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Income Tax Appellate Tribunal, ‘’ D’’ BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED & SHRI SIDDHARATHA NAUTIYAL
आदेश/O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned two appeals have been filed at the instance of the Revenue against the separate orders of the Learned Commissioner of Income Tax (Appeals)- 1 Ahmedabad arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Years 2015-2016 & 2016-17.
-283/AHD/2020 A.Y. 2015-16 & 2016-17 2 First, we take up Revenue for AY 2015-16
The Revenue has raised the following grounds of appeal:
1. The CIT(A) has erred in deleting the disallowance of swap contract loss of Rs.91,91,13,166/- 2. It is, therefore, prayed that the order of the Ld.CIT(A) may be set aside and that of the Assessing Officer be restored.
3. The only issue raised by the Revenue is that the learned CIT (A) erred in deleting the disallowance of swap contract loss made by the AO for Rs. 91,91,13,146/- only.
The facts in brief are that the assessee is a private company and engaged in the business of energy and power generation. The assessee during the year under consideration to refinance its project availed external commercial borrowing at the rate of LIBOR + 4.4%. The assessee to hedge itself from the fluctuation interest rate entered into derivative contract in the nature of interest rate swap with Standard Chartered Bank on which assessee incurred loss of Rs. 91.91 crores. It was submitted by the assessee that out of said loss, an amount of loss of Rs. 40.62 crores represent realized loss whereas the loss of Rs. 51.30 crore represent mark to market loss as on balance sheet date. The assessee further submitted that it recognized mark to market loss on outstanding interest swap agreement as on balance sheet date as per the principles of prudence and by following the accounting standard -1 being disclosure of accounting policies issued by the ICAI. The swap contract was entered into with view to reduce the interest cost of ECB. Therefore, the loss incurred on the same is business expenses/loss allowable under section 37 of the Act. -283/AHD/2020 A.Y. 2015-16 & 2016-17 3
However, the AO held that mark to market loss on the derivative instrument held by the assessee as on balance sheet is not real but a notional loss for the reason that there was no actual transaction carried out by the assessee. As such, it is a way of disclosure of the market value of the financial instrument as on the date of balance sheet to show true and transparent picture of the financial position to the shareholders and other stakeholders. The AO after making reference to the CBDT Instruction No. 03/2010, disallowed mark to market loss on interest swap agreement of Rs 91,91,13,146/- by holding that notional loss cannot be allowed as deduction while calculating the income under the head business and profession.
Aggrieved assessee preferred an appeal before the learned CIT(A) who deleted the disallowance made by the AO by observing as under:
5.7 It is observed that facts for the year under consideration continued to remain ) same and disallowance of swap contract loss mainly pertains to ECB transactions which / was considered by my predecessor C1T(A) in his order referred supra. He has also considered CBDT instruction 3/2010 relied upon by AO and various decisions of ITATs and High court including jurisdictional ITAT and Hon'ble Gujarat High court decisions relied upon by appellant. During the course of appellate hearings, ARs of the appellant have referred to decision of Hon'ble Ahmedabad ITAT in one of its group entity being Adani Enterprise limited in ITAno. 1840, 3321 and 2305/Ahd/15 dated 12/02/2019 has decided similar issue in favour of assessee and held as under; "11. So far this grievance of the assessee is concerned, the relevant material facts are as follows. During the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has claimed deduction of Rs 1.96 crores in respect of derivales contracts. When the matter was probed further, it was found that "the said loss consists of Its 0.73 crores in respect of forex derivates contracts " which "is in the nature of mark to market loss in respect of forward contracts entered into by the assessee company in respect of trade obligations". The Assessing Officer, however, declined this deduction by observing that "these losses are notional losses and cannot be claimed against income of the year. 'Mark to market' is a concept under which financial instruments are valued at market rate so as to report their actual value on the reporting date. However, these losses are notional losses on account of position as on 31,3.2008". The Assessing Officer then, relying upon the CBDT instruction no. 3/2010 dated 23rd March 2010, disallowed the claim. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) simply relied upon the CBDT instructions and followed the same. The assessee is not satisfied and is in further appeal before us.
As learned representatives fairly agree, this issue is now covered, in favour of the assessee, by a coordinate bench decision in the case of Veer Gems Vs ACIT [(2017) 77 taxmann.com 127 (Ahmedabad - Trib.) wherein the coordinate bench inter alia, observed as follows:
-283/AHD/2020 A.Y. 2015-16 & 2016-17 4
18. We have heard rival submissions. Relevant findings perused. The assessee has admittedly made the impugned provision in view of difference in exchange rate as on the dale of booking of its forward contract vis-a-vis exchange rate prevailing as on 31.03.2008. It has fortified its claim in view of ABN Amro Bank's MTM certificate forming basis of the impugned provision. The Revenue fails to dispute that the assessee has followed mercantile system of accounting instead of cash system and it is accordingly supposed to account for all expenses/gains in the P&L account on the said basis. It thus emerges that assessee had sufficient reason lo treat (he impugned liability arising on account of foreign exchange rate difference so an to make the impugned provision as per the relevant accounting standard issued by the Institute of Chartered Accountants of India. We thus find no reason to restore the impugned disallowance.
On a similar note, bill with a little more detailed analysis, another coordinate bench of the Tribunal, in the case of Suzlon Energy Ltd Vs ACIT [(2017) 81 taxmann.190 (AM)], has observed as follows: "8. In the present cane also, the assessee is consistently following the mercantile method of accounting, the same accounting treatment for the foreign exchange losses and gains has been given by the assessee all along, the assessee is making entries in respect of such losses and gains, and the treatment is consistent with the Accounting Standards. As a matter of fact, the Assessing Officer has not even raised any issues with respect to the above His case is confined to the lass being notional in nature anil contrary to the CBDT guidelines. As for the CBDT instructions, it is only elementary Unit any instructions issued by the CBDT cannot bind the assessee even though the assessee is entitled to, and can legitimately ask for, any benefits granted to the assessee by such instructions or circulars. Nothing, therefore, tarns on the CBDT Instruction even if it is actually contrary to the claim of the assessee.
9. We have also noted that, as per the details filed by the assessee the foreign exchange contracts have been entered into for genuinely restricting bonafide risk exposure of the assessee in respect of its exports and imports transactions. These contracts cannot, therefore, be viewed on a standalone basis as speculative transaction.'). These transactions are integral purl of the business transactions and any loss or gains arising from these transactions, for the detailed reasons set out above, are deductible in computation of profits and gains of business. JO. In view of the above discussions, we uphold the action of the CIT (A) so far as this relief in respect of deleting the disallowance of Rs. 22,15,55,371 on account of loss, al the end of the year, on foreign exchange contracts. We confirm the same and decline to interfere in the matter. "
In view of these binding judicial precedents, with which we are in considered agreement, we uphold the plea of the assesee and direct the Assessing Officer to delete the impugned disallowance of Rs 73,00,000. The assessee gets the relief accordingly. " Considering these facts and relying upon finding given by my predecessor CIT(A) in appellant's own case, it is held as under: (i) SWAP loss disallowed by AO for Rs 91,91,13.146/-also includes realized loss of Rs 40,61,56,577 and such loss cannot be treated as notional loss hence CBDT instruction 3/2010 cannot be applied on such loss. The ARs of the appellant also -283/AHD/2020 A.Y. 2015-16 & 2016-17 5
referred to assessment order passed in case of appellant for AY 2016-17 wherein on identical fads, AO has already allowed realized interest SWAP loss of Rs 43.22 crore in assessment order passed n/s 143(3) of the Act on 22/12/2018. Similar disallowance way deleted by my predecessor C1T(A) at para 3.6 of his order referred supra. On this basis, disallowance made by AO for Rs 40,61,56,5777- is deleted. (ii) So far as unrealized loss of Rs. 51,29,56,469/- , my predecessor CIT(A) has deleted such disallowance in para 3.6 & 3.7 of his order referred supra. Further, Hon'ble Ahmedabad 1TAT in the case of Adani Enterprise Limited has also deleted similar disallowance made in its case. On this basis, disallowance made by AO for Rs.51,29,56,469/- is deleted. The related grounds of appeal are allowed.
Being aggrieved by the order of the learned CIT(A), the Revenue is in appeal before us.
The learned DR before us vehemently supported the order of the AO by reiterating the findings contained in the assessment order. On the other hand the learned AR before us filed a paper book running from pages 1 to 53 and inter alia contended that the issue is covered in favour of the assessee by the order of the ITAT in the group case. The ld. AR vehemently supported the order of the ld. CIT- A.
We have heard the rival contentions of both the parties and perused the materials available on record. At the outset, we note that identical issue came up before this tribunal in case of sister concern of the assessee namely Adani Petronet (Dahej) Port Pvt. Ltd for A.Y. 2011-12 in where the issue has been decided in favour of the assessee and against the Revenue. The relevant finding of the bench is extracted as under:
8.5 We have heard the arguments of both the sides on this issue and also perused the relevant material available on record. The learned DR in support of the Revenue’s case on this issue has mainly relied on the order of the Assessing Officer. The learned Counsel for the assessee, on the other hand, has contended that this issue is squarely covered in favour of the assessee by the various judicial pronouncements which have been referred to and discussed in details by the learned CIT(A) in his impugned order while giving relief to the assessee. As submitted by him, the assesseecompany had taken rupee term loan and with a view to reduce effective rate of interest from 11.75% to 6.67%, it entered into Principal Only Swap (POS) contract with ICICI Bank Ltd and Axis Bank Ltd to convert the Rupee Loans to US Dollar Loans. He has submitted that the assessee-company by this way saved interest -283/AHD/2020 A.Y. 2015-16 & 2016-17 6 cost of Rs.61.39 crore during the Assessment Years 2012-13 to 2017-18. He has contended that the assessee-company by following the Principle of Prudence recognized M2M loss as at the end of the year on outstanding SWAP contract as per Accounting Standard-11 and this method was consistently followed by the assessee regarding Forex loss/gain from M2M. He has pointed out that there were substantial gains earned by the assessee in AYs 2015- 16 and 2016-17 amounting to Rs.94.37 crores and the same were duly offered to tax which was accepted by the Department. We find merit in the contention raised by the learned Counsel for the assessee on this issue. Moreover, as pointed out by him, the issue under consideration is squarely covered in favour of the assessee, in addition to the judicial pronouncements referred to and relied upon by the learned CIT(A) in his impugned order, by the latest decision of the Coordinate Bench of this Tribunal rendered in other group case of M/s. Adani Hazira Port Pvt. Ltd, vide its order dated 06.04.2022 in wherein it is held that M2M loss on SWAP contract was allowable where loans were converted into foreign currency loan to take benefit of low interest rate and loss recognized on account of foreign exchange fluctuation as per notified Accounting Standard 11 was an accrued and subsisting liability and not merely a contingent or hypothetical liability. The learned DR, on the other hand, has not been able to cite any judicial pronouncement in support of the Revenue’s case on this issue. We, therefore, find no infirmity in the impugned order of the learned CIT(A) allowing the claim of the assessee for deduction on account of Mark-toMarket Exchange Loss in respect of Foreign Currency Derivatives Contracts and upholding the same, we dismiss Ground No.3 of the Revenue’s appeal.
9.1 Before us, no material has been placed on record by the Revenue to demonstrate that the decision of Tribunal as discussed above has been set aside / stayed or overruled by the Higher Judicial Authorities. Before us, Revenue has not placed any material on record to point out any distinguishing feature in the facts & circumstances of the case of the assessee and fact & circumstances in case of sister concern nor has placed any contrary binding decision in its support. Thus, respectfully following the order this tribunal in the case as discussed above, we uphold the finding of the learned CIT(A). Thus, the ground of appeal raised by the Revenue is hereby dismissed.
9.2 In the Result appeal of the Revenue is hereby dismissed.
Coming to an appeal by the Revenue for A.Y. 2016-17
The only issue raised by the Revenue is that the learned CIT (A) erred in deleting the disallowance made by the AO of Mark to market loss of Rs. 25,45,18,097/- only. -283/AHD/2020 A.Y. 2015-16 & 2016-17 7
At the outset we note that the issue raised by the revenue in its grounds of appeal for the AY 2016-17 is identical to the issues raised by the Revenue in 2015-16. Therefore, the findings given in shall also be applicable for the year under consideration i.e. AY 2016-17. The appeal of the Revenue for the assessment 2015-16 has been decided by us vide paragraph No.9 of this order against the Revenue. The learned AR and the DR also agreed that whatever will be the findings for the assessment year 2015-16 shall also be applied for the year under consideration i.e. AY 2016-17. Hence, the grounds of appeal filed by the Revenue is hereby dismissed.
11.1 In the result, the appeal of the Revenue is hereby dismissed.
In the combined result, both the appeals of the Revenue are hereby dismissed.
Order pronounced in the Court on 30/11/2022 at Ahmedabad.