RELIANCE COMMUNICATIONS LTD, NAVI MUMBAI V. ASST CIT 10(3), MUMBAI

ITA 671/MUM/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 75527 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-02-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 05-02-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 24-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SURENDER JIT SINGH
• Assessee Lawyers: A V SONDE SHRI YOGESH THOR
• Keywords: Gift; Transactions in derivatives; Wholly owned subsidiary; Assessment record; Revocable transfer
• Section: 143(3); 263; 63

Judgement Text

, ,, , , ,, , IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUMBAI , , !' #$ #$ #$ #$ %$ $ , !' & & & & BEFORE SHRI SANJAY ARORA, AM AND SRI VIJAY PAL RAO, JM ./ I.T.A. NO. 671/MUM/2013 ( ' ( ' ( ' ( ' ( $)( $)( $)( $)( / ASSESSMENT YEAR: 2008-09 ) RELIANCE COMMUNICATIONS LTD. H BLOCK, 1 ST FLOOR, DHIRUBHAI AMBANI KNOWLEDGE CITY, NAVI MUMBAI-400710 ' ' ' ' / VS. THE COMMISSIONER OF INCOME TAX-10(3), ROOM NO.574, 5 TH FLOOR, AAYAKAR BHAVAN, M.K. MARG, MUMBAI-400020 '* ./ PAN : AACCR7832C ( *+ / ASSESSEE ) .. ( ,-*+ / RESPONDENT ) *+ . / / ASSESSEE BY : SHRI A.V.SONDE, SHRI YOGESH THOR, & SHRI JITENDRA SANGHAVI ,-*+ . / / RESPONDENT BY : SHRI SURENDER JIT SINGH '$ . 0 / DATE OF HEARING : 05/02/2014 1) . 0 / DATE OF PRONOUNCEMENT : 12/ 02/2014 !2 / O R D E R PER VIJAY PAL RAO, JM: THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE REVISION ORDER DATED 22/11/2012 OF THE COMMISSIONER OF INCOME-TAX -10, M UMBAI PASSED U/S 263 OF THE INCOME-TAX ACT FOR THE ASSESSMENT YEAR 2008- 09. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS IN THIS APPEAL AS UNDER. 1 . ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW, THE HONBLE COMMISSIONER OF INCOME TAX-10, MUMBAI (THE HONBLE CIT) ERRED IN HOLDING THAT THE ORDER OF ASST. COMM. OF INCOME TAX, RANGE 10(3), MUMBAI (THE AO) PASSED U/S 143(3) OF THE ACT FOR A.Y. 2008-09 IN RE SPECT OF MATTERS SPECIFIED IN GROUNDS II AND III HEREOF, ERRONEOUS AND/OR PREJUDI CIAL TO THE INTEREST OF REVENUE 2 ITA NO.671/MUM/2013 RELIANCE COMMUNICATIONS LTD . . AND CONSEQUENTLY, INVOKING PROVISIONS OF SECTION 26 3 OF THE ACT AND DIRECTING REVISION OF THE ASSESSMENT ORDER. 2. HE FAILED TO APPRECIATE AND OUGHT TO HAVE HELD T HAT THE RELEVANT ASPECTS HAD BEEN CONSIDERED IN THE COURSE OF ASSESSMENT PRO CEEDINGS AND WITHOUT PREJUDICE THE OF ORDER OF THE ASSESSING OFFICER WAS NEITHER ERRONEOUS NOR PREJUDICIAL TO THE INTERESTS OF REVENUE AND THE FIN DING TO THE CONTRARY WAS WITHOUT ANY BASIS IN FACT AND/OR IN LAW. 3. THE APPELLANT PRAYS THAT, IT BE HELD THAT THE AC TION OF THE HONBLE CIT IN INVOKING PROVISION OF SECTION 263 TO SET ASIDE THE ORDER U/S 143(3) AND DIRECTING THE AO TO FRAME THE ASSESSMENT DENOVO, AFTER EXAMIN ING THE ISSUES SPECIFIED, BE HELD TO BE AB-INITIO AND/OR OTHERWISE VOID AND BAD- IN-LAW. 2. THE ASSESSMENT IN THIS CASE WAS COMPLETED U/S 143(3 ) OF THE INCOME-TAX ACT ON 31/12/2010 WHEREBY THE TOTAL INCO ME OF THE ASSESSEE WAS COMPUTED AT RS.9,77,30,916/-. SUBSEQU ENTLY, THE COMMISSIONER OF INCOME-TAX ON PERUSAL OF ASSESSMENT RECORDS, FOUND THAT THE ASSESSEE COMPANY HAS CLAIMED TO HAVE RAISE D FUNDS TO THE TUNE OF RS.6485 CRORES BY WAY OF FOREIGN CURRENCY C ONVERTIBLE BONDS (FCCB) DURING THE PREVIOUS ASSESSMENT YEAR. OUT OF THE SAID FCCB FUNDS, AN AMOUNT OF RS.5142 CRORES ARE GIVEN TO M/ S RELIANCE INFO INVESTMENT PVT. LTD. (RIIL), WHICH IN TURN INVESTED THE SAID MONEY AND EARNED INTEREST OF RS.389 CRORES IN THE YEAR UNDER CONSIDERATION. HENCE, GRANTING OF INTEREST FREE LOAN IN VIEW OF TH E COMMISSIONER WILL BE DEEMED TO BE TRANSFER OF AN ASSET IN TERMS OF THE P ROVISIONS OF SECTIONS 60 TO 63 OF THE INCOME-TAX ACT AND CONSEQUENTLY THE INTEREST INCOME IS LIABLE TO BE CLUBBED IN THE HANDS OF THE ASSESSEE C OMPANY. THE COMMISSIONER ALSO FOUND THAT THE ASSESSEE HAS ACQUI RED FOREX/DERIVATIVE INSTRUMENTS FOR HEDGING AND THE LO SSES ARE RECOGNIZED ON THE SETTLEMENT DAY OR THE REPORTING DAY WHICHEVE R IS EARLIER AND THE SAME ARE RECOGNIZED IN THE PROFIT & LOSS ACCOUNT. THE COMMISSIONER WAS OF THE VIEW THE SAID MARK-TO-MARKET LOSSES AS ON THE REPORTING DAY I.E. 31/03/2008 ARE ONLY NOTIONAL LOSSES AND TH EREBY CONTINGENT IN NATURE, HENCE, CANNOT BE ALLOWED TO BE SET OFF AGAI NST TAXABLE INCOME. ACCORDINGLY, THE COMMISSIONER ISSUED A SHOW-CAUSE N OTICE U/S 263 OF 3 ITA NO.671/MUM/2013 RELIANCE COMMUNICATIONS LTD . . THE INCOME-TAX ACT TO THE ASSESSEE AS TO WHY THE AS SESSMENT SHOULD NOT BE CANCELLED/SET-ASIDE BEING ERRONEOUS AND PREJ UDICIAL TO THE INTEREST OF REVENUE. THE ASSESSEE HAS FILED ITS RE PLY TO THE SHOW-CAUSE NOTICE AND RAISED VARIOUS CONTENTIONS INCLUDING THE JURISDICTION OF THE CIT TO INVOKE THE PROVISIONS OF SECTION 263 WHEN TH E ASSESSING OFFICER HAS ALREADY EXAMINED THE ISSUES AND TAKEN A POSSIBL E VIEW. THE COMMISSIONER DID NOT ACCEPT THE CONTENTION OF THE A SSESSEE AND SET- ASIDE THE ASSESSMENT ORDER DATED 31/12/2010 BEING E RRONEOUS AND PREJUDICIAL TO THE INTEREST OF REVENUE AND DIRECTED THE AO TO FRAME THE ASSESSMENT DENOVO AFTER REEXAMINING THE AFORESAID I SSUE. 3. BEFORE US, SHRI A.V. SONDE, LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT AN IDENTICAL ISSUE HAS BEEN CONSIDER ED AND DECIDED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.Y.2007-08 VIDE ORDER DATED 05/02/2013 IN ITA NO. 2915/MUM/2012. THE LD. COUNS EL FOR THE ASSESSEE HAS INVITED OUR ATTENTION TO THE QUESTIONS INVOLVED IN THE APPEAL FILED BY THE ASSESSEE AGAINST THE REVISION O RDER PASSED U/S 263 FOR THE A.Y. 2007-08 AND SUBMITTED THAT THE QUESTION NO. 2 AND 3 AS REPRODUCED BY THE TRIBUNAL IN THE SAID ORDER AT PAG E NO. 2 ARE IDENTICAL TO THE QUESTIONS/ISSUES INVOLVED IN THE REVISION OR DER FOR THE YEAR UNDER CONSIDERATION. THE LD. COUNSEL THEN TOOK US TO THE RELEVANT FINDINGS OF THE TRIBUNAL ON THESE TWO ISSUES AND SUBMITTED THAT AFTER CONSIDERING THE IDENTICAL FACTS AND CIRCUMSTANCES, THE TRIBUNAL HAS SET-ASIDE THE REVISION ORDER PASSED BY THE COMMISSIONER FOR THE A .Y. 2007-08. ON THE OTHER HAND, THE LD. DR HAS HEAVILY RELIED UPON THE IMPUGNED ORDER OF THE COMMISSIONER AND SUBMITTED THAT THE ASSESSEE HAS DIVERTED THE BORROWED FUND TO ITS SISTER CONCERN WHICH HAS EARNE D ONLY INTEREST INCOME AND NO OTHER BUSINESS ACTIVITY WAS CARRIED O UT THEREFORE AS PER THE PROVISIONS OF SECTIONS 60 TO 63 OF THE INCOME-T AX ACT, THE SAID 4 ITA NO.671/MUM/2013 RELIANCE COMMUNICATIONS LTD . . INTEREST INCOME IS LIABLE TO CLUBBED IN THE HANDS O F THE ASSESSEE. THE LD. DR HAS FORCEFULLY CONTENDED THAT NON INVOKING T HE PROVISION OF SECTIONS 60 TO 63 OF THE INCOME-TAX ACT, THE ASSESS ING OFFICER HAS NOT APPLIED HIS MIND. THUS, THE LD. DR HAS SUBMITTED T HAT THOUGH THE IDENTICAL ISSUE WAS CONSIDERED BY THE TRIBUNAL FOR THE A.Y. 2007-08 HOWEVER IN VIEW OF THE PROVISIONS OF THE INCOME-TAX ACT, THE SAID INTEREST INCOME HAS TO BE CLUBBED IN THE HAND OF TH E ASSESSEE. AS REGARDS, THE NOTIONAL LOSS ON FOREX INSTRUMENT AS O N THE DATE OF REPORTING, THE LD. DR HAS SUBMITTED THAT CBDT INSTR UCTION NO.3/2010 ARE CLEAR ON THIS POINT AND IN VIEW OF THE CBDT INS TRUCTION, NO BENEFIT OF ADJUSTMENT OF INCOME OR GAIN SHOULD BE GIVEN AGA INST SUCH LOSSES. THEREFORE, THE ASSESSING OFFICER WHILE ALLOWING THE CLAIM OF THE ASSESSEE DID NOT APPLY HIS MIND. THE LD. DR HAS SUBMITTED T HAT THE ASSESSMENT ORDER PASSED WITHOUT APPLICATION OF MIND IS ERRONEO US AS WELL AS PREJUDICIAL TO THE INTEREST OF THE REVENUE AND THER EFORE THE COMMISSIONER IS JUSTIFIED IN SETTING-ASIDE THE ASSE SSMENT ORDER. 4. HAVING CONSIDERED THE RIVAL SUBMISSIONS AND CARE FULLY PERUSAL OF THE RELEVANT RECORD, WE NOTE THAT THE ISSUES ON WHI CH THE COMMISSIONER HAS PASSED A REVISION ORDER ARE COMMON TO THE ISSUE S INVOLVED FOR THE A.Y. 2007-08 WHICH HAVE BEEN RECORDED BY THE TRIBUNA L IN THE ORDER DATED 05/02/2013 UNDER ITEM NO. 2 AND 3 AS UNDER. (2). OUT OF THE PROCEEDS OF THE SAID FCCB FUNDS, AN AMOUNT OF RS.5142 CRORE WAS GIVEN TO M/S. RELIANCE INFO INVESTMENTS LTD., ( RIIL), WHICH WAS INVESTED BY THIS COMPANY ON WHICH INTEREST INCOME OF RS.157.95 CRORES WAS EARNED. SUCH GRANTING OF INTEREST FREE FUNDS WOULD BE DEEMED TO BE TRANSFER OF AN ASSET AND IN VIEW OF THE PROVISIONS OF SECTION 60 TO 63 OF THE A CT, THE THE AO FAILED TO CLUB SUCH INTEREST INCOME WITH THE ASSESSEES TOTAL INCO ME. (3) THE ASSESSEE ACQUIRED DERIVATIVE INSTRUMENTS FO R HEDGING AND RECOGNIZED LOSSES ON THE SETTLEMENT DAY OR THE REPORTING DAY, WHICHEVER IS EARLIER. THE SAID MARK TO MARKET LOSSES (MTM) AS ON THE REPORTING DA Y WERE NOTIONAL LOSSES AND 5 ITA NO.671/MUM/2013 RELIANCE COMMUNICATIONS LTD . . HENCE CONTINGENT IN NATURE NOT ALLOWABLE FOR SET OF F AGAINST THE TOTAL INCOME. THE AO WAS WRONG IN ALLOWING SUCH SET OFF. 5. THUS, THERE IS NO QUARREL ON THIS POINT THAT THE ISSUE ON WHICH THE PROVISION OF SECTIONS 263 ARE INVOKED BY THE COMMIS SIONER FOR THE YEAR UNDER CONSIDERATION ARE COMMON AND IDENTICAL TO THE ISSUES FOR THE A.Y.2007-08. AS REGARDS, THE ISSUE OF FCCB FUNDS DIV ERTED TO THE M/S RELIANCE INFO INVESTMENT WITHOUT CHARGING INTEREST AND THEREFORE THE COMMISSIONER HELD THAT THE INTEREST FREE FUND WOULD BE DEEMED TO BE TRANSFER OF AN ASSET IN VIEW OF THE PROVISIONS OF S ECTIONS 60 TO 63 OF THE ACT THE TRIBUNAL FOR THE A.Y. 2007-08 HAS DEALT WITH THE ISSUE IN PARA 7 TO 7.5 OF AS UNDER:- 7. APPLICABILITY OF SECTIONS 60 TO 63 7.1. THE SECOND POINT CONSIDERED BY LD. CIT MAK ING THE ASSESSMENT ORDER ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF REVENUE IS ABOU T THE ATTRACTABILITY OF THE PROVISIONS OF SECTIONS 60 TO 63 OF THE ACT ON INTEREST INCOME EAR NED BY RIIL ON THE BANK DEPOSITS, WHICH AMOUNT WAS ADVANCED BY THE ASSESSEE COMPANY F REE OF INTEREST. THE LD. CIT NOTICED THAT : THE ASSESSEE COMPANY TRANSFERRED IT S ASSETS BY VIRTUE OF A REVOCABLE TRANSFER WHICH IN EFFECT MEANS TRANSFER OF INCOME W ITHOUT THE TRANSFER OF THE ASSETS. HE FURTHER OBSERVED THAT : IF AN INTEREST FREE LOA N IS GIVEN BY A PERSON TO ANOTHER PERSON, IT IS A CASE OF TRANSFER OF AN ASSET AND TH E TRANSFER IS TO BE TREATED AS A REVOCABLE TRANSFER BECAUSE THE TRANSFEROR WOULD REC EIVE THE FUND BACK THUS INVOKING PROVISIONS OF SECTION 60 TO 63. AS THIS ASPECT WA S NOT PROPERLY CONSIDERED IN THIS ASSESSMENT ORDER, THE LD. CIT OPINED THAT IT LED TO MAKING THE ASSESSMENT ORDER ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE. 7.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PER USED THE RELEVANT MATERIAL ON RECORD. IN THIS REGARD, IT IS OBSERVED THAT THE AO ENQUIRED ABOUT THIS ASPECT OF THE MATTER DURING THE COURSE OF THE ASSESSMENT PROCEEDI NGS. THE ASSESSEE, VIDE ITS LETTER DATED 20.5.2009 ADDRESSED TO THE AO, EXPLAINED THA T OUT OF THE PROCEEDS OF THE FCCB, A SUM OF RS.1,343 CRORE WAS UTILIZED FOR CAPITAL EX PENDITURE AND THE BALANCE AMOUNT OF RS.5,142 CRORE WAS TEMPORARILY HELD IN VARIOUS NATI ONALIZED BANKS BY RIIL, A WHOLLY OWNED SUBSIDIARY OF THE ASSESSEE COMPANY. THE ASSE SSEE FURTHER INTIMATED THAT RIIL EARNED INTEREST INCOME OF RS.157.95 CRORE ON THE SA ID FIXED DEPOSIT AND ACCOUNTED FOR THE SAME IN ITS PROFIT AND LOSS ACCOUNT. COPY OF A CCOUNTS OF RIIL FOR THE YEAR ENDING 31.3.2007 WAS ALSO FURNISHED TO THE AO WITH FURTHER DETAILS OF FIXED DEPOSITS GIVEN THROUGH ANNEXURES 4 & 5 OF ASSESSEES LETTER. 7.3. NOW WE TURN TO THE APPLICABILITY OF THE PROVISIONS OF SECTIONS 60 TO 63 TO THE PRESENT FACTUAL POSITION. FIRSTLY, IT IS RELEVANT T O NOTE THAT THE LD. CIT HAS REFERRED TO SECTIONS 60 TO 63 IN A COMPOSITE MANNER WITHOUT PAR TICULARLY POINTING OUT AS TO UNDER WHICH SPECIFIC PROVISION THE CASE FALLS. AS SUCH, W E WILL ALSO EXAMINE THE CASE ACCORDINGLY. SECTION 60 CONTEMPLATES CLUBBING OF IN COME IN THE HANDS OF THE TRANSFEROR WHEN THE ASSET IS RETAINED WITH SELF BUT THE INCOME IS TRANSFERRED. THIS SECTION CATEGORICALLY PROVIDES THAT ALL INCOME ARISING TO A NY PERSON BY VIRTUE OF A TRANSFER 6 ITA NO.671/MUM/2013 RELIANCE COMMUNICATIONS LTD . . WHETHER REVOCABLE OR NOT, SHALL BE CHARGEABLE TO IN COME TAX AS THE INCOME OF THE TRANSFEROR WHERE THERE IS NO TRANSFER OF THE ASSET FROM WHICH THE INCOME ARISES. IT IS QUITE MANIFEST ALSO THAT WHEN THE ASSET IS RETAINED BY THE TRANSFEROR HIMSELF BUT ONLY INCOME IS TRANSFERRED, SUCH INCOME IS LIABLE TO BE INCLUDED IN THE TOTAL INCOME OF THE TRANSFEROR. SECTION 61 DEALS WITH THE CLUBBING OF I NCOME FROM A REVOCABLE TRANSFER OF ASSET. THIS SECTION PROVIDES THAT ALL INCOME ARISIN G TO ANY PERSON BY VIRTUE OF A REVOCABLE TRANSFER OF ASSETS SHALL BE CHARGEABLE TO INCOME TAX AS THE INCOME OF THE TRANSFEROR AND SHALL BE INCLUDED IN HIS TOTAL INCOM E. REVOCABLE TRANSFER HAS BEEN DEFINED IN SECTION 63. CLAUSE (A) OF SECTION 63 PRO VIDES THAT A TRANSFER SHALL BE DEEMED TO BE REVOCABLE IF (I) IT CONTAINS ANY PROVISION FO R THE RE-TRANSFER DIRECTLY OR INDIRECTLY OF THE WHOLE OR ANY PART OF THE INCOME OR ASSETS TO THE TRANSFEROR, OR (II) IT, IN ANY WAY, GIVES THE TRANSFEROR A RIGHT TO RE-ASSUME POWER DIR ECTLY OR INDIRECTLY OVER THE WHOLE OR ANY PART OF THE INCOME OR ASSETS. WHEN WE READ SECT ION 61 IN CONJUNCTION WITH SECTION 63, IT BECOMES MANIFEST THAT IN CASE OF A REVOCABLE TRANSFER OF ASSET AS DEFINED IN SECTION 63(A), THE INCOME IS CHARGEABLE IN THE HAND S OF THE TRANSFEROR AND NOT THE TRANSFEREE. 7.4. NOW THE QUESTION ARISES AS TO THE APPLICA BILITY OR OTHERWISE OF SECTIONS 60 TO 63 OF THE ACT TO THE INTEREST INCOME IN A CASE WHERE I NTEREST FREE LOAN IS GIVEN BY ONE TO ANOTHER AND THE LATER EARNS INTEREST INCOME THEREON . THE LD. COUNSEL VEHEMENTLY ARGUED THAT THE CLUBBING PROVISIONS CANNOT BE ATTRA CTED IN CASE OF INTEREST EARNED BY THE BORROWER ON THE INTEREST BEARING OR INTEREST FR EE LOAN ADVANCED BY THE LENDER. PER CONTRA, THE LD. DR FORCEFULLY RELIED ON THE RELEVAN T PROVISIONS TO CONTEND THAT THERE IS NO BAR ON SUCH CLUBBING. SHE REFERRED TO THE PROVIS IONS OF SECTION 63(A)(I) TO CONTEND THAT WHAT IS CONTEMPLATED IS THE RE-TRANSFER OF AN ASSET. HER ARGUMENT WAS THAT IN EVERY LOAN, THE PRE-REQUISITE OF RE-TRANSFER IS ALW AYS PRESENT. IF THE PROVISION OF RE- TRANSFER IS OBLITERATED IN A MONEY TRANSACTION, THE N IT BECOMES A CASE OF GIFT. IN EVERY CASE OF LOAN, SHE SUBMITTED, THAT THE PROVISIONS OF SECTION 63(A)(I) WILL BE ATTRACTED TO MAKE IT A CASE OF REVOCABLE TRANSFER AND CONSEQUENT LY THE INTEREST INCOME EARNED BY THE BORROWER SHALL BECOME ELIGIBLE FOR CLUBBING IN THE HANDS OF THE LENDER. ON A POINTED QUERY, THE LD. DR FAILED TO DRAW OUR ATTENT ION TOWARDS ANY PRECEDENT IN SUPPORT OF HER CONTENTION. 7.5. THOUGH, EX FACIE, WE FIND SOME FORCE I N THE SUBMISSIONS ADVANCED ON BEHALF OF THE REVENUE IN THIS REGARD, WE EQUALLY FIND TH AT THE AHMEDABAD BENCH OF THE TRIBUNAL IN THE CASE OF ITO V. NALINBHAI M.SHAH [(2 000) 93 TTJ (AHD) 107] HAS HELD THAT INCOME EARNED BY FAMILY MEMBERS OF THE ASSESSE E BY EMPLOYING INTEREST FREE LOAN ADVANCED TO THEM BY THE ASSESSEE OUT OF HIS FUNDS C ANNOT BE MADE SUBJECT MATTER OF ADDITION U/S 60. IN THE LIGHT OF THE ABOVE, IT IS C LEAR THAT THE QUESTION AS TO WHETHER INCOME EARNED BY THE BORROWER FROM THE INTEREST FRE E LOAN ADVANCED BY THE LENDER BE CLUBBED IN THE HANDS OF THE LENDER, IS DEFINITELY D EBATABLE AND NOT CONCLUSIVE. SUFFICE TO SAY, WE ARE DEALING WITH PROCEEDINGS U/S 263. THE S COPE OF SUCH PROCEEDINGS IS RESTRICTED TO REVISING AN ORDER WHICH IS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE. AN ORDER CANNOT BE SAID TO BE ERRONEOUS WH EN THE AO FOLLOWED ONE OF THE LEGALLY SUSTAINABLE VIEW OUT OF THE TWO VIEWS AVAIL ABLE ON THE POINT. THE CIT CAN NOT CALL AN ASSESSMENT ORDER TO BE ERRONEOUS SIMPLY BEC AUSE HE IS INCLINED TO FOLLOW THE OTHER LEGALLY SUSTAINABLE VIEW IN PREFERENCE TO THE ONE FOLLOWED BY THE AO. THE HONBLE SUMMIT COURT IN MALABAR INDUSTRIAL CO. LTD. V. CIT [(2000) 243 ITR 83 (SC)] HAS HELD THAT : `WHERE TWO VIEWS ARE POSSIBLE AND T HE INCOME-TAX OFFICER HAS TAKEN ONE VIEW WITH WHICH THE COMMISSIONER DOES NOT AGREE , IT CANNOT BE TREATED AS AN ERRONEOUS ORDER PREJUDICIAL TO THE INTERESTS OF THE REVENUE, UNLESS THE VIEW TAKEN BY THE INCOME-TAX OFFICER IS UNSUSTAINABLE IN LAW. TH E SAME VIEW HAS BEEN REITERATED BY SEVERAL HONBLE HIGH COURTS INCLUDING THE HONBLE D ELHI HIGH COURT IN CIT VS. ANSAL 7 ITA NO.671/MUM/2013 RELIANCE COMMUNICATIONS LTD . . PROPERTIES & IND. (P) LTD. (2009) 315 ITR 225 (DEL) . IN THIS CASE IT HAS BEEN NOTICED THAT : `THAT AT THE TIME WHEN THE COMMISSIONER ISSU ED THE NOTICE UNDER SECTION 263 AND PASSED THE ORDER DATED MARCH 23, 2004, THE QUESTION OF SURCHARGE ON UNDISCLOSED INCOME WAS A DEBATABLE ONE. WHEN AN ISSUE WAS DEBAT ABLE, THE PROVISIONS OF SECTION 263 COULD NOT BE INVOKED. FROM THE ABOVE DISCUSSIO N IT IS AXIOMATIC THAT NO REVISION CAN BE DONE ON A DEBATABLE ISSUE. AN ISSUE BECOMES DEBATABLE IF TWO LEGALLY SUSTAINABLE VIEWS EXIST ON A PARTICULAR POINT. WHE N THE A.O. ACCEPTS AND ADOPTS ONE POSSIBLE VIEW, THE POWER OF THE CIT IS OUSTED TO RE VISE THE ASSESSMENT ORDER ON HIS FINDING THE OTHER LEGALLY SUSTAINABLE VIEW AS MORE LOGICAL IN PREFERENCE TO THE ONE ADOPTED BY THE AO. COMING BACK TO THE ISSUE IN HAN D, WE FIND THAT THE CONTROVERSY HERE LIES IN NARROW COMPASS INASMUCH AS THE EXISTEN CE OF ONE POSSIBLE VIEW IN FAVOUR OF THE ASSESSEE ALSO EXISTS. WITHOUT GOING DEEP INT O THE INTERPRETATION OF THE RELEVANT PROVISIONS, WE LEAVE THIS POINT HERE BY HOLDING THA T THIS ASPECT CANNOT BE TAKEN OUT FROM THE REALM OF DEBATABLE ISSUE AND HENCE THERE CAN BE NO REVISION OF THE ASSESSMENT ORDER ON THIS POINT. 6. IT IS CLEAR FROM THE ABOVE FINDING THAT THE TRIB UNAL HAS CONSIDERED ALL THE CONTENTION OF THE DEPARTMENT REGARDING APPL ICABILITY OF SECTION 60 TO 63 OF THE ACT TO THE INTEREST INCOME AND THEN GAVE A FINDING THAT THE ISSUE WAS DEBATABLE AND PROVISIONS OF SECTION 2 63 COULD NOT BE INVOKED WHEN THE AO HAS ALREADY CONDUCTED AN ENQUIR Y AND TAKEN ONE OF THE POSSIBLE VIEW. THERE IS NO QUARREL ON THE P OINT THAT FOR THE YEAR UNDER CONSIDERATION, THE AO CONDUCTED AN ENQUIRY ON THE ISSUE THEREFORE WE DO NOT FIND ANY REASON FOR DISTINGUISH ING EITHER THE FACT OR THE FINDING OF THE TRIBUNAL ON THE ISSUE FOR THE A. Y. 2007-08 7. AS REGARDS TO MARK TO MARKET LOSS/GAIN THE TRIB UNAL FOR THE A.Y. 2007-08 HAS CONSIDERED AND DECIDED THE ISSUE IN PAR A 8 TO 8.5 AS UNDER:- 8. MARK TO MARKET LOSS/GAIN 8.1. THE NEXT POINT CONSIDERED BY LD. CIT FOR A SSUMING JURISDICTION U/S.263 IS ABOUT MARK TO MARKET (MTM) LOSSES CLAIMED BY THE ASSESSEE . THE LD. CIT NOTICED THAT THERE WAS A COMPONENT OF MTM LOSS ON FOREIGN EXCHANGE DER IVATIVES WHICH WAS INCLUDED BY THE ASSESSEE UNDER THE HEAD FOREIGN CURRENCY EXCHAN GE FLUCTUATION LOSS/GAIN (NET) IN SCHEDULE O, THAT IS, FINANCIAL CHARGES. THE SAID M TM LOSS AS ON THE REPORTING DATE WAS HELD BY THE LD. CIT TO BE ONLY NOTIONAL AND CON TINGENT IN NATURE NOT ELIGIBLE FOR SET OFF AGAINST TAXABLE INCOME. IN REACHING THIS CONCL USION, THE LD. CIT TOOK ASSISTANCE FROM CBDT INSTRUCTION NO.3 /2010, WHICH PROVIDES TH AT NO BENEFIT OF ADJUSTMENT OF INCOME OR GAIN SHOULD BE GIVEN AGAINST SUCH LOSSES. HE NOTICED THAT IT WAS NOT CLEAR, IN THE ABSENCE OF DETAILS OF GAINS AMOUNTING TO RS.21. 89 CRORES, THAT HOW MUCH COMPONENT WAS OF LOSS SET OFF AGAINST THE INCOME. AS THIS ISSUE WAS NOT EXAMINED BY 8 ITA NO.671/MUM/2013 RELIANCE COMMUNICATIONS LTD . . THE AO, THE LD. CIT HELD THE ASSESSMENT ORDER TO BE ERRONEOUS AND ALSO PREJUDICIAL TO THE INTERESTS OF THE REVENUE. 8.2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. MARK-TO-MARKET OR FAIR VALUE ACCOUNTING REF ERS TO ACCOUNTING FOR THE 'FAIR VALUE' OF AN ASSET OR LIABILITY BASED ON THE CURREN T MARKET VALUE ON THE LAST BUSINESS DAY OF THE YEAR, AND ANY GAIN OR LOSS IS TAKEN INTO ACCOUNT FOR THAT YEAR. WE FIND THAT THE AO EXAMINED FINANCIAL CHARGES DEBITED TO PROFIT AND LOSS ACCOUNT TO THE TUNE OF RS.264,91,96,232, THE DETAILS OF WHICH ARE AVAILAB LE AT PAGE 82 OF PB. IT HAS SEVERAL SUB-COMPONENTS. PRESENTLY WE ARE CONCERNED WITH SUB -COMPONENT H WITH TITLE: FOREIGN CURRENCY EXCHANGE FLUCTUATION LOSS/(GAIN)/ (NET). UNDER THIS SUB-HEAD, THERE ARE SIX TRANSACTIONS - FOUR REPRESENTING GAIN ON ACCOUNT OF FOREIGN CURRENCY EXCHANGE FLUCTUATION, INTER ALIA, A SUM OF RS.21.89 CRORES TOWARDS `UREALISED FOREX GAIN DERIVATIVES AND TWO ITEMS OF LOSSES. THERE IS AN OVERALL EXCESS OF GAIN OF FOREIGN CURRENCY EXCHANGE FLUCTUATION OVER THE LOSS UNDER THIS SUB-COMPONENT TO THE EXTENT OF RS.69.42 CRORES, WHICH HAS BEEN REDUCED F ROM THE TOTAL FINANCIAL CHARGES DEBITED TO THE PROFIT AND LOSS ACCOUNT. THERE IS N O DISPUTE ON ANY OTHER ITEM EVEN UNDER SUB-COMPONENT H, EXCEPT UNREALIZED FOREX GAIN OF DERIVATIVES AMOUNTING TO RS.21.89 CRORES. THE LD. CIT RELIED ON CBDT INSTRU CTION NO.3/2010 TO BOLSTER HIS POINT OF VIEW THAT THE LOSS ON ACCOUNT OF DERIVATIVES CAN NOT BE CLAIMED AS DEDUCTION. WE HAVE PERUSED THIS INSTRUCTION. THE CRUX OF THE INST RUCTION IS THAT THE LOSS ON ACCOUNT OF FOREX DERIVATIVES CANNOT BE ALLOWED AGAINST TAXABLE INCOME. 8.3. IN CIT V. WOODWARD GOVERNOR INDIA (P.) LT D. [(2009) 312 ITR 254 (SC)], THE ASSESSEE DEBITED TO ITS PROFIT AND LOSS ACCOUNT CER TAIN UNREALIZED LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION IN FOREIGN CURRENCY TRANSACTIO NS TOWARDS REVENUE ITEMS AS ON THE LAST DAY OF THE ACCOUNTING YEAR. THE A.O. HELD THAT THE LIABILITY AS ON THE LAST DATE OF THE PREVIOUS YEAR WAS NOT AN ASCERTAINED BUT A CONT INGENT LIABILITY. RESULTANTLY, THE SAME WAS ADDED BACK TO THE TOTAL INCOME. THE CIT(A) ECHOED THE ASSESSMENT ORDER. HOWEVER, THE TRIBUNAL HELD THAT THE CLAIM OF THE AS SESSEE FOR DEDUCTION OF UNREALIZED LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION AS ON THE LAST DATE OF THE PREVIOUS YEAR WAS DEDUCTIBLE. THE SAID ORDER OF THE TRIBUNAL WAS UPHE LD BY THE HONBLE HIGH COURT. ON FURTHER APPEAL, THE HONBLE SUPREME COURT HELD THAT THE LOSS SUFFERED BY THE ASSESSEE ON REVENUE ACCOUNT TOWARDS FOREIGN EXCHANGE DIFFERE NCE AS ON THE DATE OF BALANCE SHEET IS AN ITEM OF EXPENDITURE DEDUCTIBLE U/S 37(1 ). IT FURTHER OBSERVED THAN AN ENTERPRISE HAS TO REPORT OUTSTANDING LIABILITY RELA TING 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. IN PARA 21 OF THE REP ORT, THE HONBLE SUPREME COURT SUMMED UP ITS CONCLUSION BY OBSERVING THAT IN ORDER TO FIND OUT IF AN EXPENDITURE IS DEDUCTIBLE CERTAIN FACTORS, INTER ALIA, THE FOLLOW ING SHOULD BE TAKEN INTO CONSIDERATION: WHETHER THE ASSESSEE HAS BEEN CONSISTENT AND DEFIN ITE IN MAKING ENTRIES IN THE ACCOUNT BOOK IN RESPECT OF LOSSES AND GAINS; WHETHE R THE METHOD ADOPTED BY THE ASSESSEE FOR MAKING ENTRIES IN THE BOOKS OF ACCOUNT IN RESPECT OF LOSSES AND GAINS IS AS PER NATIONALLY ACCEPTED ACCOUNTING STANDARDS. FROM THE JUDGMENT OF THE HONBLE SUMMIT COURT IT CAN BE CLEARLY DEDUCED THAT UNREALI ZED LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION IN FOREIGN CURRENCY TRANSACTIONS ON REV ENUE ITEMS AS ON THE LAST DATE OF THE ACCOUNTING YEAR IS DEDUCTIBLE. A FURTHER IMPORTANT FACTOR WHICH NEEDS CONSIDERATION IS THAT THE SAME TREATMENT NEEDS TO BE GIVEN TO LOSSES AS WELL AS GAINS ACCRUING TO THE ASSESSEE ON ACCOUNT OF FLUCTUATIONS IN FOREIGN CURR ENCY RATE AS AT THE END OF THE YEAR. 8.4. REVERTING TO THE FACTS OF THE INSTANT CASE , IT IS SEEN THAT THE ASSESSEE SHOWED NET `UNREALISED FOREX GAIN ON DERIVATIVES AMOUNTING TO RS.21.89 CRORE. IN OTHER WORDS, IT IS A CASE OF OVERALL GAIN ON DERIVATIVES DUE TO CHANGE IN THE MARKET RATE AS AT THE END 9 ITA NO.671/MUM/2013 RELIANCE COMMUNICATIONS LTD . . OF THE YEAR AND NOT THAT OF THE LOSS. THUS IT BECO MES MANIFEST THAT ON THIS COUNT, THE ASSESSEE OFFERED FOR TAXATION THE SAID SUM AND DID NOT CLAIM DEDUCTION FOR LOSS. THIS FACT FINDS PROMINENCE IN THE IMPUGNED ORDER AS WELL . DESPITE THAT, THE LD. CIT HAS HELD THAT THE COMPONENT OF FOREX LOSS ON DERIVATIVES WAS NOT ELIGIBLE FOR DEDUCTION. THERE IS NO DOUBT THAT THE CBDT INSTRUCTION PROVIDES THAT NO DEDUCTION CAN BE ALLOWED ON ACCOUNT OF FOREX LOSSES. SUCH INSTRUCTION HAS BEEN OBVIOUSLY ISSUED AFTER THE JUDGMENT IN THE CASE OF WOODWARD GOVERNOR (SC) AND RESTRICTS ITSELF TO THE DISALLOWABILITY OF LOSS ON ACCOUNT OF CURRENCY DERIVATIVES. GOING BY T HIS INSTRUCTION, IT BECOMES PATENT THAT SUCH FOREX LOSS IS NO MORE DEDUCTIBLE. WE FAI L TO UNDERSTAND THE LOGIC OF THE VIEW THAT THE FOREX LOSS BE IGNORED BUT THE FOREX GAIN ON DERIVATIVES BE TAXED. ANY PROFIT AND LOSS FROM AN ITEM CANNOT GO IN THE OPPOSITE DI RECTIONS. THIS POSITION CAN BE OBSERVED FROM THE JUDGMENT OF THE HONBLE SUPREME C OURT IN WOODWARD GOVERNOR (SUPRA). THE INSTRUCTION OF CBDT SIMPLY STATES TH E LOSS ON ACCOUNT OF FOREX DERIVATIVES CANNOT BE ALLOWED SINCE IT IS A CONTIN GENT LOSS. IT CANNOT BE ACCEPTED THAT THE DEDUCTION CLAIMED BY THE ASSESSEE TOWARDS LOSS DUE TO FOREIGN EXCHANGE FLUCTUATION IN FOREIGN CURRENCY TRANSACTIONS IN DERIVATIVES SHO ULD BE CONSIDERED AS CONTINGENT AND HENCE IGNORED BUT THE GAIN DUE TO SUCH FOREIGN EXCH ANGE FLUCTUATIONS IN FOREIGN CURRENCY TRANSACTIONS ON DERIVATIVES SHOULD BE ASSE SSED TO TAX. BOTH THE LOSS / GAIN ASSUME THE SAME CHARACTER OF EITHER CONTINGENT OR N ON-CONTINGENT. IF THE FOREX LOSS ON ACCOUNT OF DERIVATIVES IS CONSIDERED AS CONTINGENT AND HENCE INELIGIBLE FOR DEDUCTION, THE FOREX GAIN WILL ALSO HAVE TO BE CONSIDERED AS C ONTINGENT AND HENCE IMMUNE FROM TAXATION. IF THERE IS A PROHIBITION IN NOT ALLOWING THE LOSS ON ACCOUNT OF FOREX DERIVATIVES, EQUALLY THERE CAN BE NO QUESTION OF CH ARGING TO TAX THE GAIN ON ACCOUNT OF FOREX DERIVATIVES. IT IS AXIOMATIC THAT BOTH LOSS OR GAIN CAN MOVE IN TANDEM AND NOT IN DIAMETRICALLY OPPOSITE DIRECTIONS. 8.5. BE THAT AS IT MAY, IT IS OBSERVED FROM T HE IMPUGNED ORDER AS WELL AS THE DETAILS OF THE FINANCIAL CHARGES THAT THE AMOUNT OF RS.21.8 9 CRORES REPRESENTS GAIN ON ACCOUNT OF FOREX DERIVATIVES. THIS FACT HAS ALSO BEEN ADMI TTED BY LD CIT IN PARA 6.3 OF THE IMPUGNED ORDER. WHEN THERE IS A NET GAIN OF RS.21. 89 CRORES, WHICH THE ASSESSEE INCLUDED IN ITS TOTAL INCOME, WE FAIL TO APPRECIATE THE REASON FOR CHARGING THE GROSS GAIN OF FOREX DERIVATIVES TO TAX BUT IGNORING THE L OSS ON ACCOUNT OF SUCH FOREX DERIVATIVES. AS THE ULTIMATE NET FIGURE ON ACCOUNT OF FOREX DERIVATIVES IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE IS THAT OF GAIN WHICH WAS OFFERED FOR TAXATION, IT IS MANIFEST THAT THE ASSESSMENT ORDER IN ACCEPTING SAI D FIGURE OF GAIN AS CHARGEABLE TO TAX, CANNOT BE DESCRIBED AS PREJUDICIAL TO THE INT ERESTS OF THE REVENUE. WE ARE, THEREFORE, UNABLE TO COUNTENANCE THE VIEW CANVASSED IN THE IMPUGNED ORDER ON THIS ISSUE. 8. IT IS CLEAR THAT THE TRIBUNAL WHILE DECIDED THE ISSUE FOR THE A.Y. 2007-08 HAS ALSO CONSIDERED THE CBDT INSTRUCTION NO . 3/2010 WHICH HAS BEEN HEAVILY RELIED UPON BY THE COMMISSIONER AS WELL AS THE LD. DR. WE FURTHER NOTE THAT THE AO HAS EXAMINED THIS ISSUE AND DISALLOWED THE NET LOSS AFTER ADJUSTING THE GAIN ON ACCOUNT OF FOREIGN CURRENCY DERIVATIVES FOR HEDGING AND THEREFORE IT I S MANIFEST FROM THE RECORD THAT THE ISSUE HAS BEEN EXAMINED BY THE ASSE SSING OFFICER AND TAKEN A POSSIBLE VIEW. THE TRIBUNAL ON THE IDENTIC AL FACTS HAS DECIDED 10 ITA NO.671/MUM/2013 RELIANCE COMMUNICATIONS LTD . . THIS ISSUE BY HOLDING THAT THE VIEW OF THE COMMISSI ONER CANNOT BE COUNTENANCED WITH. ACCORDINGLY, WE DO NOT FIND ANY REASON TO TAKE A DIFFERENT VIEW FROM THAT OF ALREADY TAKEN BY THE TR IBUNAL FOR THE A.Y. 2007-08. THE TRIBUNAL HAS ALSO CONSIDERED THE VARI OUS DECISIONS AND RULING ON THIS POINT AND FINALLY CONCLUDED IN PARA 16 AS UNDER:- 16. ADVERTING TO THE FACTS OF THE INSTANT CA SE, WE FIND THAT THE ASSESSING OFFICER MADE ENQUIRY ABOUT THE ABOVE REFERRED THREE ASPECTS WHICH HAVE BEEN NOTED BY THE CIT FOR EXERCISING JURISDICTION U/S 263. UPON SUCH ENQU IRY, THE ASSESSEE MADE SUBMISSIONS BY PLACING ALL THE RELEVANT DOCUMENTS BEFORE THE AO . THUS IT CAN BE SEEN THAT THIS CASE DOES NOT FALL IN THE CATEGORY DISCUSSED IN PARA 15. 1. ABOVE. THE MERE FACT THAT THE ASSESSING OFFICER DID NOT MAKE ANY REFERENCE TO THE SE THREE ISSUES IN THE ASSESSMENT ORDER CANNOT MAKE THE ASSESSMENT ORDER ERRONEOUS WH EN THESE ISSUES WERE PROPERLY LOOKED INTO BY THE ASSESSING OFFICER. NOW LET US SE E WHETHER IT CAN BE BROUGHT WITHIN THE AMBIT OF PARA 15.2. ABOVE. FROM THE DETAILS FIL ED BY THE ASSESSEE IT CAN BE INFERRED THAT THE AO NOT ONLY ENQUIRED INTO THESE THREE ISSU ES BUT ALSO GOT SATISFIED WITH THE ASSESSEES REPLY SUBMITTED FROM TIME TO TIME IN SUP PORT OF ITS STAND. RESORTING TO THE PROVISIONS OF SECTION 263 IN SUCH A SITUATION COULD HAVE BEEN POSSIBLE ONLY ON THE LD. CIT SHOWING THAT THE ASSESSMENT ORDER WAS ERRONEOUS ON SUCH THREE ASPECTS. FROM THE DETAILED DISCUSSION MADE ABOVE ON THESE ISSUES, IT IS MANIFEST THAT THE AO TOOK EITHER PERFECTLY CORRECT OR A POSSIBLE VIEW. AS SUCH, THE EXTANT ASSESSMENT ORDER CANNOT BE HELD AS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF THE REVENUE. THE NATURAL COROLLARY WHICH, THEREFORE, FOLLOWS IN THE PRESENT CASE IS THAT THE LEARNED CIT WAS NOT JUSTIFIED IN INVOKING HIS JURISDICTION U/S 263 OF T HE ACT. WE, THEREFORE, SET ASIDE THE IMPUGNED ORDER. 9. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBU NAL ON THE IDENTICAL ISSUES FOR A.Y. 2007-08, WE SET-ASIDE THE IMPUGNED R EVISION ORDER OF THE COMMISSIONER. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 1 2 /02/2014 . !2 . 1) 3!' 12 /02/2014 , . 4 SD/- ( SANJAY ARORA ) SD/- ( VIJAY PAL RAO) !' / ACCOUNTANT MEMBER !' / JUDICIAL MEMBER MUMBAI; 3!' /DATED : 12/02/ 2014 F{X~{T? P.S. 11 ITA NO.671/MUM/2013 RELIANCE COMMUNICATIONS LTD . . !2 . ,0% 5%)0 / COPY OF THE ORDER FORWARDED TO : (1) ' (60 / THE ASSESSEE; (2) '$ / THE REVENUE; (3) 7 ( ) / THE CIT(A); (4) 7 / THE CIT, MUMBAI CITY CONCERNED; (5) %$84 ,0' , , / THE DR, ITAT, MUMBAI; (6) 4( 9 / GUARD FILE. -%0 ,0 / TRUE COPY !2' / BY ORDER : / ; / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI