessment records that the contractual revenue attributed to the 'OFA' and the notional retranslation difference were reduced from the 'P&L' but considered for computing book profits under MAT by the assessee company for A.Ys. 2016-17 as under: - A.Y. Adjustments reduced from P&L Amount reduced from P&L (in Rs.)

It is noticed that the during the scrutiny proceedings for A.Y.2016-17, the accounting treatment of difference on account of fair value measurement of the OFA and Fair value gain on financial instruments at fair value through profit and loss had been examined. This aspect of reducing the difference on account of fair value measurement of the OFA and fair value gain on financial instruments at fair value through profit and loss while computing the company's taxable income under the normal provisions of the Act but offering to tax the difference on account of fair value measurement at fair value through profit and loss under MAT computation, had been accepted by the Assessing Officer in the assessment order passed for the A.Y.2016-17 on 19/12/2018.

In light of the Hon'ble AAR(IT), Mumbai order dated 19/11/2019 rejecting the application filed by the assessee company as not maintainable, the difference on account of fair value measurement of the OFA and Fair value gain on financial instruments at fair value through profit and loss is not to be deducted while computing the company's taxable income under the normal provisions of the Act and the same is required to be brought to tax for A.Y.2016-17 u/s.43AA of the Income Tax Act. 6. In view of the above, the Assessment Order passed u/s. 143(3) of the Income Tax Act 1961 on 19.12.2018 appears to be erroneous in so far as it is prejudicial to the interests of revenue.

AAR is not an appellate forum. The purpose of the AAR is to have certainty about liability to pay tax and to avoid further litigation in relation to a transaction which has been undertaken or is proposed to be undertaken. The Authority is also barred from entertaining any question which is pending before the Income Tax Authority or Appellate Tribunal or any Court. In other words, the contentious or doubtful issue or question should be raised in advance before the AAR and not when it has already pending before the above-mentioned authorities. Much less the issue is already deliberated, discussed and concluded before the above referred authorities. In the instant case, identical questions were before Assessing Officer where the Company participated and made detailed submissions and thereafter the matter was concluded.So, the Company had a fair chance to put forth his points before the Assessing Officer. " • Given the above, your goodself would appreciate that the Hon'ble AAR has rejected the application filed by the Company as the question raised has been already dealt in the assessment proceedings and that the tax department has accepted the stand adopted by the Company. In other words, the Hon'ble AAR has not provided any ruling whether the treatment adopted by the Company is correct or not. The Hon'ble AAR has categorically held that given that the issue has already been deliberated, discussed and concluded before the tax authorities it may not interfere on the same. • In this regard, your goodself, by placing reliance on the order passed by the AAR rejecting the application of the Company had issued the subject notice asking the Assessee to provide explanations why the transaction under consideration should not be taxed under section 43AA of the Act. • The Company in this connection objects to your goodself’s action of initiating revisionary proceedings based on the submissions on legal aspects as well on merits in the ensuing paragraphs In the said background, the assessee assailed the revision of the order on the ground that once Assessing Officer exercising his quasi-judicial function has completed the assessment proceedings, the power of revision u/s 263 is to be used with utmost precaution after examining the issues from all angles subject to the satisfaction of the primary twin conditions that the order was erroneous as well as prejudicial to the interest of the revenue. In the present case, Ld. AO had called for requisite details during the course of assessment proceedings which were duly responded to by the assessee and accepted by Ld. AO with due application of mind. It could not be said that the assessment was framed without making enquiries or verification which should have been made. In fact, it was the findings of Hon’ble ARR that the issue had 12 - already been deliberated, discussed and concluded before the tax authorities. Accordingly, the revision was not justified int terms of variousjudicial pronouncements. Further, Non-mentioning of issue under consideration in the assessment order cannot lead to a conclusion that Ld. AO had not applied his mind as held by Hon’ble Bombay High court in CIT V/s Fine Jewellery India Ltd. (372 ITR 303) as well as Hon’ble Delhi High Court in CIT V/s Vikas Polymers (341 ITR 537) wherein it was held that once inquiry was made, a mere non-discussion or non- mention thereof in the assessment order cannot lead to an assumption that AO did not apply his mind or that he has not made any enquiry on the subject matter. Similarwas stated to the be the decision of Hon’ble Bombay High Court in CIT V/s Gabriel India Ltd. (71 Taxman 585) which held that once ITO had exercised the quasi-judicial power vested in him in accordance with law and arrived at a conclusion and such a conclusion cannot be termed to be erroneous simply because the Commissioner does not feel satisfied with the conclusion. Similarother decisions were quoted in support of the arguments. On the basisof above, the assessee assailed the validity of revisions proceedings. 6.3 At the same time, the assessee assailed the proposed adjustments on merits which is similar to its reply dated 14.12.2018 as filed before Ld. AO during the course of regular assessment proceedings. 6.4 The Ld. Pr. CIT, after considering assessee’s reply, concurred that the provisions of Sec.43AA as introduced w.e.f. 01.04.2017 would be applicable only from AY 2017-18 and therefore, the reference to Sec.43AA in the show-cause notice is treated as withdrawn. The relevant observations were as under: - 13 - 6.1 Before going into the merits of the issue, there are certain technical aspects related to mention of Sec.43AA of the Income Tax Act in the show cause notice. On perusal, it is seen that the provisions of Section 43AA of the Income tax Act, 1961 came into statute only from 01.04.2017 applicable from the A.Y.2017-18 after ICDS notified by the CBDT on forex transactions come into effect from AY 2017-18. Since the assessment year under consideration is AY 2016-17, the reference to section 43AA in the show cause notice is treated as withdrawn and the main issue is considered independently on the basis of material available on record. 6.5 Proceeding further, Ld. CIT(A) noted that the assessee had redrawn its Profit & Loss Account as per Ind-AS and recognized certain income in the financial statements. From the terms of Power Purchase Agreement (PPA), it was clear that the assessee was entitled to calculate fixed capacity charges comprising value of approved capital cost, RoE etc. in terms of USD to safeguard its investment and charge the purchaser i.e., TANGEDCO accordingly, Thus, it is clear that the component of forex gain is related to fixed cost (which is taken into account while billing) and therefore it is primarily a revenue item. Accordingly, the assessee has considered the same as revenue in its Profit & Loss Account. Further, the assessee was entitled for return of 16% calculated in USD and therefore, the bills raised in INR would not impact its revenue which is recognized on the basis of USD as per Power Purchase Agreement (PPA). 6.6 Further the assessee was charging depreciation on the power plant as per AS-6 but switched over to revised AS-10 as AS-6 was withdrawn by the ICAI. Therefore, the plea that derecognition of asset would not have effect on income under normal provisions would have no relevance. The issue under consideration was recognition of revenue and not the claim of depreciation. The assessee’s plea that the amount recognized as forex gain was nothing but notional amount, it was to be noted that the assessee was to follow mercantile system of accounting to 14 - recognize the revenue and it was required to follow accounting standards to prepare the financial statements. Accordingly, the income so arrived would be income as per Sec.28(i) of the Act subject to computations as per Sec.30 to 43D. The assessee failed to state under which of the provisions of Sec.30 to 43D the amount recognized as forex gain would be deductible. Therefore, prima-facie the claim of said deduction under the normal provisions was not as per law which Ld. AO failed to take note of in the assessment order. The decision of Hon’ble Supreme Court in CIT V/s Woodward Governor Private Ltd. (312 ITR 254) wherein it was held that any difference, loss or gain, arising on conversion of the liability on closing rate should be recognized in the Profit & Loss Account for the reporting period. Therefore, the revenue recognized by the assessee could not be deducted under normal provisions. The submission that the amount was notional was not supported by any law. Accordingly, no such deduction could be claimed by the assessee while computing the normal income. 6.7 Regarding assessee’s objections to revisional proceedings, the Ld. Pr. CIT held that when the order of Hon’ble AAR came to notice, the relevant assessment records were perused and it was felt that the order was erroneous and prejudicial to the interest of the revenue and the entire issue was considered on merits as per the details available on record at the time of assessment. Regarding submissions that Ld. AO had already considered the issue, it was held that there was failure on the part of Ld. AO to consider the decision of Hon’ble Supreme Court and therefore, the order was erroneous and prejudicial to the interest of the revenue as per Clause (d) of Explanation-2 to sub-section (1) of Section 263. The case also fall under clause (a) of the aforesaid Explanation-2 since the order was passed without making inquiries or verification which is required to be made. 6.8 The plea that the assessee paid taxes under MAT and therefore, there would be no tax impact was negated on the ground that the assessee would be able to carry forward the MAT credit for set-off in subsequent years. 6.9 Finally, Ld. AO was directed to redo the assessment with following directions: - 8. In the light of the finding that the order of assessment is erroneous so far as it is prejudicial to the interest of revenue at paragraphs 6 & 7 above, the order of assessment dated 19.12.2018 is hereby set-aside to the file of the Assessing Officer for the limited purpose of examining the issue of the foreign exchange gain on OFA as mentioned in para 3 of the show cause notice and the deduction claimed in the computation of income under the head, “income from Business or Profession”. The assessing officer is directed to pass appropriate order after giving reasonable opportunity to the assessee. The AO is further directed to look into the claim of the assessee that in the subsequent years it has reversed the forex losses.

However, we find that the new accounting standard as adopted by the assessee during the year deal with the revenue recognition accruing to assessee under such service contracts. The assessee was mandated by law to follow such accounting treatment. Accordingly, the assessee derecognized the entire items which were held in the nature of fixed assets and recognized the ‘operating financial assets’ which were disclosed as ‘current assets’ and the resultant gains were credited to the Profit & Loss Account. In other words, there was paradigm shift in the accounting treatment of revenue recognition from such projects. Therefore, to say that the aforesaid adjustment was mere accounting treatment and would not impact the taxable income under the provisions of the Act would not be a correct proposition since the revenue were to be recognized over the useful life of a project in a particular manner as mandated by the new accounting standard. As per the new accounting treatment, the services were to be recognized as financial asset at its fair value and the project was to be treated in the nature of Service Concession Agreements. Upon perusal of assessment order and queries raised therein, we find that this aspect of revenue recognition was never touched upon by Ld. AO. In fact, except for raising an initial enquiry, no further enquiries were made by Ld. AO to understand the impact of new 17 - accounting treatment on revenue recognition and the assessee’s explanation was accepted as such. The assessee may have responded elaborately to such query, but the same should have been subjected to further enquiries since it would significantly impact the revenue recognition for the assessee under the contracts. We find that this element of enquiry is missing in the present case. Upon perusal of assessee’s replies as made during the course of assessment proceedings, we arrive at a conclusion that though the initial query was raised by the Ld. AO and elaborate replies were furnished by the assessee, however, the element of application of mind by Ld. AO, on the issue, is missing.

We are of the considered opinion that as per the provisions of Section 263, the appropriate revisional authority is vested with the supervisory powers of suo-moto revision of any order passed by Ld. AO. For the said purpose, the appropriate authority may call for and examine the record of any proceedings under the Act and may proceed to revise the same provided two conditions are satisfied-(i) the order of the 18 - assessing officer sought to be revised is erroneous; and (ii) it is prejudicial to the interest of the revenue. If one of the conditions is absent i.e. if the order of the Income-tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but it is prejudicial to the revenue - recourse cannot be had to Section 263 of the Act as held by Hon’ble Supreme Court in Malabar Industrial Co. Ltd. V/s CIT [243 ITR 83 10/02/2000] & noted by Hon’ble Delhi High Court in CIT V/s Vikas Polymers [194 Taxman 57 16/08/2010]. After going through the facts of the present case, we find that both these twin conditions were duly satisfied since non-consideration of a pertinent issue with due application of mind would make the order erroneous and the same would prejudice the interest of the revenue. The case would fall under the category of lack of requisite enquiry on the part of Ld. AO.

Proceeding further, we find that a n Explanation-2 has been inserted by Finance Act 2015 in Section 263 with effect from 01/06/2015 to declare that order shall be deemed to be erroneous in so far as it is prejudicial to the interest of the revenue, if in the opinion of appropriate authority-(a) the order was passed without making inquiries or verifications which should have been made; (b) the order is passed allowing any relief without inquiring into the claim; (c) the order is not in accordance with any direction or instructions etc. issued by the Board u/s 119; or (d) the order was not in accordance with binding judicial precedent. In the impugned order, Ld. Pr. CIT has rightly pointed out that the case would fall under Clause (a) as well as under Clause (d) of this explanation and we concur with these findings of Ld. Pr. CIT.

The Hon’ble Supreme Court in CIT V/s Amitabh Bachchan (69 Taxmann.com 170 11/05/2016) held that the power of appeal and 19 - revision is contained in Chapter XX of the Act which includes section 263 that confers suo-motu power of revision in the Commissioner. The different shades of power conferred on different authorities under the Act has to be exercised within the areas specifically delineated by the Act and the exercise of power under one provision cannot trench upon the powers available under another provision of the Act. In this regard, it must be specifically noticed that against an order of assessment, so far as the revenue is concerned, the power conferred under the Act is to reopen the concluded assessment under section 147 and/or to revise the assessment order under section 263. The scope of the power/jurisdiction under the different provisions of the Act would naturally be different. The power and jurisdiction of the revenue to deal with a concluded assessment, therefore, must be understood in the context of the provisions of the relevant sections. While doing so, it must also be borne in mind that the legislature had not vested in the revenue any specific power to question an order of assessment by means of an appeal. Regarding applicability of Section 263, what has to be seen is that a satisfaction that an order passed by the Authority under the Act is erroneous and prejudicial to the interest of the revenue is the basic pre- condition for exercise of jurisdiction under section 263. Both are twin conditions that have to be conjointly present. Once such satisfaction is reached, jurisdiction to exercise the power would be available subject to observance of the principles of natural justice which is implicit in the requirement cast by the section to give the assessee an opportunity of being heard. Further,there could be no doubt that so long as the view taken by the Assessing Officer is a possible view, the same ought not to be interfered with by the Commissioner under Section 263 merely on the 20 - ground that there is another possible view of the matter. Permitting exercise of revisional power in a situation where two views are possible would really amount to conferring some kind of an appellate power in the revisional authority. This is a course of action that must be desisted from. However, in the present case, we find that no such view has been formed by Ld. AO during the course of regular assessment proceedings. Regarding show-cause notice, Hon’ble Court further held that the requirement is that a notice proposing the revisional exercise is to be given to the assessee indicating therein broadly or even specifically the grounds on which the exercise is felt necessary. But there is nothing in the Section 263 to raise the said notice to the status of a mandatory show-cause notice affecting the initiation of the exercise in the absence thereof or to require the Commissioner to confine himself to the terms of the notice and foreclosing consideration of any other issue or question of fact. This is not the purport of Section 263. Of course, there can be no dispute that while the Commissioner is free to exercise his jurisdiction on consideration of all relevant facts, a full opportunity to controvert the same and to explain the circumstances surrounding such facts, as may be considered relevant by the assessee, must be afforded to him by the Commissioner prior to the finalization of the decision. We find that this requirement has duly been fulfilled by the revisional authority in the present case and adequate opportunity has been granted to the assessee to state its case.

The decision of Hon’ble High Court of Madras in Shri Ravi Kannan V/s ACIT (TCA No.316 of 2018 dated 29.07.2020), as referred to by Ld. AR, is a case wherein it was a finding by Hon’ble Court that the notice was a vague statement. The PCIT agrees that the verifications were 21 - done, however, it was stated that proper verification was not done. In such a case, PCIT was bound to disclose in the show-cause notice as to why he considers the verification to be not proper. However, the case before us falls under the category wherein Ld. AO has not applied his mind to the issue. Further, the notice clearly states the reasons as to why the order is being subjected to revision u/s 263. In the replies to show-cause notice, it was nowhere the case of the assessee that the notice was vague or the same did not disclose the reasons for revision. The case law of CIT V/s PVP Ventures Ltd. (23 Taxmann.com 286) is factually distinguishable since in para-26 of the decision, it is a fact that there was no proper initiation of proceedings u/s 263 and there was no ground for shifting in stand by the Commissioner which were different from the one which prompted him to initiate proceedings u/s 263. Therefore, this case law is also distinguishable. The decision of Mumbai Tribunal in M/s Tata Motors Ltd. V/s DCIT (ITA No.3425/Mum/2019 dated 05.03.2021)is a case wherein the view formed by Ld. AO was one of the possible views while framing the assessment based on the laws prevailing at that relevant point of time (para 3.13) and therefore, revision was held to be unjustified. This is not the case here.

Finally, considering the entirety of facts and circumstances of the case, the revisional jurisdiction u/s 263 as exercised by Ld. Pr. CIT could not be faulted with and the same could not be held to be bad-in-law as urged by Ld. AR. We order so. However, our aforesaid view would not be construed as any expression on the merits of the case, in any manner, which is left open for consideration of lower authorities. In this appeal, we have only examined the validity of revisional proceedings.

The appeal stands dismissed.