Income Tax Appellate Tribunal - Mumbai
Acit, Circle - 3 3 1, Mumbai vs Jamnagar Utilities And Power Pvt Ltd, ... on 4 December, 2025
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "F" MUMBAI
BEFORE SHRI OM PRAKASH KANT (ACCOUNTANT MEMBER)
AND
SHRI RAJ KUMAR CHAUHAN (JUDICIAL MEMBER)
ITA No. 5312 & 5310/MUM/2024
Assessment Year: 2019-2020 & 2020-21
ACIT- Circle 3 3 1, Jamnagar Utilities and Power Pvt.
Room No. 481, 4th Floor, Aayakar Ltd.,
Bhavan, M.K. Road, Churchgate, Vs. 3rd Maker Chamber, Nariman
Mumbai-400020. Point,
Mumbai-400021.
PAN NO. AAACR 3893 B
Appellant Respondent
Assessee by : Mr. Nimesh Vora/
Ms. Moksha Mehta
Revenue by : Mr. Vivek Perampurna, CIT-DR
(Virtually Present)
Date of He aring : 17/09/2025
Date of pronouncement : 04/12/2025
ORDER
PER BENCH These two appeals by the Revenue are directed against, two separate orders, dated 06.08.2024 and 02.08.2024, passed by the Ld. Commissioner of Income-tax (Appeals) - National Faceless Appeal Centre, Delhi [in short 'the Ld. CIT(A)'] for assessment year 2019-2020 and 2020-21 respectively.
Jamnagar Utilities and Power Pvt. Ltd. 2 ITA No. 5312 & 5310/MUM/2024
2. As these appeals are having common issue iss in dispute permeating from same set of facts, facts, therefore, same were heard together and disposed off by way of this consolidated order for the sake of convenience and avoid repetition of facts.
3. Att the outset, the Ld. Departmental Representative (DR) ubmitted that there was a delay of 4 days in filing the appeal for submitted Assessment Year 2019 2019-20 20 and a delay of 8 days in filing the appeal 2020 21. The Ld. DR explained that the delay for Assessment Year 2020-21.
occurred due to workload arising from judicial matters, reporting r duties, and other miscellaneous official responsibilities. It was further submitted that the delay was neither deliberate nor intentional but occurred for bona fide reasons, and therefore deserved to be condoned. As there was no serious objection from the opposite side, and upon considering the reasons furnished by the Ld. DR, we are satisfied that sufficient cause has been shown for not filing the appeals within the prescribed time. The explanation offered is found to be reasonable and acceptable. Accordingly, the delay in filing the appeals is condoned.
4. Now, we take up the appeal of the Revenue for assessment 2020. The grounds raised by the Revenue are reproduced year 2019-2020.
as under:
1. "Whether the contribution or donation made by assessee not voluntarily, but to discharge legal obligation arising from section 135 of the Company's Act r.w. schedule VII of Company's Act, is donation Jamnagar Utilities and Power Pvt. Ltd. 3 ITA No. 5312 & 5310/MUM/2024 or voluntary contribution within the meaning of Section Section 80G r.w.s. 's 11 & 12 of the IT Act, 1961?"
2. "Whether the MTM losses arising out of Currency Swap Contract do not fall in the purview of Section 43AA of the Act which is subject to the section 43A of the Act relating to taxation of foreign exchange fluctuation?"
3. "Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) has rightly confirmed the treatment of MTM losses on currency swap as done by the assessee disregarding the findings of assessing officer made during the as sessment proceedings?"
assessment
4. "Whether the amount paid by the Assessee to Shrimad Rajchandra Sarvamangal Trust and Reliance Foundation is eligible spending within the meaning of section 135 r.w. rule 7 of Company's Act 2013?"
5. "Whether on the facts and in th the e circumstances of the case and in law, the Ld.CIT(A) has justified in deleting the addition of fair value adjustment on asset being redeemable preference shares(RPS) in book profit, without appreciating the facts that assessee has valued the RPS price to NIL arbitrarily and MTM loss arising out of revaluation/fair value adjustment is not applicable as there is no market?"
6. "Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) has justified in deleting the addition of fair value v adjustment on asset being redeemable preference shares(RPS) in book profit, without appreciating the fact that revaluation of the RPS is nothing but a provision for diminution?"
5. Briefly stated, the facts of the case are that the assessee-
assessee company, incorporated ncorporated in 1991, is primarily engaged in the business of setting up, operating, and maintaining captive plants at various manufacturing locations of M/s Reliance Industries Limited. The assessee filed its original return of income under section 139(1) of the Income tax Act, 1961 ("the Act") for the year Income-tax under consideration on 29.11.2019, declaring total income of Rs. 15,84,40,22,530/- under the normal provisions and Rs.
Jamnagar Utilities and Power Pvt. Ltd. 4 ITA No. 5312 & 5310/MUM/2024 12,46,26,46,242/- under section 115JB of the Act (MAT). The return was selected for scrutiny, and statutory notices were duly issued and complied with. The assessment was completed under section 143(3) read with section 144B of the Act on 30.03.2022, wherein the Assessing Officer made the following additions/adjustments:
a. Disallowance of
of deduction u/s 80G amounting to Rs.
11,15,00,000/
11,15,00,000/-
b. Mark To Market loss on currency swap contracts am amounting to Rs.
1,95,03,97,953/ was added back by the assessee but allowed by 1,95,03,97,953/-
Assessing officer as deduction.
18,83,82,94,946/- to book profits under section c. Addition of Rs. 18,83,82,94,946/ 115JB in relation to loss recognised on Fair Value of investments in accordance with Ind AS.
6. On further appeal, the Ld. CIT(A) deleted all the three additions/adjustments. Aggrieved, the Revenue is in appeal before us by way off raising the grounds as reproduced above.
Grounds Nos. 1 and 4 - Deduction under Section 80G in respect of CSR Expenditure
7. The Ground Nos s.. 1 and 4 of the appeal of Revenue concern the disallowance made by the Assessing Officer of the deduction claimed by the assessee under section 80G amounting to Rs. 11,15,00,000/-,, which the Ld. CIT(A) has deleted.
7.1 The brief facts relevant to this issue are that the assessee 22,30,00,000/- in its profit and loss account debited a sum of Rs. 22,30,00,000/ Jamnagar Utilities and Power Pvt. Ltd. 5 ITA No. 5312 & 5310/MUM/2024 Social Responsibility (CSR) expenditure. In towards Corporate Social accordance with the specific bar contained in Explanation 2 to section 37(1) of the Act, the assessee suo-motu disallowed this amount while computing its business income. However, as these payments were made to insti institutions tutions duly registered under section 80G, the assessee claimed deduction of 50% of the eligible amount, i.e., Rs. 11,15,00,000/ 11,15,00,000/- under section 80G. Party-wise wise details of the donees, copies of donation receipts, and copies of their valid section 80G registration ration certificates were furnished.
7.2 The Assessing Officer rejected the claim on the ground that CSR expenditure under the Companies Act, 2013 is mandatory and therefore lacks voluntariness, which in his view is an essential prerequisite for a donation eligible for deduction under section 80G.
deduction would indirectly The AO further held that allowing such deduction e CSR expenditure, contrary to legislative intent.
subsidize intent..
7.3 Before the Ld. CIT(A), the assessee relied upon the decision of the Coordinate Bench h of the Tribunal in Reliance Industries Ltd. v. DCIT (ITA Nos. 2587 & 2588/Mum/2022), Naik Seafoods Pvt. Ltd. v. Pr. CIT (ITA No. 490/Mum/2021) and other decisions wherein it has been consistently held that, although CSR expenditure cannot be allowed as business expenditure under section 37, nothing in section 80G prohibits deduction of amounts paid to eligible institutions merely because they also fall within CSR obligations.
Jamnagar Utilities and Power Pvt. Ltd. 6 ITA No. 5312 & 5310/MUM/2024 The Ld. CIT(A), following these binding precedents, deleted the disallowance.
8. Before us, the Ld. DR submitted that the above decisions have not been accepted by the Department and that further appea appeal is pending before the Hon'ble Bombay High Court. However, no stay of operation of those orders has been brought to our notice.
9. ounsel for the assessee contended that the The Ld. Counsel Tribunal's decisions continue to hold the field and must be treated as binding inding precedents.
10. We have considered the rival submissions and examined the material on record. The core issue is whether CSR expenditure, though disallowed under section 37(1), can nevertheless qualify for deduction under section 80G, provided other statutory conditions are fulfilled. Section 37(1), read with Explanation 2, merely prohibits allowance of CSR expenditure as business expenditure expenditure. It does not create any bar on the allowance of such expenditure under other provisions of the Act, including section 80G. This is further supported by the Explanatory Memorandum to the Finance (No. 2) Act, 2014, which expressly clarifies that CSR expenditure of the nature described in sections 30 to 36 will continue to be allowable only its allowance under section 37(1) under those provisions, and only the relevant Explanation of is restricted. For ready reference, the section 37(1) of the Act is reproduced as under:
Jamnagar Utilities and Power Pvt. Ltd. 7 ITA No. 5312 & 5310/MUM/2024
37. 37 (1) 38Any expenditure 39 (not being expenditure of the nature described in sections 30 to 3640[***] and not being in the nature of capital expenditure 41 or personal expenses of the asses see), laid out or expended wholly and assessee), exclusively 41 for the purposes pur of the business 41 or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business ness or profession".
42 [ 43[Explanation Explanation 1.]-
1. ........................
45 [Explanation Explanation 2.-For
2. For the removal of doubts, it is hereby declared that for the purposes of sub sub-section section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) 20 46 shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.] 47 [Explanation Explanation 3.-
3. .....................
(2) ................
10.1 It is also of significance that Parliament, while amending section 37(1), did not amend section 80G to exclude CSR payments. On the contrary, only two specific categories of CSR contributions viz., payments to the "Swachh Bharat Kosh" and "Clean Ganga expressly denied deduction under section Fund", have been expressly 80G(2)(iiihk) and (iiihl). The principle of expressio unius est exclusio alterius therefore applies: where the Legislature intended to deny deduction, it has done so explicitly; no further implied prohibition can be read into the statute. The relevant finding of the Ld. CIT(A) on the issue in dispute is under:
7.3 The appellant during the appellate proceedings has submitted that the belief of the AO was purely based on its interpretation of the provisions of the Act. Nothing in the provisions of section 80G of the Act debars deduction in respect of donations made in the nature of CSR activities. If the legislators intended to deny deduction under section 80G of the Act for such donations, they could have amended section n 80G similar to the amendment in Explanation 2 to section 37(1) of the Act, wherein it has specified that expenditure in the nature of CSR activity shall not be deemed as business or professional expenditure. Since no such amendment has been made Jamnagar Utilities and Power Pvt. Ltd. 8 ITA No. 5312 & 5310/MUM/2024 in section on 80G, the appellant is eligible to claim a deduction of Rs 11,15,00,000/ being 50% of donations of Rs 22,30,00,000/ 11,15,00,000/- 22,30,00,000/- made in the nature of CSR activities. The Appellant further relied on the decision of Hon'ble Delhi Tribunal, in case of Interglobe Technology Tech Quotient Private Limited Vs. ACIT, Circle-10(1), Circle 10(1), New Delhi (ITA No 95/DEL/2024), wherein while allowing deduction u/s. 80G in respect of amount spent under CSR, the Hon'ble ITAT negated the Department's argument on voluntariness in amounts spent und under CSR. It has been held that the CSR expenditures are voluntary in nature as they are without any reciprocal commitment from beneficiary being philanthropic in nature.
Further, the appellant placed reliance on the following judicial decisions including the decisions of jurisdictional ITAT Mumbai where it has been held that payments towards donations made on account of corporate social responsibility, disallowed under section 37(1), are allowable as deductions under section 80G of the Act:
(i) (Mumbai ITAT) ITAT) DCIT v. Reliance Industries Ltd. [2023] I.T.A. No. 2587 & 2588/Mum/2022
(ii) FNF India (P.) Ltd. Vs. ACIT [2021] (133 taxmann.com 251) (Bangalore ITAT)
(iii) Sling Media (P.) Ltd. Vs. DCIT [2022] (194 ITD 1) (Banglore ITAT)
(iv) Infinera India (P.) Ltd. Vs. JCIT JCIT [2022] (194 ITD 463) (Bangalore ITAT)
(v) DCIT Vs. M/s. The Peerless General Finance & Investment & Co.
Ltd (ITA No. 1469 & 1470/Kol/2019) (Kolkata ITAT) M/s. Naik Seafoods Pvt. Ltd. Vs. Pr. CIT - 2 (ITA No 490/MUM/2021)
(vi) (Mumbai ITAT) .4 It is observed from the contents of above decision of Hon'ble ITAT 7.4 that the explanatory memorandum to Finance Act No. 2, 2014, introducing Explanation 2 to Section 37 (1) which prohibited the allowability of CSR expenditure as business expenditure. The memorandum clearly states that CSR expenditure described in Income tax Act, 1961 shall be allowed.
sections 30 to 36 of the Income-tax Legislators never intended to deny deductions for CSR expenditure outright; it is only not allowable under section 37(1). As the ndment in section 37(1) does not apply to sections 30 to 36 of the amendment Act, the same would not apply to section 80G of the Act. Thus, appellant shall be allowed to claim a deduction under section 80G of the Income Tax Act, 1961 to the extent of eligibility.
Jamnagar Utilities and Power Pvt. Ltd. 9 ITA No. 5312 & 5310/MUM/2024 4.1 It is further viewed that jurisdictional Hon'ble Mumbai ITAT in 7.4.1 the case of M/s.Reliance Industries Ltd. V.DCIT[2023](ITA ΝΟ.2587 & 2588/MUM/2022) has followed the decision rendered by Mumbai ITAT in the case of Naik Sea foods P Ltd V.Pr.CIT-2(ITA V.Pr.CIT NO.490/MUM/2021).
90/MUM/2021). In the case of Naik Sea foods P Ltd (supra), the ordinate bench has followed the decision rendered by Bangalore co-ordinate bench of Tribunal in the case of M/s FNF India P Ltd (ITA No. 1565/Bang/2019 dated 05 05- 012021), which in turn followed the sion rendered in the case of Allegis Services (India) Pvt. Ltd. v. decision ACIT (ITA No. 1693/Bang/2019) and held that the assessee is eligible for deduction u/s 80G of the Act in respect of certain payments included in CSR Expenses.
7.4.2 The relevant discussions made by the Tribunal in the case of V.Pr.CIT 2 (ITA NO.490/MUM/2021) are Naik Sea foods P Ltd V.Pr.CIT-2 reproduced hereunder:-
hereunder:
15................... After considering the submissions of both the parties we observe from the record that with regard to section 80G deduction ded we observed that the Coordinate Bench of ITAT Bangalore Bench decided the issue of deduction u/s. 80G relating to donations which is part of Corporate Social Responsibility in the case of M/s.FNF India Pvt. Ltd., v. ACIT (ITA. No. 1565/Bang/2019 dated dat 05.01.2021). The relevant findings of the Bangalore Bench are reproduced below: -
"9. After hearing both the parties, we find that similar issue came up for consideration before this Tribunal in ITA No.1693/Bang/2019 in (India) Pvt. Ltd. v. ACIT. The Tribunal by the case of Allegis Services (India) its order dated 29.4.2020 held as under:-
under:
"10. Section 135 of Companies Act, 2013 requires companies with CSR obligations, with effect from 01/04/2014.
Finance (No.2) Act, 2014 inserted new Explanation 2 to sub- sub section (1) of section 37, so as to clarify that for purposes of sub sub- section (1) of section 37, any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 shall n not ot be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.
This amendment will take effect from 1/04/2015 and will, 2015 16 and subsequent accordingly, apply to assessment year 2015-16 years. 11.
Jamnagar Utilities and Power Pvt. Ltd. 10 ITA No. 5312 & 5310/MUM/2024 expenditure is to be disallowed by new Explanation 2
12. Thus, CSR expenditure to section 37(1), while computing Income under the Head 'Income form Business and Profession'. Further, clarification regarding impact of Explanation 2 to section 37(1) of the Income Tax Act in Explanatory Memorandum orandum to The Finance (No.2) Bill, 2014 is as under:
"The existing provisions of section 37(1) of the Act provide that deduction for any expenditure, which is not mentioned specifically in section 30 to section 36 of the Act, shall be allowed if the same is incurred wholly and exclusively for the purposes of carrying on business or profession. As the CSR expenditure (being an application of income) is not incurred for the purposes of carrying on business, such expenditure cannot be allowed under the existingexisting provisions of Income tax Act. Therefore, in order to provide section 37 of the Income-tax certainty on this issue, it is proposed to clarify that for the purposes of section 37(1) any expenditure incurred by an assessee on the social responsibility referred to in activities relating to corporate social section 135 of the Companies Act, 2013 shall not be deemed to have been incurred for the purpose of business and, hence, shall not be allowed as deduction under section 37. However, the CSR nature described in section 30 to section expenditure which is of the nature 36 of the Act shall be allowed deduction under those sections subject to ulfillment of conditions, if any, specified therein."
13. From the above it is clear that under Income tax Act, certain state that deductions for expenditure would be provisions explicitly state allowed while computing income under the head, 'Income from Business and Profession" to those, who pursue corporate social responsibility projects under following sections.
Section 30 provides deduction on repairs, municipal tax and insurance premiums.
Section 31, provides deduction on repairs and insurance of plant, machinery and furniture Section 32 provides for depreciation on tangible assets like building, machinery, plant, furniture and also on intangible le assets like knowhow, patents, trademarks, licenses. Section 33 allows development rebate on machinery, plants and ships.
Section 34 states conditions for depreciation and development rebate.
Section 35 grants deduction on expenditure for scientific research rese and knowledge extension in natural and applied sciences under agriculture, animal husbandry and fisheries. Payment to approved universities/research institutions or company also qualifies for house R&D is eligible for deduction, under this deduction. In--house th section.
Jamnagar Utilities and Power Pvt. Ltd. 11 ITA No. 5312 & 5310/MUM/2024 Section 35CCD provides deduction for skill development projects, which constitute the flagship mission of the present Government.
Section 36 provides deduction regarding insurance premium on stock, health of employees, loans or commission for eemployees, mployees, interest on borrowed capital, employer contribution to provident fund, gratuity and payment of security transaction tax, Income Tax Act, under section 80G, forming part of Chapter VIA, provides for deductions for computing taxable income as under
under:
Section 80G(2) provides for sums expended by an assessee as donations against which deduction is available.
a) Certain donations, give 100% deduction, without any qualifying limit like Prime Minister's National Relief Fund, National Defence National Illness Assistance Fund etc., specified under section Fund, National 80G(1) (i)
b) Donations with 50% deduction are also available under Section 80G for all those sums that do not fall under section 80G(1)(i).
Under Section 80G(2) (iiihk) and (iiihl) there are specific exclusion of certain payments, that are part ofCSR responsibility, not eligible for deduction u/s80G.
14. In our view, expenditure incurred under section 30 to 36 are claimed while computing income under the head, 'Income form Business and Profession", wwhere here as monies spent under section 80G ate claimed while computing "Total Taxable income" in the hands of assessee. The point of claim under these provisions are different.
15. Further, intention of legislature is very clear and unambiguous, since expenditure expenditure incurred under section 30 to 36 are excluded from Explanation 2 to section 37(1) of the Act, they are specifically excluded in clarification issued. There is no restriction on an expenditure being claimed under above sections to be exempt, as long as itt satisfies necessary conditions under section 30 to 36 of the Act, for computing income under the head, "Income "Income from Business and Profession".
Profession
16. For claiming benefit under section 80G, deductions are considered at the stage of computing "Total taxable income".
income". Even if any payments under section 80G forms part of CSR payments(keeping in mind ineligible deduction expressly provided u/s.80G), the same would already stand excluded while computing, Income under the head, "Income from Business and Profession". The effect of such disallowance would lead to increase in Business Jamnagar Utilities and Power Pvt. Ltd. 12 ITA No. 5312 & 5310/MUM/2024 income. Thereafter benefit accruing to assessee under Chapter VIA for computing "Total Taxable Income" cannot be denied to assessee, subject to fulfillment of necessary conditions therein.
17. We therefore do not agree with arguments advanced by Ld. Sr. DR.
18. In present facts of case, Ld.AR submitted that all payments forming part of CSR does not form part of profit and loss account for computing Income under the head, "Income from Business Busine and Profession It has been submitted that some payments forming part of CSR were claimed as deduction under section 80G of Act, for computing "Total taxable income", which has been disallowed by authorities below. In our view, assessee cannot be denied the benefit of claim under Chapter VI A, which is considered for computing 'Total Taxable Income". If assessee is denied this benefit, merely because such payment forms part of CSR, would lead to double disallowance, which is not the intention of Legislature.
Legislatu
19. On the basis of above discussion, in our view, authorities below have erred in denying claim of assessee under section 80G of the Act. 77e also note that authorities below have not verified nature of payments qualifying exemption under section 80G of the Act and quantum of eligibility as per section 80G(1) of the Act.
20. Under such circumstances, we are remitting the issue back to Ld.AO for verifying conditions necessary to claim deduction under section 80G of the Act. Assessee is directed to file all requisite details in order to substantiate its claim before Ld.AO. Ld.AO is then directed to grant deduction to the ex tent of eligibility. Accordingly grounds raised by assessee stands allowed for statistical purposes."
7.5 The Hon'ble ITAT Delhi, 'C' Bench in the case of Interglobe Technology Quotient (P.) Ltd vs. ACIT, ITA No.95 of 2024 dated 28.05.2024 has held as under: -
Income-tax Act, 1961 -
I. Section 80G, read with section 37(1), of the Income- Deductions - Donations to certain funds, Charitable institutions, insti etc. (CSR) Assessment year 2020-212020 Assessee-company company claimed deduction under section 80G in respect of donations It had suo-
suo motu disallowed expenditure incurred as part of Corporate Social Responsibility (CSR) activities in accordance with provisi provisions of section 37(1) Assessing Officer disallowed deduction claimed by assessee by holding that donations had been made to meet statutory requirement of provisions of Companies Act 2013 and were accordingly not 'voluntary donation to be allowable under section sec 80G - Whether section 80G falls in Chapter VIA, which comes into Jamnagar Utilities and Power Pvt. Ltd. 13 ITA No. 5312 & 5310/MUM/2024 play only after gross total income has been computed by applying computation provisions under various heads of income, including Explanation 2 to section 37(1) and, thus, there was no co correlation between suosuo-moto moto disallowance in section 37(1) and claim of deduction under section 80G Held, yes Whether Act permits deduction of donations as per section 80G, even though, assessee was not gaining any benefit out of any reciprocity from donee and, a similarly, mandatory nature of CSR expenditure does not justify disallowance of same under section 80G, if other conditions of section 80G were fulfilled - Held, yes [Paras 7.4 and 7.5] [In favour of assessee] 7.6 In view of the decision of jurisdictional Hon'ble Mumbai ITAT in the case of M/s.Reliance Industries Ltd. V.DCIT[2023] (ITA NO.2587 & 2588/MUM/2022) and Naik Seafoods Pvt. Ltd. V.Pr.CIT-2[2021]) V.Pr.CIT ITA No.490/MUM/2021, it is held that AO has erred in denying claim under section 80G of the Act. It is also observed that of the appellant under assessing officer has not verified nature of payments qualifying exemption u/s.80G of the Act and quantum of eligibility as per section 80G(1) of the Act. Therefore, AO is directed to verify necessary to claim deduction u/s.80G of the Act and grant conditions necessary deduction to the extent of eligibility. Accordingly, this ground no. 2 stands allowed for statistical purposes."
10.2 The reasoning of the Assessing Officer that CSR expenditure lacks voluntariness has been expressly rejected by several Benches of the Tribunal, which held that voluntariness is not defeated merely because CSR spending is statutory; donations made to eligible institutions remain philanthropic, and there is no element of quid pro quo. In the present case, the assessee has furnished complete evidence of payments to institutions registered under section 80G. The AO has not doubted the genuineness of donations, the eligibility of the donees, or compliance with section 80G(5). The on raised is on the legal interpretation that CSR only objection payments are per se ineligible for deduction. This objection cannot Jamnagar Utilities and Power Pvt. Ltd. 14 ITA No. 5312 & 5310/MUM/2024 be sustained in view of consistent judicial authority holding to the contrary.
10.3 We also note that the Ld. CIT(A) has followed binding precedents of the jurisdictional Mumbai Tribunal, particularly Reliance Industries Ltd. (supra) and Naik Seafoods Pvt. Ltd. (supra). The mere fact that the Revenue has filed further appeal cannot dilute the binding force of those decisions in the absence of o a stay.
well reasoned order of the Ld. We therefore find no infirmity in the well-reasoned CIT(A). The deletion of the disallowance is in accordance with law and judicial precedent. We accordingly uphold the order of the Ld. CIT(A) on this issue.. The Ground Nos. 1 & 4 of appeal raised by the Revenue are therefore dismissed.
Ground Nos. 2 & 3:: Disallowance of Mark Mark-to-Market Market Losses on Cross-Currency Currency Swap Contracts
11. The Ground Nos. 2 and 3 of the appeal concern whether the market (MTM) loss of ₹195,03,97,953/- arising on the mark-to-market assessee's outstanding cross cross-currency currency swap (CCS) contracts is to be treated as a revenue expenditure while computing business income, or whether it is merely a notional loss liable to be added back.
11.1 The facts in brief qua the issue in dispute are that assessee had outstanding rupees borrowing of Rs.5875 crores by way of debentures. Keeping part of said borrowers as underlying, underlying the Jamnagar Utilities and Power Pvt. Ltd. 15 ITA No. 5312 & 5310/MUM/2024 assessee entered into cross currency swap (CCS) contracts coupled with interest swap which has following ef effect:
(a) the assessee lent notional amount of Rs.5310.76 crores to counterparties ( i.e Banks) and
(b) the assessee notionally borrowed equivalent amount in USD (approximately USD 822.29 million) at lower rates linked to LIBOR.
LIBOR 11.2 The assessee explaine explainedd that CCS transactions involve only a contractual exchange of rights and obligations, without any actual exchange of money or currencies. The interest cash flows were settled periodically on a net basis; the notional principal was similarly net-settled settled only on scheduled maturity. At each balance-
only balance sheet date, the CCS positions were restated at MTM values which was derived based on market projections/expectations of interest rates curves and foreign currency curves for the balance period of maturity.
11.3 It was submitted that in vie vieww of provisions of the Act read with income computation and disclosure standards (ICDS)-1, and (ICDS) relating to Accounting Policies, marked to market loss or gain was not to be recognized unless specifically provided by any ICDS. It was bmitted on behalf of the assessee that said unrealized marked to submitted market loss of Rs.195.04 crores was debited to profit and loss account.. This loss was adjusted with the realized interest/settlement gain on contracts of Rs. 197.50 crores.
Jamnagar Utilities and Power Pvt. Ltd. 16 ITA No. 5312 & 5310/MUM/2024 e profit and loss account a net gain of Rs.2.46 Accordingly, in the crores was reflected. But while computing the taxable income, the assessee offered the realized gain of settlement of the contracts for tax but unrealized loss of Rs.195.04 crores was added back in terms of the ICDS-II relating to accounting policies.
11.4 However, the Assessing Officer was not convinced with the above treatment by the assessee. He relied on section 36(1)(xviii) as per which marked to market loss as computed in the manner provided in ICDS notified u/s 145(2) of the Act is allowable as deduction. The Assessing Officer further relied on section 43AA of the Act which provides that any gain or loss arising on account of change in foreign exchange rates shall be treated as income or loss in accordance rdance with the ICDS. The Assessing Officer in para 7.3 of the impugned assessment order observed that the currency swaps in a form of derivative contract which are generally used for arbitrage or hedging. Most swaps involved cash flow based on incipal amount. Having narrated the features of swap notional principal contracts, the Assessing Officer then rejected the sub submission of the se were not transactions in foreign currency or assessee that those forward exchange contract. The Assessing Officer accordingly d that marked to market losses was therefore to be allowed concluded to the assessee.
11.5 The Assessing Officer further noticed that prior to insertion of clause (xviii) in section 36, the MTM losses were allowed as Jamnagar Utilities and Power Pvt. Ltd. 17 ITA No. 5312 & 5310/MUM/2024 business loss by Hon'ble Supreme Court and other authorities. But post amendment to section 36(1) and insertion of section 43AA, MTM loss is allowed as deduction. The ld AO further, relied on VI which provides for treatment of income or loss in case of ICDS-VI forward exchange contracts. According to the AO, A the cross currency swaps(CCS) entered into by the assessee are in nature of forward exchange contract and hence loss arising thereon to be treated under ICDS--VI and to be recognised in profit and loss account as revenue expenditure. Accordingly, the Assessing Ass Officer allowed the said loss of Rs.195,03,97,953/ Rs.195,03,97,953/- to the computation of the income including computation of profit for SEZ Unit while claiming deduction u/s 80IAB. Thus Thus, allowing of loss on currency al income before swap contract as revenue expenditure reduced total Chapter VI A deduction and then reduced deduction u/s 80-IA 80 accordingly.
11.6 Before the Ld. CIT(A), the assessee contended that, in terms of Sections 36(1)(xviii) and 43AA of the Act, mark-to mark to-market (MTM) loss or expected loss is allowab le only in accordance with ICDS-I, allowable ICDS which governs accounting policies. The assessee submitted that although MTM losses are generally not allowable, an exception ICDS I specifically permits such recognition while exists only where ICDS-I computing taxable income. The he Assessing Officer, however, relied on ICDS-VI unreali ed MTM loss on currency VI and held that the unrealized swap contracts (CCS) was allowable as a revenue item. In response, Jamnagar Utilities and Power Pvt. Ltd. 18 ITA No. 5312 & 5310/MUM/2024 the assessee argued that ICDS VI applies only to "forward exchange ICDS-VI contracts" and does not extend to CCS. To support this contention, the assessee referred to the definitions of "forward exchange contract," "forward rate," and "exchange difference" under ICDS ICDS-VI and submitted that currency swaps do not fall within any of these rdingly, the assessee maintained that ICDS definitions. Accordingly, ICDS-VI has no application to the CCS transactions undertaken by it, and only ICDS-II would govern such contracts. Under ICDS I, MTM losses on ICDS-I, currency swaps are not allowable while computing income under the Act.
11.7 After considering the rival submissions and examining the material on record, the Ld. CIT(A) accepted the assessee's position and allowed the claim, placing reliance on the decisions of the Co-
Co ordinate Bench in East West Pipelines (supra) and Adani Power Maharashtra (supra). The relevant finding of the Ld. CIT(A) are reproduced as under:
8.7 As per Ind AS, all forwards contracts in foreign currency needs to be marked to market at exchange rate as on the day of closing of financial period. However taxability of MTM (Marked to Market) losses are governed by ICDS & Income Tax Act. Appellant needs to make adjustments in Computation of Income to disallow unrealized MTM losses for the financial period considered in Profit and Loss Account.
8.8 The provisions related related to taxation of MTM losses as per ICDS and as per Income Tax Act are as under:
1. As per ICDS I Para 4 (ii) :
Jamnagar Utilities and Power Pvt. Ltd. 19 ITA No. 5312 & 5310/MUM/2024 MTM loss or an expected loss shall not be recognized unless the recognition of such loss is in accordance with the provisions of any other ICDS.
(ii) As per ICDS VI Para 8 (5):
Premium, discount or exchange difference on contracts that are intended for trading or speculation purposes, or that are entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction transaction shall be recognized at the time of settlement. It means only realized losses will be allowed as deduction as per ICDS.
(iii) As per Income Tax Act Section 36 (1) (xviii) : HE TAX DEPAR Marked to market loss or other expected loss as computed in ccordance with the income computation and disclosure standards accordance sub section (2) of section 145 will be allowed as notified under sub-section deduction. As per ICDS loss on settlement of forward contracts will be allowed as deduction.
(iv) The provisions of section 43AA of the Income Tax Act are reproduced hereunder:
37 [Taxation of foreign exchange fluctuation.
43AA. (1) Subject to the provisions of section 43A, any gain or loss arising on account of any change in foreign exchange rates shall be treated as income or los loss, s, as the case may be, and such gain or loss shall be computed in accordance with the income computation and disclosure standards notified under sub sub-section section (2) of section 145,38 (2) For the purposes of sub-section sub section (1), gain or loss arising on he effects of change in foreign exchange rates shall be in account of the respect of all foreign currency transactions, including those relating to-
(1) monetary items and non non-monetary items;
(ii) translation of financial statements of foreign operations;
(iii) forward exchange contracts;
(iv) foreign currency translation reserves.] 8.9 Any gain or loss arising on account of any change in foreign exchange rates shall be treated as income or loss, as the case may Jamnagar Utilities and Power Pvt. Ltd. 20 ITA No. 5312 & 5310/MUM/2024 be, and such gain or loss shall be computed in accordance with the income computation and disclosure standards notified under sub- sub section (2) of section 145. It means any forex loss shall be allowed as deduction only if it is computed in accordance with ICDS. As per ICDS only realized forex loss on forward contracts contracts is allowed as deduction.
8.9.1 The AO has relied upon the decision rendered in the case of Income tax, Delhi v. Woodward Governor India (P.) Commissioner of Income-tax, Ltd 312 ITR 254 (SC)/[2009]. The Hon'ble Supreme Court of India has held as under:-
under:
Assessment year 1998-99 1998 99 1. Section 37(1), read with section 145, of the Income-taxtax Act, 1961 Business expenditure Allowablilty of Whether expression 'expenditure' as used in section 37 may, in circumstances of a particular case, cover an amount which is really s', even though said amount has not gone out from pocket of a 'loss', assessee - Held, yes Whether loss suffered by assessee on account of foreign exchange difference as on date of balance sheet is an item of expenditure under section 37(1) Held, yes Whether accountinging method followed by an assessee continuously for a given period of time needs to be presumed to be correct till Assessing Officer comes to conclusion for reasons to be given that said system does not reflect true and correct profits - Held, yes - Whetherr an enterprise has to report outstanding liability relating to import of raw material using closing rate of foreign exchange and any difference, loss or gain, arising on conversion of said liability at closing rate should be recognized in profit and loss account for reporting period - Held, yes II. Section 43A of the exchange, change in to section 43A by amendatory and not clarificatory - Held, yes - Whether under unamended section 43A, 'actual payment' was not a condition precedent for making necessary adjustment in carrying cost of fixed asset acquired in foreign currency Held, yes Whether therefore, prior to amendment to section 43A, assessee was entitled to adjust actual cost of imported assets acquired in foreign currency on account of fluctuation in rate of exchange at each balance-sheet balance date, pending actual payment of varied liability - Held, Income-tax Income Act, 1961 Foreign currency, rate of Assessment year 1998 1998-99 -
her amendment Finance Act, 2002 with effect from 1-4-2003 Whether 1 is yes 8.9.2 The facts of the case in Woodward Governor India P. Ltd. was that Jamnagar Utilities and Power Pvt. Ltd. 21 ITA No. 5312 & 5310/MUM/2024 "the assessee had debited to its Profit & Loss Account a sum of Rs.
41,06,746.00 out of which a sum of Rs. 29,49,088.00 was the unrealized loss due to foreign exchange fluctuation on the last date of the accounting year. The AO held that the liability as on the last date of the previous year under consideration was a contingent liability, it was not an ascertained liability and consequently it had liability to be added back to the total income of the assessee. Accordingly, he added back Rs. 29,49,088.00 being the unrealized loss due to foreign exchange fluctuation. In other words, the debit to the P&L account was disallowed."
owever, in this case the issue is that the appellant had 8.9.3 However, entered into currency swap (CCS) contracts with various banks (authorized dealers). The marked to market loss of Rs.195.04 Cr on these contracts was debited to profit & loss account. However, while computing omputing its taxable income the appellant had added back these amount of Rs.195.04 Cr in terms of provision income computation and disclosure standards [ICDS(I)].
8.10 During the appellate proceedings (Video Conferencing) the appellant was confronted with the fact that various courts had rendered decisions wherein cross currency swap loss was allowed to the assessee. The issue being identical for A.Y. 2019-20 2019 and 21, the appellant discussed the issue in detail in A.Y. 2020-21 2020-21, 2020 and relied upon the same for f 20. On this issue the A.Y. 2019-20.
appellant has filed written submission and discussed the decision rendered by courts in respect of below cases:
(i) DCIT v. East West Pipeline Pvt. Ltd. [2023] ITA No.1999/Mum/2023 (Mum)(ITAT) Maharashtra Ltd. [2023] 199 ITD 226
(ii) DCIT v. Adani Power Maharashtra 8.11 In this regards, the appellant has submitted that the above case laws are not applicable to the facts of its case. The discussion made in the submission pertaining to A.Y. 2020 2020-2121 in para 2.8, 2.10 & 2.11 of submission dated 29.07.2024 is reproduced hereunder:
"2.8 In this regard, decision of DCIT v. East West Pipeline Pvt. Ltd. [2023] ITA No.1999/Mum/2023 (Mum) (ITAT) can be referred which was rendered in context of allowability of realized and unrealized (marked to mamarket) rket) foreign exchange loss on account of CCS. The AO had disallowed the same by treating it as speculative in nature u/s 43(5) and capital in nature u/s. 37(1). The learned CIT(A) held that said losses are not speculative in nature and not capital in re and also held that the reopening of the assessment was bad nature in law. The Hon'ble ITAT has dismissed department's appeal on the Jamnagar Utilities and Power Pvt. Ltd. 22 ITA No. 5312 & 5310/MUM/2024 jurisdictional issue and quashed the assessment re re- opened beyond 44 years by holding that the assessee had made full and true isclosure. Resultantly, the Hon'ble ITAT rendered the grounds on disclosure.
merits as academic and dismissed the same as infructuous. It is to be noted that the decision pertained to AY 2014- 2014 15. [Copy of decision is attached as Annexure 'A'] 2.10 Another decision of Hon'ble Ahmedabad ITAT in case of DCIT v. Adani Power Maharashtra Ltd. [2023] 199 ITD 226, can be referred which was rendered in context of allowability of marked to market foreign exchange loss on account of interest rate swap contract. The said loss was recognized and claimed as deduction as per principles of prudence and following accounting standard (AS) - 1, being disclosure of accounting policies issued y ICAI. The ITAT allowed the claim of the assessee as same was in accordance with AS-11 11 and was notnot contingent or hypothetical liability. It is to be 2015 16 and 2016 noted that the decision pertained to AY 2015-16 2016-17. [Copy of decision is attached as Annexure 'B]."
2.11 Both the above decision are not applicable to the facts of the before your honour, since the appellant's case case of the Appellant before pertains to AY 2020 2020-2121 to which provisions of clause (xviii) to section 36(1) applies, which was introduced by Finance Act, 2018, w.e.f. 1.4.2017 (AY 2017-18).
20178.12 The appellant has also argued that the action of the AO was bad in law in as much as the law laid down by the Hon'ble Supreme Court in the case of Goetze (India) Limited vs. CIT [2006] 284 ITR 323 (SC) is squarely applicable to the facts of the case. The Assessing Officer cannot entertained a claim of deduction deduction otherwise than by filing return or revised return. In the appellant's case the unrealized loss on CCS was disallowed in the computation of income in the return of income itself. However, the AO allowed the deduction even though he did not make a cl claim, aim, which is contradictory to the law laid down by the Hon'ble Supreme Court.
8.13 During the Video Conferencing the appellant stressed on the issue that the case is not covered under the term "Foreign Exchange Contracts" as referred in Section 43AA(2)(ii 43AA(2)(iii).
i). It was argued that there is a great difference between a "forward exchange contract"
and a "currency swap contract". It was further stressed it is pertinent to note how both these contracts are not similar in nature. It was stated that as per provision provisions of ICDS-VI:
VI: "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;" Further "Forward exchange rate for exchange of two currencies rate" is the specified exchange Jamnagar Utilities and Power Pvt. Ltd. 23 ITA No. 5312 & 5310/MUM/2024 at specified future date;" The appellant submitted that there are two elements of forward exchange contract, being:
i. exchange of different currencies;
ii. at a forward rate The appellant therefore argued that as per the definition of forward pre agreed rate at which the currencies rate, it is clear that it is a pre-agreed will be exchanged at a future date, meaning thereby, the forward rate would not vary at any given point of time.
8.14 The appellant has clarified that as as on 31.03.2019 it had outstanding rupee borrowing Rs.5875 crore by way of debentures.
Keeping part of these rupee borrowings as underlying, it entered into cross currency swap (CCS) contracts coupled with interest swaps, which effectively meant that it lent lent notional amount of Rs.5310.76 crore to counterparties and borrowed equivalent amount in USD (appx USD 822.29 mn) at lower interest rates linked to LIBOR. Thus the transaction involves contractual assumption of without actual exchange of rights and obligations by the parties without money or foreign currency. These are not transactions in foreign currency or forward exchange contracts. The interest difference is periodically settled on net basis. The notional loan amount is settled on net basis on scheduled maturity.
maturity. At end of reporting period, the outstanding CCS are required to be adjusted for marked to market (MTM) which is derived based on expected foreign currency curves and interest rates curves for the balance period of maturity.
8.15 The AO has held that thethe currency swap is in the nature of forward contracts. He has further relied upon provisions of section 43AA of the IT Act. Perusal of the submission of the appellant and facts of the case reveal that the transactions do not fall under the term "Forward Exchange Exchange Contract". The definition of forward exchange contract as per ICDS is reproduced hereunder:-
hereunder:
3. Definitions "2. (1) The following terms are used in this Income Computation and Disclosure Standard with the meanings specified:
(h) "Forward exchange ccontract"
ontract" 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;
Perusal of the above definition reveals that the currency swap contract does s not fall under the term "forward exchange contract".
Jamnagar Utilities and Power Pvt. Ltd. 24 ITA No. 5312 & 5310/MUM/2024 However, even if the said transaction is considered as forward exchange contract, as per ICDS VI Para 8 (5) Premium, discount or exchange difference on contracts that are intended for trading or speculation ation purposes, or that are entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction shall be recognized at the time of settlement. It means only realized losses will be allowed as deduction as per ICDS. ICDS Therefore, the same does not get covered by ICDS VI. Therefore, it would then revert to ICDS I. As per ICDS I Para 4 (ii) MTM loss or an expected loss shall not be recognized unless the recognition of such loss is in accordance with the provisions of any other ICDS.
8.16 To sum up a forward exchange contract is a financial agreement between two parties to exchange a specific amount of one currency for another currency at a fixed exchange rate on a specific date in the future. This type of contract is used to manage foreign exchange risk and lock in a fixed rate for future transactions.
Key elements of a forward exchange contract are as under:
under:-
1. Fixed exchange rate: The rate at which the currencies will be exchanged is agreed upon and fixed at the time of the contract.
2. Specific date: The contract specifies the date on which the exchange will take place.
3. Amount: The amount of currency to be exchanged is predetermined.
4. Parties: Typically involves a business or investor and a bank or financial instit institution.
8.17 The appellant has distinguished the case laws stating that the 2019 20 to which provisions of appellant's case pertains to AY 2019-20 clause (xviii) to section 36(1) applies, which was introduced by Finance Act, 2018, w.e.f. 1.4.2017 (AY 2017-18).
2017 18). Further, it has not made any forward contracts and no foreign currency rate has been fixed on the date of settlement. Therefore, considering the provisions of Act and ICDS, unrealized MTM Loss is not allowable as deduction Income Tax Act and appellant in Computation of Income as per Income needs to make required adjustments while preparing Computation of Income, which, appellant has rightly done in its computation of income. In view of the above discussion the appellant is right in giving treatment of MMT loss on currency currency swap. In view of the above discussion and on the lines of decision rendered in the case Jamnagar Utilities and Power Pvt. Ltd. 25 ITA No. 5312 & 5310/MUM/2024 of the appellant for A.Y. 2020 2020-21 21 on identical issue, the Ground no.
3 and 4 of appeal are allowed."
12. We have carefully considered the rival submissions and perused rused the material placed on record, including the audited risk management policy, the financial statements, the assessee's risk-management terms of the cross--currency currency swap contracts, and the statutory framework comprising sections 145, 43AA and 36(1)(xviii) of the Act ICDS VI. The short controversy is whether the read with ICDS-II and ICDS-VI.
notional "mark-to-market"
market" (MTM) loss recognised by the assessee cross currency swap contracts as at the balance- on outstanding cross-currency balance sheet date is an allowable deduction in computing business income inc for the year under consideration.
12.1 At the outset, we feel it necessary to refer the statutory scheme. Under section 145(2), the Central Government has notified Income Computation and Disclosure Standards (ICDS) to be followed for the purposes of computation of income chargeable computation under the head "Profits and gains of business or profession".
12.2 The ICDS-I, I, provides that marked arked to market loss or an expected loss shall not be recognized unless the recognition of such provisions of any other ICDS. MTM loss is in accordance with the provisions gain or expected profit shall also not be recognized in the same way way.
VI deals with: (a) treatment of transactions in 12.3 The ICDS-VI foreign currencies; (b) translating the financial statements of foreign operations; and (c)) treatment of foreign currency transactions in the nature of forward exchange contracts. The ICDS-VI ICDS specifically Jamnagar Utilities and Power Pvt. Ltd. 26 ITA No. 5312 & 5310/MUM/2024 deals with foreign currency transactions and forward exchange contracts. Clause (h) of paragraph 2 of ICDS-VI ICDS VI defines "forward act" to mean an agreement to exchange different exchange contract"
currencies at a forward rate and expressly provides that it includes a foreign currency option contract or another financial instrument of a definition provided in paragraph 2 under said similar nature. The definitions ICDS is reproduced as under:
2 (1).
(a) to (b)) ..........................
(c)) "Exchange difference" is the difference resulting from reporting the same number of units of a foreign currency in the reporting currency of a person at different exchange rates;"
(d)......................
(e) "Foreign currency" is a currency other than the reporting currency of a person;"
(f) -(g)............................
(g)............................
(h) "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;"
rward rate" is the specified exchange rate for exchange of two
(i) "Forward currencies at specified future date;"
12.4 Further, the ICDS VI also provides he Clause 8 (1) of the ICDS-
that "Any premium or discount arising at the inception of a forward exchange contract shall be amortised as expense or income over the life of the contract. Exchange differences on such a contract shall be recognised as income or as expense in Jamnagar Utilities and Power Pvt. Ltd. 27 ITA No. 5312 & 5310/MUM/2024 the previous year in which the exchange rates change. Any profit or loss arising on cancellation or renewal shall be recognised as income or as expense for the previous year."
12.5 Further, section 43AA mandates that exchange differences in currency transactions shall be computed respect of specified foreign currency in accordance with the notified ICDS and recognised accordingly, and section 36(1)(xviii) allows deduction of loss only to the extent so computed. Thus, the legislative design is that all material foreign currency risk management instruments are to be governed by ICDS-VI VI for tax purposes.
12.6 From the submission before lower authorities and before us, it is evident that the assessee had entered into cross--currency swaps (CCS) to hedge its underlying foreign currency exposures.
foreign ex Under se contracts, the assessee notionally lends one currency and those borrows another of equivalent notional principal; it receives interest on one currency leg and pays interest on the other over the tenure of the contract, and principal on both legs is amortised or settled over time. On each reset or settlement date, the interest and principal cash flows in the foreign currency leg are translated into the functional currency by reference to the prevailing exchange rate, and only the net amount in the functional currency is settled between the parties. Economically, such a structure is well recognised in finance as being equivalent to a series of forward interest rate swaps.
exchange contracts coupled with interest-rate Jamnagar Utilities and Power Pvt. Ltd. 28 ITA No. 5312 & 5310/MUM/2024 that a combined 12.7 Before us, the assessee submitted that reading of paragraph 8(1) of ICDS ICDS-VI VI and the definitions of "exchange difference," "forward exchange contract," and ICDS VI leads to "forward rate" contained in paragraph 2(1) of ICDS- the following conclusions:
Appellant is Indian Rupees (INR) a. The reporting currency of the Appellant b. Exchange difference in relation to forward exchange contracts covered by ICDS ICDS-VI VI is a difference arising on account of reporting of foreign currency (USD in the case of appellant) in equivalent amount of INR at a given excha nge rate at relevant point of time. It does not exchange envisage a case where future exchange rate is determined by prevailing market rates.
c. The Forward Exchange Contract (FEC) covered by ICDS-VI ICDS is a contract involving determination / fixation of Forward Rate for a Foreign Currency (USD in this case) upfront at which the transaction will be settled in future.
d. The contract where conversion of rate of Foreign Currency in to ICDS VI. In short, the INR is not fixed upfront is not covered by ICDS-VI. Currency Swap Contract VI as this contract Contrac is not covered by ICDS-VI does not involve upfront fixation of conversion rate of foreign currency into INR.
12.8 The assessee further explained as why currency swap contracts cannot be treated as forward contracts. It was submitted thatt the assessee had outstanding rupee borrowings of ₹5,875 crore through debentures, and, using a 5,875 crores portion thereof as the underlying, it entered into cross cross-
currency swap (CCS) contracts coupled with interest swaps. The effect of these arrangements was:
(a) Assessee lent notional amount of Rs 5310.76 crore to counterparties and Jamnagar Utilities and Power Pvt. Ltd. 29 ITA No. 5312 & 5310/MUM/2024
(b) Assessee notionally borrowed equivalent amount in USD (appx USD 822.29 mn) at lower interest rates linked to LIBOR.
ii. In terms of the above, Appellant receives interest on INR IN leg of the contract and it pays interest on USD leg of the contract over the tenure of the contract.
iii. The principal amount of the contract (Rs. 5310.76 cr in this case) will be amortised in installments as per agreed schedule in the contract. Simulta Simultaneously neously USD leg (USD 822.29 mn in this case) of the loan will also be amortised in same manner.
iv. The settlement of the interest and principal will happen on net basis on respective dates as per the schedule agreed in the Contract.
v. Thus, on the agreed date, principal amount of USD leg and interest on this USD notional amount will be converted into INR at the rate prevailing on that date of settlement. In other words! the rate of conversion of USD into INR is not determined upfront, unlike in the case off forward rate contracts.
Thus the currency swap contacts entered into by Appellant are not in the nature of forward rate contracts within the meaning of the ICDS-VI."
12.9 On this basis, the assessee argued that currency swaps are fundamentally different from forward rate contracts because they do not involve the fixation of a forward rate at the inception of the contract. Therefore, they do not fall within the meaning of "forward exchange contract" under ICDS VI.
ICDS-VI. Consequently, such transactions, in its view, must be governed by ICDS-I, view, ICDS under which market losses cannot be recognised unless specifically mark-to-market he assessee contended that since no permitted by another ICDS. The separate ICDS deals with currency swaps, the ICDS--I alone applies, and, therefore, the MTM loss on currency swaps cannot be allowed while computing taxable income.
Jamnagar Utilities and Power Pvt. Ltd. 30 ITA No. 5312 & 5310/MUM/2024 12.10 cross currency swaps do not The assessee asserted that cross-currency satisfy the definitions of "forward exchange contract," "forward rate," or "exchange difference" in clause (h) of paragraph 2 of ICDS ICDS-
VI.. However, having considered the submissions and examined the relevant provisions, we find no merit in this contention.
12.11 In the first place, the definition in clause (h) is couched in usive terms. It states that "forward exchange contract" means inclusive 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. The use of the word "includes"
"includes is well understood to enlarge the scope of the main part of the definition. It is significant that a foreign currency option contract has been specifically brought within the ambit of "forward exchange contract" even though such an option may, depending on its terms, not involve any physical exchange of currencies and may be cash-
cash settled. The Legislature has thus clearly indicated that physical delivery of currencies on a single future date is not an attrac indispensable element once the inclusive limb is attracted.
12.12 Secondly, the expression "another financial instrument of a similar nature" directs attention to the economic substance rather than the legal form of the instrument. The relevant "nature" for the purposes of ICDS-VI inancial derivative VI is that the instrument is a ffinancial whose payoff is a function of movements in the exchange rate between two currencies and which is employed to transfer or Jamnagar Utilities and Power Pvt. Ltd. 31 ITA No. 5312 & 5310/MUM/2024 Cross currency swaps, by their very manage foreign exchange risk. Cross-currency financia instruments design, satisfy these criteria: they are financial denominated in two different currencies; they generate streams of cash flows in each currency; and the net settlement is determined with reference to the bilateral exchange rate. On this parameter, exchange contracts and they are of the same genus as forward exchange foreign currency options.
12.13 Thirdly, even on the main limb of the definition, we are of the view that a standard cross-currency cross currency swap substantially meets the ingredients of an "agreement to exchange different currencies at e". There is an agreement that, on specified future a forward rate".
dates, one party will make payments referable to principal and interest in one currency, while the counterparty will make payments referable to principal and interest in another currency, eciprocal obligations will be settled by reference to and that these reciprocal the specified exchange rate mechanism on those future dates. The fact that, in practice, the parties may settle only the net amount in the functional currency does not detract from the underlying ter that each leg represents an obligation to pay the character equivalent of another currency. In modern derivative markets, forward contracts and options are frequently cash settled, yet they cash-settled, are still regarded as forward exchange contracts and options for all legal al and regulatory purposes.
Jamnagar Utilities and Power Pvt. Ltd. 32 ITA No. 5312 & 5310/MUM/2024 12.14 As regards the expression "forward rate", ICDS ICDS-VI defines it as the specified exchange rate for exchange of two currencies at a specified future date. There is nothing in the language to suggest fixed numerical figure agreed upon at that the rate must be a fixed inception; the requirement is that the rate, or the method of determining such rate, must be contractually specified for the future date. A clause which stipulates that, on each settlement shall be converted into the functional date, the foreign currency leg shall prevailing reference rate (for example, the RBI currency at the then--prevailing reference rate or an agreed market benchmark) is, in our view, a ICDS VI. The contractual "specified" rate within the meaning of ICDS-VI. formula or rule for determining the rate on the future date suffices to meet the definition.
12.15 Thus, both on a strict textual construction and on a cross currency swaps are covered by the purposive reading, cross-currency inclusive definition of "forward exchange contract" in clause (h) of paragraph 2 of ICDS ICDS-VI VI as "another financial instrument of a similar nature". The argument that they stand outside the scope of VI merely because there is no gross physical exchange of ICDS-VI currencies or because the rate is determined by a formula linked link to the prevailing rate is, therefore, not acceptable.
12.16 This conclusion is fortified if one has regard to the legislative purpose behind section 43AA and ICDS-VI.
ICDS These provisions were introduced to provide a uniform and codified regime Jamnagar Utilities and Power Pvt. Ltd. 33 ITA No. 5312 & 5310/MUM/2024 ion of exchange differences in respect of foreign currency for recognition transactions and related derivatives and to align tax computation with the economic realities of such instruments. It would be wholly inconsistent with this purpose if simple forwards and options were w brought within ICDS-VI ICDS VI while more sophisticated, but functionally equivalent, instruments such as cross currency swaps were left to cross-currency be dealt with under the general provisions of ICDS-I. ICDS Such an interpretation would open the door to arbitrage, allowing taxpayers to choose the form of derivative purely to achieve a more favourable timing of recognition of gains or losses.
12.17 It is also a matter of common commercial understanding, as reflected in accounting standards under Ind AS/IFRS and e, that foreign currency forwards, options and swaps market practice, are all forms of foreign exchange derivative contracts. Hedge accounting frameworks do not segregate them into watertight compartments for the purposes of identifying and measuring foreign currency risk. The legislature is aware of the evolving derivative landscape, therefore, has consciously used the broad expression "another financial instrument of a similar nature" so as not to create a casus omissus in respect of instruments like currency swaps which were already well known at the time of notification. In our opinion, had ad there been an intention to exclude such instruments, a specific exclusion could easily have been articulated.
Jamnagar Utilities and Power Pvt. Ltd. 34 ITA No. 5312 & 5310/MUM/2024 12.18 cross currency swaps are forward Having held that cross-currency exchange contracts s within the extended meaning of clause (h) of paragraph 2 of ICDS VI, we now turn to the consequence for the ICDS-VI, balance sheet date. ICDS-I, recognition of MTM losses at the balance-sheet ICDS which lays down the fundamental principles of accounting for income essly mandates that MTM losses or expected computation, expressly losses shall not be recognised unless recognition is required by any VI, in turn, draws a clear distinction between (i) other ICDS. ICDS-VI, forward exchange contracts entered into for trading or speculation purposes or to hedge firm commitments or highly probable forecast transactions, and (ii) those entered into for other purposes.
p In the former category, which, on the facts of the present case, includes cross-currency swaps, the standard provides that the assessee's cross any gain or loss shall be recognised only at the time of settlement of the contract, subject to the provisions of section 43AA.
12.19 Section 43AA reinforces this position by enacting that exchange differences in respect of specified foreign currency sactions shall be computed in accordance with the notified transactions ICDS and shall be recognised in accordance with such standards. Section 36(1)(xviii) then allows deduction of such loss only to the extent so computed. Once the governing ICDS postpones recognition of gain or loss on such contracts until the time of settlement, any deduction claimed in respect of interim revaluation Jamnagar Utilities and Power Pvt. Ltd. 35 ITA No. 5312 & 5310/MUM/2024 balance sheet date would or MTM losses on open contracts at the balance-sheet run counter to the statutory scheme.
12.20 The assessee's reliance on general
general principles of
commercial accounting and on pre-ICDS pre ICDS judicial authorities which permitted deduction of foreign exchange losses on restatement of monetary items is, in this context, misplaced. Those authorities were rendered in a regime where the trea treatment tment of such items was income computation standards notified under not codified by income-computation section 145(2). After the insertion of sections 43AA and 36(1)(xviii) and the notification of ICDS-I VI, the field is occupied by ICDS and ICDS-VI, Where there is a conflict between specific statutory directions. Where general accounting conventions and a binding computation standard, the latter must prevail for purposes of the Act.
12.21 In the light of the above discussion, we hold that the cross-currency assessee are covered by currency swaps entered into by the assessee the expression "another financial instrument of a similar nature" in clause (h) of paragraph 2 of ICDS ICDS-VI VI and are, therefore, to be treated as forward exchange contracts for the purposes of that standard. Consequently, the MTM loss recognised recognised by the assessee on such outstanding contracts as at the balance-sheet balance date is purely notional, has not crystallised into an enforceable liability, and is not an allowable deduction in the year under consideration, having regard to the combined operati I, ICDS operation of ICDS-I, ICDS-VI, section 43AA and section 36(1)(xviii) of the Act.
Jamnagar Utilities and Power Pvt. Ltd. 36 ITA No. 5312 & 5310/MUM/2024 12.23 In view of the foregoing, we are unable to sustain the finding of ld CIT(A) which proceeds on the footing that such MTM currency swaps is allowable in the year of re-
loss on cross-currency re measurement. The disallowance made by the Assessing Officer by adding back the MTM loss on cross-currency cross currency swaps to the total uphel The ground Nos. 2 &3 of appeal of income is accordingly upheld.
the Revenue on this issue are allowed.
14. The ground Nos. 5 and 6 of the appeal concern the computation of book profit under section 115JB of the Act, specifically whether the loss recognised on fair valuation of preference rence shares in accordance with Indian Accounting Standard (Ind AS) 109 can be reduced while determining the assessee's book profit.
14.1 The facts in brief qua the issue in dispute are that the assessee prepared its financial statements in compliance with Ind AS, as mandated under the Companies (Indian Accounting Standards) Rules, 2015. During the year, the assessee debited an amount of ₹18,83,82,94,946 18,83,82,94,946 to its profit and loss account towards value loss arising on preference shares of East West Pipeline fair-value Ltd. (EWPL), in accordance with Ind AS 109. While the assessee AS-109.
added back this loss in computing its income under the normal provisions of the Act, no such adjustment was made while whil computing book profit under section 115JB.
Jamnagar Utilities and Power Pvt. Ltd. 37 ITA No. 5312 & 5310/MUM/2024 14.2 The EWPL is a wholly owned subsidiary of EWPL Holdings Pvt. Ltd. (EHPL). The assessee holds 45% equity in EHPL and is thus an indirect promoter of EWPL. The assessee submitted that because EWPL's pipeline business had incurred substantial losses and its net worth had significantly eroded, its promoters, including the assessee, undertook to support its financial obligations to all external lender/investors of EWPL including obligations relating to redeemable preference shares.
2018-19, EWPL 14.3 The assessee submitted that during FY 2018 proposed a transfer of its pipeline business under a scheme of arrangement sanctioned by the NCLT u/s 230-232 230 of the 2013.. Reliance Industries Ltd. (RIL), was holding Companies Act, 2013 redeemable preference shares (RPS), at premium. The RIL was accruing the premium year on year in its books of accounts. For obtaining the sanction of Hon'ble NCLT for transfer of pipelines business at least three fourth value of the creditors or cl class of creditors or members or class of member must agree for any compromise or arrangement. A preference share holder is a member in a company hence, pursuant to the said provision, EWPL was required to obtain consent from RIL to transfer its pipeline pipel business under the scheme. Since the assessee being a promoter of EWPL, holding 45% equity therein through its subsidiary, it agreed to acquire part of the RPS held by the RIL at Rs.1883.83 crores (equivalent to amount invested+ accrued premium) enabling RIL to Jamnagar Utilities and Power Pvt. Ltd. 38 ITA No. 5312 & 5310/MUM/2024 grant consent to the said scheme transfer of the pipeline business by EWPL. Accordingly, for financial year 2018-19, 2018 19, the assessee acquired 25,00,00,000 preference share of EWPL from RIL, at consideration of Rs.1883.83 crores.
14.4 The EWPL had huge carried carried forward losses and post transfer of the pipeline business it ceased to have any significant business activities. Subsequent to transfer of pipeline no operating income and cash flows remained with EWPL and it had very remote hese preference shares held by the possibility of redeeming tthese assessee. Hence, in view of Ind AS 109, the RPS were fair f valued by the assessee to Rs.1 .1 in its financial statement. Balance sheet of 2018 19 is indicating that it had no EWPL for assessment year 2018-19 ability to redeem these redeemable redeemable preference shares.
14.5 But, the he Assessing Officer, however, regarded the loss recorded in books of account on account of fair valuation of RPS as a provision for diminution in the value of an asset falling within clause (i)) of Explanation 1 to section 115JB(2), observing that there was no market for the RPS, that the fair value adjustment was in fair-value substance a provision, and that the change in nomenclature could not alter the true nature of the transaction.
T(A), the assessee contended that the financial 14.6 Before the CIT(A), statements were prepared strictly in accordance with Ind AS, as mandated under the relevant provisions of the Companies Act, Jamnagar Utilities and Power Pvt. Ltd. 39 ITA No. 5312 & 5310/MUM/2024 2013 and accordingly, the assessee had recognized its investment in mutual fund, bo bonds, nds, commercial paper associates, fellow subsidiary at a fair value through profit and loss (FVTPL) as AS 19 for Financial instrument. Accordingly, the prescribed in Ind AS-19 at the yearend RPSs were re re-valued valued at fair market value and debited to the profit and loss account under the resultant loss was debited head 'other expenses. The assessee relied on CBDT Circular No. fair value adjustments under 24/2017, which clarifies that where fair-value Ind AS are routed through the profit and loss account, such losses are not to be added d back while computing book profit under section 115JB and the provision related the diminution or impairment of asset would not apply.
apply. Reliance was also placed on judicial precedents, including Apollo Tyres Ltd. v. CIT (255 ITR 273, SC), wherein it was held ld that the Assessing Officer cannot go behind the profit and loss account prepared in accordance with the Companies Act, except to make the specific adjustments prescribed in Explanation 1 to section 115JB. The Ld. CIT(A) after considering the ction and other judicial precedent on the issue in CBDT instruction dispute allowed the claim of the assessee observing as under:
"9.3 9.3 The stand taken by the AO and the submissions filed by the appellant has been carefully considered. The appellant has submitted that its books of accounts were drawn up in compliance with Indian accounting standards ("Ind AS") as notified under the Companies (Indian Accounting Standards) Rules, 2015. During the consideration, the appellant debited its profit and loss year under consideration, 18,83,82,94,946/ towards loss on fair valuation of account by Rs. 18,83,82,94,946/-
the preference shares held by the Appellant of M/s. East West Pipeline Limited (EWPL) as per Ind AS 109. The Appellant had added back th the said loss of Rs. 18,83,82,94,946/-,, while computing Jamnagar Utilities and Power Pvt. Ltd. 40 ITA No. 5312 & 5310/MUM/2024 income under the normal provisions of the Act. No adjustment was made towards the said loss while computing book profits u/s. 115JB of the Act. East West Pipeline Limited (EWPL) is wholly owned by EWPL Holdings Private Limited (EHPL). The Appellant holds 45% equity stake in EHPL and hence owns indirectly 45% of the equity in EWPL. Appellant, being one of the promoters of EHPL, is also a promoter of EWPL. Since EWPL was making losses in its pipeline business, business, the net worth held substantially eroded. The promoter of the EWPL, including the appellant had committed to extend full financial support to owner financial obligations to all external lenders/ investors of EWPL.
9.4 The main contention of the AO was that the preference share was acquired at the inflated rate. Further, it was held that marked to market loss was not applicable to the appellant as there was no market available for such transactions. The AO also held that the "provision" and therefore Rs. 1883.83 Cr. loss was in the nature of "provision"
Was required to be added back while computing profit u/s. 115JB of the Act.
9.5 On the other hands the appellant filed detailed submission to rebut the findings of the appellant. The gist of the submission of the appellant ellant is reproduced hereunder: -
(i) In FY 2018 2018-19, 19, the Pipeline Business of EWPL was transferred to an external entity under a scheme of arrangement u/s. 230-232 230 of the Companies Act, 2013, which scheme was sanctioned by the Hon'ble National Company Law Tribunal ("NCLT") at Ahmedabad and Mumbai.
(ii) For obtaining the sanction of Hon'ble NCLT for transfer of pipeline business as per section 230 of the Companies Act, 2013, at least three fourth of value of creditors, or class of creditors or members or classss of members must agree for any compromise or arrangement. A preference share holder is a member in a company. Hence, pursuant to the said provision, EWPL was required to obtain consent from RIL to transfer its pipeline business under the scheme.
(iii) Since nce the Appellant was a promoter of EWPL, holding 45% equity therein through its subsidiary, it agreed to acquire part of the RPS held by RIL at Rs. 1883.83 crore (equivalent to amount invested + accrued premium), enabling RIL to grant consent to the said scheme for transfer of the pipeline business by EWPL.
(iv) It is a settled legal position that the assessing officer can make adjustments to book profits u/s. 115JB only if the adjustment falls Jamnagar Utilities and Power Pvt. Ltd. 41 ITA No. 5312 & 5310/MUM/2024 within any of the adjustments prescribed in Explanation 1 to s section 115JB(1) of the Act. [Apollo Tyres v. CIT [2002] 255 ITR 273 (SC)].
(v) The Circular no. 24 of 2017 dated 25/07/2017, issued by the Central Board of Direct Taxes ("CBDT"), which has clarified the issue regarding to FVTPL adjustments under Ind-AS.
Ind
(vi)
i) In Sri Hariram Hotels (P.) Ltd. V. CIT [2016] 237 Taxman 564 (Karnataka HC), it has been held that once the accounts are scrutinized, certified by the statutory auditors (even though with qualification) and approved by the company in general body of ting, and then filed with registrar of companies, the AO has to meeting, rely on the authentic accounts and has no power to re re-compute the book profit. The AO has no power to embark upon a fresh enquiry with regard to entries made in books of account of company and has to rely upon authentic statements of accounts of company, being scrutinized and certified by statutory auditors.
(vii) The Appellant had recognized the RPS at their value in terms of Ind AS 109. The Appellant has not "set aside" any amount as provisionn for diminution in value. On the other hand it has reduced the carrying amount of investments itself.
(viii) The RPS of EWPL are transferable instruments and can be traded. Ind AS 109 mandates investments / financial instruments irrespective of whether they are actively traded in to be fair valued irrespective the market, as prescribed in Ind AS 113.
9.6 The appellant has further relied on the decision rendered by the Hon'ble Supreme Court in the case of Apollo Tyres Ltd. V. Commissioner of Income /[2002] has held as Income-tax, 255 ITR 273 (SC)/[2002] under: -
"Section 115J of the Income-tax Income tax Act, 1961, read with Parts II and III Zero tax companies of Schedule VI to the Companies Act, 1956 Zero-tax company, while determining its net profit, had provided Assessee-company, for arrears of depreciation in its profit and loss account which according to revenue was not in accordance with Parts II and III of Schedule VI to the Companies Act, 1956 Hence, Assessing Officer, assessee company under section 115J, while considering case of assessee-company recomputed said profit and loss account so as to exclude provisions made for arrears of depreciation Accounts of assessee company were certified by auditors as having been maintained in accordance with provisions of the Companies Act - Tribunal held that Assessing Officer had no authority authority to reopen accounts of a company which were certified by auditors of company as having been maintained in accordance with provisions of the Companies Act and which Jamnagar Utilities and Power Pvt. Ltd. 42 ITA No. 5312 & 5310/MUM/2024 account had been accepted in general meeting of company as well as by Registrar of Companies Companies Whether, while computing income under section 115J, Assessing Officer has only power of examining whether books of account are certified by authorities under Companies Act as having been properly maintained in accordance with Companies Act and ther eafter, he has limited power of making thereafter, additions and reductions as provided for in Explanation to said section - Held, yes - Whether, therefore, Assessing Officer does not have jurisdiction to go behind net profit shown in profit and loss account except to extent provided in Explanation to section 115J - Held, yes - Whether Tribunal had rightly set aside order of Assessing Officer - Held, yes"
9.7 The Hon'ble High Court of Calcutta in the case of Balmer Lawrie (Calcutta) has held and Company Ltd, [2023] 149 taxmann.com 286 (Calcutta) as under: -
Income tax Act, 1961 Business expenditure -
"I. Section 37(1) of the Income-tax Allowability of (Prior period expenses) - Assessment year 2012-13 2012 Assessee claimed prior period expenses adjustment in its return of income for relevant year Assessing Officer asked assessee to explain why prior period expenditure should not be disallowed - Assessing Officer held that assessee did not follow mercantile system of accounting and, therefore, not allowable as expenditure appealed before Commissioner (Appeals). Aggrieved, assessee appealed contending that expenditure though related to earlier period got crystallized during year under consideration and was incurred wholly and exclusively for carrying on business and hence deductible Commissioner (Appeals) allowedallowed entire prior period expenses Tribunal, upheld order of Commissioner (Appeals) - Revenue was not able to place any material to disprove explanation furnished by assessee before authorities in support of its claim that liability to pay expenses charged under under head 'prior period crystallized during financial year 2011 2011-12- Whether therefore, no substantial question of law arose for consideration under head prior period expenses - Held, yes [Paras 4 and 5] [In favour of assessee] II. Section 115JB of the Income-tax Inco Act, 1961 - Minimum alternate tax (Computation of book profit) Assessment year 2012-13 2012 - Whether amount though bearing nomenclature of provision for diminution in value of investment, having been actually written off, could not be added to book profit profit under section 115JB(2) Held, yes [Para 8] [In favour of assessee)"
.8 On appreciation of the facts it is clear that the loss debited to 9.8 the P&L is a diminution in value. It was not a provision. The value of assets (RPS) itself has been reduced, it does not amount to provision Jamnagar Utilities and Power Pvt. Ltd. 43 ITA No. 5312 & 5310/MUM/2024 for diminution in value of asset but it amounts to actual write off of the loss. The Circular no. 24 of 2017 dated 25/07/2017, issued by the Central Board of Direct Taxes ("CBDT"), relied by the appellant clarifies that since MTM g gains ains recognized through profit or loss on FVTPL classified financial instruments are included in book profits for MAT computation, it is clarified that MTM losses on such instruments recognized through profit or loss shall not require any adjustments as pr provided ovided under clause (i) of Explanation 1 to section 115JB(2) of the Act. In view of the facts of the case and case laws discussed above, it is clear that book profits of the appellant cannot be tinkered with. In view of the above, the ground no.5 & 6 is allowed."
14.7. We have heard rival submissions of the parties and perused the relevant materials on record.
record. The narrow issue before us is
whether the fair-value
value loss recognised by the assessee on
redeemable preference shares, mandated by Ind AS, can be brought within the mischief of "provision for diminution in the value of any asset" for purposes of section 115JB. The assessee has referred to the CBDT Circular No. 24/2017, 24/ where it is explicitly clarified that fair-value profit and loss account value losses recognised through the profit under Ind AS (FVTPL) for classified instruments,, are not to be added back under clause (i) of Explanation 1 to section 115JB(2) as he Ld. CIT(A) has followed diminution or impairment of the asset. The tax Authorities.
the said circular which is binding on the Income-tax Authorities 14.8 In the present case, the assessee has not created any provision; rather, it has reduced the carrying amount of the investment itself in accordance accordanc with Ind AS-109.
109. Such a write down does not fall within the scope of a "provision for diminution"
contemplated in Explanation 1 to section 115JB of the Act Act. The Jamnagar Utilities and Power Pvt. Ltd. 44 ITA No. 5312 & 5310/MUM/2024 CIT(A) has correctly applied the CBDT circular as well as the principles laid down in Apollo Tyres ltd (supra) and other judicial therefore,, we do not find any infirmity in the order of authorities. Ttherefore the Ld. CIT(A) on the issue in dispute. Accordingly, we uphold the same. The ground of appeal of the Revenue is accordingly dismissed.
15. Now we take up the appeal of the Revenue for Assessment year 2020-21.
21. The ground raised by the Revenue are reproduced as under :
1. "Whether the contribution or donation made by assessee not voluntarily, but to discharge legal obligation arising from section 135 Act r.w. schedule VII of Company's Act, is donation of the Company's Act or voluntary contribution within the meaning of Section 80G r.w.s. 's 11 & 12 of the IT Act, 1961?"
2. "Whether the MTM losses arising out of Currency Swap Contract do not fall in the purview of Section 43AA of the Act which is subject 43AA to the section 43A of the Act relating to taxation of foreign exchange fluctuation?"
3. "Whether on the facts and in the circumstances of the case and in law, the Ld.CIT(A) has rightly confirmed the treatment of MTM losses on currency swap as done by the assessee disregarding the findings of assessing officer made during the assessment proceedings?"
4. "Whether the amount paid by the Assessee to M/s. Reliance Foundation is eligible spending within the meaning of section 135 r.w.
w. rule 7 of Company's Act 2013?"
5. "Whether on the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (Appeal) was justified in deleting the disallowance made u/s.14A without appreciating that the disallowance u/s.
u/s. 145A as required to be determined according to Rule 8D of Income Tax Rules 1962 as had been done by the Assessing officer?"
Jamnagar Utilities and Power Pvt. Ltd. 45 ITA No. 5312 & 5310/MUM/2024
6. "Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was correct in not noticing CBDT CircularCircul No. 5/2014 when it is judicially acknowledged that CBDT Circulars constitute important clarifications of legislature intent ?"
os.1 and 4 of the appeal for AY 2020 15.1 The Ground No 2020-21 are round no.1 and 4 of the appeal for AY 2019 identical to the Ground 2019-20, therefore, these grounds are decided mutatis mutandis to ground decided in AY 2019-20.20.
15.2 The Ground Nos.2 and 3 of the present appeal are identical to s.2 the Ground round no.2 and 3 of the appeal for AY 2019 2019-20, therefore, these grounds are decided mutatis mutandis to ground decided in AY 2019-20.
15.3 The Ground No os. 5 and 6 of the appeal relate to disallowance der Section 14 A read with Rule 8 D of the Income Tax Rules, under 1962.
16. We have carefully considered the rival submissions and examined the material material placed on record in relation to the issue under adjudication. The Assessing Officer noted that the assessee had made substantial investments in shares capable of yielding exempt dividend income. However, it is an undisputed fact that no s earned by the assessee during the year under exempt income was consideration. Notwithstanding this, and in the absence of any suo motu disallowance by the assessee, the Assessing Officer proceeded to invoke Rule 8D of the Income Income-tax tax Rules, 1962, and accordingly computed a disallowance of ₹65,63,50,056/-.
Jamnagar Utilities and Power Pvt. Ltd. 46 ITA No. 5312 & 5310/MUM/2024
17. In appeal, the Ld. CIT(A) deleted the disallowance primarily on the ground that the assessee had not earned any exempt income during the relevant assessment year. The Ld. CIT(A), relying on the issue including the judgment of judicial precedents governing the issue--including the Hon'ble Jurisdictional High Court in Ballarpur Industries Ltd.
eld that in such circumstances, no disallowance under (supra)--held section 14A read with Rule 8D was warranted. The Ld. CIT(A) also duly considered the applicability of CBDT Circular No. 5/2014 while arriving at the aforesaid conclusion. Relevant finding of the Ld. CIT (A) is reproduced as under:
"9.Ground Ground no.6 and 7 of appeal is related to the disallowance u/s 14A r.w.r 8D of the Act of Rs. 65,63,50,056/-.
65,63,50,056/ . The appellant has contended that AO erred in computing disallowance u/s 14A r.w.r 8D of Rs. 65,63,50,056/ 65,63,50,056/- without appreciating the fact that most of the investment yield is taxable income and income on such investments recognized during the year is taxed under various heads of income. The AO erred in making disallowance u/s 14A in the absence of earned during the year under consideration. any exempt income earned 9.1 The AO while making disallowance u/s 14A of the Act of Rs. 65,63,50,056/ 65,63,50,056/-
relied on CBDT circular no. 05/2014 which gives a mechanism for calculating disallowance u/s 14A of the Act and clearly mentions that the said disallowance is attracted even when there is no exempt income. During the appellate proceedings the appellant has filed written submission on the issue of disallowance u.s 14A of the Act. The appellant submitted that during the year under consideration it did not earn any exempt income and it is a settled legal position that the disallowance u/s 14A cannot be made in absence of exempt income. In this regard the appellant has relied on various case laws as under:
Jamnagar Utilities and Power Pvt. Ltd. 47 ITA No. 5312 & 5310/MUM/2024 Industries Limited [2016] (ITA No. 51 of 2016)
(i) PCIT v. Ballarpur Industries (Bom)(HC).
(ii) PCIT v. Kohinoor Project (P.) Ltd. [2020] 425 ITR 700 (Bom)(HC)
(iii) MAN Infraprojects Ltd. (ITA No.259 of 2017 dated 09.04.2019) (Bom.)(HC)
(iv) PCIT vs. Wockhardt Hospitals Limited ITA No. 1393 of 2017 (dated 16.03.2020) (Bom.)(HC)
(v) PCIT vs. JSW Energy Ltd. ITA No. 699 of 2017 (dated 19.08.2019) (Bom.)(HC)
(vi) Cheminvest Ltd. v. CIT [2015] 234 Taxman 761, Hon'ble Delhi High Court
(vii) PCIT v. McDonald's India (P.) Ltd. [2019] 101 taxmann.com 86 (Delhi) 9.2 Further, to counter the CBDT circular no. 05/2014 on which the AO relied while making the disallowance u/s 14A of the Act, the appellant has relied on the following case laws.
(i) Hon'ble Delhi High Court, in case of PCIT v. IL & FS Energy Development Company Ltd.[2017] 399 ITR 483 (Delhi) has considered the above mentioned CBDT Circular and held that the said Circular cannot override the express provisions of section 14A read with Rule 8D. It was ultimately held that disallowance u/s. 14A cannot be made where no exempt income was earned by the assessee during the year.
(ii) Hon'ble Mumbai Tribunal, too, in case of Kamat Hotels (India) Ltd. v. DCIT [2018] 89 taxmann.com 225,, has considered the said intent is more discernible in CBDT Circular and held that legislative intent decisions of High Courts. Hence, following decisions of various High Jamnagar Utilities and Power Pvt. Ltd. 48 ITA No. 5312 & 5310/MUM/2024 Courts it was held that section 14A will not apply if no exempt income is received during the relevant previous year.
(iii) In Astik Dyestuff Pvt Ltd Vs. CCE [20 [2014-TIOL TIOL- 237- HC- AHM-
ST], Hon'ble Gujarat High Court has held that in case of conflict between decision of Jurisdictional High Court and a Board's Circular arises, the decision of the jurisdictional High Court is binding on the department rather than CBDT circular.
9.3 The appellant has also pointed out the amendment brought in section 14A, vide Finance Act, 2022, by which an Explanation to section 14A has been inserted. The same is reproduced as under:
"Explanation.--
--For For the removal of doubts, it is hereby clarified that notwithstanding anything to the contrary contained in this Act, the provisions of this section shall apply and shall be deemed to have always applied in a case where the income, not forming part of the total income under this Act, has not accrued or arisen or has not been received during the previous year relevant to an assessment year and the expenditure has been incurred during the said previous year in relation to such income not forming part of the total income."
that the amendment has been made effective only The Appellant pleaded that from 1.4.2022, i.e., from Assessment Year 2022-23.
2022 23. The same cannot be 2020 21.
applied to the assessment year in question, i.e., AY 2020-21.
9.4 Perusal of the assessment order reveals that during the assessment proceedings dings the appellant itself submitted the working of 14A disallowance as under:
Annual Average of Monthly average of Balance Investment for FY 19-20 Jamnagar Utilities and Power Pvt. Ltd. 49 ITA No. 5312 & 5310/MUM/2024 Month Opening Closing Monthly Balance Balance Average April 33,002 33,002 33,002 May 33,002 33,002 33,002 June 33,002 33,002 33,002 July 33,002 33,002 33,002 August 33,002 33,002 33,002 September 33,002 33,002 33,002 October 33,002 33,002 33,002 November 33,002 33,002 33,002 December 33,002 25,33,002 12,83,002 January 25,33,002 25,33,002 25,33,002 February 25,33,002 25,33,002 25,33,002 March 25,33,002 25,33,002 25,33,002 Total of Monthly Average (A) 91,46,024 Annual Average A/12 7,62,168.667 1% of Annual Average of Monthly average of 7621/ 7621/-
Balance Investments of FY 19 19-20 Jamnagar Utilities and Power Pvt. Ltd. 50 ITA No. 5312 & 5310/MUM/2024 During the appellate proceedings the appellant submitted that without prejudice its contention that no disallowance should be made in the absence of exempt income, Rule 8D when applied to balance investments (i.e. investments other than those which generate interest income / gains on redemption/transfer which is offered to tax in ROI), 1% of the annual average of monthly average of balance investments works out to Rs. 7,622.
9.5 In view of the above discussion, case laws relied upon by the appellant and the fact that during the year under consideration the appellant has not earned any exempt income which is evident from the computation of income provided by the appellant, the disallowance of Rs. 65,63,50,056/-
65,63,50,056/ made u/s 14A of the Act by AO is restricted to Rs. 7,622/-."
7,622/
18. Since the Ld. CIT (A) has followed the binding precedents on the issue in dispute, we do not find any infirmity in the finding of accordingly, we uphold the same.
the Ld. CIT (A) and accordingly
19. The Ground Nos.5 N .5 and 6 of the appeal are accordingly dismissed.
20. In the result, both the appeals of the Revenue are allowed partly.
Order pronounced ounced in the open Court on 04/1 04/12/2025.
Sd/- Sd/-
Sd/
(RAJ
RAJ KUMAR CHAUHAN
CHAUHAN) (OM
OM PRAKASH KANT)
KANT
JUDICIAL MEMBER ACCOUNTANT MEMBER
Mumbai;
Dated: 04/12/2025
Rahul Sharma, Sr. P.S.
Copy of the Order forwarded to :
1. The Appellant
Jamnagar Utilities and Power Pvt. Ltd. 51 ITA No. 5312 & 5310/MUM/2024
2. The Respondent.
3. CIT
4. DR, ITAT, Mumbai
5. Guard file.
BY ORDER, //True Copy// (Assistant Registrar) ITAT, Mumbai